| 6. Property and Casualty Insurance Activity | Premiums
Earned Premiums written,
ceded and earned are as follows:
Direct Assumed Ceded Net
Six
months ended June 30, 2015
Premiums
written $ 42,655,494
$ 21,870
$(18,667,737) $ 24,009,627
Change
in unearned premiums (3,654,318) 2,377
893,828
(2,758,113)
Premiums
earned $ 39,001,176
$ 24,247
$(17,773,909) $ 21,251,514
Six
months ended June 30, 2014
Premiums
written $ 36,597,945
$ 16,302
$(21,527,803) $ 15,086,444
Change
in unearned premiums (4,872,810) 6,351
2,135,699
(2,730,760)
Premiums
earned $ 31,725,135
$ 22,653
$(19,392,104) $ 12,355,684
Three
months ended June 30, 2015
Premiums
written $ 23,166,065
$ 13,959
$(10,048,331) $ 13,131,693
Change
in unearned premiums (3,181,987) (1,535) 917,544
(2,265,978)
Premiums
earned $ 19,984,078
$ 12,424
$ (9,130,787) $ 10,865,715
Three
months ended June 30, 2014
Premiums
written $ 20,250,500
$ 8,655
$(11,757,974) $ 8,501,181
Change
in unearned premiums (3,739,282) 3,697
1,663,777
(2,071,808)
Premiums
earned $ 16,511,218
$ 12,352
$(10,094,197) $ 6,429,373
Premium
receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of June
30, 2015 and December 31, 2014 was approximately $1,383,000 and $1,007,000, respectively. Loss and
Loss Adjustment Expense Reserves The
following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expense (“LAE”)
reserves:
Six
months ended
June
30,
2015 2014
Balance
at beginning of period $ 39,912,683
$ 34,503,229
Less
reinsurance recoverables (18,249,526) (17,363,975)
Net
balance, beginning of period 21,663,157
17,139,254
Incurred
related to:
Current
year 11,747,214
6,975,731
Prior
years 86,816
357,162
Total
incurred 11,834,030
7,332,893
Paid
related to:
Current
year 5,121,409
2,691,199
Prior
years 5,597,256
3,132,536
Total
paid 10,718,665
5,823,735
Net
balance at end of period 22,778,522
18,648,412
Add
reinsurance recoverables 18,470,298
21,055,876
Balance
at end of period $ 41,248,820
$ 39,704,288
Incurred losses
and LAE are net of reinsurance recoveries under reinsurance contracts of $9,114,440 and $11,654,729 for the six months ended June
30, 2015 and 2014, respectively. Prior
year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and
LAE development incurred during the six months ended June 30, 2015 and 2014 was $86,816 and $357,162, respectively. The
CompanyÂ’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but
not reported (“IBNR”) reserves, giving consideration to Company and industry trends. The
reserving process for loss and LAE reserves provides for the CompanyÂ’s best estimate at a particular point in time of the
ultimate unpaid cost of all losses and LAE 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 CompanyÂ’s control. Several actuarial reserving methodologies are used to estimate
required loss reserves. The process produces carried reserves set by management based upon the actuariesÂ’ best estimate and
is the result of numerous best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE
reserves for reported claims (“case reserve”) 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 LAE reserves for unreported claims and development on known claims (IBNR reserves) 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 actuariesÂ’ 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
yearÂ’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported
claims and a variety of statistical techniques. 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. Several methods
are used, varying by product line and accident year, in order to select the estimated year-end loss reserves. These methods include
the following: Paid
Loss Development Incurred
Loss Development Paid
Bornhuetter-Ferguson (“BF”) Incurred
Bornhuetter-Ferguson (“BF”) Management’s
best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various
methods based on the line of business and accident year being projected. In some cases, additional methods or historical data
from industry sources are employed to supplement the projections derived from the methods listed above. Two
key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year
used in the BF methods described above, and the loss development factor selections used in the loss development methods described
above. The loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted
for rate changes, trend, and mix of business. The
Company is not aware of any claims trends that have emerged or that would cause future adverse development that have not already
been considered in existing case reserves and in its current loss development factors. In
New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date
of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (‘pure’ IBNR)
for accident years 2011 and prior is limited although there remains the possibility of adverse development on reported claims
(‘case development’ IBNR). The
Company was previously a one-third participant in a pool arrangement. Effective November 1, 1997, the Company withdrew from its
participation in the pool arrangement. Accordingly, the Company will only be participating in losses and allocated loss adjustment
