NOTE 20. CATASTROPHE REINSURANCE

Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of the Company’s property and casualty insurance companies. Further, because the level of these insured losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year fluctuations in the results of operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by ISO to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions that follow utilize ISO’s definition of catastrophes.

The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in certain regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various catastrophe reinsurance programs for its property and casualty insurance businesses.

Coverage for the Property & Casualty Insurance segment’s catastrophe reinsurance program effective January 1, 2017 to December 31, 2017 is provided in various layers as presented below.



DOLLARS IN MILLIONS	Catastrophe Losses and LAE				Percentage of Coverage
DOLLARS IN MILLIONS	In Excess of		Up to		Percentage of Coverage
Property & Casualty Insurance Segment:
Retained	$	—	$	50.0	—	%
1st Layer of Coverage	50.0		150.0		95.0
2nd Layer of Coverage	150.0		250.0		31.7
2nd Layer of Coverage	150.0		350.0		63.3

Coverage for the Property & Casualty Insurance segment’s catastrophe reinsurance program effective January 1, 2016 to December 31, 2016 is provided in various layers as presented below.



DOLLARS IN MILLIONS	Catastrophe Losses and LAE				Percentage of Coverage
DOLLARS IN MILLIONS	In Excess of		Up to		Percentage of Coverage
Property & Casualty Insurance Segment:
Retained	$	—	$	50.0	—	%
1st Layer of Coverage	50.0		150.0		95.0
2nd Layer of Coverage	150.0		350.0		95.0

NOTE 20. CATASTROPHE REINSURANCE (Continued)

Coverage for the Property & Casualty Insurance segment’s catastrophe reinsurance program effective January 1, 2015 to December 31, 2015 is provided in various layers as presented below.



DOLLARS IN MILLIONS	Catastrophe Losses and LAE				Percentage of Coverage
DOLLARS IN MILLIONS	In Excess of		Up to		Percentage of Coverage
Property & Casualty Insurance Segment:
Retained	$	—	$	50.0	—	%
1st Layer of Coverage	50.0		150.0		95.0
2nd Layer of Coverage	150.0		350.0		95.0

In the event that the Property & Casualty Insurance segment’s incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs presented in the three preceding tables exceed the retention for that particular layer, each of the programs required one reinstatement of such coverage. In such an instance, the Property & Casualty Insurance segment is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such layer.

The Property & Casualty Insurance segment’s catastrophe reinsurance in 2017, 2016 and 2015 also included reinsurance coverage from the Florida Hurricane Catastrophe Fund (the “FHCF”) for hurricane losses in Florida at retentions lower than those described above. The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida. Except for the coverage provided by the FHCF, the Life & Health Insurance segment does not carry any other catastrophe reinsurance coverage.

Reinsurance premiums for the Company’s catastrophe reinsurance programs and the FHCF Program reduced earned premiums for the years ended December 31, 2017, 2016 and 2015 by the following:



DOLLARS IN MILLIONS	2017		2016		2015
Property & Casualty Insurance	$	10.9	$	11.9	$	12.8
Life & Health Insurance	0.1		0.1		0.1
Total Ceded Catastrophe Reinsurance Premiums	$	11.0	$	12.0	$	12.9

In 2017, the Company paid $0.8 million in reinstatement premium to reinstate the first layer of coverage under the Property & Casualty Insurance segment’s catastrophe reinsurance program. The Company did not pay any reinstatement premium in 2016 or 2015.

Catastrophe losses and LAE (including reserve development), net of reinsurance recoveries, for the years ended December 31, 2017, 2016 and 2015 by business segment are presented below.



DOLLARS IN MILLIONS	2017		2016		2015
Property & Casualty Insurance	$	174.0	$	90.4	$	56.6
Life & Health Insurance	6.4		5.4		3.9
Total Catastrophe Losses and LAE	$	180.4	$	95.8	$	60.5

In 2017, the Property & Casualty Insurance segment had catastrophe reinsurance recoveries of $11.9 million under the catastrophe reinsurance program. The Property & Casualty Insurance segment did not have any recoveries from the FHCF. The Life & Health Insurance segment had reinsurance recoveries of $0.2 million under the FHCF in 2017. Neither segment had catastrophe reinsurance recoveries in 2016 or 2015.

Total catastrophe loss and LAE reserves, net of reinsurance recoverables, developed favorably by $4.5 million, $19.3 million and $7.8 million in 2017, 2016 and 2015, respectively. The Property & Casualty Insurance segment reported favorable catastrophe reserve development of $5.0 million, $19.2 million and $7.9 million in 2017, 2016 and 2015, respectively. The Life & Health Insurance segment reported adverse catastrophe reserve development of $0.5 million in 2017, favorable catastrophe reserve development of $0.1 million in 2016, and adverse catastrophe reserve development of $0.1 million in 2015.

The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Company’s estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development

NOTE 20. CATASTROPHE REINSURANCE (Continued)

experience for areas that have not been inspected or for claims that have not yet been reported. The Company’s estimates of direct catastrophe losses are based on the coverages provided by its insurance policies. The Company’s homeowners and dwelling insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind-driven rain. Accordingly, the Company’s estimates of direct losses for homeowners and dwelling insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number and severity of claims ultimately reported are influenced by many variables, including, but not limited to, repair or reconstruction costs and determination of cause of loss that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Company’s estimates of indirect losses from wind pools and joint underwriting associations are based on a variety of factors, including, but not limited to, actual or estimated assessments provided by or received from such entities, insurance industry estimates of losses, and estimates of the Company’s market share in the assessable states. Actual assessments may differ materially from these estimated amounts.