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6. Property and Casualty Insurance Activity

3 Months Ended

Mar. 31, 2016

6. Property and Casualty Insurance Activity

Premiums Earned

Premiums written, ceded and earned are as follows:

	Direct			Assumed		Ceded			Net

Three months ended March 31, 2016
Premiums written	$	23,043,325		$	5,078	$	(8,386,528	)	$	14,661,875
Change in unearned premiums		(126,428	)		3,571		(7,343	)		(130,200	)
Premiums earned	$	22,916,897		$	8,649	$	(8,393,871	)	$	14,531,675

Three months ended March 31, 2015
Premiums written	$	19,489,429		$	7,911	$	(8,619,406	)	$	10,877,934
Change in unearned premiums		(472,331	)		3,912		(23,716	)		(492,135	)
Premiums earned	$	19,017,098		$	11,823	$	(8,643,122	)	$	10,385,799

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of March 31, 2016 and December 31, 2015 was approximately $1,732,000 and $1,199,000, 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:

	Three months ended
	March 31,
	2016			2015

Balance at beginning of period	$	39,876,500		$	39,912,683
Less reinsurance recoverables		(16,706,364	)		(18,249,526	)
Net balance, beginning of period		23,170,136			21,663,157

Incurred related to:
Current year		9,903,094			6,956,761
Prior years		(419,239	)		106,456
Total incurred		9,483,855			7,063,217

Paid related to:
Current year		3,006,210			1,685,306
Prior years		3,421,820			3,201,258
Total paid		6,428,030			4,886,564

Net balance at end of period		26,225,961			23,839,810
Add reinsurance recoverables		19,804,804			18,311,454
Balance at end of period	$	46,030,765		$	42,151,264

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $4,313,667 and $5,448,387 for the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015 was $(419,239) favorable and $106,456 unfavorable, 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.

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 monthly 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 determine the required IBNR 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 March 31, 2013 and prior is limited although there remains the possibility of adverse development on reported claims (‘case development’ IBNR).

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 34 and 599 commercial auto policies in force as of March 31, 2016 and 2015, respectively.

Reinsurance

The Company’s quota share reinsurance treaties are on a July 1 through June 30 fiscal 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 three months ended March 31, 2016 for its personal lines business, which primarily consists of homeowners’ policies, was covered under the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”). The Company’s quota share reinsurance treaty in effect for the three months ended March 31, 2015 was covered under the July 1, 2014/June 30, 2015 treaty year (“2014/2015 Treaty”).

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 exercised its contractual option to reduce the ceding percentage in the personal lines quota share treaty from 75% to 55%. The Company entered into new annual treaties with different terms effective July 1, 2015. The Company’s 2014/2015 Treaty and 2015/2016 Treaty provide for the following material terms:

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

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

Personal Umbrella
Quota share treaty:
Percent ceded - first million dollars of coverage		90	%		90	%
Percent ceded - excess of one million dollars of coverage		100	%		100	%
Risk retained	$	100,000		$	100,000
Total reinsurance coverage per occurrence	$	2,900,000		$	2,900,000
Losses per occurrence subject to quota share reinsurance coverage	$	3,000,000		$	3,000,000
Expiration date		June 30, 2016			June 30, 2015

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

Commercial Auto:
Risk retained	$	300,000		$	300,000
Excess of loss coverage in excess of risk retained	$	1,700,000		$	1,700,000
		in excess of			in excess of
	$	300,000		$	300,000
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty	$	4,000,000		$	4,000,000
Risk retained per catastrophe occurrence (1)	$	2,400,000		$	1,800,000
Catastrophe loss coverage in excess of quota share coverage (2) (3)	$	176,000,000		$	137,000,000
Severe winter weather aggregate (3)		Yes			Yes
Reinstatement premium protection (4)		Yes			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 and under the treaties that expired on June 30, 2015 are as follows:

	July 1, 2015 - June 30, 2016					July 1, 2014 - June 30, 2015
Treaty	Extent of Loss		Risk Retained			Extent of Loss		Risk Retained
Personal Lines		Initial $750,000	$	450,000			Initial $800,000	$	360,000
		$750,000 - $4,500,000		None(1)			$800,000 - $4,000,000		None(1)
		Over $4,500,000		100	%		Over $4,000,000		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 - $3,000,000		None(1)
		Over $3,000,000		100	%		Over $3,000,000		100	%

Commercial Lines		Initial $425,000	$	425,000			Initial $400,000	$	400,000
		$425,000 - $4,500,000		None(1)			$400,000 - $4,000,000		None(1)
		Over $4,500,000		100	%		Over $4,000,000		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	$	2,400,000			Initial $4,000,000	$	1,800,000
		$4,000,000 - $180,000,000		None			$4,000,000 - $141,000,000		None
		Over $180,000,000		100	%		Over $141,000,000		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 three months ended March 31, 2016 are attributable to contracts for the 2015/2016 Treaty. The Company's Loss Ratios for treaties in effect for the three months ended March 31, 2015 are attributable to contracts for the 2014/2015 Treaty.

Treaties in effect for the three months ended March 31, 2016

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 to the less favorable sliding scale rate. The Company’s Loss Ratio for the period July 1, 2015 through March 31, 2016, 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 month period ended March 31, 2016, the Company’s contingent ceding commission earned was reduced as a result of the estimated Loss Ratio for the 2015/2016 Treaty.

Treaties in effect for the three months ended March 31, 2015

The Company’s Loss Ratio for the period July 1, 2014 through March 31, 2015, which is attributable to the 2014/2015 Treaty, was lower than the contractual Loss Ratio at which the provisional ceding commissions are earned. As a result of severe winter weather during the three months ended March 31, 2015, the Loss Ratio attributable to this treaty as of March 31, 2015 was greater than the Loss Ratio as of December 31, 2014. Accordingly, for the three months ended March 31, 2015, the Company’s contingent ceding commission earned was reduced as a result of the increase in the estimated Loss Ratio for the 2014/2015 Treaty.

In addition to the treaties that were in effect for three months ended March 31, 2016 and 2015, 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 commission revenue consists of the following:

	Three months ended
	March 31,
	2016			2015

Provisional ceding commissions earned	$	3,099,614		$	2,915,029
Contingent ceding commissions earned		(329,277	)		174,375
	$	2,770,337		$	3,089,404

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.