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 2014, we placed our reinsurance program for the 2014 treaty year beginning June 1, 2014 and ending on May 31, 2015. The agreements 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 in Florida against storms that the National Hurricane Center designates as hurricanes. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes.

For the 2014 hurricane season, our insurance affiliate purchased catastrophe excess of loss reinsurance protection of $1,080,200,000 excess $25,000,000 providing sufficient protection for approximately a one-in-185 year hurricane event as calculated by our licensed modeling software, AIR model version 15 using long-term event rates excluding demand surge. For a single hurricane catastrophe, our insurance affiliate will pay, or “retain”, the first 70% of losses up to $25,000,000 ($17,500,000) and an affiliated reinsurer will pay the remaining 30% of losses up to $25,000,000 ($7,500,000). The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,080,200,000.

Our agreement with the FHCF consists of a single layer of coverage, the mandatory layer. Under the agreement, we estimate the FHCF will provide approximately $555,200,000 of aggregate coverage for covered losses in excess of $230,800,000. The initial premium for the FHCF agreement is approximately $41,700,000.

The 2014 private catastrophe excess of loss reinsurance agreements structure coverage into layers, with a cascading feature such that all layers attach at $25,000,000. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. The 2014 catastrophe excess of loss reinsurance agreements with unaffiliated private reinsurers provide $525,000,000 of aggregate coverage for covered losses in excess of $25,000,000. Additionally, our insurance affiliate purchased a dedicated second event cover with recovery potential in subsequent events providing 100% coverage for losses of $15,000,000 excess $10,000,000, subject to an annual aggregate deductible of $15,000,000. The total cost of the 2014 private catastrophe excess of loss reinsurance program is $90,600,000. Certain parts of the reinsurance program provide coverage for two years. All private insurers with whom our insurance affiliate contracted either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts.

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited 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:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Excess-of-loss	$	(131,213	)	$	(112,387	)	$	(131,274	)	$	(111,083	)
Equipment & Identity Theft	(1,156		)	(684		)	(1,917		)	(1,155		)
Flood	(4,423		)	(4,075		)	(7,452		)	(6,651		)
Ceded premiums written	$	(136,792	)	$	(117,146	)	$	(140,643	)	$	(118,889	)
Increase in ceded unearned premiums	103,753			88,217			76,627			62,381
Ceded premiums earned	$	(33,039	)	$	(28,929	)	$	(64,016	)	$	(56,508	)

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



		2014					2013
		Number of Events	Incurred Loss and LAE		Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽⁴⁾		Combined Ratio Impact
Three Months Ended June 30,
Current period catastrophe losses incurred
Less than $1 million	⁽¹⁾	1	$	260	0.4	%	3	$	1,777	3.9	%
Total		1	$	260	0.4	%	3	$	1,777	3.9	%

Six Months Ended June 30,
Current period catastrophe losses incurred
$ 1 million to $5 million	⁽²⁾	—	$	—	—	%	1	$	1,900	2.2	%
Less than $1 million	⁽³⁾	1	260		0.2	%	2	1,695		1.9	%
Total		1	$	260	0.2	%	3	$	3,595	4.1	%

⁽¹⁾ Reflects losses from the Richland hailstorm in June 2014.

⁽²⁾ Reflects losses from Winterstorm Nemo.

⁽³⁾ Reflects losses from Winterstorm Nemo, the Orlando weather event in March 2013 and Tropical Storm Andrea in June 2013.

⁽⁴⁾ Incurred loss and Loss Adjustment Expenses (LAE) is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.

We realized recoveries under our reinsurance agreements totaling $664,000 and $1,223,000 for the three-month periods ended June 30, 2014 and 2013, respectively, and $1,081,000 and $1,471,000 for the six-month periods ended June 30, 2014 and 2013, respectively.

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 our 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 are 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 $162,000 and $188,000 for the three-month periods ended June 30, 2014 and 2013, respectively, and $580,000 and $268,000 for the six-month periods ended June 30, 2014 and 2013, respectively.