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 stockholders 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 of losses in 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.

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Consolidated Statements of Comprehensive Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:



	Year Ended December 31,
	2013			2012			2011
Excess-of-loss	$	(108,696	)	$	(100,549	)	$	(82,832	)
Equipment & identity theft	(2,608		)	(1,540		)	(587		)
Flood	(13,378		)	(11,145		)	(9,999		)
Ceded premiums written	$	(124,682	)	$	(113,234	)	$	(93,418	)
Increase in ceded unearned premiums	5,352			8,948			2,661
Ceded premiums earned	$	(119,330	)	$	(104,286	)	$	(90,757	)

Current year catastrophe losses by the event magnitude are shown in the following table.



		2013				2012
		Number of Events	Incurred Loss and LAE ⁽³⁾	Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽³⁾	Combined Ratio Impact
Year Ended December 31,
Current period catastrophe losses incurred
$ 1 million to $5 million	⁽¹⁾	1	1,839	0.9	%	2	2,896	2.4	%
Less than $1 million	⁽²⁾	2	1,763	0.9	%	1	770	0.6	%
Total		3	3,602	1.8	%	3	3,666	3.0	%

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 Winterstorm Nemo in 2013 and Tropical Storms Debby and Isaac in 2012.

⁽²⁾ Reflects losses from the Orlando weather event and Tropical Storm Andrea in 2013, and Superstorm Sandy in 2012.

⁽³⁾ Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.

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



	December 31,
	2013		2012
Reinsurance recoverable on unpaid losses and LAE	$	1,957	$	1,935
Reinsurance recoverable on paid losses and LAE	469		337
Reinsurance recoverable	$	2,426	$	2,272

During the years ended December 31, 2013 and 2012, we realized recoveries under our reinsurance agreements totaling $2,521,000 and $2,753,000, respectively. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.

During the fourth quarter of 2013, we placed our non-catastrophe reinsurance agreement, which will expire on December 31, 2014. The 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.

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 $570,000, $267,000, and $377,000 for the years ended December 31, 2013, 2012, and 2011, 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,
	2013			2012			2011
Premium written:
Direct	$	339,765		$	254,913		$	199,606
Assumed	41,587			(4		)	4,200
Ceded	(124,682		)	(113,234		)	(93,418		)
Net premium written	$	256,670		$	141,675		$	110,388
Change in unearned premiums:
Direct	$	(44,422	)	$	(28,743	)	$	(23,666	)
Assumed	(20,222		)	88			697
Ceded	5,352			8,948			2,661
Net increase	$	(59,292	)	$	(19,707	)	$	(20,308	)
Premiums earned:
Direct	$	295,343		$	226,170		$	175,940
Assumed	21,365			84			4,897
Ceded	(119,330		)	(104,286		)	(90,757		)
Net premiums earned	$	197,378		$	121,968		$	90,080
Losses and LAE incurred:
Direct	$	92,526		$	60,248		$	35,774
Assumed	9,240			(335		)	2,554
Ceded	(2,936		)	(1,504		)	533
Net losses and LAE incurred	$	98,830		$	58,409		$	38,861

Ceded losses incurred increased by $1,432,000 during the year ended December 31, 2013, compared to the year ended December 31, 2012, primarily because we ceded more per risk losses in 2013. The losses we incurred in 2013, 2012 and 2011 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,
	2013			2012
Unpaid losses and LAE:
Direct	$	42,954		$	34,503
Assumed	4,497			1,189
Gross unpaid losses and LAE	47,451			35,692
Ceded	(1,957		)	(1,935		)
Net unpaid losses and LAE	$	45,494		$	33,757
Unearned premiums:
Direct	$	173,206		$	128,785
Assumed	20,222			—
Gross unearned premiums	193,428			128,785
Ceded	(55,268		)	(49,916		)
Net unearned premiums	$	138,160		$	78,869