7. Reinsurance

12 Months Ended

Dec. 31, 2012

Insurance [Abstract]

7. 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, 2012. The treaties, which are annual, provide for the following material terms as of July 1, 2012:

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 with respect to losses of up to $1,000,000 per occurrence. An excess of loss contract provides 100% of coverage for the next $1,900,000 of losses for a total reinsurance coverage of $2,650,000 with respect to losses of up to $2,900,000 per occurrence. See “Catastrophe Reinsurance” below for a discussion of the Company’s reinsurance coverage with respect to its Personal Lines business in the event of a catastrophe.

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 40% quota share treaty, which provides coverage with respect to losses of up to $500,000 per occurrence. Excess of loss contracts provide 100% of coverage for the next $2,400,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000 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.

Catastrophe Reinsurance

The Company has catastrophe reinsurance coverage with regard to losses of up to $73,000,000. The initial $3,000,000 of losses in a catastrophe are subject to a 75% quota share treaty, such that the Company retains $750,000 per catastrophe occurrence With respect to any additional catastrophe losses of up to $70,000,000, the Company is 100% reinsured under its catastrophe reinsurance program.

The Company’s reinsurance program is structured to enable 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 reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not relieve the Company from its obligations to policyholders.

Approximate reinsurance recoverables on unpaid and paid losses by reinsurer are as follows:

	Unpaid		Paid
($ in thousands)	Losses		Losses		Total		Security
December 31, 2012
Maiden Reinsurace Company	$	8,173	$	2,989	$	11,162	$	6,503	(1)
SCOR Reinsurance Company		4,437		1,495		5,932		-
Motors Insurance Corporation		1,550		49		1,599		1,214	(1)
Sirius American Insurance Company		1,406		18		1,424		-
Swiss Reinsurance America Corporation		1,705		756		2,461		-
Allied World Assurance Company		808		372		1,180		-
Others		341		113		454		91	(2)
Total	$	18,420	$	5,792	$	24,212	$	7,808
December 31, 2011
Maiden Reinsurace Company	$	3,534	$	514	$	4,048	$	8,156	(1)
SCOR Reinsurance Company		2,046		272		2,318		-
Motors Insurance Corporation		1,730		228		1,958		1,923	(1)
Sirius American Insurance Company		993		67		1,060		-
Others		1,657		536		2,193		360	(2)
Total	$	9,960	$	1,617	$	11,577	$	10,439

(1) Secured pursuant to collateralized trust agreements.

(2) Guaranteed by an irrevocable letter of credit.

Assets held in the two trusts referred to in footnote (1) above are not included in the Company’s invested assets and investment income earned on these assets is credited to the two reinsurers respectively. In addition to reinsurance recoverables on unpaid and paid losses, reinsurance receivables as of December 31, 2012 and 2011 include unearned ceded premiums of $14,690,683 and $12,304,499, respectively.

The Company received advance payments from catastrophe reinsurers related to Superstorm Sandy. As of December 31, 2012 and 2011, the balance of advance payments from catastrophe reinsurers which will be applied against unpaid losses when paid was $7,358,391 and $-0-, respectively, and are included in “Advance payments from catastrophe reinsurers” in the Consolidated Balance Sheets.

Ceding Commission Revenue

The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.

As of December 31, 2012, the Company’s estimated ultimate loss ratios are attributable to contracts for the July 1, 2011/June 30, 2012 treaty year (“2011/2012 Treaty”) and July 1, 2012/June 30, 2013 treaty year (“2012/2013 Treaty”). As of December 31, 2012, the Company’s estimated ultimate loss ratios attributable to the 2011/2012 Treaty are lower than the contractual ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, as of December 31, 2012, the Company has recorded contingent ceding commissions earned with respect to the 2011/2012 Treaty. As of December 31, 2012, the Company’s estimated ultimate loss ratios attributable to the 2012/2013 Treaty are greater than the contractual ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2012, the Company has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaty.

As of December 31, 2011, the Company’s estimated ultimate loss ratios attributable to contracts for the July 1, 2010/June 30, 2011 treaty year (“2010/2011 Treaty”) and 2011/2012 Treaty are lower than the contractual ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2011, the Company has recorded contingent ceding commissions earned with respect to the 2010/2011 Treaty and 2011/2012 Treaty.

Ceding commissions earned consists of the following:

	Years ended
	December 31,
	2012		2011
Provisional ceding commissions earned	$	8,516,240	$	6,916,027
Contingent ceding commissions earned		1,173,915		3,708,687
	$	9,690,155	$	10,624,714

Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled annually based on the loss ratio of each treaty year that ends on June 30. As discussed above, as of December 31, 2012, the Company has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaty, which results in ceding commissions payable to reinsurers. Contingent ceding commissions payable to reinsurers as of December 31, 2012 were $807,415 and are included in “Reinsurance balances payable” in the Consolidated Balance Sheets. Contingent ceding commissions due from reinsurers as of December 31, 2011 were $1,734,535 and are included in “Receivables – reinsurance contracts” in the Consolidated Balance Sheets.