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, 2013.

The estimated insured value of the Company’s in-force policyholder coverage for windstorm exposures as of December 31, 2013, was approximately $120.1 billion.

The Company reduced the percentage of premiums ceded by UPCIC to its quota share reinsurers to 45% beginning with the reinsurance program effective June 1, 2012, from 50% under the prior year quota share contract effective June 1, 2011 through May 31, 2012. The Company’s two quota share reinsurance contracts were effective June 1, 2013. One quota share reinsurance contract provides coverage to UPCIC through May 31, 2014 and the other provides coverage to UPCIC through May 31, 2015. By ceding 5% less premium to its quota share reinsurers, the Company intends to increase its profitability. The reduction of cession rate also decreases the amount of losses and LAE 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, 2013, 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 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, 2013
							Losses and Loss
	Premiums			Premiums			Adjustment
	Written			Earned			Expenses
Direct	$	783,894		$	788,477		$	216,852
Ceded		(522,116	)		(520,822	)		(108,237	)

Net	$	261,778		$	267,655		$	108,615


	Year Ended December 31, 2012
							Losses and Loss
	Premiums			Premiums			Adjustment
	Written			Earned			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
							Losses and Loss
	Premiums			Premiums			Adjustment
	Written			Earned			Expenses
Direct	$	721,462		$	689,955		$	245,335
Ceded		(512,979	)		(490,970	)		(121,026	)

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

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


	As of December 31,
	2013		2012
Prepaid reinsurance premiums	$	241,214	$	239,921

Reinsurance recoverable on unpaid losses and LAE	$	68,584	$	81,415
Reinsurance recoverable on paid losses		39,263		7,776
Reinsurance receivable, net		203		24,334

Reinsurance recoverable and receivable	$	108,050	$	113,525

Segregated Account T25

UIH owned and maintained 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 entered 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 were a cost-effective alternative to reinsurance that the Insurance Entities would otherwise purchase from third-party reinsurers. While the Company retained risk that otherwise would be transferred to third party reinsurers, the use of the Segregated Account T25 provided benefits to the Insurance Entities in “no-loss” years that could not be replicated in the open reinsurance market. These benefits included 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 with the exception of amounts held in trust or on deposit with the OIR which is presented as restricted cash and cash equivalents.

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., UPCIC) and the balance to the grantor (i.e., UIH) in December 2012.

Effective January 1, 2013, the T25 contract was subsequently replaced at identical limits and retentions as the prior agreement with unaffiliated third-party reinsurers as an open market purchase. Effective January 1, 2013 through May 31, 2013, under an 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. The total cost of this reinsurance coverage is $2.7 million.