| 6. Property and Casualty Insurance Activity | Premiums Earned Premiums written, ceded and earned are as follows:
Direct Assumed Ceded Net
Nine months ended September 30, 2019
Premiums written $ 128,333,117 $ 938 $ (20,914,074 ) $ 107,419,981
Change in unearned premiums (11,035,993 ) (559 ) (1,366,251 ) (12,402,803 )
Premiums earned $ 117,297,124 $ 379 $ (22,280,325 ) $ 95,017,178
Nine months ended September 30, 2018
Premiums written $ 107,175,413 $ 842 $ (19,409,423 ) $ 87,766,832
Change in unearned premiums (9,930,503 ) 3,762 (3,363,953 ) $ (13,290,694 )
Premiums earned $ 97,244,910 $ 4,604 $ (22,773,376 ) $ 74,476,138
Three months ended September 30, 2019
Premiums written $ 46,023,290 $ 861 $ (5,586,278 ) $ 40,437,873
Change in unearned premiums (4,579,777 ) (761 ) (1,637,325 ) (6,217,863 )
Premiums earned $ 41,443,513 $ 100 $ (7,223,603 ) $ 34,220,010
Three months ended September 30, 2018
Premiums written $ 38,785,453 $ 18 $ (2,683,699 ) $ 36,101,772
Change in unearned premiums (4,435,174 ) 698 (4,133,389 ) (8,567,865 )
Premiums earned $ 34,350,279 $ 716 $ (6,817,088 ) $ 27,533,907 Premium receipts in advance of the policy
effective date are recorded as advance premiums. The balance of advance premiums as of September 30, 2019 and December 31, 2018
was $3,737,491 and $2,107,629, 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:
Nine months ended
September 30,
2019 2018
Balance at beginning of period $ 56,197,106 $ 48,799,622
Less reinsurance recoverables (15,671,247 ) (16,748,908 )
Net balance, beginning of period 40,525,859 32,050,714
Incurred related to:
Current year 60,401,821 41,611,658
Prior years 11,186,029 127,465
Total incurred 71,587,850 41,739,123
Paid related to:
Current year 31,515,656 23,404,909
Prior years 18,600,946 12,160,419
Total paid 50,116,602 35,565,328
Net balance at end of period 61,997,107 38,224,509
Add reinsurance recoverables 15,412,316 15,718,448
Balance at end of period $ 77,409,423 $ 53,942,957 Incurred losses and LAE are net of reinsurance
recoveries under reinsurance contracts of $8,849,440 and $11,668,527 for the nine months ended September 30, 2019 and 2018, 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 nine months
ended September 30, 2019 and 2018 was $11,186,029 unfavorable and $127,465 unfavorable, respectively. During the nine months ended
September 30, 2019, the Company increased case reserves for a significant number of older liability claims, which primarily affected
the ultimate loss projections for commercial lines business. These adjustments were in line with management’s continued process
of monitoring claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”)
reserves, giving consideration to both Company and industry trends. The reserving process for loss and LAE
reserves provides for the Company’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 including
losses that have occurred but that have not yet been reported. The process relies on standard actuarial reserving methodologies,
judgments relative to estimates of ultimate claim severity and frequency, the length of time before losses will develop to their
ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors that are beyond
the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process
produces carried reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of
the best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE reserves for individual
reported claims (the “case reserve”) is determined by the claims department and changes over time as new information
is gathered. Such information is critical to the review of appropriate IBNR reserves and includes a review of coverage applicability,
comparative liability on the part of the insured, injury severity, property damage, replacement cost estimates, 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 aggregated 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 period’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 periods. Several methods are used, varying by line of business
and accident year, in order to select the estimated period-end loss reserves. These methods include the following: Paid Loss Development Incurred Loss Development Paid Bornhuetter-Ferguson
(“BF”) Incurred Bornhuetter-Ferguson
(“BF”) Incremental Claim-Based
Methods Frequency / Severity Based
Methods Management’s best estimate of required
reserves is generally based on an average of the methods above, with appropriate weighting of 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 claim
trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current
carried reserves levels. 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 dates of September 30, 2016
and prior is limited, although there remains the possibility of adverse development on reported claims (“case development”
IBNR). In certain rare circumstances states have retroactively revised a statute of limitations. The Company is not aware of any
such effort that would have a material impact on the Company’s results. The following is information about incurred
and paid claims development as of September 30, 2019, net of reinsurance, as well as the cumulative reported claims by accident
year and total IBNR reserves as of September 30, 2019 included in the net incurred loss and allocated expense amounts. The historical
information regarding incurred and paid claims development for the years ended December 31, 2010 to December 31, 2018 is presented
as supplementary unaudited information.
