Reinsurance Activity

9 Months Ended

Sep. 30, 2013

Reinsurance Activity

Reinsurance Activity

19. Reinsurance Activity

NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At September 30, 2013, reinsurance receivables had a carrying value of $7.7 million. There was no allowance for uncollectible accounts at September 30, 2013, based on our quality requirements.

The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).

	Three Months Ended September 30,												Nine Months Ended September 30,
	2013						2012						2013						2012
	Written			Earned			Written			Earned			Written			Earned			Written			Earned
Premiums from direct business	$	44,484		$	43,031		$	40,899		$	40,922		$	134,292		$	125,520		$	126,833		$	121,209
Reinsurance assumed	2,058			1,860			1,726			1,520			5,931			5,238			4,830			4,296
Reinsurance ceded	(5,100		)	(4,909		)	(5,106		)	(4,754		)	(14,879		)	(14,713		)	(14,953		)	(16,467		)
Net premiums	$	41,442		$	39,982		$	37,519		$	37,688		$	125,344		$	116,045		$	116,710		$	109,038

The effects of reinsurance on incurred losses are as follows (in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Loss and LAE incurred	$	27,558		$	31,577		$	98,507		$	94,022
Reinsurance recoverables	(2,927		)	(1,441		)	(4,531		)	(2,273		)
Net loss and LAE incurred	$	24,631		$	30,136		$	93,976		$	91,749

Multi-line excess of loss coverage

For all lines of business, NLC has excess of loss reinsurance covering $700,000 in excess of $300,000 retention on losses on any one risk.

Catastrophic coverage

NLC has catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintains an underlying layer of coverage, providing $6.5 million in excess of its $1.5 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of four layers of protection: $17 million in excess of $8 million retention; $25 million in excess of $25 million loss; $50 million in excess of $50 million loss and $40 million ($70 million through June 30, 2013) in excess of $100 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At September 30, 2013, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.

Effective July 1, 2013, NLC renewed its catastrophic reinsurance contract for its third and fourth layers of reinsurance for a two year period. In the contract renewal, the coverage provided by the fourth layer changed to reflect the reduction of exposure in Texas primarily as a result of NLIC exiting the Texas coast and reducing its exposure in Harris County, Texas. The coverage provides $40 million in excess of $100 million loss, resulting in catastrophic excess of loss reinsurance coverage up to $140 million.