8. Property and Casualty Insurance Activity

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

8. Property and Casualty Insurance Activity

Earned Premiums

Premiums written, ceded and earned are as follows (unaudited):

	Direct			Assumed			Ceded			Net
Nine months ended September 30, 2012 (restated)
Premiums written	$	36,439,884		$	21,553		$	(21,699,102	)	$	14,762,335
Change in unearned premiums		(4,017,217	)		(9,119	)		1,817,614			(2,208,722	)
Premiums earned	$	32,422,667		$	12,434		$	(19,881,488	)	$	12,553,613
Nine months ended September 30, 2011
Premiums written	$	30,502,800		$	6,289		$	(18,099,446	)	$	12,409,643
Change in unearned premiums		(3,823,593	)		1,611			2,234,476			(1,587,506	)
Premiums earned	$	26,679,207		$	7,900		$	(15,864,970	)	$	10,822,137
Three months ended September 30, 2012 (restated)
Premiums written	$	12,765,358		$	18,354		$	(7,218,500	)	$	5,565,212
Change in unearned premiums		(1,363,818	)		(13,031	)		228,143			(1,148,706	)
Premiums earned	$	11,401,540		$	5,323		$	(6,990,357	)	$	4,416,506
Three months ended September 30, 2011
Premiums written	$	10,382,641		$	3,409		$	(6,119,576	)	$	4,266,474
Change in unearned premiums		(909,125	)		(41	)		579,881			(329,285	)
Premiums earned	$	9,473,516		$	3,368		$	(5,539,695	)	$	3,937,189

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $497,000 and $545,000 as of September 30, 2012 (unaudited) and December 31, 2011, respectively.

Loss and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):

	Nine months ended
	September 30,
	2012			2011
	(unaudited)
Balance at beginning of period	$	18,480,717		$	17,711,907
Less reinsurance recoverables		(10,001,060	)		(10,431,415	)
Net balance, beginning of period		8,479,657			7,280,492
Incurred related to:
Current year		6,554,087			6,742,201
Prior years		824,334			565,724
Total incurred		7,378,421			7,307,925
Paid related to:
Current year		2,572,948			2,414,171
Prior years		2,681,698			2,608,709
Total paid		5,254,646			5,022,880
Net balance at end of period		10,603,432			9,565,537
Add reinsurance recoverables		11,679,713			11,808,025
Balance at end of period	$	22,283,145		$	21,373,562

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $6,917,332 and $7,035,191 for the nine months ended September 30, 2012 and 2011, respectively.

Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to Company and industry trends (See Note 14 - Subsequent events).

Loss and loss adjustment expense reserves

The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often beyond the Company’s control. The loss ratio projection method is used to estimate loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the result of numerous best estimates made by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

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. Specifically, on at least a quarterly 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.

Reinsurance

The Company’s reinsurance treaties for both its Personal Lines business, which primarily consists of homeowners’ policies, and Commercial Lines business, other than commercial auto, were renewed as of July 1, 2012. The treaties, which are renewed annually, provide for the following material terms as of July 1, 2012:

Personal Lines

Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty which provides coverage with respect to losses of up to $1,000,000 per occurrence. An excess of loss contract provides 100% of coverage for the next $1,900,000 of losses for a total coverage with respect to losses of up to $2,900,000 per occurrence. See “Catastrophe Reinsurance” below.

Personal umbrella policies are reinsured under a 90% quota share treaty limiting the Company to a maximum of $100,000 per occurrence for the first $1,000,000 of coverage. The second $1,000,000 of coverage is 100% reinsured. 

Commercial Lines

General liability commercial policies written by the Company, except for commercial auto policies, are reinsured under a 40% quota share treaty, which provides coverage with respect to losses of up to $500,000 per occurrence.   Excess of loss contracts provide 100% of coverage for the next $2,400,000 of losses for a total coverage with respect to losses of up to $2,900,000 per occurrence.

Commercial Auto

Commercial auto policies are covered by an excess of loss reinsurance contract which provides $1,750,000 of coverage in excess of $250,000.

Catastrophe Reinsurance

The Company has catastrophe reinsurance coverage with regard to losses of up to $73,000,000.  The initial $3,000,000 of losses in a catastrophe are subject to a 75% quota share treaty, such that the Company retains $750,000 per catastrophe occurrence With respect to any additional catastrophe losses of up to $70,000,000, the Company is 100% reinsured under its catastrophe reinsurance program.

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 from its obligations to policyholders.

Ceding Commission Revenue

The Company earns ceding commissions under its quota share reinsurance agreements based on a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios.  The commission rate and ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and ceding commissions earned decreases when the estimated ultimate loss ratio increases.

As of September 30, 2012 and 2011, the Company’s estimated ultimate loss ratios attributable to these contracts are lower than the contractual ultimate loss ratios at which the minimum amount of ceding commissions can be earned. Accordingly, the Company has recorded ceding commissions earned that are greater than the minimum provisional commissions (see Note 14 - Subsequent Events).

Ceding commission revenue consists of the following:

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
	(unaudited)				(unaudited)
Provisional ceding commissions earned	$	2,171,391	$	1,763,930	$	6,231,106	$	5,048,609
Contingent ceding commissions earned		540,040		543,460		2,294,839		2,299,223
	$	2,711,431	$	2,307,390	$	8,525,945	$	7,347,832

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. Ceding commissions due from reinsurers, which include contingent ceding commissions receivable, as of September 30, 2012 (unaudited) and December 31, 2011 were $2,668,123 and $1,734,535, respectively, and are included in “Receivables – reinsurance contracts” in the Consolidated Balance Sheets.