7. Reinsurance

12 Months Ended

Dec. 31, 2015

Weighted average amortization period of identified intangible assets of finite useful life

7. 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 year ended December 31, 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 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 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

1.	Plus losses in excess of catastrophe coverage.
2.	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.

3.	Effective July 1, 2014, our catastrophe treaty also covers losses caused by severe winter weather during any consecutive 28 day period.
4.	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.

Approximate reinsurance recoverables on unpaid and paid losses by reinsurer at December 31, 2015 and 2014 are as follows:

	Unpaid		Paid
($ in thousands)	Losses		Losses		Total		Security
December 31, 2015
Maiden Reinsurace Company	$	7,979	$	631	$	8,610	$	12,201	(1)
Swiss Reinsurance America Corporation		3,662		377		4,039		-
SCOR Reinsurance Company		1,982		114		2,096		-
Hannover Rueck		853		524		1,377		-
Allied World Assurance Company		940		285		1,225		-
Others		1,290		117		1,407		293	(2)
Total	$	16,706	$	2,048	$	18,754	$	12,494
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	(3)
Total	$	18,250	$	1,469	$	19,719	$	13,457
(1) Secured pursuant to collateralized trust agreement.
(2) Includes $248,000 secured pursuant to collateralized trust agreement and $45,000 guaranteed by an irrevocable letter of credit.
(3) 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, 2015 and 2014 include unearned ceded premiums of $12,515,892 and $15,856,387, 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 (“Loss Ratio(s)”) for treaties in effect for the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2015

Under the 2015/2016 Treaty, the Company is receiving a higher upfront fixed provisional rate in exchange for a less favorable sliding scale contingent rate. Under this arrangement, the Company earns more provisional ceding commissions, while contingent ceding commissions are reduced due the less favorable sliding scale rate. The Company’s Loss Ratio for the period July 1, 2015 through December 31, 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 six month period ended December 31, 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 year ended December 31, 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 year ended December31, 2014

The Company’s Loss Ratio for the period July 1, 2014 through December 31, 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 six month period ended December 31, 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 year ended December 31, 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 years ended December 31, 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:

	Years ended
	December 31,
	2015			2014
Provisional ceding commissions earned	$	11,692,458		$	12,456,411
Contingent ceding commissions earned		(219,341	)		1,453,700
	$	11,473,117		$	13,910,111

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 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. As of December 31, 2015 and 2014, net contingent ceding commissions (payable to) and due from reinsurers under all treaties was approximately $(1,277,000) and $1,302,000, respectively.