REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophe). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made.

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 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 FHCF. 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, we will pay, or “retain” up to $25,000,000. The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,105,200,000.

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 $38,594,000.

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 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,
	2014			2013			2012
Excess-of-loss	$	(125,638	)	$	(108,696	)	$	(100,549	)
Equipment & identity theft	(4,370		)	(2,608		)	(1,540		)
Flood	(14,396		)	(13,378		)	(11,145		)
Ceded premiums written	$	(144,404	)	$	(124,682	)	$	(113,234	)
Increase in ceded unearned premiums	8,559			5,352			8,948
Ceded premiums earned	$	(135,845	)	$	(119,330	)	$	(104,286	)

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



December 31, 2014		Number of Events	Incurred Loss and LAE ⁽⁶⁾		Combined Ratio Impact
Current period catastrophe losses incurred
Less than $1 million	⁽¹⁾	3	$	829	0.3	%
Total		3	$	829	0.3	%

December 31, 2013
Current period catastrophe losses incurred
$ 1 million to $5 million	⁽²⁾	1	1,839		0.9	%
Less than $1 million	⁽³⁾	2	1,763		0.9	%
Total		3	$	3,602	1.8	%

December 31, 2012
Current period catastrophe losses incurred
$ 1 million to $5 million	⁽⁴⁾	2	2,896		2.4	%
Less than $1 million	⁽⁵⁾	1	770		0.6	%
Total		3	$	3,666	3.0	%


⁽¹⁾	Reflects losses from the Richland hailstorm, Hurricane Arthur and the Revere Tornado in 2014. Winterstorm Nemo in 2013.


⁽²⁾	Reflects losses from Winterstorm Nemo in 2013.


⁽³⁾	Reflects losses from the Orlando weather event and Tropical Storm Andrea in 2013.


⁽⁴⁾	Reflects losses from Tropical Storms Debby and Isaac in 2012.


⁽⁵⁾	Reflects losses from Superstorm Sandy in 2012.


⁽⁶⁾	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,
	2014		2013
Reinsurance recoverable on unpaid losses and LAE	$	1,252	$	1,957
Reinsurance recoverable on paid losses and LAE	816		469
Reinsurance recoverable	$	2,068	$	2,426

During the years ended December 31, 2014 and 2013, we realized recoveries under our reinsurance agreements totaling $2,667,000 and $2,521,000, respectively. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.

During the fourth quarter of 2014, we placed our non-catastrophe reinsurance agreements, which will expire on December 31, 2015. The first non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $3,000,000 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-only business, excluding catastrophes, two reinstatements of coverage is included at no additional premium. We also entered into a second property catastrophe excess-of-loss reinsurance agreement that provides coverage up to $25,000,000 in excess of $3,000,000. This agreement provides coverage for events that are not named hurricanes or tropical storms. Should losses for one event exceed $25,000,000, our catastrophe reinsurance agreements would provide reinsurance for the remaining losses. Reinstatements of the second property catastrophe agreement are subject to an 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 $1,078,000, $570,000, and $267,000 for the years ended December 31, 2014, 2013, and 2012, 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,
	2014			2013			2012
Premium written:
Direct	$	417,769		$	339,765		$	254,913
Assumed	18,984			41,587			(4		)
Ceded	(144,404		)	(124,682		)	(113,234		)
Net premium written	$	292,349		$	256,670		$	141,675
Change in unearned premiums:
Direct	$	(38,995	)	$	(44,422	)	$	(28,743	)
Assumed	2,937			(20,222		)	88
Ceded	8,559			5,352			8,948
Net increase	$	(27,499	)	$	(59,292	)	$	(19,707	)
Premiums earned:
Direct	$	378,774		$	295,343		$	226,170
Assumed	21,921			21,365			84
Ceded	(135,845		)	(119,330		)	(104,286		)
Net premiums earned	$	264,850		$	197,378		$	121,968
Losses and LAE incurred:
Direct	$	111,820		$	92,526		$	60,248
Assumed	8,672			9,240			(335		)
Ceded	(2,415		)	(2,936		)	(1,504		)
Net losses and LAE incurred	$	118,077		$	98,830		$	58,409

Ceded losses incurred decreased by $521,000 during the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily because we ceded more commercial auto and multi-peril losses in 2013 than in 2014. Our commercial auto and multi-peril line of business has been in run-off since May 2009. The losses we incurred in 2014, 2013 and 2012 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,
	2014			2013			2012
Unpaid losses and LAE:
Direct	$	49,734		$	42,954		$	34,503
Assumed	4,702			4,497			1,189
Gross unpaid losses and LAE	54,436			47,451			35,692
Ceded	(1,252		)	(1,957		)	(1,935		)
Net unpaid losses and LAE	$	53,184		$	45,494		$	33,757
Unearned premiums:
Direct	$	212,201		$	173,206		$	128,785
Assumed	17,285			20,222			—
Gross unearned premiums	229,486			193,428			128,785
Ceded	(63,827		)	(55,268		)	(49,916		)
Net unearned premiums	$	165,659		$	138,160		$	78,869