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6. Property and Casualty Insurance Activity

9 Months Ended

Sep. 30, 2015

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, 2015
Premiums written	$ 67,225,990	$ 34,815	$(21,913,608)	$ 45,347,197
Change in unearned premiums	(6,984,651)	1,362	(3,982,790)	(10,966,079)
Premiums earned	$ 60,241,339	$ 36,177	$(25,896,398)	$ 34,381,118

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

Three months ended September 30, 2015
Premiums written	$ 24,570,496	$ 12,945	$ (3,245,871)	$ 21,337,570
Change in unearned premiums	(3,330,333)	(1,015)	(4,876,618)	(8,207,966)
Premiums earned	$ 21,240,163	$ 11,930	$ (8,122,489)	$ 13,129,604

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

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of September 30, 2015 and December 31, 2014 was approximately $1,556,000 and $1,007,000, 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,
	2015	2014

Balance at beginning of period	$ 39,912,683	$ 34,503,229
Less reinsurance recoverables	(18,249,526)	(17,363,975)
Net balance, beginning of period	21,663,157	17,139,254

Incurred related to:
Current year	17,353,585	11,043,919
Prior years	(469,361)	827,141
Total incurred	16,884,224	11,871,060

Paid related to:
Current year	9,083,229	4,725,526
Prior years	6,843,425	4,834,120
Total paid	15,926,654	9,559,646

Net balance at end of period	22,620,727	19,450,668
Add reinsurance recoverables	16,278,765	17,471,621
Balance at end of period	$ 38,899,492	$ 36,922,289

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $11,026,027 and $11,881,366 for the nine months ended September 30, 2015 and 2014, respectively.

Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the nine months ended September 30, 2015 and 2014 was $(469,361) and $827,141, respectively. 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 and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE 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 LAE. The amount of loss and LAE 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 LAE reserves for unreported claims and development on known claims (IBNR 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 unreported claims (‘pure’ IBNR) for accident dates of September 30, 2012 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.

Commercial Auto Line of Business

Effective October 1, 2014 the Company decided that it would no longer accept applications for new commercial auto policies. The action was taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of business. The actions taken did not yield the hoped for results. In February 2015, the Company made the decision that it would no longer offer renewals on its existing commercial auto policies beginning with those that expire on or after May 1, 2015. The Company had 238 and 730 commercial auto policies in force as of September 30, 2015 and December 31, 2014, respectively.

Reinsurance

The Company’s quota share reinsurance treaties are on a July 1 through June 30 calendar year basis; therefore, for year to date fiscal periods after June 30, two separate treaties will be included in such periods.

The Company’s quota share reinsurance treaty in effect for the nine months ended September 30, 2015 for its personal lines business, which primarily consists of homeowners’ policies, was covered under the July 1, 2014/June 30, 2015 and July 1, 2015/June 30, 2016 treaty years. 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 personal lines quota share treaty that covered the July 1, 2013/June 30, 2014 treaty year was a two year treaty that expired 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. The Company entered into new annual treaties with different terms effective July 1, 2015. The Company’s treaties for the July 1, 2013/ June 30, 2014, July 1, 2014/June 30, 2015 and July 1, 2015/June 30, 2016 treaty years provide for the following material terms:

	Treaty Year
	July 1, 2015	July 1, 2014	July 1, 2013
	to	to	to
Line of Busines	June 30, 2016	June 30, 2015	June 30, 2014

Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded	40%	55%	75%
Risk retained	$ 450,000	$ 360,000	$ 300,000
Losses per occurrence subject to quota share reinsurance coverage	$ 750,000	$ 800,000	$ 1,200,000
Excess of loss coverage above quota share coverage	$ 3,750,000	$ 3,200,000	$ 1,700,000
	in excess of	in excess of	in excess of
	$ 750,000	$ 800,000	$ 1,200,000
Total reinsurance coverage per occurrence	$ 4,050,000	$ 3,640,000	$ 2,600,000
Losses per occurrence subject to reinsurance coverage	$ 4,500,000	$ 4,000,000	$ 2,900,000
Expiration date	June 30, 2016	June 30, 2015	June 30, 2015

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	$ 2,900,000	$ 1,900,000
Losses per occurrence subject to quota share reinsurance coverage	$ 3,000,000	$ 3,000,000	$ 2,000,000
Expiration date	June 30, 2016	June 30, 2015	June 30, 2014

Commercial Lines:
General liability commercial policies, except for commercial auto
Quota share treaty:
Percent ceded (terminated effective July 1, 2014)	None	None	25%
Risk retained	$ 425,000	$ 400,000	$ 300,000
Losses per occurrence subject to quota share reinsurance coverage	None	None	$ 400,000
Excess of loss coverage above quota share coverage	$ 4,075,000	$ 3,600,000	$ 2,500,000
	in excess of	in excess of	in excess of
	$ 425,000	$ 400,000	$ 400,000
Total reinsurance coverage per occurrence	$ 4,075,000	$ 3,600,000	$ 2,600,000
Losses per occurrence subject to reinsurance coverage	$ 4,500,000	$ 4,000,000	$ 2,900,000

