Reinsurance

9 Months Ended

Sep. 30, 2023

Note 10. Reinsurance

2023 Program

Our third-party quota share reinsurance program is split into three separate placements to maximize coverage and cost efficiency. The 2023 Coastal Program covers our business in certain Texas coastal regions and the Houston metropolitan area and is placed at 42% of subject property and casualty losses (“P&C losses”), as well as all business in South Carolina which is placed at 7% of P&C losses. The 2023 Core Program, which covers the portion of our business not in the Coastal Program, is placed at 9.5% of P&C losses of our remaining business in Texas and 8% of P&C losses of our business in other states. In addition, the Combined Program covers all of our business and is placed at 5% of P&C losses. All programs are effective for the period January 1, 2023, through December 31, 2023, or March 31, 2024, and are subject to certain limits and exclusions, which vary by participating reinsurer.

Property catastrophe excess of loss treaties were placed on April 1, 2023, and were updated in August 2023 after the events described in the “Terminated Reinsurance Contract” section below. Coverage for wind storms starts at $20 million per occurrence. Losses are shared between $20 million and $80 million. Over $80 million, losses are covered up to a net loss of $440 million. We also place reinstatement premium protection to cover any reinstatement premiums due on the first four layers.

The effects of reinsurance on premiums written and earned for the three and nine months ended September 30, 2023 and 2022, were as follows:


	Three Months Ended September 30,
	2023				2022
	Written		Earned		Written		Earned
Direct premiums	$	130,952	$	117,032	$	137,047	$	105,245
Ceded premiums	30,358		(41,846)		(119,131)		(93,982)
Net premiums	$	161,310	$	75,186	$	17,916	$	11,263


	Nine Months Ended September 30,
	2023				2022
	Written		Earned		Written		Earned
Direct premiums	$	349,365	$	348,253	$	349,084	$	282,645
Ceded premiums	(34,763)		(188,686)		(297,693)		(248,804)
Net premiums	$	314,602	$	159,567	$	51,391	$	33,841

Our 2023 third-party quota share program was placed at a reduced ceding percentage as compared to the 2022 program, which resulted in a portfolio transfer and lower ceded written premiums in the nine months ended September 30, 2023.

The effects of reinsurance on incurred losses and loss adjustment expense (“LAE”) for the three and nine months ended September 30, 2023 and 2022, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Direct losses and LAE	$	44,273	$	77,471	$	271,879	$	220,309
Ceded losses and LAE	(1,727)		(60,900)		(115,325)		(180,006)
Net losses and LAE	$	42,546	$	16,571	$	156,554	$	40,303

The detail of reinsurance balances due is as follows:


	September 30, 2023		December 31, 2022
Ceded unearned premium	$	49,271	$	203,157
Losses and LAE reserve	25,772		76,999
Reinsurance recoverable	23,118		18,765
Other	330		139
Reinsurance balance due	$	98,491	$	299,060

Terminated Reinsurance Contract

In the third quarter of 2023, HOA, a subsidiary of Porch Group, discovered that Vesttoo Ltd (“Vesttoo”), which arranged capital for one of our reinsurance contracts, faced allegations of fraudulent activity in connection with collateral it provided to HOA and certain other third parties. We have communicated and met with regulators and other key stakeholders regarding the evolving situation. This reinsurance agreement provided partial quota share coverage as well as up to approximately $175 million in a catastrophic event.

As a result of its findings, and in accordance with the terms of the reinsurance agreement, HOA terminated the associated contract on August 4, 2023, with an effective date of July 1, 2023. Had the contract not been terminated, the contract would have expired on December 31, 2023, and HOA would have been contracted to pay approximately $20 million in additional premium payments during July through December 2023. Following the effective date of the termination, HOA seized available liquid collateral in the amount of approximately $47.6 million from a reinsurance trust, of which HOA was the beneficiary. In addition, HOA is evaluating and intends to pursue all available legal claims and remedies to enforce its rights under the letter of credit required by the reinsurance agreement in the amount of $300 million as additional collateral. We are also seeking recovery of all losses and damages incurred as a result of terminating the reinsurance agreement due to allegations of fraudulent activity by third parties.

In the second quarter of 2023, we recognized a charge of $48.2 million in provision for doubtful accounts in the unaudited condensed consolidated statements of operations, calculated as the net asset due under the reinsurance contract (as we have the legal right of offset) of $95.8 million as of June 30, 2023, before adjustment, less the $47.6 million collateral received from a trust in July 2023. During the third quarter of 2023, we experienced improvement in loss reserves, which reduced the amount of the reinsurance recoverable by approximately $7.0 million.

HOA has secured supplemental reinsurance coverage in the amount of approximately $166 million, replacing nearly all of the reinsurance coverage for certain catastrophic weather events that was in place under the terminated reinsurance contract. HOA is currently seeking additional supplemental reinsurance coverage in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event for which it has not obtained supplemental coverage and to satisfy regulatory and rating agency requirements.