Assurant 2012 Annual Report Download - page 115

ASSURANT, INC.2012 Form10-K F-39
13 Reinsurance
 e Company had $1,069,031 and $1,014,164, respectively, of
invested assets held in trusts or by custodians as of December31,
2012 and 2011, respectively, for the bene t of others related to certain
reinsurance arrangements.
 e Company utilizes ceded reinsurance for loss protection and capital
management, business dispositions, and in the Assurant Solutions and
Assurant Specialty Property segments, for client risk and pro t sharing.
Loss Protection and Capital Management
As part of the Company’s overall risk and capacity management strategy,
the Company purchases reinsurance for certain risks underwritten by
the Company’s various segments, including signi cant individual or
catastrophic claims.
For those product lines where there is exposure to losses from catastrophe
events, the Company closely monitors and manages its aggregate risk
exposure by geographic area.  e Company has entered into reinsurance
treaties to manage exposure to these types of events.
On May5, 2009, certain of the Company’s subsidiaries (the
“Subsidiaries”) entered into two reinsurance agreements with Ibis Re
Ltd., an independent special purpose reinsurance company domiciled
in the Cayman Islands (“Ibis Re”).  e Ibis Re agreements provide up
to $150,000 of reinsurance coverage for protection against losses over a
three-year period from individual hurricane events in Hawaii and along
the Gulf and Eastern Coasts of the United States. Ibis Re  nanced the
property catastrophe reinsurance coverage by issuing catastrophe bonds
in an aggregate amount of $150,000 to unrelated investors (the “Series
2009-1 Notes”).  e agreements expired in May2012.
On April27, 2010, the Subsidiaries entered into two additional
reinsurance agreements with Ibis Re providing up to $150,000 of
reinsurance coverage for protection against losses over a three-year
period from individual hurricane events in Hawaii and along the
Gulf and Eastern Coasts of the United States.  e agreements expire
in May2013. Ibis Re  nanced the property catastrophe reinsurance
coverage by issuing catastrophe bonds in an aggregate amount of
$150,000 to unrelated investors (the “Series 2010-1 Notes”).
On January30, 2012, the Subsidiaries entered into two reinsurance
agreements with Ibis Re II Ltd. (“Ibis Re II”). Ibis Re II, incorporated
on December2, 2011, is an independent special purpose reinsurance
company domiciled in the Cayman Islands.  e Ibis Re II agreements
provide up to $130,000 of reinsurance coverage for protection against
losses over a three-year period from individual hurricane events in Hawaii,
Puerto Rico, and along the Gulf and Eastern Coasts of the United
States.  e agreements expire in February2015. Ibis Re II  nanced
the property catastrophe reinsurance coverage by issuing $130,000 in
catastrophe bonds to unrelated investors (the “Series 2012-1 Notes”).
 e Series 2012-1 Notes replace the Series 2009-1 Notes.
Upon expiration of the Series 2009-1 Notes, the remaining $280,000 of
coverage represents approximately 20% of the expected  rst event coverage
(net of reimbursements of the Florida Hurricane Catastrophe Fund)
purchased by the Company in excess of the Company’s anticipated retention.
Under the terms of these reinsurance agreements, the Subsidiaries are
obligated to pay annual reinsurance premiums to Ibis Re and Ibis Re
II for the reinsurance coverage.  e reinsurance agreements with Ibis
Re and Ibis Re II utilize a dual trigger that is based upon an index that
is created by applying predetermined percentages to insured industry
losses in each state in the covered area as reported by an independent
party and the Subsidiaries’ covered losses incurred. Reinsurance contracts
that have a separate, pre-identi ed variable (e.g., a loss-based index)
are accounted for as reinsurance if certain conditions are met. In
the case of the reinsurance agreements with Ibis Re and Ibis Re II,
these conditions were met, thus the Company accounted for them as
reinsurance in accordance with the guidance for reinsurance contracts.
Amounts payable to the Subsidiaries under the reinsurance agreements
will be determined by the index-based losses, which are designed to
approximate the Subsidiaries’ actual losses from any covered event.  e
amount of actual losses and index losses from any covered event may
di er. For each covered event, Ibis Re and Ibis Re II pay the Subsidiaries
the lesser of the covered index-based losses or the Subsidiaries’ actual
losses.  e principal amount of the catastrophe bonds will be reduced by
any amounts paid to the Subsidiaries under the reinsurance agreements.
 e Subsidiaries have not incurred any losses subject to the reinsurance
agreements since their inception.
As of December31, 2012, the Company had not ceded any losses to
Ibis Re or Ibis Re II.
As with any reinsurance agreement, there is credit risk associated with
collecting amounts due from reinsurers. With regard to the Series
2010-1 Notes and Series 2012-1 Notes, the credit risk is mitigated by
two reinsurance trust accounts for each Series. Each reinsurance trust
account has been funded by Ibis Re (Series 2010-1 Notes) or Ibis Re
II (Series 2012-1 Notes) with money market funds that invest solely
in direct government obligations backed by the U.S. government with
maturities of no more than 13 months.  e money market funds must
have a principal stability rating of at least AAA by Standard& Poor’s.
At the time the agreements were entered into with Ibis Re and Ibis Re
II, the Company evaluated the applicability of the accounting guidance
that addresses variable interest entities (“VIEs”). Entities which do not
have su cient equity at risk to allow the entity to  nance its activities
without additional  nancial support or in which the equity investors,
as a group, do not have the characteristic of a controlling  nancial
interest are referred to as VIEs. A VIE is consolidated by the variable
interest holder that is determined to have the controlling  nancial
interest (primary bene ciary) as a result of having both the power to
direct the activities of a VIE that most signi cantly impact the VIE’s
economic performance and the obligation to absorb losses or right to
receive bene ts from the VIE that could potentially be signi cant to the
VIE.  e Company determines whether it is the primary bene ciary
of an entity subject to consolidation based on a qualitative assessment
of the VIE’s capital structure, contractual terms, nature of the VIE’s
operations and purpose and the Company’s relative exposure to the
related risks of the VIE on the date it becomes initially involved in
the VIE.  e Company reassesses its VIE determination with respect
to an entity on an ongoing basis.
As a result of the evaluation of the reinsurance agreements with Ibis Re
and Ibis Re II, the Company concluded that Ibis Re and Ibis Re II are
VIEs. However, while Ibis Re and Ibis Re II are VIEs, the Company
concluded that it does not have a signi cant variable interest in Ibis
Re or Ibis Re II as the variability in results, caused by the reinsurance
agreements, is expected to be absorbed entirely by the bondholders and
the Company is not entitled to any residual amounts. Accordingly, the
Company is not the primary bene ciary of Ibis Re or Ibis Re II and
does not consolidate the entities in the Company’s  nancial statements.