REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. We define "catastrophe" as an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. The nature and level of catastrophes in any period cannot be reliably predicted.

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 2013, we placed our reinsurance program for the 2013 hurricane season. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2013, 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 $490,600,000 or $441,540,000, in excess of our retention and private reinsurance of $360,060,000, 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 $167,200,000 of losses in excess of $20,000,000 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 $490,600,000 excess of $187,200,000 with no reinstatement limits.


•	Excess - provides coverage on $172,860,000 of losses in excess of the private and FHCF reinsurance coverage and is 100% placed.

Catastrophe losses by the size of the event are shown in the following table.



		2013				2012
		Number of Events	Incurred Loss and LAE ⁽⁵⁾	Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽⁵⁾	Combined Ratio Impact
Three Months Ended June 30,
Size of catastrophe loss
$ 1 million to $5 million	⁽¹⁾	—	—	—	%	1	1,155	3.9	%
Less than $1 million	⁽²⁾	3	1,777	3.9	%	—	—	—	%
Total		3	1,777	3.9	%	1	1,155	3.9	%

Six Months Ended June 30,
Size of catastrophe loss
$ 1 million to $5 million	⁽³⁾	1	1,900	2.2	%	1	1,155	2.0	%
Less than $1 million	⁽⁴⁾	2	1,695	1.9	%	—	—	—	%
Total		3	3,595	4.1	%	1	1,155	2.0	%

Note: A storm can be in one loss size for the quarter and a different loss size for the year dependent upon the losses paid for that particular storm during the specified time frame.

⁽¹⁾ Reflects losses from Tropical Storm Debby in 2012.

⁽²⁾ Reflects losses from Winterstorm Nemo, the Orlando weather event in March and Tropical Storm Andrea in June 2013.

⁽³⁾ Reflects losses from Winterstorm Nemo in 2013 and Tropical Storm Debby in 2012.

⁽⁴⁾ Reflects losses from the Orlando weather event and Tropical Storm Andrea in 2013.

⁽⁵⁾ Incurred loss and LAE is equal to losses and LAE paid plus the change in incurred but not reported reserves.

We realized recoveries under our reinsurance agreements totaling $3,033,000 and $838,000 for the three-month periods ended June 30, 2013 and 2012, respectively, and $3,226,000 and $1,563,000 for the six-month periods ended June 30, 2013 and 2012, respectively.

Our non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $500,000 in excess of $500,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property-only business, excluding catastrophes, three reinstatements of the full coverage amount is included at no additional premium. The non-catastrophe reinsurance agreement expires on December 31, 2013. The Company intends to renegotiate a new contract that will run for the calendar year, beginning January 1, 2014.

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 $188,000 and $144,000, for the three-month periods ended June 30, 2013 and 2012, respectively, and $268,000 and $241,000 for the six-month periods ended June 30, 2013 and 2012, respectively.