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 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 2015, we placed our reinsurance program for the 2015 treaty year beginning June 1, 2015 and ending on May 31, 2016. 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 treaty year beginning June 1, 2015 and ending on May 31, 2016, UPC Insurance has obtained reinsurance protection of $1,243,122,000 excess $25,000,000, providing sufficient protection for approximately a 1-in-100 year hurricane event and a second 1-in-50 year hurricane event as calculated using a blended model result predominately based on our licensed modeling software, AIR model version 15, using long-term event rates including demand surge. For a single first event hurricane or tropical storm, UPC Insurance will pay, or “retain”, 100% of losses up to $25,000,000 in a Florida event and 100% of losses up to $5,000,000 in an event outside of Florida. The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,173,122,000 for a first event and $1,243,122,000 for any number of subsequent events until all limit is exhausted.

For the 2015 contract year, UPC Insurance has elected a 45% participation rate with the FHCF and purchased FHCF replacement coverage from private reinsurers for the remaining 45%. Of the $1,243,122,000 in excess of $25,000,000, we estimate the mandatory FHCF layer will provide approximately $284,061,000 (45% of $631,247,000) of aggregate coverage for losses in excess of $230,356,000. The private market FHCF replacement coverage provides another $284,061,000 in excess of $230,356,000 layer for Florida only on a fully collateralized basis that also inures to the benefit of all other private reinsurance coverage.

In addition to the FHCF and FHCF replacement coverage, $585,000,000 of aggregate catastrophe reinsurance coverage in excess of $25,000,000 was acquired from 35 unaffiliated private reinsurers who either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts for the benefit of UPC. Our 2015 agreements with these private reinsurers structure coverage into 6 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 ensuring there are no potential gaps in coverage up to the $1,173,122,000 first event program exhaustion point. The Company also secured up to $95,000,000 of limit that can be utilized at our option for 2^nd and subsequent events at an additional cost, but the Company is under no obligation to activate this layer.

UPC also purchased a $20,000,000 per occurrence, excess of $5,000,000, underlying layer with $40,000,000 of aggregate contract year limit. This coverage reduces our retention for named windstorms to $5,000,000 subject to an overall annual aggregate limit of $40,000,000. For losses in Florida, this contract stipulates an annual aggregate deductible of $25,000,000, which effectively reduces our 2^nd event retention in Florida to $10,000,000 and 3^rd and subsequent event retentions in Florida to $5,000,000 subject to the overall $40,000,000 of aggregate limit.

The total cost of the 2015-16 catastrophe reinsurance program is estimated to be $161,400,000.

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,
	2015			2014			2015			2014
Excess-of-loss	$	(162,993	)	$	(131,213	)	$	(165,119	)	$	(131,274	)
Equipment & identity theft	(1,604		)	(1,156		)	(2,798		)	(1,917		)
Flood	(4,109		)	(4,423		)	(6,956		)	(7,452		)
Ceded premiums written	$	(168,706	)	$	(136,792	)	$	(174,873	)	$	(140,643	)
Decrease in ceded unearned premiums	128,176			103,753			97,209			76,627
Ceded premiums earned	$	(40,530	)	$	(33,039	)	$	(77,664	)	$	(64,016	)

Current year catastrophe losses by the event magnitude are shown in the following table for the three and six months ended June 30, 2015 and 2014.



	2015					2014
	Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact
Three Months Ended June 30,
Current period catastrophe losses incurred
$ 1 million to $5 million ⁽²⁾	7	$	4,696	5.8	%	—	$	—	—	%
Less than $1 million ⁽³⁾	5	1,821		2.3	%	1	260		0.4	%
Total	12	$	6,517	8.1	%	1	$	260	0.4	%

Six Months Ended June 30,
Current period catastrophe losses incurred
$ 1 million to $5 million ⁽²⁾	7	$	19,956	12.6	%	—	$	—	—	%
Less than $1 million ⁽³⁾	5	1,821		1.1	%	1	260		0.2	%
Total	12	$	21,777	13.7	%	1	$	260	0.2	%


⁽¹⁾	Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.


⁽²⁾	Reflects losses from winter storms and hail storms in 2015.


⁽³⁾	Reflects losses from hail storms, Texas flooding and Tropical Storm Bill in 2015 and losses from the Richland hail storm in June 2014.

We collected cash recoveries under our reinsurance agreements totaling $116,000 and $664,000 for the three month periods ended June 30, 2015 and 2014, respectively, and $927,000 and $1,081,000 for the six month periods ended June 30, 2015 and 2014, respectively.

Effective January 1, 2015, we entered into two new reinsurance agreements, which will expire on December 31, 2015. The first 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 named windstorms, two reinstatements of coverage are included at no additional premium, with a third reinstatement subject to 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 during any period of 168 consecutive hours 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 $241,000 and $162,000 for the three month periods ended June 30, 2015 and 2014, respectively, and $482,000 and $580,000 for the six month periods ended June 30, 2015 and 2014, respectively.