(7) Reinsurance Agreements

Financing risk generally involves a combination of risk retention and risk transfer techniques. “Retention”, similar to a deductible, involves financing losses by funds internally generated. “Transfer” involves the existence of a contractual arrangement designed to shift financial responsibility to another party in exchange for premium. Secondary to the primary risk-transfer agreements, we use reinsurance agreements to transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. We utilize reinsurance to reduce exposure to catastrophic and non-catastrophic risks and to help manage the cost of capital. Reinsurance techniques are designed to lessen earnings volatility, improve shareholder return, and to support the required statutory surplus requirements. We also use reinsurance to realize an arbitrage of premium rates, benefit from the availability of our reinsurers’ expertise, and benefit from the management of a profitable portfolio of insureds by way of enhanced analytical capacities. Our primary property line that is subject to catastrophic reinsurance is Homeowners Multiple Peril. FNIC cedes these risks to domestic and foreign reinsurance participants from Bermuda and Europe as well as to the FHCF.

Generally, there are three separate kinds of reinsurance structures – quota share, excess of loss, and facultative, each considered either proportional or non-proportional. Our reinsurance structures are maintained to protect our insurance subsidiary against the severity of losses on individual claims or unusually serious occurrences in which the frequency and or the severity of claims produce an aggregate extraordinary loss from catastrophic events. In addition to reinsurance agreements, we also from time to time enter into retro-cessionary reinsurance agreements; each designed to shift financial responsibility based on predefined conditions.

Although reinsurance does not discharge us from our primary obligation to pay for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit risk exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer's insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition. Our reinsurance structure has significant risks, including the fact that the FHCF may not be able to raise sufficient money to pay its claims or impair its ability to pay its claims in a timely manner. This could result in significant financial, legal and operational challenges to all property and casualty companies associated with FHCF, including our company.

The availability and costs associated with the acquisition of reinsurance will vary year to year. These fluctuations, which can be significant, are not subject to our control and may limit our ability to purchase adequate coverage. For example, FHCF continues to restrict its reinsurance capacity and is expected to continue constricting capacity for future seasons. This gradual restriction is requiring us to replace that capacity with private market reinsurance. Our reinsurance program is subject to approval by the Florida OIR and review by Demotech, Inc. (“Demotech”). The recovery of increased reinsurance costs through rate action is not immediate and cannot be presumed and is subject to Florida OIR approval.

For the 2013–2014 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $558.3 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $416.0 million, with the Company retaining the first $7.0 million of losses and LAE for each event. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. Coverage afforded by the FHCF totals approximately $273.7 million, or 49.0% of the $558.3 million of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2013-2014 hurricane season, inclusive of approximately $21.4 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $67.6 million.

The 2013-2014 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) rating are listed in the table as follows.

Reinsurer	A.M. Best Rating			S&P Rating

UNITED STATES
American Agricultural Insurance Company	A-			NR
Everest Reinsurance Company	A+			A+
Houston Casualty Company, UK Branch	A			A+
Odyssey Reinsurance Company	A			A-

BERMUDA
ACE Tempest Reinsurance Limited	A+			AA-
Allied World Assurance Company Limited, Bermuda	A			A
Arch Reinsurance Limited	A+			A+
Argo Reinsurance Limited	A			NR
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)	A-			NR
DaVinci Reinsurance Ltd	A			A+
Endurance Specialty Insurance Limited	A			A
JC Re Ltd. (aka Pillar Capital and fka Juniperus & Actua Re Ltd.)	NR	*	**	NR
Partner Reinsurance Company Limited	A+			A+
Platinum Underwriters Bermuda Limited	A			A-
Renaissance Reinsurance Ltd	A+			AA-
S.A.C. Re, Ltd.	A-			NR
XL Re Limited	A			A

UNITED KINGDOM
A.F. Beazley Syndicate No. 623 (AFB)	A			A+
A.F. Beazley Syndicate No. 2623 (AFB)	A			A+
Amlin Syndicate No. 2001 (AML)	A			A+
Ariel Syndicate No. 1910 (ARE)	A			A+
ARK Syndicate No. 3902 (NOA)	A			A+
Ascot Syndicate No. 1414 (ASC)	A			A+
Barbican Syndication No. 1955 (BAR)	A			A+
Canopius Syndicate No. 958 (CNP)	A			A+
Canopius Syndicate No. 4444 (CNP)	A			A+
Cathederal Syndicate No. 2010 (MMX)	A			A+
Kiln Syndicate No. 510 (KLN)	A			A+
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)	NR			A+
MAP Underwriting Syndicate No. 2791 (MAP)	A			A+
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)	A			A+
Novae Syndicate No. 2007 (NVA)	A			A+
Pembroke Syndicate No. 4000 (PEM)	A			A+
Tokio Marine Kiln Syndicate No. 1880 (TMK)	A			A+