Commercial Auto:
Risk retained	$ 300,000	$ 300,000	$ 300,000
Excess of loss coverage in excess of risk retained	$ 1,700,000	$ 1,700,000	$ 1,700,000
	in excess of	in excess of	in excess of
	$ 300,000	$ 300,000	$ 300,000
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty	$ 4,000,000	$ 4,000,000	$ 4,000,000
Risk retained per catastrophe occurrence (1)	$ 2,400,000	$ 1,800,000	$ 1,000,000
Catastrophe loss coverage in excess of quota share coverage (2) (3)	$ 176,000,000	$ 137,000,000	$ 86,000,000
Severe winter weather aggregate (3)	Yes	Yes	No
Reinstatement premium protection (4)	Yes	No	No

Plus losses in excess of catastrophe coverage.

Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2015, the duration of a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone was extended to 120 consecutive hours from 96 consecutive hours.

Effective July 1, 2014, our catastrophe treaty also covers losses caused by severe winter weather during any consecutive 28 day period.

Effective July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage in excess of $4,000,000.

The single maximum risks per occurrence to which the Company is subject under the new treaties effective July 1, 2015 are as follows:

	July 1, 2015 - June 30, 2016
Treaty	Extent of Loss	Risk Retained
Personal Lines	Initial $750,000	$450,000
	$750,000 - $4,500,000	None(1)
	Over $4,500,000	100%

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

Commercial Lines	Initial $425,000	$425,000
	$425,000 - $4,500,000	None(1)
	Over $4,500,000	100%

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

Catastrophe (2)	Initial $4,000,000	$2,400,000
	$4,000,000 - $180,000,000	None
	Over $180,000,000	100%

The single maximum risks per occurrence to which the Company is subject under the treaties that expired on June 30, 2015 and 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 (“Loss Ratio(s)”) for treaties in effect for the nine months and three months ended September 30, 2015 are attributable to contracts for the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”) and the July 1, 2014/June 30, 2015 treaty year (“2014/2015 Treaty”). The Company’s Loss Ratios for treaties in effect for the nine months and three months ended September 30, 2014 are attributable to contracts for the 2014/2015 Treaty and the July 1, 2013/June 30, 2014 treaty year (“2013/2014 Treaties”).

Treaties in effect for the nine months and three months ended September 30, 2015

The Company’s Loss Ratio for the period July 1, 2015 through September 30, 2015, which is attributable to the 2015/2016 Treaty, was higher than the contractual Loss Ratio at which provisional ceding commissions are earned. Accordingly, for the three months ended September 30, 2015, the Company’s contingent ceding commission earned was reduced as a result of the estimated Loss Ratio for the 2015/2016 Treaty.

The Company’s Loss Ratio for the period July 1, 2014 through June 30, 2015, which is attributable to the 2014/2015 Treaty, was lower than the contractual Loss Ratio at which provisional ceding commissions are earned. Accordingly, for the six months ended June 30, 2015, the Company earned contingent ceding commission revenue with respect to the 2014/2015 Treaty. However, as a result of severe winter weather during February and March 2015, the Loss Ratio was greater than what would have been expected during an ordinary winter. Such severe winter weather had the effect of reducing contingent ceding commission revenue that would have otherwise been earned.

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

The Company’s Loss Ratio for the period July 1, 2014 through September 30, 2014, which is attributable to the 2014/2015 Treaty, was lower than the contractual Loss Ratio at which provisional ceding commissions are earned. Accordingly, for the three month period ended September 30, 2014, the Company recorded contingent ceding commission earned with respect to the 2014/2015 Treaty.

The Company’s Loss Ratios for the period July 1, 2013 through June 30, 2014, which are attributable to the 2013/2014 Treaties, were lower than the contractual Loss Ratios at which provisional ceding commissions are earned. Accordingly, for the six months ended June 30, 2014, the Company earned contingent ceding commission revenue with respect to the 2013/2014 Treaties. However, as a result of severe winter weather during January and February 2014, the Loss Ratios attributable to these treaties as of June 30, 2014 were greater than the Loss Ratios as of December 31, 2013. Such severe winter weather had the effect of reducing contingent ceding commission revenue that would have otherwise been earned.

In addition to the treaties that were in effect for nine months and three months ended September 30, 2015 and 2014, the 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,
	2015	2014	2015	2014

Provisional ceding commissions earned	$ 2,854,524	$ 2,653,690	$ 8,734,477	$ 9,660,437
Contingent ceding commissions earned	(210,993)	624,629	653,980	705,214
	$ 2,643,531	$ 3,278,319	$ 9,388,457	$ 10,365,651

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.