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6. Property and Casualty Insurance Activity

6 Months Ended

Jun. 30, 2019

6. Property and Casualty Insurance Activity

Premiums Earned

Premiums written, ceded and earned are as follows:

	Direct			Assumed		Ceded			Net

Six months ended June 30, 2019
Premiums written	$	82,309,827		$	77	$	(15,327,796	)	$	66,982,108
Change in unearned premiums		(6,456,216	)		202		271,074			(6,184,940	)
Premiums earned	$	75,853,611		$	279	$	(15,056,722	)	$	60,797,168

Six months ended June 30, 2018
Premiums written	$	68,389,960		$	824	$	(16,725,724	)	$	51,665,060
Change in unearned premiums		(5,495,329	)		3,064		769,436		$	(4,722,829	)
Premiums earned	$	62,894,631		$	3,888	$	(15,956,288	)	$	46,942,231

Three months ended June 30, 2019
Premiums written	$	44,821,279		$	111	$	(8,199,887	)	$	36,621,503
Change in unearned premiums		(5,828,149	)		7		407,918			(5,420,224	)
Premiums earned	$	38,993,130		$	118	$	(7,791,969	)	$	31,201,279

Three months ended June 30, 2018
Premiums written	$	36,863,677		$	488	$	(8,899,489	)	$	27,964,676
Change in unearned premiums		(4,486,460	)		1,163		625,235			(3,860,062	)
Premiums earned	$	32,377,217		$	1,651	$	(8,274,254	)	$	24,104,614

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of June 30, 2019 and December 31, 2018 was $3,468,225 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:

	Six months ended
	June 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		40,689,147			28,215,069
Prior years		6,117,385			227,346
Total incurred		46,806,532			28,442,415

Paid related to:
Current year		19,692,437			14,656,892
Prior years		13,999,258			10,977,023
Total paid		33,691,695			25,633,915

Net balance at end of period		53,640,696			34,859,214
Add reinsurance recoverables		16,034,424			14,398,642
Balance at end of period	$	69,675,120		$	49,257,856

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $6,621,688 and $8,017,022 for the six months ended June 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 six months ended June 30, 2019 and 2018 was $6,117,385 unfavorable and $227,346 unfavorable, respectively. During the six months ended June 30, 2019, the Company increased case reserves for certain older open liability claims, which primarily affected the ultimate loss projections for commercial lines business. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves, giving consideration to 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 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 – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.

Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.

Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.

Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.

Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed and assumptions are made regarding average loss and LAE development applied to remaining claims inventory. Such methods more properly reflect changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development. These methods also provide a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has occurred.

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various 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 considered in existing case reserves and in its current loss development factors.

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 June 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 June 30, 2019, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of June 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)

	Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance																				As of June 30, 2019
																			Six Months Ended				Cumulative Number of Reported Claims by
Accident	For the Years Ended December 31,																		June 30,				Accident
Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Year
	(Unaudited 2010 - 2018)																		(Unaudited)
2010	$	5,598	$	5,707	$	6,429	$	6,623	$	6,912	$	6,853	$	6,838	$	6,840	$	6,787	$	6,787	$	-		1,617
2011				7,603		7,678		8,618		9,440		9,198		9,066		9,144		9,171		9,181		37		1,914
2012						9,539		9,344		10,278		10,382		10,582		10,790		10,791		11,030		42		4,704	(1)
2013								10,728		9,745		9,424		9,621		10,061		10,089		10,464		67		1,561
2014										14,193		14,260		14,218		14,564		15,023		16,294		176		2,133
2015												22,340		21,994		22,148		22,491		23,133		123		2,555
2016														26,062		24,941		24,789		27,112		68		2,868
2017																31,605		32,169		33,895		895		3,364
2018																		54,455		54,067		3,944		4,137
2019																				38,622		13,451		1,865
																	Total		$	230,585

(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
Accident	For the Years Ended December 31,																		Six Months Ended June 30,
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		8,773
2012						3,950		5,770		7,127		8,196		9,187		10,236		10,323		10,420
2013								3,405		5,303		6,633		7,591		8,407		9,056		9,212
2014										5,710		9,429		10,738		11,770		13,819		14,031
2015												12,295		16,181		18,266		19,984		20,326
2016														15,364		19,001		21,106		21,910
2017																16,704		24,820		27,024
2018																		32,383		41,894
2019																				18,803
																	Total		$	179,173

Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented																			$	51,412
All outstanding liabilities before 2010, net of reinsurance																				107
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance																			$	51,519

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)*	June 30, 2019
Liabilities for loss and loss adjustment expenses, net of reinsurance	$	51,519
Total reinsurance recoverable on unpaid losses		16,034
Unallocated loss adjustment expenses		2,122
Total gross liability for loss and LAE reserves	$	69,675

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 for the six months ended June 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 for the six months ended June 30, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”) and the treaty in effect for the six months ended June 30, 2018 was covered under the July 1, 2017 through June 30, 2018 treaty year (“2017/2018 Treaty Year”).

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 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 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%

Commercial Umbrella	Initial $1,000,000	$100,000
	$1,000,000 - $5,000,000	None
	Over $5,000,000	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 Company’s reinsurance program is structured to enable the Company to significantly 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 for the three months and six months ended June 30, 2019 are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year. The Loss Ratios for treaties in effect for the three months and six months ended June 30, 2018 are attributable to contracts under the 2017/2019 Treaty for the 2017/2018 Treaty Year.

Treaty in effect for the three months and six months ended June 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 three months and six months ended June 30, 2019.

Treaty in effect for the three months and six months ended June 30, 2018

The Loss Ratios for the period July 1, 2017 through June 30, 2018 attributable to the 2017/2019 Treaty were higher than the contractual Loss Ratio at which provisional ceding commissions were earned. Accordingly, for the three months and six months ended June 30, 2018, the Company incurred negative contingent ceding commissions as a result of the estimated Loss Ratio for the 2017/2019 Treaty, which reduced contingent ceding commissions earned.

In addition to the treaties that were in effect for the three months and six months ended June 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						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018

Provisional ceding commissions earned	$	1,363,474		$	2,145,775		$	2,681,225		$	4,213,280
Contingent ceding commissions earned		(687,779	)		(454,607	)		(727,847	)		(826,954	)
	$	675,695		$	1,691,168		$	1,953,378		$	3,386,326

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 June 30, 2019 and December 31, 2018, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,333,000 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 7,770 commercial lines policies in force as of June 30, 2019. For the six months ended June 30, 2019, these policies represented approximately 12% of net premiums earned. As of June 30, 2019, claims from these commercial lines represent 43% of loss and loss adjustment expense reserves net of reinsurance recoverables. Inforce policies for these lines will be non-renewed at the end of their current annual terms. It is expected that all existing inforce Commercial Lines policies will expire by September 30, 2020.