Allowance for Expected Credit Losses

9 Months Ended

Sep. 30, 2020

Allowance for Expected Credit Losses

Allowance for Expected Credit Losses

6.  Allowance for Expected Credit Losses

Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 2 – Recent Accounting Pronouncements for additional information and Note 5 – Investments for information about the allowance for expected credit losses on AFS debt securities.

The Company’s financial instruments measured at amortized cost include premiums and accounts receivable, and reinsurance recoverables.

Premiums and accounts receivable are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. Credit risk is partially mitigated by the Company’s ability to cancel the policy if the policyholder does not pay the premium and the Company writes off premiums receivable balances that are more than 90 days overdue.

The following tables present the balances of premiums receivable, net of the allowance for expected credit losses, at September 30, 2020 and January 1, 2020, and changes in the allowance for expected credit losses for the three and nine months ended September 30, 2020.

		At and For the				At and For the
		Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
		Accounts Receivable Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses		Accounts Receivable Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses
Balance, beginning of period	$	199,356	$	914	$	193,369	$	578
Current period change for expected credit losses				296				2,498
Writeoffs of uncollectable accounts receivable				(251)				(2,117)
Balance, end of period	$	193,967	$	959	$	193,967	$	959

Reinsurance recoverables include amounts due from reinsurers for both paid and unpaid losses. The Company cedes insurance to Commonwealth Automobile Reinsurers (“CAR”) and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectable reinsurance. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of claims and claim adjustment expenses.

The majority of the Company’s reinsurance recoverable on paid and unpaid losses is a result of our participation as a servicing carrier in the CAR Commercial Automobile Program and the Taxi/Limo Program, which represents 98% of the total reinsurance recoverable on paid and unpaid losses at September 30, 2020. The remaining 2% of amounts due from reinsurers are related to our other excess of loss and quota share contracts. For amounts due under these contracts, the Company utilizes updated A.M. Best credit ratings on a quarterly basis to determine the allowance for expected credit losses. As of September 30, 2020, all reinsurers under these programs are rated “A” or better by A.M. Best. Certain of the Company's reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements. The Company’s analysis concludes that there are no expected credit losses at September 30, 2020.