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6. Property and Casualty Insurance Activity

9 Months Ended

Sep. 30, 2014

6. Property and Casualty Insurance Activity

Premiums Earned

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net

Nine months ended September 30, 2014
Premiums written	$	56,729,057		$	39,263		$	(24,013,732	)	$	32,754,588
Change in unearned premiums		(7,311,116	)		(6,082	)		(3,186,706	)		(10,503,904	)
Premiums earned	$	49,417,941		$	33,181		$	(27,200,438	)	$	22,250,684

Nine months ended September 30, 2013
Premiums written	$	44,651,570		$	36,999		$	(26,567,984	)	$	18,120,585
Change in unearned premiums		(5,465,632	)		17,377			2,752,751			(2,695,504	)
Premiums earned	$	39,185,938		$	54,376		$	(23,815,233	)	$	15,425,081

Three months ended September 30, 2014
Premiums written	$	20,131,112		$	22,961		$	(2,485,929	)	$	17,668,144
Change in unearned premiums		(2,438,306	)		(12,433	)		(5,322,405	)		(7,773,144	)
Premiums earned	$	17,692,806		$	10,528		$	(7,808,334	)	$	9,895,000

Three months ended September 30, 2013
Premiums written	$	15,925,613		$	16,952		$	(8,786,730	)	$	7,155,835
Change in unearned premiums		(2,013,499	)		(11,192	)		994,440			(1,030,251	)
Premiums earned	$	13,912,114		$	5,760		$	(7,792,290	)	$	6,125,584

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of September 30, 2014 and December 31, 2013 was approximately $1,263,000 and $776,000, respectively

Loss and Loss Adjustment Expense Reserves

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

	Nine months ended
	September 30,
	2014			2013

Balance at beginning of period	$	34,503,229		$	30,485,532
Less reinsurance recoverables		(17,363,975	)		(18,419,694	)
Net balance, beginning of period		17,139,254			12,065,838

Incurred related to:
Current year		11,043,919			7,467,756
Prior years		827,141			682,814
Total incurred		11,871,060			8,150,570

Paid related to:
Current year		4,725,526			2,458,940
Prior years		4,834,120			3,498,333
Total paid		9,559,646			5,957,273

Net balance at end of period		19,450,668			14,259,135
Add reinsurance recoverables		17,471,621			15,257,918
Balance at end of period	$	36,922,289		$	29,517,053

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $11,881,366 and $12,170,056 for the nine months ended September 30, 2014 and 2013, respectively.

Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves, giving consideration to Company and industry trends.

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. Several actuarial reserving methodologies are used to estimate required 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 (“case reserve”) 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 and development on known claims (incurred but not reported reserves) 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. 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. Several methods are used, varying by product line and accident year, in order to select the estimated year-end loss reserves. These methods include the following:

Paid Loss Development – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.

Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.

Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.

Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.

Two key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods described above, and the loss development factor selections used in the loss development methods described above. The loss ratio estimates used in the BF methods are 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 are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to ‘pure’ IBNR for accident years 2010 and prior is limited although there remains the possibility of adverse development on reported claims (‘case development’ IBNR).

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.

Reinsurance

The Company’s quota share reinsurance treaties in effect for the nine months ended September 30, 2014 for its Personal Lines business, which primarily consists of homeowners’ policies, were covered under the July 1, 2013/June 30, 2014 and July 1, 2014/June 30, 2015 treaty years. The Company’s quota share reinsurance treaty in effect for the nine months ended September 30, 2014 for its Commercial Lines business was covered under the July 1, 2013/June 30, 2014 treaty year. The Company did not renew its expiring Commercial Lines quota share reinsurance treaty on July 1, 2014. The Company’s quota share reinsurance treaties in effect for the nine months ended September 30, 2013 for both its Personal Lines business and Commercial Lines business were covered under the July 1, 2012/June 30, 2013 and July 1, 2013/June 30, 2014 treaty years. The Company’s personal lines quota share treaty that covered the July 1, 2013/June 30, 2014 treaty year is a two year treaty expiring on June 30, 2015. Effective as of July 1, 2014, the Company had the option to increase the quota share percentage from 75% to a maximum of 85% or decrease the quota share percentage from 75% to a minimum of 55% by giving no less than 30 days advance notice. On May 12, 2014, the Company notified the personal lines reinsurers of its election to reduce the ceding percentage in the personal lines quota share treaty from 75% to 55% effective July 1, 2014. In addition to the change in the personal lines quota share treaty discussed above, the Company entered into new annual treaties with different terms effective July 1, 2014. The Company’s treaties for the July 1, 2012/June 30, 2013, July 1, 2013/ June 30, 2014 and July 1, 2014/June 30, 2015 treaty years provide for the following material terms:

	Treaty Year
	July 1, 2014			July 1, 2013			July 1, 2012
	to			to			to
Line of Busines	June 30, 2015			June 30, 2014			June 30, 2013

Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded		55	%		75	%		75	%
Risk retained	$	360,000		$	300,000		$	250,000
Losses per occurrence subject to quota share reinsurance coverage	$	800,000		$	1,200,000		$	1,000,000
Excess of loss coverage above quota share coverage	$	3,200,000		$	1,700,000		$	1,900,000
	in excess of			in excess of			in excess of
	$	800,000		$	1,200,000		$	1,000,000
Total reinsurance coverage per occurrence	$	3,640,000		$	2,600,000		$	2,650,000
Losses per occurrence subject to reinsurance coverage	$	4,000,000		$	2,900,000		$	2,900,000
Expiration date	June 30, 2015			June 30, 2015			June 30, 2013

Personal Umbrella
Quota share treaty:
Percent ceded - first million dollars of coverage		90	%		90	%		90	%
Percent ceded - excess of one million dollars of coverage		100	%		100	%		100	%
Total reinsurance coverage per occurrence	$	2,900,000		$	1,900,000		$	1,900,000
Losses per occurrence subject to quota share reinsurance coverage	$	3,000,000		$	2,000,000		$	2,000,000
Expiration date	June 30, 2015			June 30, 2014			June 30, 2013

Commercial Lines:
General liability commercial policies, except for commercial auto
Quota share treaty:
Percent ceded (terminated effective July 1, 2014)	None				25	%		40	%
Risk retained	$	400,000		$	300,000		$	300,000
Losses per occurrence subject to quota share reinsurance coverage	None			$	400,000		$	500,000
Excess of loss coverage above quota share coverage	$	3,600,000		$	2,500,000		$	2,400,000
	in excess of			in excess of			in excess of
	$	400,000		$	400,000		$	500,000
Total reinsurance coverage per occurrence	$	3,600,000		$	2,600,000		$	2,600,000
Losses per occurrence subject to reinsurance coverage	$	4,000,000		$	2,900,000		$	2,900,000

Commercial Auto:
Excess of loss coverage in excess of risk retained	$	1,700,000		$	1,700,000		$	1,750,000
	in excess of			in excess of			in excess of
	$	300,000		$	300,000		$	250,000
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty	$	4,000,000		$	4,000,000		$	3,000,000
Risk retained per catastrophe occurrence (1)	$	1,800,000		$	1,000,000		$	750,000
Catastrophe loss coverage in excess of quota share coverage (2) (3)	$	137,000,000		$	86,000,000		$	70,000,000

(1)	Plus losses in excess of catastrophe coverage.

(2)

Effective July 1, 2014, the Company’s catastrophe treaty also covers losses caused by severe winter weather during any consecutive 28 day period. Effective July 1, 2014, the duration of a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone has been extended to 96 consecutive hours from 72 consecutive hours.

(3)	Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.