All Lines of Business
(in thousands, except reported claims data)
As of
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance September 30, 2019
For the Years Ended December 31, Nine IBNR Cumulative Number of Reported Claims by Accident Year
Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(Unaudited 2010 - 2018) (Unaudited)
2010 $5,598 $5,707 $6,429 $6,623 $6,912 $6,853 $6,838 $6,840 $6,787 $ 6,793 $ - 1,617
2011 7,603 7,678 8,618 9,440 9,198 9,066 9,144 9,171 9,161 14 1,914
2012 9,539 9,344 10,278 10,382 10,582 10,790 10,791 11,016 79 4,704 (1)
2013 10,728 9,745 9,424 9,621 10,061 10,089 10,571 95 1,561
2014 14,193 14,260 14,218 14,564 15,023 16,576 454 2,134
2015 22,340 21,994 22,148 22,491 23,408 311 2,555
2016 26,062 24,941 24,789 28,209 883 2,873
2017 31,605 32,169 34,848 879 3,368
2018 54,455 56,320 3,091 4,162
2019 57,364 16,404 3,118
Total $ 254,266
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.
All Lines of Business
(in thousands)
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31, Nine
Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(Unaudited 2010 - 2018) (Unaudited)
2010 $2,566 $3,947 $4,972 $5,602 $6,323 $6,576 $6,720 $6,772 $6,780 $ 6,780
2011 3,740 5,117 6,228 7,170 8,139 8,540 8,702 8,727 8,778
2012 3,950 5,770 7,127 8,196 9,187 10,236 10,323 10,422
2013 3,405 5,303 6,633 7,591 8,407 9,056 9,235
2014 5,710 9,429 10,738 11,770 13,819 14,692
2015 12,295 16,181 18,266 19,984 20,982
2016 15,364 19,001 21,106 22,988
2017 16,704 24,820 27,470
2018 32,383 43,383
2019 30,115
Total $ 194,845
Net liability for unpaid loss and allocated
loss adjustment expenses for the accident years presented $ 59,421
All outstanding liabilities before 2010,
net of reinsurance 143
Liabilities for loss and allocated loss
adjustment expenses, net of reinsurance $ 59,564
Reported claim counts are measured on
an occurrence or per event basis. A single claim occurrence could result in more than one loss type or claimant; however,
the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved. The reconciliation of the net incurred
and paid loss development tables to the loss and LAE reserves in the consolidated balance sheet is as follows:
As of
(in thousands) September 30, 2019
Liabilities for loss and loss adjustment expenses, net of reinsurance $ 59,564
Total reinsurance recoverable on unpaid losses 15,412
Unallocated loss adjustment expenses 2,433
Total gross liability for loss and LAE reserves $ 77,409 Reinsurance The Company’s quota share reinsurance
treaties are on a July 1 through June 30 fiscal year basis. The Company’s quota share reinsurance treaties in effect during
the nine months ended September 30, 2019 and 2018 for its personal lines business, which primarily consists of homeowners’
policies, were covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”).
