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Reinsurance

12 Months Ended

Dec. 31, 2022

Reinsurance

10. Reinsurance

The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. The Company primarily utilizes excess of loss (XOL) and quota share reinsurance to protect against catastrophe and attritional losses. The Company also writes premiums under fronting agreements, whereby the majority of premium and risk is ceded to reinsurers and the Company receives a fronting fee.

In an XOL treaty, the Company retains losses for any occurrence up to a specified amount (its “retention”) and reinsurers assume any losses above that amount. Historically, the Company has had a retention of between $5 million and $15 million for hurricane and earthquake events. As of December 31, 2022, the Company’s catastrophe event retention is $12.5 million for all perils. As of December 31, 2022, the Company’s XOL reinsurance structure provides protection up to $2.11 billion for earthquake events, $1.01 billion for Hawaii hurricane events, and $250 million for continental U.S. hurricane events.

In a quota share agreement, the Company transfers, or cedes, a portion of its premiums to reinsurers and, in return, the reinsurer must share an agreed upon portion of losses and pay a ceding commission to the Company. In a fronting agreement, the Company writes premium and then cedes the majority of the premium and risk in exchange for a fronting fee, which is the primary source of profit in the arrangement.

The following table shows ceded written premiums under fronting and quota share arrangements by line of business for the years ended December 31, 2022, 2021 and 2020:

The following table shows ceded written premiums under fronting and quota share arrangements by line of business for the years ended December 31, 2022, 2021 and 2020:
		Year Ended December 31,
		2022			2021			2020

		(in thousands)
Fronting		$	237,285		$	11,001		$	—
Inland Marine			63,627			28,389			5,339
Specialty Homeowners			4,946			27,394			22,295
Commercial Earthquake			20,467			14,447			6,929
Commercial All Risk			6,260			3,948			19,218
Others			32,609			10,822			5,495
Total		$	365,193		$	96,001		$	59,276

The Company recognizes ceded unearned premiums related to quota share agreements as an asset on its consolidated balance sheets. As of December 31, 2022 and 2021, ceded unearned premiums totaled $204.1 million and $58.3 million, respectively. The increase was driven primarily by premium growth in lines subject to fronting agreements or quota shares.

As part of its reinsurance program, in May 2017, the Company obtained catastrophe protection through a reinsurance agreement with Torrey Pines Re Ltd. (“TPRe”). In connection with the reinsurance agreement, TPRe issued notes to unrelated investors in an amount equal to the full $166 million of coverage provided under the reinsurance agreement covering a three-year period, ending May 31, 2020. During the first quarter of 2021, the Company closed a $400 million 144A catastrophe bond which became effective June 1, 2021. The catastrophe bond was completed through Torrey Pines Re Pte. Ltd. (“Torrey Pines Re”). During the second quarter of 2022, the Company also closed a $275 million 144A catastrophe bond which became effective June 1, 2022. This catastrophe bond was completed through Torrey Pines Re Ltd., a Bermuda-domiciled special purpose insurer that provides indemnity-based reinsurance covering earthquake events through June 1, 2025.

Written premiums ceded under these catastrophe bond agreements were $28.3 million, $11.7 million and $5.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The effect of reinsurance on premiums written and earned and on losses and LAE incurred for the years ended December 31, 2022, 2021 and 2020, is as follows:


		2022						2021						2020
		Written			Earned			Written			Earned			Written			Earned

		(in thousands)
Premiums Written and Earned:
Direct		$	816,387		$	628,973		$	467,424		$	384,463		$	324,253		$	271,887
Assumed			65,481			66,299			67,751			49,535			30,107			29,569
Ceded			(524,575)			(378,806)			(223,443)			(200,172)			(155,102)			(146,388)
Net		$	357,293		$	316,466		$	311,732		$	233,826		$	199,258		$	155,068


		2022
		Losses			LAE			Total

		(in thousands)
Losses and LAE Incurred:
Direct		$	133,517		$	38,004		$	171,521
Assumed			23,574			5,998			29,572
Ceded			(91,261)			(31,159)			(122,421)
Net		$	65,829		$	12,843		$	78,672


		2021
		Losses			LAE			Total

		(in thousands)
Losses and LAE Incurred:
Direct		$	168,292		$	13,295		$	181,587
Assumed			17,184			1,926			19,110
Ceded			(148,106)			(11,134)			(159,240)
Net		$	37,370		$	4,087		$	41,457


		2020
		Losses			LAE			Total

		(in thousands)
Losses and LAE Incurred:
Direct		$	145,774		$	18,777		$	164,551
Assumed			3,485			159			3,644
Ceded			(91,969)			(12,111)			(104,080)
Net		$	57,290		$	6,825		$	64,115

The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.

To reduce credit exposure to reinsurance recoverable balances, the Company obtains letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms of its reinsurance contracts, the Company may retain funds due from reinsurers as security for those recoverable balances. As of December 31, 2022 and 2021, the Company had retained $10.7 million and $10.9 million in funds from reinsurers, respectively. The Company is able to use the funds in the ordinary course of its business. The funds are held in cash and cash equivalents and investments with an offsetting liability on the accompanying consolidated balance sheets.

For the year ended December 31, 2022, reinsurance premiums ceded to the Company’s three largest reinsurers totaled $24.7 million, $22.9 million and $18.4 million, representing 23.9% of the total balance. For the year ended December 31, 2021, reinsurance premiums ceded to the Company’s three largest reinsurers totaled $24.7 million, $11.7 million and $10.4 million, representing 20.9% of the total balance. For the year ended December 31, 2020, reinsurance premiums ceded to the Company’s three largest reinsurers totaled $9.7 million, $8.6 million and $6.0 million, representing 22.4% of the total balance.

At December 31, 2022 reinsurance recoverable on unpaid losses by the Company’s three largest reinsurers were $60.6 million, $53.9 million and $50.6 million representing 31.5% of the total balance. At December 31, 2021 reinsurance recoverable on unpaid losses by the Company’s three largest reinsurers were $21.9 million, $10.5 million and $9.2 million representing 19.3% of the total balance. All of the Company’s reinsurers are required to have an A.M. best rating of A− (excellent) or better or post collateral.