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Reinsurance
 12 Months Ended
Dec. 31, 2012
Reinsurance/Insurance Operations [Abstract]  
REINSURANCE

NOTE 4 – REINSURANCE

The Company seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally, as of the beginning of the hurricane season on June 1 of each year. The Company’s reinsurance program consists of excess of loss, quota share and catastrophe reinsurance, subject to the terms and conditions of the applicable agreements. The Company is responsible for insured losses related to catastrophes and other events in excess of coverage provided by its reinsurance program. The Company also remains responsible for the settlement of insured losses in the event of the failure of any of its reinsurers to make payments otherwise due to the Company. See Note 1, SIGNIFICANT ACCOUNTING POLICIES – Concentrations of Credit Risk), for amounts due from our largest reinsurers as of December 31, 2012

The estimated insured value of the Company’s in-force policyholder coverage for windstorm exposures as of December 31, 2012, was approximately $127.0 billion.

The Company has reduced the percentage of premiums ceded by UPCIC to its quota share reinsurer to 45% under the reinsurance program which became effective June 1, 2012, from 50% under the prior year quota share contract effective June 1, 2011 through May 31, 2012. The Company’s intent is to increase its profitability over the contract term by ceding 5% less premium to its quota share reinsurer. This reduction of cession rate also decreases the amount of losses and loss adjustment expenses that may be ceded by UPCIC and effectively increases the amount of risk retained by UPCIC and the Company. The reduction of cession rate also reduces the amount of ceding commissions earned from the Company’s quota share reinsurer during the contract term and decreases the amount of deferred ceding commission, as of December 31, 2012, that is a component of net deferred policy acquisition costs.

Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance contracts. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Deferred ceding commissions are netted against policy acquisition costs and amortized over the effective period of the related insurance policies.

 

The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statements of Income for the periods presented (in thousands):

 

                         
    Year Ended December 31, 2012  
    Premiums
Written		     Premiums
Earned		     Loss and Loss
Adjustment
Expenses		  

Direct

   $ 780,128     $ 751,899     $ 249,064  

Ceded

     (517,604 )      (520,779 )      (122,877 ) 
   

 

 

    

 

 

    

 

 

  

Net

   $ 262,524     $ 231,120     $ 126,187  
   

 

 

    

 

 

    

 

 

  

 

                         
    Year Ended December 31, 2011  
    Premiums
Written		     Premiums
Earned		     Loss and Loss
Adjustment
Expenses		  

Direct

   $ 721,462     $ 689,955     $ 245,335  

Ceded

     (512,979 )      (490,970 )      (121,026 ) 
   

 

 

    

 

 

    

 

 

  

Net

   $ 208,483     $ 198,985     $ 124,309  
   

 

 

    

 

 

    

 

 

  

 

                         
    Year Ended December 31, 2010  
    Premiums
Written		     Premiums
Earned		     Loss and Loss
Adjustment
Expenses		  

Direct

   $ 666,309     $ 616,345     $ 229,044  

Ceded

     (466,694 )      (445,902 )      (115,689 ) 
   

 

 

    

 

 

    

 

 

  

Net

   $ 199,615     $ 170,443     $ 113,355  
   

 

 

    

 

 

    

 

 

  

The following prepaid reinsurance premiums and reinsurance recoverables are reflected in the Consolidated Balance Sheets as of the periods presented (in thousands):

 

                 
    As of December 31,  
    2012     2011  

Prepaid reinsurance premiums

   $ 239,921     $ 243,095  
   

 

 

    

 

 

  
     

Reinsurance recoverable on unpaid losses and LAE

   $ 81,415     $ 88,002  

Reinsurance recoverable on paid losses

     7,776       (2,296 ) 

Reinsurance receivables, net

     24,334       55,205  
   

 

 

    

 

 

  

Reinsurance recoverables and receivables

   $ 113,525     $ 140,911  
   

 

 

    

 

 

  

 

Segregated Account T25

UIH owns and maintains a segregated account, Segregated Account T25 – Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“T25”), established in accordance with Bermuda law. As part of the Company’s overall reinsurance program, T25 at times enters into underlying excess catastrophe contracts with the Insurance Entities for the purpose of assuming certain risk for specified loss occurrences, including hurricanes. The agreements between T25 and the Insurance Entities are a cost-effective alternative to reinsurance that the Insurance Entities would otherwise purchase from third-party reinsurers. While the Company retains risk that otherwise would be transferred to third party reinsurers, these agreements provide benefits to the Insurance Entities in “no-loss” years that cannot be replicated in the open reinsurance market. These benefits include the return to the Insurance Entities of a substantial portion of the earned reinsurance premiums under the contract. All the related intercompany transactions with respect to these agreements are eliminated in consolidation.

Under the T25 arrangement, effective June 1, 2012 through May 31, 2013, under an underlying excess catastrophe contract, UPCIC obtained catastrophe coverage of 45% of $75 million in excess of $75 million and 55% of $105 million in excess of $45 million covering certain loss occurrences including hurricanes. Under this T25 agreement, T25 retains a maximum, pre-tax liability of $91.5 million for the first catastrophic event up to $1.733 billion of losses. UPCIC is required to make premium installment payments aggregating $72.981 million to T25, subject to the terms of the agreement. Through capital contributions made to T25 by UIH, T25 contributes an amount equal to its liability for losses, net of UPCIC’s required premium payments and expenses thereon, to a trust account as collateral. The trust account is funded with the required collateral and invested in a cash reserve fund. The amounts held in the cash reserve fund are included in restricted cash and cash equivalents in our Condensed Consolidated Balance Sheets. The collateral is available to be used to pay any claims that may arise from the occurrence of covered events. The collateral is required to be held in trust for the benefit of UPCIC until the occurrence of a covered event or expiration or termination of the agreement between T25 and UPCIC. UIH has no requirement to fund T25 in the event losses exceed the amount of collateral held in trust.

Reinsurance agreements between T25 and the Insurance Entities are generally terminated on or about May 31 and December 31 each year and replaced with similarly structured agreements or with agreements with third party reinsurers effective June 1 and January 1, respectively. The terminations effective May 31 are intended to coordinate and integrate the replacement contracts into the Insurance Entities’ overall reinsurance program and the related changes to limits and retention levels for the subsequent contract year (i.e., June 1 through May 31). The terminations effective December 31 are intended to provide the aforementioned benefit of return premium to the Insurance Entities.

The T25 agreement effective June 1, 2012 through May 31, 2013 was terminated effective December 31, 2012, pursuant to the terms of the agreement. In connection with the termination of the agreement, the affiliates agreed to release funds held in trust due to the beneficiary (i.e., the Insurance Entities) and the balance to the grantor (i.e., UIH) in December 2012. See “Note 18. SUBSEQUENT EVENTS” for information about a replacement contract entered into by the Company with non-affiliated third parties.