The treaty in effect during the nine months ended September 30, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty
year (“2018/2019 Treaty Year”). The treaties in effect during the nine months ended September 30, 2018 were covered
under the July 1, 2017 through June 30, 2018 treaty year (“2017/2018 Treaty Year”) and the 2018/2019 Treaty Year that
began on July 1, 2018. In August 2018, the Company terminated
its contract with one of the reinsurers that was a party to the 2017/2019 Treaty. This termination was retroactive to July 1, 2018
and had the effect of reducing the quota share ceding rate to 10% under the 2018/2019 Treaty Year from 20% under the 2017/2018
Treaty Year. Effective July 1, 2019, the 2017/2019
Treaty and commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. The Company entered into new
excess of loss and catastrophe reinsurance treaties effective July 1, 2019. Material terms for reinsurance treaties in effect for
the treaty years shown below are as follows:
Treaty Year
July 1, 2019 July 1, 2018 July 1, 2017
to to to
Line of Business June 30, 2020 June 30, 2019 June 30, 2018
Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded None 10 % 20 %
Risk retained $ 1,000,000 $ 900,000 $ 800,000
Losses per occurrence subject to quota share reinsurance coverage None $ 1,000,000 $ 1,000,000
Excess of loss coverage and facultative facility above quota share coverage (1) $ 10,000,000 $ 9,000,000 $ 9,000,000
in excess of in excess of
$ 1,000,000 $ 1,000,000
Total reinsurance coverage per occurrence $ 9,000,000 $ 9,100,000 $ 9,200,000
Losses per occurrence subject to reinsurance coverage $ 10,000,000 $ 10,000,000 $ 10,000,000
Expiration date June 30, 2020 June 30, 2019 June 30, 2019
Personal Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of coverage 90 % 90 % 90 %
Percent ceded - excess of $1,000,000 dollars of coverage 100 % 100 % 100 %
Risk retained $ 100,000 $ 100,000 $ 100,000
Total reinsurance coverage per occurrence $ 4,900,000 $ 4,900,000 $ 4,900,000
Losses per occurrence subject to quota share reinsurance coverage $ 5,000,000 $ 5,000,000 $ 5,000,000
Expiration date June 30, 2020 June 30, 2019 June 30, 2018
Commercial Lines:
General liability commercial policies
Quota share treaty None None None
Risk retained $ 750,000 $ 750,000 $ 750,000
Excess of loss coverage above risk retained $ 3,750,000 $ 3,750,000 $ 3,750,000
in excess of in excess of in excess of
$ 750,000 $ 750,000 $ 750,000
Total reinsurance coverage per occurrence $ 3,750,000 $ 3,750,000 $ 3,750,000
Losses per occurrence subject to reinsurance coverage $ 4,500,000 $ 4,500,000 $ 4,500,000
Commercial Umbrella
Quota share treaty: None
Percent ceded - first $1,000,000 of coverage 90 % 90 %
Percent ceded - excess of $1,000,000 of coverage 100 % 100 %
Risk retained $ 100,000 $ 100,000
Total reinsurance coverage per occurrence $ 4,900,000 $ 4,900,000
Losses per occurrence subject to quota share reinsurance coverage $ 5,000,000 $ 5,000,000
Expiration date June 30, 2019 June 30, 2018
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty None $ 5,000,000 $ 5,000,000
Risk retained per catastrophe occurrence (2) $ 7,500,000 $ 4,500,000 $ 4,000,000
Catastrophe loss coverage in excess of quota share coverage (3) $ 602,500,000 $ 445,000,000 $ 315,000,000
Reinstatement premium protection (4)(5)(6) Yes Yes Yes
(1) For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.
(2) Plus losses in excess of catastrophe coverage.
(3) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.
(4) Effective July 1, 2017, reinstatement premium protection for $145,000,000 of catastrophe coverage in excess of $5,000,000.
(5) Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
(6) Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000. The single maximum risks per occurrence to which the Company
is subject under the treaty year shown below are as follows:
July 1, 2019 - June 30, 2020
Treaty Range of Loss Risk Retained
Personal Lines (1) Initial $1,000,000 $1,000,000
$1,000,000 - $10,000,000 None(2)
Over $10,000,000 100%
Personal Umbrella Initial $1,000,000 $100,000
$1,000,000 - $5,000,000 None
Over $5,000,000 100%
Commercial Lines Initial $750,000 $750,000
$750,000 - $4,500,000 None(3)
Over $4,500,000 100%
Catastrophe (4) Initial $7,500,000 $7,500,000
$7,500,000 - $610,000,000 None
Over $610,000,000 100%
(1) Personal lines quota share treaty was eliminated effective July 1, 2019. The 2017/2019 Treaty expired on a run-off basis.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. The single maximum risks per occurrence
to which the Company is subject under the treaties effective July 1, 2018 and 2017 are as follows:
July 1, 2018 - June 30, 2019 July 1, 2017 - June 30, 2018
Treaty Range of Loss Risk Retained Range of Loss Risk Retained
Personal Lines (1) Initial $1,000,000 $900,000 Initial $1,000,000 $800,000
$1,000,000 - $10,000,000 None(2) $1,000,000 - $10,000,000 None(2)
Over $10,000,000 100% Over $10,000,000 100%
Personal Umbrella Initial $1,000,000 $100,000 Initial $1,000,000 $100,000
$1,000,000 - $5,000,000 None $1,000,000 - $5,000,000 None
Over $5,000,000 100% Over $5,000,000 100%
Commercial Lines Initial $750,000 $750,000 Initial $750,000 $750,000
$750,000 - $4,500,000 None(3) $750,000 - $4,500,000 None(3)
