Property and Casualty Insurance Activity

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Property and Casualty Insurance Activity

Earned Premiums

Premiums written, ceded and earned are as follows:

	Direct	Assumed	Ceded	Net
Nine months ended September 30, 2011 (unaudited)
Premiums written	$    30,502,800	$             6,289	$(18,099,446)	$  12,409,643
Change in unearned premiums	(3,823,593)	1,611	2,234,476	(1,587,506)
Premiums earned	$    26,679,207	$             7,900	$(15,864,970)	$  10,822,137
Nine months ended September 30, 2010 (unaudited)
Premiums written	$    24,969,119	$             9,572	$(14,529,432)	$  10,449,259
Change in unearned premiums	(3,126,232)	(1,360)	583,683	(2,543,909)
Premiums earned	$    21,842,887	$             8,212	$(13,945,749)	$    7,905,350
Three months ended September 30, 2011 (unaudited)
Premiums written	$    10,382,641	$             3,409	$  (6,119,576)	$    4,266,474
Change in unearned premiums	(909,125)	(41)	579,881	(329,285)
Premiums earned	$      9,473,516	$             3,368	$  (5,539,695)	$    3,937,189
Three months ended September 30, 2010 (unaudited)
Premiums written	$      8,375,776	$             6,436	$  (5,015,905)	$    3,366,307
Change in unearned premiums	(595,995)	(3,432)	298,409	(301,018)
Premiums earned	$      7,779,781	$             3,004	$  (4,717,496)	$    3,065,289

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $637,000 and $411,000 as of September 30, 2011 (unaudited) and December 31, 2010, respectively.

Loss and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):

	Nine months ended
	September 30,
	2011	2010
	(unaudited)
Balance at beginning of period	$  17,711,907	$  16,513,318
Less reinsurance recoverables	(10,431,415)	(10,512,203)
Net balance, beginning of period	7,280,492	6,001,115
Incurred related to:
Current year	6,742,201	4,211,203
Prior years	565,724	307,050
Total incurred	7,307,925	4,518,253
Paid related to:
Current year	2,414,171	1,960,235
Prior years	2,608,709	1,725,204
Total paid	5,022,880	3,685,439
Net balance at end of period	9,565,537	6,833,929
Add reinsurance recoverables	11,808,025	10,304,307
Balance at end of period	$  21,373,562	$  17,138,236

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $7,035,191 and $6,588,317 for the nine months ended September 30, 2011 and 2010.

Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to Company and industry trends.

Loss and loss adjustment expense reserves

The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often beyond the Company’s control. The loss ratio projection method is used to estimate loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the result of numerous best estimates made by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior years.

Reinsurance

The Company’s reinsurance treaties for both its Personal Lines business, which primarily consists of homeowners’ policies, and Commercial Lines business, other than commercial auto were renewed as of July 1, 2011. The treaties are renewed annually; the terms of the treaties effective July 1, 2011 are as follows:

Personal Lines

Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty which provides coverage up to $700,000 per occurrence. An excess of loss contract provides $1,500,000 of coverage in excess of the $700,000 included under the 75% quota share treaty for a total coverage up to $2,200,000 per occurrence. Personal umbrella policies are reinsured under a 90% quota share treaty limiting the Company to a maximum of $100,000 per occurrence for the first $1,000,000 of coverage. The second $1,000,000 of coverage is 100% reinsured. 

Commercial Lines

General liability commercial policies written by the Company, except for commercial auto policies, are reinsured under a 60% quota share treaty, which provides coverage up to $700,000 per occurrence.  An excess of loss contract provides $1,500,000 of coverage in excess of the $700,000 included under the 60% quota share treaty for a total coverage up to $2,200,000 per occurrence.

Commercial Auto

Commercial auto policies are covered by an excess of loss reinsurance contract which provides $1,750,000 of coverage in excess of $250,000 for a total coverage up to $2,000,000 per occurrence.

Catastrophe Reinsurance

A total of $54,000,000 of catastrophe reinsurance coverage has been obtained, whereby the Company retains $500,000 per occurrence.

The Company’s reinsurance program is structured to enable it to reflect significant reductions in premiums written and earned and also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. This structure has enabled the Company to significantly grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The Company’s participation in reinsurance arrangements does not relieve the Company from its obligations to policyholders.

Ceding Commission Revenue

The Company earns ceding commissions under its quota share reinsurance agreements based on a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and ceding commissions earned decreases when the estimated ultimate loss ratio increases.

As of September 30, 2011 and 2010, the Company’s estimated ultimate loss ratios attributable to these contracts are lower than the contractual ultimate loss ratios at which provisional ceding commissions are earned. Accordingly, the Company has recorded contingent ceding commissions earned in addition to the provisional ceding commissions earned.

Ceding commission revenue consists of the following:

	Three months ended		Nine months ended
	September 30,		September 30,
	2011	2010	2011	2010
	(unaudited)		(unaudited)
Provisional ceding commissions earned	$  1,763,930	$  1,547,878	$  5,048,609	$  4,771,366
Contingent ceding commissions earned	543,460	683,615	2,299,223	1,642,408
	$  2,307,390	$  2,231,493	$  7,347,832	$  6,413,774