Property and Casualty Insurance Activity

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 11. Property and Casualty Insurance Activity

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net
Year ended December 31, 2011
Premiums written	$	40,734,767		$	10,990		$	(24,449,655	)	$	16,296,102
Change in unearned premiums		(4,005,312	)		(516	)		2,578,472			(1,427,356	)
Premiums earned	$	36,729,455		$	10,474		$	(21,871,183	)	$	14,868,746
Year ended December 31, 2010
Premiums written	$	33,249,331		$	10,699		$	(19,525,208	)	$	13,734,822
Change in unearned premiums		(3,189,250	)		105			589,958			(2,599,187	)
Premiums earned	$	30,060,081		$	10,804		$	(18,935,250	)	$	11,135,635

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of December 31, 2011 and 2010 was approximately $545,000 and $411,000, respectively.

The components of the liability for loss and LAE expenses and related reinsurance receivables as of December 31, 2011 and 2010 are as follows:

	Gross		Reinsurance
	Liability		Receivables
December 31, 2011
Case-basis reserves	$	11,467,967	$	6,148,765
Loss adjustment expenses		2,117,242		1,017,983
IBNR reserves		4,895,508		2,793,586
Recoverable on unpaid losses				9,960,334
Recoverable on paid losses		-		1,615,981
Total loss and loss adjustment expenses	$	18,480,717		11,576,315
Unearned premiums				12,304,499
Total reinsurance receivables			$	23,880,814
December 31, 2010
Case-basis reserves	$	11,772,329	$	6,910,340
Loss adjustment expenses		1,958,700		1,058,325
IBNR reserves		3,980,878		2,462,750
Recoverable on unpaid losses				10,431,415
Recoverable on paid losses		-		562,752
Total loss and loss adjustment expenses	$	17,711,907		10,994,167
Unearned premiums				9,726,027
Total reinsurance receivables			$	20,720,194

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

	Years ended
	December 31,
	2011			2010
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		8,297,998			6,095,528
Prior years		273,060			330,057
Total incurred		8,571,058			6,425,585
Paid related to:
Current year		4,108,010			2,855,074
Prior years		3,223,157			2,291,134
Total paid		7,331,167			5,146,208
Net balance at end of period		8,520,383			7,280,492
Add reinsurance recoverables		9,960,334			10,431,415
Balance at end of period	$	18,480,717		$	17,711,907

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $7,073,026 and $7,187,536 for the years ended December 31, 2011 and 2010, respectively.

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.

The table below shows the method used by product line and accident year to select the estimated year-ending loss reserves:

		Accident Year
Product Line	Most Recent	1st Prior	All Other
Fire	Loss Ratio	Loss Development	Loss Development
Homeowners	Loss Ratio	Loss Development	Loss Development
Multi-Family	Loss Ratio	Loss Development	Loss Development
Commercial multiple-peril property	Loss Ratio	Loss Development	Loss Development
Commercial multiple-peril liability	Loss Ratio	Loss Development	Loss Development
Other Liability	Loss Ratio	Loss Development	Loss Development
Commercial Auto Liability	Loss Ratio	Loss Development	Loss Development
Auto Physical Damage	Loss Ratio	Loss Development	Loss Development
Personal Auto Liability	Loss Ratio	Loss Development	Loss Development

Two key assumptions that materially impact the estimate of loss reserves are the loss ratio estimate for the current accident year and the loss development factor selections for all accident years. The loss ratio estimate for the current accident year is selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business.

The Company is not aware of any claims trends that have emerged or that would cause future adverse development that have not already been considered in existing case reserves and in its current loss development factors.

In New York State, lawsuits for negligence, subject to certain limitations, must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to IBNR for accident years 2008 and prior is limited although there remains the possibility of adverse development on reported claims.

The Company was previously a one-third participant in a pool arrangement. Effective November 1, 1997, the Company withdrew from its participation in the pool arrangement. Accordingly, the Company will only be participating in losses and allocated loss adjustment expenses that occurred prior to that date. A reserve was established due to the potential that the pool will be unable to collect reinsurance on certain lead paint cases. The balance of the reserve was $103,000 as of December 31, 2011 and 2010.