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 stockholders 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 Insurance 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 in 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, which 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 AmCo 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, with 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.

UPC Insurance renewed our quota share reinsurance agreement (the “quota share agreement”) and our aggregate excess of loss reinsurance agreement (the “aggregate excess of loss agreement”) 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, IIC, and FSIC. These new reinsurance programs are designed to work in conjunction with our catastrophe excess of loss reinsurance program to provide the Company broad risk transfer protection and to lessen financial volatility.

Effective December 31, 2017, UPC Insurance, through our wholly-owned insurance subsidiary UPC, replaced our 15% quota share agreement that expired on November 30, 2017 and our 5% quota share agreement that was set to renew on December 1, 2017 with the quota share agreement with private reinsurers. The quota share agreement has a term of 12 months and a cession rate of 20% for all subject business. The quota share agreement provides coverage for all catastrophe perils and attritional losses. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Quota share reinsurers’ participation in paying attritional losses is subject to an attritional loss ratio cap.

Effective January 1, 2018, UPC Insurance, through its wholly-owned insurance subsidiaries UPC, ACIC, IIC and FSIC, renewed the aggregate excess of loss agreement with a private reinsurer. The treaty provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. Under this agreement, we will retain, in the aggregate, 100% of those losses up to 4.75% of the covered companies’ gross earned premium. The reinsurer will then be liable for all losses in excess of 4.75% of the covered companies’ gross earned premium in the aggregate not to exceed $20,000,000 over the term of the treaty. Recoveries under this treaty will be calculated quarterly based on the cumulative gross earned premium.

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,
	2017			2016			2015
Excess-of-loss	$	(419,668	)	$	(235,236	)	$	(163,106	)
Equipment & identity theft	(9,576		)	(8,313		)	(6,169		)
Novation of Auto Policies ⁽¹⁾	—			(2,396		)	—
Flood	(18,085		)	(16,395		)	(14,533		)
Ceded premiums written	$	(447,329	)	$	(262,340	)	$	(183,808	)
Increase in ceded unearned premiums	46,796			52,442			15,551
Ceded premiums earned	$	(400,533	)	$	(209,898	)	$	(168,257	)

⁽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 IIC transaction.

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



	Number of Events	Incurred Loss and Loss adjustment expense (LAE) ⁽¹⁾		Combined Ratio Impact
December 31, 2017
Current period catastrophe losses incurred
Named and numbered storms	6	$	84,226	14.4	%
All other catastrophe loss events	16	32,198		5.5	%
Total	22	$	116,424	19.9	%

December 31, 2016
Current period catastrophe losses incurred
Named and numbered storms	4	$	33,817	7.4	%
All other catastrophe loss events	15	22,025		4.8	%
Total	19	$	55,842	12.2	%

December 31, 2015
Current period catastrophe losses incurred
Named and numbered storms	2	$	1,167	0.3	%
All other catastrophe loss events	12	27,398		8.2	%
Total	14	$	28,565	8.5	%

⁽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 current year development on storms during the year in which it occurred.

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



	December 31,
	2017		2016
Reinsurance recoverable on unpaid losses and LAE	$	305,673	$	18,724
Reinsurance recoverable on paid losses and LAE	90,101		5,304
Reinsurance recoverable	$	395,774	$	24,028

During the years ended December 31, 2017 and December 31, 2016, we realized recoveries under our reinsurance agreements totaling $186,104,000 and $18,412,000, respectively. These recoveries were primarily related to losses from Hurricane Irma and Hurricane Harvey in 2017 and to Hurricane Matthew, Hurricane Hermine, Winter Storm Olympia, Tropical Storm Colin, tornadoes, thunderstorms, hail storms, and flooding in 2016.

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 $1,255,000, $1,056,000, and $959,000 for the years ended December 31, 2017, 2016, and 2015, 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,
	2017			2016			2015
Premium written:
Direct	$	989,525		$	708,252		$	548,916
Assumed	51,323			(96		)	20,820
Ceded	(447,329		)	(262,340		)	(183,808		)
Net premium written	$	593,519		$	445,816		$	385,928
Change in unearned premiums:
Direct	$	(49,386	)	$	(57,759	)	$	(65,300	)
Assumed	(5,439		)	16,432			(221		)
Ceded	46,796			52,442			15,551
Net decrease (increase)	$	(8,029	)	$	11,115		$	(49,970	)
Premiums earned:
Direct	$	940,139		$	650,493		$	483,616
Assumed	45,884			16,336			20,599
Ceded	(400,533		)	(209,898		)	(168,257		)
Net premiums earned	$	585,490		$	456,931		$	335,958
Losses and LAE incurred:
Direct	$	863,928		$	335,542		$	188,270
Assumed	60,836			3,747			7,861
Ceded	(559,229		)	(40,936		)	(13,023		)
Net losses and LAE incurred	$	365,535		$	298,353		$	183,108

Ceded losses incurred increased by $518,293,000 during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily because we incurred more ceded losses in 2017 than in 2016 as a result of Hurricanes Harvey and Irma which occurred during 2017. A portion of the losses we incurred in 2017, 2016 and 2015 exceeded our retained loss thresholds; therefore, we received reinsurance recoveries for losses that we incurred on these storms and expect to receive additional recoveries during 2018.

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,
	2017			2016			2015
Unpaid losses and LAE:
Direct	$	441,355		$	138,345		$	72,373
Assumed	40,877			2,510			4,419
Gross unpaid losses and LAE	482,232			140,855			76,792
Ceded	(305,673		)	(18,724		)	(2,114		)
Net unpaid losses and LAE	$	176,559		$	122,131		$	74,678
Unearned premiums:
Direct	$	528,419		$	371,149		$	287,148
Assumed	27,454			1,074			17,506
Gross unearned premiums	555,873			372,223			304,654
Ceded	(201,904		)	(132,564		)	(79,400		)
Net unearned premiums	$	353,969		$	239,659		$	225,254