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Reinsurance Activity
9 Months Ended
Sep. 30, 2012
Reinsurance Activity  
Reinsurance Activity

5.              Reinsurance Activity

 

NLASCO, Inc., or NLASCO, our wholly owned property and casualty insurance holding company, limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded; however, these reinsurance contracts do not relieve NLASCO from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net premiums earned, losses and loss adjustment expenses, or LAE, and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies.  Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets.  Failure of reinsurers to honor their obligations could result in losses to NLASCO; consequently, allowances are established for amounts deemed uncollectible. NLASCO evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At September 30, 2012, we had reinsurance recoverables with no allowance of approximately $22 million.

 

NLASCO voluntarily participates as a Write Your Own carrier in the National Flood Insurance  Program, or NFIP.  The NFIP is administered and regulated by the Federal Emergency Management Agency (FEMA).  NLASCO operates as a fiscal agent of the Federal government in the selling and administering of the Standard Flood Insurance Policy.  This involves writing the policy, collecting premiums and paying covered claims.  All pricing is set by FEMA and all collections are made by the Company.

 

The Company cedes 100% of the policies written by the Company on the Standard Flood Insurance Policy to FEMA; however, if FEMA were unable to perform, the Company would have a legal obligation to the policyholders. The terms of the reinsurance agreement are standard terms, which require the Company to maintain its rating criteria, determine policyholder eligibility, issue policies on the Company’s paper, endorse and cancel policies, collect from the insureds and process claims.  NLASCO receives ceding commissions from NFIP for underwriting administration, claims management, commission and adjuster fees.

 

The effect of reinsurance on premiums written and earned for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands).

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

 

 

Written

 

Earned

 

Written

 

Earned

 

Written

 

Earned

 

Written

 

Earned

 

Premiums from direct business

 

$

40,899

 

$

40,922

 

$

38,826

 

$

37,783

 

$

126,833

 

$

121,209

 

$

119,137

 

$

108,939

 

Reinsurance assumed

 

1,726

 

1,520

 

1,420

 

1,313

 

4,830

 

4,296

 

4,091

 

3,834

 

Reinsurance ceded

 

(5,106

)

(4,754

)

(4,484

)

(4,153

)

(14,953

)

(16,467

)

(14,642

)

(14,330

)

Net premiums

 

$

37,519

 

$

37,688

 

$

35,762

 

$

34,943

 

$

116,710

 

$

109,038

 

$

108,586

 

$

98,443

 

 

The effect of reinsurance on incurred losses was as follows for the three and nine months ended September 30, 2012 and 2011 (in thousands).

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense (LAE) incurred

 

$

31,577

 

$

16,568

 

$

94,022

 

$

77,718

 

Reinsurance recoverables

 

(1,441

)

7,226

 

(2,273

)

3,181

 

Net loss and LAE incurred

 

$

30,136

 

$

23,794

 

$

91,749

 

$

80,899

 

 

Multi-line excess of loss coverage

 

For all lines of business, the Company has excess of loss reinsurance covering $775,000 in excess of $225,000 retention on losses on any one risk.

 

Catastrophic coverage

 

As of January 1, 2012, the Company renewed its catastrophic reinsurance contract for its first and second layers of reinsurance.  Per the contract renewal, the Company changed its underlying coverage at ASIC to $6.5 million in excess of $1.5 million retention.  The Company has reinsurance for up to $162 million in losses per event in excess of the $8 million retention.  The reinsurance from $8 million to $50 million loss is comprised of two layers of protection: $17 million in excess of $8 million loss; $25 million in excess of $25 million loss.  The third, fourth and fifth layer reinsurance contract renewed after June 30, 2012, in two layers, $50 million in excess of $50 million loss and $70 million in excess of $100 million loss, both of which are fully subscribed.  NLIC and ASIC do not retain participation in any of the layers, other than the first $8 million and $1.5 million retention, respectively.  During 2012, all four layers can be reinstated one time for 100% of the original premium.