expenses that occurred prior to that date. Commercial
Auto Line of Business Effective
October 1, 2014 the Company decided that it would no longer accept applications for new commercial auto policies. The action was
taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of
business. The actions taken did not yield the hoped for results. In February 2015, the Company made the decision that it would
no longer offer renewals on its existing commercial auto policies beginning with those that expire on or after May 1, 2015. The
Company had 390 and 730 commercial auto policies
in force as of June 30, 2015 and December 31, 2014, respectively. Reinsurance The CompanyÂ’s
quota share reinsurance treaty in effect for the six months ended June 30, 2015 for its personal lines business, which primarily
consists of homeownersÂ’ policies, were covered under the July 1, 2014/June 30, 2015 treaty year. The Company did not renew
its expiring commercial lines quota share reinsurance treaty on July 1, 2014. The CompanyÂ’s quota share reinsurance
treaties in effect for the six months ended June 30, 2014 for both its personal lines business and commercial lines business were
covered under the July 1, 2013/June 30, 2014 treaty year. The CompanyÂ’s personal lines quota share treaty that covered the
July 1, 2013/June 30, 2014 treaty year was a two year treaty that expired on June 30, 2015. Effective July 1, 2014, the Company
had the option to increase the quota share percentage from 75% to a maximum of 85% or decrease the quota share percentage from
75% to a minimum of 55% by giving no less than 30 days advance notice. On May 12, 2014, the Company notified the personal lines
reinsurers of its election to reduce the ceding percentage in the personal lines quota share treaty from 75% to 55% effective
July 1, 2014.The Company entered into new annual treaties with different terms effective July 1, 2015. The CompanyÂ’s treaties
for the July 1, 2013/ June 30, 2014, July 1, 2014/June 30, 2015 and July 1, 2015/June 30, 2016 treaty years provide for the following
material terms:
Treaty
Year
July
1, 2015 July
1, 2014 July
1, 2013
to to to
Line
of Busines June
30, 2016 June
30, 2015 June
30, 2014
Personal
Lines:
Homeowners, dwelling
fire and canine legal liability
Quota
share treaty:
Percent
ceded 40% 55% 75%
Risk
retained $ 450,000 $ 360,000 $ 300,000
Losses
per occurrence subject to quota share reinsurance coverage $ 750,000 $ 800,000 $ 1,200,000
Excess
of loss coverage above quota share coverage $ 3,750,000 $ 3,200,000 $ 1,700,000
in
excess of in
excess of in
excess of
$ 750,000 $ 800,000 $ 1,200,000
Total
reinsurance coverage per occurrence $ 4,050,000 $ 3,640,000 $ 2,600,000
Losses
per occurrence subject to reinsurance coverage $ 4,500,000 $ 4,000,000 $ 2,900,000
Expiration
date June
30, 2016 June
30, 2015 June
30, 2015
Personal Umbrella
Quota
share treaty:
Percent
ceded - first million dollars of coverage 90% 90% 90%
Percent
ceded - excess of one million dollars of coverage 100% 100% 100%
Risk
retained $ 100,000 $ 100,000 $ 100,000
Total
reinsurance coverage per occurrence $ 2,900,000 $ 2,900,000 $ 1,900,000
Losses
per occurrence subject to quota share reinsurance coverage $ 3,000,000 $ 3,000,000 $ 2,000,000
Expiration
date June
30, 2016 June
30, 2015 June
30, 2014
Commercial
Lines:
General liability
commercial policies, except for commercial auto
Quota
share treaty:
Percent
ceded (terminated effective July 1, 2014) None None 25%
Risk
retained $ 425,000 $ 400,000 $ 300,000
Losses
per occurrence subject to quota share reinsurance coverage None None $ 400,000
Excess
of loss coverage above quota share coverage $ 4,075,000 $ 3,600,000 $ 2,500,000
in
excess of in
excess of in
excess of
$ 425,000 $ 400,000 $ 400,000
Total
reinsurance coverage per occurrence $ 4,075,000 $ 3,600,000 $ 2,600,000
Losses
per occurrence subject to reinsurance coverage $ 4,500,000 $ 4,000,000 $ 2,900,000
Commercial
Auto:
Risk
retained $ 300,000 $ 300,000 $ 300,000
Excess
of loss coverage in excess of risk retained $ 1,700,000 $ 1,700,000 $ 1,700,000
in
excess of in
excess of in
excess of
$ 300,000 $ 300,000 $ 300,000
Catastrophe
Reinsurance:
Initial
loss subject to personal lines quota share treaty $ 4,000,000 $ 4,000,000 $ 4,000,000
Risk
retained per catastrophe occurrence (1) $ 2,400,000 $ 1,800,000 $ 1,000,000
Catastrophe
loss coverage in excess of quota share coverage (2) (3) $ 176,000,000 $ 137,000,000 $ 86,000,000
Severe
winter weather aggregate (3) Yes Yes No
Reinstatement
premium protection (4) Yes No No
(1) Plus
losses in excess of catastrophe coverage.
(2) Effective
July 1, 2014, the CompanyÂ’s catastrophe treaty also covers losses caused by severe
winter weather during any consecutive 28 day period. Effective July 1, 2015, the duration
of a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone has
been extended to 120 consecutive hours from 96 consecutive hours.
(3) Catastrophe
coverage is limited on an annual basis to two times the per occurrence amounts.