EUROPE
Amlin Bermuda (Branch of Amlin AG)	A			A
SCOR Global P&C SE	A			A

* Reinstatement Premium Protection Program Participants

** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

For the 2012–2013 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $328.3 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $246.5 million, with the Company retaining the first $8.0 million of losses and LAE for each event. The reinsurance program included coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. Coverage afforded by the FHCF totals approximately $144.7 million, or 44.1% of the $328.3 million of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2012-2013 hurricane season, inclusive of approximately $9.6 million payable to the FHCF and the prepaid automatic premium reinstatement protection, was approximately $41.6 million.

The 2012-2013 private reinsurance companies and their respective A.M. Best and S&P ratings are listed in the table as follows.

Reinsurer	A.M. Best Rating			S&P Rating

UNITED STATES
American Agricultural Insurance Company	A-			NR
Everest Reinsurance Company	A+			A+
Houston Casualty Company, (UK Branch)	A+	*		AA
Munich Reinsurance America, Inc.	A+			AA-
Odyssey Reinsurance Company	A			A-

BERMUDA
ACE Tempest Reinsurance Limited	A+	*		AA-
Arch Reinsurance Limited	A+	*		A+
Ariel Reinsurance Bermuda Limited for and on Behalf of Ariel Syndicate 1910 (ARE)	A-	*		NR
DaVinci Reinsurance Limited	A	*		A+
JC Re Limited (Juniperus & fka Actua Re Limited)	NR	*	**	NR
Montpelier Reinsurance Limited	A-			A-
Nephila (via Allianz Risk Transfer AG, Bermuda Branch)	NR			AA-
Platinum Underwriters Bermuda Limited	A	*		A-
Renaissance Reinsurance Limited	A+	*		AA-

UNITED KINGDOM
Amlin Syndicate No. 2001 (AML)	A			A+
Ariel Syndicate No. 1910 (ARE)	A	*		A+
ARK Syndicate No. 3902 (NOA)	A			A+
Barbican Syndication No. 1955 (BAR)	A			A+
Kiln Syndicate No. 510 (KLN)	A			A+
Liberty Syndicates Services Limited Paris, for and on Behalf of Lloyd's Syndicate No. 4472 (LIB)	NR			A+
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)	A			A+
Novae Syndicate No. 2007 (NVA)	A			A+
Tokio Marine Kiln Syndicate No. 1880 (TMK)	A			A+
Torus Syndicate No. 1301 (TUL)	A			A+

EUROPE
Amlin Bermuda (Branch of Amlin AG)	A			A
SCOR Global P&C Zurich Branch	A			A

* Reinstatement Premium Protection Program Participants

** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

Annually, the cost and amounts of reinsurance are based on management's analysis of FNIC's exposure to catastrophic risk as of June 30 and estimated to September 30. Our data is then subjected to actual exposure level analysis as of September 30. This analysis of our exposure level in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in limits and reinsurance premiums as a result of the reconciliation of estimated to actual exposure level. The September 30, 2013 change to total limits was an increase of $8.6 billion of total insured value or 25.4% and the change to reinsurance premiums was an increase of $7.9 million or 13.3%. The September 30, 2012 change to total limits was an increase of $2.1 billion of total limits or 12.6% and the change to reinsurance premiums was an increase of $2.4 million or 3.0%. These adjustments are amortized over the remaining underlying policy term.

To date, we have made no claims asserted against our reinsurers in connection with the 2013–2014 and 2012–2013 excess of loss and FHCF treaties.

The quota share retrocessionaire reinsurance agreements require FNIC to securitize credit, regulatory and business risk. Fully funded trust agreements totaled $4.8 million as of September 30, 2013 and December 31, 2012.

We are selective in choosing reinsurers and consider numerous factors, the most important of which are the financial stability of the reinsurer, their history of responding to claims and their overall reputation. In an effort to minimize our exposure to the insolvency of a reinsurer, we evaluate the acceptability and review the financial condition of the reinsurer at least annually.