The single maximum risks per occurrence to which the Company is subject under the treaties that expired on June 30, 2014 and the new treaties effective July 1, 2014 are as follows:

	July 1, 2014 - June 30, 2015		July 1, 2013 - June 30, 2014
Treaty	Extent of Loss	Risk Retained	Extent of Loss	Risk Retained
Personal Lines	Initial $800,000	$360,000	Initial $1,200,000	$300,000
	$800,000 - $4,000,000	None(1)	$1,200,000 - $2,900,000	None(1)
	Over $4,000,000	100%	Over $2,900,000	100%

Personal Umbrella	Initial $1,000,000	$100,000	Initial $1,000,000	$100,000
	$1,000,000 - $3,000,000	None(1)	$1,000,000 - $2,000,000	None(1)
	Over $3,000,000	100%	Over $2,000,000	100%

Commercial Lines	Initial $400,000	$400,000	Initial $400,000	$300,000
	$400,000 - $4,000,000	None(1)	$400,000 - $2,900,000	None(1)
	Over $4,000,000	100%	Over $2,900,000	100%

Commercial Auto	Initial $300,000	$300,000	Initial $300,000	$300,000
	$300,000 - $2,000,000	None(1)	$300,000 - $2,000,000	None(1)
	Over $2,000,000	100%	Over $2,000,000	100%

Catastrophe (2)	Initial $4,000,000	$1,800,000	Initial $4,000,000	$1,000,000
	$4,000,000 - $141,000,000	None	$4,000,000 - $90,000,000	None
	Over $141,000,000	100%	Over $90,000,000	100%

________________

(1)	Covered by excess of loss treaties.

(2)	Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.

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 of its obligations to policyholders.

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.

The Company’s estimated ultimate treaty year loss ratios for treaties in effect for the nine months and three months ended September 30, 2014 are attributable to contracts for the July 1, 2014/June 30, 2015 treaty year (“2014/2015 Treaties”) and the July 1, 2013/June 30, 2014 treaty year (“2013/2014 Treaties”). The Company’s estimated ultimate treaty year loss ratios for treaties in effect for the nine months and three months ended September 30, 2013 are attributable to contracts for the July 1, 2012/June 30, 2013 treaty year (“2012/2013 Treaties”) and the 2013/2014 Treaties.

Treaties in effect for the nine months and three months ended September 30, 2014

The Company’s estimated ultimate loss ratios (“Loss Ratios”) for the period July 1, 2014 through September 30, 2014, which are attributable to contracts for the 2014/2015 Treaties were lower than the contractual Loss Ratios at which the provisional ceding commissions are earned. Accordingly, for the three months ended September 30, 2014, the Company recorded contingent ceding commission earned with respect to the 2014/2015 Treaties.

The Company’s estimated ultimate Loss Ratios for the period January 1, 2014 through September 30, 2014 attributable to contracts for the 2013/2014 Treaties were lower than the contractual Loss Ratios at which the provisional ceding commissions are earned. Accordingly, for the nine months ended September 30, 2014, the Company recorded contingent ceding commission earned with respect to the 2013/2014 Treaties.

Treaties in effect for the nine months and three months ended September 30, 2013

The Company’s estimated ultimate Loss Ratios for the period July 1, 2013 through September 30, 2013, which are attributable to contracts for the 2013/2014 Treaties, were lower than the contractual Loss Ratios at which the provisional ceding commissions were earned. Accordingly, for the three months ended September 30, 2013, the Company’s recorded contingent ceding commission earned with respect to the 2013/2014 Treaties.

The Company’s estimated ultimate Loss Ratios for the period January 1, 2013 through September 30, 2013 attributable to contracts for the 2012/2013 Treaties were greater than the contractual Loss Ratios at which the provisional ceding commissions were earned. Accordingly, for the nine months September 30, 2013, the Company recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaties.

In addition to the treaties that were in effect for the nine months and three months ended September 30, 2014 and 2013, the estimated ultimate loss ratios from prior years’ treaties are subject to change as loss reserves from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.

Ceding commissions earned consists of the following:

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013

Provisional ceding commissions earned	$	2,653,690	$	2,940,661	$	9,660,437	$	7,836,370
Contingent ceding commissions earned		624,629		670,883		705,214		403,316
	$	3,278,319	$	3,611,544	$	10,365,651	$	8,239,686

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, for the nine months ended September 30, 2013, the Company recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaties, which resulted in ceding commissions payable to reinsurers. There was no net contingent ceding commissions payable to reinsurers as of September 30, 2014 and December 31, 2013.