7. Reinsurance

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

7. Reinsurance

The Company’s quota share reinsurance treaties in effect for the year ended December 31, 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 year ended December 31, 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 year ended December 31, 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 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	%
Risk retained	$	100,000		$	100,000		$	100,000
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:
Risk retained	$	300,000		$	300,000		$	250,000
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.

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

	Unpaid		Paid
($ in thousands)	Losses		Losses		Total		Security
December 31, 2014
Maiden Reinsurace Company	$	7,946	$	598	$	8,544	$	12,847	(1)
SCOR Reinsurance Company		2,843		194		3,037		-
Swiss Reinsurance America Corporation		3,652		359		4,011		-
Motors Insurance Corporation		931		8		939		500	(1)
Sirius American Insurance Company		908		22		930		-
Allied World Assurance Company		651		15		666		-
Others		1,319		273		1,592		110	(2)
Total	$	18,250	$	1,469	$	19,719	$	13,457
December 31, 2013
Maiden Reinsurace Company	$	6,929	$	732	$	7,661	$	13,868	(1)
SCOR Reinsurance Company		3,318		294		3,612		-
Swiss Reinsurance America Corporation		2,523		454		2,977		-
Motors Insurance Corporation		1,536		48		1,584		792	(1)
Sirius American Insurance Company		1,410		44		1,454		-
Allied World Assurance Company		665		39		704		-
Others		983		185		1,168		135	(2)
Total	$	17,364	$	1,796	$	19,160	$	14,795

 (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) in the table 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, 2014 and 2013 include unearned ceded premiums of $15,856,387 and $18,400,338, respectively.

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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 2014

The Company’s estimated ultimate loss ratios (“Loss Ratios”) for the period July 1, 2014 through December 31, 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 six month period ended December 31, 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 December 31, 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 year ended December 31, 2014, the Company recorded contingent ceding commission earned with respect to the 2013/2014 Treaties.

Treaties in effect for year ended December 31, 2013

The Company’s estimated ultimate Loss Ratios for the period July 1, 2013 through December 31, 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 six month period ended December 31, 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 December 31, 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 year ended December 31, 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 years ended December 31, 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:

	Years ended
	December 31,
	2014		2013
Provisional ceding commissions earned	$	12,456,411	$	11,007,342
Contingent ceding commissions earned		1,453,700		665,761
	$	13,910,111	$	11,673,103

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 year ended December 31, 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 December 31, 2014 and 2013.