REINSURANCE

The Company's insurance operations utilize reinsurance in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. Life reinsurance is accomplished through yearly renewable term coverage. Property and casualty reinsurance is placed on both a quota-share and excess of loss basis. Reinsurance ceded arrangements do not discharge the insurance subsidiaries as the primary insurer, except for cases involving a novation. Failure of re-insurers to honor their obligations could result in losses to the insurance subsidiaries. The insurance subsidiaries evaluate the financial conditions of their reinsurance companies and monitor concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the companies to minimize their exposure to significant losses from reinsurance insolvencies.

In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other individually significant large loss events that cause unfavorable underwriting results by re-insuring certain levels of risk in various areas of exposure with reinsurance companies. NSFC maintains a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes.

Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from each catastrophe event. Reinsurance coverage is maintained in four layers as follows:



Layer	Reinsurers' Limits of Liability
First Layer	100% of $6,000,000 in excess of $4,000,000
Second Layer	100% of $7,500,000 in excess of $10,000,000
Third Layer	100% of $25,000,000 in excess of $17,500,000
Fourth Layer	100% of $30,000,000 in excess of $42,500,000

Each reinsurance layer covers events occurring from January 1-December 31 of the contract year. All significant reinsurance companies under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.

The Company's catastrophe reinsurance contract allows for one reinstatement. The Company maintains reinstatement premium protection (RPP) to cover reinstatement premiums incurred. The RPP further reduces risk from a major catastrophe and serves to strengthen the Company's capital position by reducing the modeled 100 year event net cost.

Amounts recoverable from re-insurers are estimated in a manner consistent with the claim liability associated with the underlying insurance policies. Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.

In the normal course of business, NSIC seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to reinsurance companies under excess coverage contracts. NSIC retains a maximum of $50,000 of coverage per individual life. The cost of reinsurance is amortized over the contract period of the reinsurance.

At September 30, 2013, the largest reinsurance recoverable of a single reinsurer was $69,000 ($295,000 at December 31, 2012). Amounts reported as ceded incurred losses in both 2013 and 2012 were related to the development of losses from prior year catastrophes.

The effect of reinsurance on premiums written and earned in the property and casualty segment is as follows (dollars in thousands):



	Three months ended September 30, 2013						Three months ended September 30, 2012
	Written			Earned			Written			Earned

Direct	$	14,304		$	13,528		$	13,890		$	13,311
Assumed	—			—			—			—
Ceded	(2,081		)	(2,082		)	(2,064		)	(2,068		)
Net	$	12,223		$	11,446		$	11,826		$	11,243

	Nine months ended September 30, 2013						Nine months ended September 30, 2012
	Written			Earned			Written			Earned

Direct	$	43,403		$	40,423		$	42,181		$	39,928
Assumed	—			—			—			—
Ceded	(6,401		)	(6,413		)	(6,135		)	(6,127		)
Net	$	37,002		$	34,010		$	36,046		$	33,801

The effect of reinsurance on premiums written and earned in the life segment is as follows (dollars in thousands):



	Three months ended September 30, 2013						Three months ended September 30, 2012
	Written			Earned			Written			Earned

Direct	$	1,788		$	1,767		$	1,719		$	1,684
Assumed	—			—			—			—
Ceded	(22		)	(22		)	(23		)	(23		)
Net	$	1,766		$	1,745		$	1,696		$	1,661

	Nine months ended September 30, 2013						Nine months ended September 30, 2012
	Written			Earned			Written			Earned

Direct	$	5,071		$	5,205		$	5,131		$	5,190
Assumed	—			—			—			—
Ceded	(52		)	(52		)	(58		)	(58		)
Net	$	5,019		$	5,153		$	5,073		$	5,132