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 catastrophes). 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.

Effective June 1, 2017, UPC Insurance, through our wholly owned insurance subsidiaries UPC, ACIC, FSIC and IIC, entered into reinsurance agreements with several private reinsurers and with the Florida State Board of Administration (SBA), which administers the Florida Hurricane Catastrophe Fund (FHCF). These agreements provide coverage for catastrophe losses from named or numbered windstorms and earthquakes in all states UPC operates except for the FHCF agreement which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.

Highlights of the coverage embedded these contracts include:


•	More frequency and severity protection than in any prior year, with an overall program exhaustion point of $2,747,500,000;


◦	Sufficient coverage for a single 1-in-400 year event (AIR Touchstone v3.1 Standard Event Set);


◦	Sufficient coverage for a 1-in-100 year event followed by a 1-in-50 year event in the same season;


•	Group retention of $55,000,000 for a first event and $30,000,000 for a second and subsequent events including a $5,000,000 retention related to our captive reinsurer BlueLine Cayman Holding; this represents approximately 11% of group equity for a first event, lower than in any prior year for UPC Insurance;


•	Realized cost synergies by placing a combined program with American Coastal that surpassed our previously stated goal of $20,000,000 annually;


•	Coverage from 43 reinsurers with 70% of the open market limit placed on a fully collateralized basis to mitigate credit risk; carriers providing uncollateralized limit have minimum A.M. Best financial strength ratings of A-;


•	Approximately $87,500,000 of multi-year limit; and


•	Coverage expanded to include the entire life of a hurricane in lieu of an hours clause

For the FHCF Reimbursement Contracts effective June 1, 2017, UPC Insurance has elected a 45% coverage for all its insurance subsidiaries with Florida exposure. We estimate the mandatory FHCF layer will provide approximately $789,000,000 of aggregate coverage with varying retentions and limits among the three FHCF contracts that all inure to the benefit of the open market coverage secured from private reinsurers.

The $1,928,000,000 of aggregate open market catastrophe reinsurance coverage is structured into multiple layers with a cascading feature that all layers drop down as layers below them are exhausted. Any remaining unused layer protection drops down for subsequent events until exhausted, ensuring there are no potential gaps in coverage up to the $2,747,500,000 program exhaustion point.

The total cost of the 2017-18 catastrophe reinsurance program is estimated to be $314,169,000.

Effective December 1, 2016, UPC Insurance, through our wholly owned insurance subsidiary, UPC, entered into a quota share reinsurance agreement (the "quota share agreement") with private reinsurers. Also, effective January 1, 2017, we renewed our aggregate excess of loss reinsurance agreement (the "aggregate excess of loss agreement," and, together with the quota share agreement, the "agreements") with private reinsurers. These agreements provide coverage for in-force, new and renewal business. The quota share agreement provides coverage only for UPC, while the aggregate excess of loss agreement provides coverage for UPC, ACIC, FSIC, and IIC. These new reinsurance programs are designed to work in conjunction with our catastrophe excess of loss reinsurance program to provide us broad risk transfer protection and to lessen financial volatility.

The quota share agreement includes a cession rate of 20% (15% on single year and 5% over a two-year period) for all subject business. The quota share agreement provides coverage for all catastrophe perils (e.g. hurricanes, tropical storms, tropical depressions and earthquakes), other-catastrophe perils (e.g. weather-related perils other than hurricanes, tropical storms, tropical depressions and earthquakes), and attritional losses. For other-catastrophe perils, the quota share agreement provides coverage alongside the aggregate excess of loss program described herein, after our retention has been satisfied. For catastrophe perils, the quota share agreement provides ground-up protection that effectively reduces our retention for catastrophe losses. Quota share agreement reinsurers' participation in paying attritional losses is subject to an attritional loss ratio cap.

The aggregate excess of loss agreement provides coverage only for other-catastrophe perils. Under this agreement, for other-catastrophe losses in excess of $1,000,000 but less than $15,000,000, UPC will retain, in the aggregate, 100% of those losses up to $30,000,000. The reinsurers will then be liable for all losses excess of $30,000,000 in the aggregate not to exceed an annual aggregate limit of $30,000,000. This program was placed at 85% rather than 100% because of the quota share agreement reinsurers' participation in paying other-catastrophe losses after the $30,000,000 retention. We have now met the $30,000,000 retention under this reinsurance program, which means the next $30,000,000 of catastrophe losses in excess of our $1,000,000 retention, other than from named windstorms or earthquakes, incurred during the remainder of 2017 will be ceded to third party reinsurers up to the $60,000,000 exhaustion point.

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Excess-of-loss	$	(28,306	)	$	(476	)	$	(400,773	)	$	(182,503	)
Equipment & identity theft	(2,606		)	(2,359		)	(7,275		)	(6,136		)
Novation of auto policies ⁽¹⁾	—			—			—			(2,396		)
Flood	(5,559		)	(5,006		)	(14,319		)	(12,969		)
Ceded premiums written	$	(36,471	)	$	(7,841	)	$	(422,367	)	$	(204,004	)
Increase (decrease) in ceded unearned premiums	(79,036		)	(45,458		)	130,012			55,167
Ceded premiums earned	$	(115,507	)	$	(53,299	)	$	(292,355	)	$	(148,837	)

⁽¹⁾Reflects ceding of auto policy premiums to Maidstone Insurance Company as part of the settlement of the novation agreement entered into at the closing of the Interboro Insurance Company transaction.

Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table for the three and nine months ended September 30, 2017 and 2016.



	2017						2016
	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 September 30,
Current period catastrophe losses incurred
Named and numbered storms	4	$	83,460		54.7	%	3	$	2,600	2.2	%
All other catastrophe loss events	15	(845		)	(0.6	)%	15	2,509		2.0	%
Total	19	$	82,615		54.1	%	18	$	5,109	4.2	%

Nine Months Ended September 30,
Current period catastrophe losses incurred
Named and numbered storms	4	$	83,724		20.0	%	3	$	4,069	1.2	%
All other catastrophe loss events	15	31,301			7.5	%	15	19,816		5.9	%
Total	19	$	115,025		27.5	%	18	$	23,885	7.1	%

⁽¹⁾ Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during both the three and nine months ended September 30, 2017. During the third quarter of 2017 we incurred losses and LAE from four new storms.

We collected cash recoveries under our reinsurance agreements totaling $20,419,000 and $9,747,000 for the three month periods ended September 30, 2017 and 2016, respectively, and $40,984,000 and $10,604,000 for the nine month periods ended September 30, 2017 and 2016, respectively.

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 $308,000 and $270,000 for the three month periods ended September 30, 2017 and 2016, respectively, and $905,000 and $772,000 for the nine month periods ended September 30, 2017 and 2016, respectively.