Assurant 2013 Annual Report Download - page 128

ASSURANT, INC. – 2013 Form 10-KF-42
13 Reinsurance
the credit risk is mitigated by two reinsurance trust accounts
for each Series, respectively. Each reinsurance trust account
has been funded by Ibis Re II 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.
The 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 II,
the Company evaluated the applicability of the accounting
guidance that addresses variable interest entities (“VIEs”).
Entities which do not have suffi cient equity at risk to allow
the entity to fi nance its activities without additional fi nancial
support or in which the equity investors, as a group, do not
have the characteristic of a controlling fi nancial interest
are referred to as VIEs. A VIE is consolidated by the variable
interest holder that is determined to have the controlling
fi nancial interest (primary benefi ciary) as a result of having
both the power to direct the activities of a VIE that most
signifi cantly impact the VIE’s economic performance and the
obligation to absorb losses or right to receive benefi ts from
the VIE that could potentially be signifi cant to the VIE. The
Company determines whether it is the primary benefi 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. The 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 II, the Company concluded that Ibis Re II is a VIE.
However, while Ibis Re II is a VIE, the Company concluded that
it does not have a signifi cant variable interest in 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 benefi ciary of Ibis
Re II and does not consolidate the entities in the Company’s
fi nancial statements.
Business Divestitures
The Company has used reinsurance to exit certain businesses,
such as the disposals of FFG and LTC. Reinsurance was used
in these cases to facilitate the transactions because the
businesses shared legal entities with operating segments
that the Company retained. Assets supporting liabilities
ceded relating to these businesses are mainly held in
trusts and the separate accounts relating to FFG are still
refl ected in the Company’s balance sheet. If the reinsurers
became insolvent, we would be exposed to the risk that the
assets in the trusts and/or the separate accounts would be
insuffi cient to support the liabilities that would revert back
to us. The reinsurance recoverable from The Hartford was
$1,101,847 and $1,125,472 as of December 31, 2013 and
2012, respectively. The reinsurance recoverable from John
Hancock was $2,578,329 and $2,494,275 as of December 31,
2013 and 2012, respectively.
The reinsurance agreement associated with the FFG sale also
stipulates that The Hartford contribute funds to increase the
value of the separate account assets relating to Modifi ed
Guaranteed Annuity business sold if such value declines below
the value of the associated liabilities. If The Hartford fails
to fulfi ll these obligations, the Company will be obligated
to make these payments.
In addition, the Company would be responsible for
administering this business in the event of reinsurer insolvency.
We do not currently have the administrative systems and
capabilities to process this business. Accordingly, we would
need to obtain those capabilities in the event of an insolvency
of one or more of the reinsurers of these businesses. We
might be forced to obtain such capabilities on unfavorable
terms with a resulting material adverse effect on our results
of operations and fi nancial condition.
As of December 31, 2013, we were not aware of any regulatory
actions taken with respect to the solvency of the insurance
subsidiaries of The Hartford or John Hancock that reinsure
the FFG and LTC businesses, and the Company has not been
obligated to fulfi ll any of such reinsurers’ obligations.
John Hancock and The Hartford have paid their obligations
when due and there have been no disputes.
Segment Client Risk and Profi t Sharing
The Assurant Solutions and Assurant Specialty Property
segments write business produced by their clients, such
as mortgage lenders and servicers, fi nancial institutions
and reinsures all or a portion of such business to insurance
subsidiaries of some clients. Such arrangements allow
signifi cant fl exibility in structuring the sharing of risks and
profi ts on the underlying business.
A substantial portion of Assurant Solutions and Assurant
Specialty Property’s reinsurance activities are related
to agreements to reinsure premiums and risks related to
business generated by certain clients to the clients’ own
captive insurance companies or to reinsurance subsidiaries
in which the clients have an ownership interest. Through
these arrangements, our insurance subsidiaries share some
of the premiums and risk related to client-generated business
with these clients. When the reinsurance companies are
not authorized to do business in our insurance subsidiary’s
domiciliary state, the Company’s insurance subsidiary generally
obtains collateral, such as a trust or a letter of credit, from
the reinsurance company or its affi liate in an amount equal
to the outstanding reserves to obtain full statutory fi nancial
credit in the domiciliary state for the reinsurance.
The Company’s reinsurance agreements do not relieve the
Company from its direct obligation to its insureds. Thus, a credit
exposure exists to the extent that any reinsurer is unable to
meet the obligations assumed in the reinsurance agreements. To
mitigate its exposure to reinsurance insolvencies, the Company
evaluates the fi nancial condition of its reinsurers and holds
substantial collateral (in the form of funds, trusts, and letters
of credit) as security under the reinsurance agreements.