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 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 FHCF. 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 excluding 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 insurers 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 Insurance. 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. UPC Insurance also secured up to $95,000,000 of limit that can be utilized at our option for the second and subsequent events at an additional cost, but UPC Insurance is under no obligation to activate this layer.

UPC Insurance 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 second event retention in Florida to $10,000,000 and third 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 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,
	2015			2014			2013
Excess-of-loss	$	(163,106	)	$	(125,638	)	$	(108,696	)
Equipment & identity theft	(6,169		)	(4,370		)	(2,608		)
Flood	(14,533		)	(14,396		)	(13,378		)
Ceded premiums written	$	(183,808	)	$	(144,404	)	$	(124,682	)
Increase in ceded unearned premiums	15,551			8,559			5,352
Ceded premiums earned	$	(168,257	)	$	(135,845	)	$	(119,330	)

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



		Number of Events⁽⁸⁾	Incurred Loss and LAE ⁽⁷⁾		Combined Ratio Impact
December 31, 2015
Current period catastrophe losses incurred
$ 5 million to $10 million	⁽¹⁾	2	$	11,523	3.4	%
$ 1 million to $5 million	⁽²⁾	7	14,699		4.4	%
Less than $1 million	⁽³⁾	5	2,343		0.7	%
Total		14	$	28,565	8.5	%

December 31, 2014
Current period catastrophe losses incurred
Less than $1 million	⁽⁴⁾	3	829		0.3	%
Total		3	$	829	0.3	%

December 31, 2013
Current period catastrophe losses incurred
$ 1 million to $5 million	⁽⁵⁾	1	1,839		0.9	%
Less than $1 million	⁽⁶⁾	2	1,763		0.9	%
Total		3	$	3,602	1.8	%


⁽¹⁾	Reflects losses from winter storms in 2015.


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


⁽³⁾	Reflects losses from winter storms, hail storms, Texas flooding, Hurricane Anna and Tropical Storm Bill in 2015.


⁽⁴⁾	Reflects losses from the Richland hailstorm, Hurricane Arthur and the Revere Tornado in 2014.


⁽⁵⁾	Reflects losses from Winter Storm Nemo in 2013.


⁽⁶⁾	Reflects losses from the Orlando weather event and Tropical Storm Andrea in 2013.


⁽⁷⁾	Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.


⁽⁸⁾	These amounts represent the actual number of catastrophic events. The numbers are not presented in thousands.

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



	December 31,
	2015		2014
Reinsurance recoverable on unpaid losses and LAE	$	2,114	$	1,252
Reinsurance recoverable on paid losses and LAE	847		816
Reinsurance recoverable	$	2,961	$	2,068

During the years ended December 31, 2015 and 2014, we realized recoveries under our reinsurance agreements totaling $10,282,000 and $2,667,000, respectively. These recoveries were primarily related to losses from the Northeast winter storms that occurred during the first half of 2015.

Effective January 1, 2016, we entered into a reinsurance agreement with several private reinsurers. This agreement provides coverage against accumulated losses from all catastrophe events in all states in which we operate except against those windstorms named by the National Hurricane Center. We will retain the first $15,000,000 of aggregate catastrophe losses and then transfer the next $20,000,000 of catastrophe losses in the aggregate, excluding named windstorms. The $20,000,000 of aggregate limit is intended to provide additional protection against the Company's modeled expected loss from the catastrophe perils of winter storms, severe convection storms, tornadoes and hail.

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 $959,000, $1,078,000, and $570,000 for the years ended December 31, 2015, 2014, and 2013, 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,
	2015			2014			2013
Premium written:
Direct	$	548,916		$	417,769		$	339,765
Assumed	20,820			18,984			41,587
Ceded	(183,808		)	(144,404		)	(124,682		)
Net premium written	$	385,928		$	292,349		$	256,670
Change in unearned premiums:
Direct	$	(65,300	)	$	(38,995	)	$	(44,422	)
Assumed	(221		)	2,937			(20,222		)
Ceded	15,551			8,559			5,352
Net increase	$	(49,970	)	$	(27,499	)	$	(59,292	)
Premiums earned:
Direct	$	483,616		$	378,774		$	295,343
Assumed	20,599			21,921			21,365
Ceded	(168,257		)	(135,845		)	(119,330		)
Net premiums earned	$	335,958		$	264,850		$	197,378
Losses and LAE incurred:
Direct	$	188,270		$	111,820		$	92,526
Assumed	7,861			8,672			9,240
Ceded	(13,023		)	(2,415		)	(2,936		)
Net losses and LAE incurred	$	183,108		$	118,077		$	98,830

Ceded losses incurred increased by $10,608,000 during the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily because we paid more ceded losses in 2015 than in 2014. A portion of the losses we incurred in 2015 exceeded our retained loss thresholds, therefore we received reinsurance recoveries for some of the losses that we incurred on these storms. The losses we incurred in 2014 and 2013 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,
	2015			2014			2013
Unpaid losses and LAE:
Direct	$	72,373		$	49,734		$	42,954
Assumed	4,419			4,702			4,497
Gross unpaid losses and LAE	76,792			54,436			47,451
Ceded	(2,114		)	(1,252		)	(1,957		)
Net unpaid losses and LAE	$	74,678		$	53,184		$	45,494
Unearned premiums:
Direct	$	287,148		$	212,201		$	173,206
Assumed	17,506			17,285			20,222
Gross unearned premiums	304,654			229,486			193,428
Ceded	(79,400		)	(63,827		)	(55,268		)
Net unearned premiums	$	225,254		$	165,659		$	138,160