(4) Effective
July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage
in excess of $4,000,000. The
single maximum risks per occurrence to which the Company is subject under the treaties that expired on June 30, 2015 and 2014
are as follows:
July
1, 2014 - June 30, 2015 July
1, 2013 - June 30, 2014
Treaty
Extent
of Loss Risk
Retained Extent
of Loss Risk
Retained
Personal
Lines Initial
$800,000 $360,000
Initial
$1,200,000 $300,000
$800,000
- $4,000,000 None(1)
$1,200,000
- $2,900,000 None(1)
Over
$4,000,000 100% Over
$2,900,000 100%
Personal
Umbrella Initial
$1,000,000 $100,000
Initial
$1,000,000 $100,000
$1,000,000
- $3,000,000 None(1)
$1,000,000
- $2,000,000 None(1)
Over
$3,000,000 100% Over
$2,000,000 100%
Commercial
Lines Initial
$400,000 $400,000
Initial
$400,000 $300,000
$400,000
- $4,000,000 None(1) $400,000
- $2,900,000 None(1)
Over
$4,000,000 100% Over
$2,900,000 100%
Commercial
Auto Initial
$300,000 $300,000
Initial
$300,000 $300,000
$300,000
- $2,000,000 None(1)
$300,000
- $2,000,000 None(1)
Over
$2,000,000 100% Over
$2,000,000 100%
Catastrophe
(2) Initial
$4,000,000 $1,800,000
Initial
$4,000,000 $1,000,000
$4,000,000
- $141,000,000 None
$4,000,000
- $90,000,000 None
Over
$141,000,000 100% Over
$90,000,000 100% The
single maximum risks per occurrence to which the Company is subject under the new treaties effective July 1, 2015 are as follows:
July
1, 2015 - June 30, 2016
Treaty
Extent
of Loss Risk
Retained
Personal
Lines Initial
$750,000 $450,000
$750,000
- $4,500,000 None(1)
Over
$4,500,000 100%
Personal
Umbrella Initial
$1,000,000 $100,000
$1,000,000
- $3,000,000 None(1)
Over
$3,000,000 100%
Commercial
Lines Initial
$425,000 $425,000
$425,000
- $4,500,000 None(1)
Over
$4,500,000 100%
Commercial
Auto Initial
$300,000 $300,000
$300,000
- $2,000,000 None(1)
Over
$2,000,000 100%
Catastrophe
(2) Initial
$4,000,000 $2,400,000
$4,000,000
- $180,000,000 None
Over
$180,000,000 100%
(1) Covered
by excess of loss treaties.
(2) Catastrophe
coverage is limited on an annual basis to two times the per occurrence amounts. The
CompanyÂ’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 CompanyÂ’s participation in reinsurance arrangements does not relieve the Company of its obligations to policyholders. Ceding
Commission Revenue The
Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional commission
rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year
loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned.
The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission
rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the
commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases. The
CompanyÂ’s estimated ultimate treaty year loss ratios for treaties in effect for the six months and three months ended June
30, 2015 are attributable to contracts for the July 1, 2014/June 30, 2015 treaty year (“2014/2015 Treaties”). The Company’s
estimated ultimate treaty year loss ratios for treaties in effect for the six months and three months ended June 30, 2014 are
attributable to contracts for the July 1, 2013/June 30, 2014 treaty year (“2013/2014 Treaties”). Treaties
in effect for the six months and three months ended June 30, 2015 The
Company’s estimated ultimate loss ratios (“Loss Ratios”) for the period July 1, 2014 through June 30, 2015, which
are attributable to contracts for the 2014/2015 Treaties, were lower than the contractual Loss Ratios at which the provisional
ceding commissions are earned. As a result of severe winter weather during February and March 2015, the Loss Ratios were greater
than what would have been expected during an ordinary winter. Accordingly, for the six months ended June 30, 2015, the CompanyÂ’s
contingent ceding commission earned was reduced as a result of the increase in estimated Loss Ratios for the 2014/2015 Treaties. Treaties
in effect for the six months and three months ended June 30, 2014 The
CompanyÂ’s Loss Ratios for the period July 1, 2013 through June 30, 2014, which are attributable to contracts for the 2013/2014
Treaties were lower than the contractual Loss Ratios at which the provisional ceding commissions are earned. As a result of severe
winter weather during January and February 2014, the Loss Ratios attributable to these treaties as of June 30, 2014 were greater
than the Loss Ratios as of December 31, 2013. Accordingly, for the six months ended June 30, 2014, the CompanyÂ’s contingent
ceding commission earned was reduced as a result of the increase in estimated Loss Ratios for the 2013/2014 Treaties. In
addition to the treaties that were in effect for six months and three months ended June 30, 2015 and 2014, the estimated ultimate
loss ratios from prior yearsÂ’ treaties are subject to change as loss reserves from those periods increase or decrease, resulting
in an increase or decrease in the commission rate and contingent ceding commissions earned. Ceding
commissions earned consists of the following:
Three
months ended Six
months ended
June
30, June
30,
2015
2014
2015
2014
Provisional
ceding commissions earned $ 2,964,924
$ 3,629,871
$ 5,879,953
$ 7,006,747
Contingent
ceding commissions earned 690,598
76,178
864,973
80,585
$ 3,655,522
$ 3,706,049
$ 6,744,926
$ 7,087,332
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. |