Over $4,500,000 100% Over $4,500,000 100%
Commercial Umbrella Initial $1,000,000 $100,000 Initial $1,000,000 $100,000
$1,000,000 - $5,000,000 None $1,000,000 - $5,000,000 None
Over $5,000,000 100% Over $5,000,000 100%
Catastrophe (4) Initial $5,000,000 $4,500,000 Initial $5,000,000 $4,000,000
$5,000,000 - $450,000,000 None $5,000,000 - $320,000,000 None
Over $450,000,000 100% Over $320,000,000 100%
(1) Treaty for July 1, 2017 – June 30, 2018 and July 1, 2018 – June 30, 2019 is a two-year treaty with expiration date of June 30, 2019.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. The Company’s reinsurance program
has been structured to enable the Company to 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 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 Company’s estimated ultimate
treaty year loss ratios (the “Loss Ratio(s)”) for treaties in effect during the nine months ended September 30, 2019
are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was
not renewed. The Loss Ratios for treaties in effect for the three months ended September 30, 2018 are attributable to contracts
under the 2017/2019 Treaty for the 2018/2019 Treaty Year. The Loss Ratios for treaties in effect for the nine months ended September
30, 2018 are attributable to contracts under the 2017/2019 Treaty for both the 2017/2018 Treaty Year and the 2018/2019 Treaty Year. Treaty in effect during
the three months and nine months ended September 30, 2019 There was no current quota
share treaty in effect during the three months ended September 30, 2019, and therefore no current contingent commission adjustment
was recorded for the three months ended September 30, 2019.Under the 2017/2019 Treaty, the Company received an upfront fixed provisional
rate that was only subject to a sliding scale contingent adjustment based upon Loss Ratio for the 2017/2018 Treaty Year (“Loss
Period”). Under this arrangement, the Company earned provisional ceding commissions that are subject to later adjustment
dependent on changes to the estimated Loss Period Loss Ratio for the 2017/2019 Treaty. The Company’s Loss Period Loss Ratios
attributable to the 2017/2019 Treaty reached the maximum contractual level during the six months ended June 30, 2018, and therefore
no contingent commission adjustment was recorded for the nine months ended September 30, 2019. Treaties in effect for the
three months and nine months ended September 30, 2018 Under the 2017/2019 Treaty,
the Company received an upfront fixed provisional rate that was only subject to a sliding scale contingent adjustment based upon
Loss Ratio for the 2017/2018 Treaty Year (“Loss Period”). The Company’s Loss Period Loss Ratios attributable
to the 2017/2019 Treaty reached the maximum contractual level during the six months ended June 30, 2018, and therefore no contingent
commission adjustment was recorded for the three months ended September 30, 2018. For the nine months ended September 30, 2018,
the Company incurred negative contingent ceding commissions as a result of the Loss Period Loss Ratio for the 2017/2019 Treaty,
which reduced contingent ceding commissions earned. In addition to the treaties that were
in effect during the three months and nine months ended September 30, 2019 and 2018, the Loss Ratios from prior years’ treaties
are subject to change as incurred losses from those periods increase or decrease, resulting in an increase or decrease in the commission
rate and contingent ceding commissions earned. Ceding commission revenue consists of
the following:
Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Provisional ceding commissions earned $ 1,320,069 $ 1,255,034 $ 4,001,294 $ 5,468,314
Contingent ceding commissions earned (290,487 ) (210,505 ) (1,018,334 ) (1,037,459 )
$ 1,029,582 $ 1,044,529 $ 2,982,960 $ 4,430,855 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. As discussed above, the Loss Ratios from prior years’ treaties are subject
to change as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent
ceding commissions earned. As of September 30, 2019 and December 31, 2018, net contingent ceding commissions payable to reinsurers
under all treaties was approximately $3,060,000 and $1,581,000, respectively, which is recorded in reinsurance balances payable
on the accompanying condensed consolidated balance sheets. Commercial Lines of Business In July 2019, the Company made the decision
that it will no longer underwrite Commercial Lines risks. These include Business Owners, Artisans (“CraftPak”), Special
Multi-Peril, and Commercial Umbrella policies. The Company had 6,793 commercial lines policies in force as of September 30, 2019
and approximately $12,179,000 in earned premiums for the nine months ended September 30, 2019. As of June 30, 2019 the Company
had 7,770 commercial lines policies in force. For the nine months ended September
30, 2019, these policies represented approximately 12% of net premiums earned. As of September 30, 2019, claims from these commercial
lines represent 46% of loss and loss adjustment expense reserves net of reinsurance recoverables. In force policies for these
lines will be non-renewed at the end of their current annual terms. All existing inforce Commercial Lines policies will expire
by September 30, 2020. |
