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, 2018, UPC Insurance, through our wholly-owned insurance subsidiaries ACIC, UPC, FSIC, IIC and BlueLine, entered into reinsurance agreements with private reinsurers and with the Florida State Board of Administration, 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 in which UPC Insurance operates except for the agreement with FHCF, which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.

Highlights of the coverage within these contracts include:


•	Increased frequency and severity protection, with an overall program exhaustion point excess of $3,100,000,000;


◦	Sufficient coverage for approximately a single 1-in-400 year event;


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


•	Lower per occurrence retention levels which include all BlueLine business;


◦	First event retention of $60,000,000 in Florida and $25,000,000 outside of Florida which, as a percentage of the group equity, represents approximately 11% and 4.6%, respectively;


◦	$25,000,000 for second event in all states;


•	Successful completion of Armor Re II CAT Bond providing $100,000,000 of limit on a multi-year basis;


•	Coverage from 41 reinsurers with 93% of the open market limit placed on a fully collateralized basis or with reinsurers having an A+ or better A.M. Best financial strength rating; and


•	Up to $262,500,000 of multi-year limit including the CAT Bond limit.

For the FHCF reimbursement contracts effective June 1, 2018, UPC Insurance has elected a 45% coverage for all its insurance subsidiaries with Florida exposure. We estimate the total mandatory FHCF layer will provide approximately $907,000,000 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 $2,185,000,000 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 $3,100,000,000 program exhaustion point.

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 ceded $20,000,000 of catastrophe losses to this treaty for the nine months ended September 30, 2018. Reinsurance recoveries under this agreement may change in future periods as the cumulative subject gross earned premiums and eligible gross catastrophe losses incurred are recognized in subsequent calendar quarters during 2018 in accordance with the terms of the agreement. No allowance has been recorded against the $20,000,000 reinsurance recoverable at September 30, 2018 since future catastrophe losses are inherently unpredictable and cannot be reasonably estimated.

Effective December 31, 2017, UPC Insurance, through our wholly-owned insurance subsidiary UPC, replaced its 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.

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Condensed 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,
	2018			2017			2018			2017
Quota share	$	(24,852	)	$	(24,768	)	$	(72,824	)	$	(71,549	)
Excess-of-loss	(28,450		)	(3,538		)	(392,541		)	(329,224		)
Equipment & identity theft	(2,375		)	(2,606		)	(7,126		)	(7,275		)
Flood	(5,897		)	(5,559		)	(15,136		)	(14,319		)
Ceded premiums written	$	(61,574	)	$	(36,471	)	$	(487,627	)	$	(422,367	)
Increase (decrease) in ceded unearned premiums	(71,052		)	(79,036		)	122,616			130,012
Ceded premiums earned	$	(132,626	)	$	(115,507	)	$	(365,011	)	$	(292,355	)

Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table:



	2018					2017
	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	3	$	25,019	14.6	%	4	$	83,460		54.7	%
All other catastrophe loss events	6	9,574		5.6	%	15	(845		)	(0.6	)%
Total	9	$	34,593	20.2	%	19	$	82,615		54.1	%

Nine Months Ended September 30,
Current period catastrophe losses incurred
Named and numbered storms	4	$	26,233	5.2	%	4	$	83,724		20.0	%
All other catastrophe loss events	22	32,017		6.3	%	15	31,301			7.5	%
Total	26	$	58,250	11.5	%	19	$	115,025		27.5	%

⁽¹⁾ Incurred loss and LAE (as defined below) 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 the year in which it occurred.

We collected cash recoveries under our reinsurance agreements totaling $66,278,000 and $20,419,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and $340,316,000 and $40,984,000 for the nine-month periods ended September 30, 2018 and 2017, 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 $408,000 and $308,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and $1,194,000 and $905,000 for the nine-month periods ended September 30, 2018 and 2017, respectively.