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 remains responsible for the settlement of insured losses irrespective of the failure of any of its reinsurers to make payments otherwise due to the Company.

The Company reduced the percentage of premiums ceded by UPCIC to its quota share reinsurers to 30% beginning with the reinsurance program effective June 1, 2014, from 45% under the prior year quota share contracts that were effective June 1, 2013 through May 31, 2014. By ceding 15% less premium to its quota share reinsurers, the Company expects to increase its profitability by retaining more premium. The reduction in cession rate also decreases the amount of losses and loss adjustment expenses (“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 June 30, 2014, 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.

In order to reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.

The following table presents ratings from rating agencies and the unsecured amounts due from the Company’s reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

Ratings as of June 30, 2014

Due from as of

Reinsurer

AM Best
Company

Standard
and Poor’s
Rating
Services

Moody’s
Investors
Service, Inc.

June 30,
2014

December 31,
2013

Everest Reinsurance Company

A+

59,420

87,789

Florida Hurricane Catastrophe Fund

n/a

—

33,593

Odyssey Reinsurance Company

A-

131,277

142,190

Total (1)

190,697

263,572

(1)	Amounts represent prepaid reinsurance premiums, reinsurance receivables, and net recoverables for paid and unpaid losses, including incurred but not reported reserves, loss adjustment expenses, and offsetting reinsurance payables.

n/a - No rating applicable, because entity is not rated.

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


	Three Months Ended June 30,
	2014									2013
							Loss and Loss									Loss and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	220,009		$	192,061		$	46,970		$	219,946		$	197,302		$	50,350
Ceded		(76,483	)		(118,699	)		(19,291	)		(133,897	)		(130,435	)		(25,151	)

Net	$	143,526		$	73,362		$	27,679		$	86,049		$	66,867		$	25,199


	Six Months Ended June 30,
	2014									2013
							Loss and Loss									Loss and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	411,926		$	382,705		$	97,692		$	424,085		$	391,470		$	100,946
Ceded		(198,132	)		(245,536	)		(43,188	)		(275,214	)		(259,194	)		(49,264	)

Net	$	213,794		$	137,169		$	54,504		$	148,871		$	132,276		$	51,682

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


	June 30, 2014		December 31, 2013
Prepaid reinsurance premiums	$	193,811	$	241,214

Reinsurance recoverable on unpaid losses and LAE	$	58,705	$	68,584
Reinsurance recoverable on paid losses		18,861		39,263
Reinsurance receivable, net		26,352		203

Reinsurance recoverable and receivable	$	103,918	$	108,050