REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms, and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.

During the second quarter of 2012, we placed our reinsurance program for the 2012 hurricane season. Our program comprises six contracts which reinsures for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2012, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement to Florida property insurers for covered hurricane losses. For UPC Insurance, the FHCF coverage includes an estimated maximum provisional limit of 90% of $392,334,000 or $353,101,000, in excess of our retention and private reinsurance of $153,332,000, and also includes reimbursement of eligible loss adjustment expenses of 5%. The limit and retention of the FHCF coverage are subject to re-measurement based on June 30th exposure data. In addition, the FHCF's retention is subject to adjustment upward or downward to an actual retention based on submitted exposures to the FHCF by all participants.

In addition to FHCF coverage, we purchase private reinsurance below, alongside, and above the FHCF layer. The contracts comprising our program are described below:


•	Below FHCF - provides coverage on $138,332,000 of losses in excess of $15,000,000 and is 100% placed. The first reinstatement of limits is prepaid and the second and final reinstatement requires additional premium.


•	Mandatory FHCF - provides 90% of $392,334,000 excess of $153,332,000 with no reinstatement of limits.


•	Excess - provides coverage on $45,886,000 of losses in excess of the private and FHCF reinsurance coverage and is 100% placed. The first reinstatement of coverage that runs alongside the FHCF layer is prepaid and the second and final reinstatement requires additional premium.

Our non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $1,700,000 in excess of $1,000,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property business, one reinstatement of the full coverage amount is included at 50% additional premium. The agreement, including reinstatements, provides aggregate coverage of $3,400,000 for losses arising out of property business, while any single occurrence is limited to $1,700,000. The agreement also provides coverage for losses arising out of a combination of property and casualty business up to $2,200,000 in excess of $1,000,000 per occurrence, subject to a maximum recovery on any one loss occurrence, regardless of the number of risks involved for property or the number or type of insureds for casualty, of $2,200,000.

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $267,000, $377,000, and $516,000, for the years ended December 31, 2012, 2011, and 2010, respectively.

The following table depicts written premiums, earned premiums and losses, showing the effects that our reinsurance transactions have on these components of our Consolidated Statements of Comprehensive Income:



	Year ended December 31,
	2012			2011			2010
Premium written:
Direct	$	254,913		$	199,606		$	155,875
Assumed	(4		)	4,200			2,762
Ceded	(113,234		)	(93,418		)	(86,475		)
Net premium written	$	141,675		$	110,388		$	72,162
Change in unearned premiums:
Direct	$	(28,743	)	$	(23,666	)	$	(2,603	)
Assumed	88			697			(727		)
Ceded	8,948			2,661			(1,977		)
Net decrease (increase)	$	(19,707	)	$	(20,308	)	$	(5,307	)
Premiums earned:
Direct	$	226,170		$	175,940		$	153,272
Assumed	84			4,897			2,035
Ceded	(104,286		)	(90,757		)	(88,452		)
Net premiums earned	$	121,968		$	90,080		$	66,855
Losses and LAE incurred:
Direct	$	60,248		$	35,774		$	60,508
Assumed	(335		)	2,554			1,436
Ceded	(1,504		)	533			(19,411		)
Net losses and LAE incurred	$	58,409		$	38,861		$	42,533

Ceded losses incurred increased by $2,037,000 during the year ended December 31, 2012, compared to the year ended December 31, 2011, because we ceded flood, garage, per risk and catastrophe losses in 2012 whereas our 2011 ceded incurred losses was impacted by the commutation of our 2005 FHCF contract. Additionally, the statute of limitations related to insured events occurring during the 2005 and 2004 storm years expired, so policyholders cannot report new claims as they could in the prior year, nor are policyholders reopening as many previously-closed claims as in the prior year. The losses we incurred in 2012, 2011 or 2010 related to storms that occurred in those same years but did not exceed our retained loss thresholds.

The following table highlights the effects that our reinsurance transactions have on unpaid losses and loss adjustment expenses and unearned premiums in our Consolidated Balance Sheets:



	December 31,
	2012			2011
Unpaid losses and LAE:
Direct	$	34,503		$	30,501
Assumed	1,189			3,099
Gross unpaid losses and LAE	35,692			33,600
Ceded	(1,935		)	(3,318		)
Net unpaid losses and LAE	$	33,757		$	30,282
Unearned premiums:
Direct	$	128,785		$	100,042
Assumed	—			88
Gross unearned premiums	128,785			100,130
Ceded	(49,916		)	(40,968		)
Net unearned premiums	$	78,869		$	59,162

Reinsurance recoverable at the balance sheet dates consists of the following:



	December 31,
	2012		2011
Reinsurance recoverable on unpaid losses and LAE	$	1,935	$	3,318
Reinsurance recoverable on paid losses and LAE	337		1,140
Reinsurance recoverable	$	2,272	$	4,458

During the years ended December 31, 2012, 2011 and 2010, we realized recoveries totaling $2,753,000, $22,278,000 and $17,447,000, respectively, under our reinsurance agreements. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.