6. Property and Casualty Insurance Activity

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

6. Property and Casualty Insurance Activity

Earned Premiums

Premiums written, ceded and earned are as follows:

	Direct			Assumed		Ceded			Net
Six months ended June 30, 2013 (unaudited)
Premiums written	$	28,725,957		$	20,047	$	(17,781,254	)	$	10,964,750
Change in unearned premiums		(3,452,133	)		28,569		1,758,311			(1,665,253	)
Premiums earned	$	25,273,824		$	48,616	$	(16,022,943	)	$	9,299,497
Six months ended June 30, 2012 (unaudited)
Premiums written	$	23,674,526		$	3,199	$	(14,480,602	)	$	9,197,123
Change in unearned premiums		(2,653,399	)		3,912		1,589,471			(1,060,016	)
Premiums earned	$	21,021,127		$	7,111	$	(12,891,131	)	$	8,137,107
Three months ended June 30, 2013 (unaudited)
Premiums written	$	15,881,121		$	10,232	$	(9,897,589	)	$	5,993,764
Change in unearned premiums		(2,873,166	)		1,128		1,554,556			(1,317,482	)
Premiums earned	$	13,007,955		$	11,360	$	(8,343,033	)	$	4,676,282
Three months ended June 30, 2012 (unaudited)
Premiums written	$	12,438,801		$	1,799	$	(7,623,640	)	$	4,816,960
Change in unearned premiums		(1,681,258	)		2,333		1,026,537			(652,388	)
Premiums earned	$	10,757,543		$	4,132	$	(6,597,103	)	$	4,164,572

Premium receipts in advance of the policy effective date are recorded as advance premiums.  The balance of advance premiums as of June 30, 2013 (unaudited) and December 31, 2012 was approximately $842,000 and $611,000, 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”):

	Six months ended
	June 30,
	2013			2012
	(unaudited)
Balance at beginning of period	$	30,485,532		$	18,480,717
Less reinsurance recoverables		(18,419,694	)		(10,001,060	)
Net balance, beginning of period		12,065,838			8,479,657
Incurred related to:
Current year		5,175,229			4,359,416
Prior years		536,209			327,603
Total incurred		5,711,438			4,687,019
Paid related to:
Current year		1,416,181			933,939
Prior years		2,675,112			2,586,898
Total paid		4,091,293			3,520,837
Net balance at end of period		13,685,983			9,645,839
Add reinsurance recoverables		14,671,485			11,152,255
Balance at end of period	$	28,357,468		$	20,798,094

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $8,275,782 and $4,626,575 for the six months ended June 30, 2013 and 2012, 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.

Reinsurance

The Company’s reinsurance treaties for both its Personal Lines business, which primarily consists of homeowners’ policies, and Commercial Lines business were renewed effective July 1, 2013. The treaties are annual, except for personal lines described below, and provide for the following material terms as of July 1, 2013:

Personal Lines

The personal lines treaty was renewed with a two year term expiring on June 30, 2015. 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 $1,200,000 per occurrence. An excess of loss contract provides 100% of coverage for the next $1,700,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000 per occurrence. Effective as of July 1, 2014, the Company has the option to increase the quota share percentage to a maximum of 85% or decrease the quota share percentage to a minimum of 55% by giving no less than 30 days advance notice. 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 25% quota share treaty, which provide coverage with respect to losses of up to $400,000 per occurrence. Excess of loss contracts provide 100% of coverage for the next $2,500,000 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 $1,700,000 of coverage in excess of $300,000.

Catastrophe Reinsurance

The Company has catastrophe reinsurance coverage with regard to losses of up to $90,000,000.  The initial $4,000,000 of losses in a catastrophe are subject to a 75% quota share treaty, such that the Company retains $1,000,000 per catastrophe occurrence With respect to any additional catastrophe losses of up to $86,000,000, the Company is 100% reinsured under its catastrophe reinsurance program.

The reinsurance treaties which were in effect as of June 30, 2013, provided for the following material terms:

Personal Lines

Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, was reinsured under a 75% quota share treaty which provided coverage with respect to losses of up to $1,000,000 per occurrence. An excess of loss contract provided 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 were 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 was 100% reinsured. 

Commercial Lines

General liability commercial policies written by the Company, except for commercial auto policies, were reinsured under a 40% quota share treaty, which provided coverage with respect to losses of up to $500,000 per occurrence.   Excess of loss contracts provided 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 were covered by an excess of loss reinsurance contract which provided $1,750,000 of coverage in excess of $250,000.

Catastrophe Reinsurance

The Company had catastrophe reinsurance coverage with regard to losses of up to $73,000,000.  The initial $3,000,000 of losses in a catastrophe were subject to a 75% quota share treaty, such that the Company retained $750,000 per catastrophe occurrence With respect to any additional catastrophe losses of up to $70,000,000, the Company was 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.

The Company received advance payments from catastrophe reinsurers related to Superstorm Sandy. As of June 30, 2013 and December 31, 2012, the balance of advance payments from catastrophe reinsurers which will be applied against unpaid losses when paid was $-0- and $7,358,391, respectively, and are included in “Advance payments from catastrophe reinsurers” in the Condensed 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 June 30, 2013, the Company’s estimated ultimate loss ratios are attributable to contracts for the July 1, 2012/June 30, 2013 treaty year (“2012/2013 Treaty”). As of June 30, 2013, 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 six months and three months ended June 30, 2013, the Company has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaty.

As of June 30, 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”). As of June 30, 2012, the Company’s estimated ultimate loss ratios attributable to contracts for the 2011/2012 Treaty are lower than the contractual ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the six months and three months ended June 30, 2012, the Company has recorded contingent ceding commissions earned with respect to the 2011/2012 Treaty.

Ceding commissions earned consists of the following:

	Three months ended					Six months ended
	June 30,					June 30,
	2013			2012		2013			2012
	(unaudited)					(unaudited)
Provisional ceding commissions earned	$	2,502,845		$	2,074,732	$	4,895,709		$	4,059,715
Contingent ceding commissions earned		(168,414	)		836,126		(267,567	)		1,754,799
	$	2,334,431		$	2,910,858	$	4,628,142		$	5,814,514

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 June 30, 2013, the Company has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaty, which results in ceding commissions payable to reinsurers. Net contingent ceding commissions payable to reinsurers as of June 30, 2013 and December 31, 2012 was $860,408 and $807,415, respectively, and is included in “Reinsurance balances payable” in the Condensed Consolidated Balance Sheets.