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7. Reinsurance

12 Months Ended

Dec. 31, 2019

Through June 30, 2019, the Company’s quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ policies, covering the period from December 15, 2019 through December 31, 2020 (“2019/2020”) Treaty. In addition to the 2019/2020 Treaty, the Company’s quota share reinsurance treaties in effect during the years ended December, 2019 and 2018 for its personal lines business 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 during the year ended December 31, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”). The treaties in effect during the year ended December 31, 2018 were covered under the July 1, 2017 through June 30, 2018 treaty year (“2017/2018 Treaty Year”) and the 2018/2019 Treaty Year that began on July 1, 2018.

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
	December 15, 2019	July 1, 2019	July 1, 2018	July 1, 2017
	to	to	to	to
Line of Business	December 31, 2020	December 14, 2019	June 30, 2019	June 30, 2018

Personal Lines:
Homeowners, dwelling fire and
and canine legal liability
Quota share treaty:
Percent ceded	25%	None	10%	20%

	Treaty Year
	December 15, 2019		July 1, 2019		July 1, 2018		July 1, 2017
	to		to		to		to
Line of Business	June 30, 2020		December 14, 2019		June 30, 2019		June 30, 2018

Personal Lines:
Homeowners, dwelling fire and
and canine legal liability
Quota share treaty:
Risk retained on intial $1,000,000
of losses	$	750,000	$	1,000,000	$	900,000	$	800,000
Losses per occurrence subject to
quota share reinsurance coverage	$	1,000,000	None		$	1,000,000	$	1,000,000
Excess of loss coverage and facultative
facility coverage (1)	$	9,000,000	$	9,000,000	$	9,000,000	$	9,000,000
		in excess of		in excess of		in excess of		in excess of
	$	1,000,000	$	1,000,000	$	1,000,000	$	1,000,000
Total reinsurance coverage per occurrence	$	9,250,000	$	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	$	10,000,000
Expiration date		June 30, 2020		June 30, 2020		June 30, 2019		June 30, 2018

Catastrophe Reinsurance:
Initial loss subject to personal lines
quota share treaty	$	7,500,000	None		$	5,000,000	$	5,000,000
Risk retained per catastrophe
occurrence (2)	$	5,625,000	$	7,500,000	$	4,500,000	$	4,000,000
Catastrophe loss coverage in excess of
quota share coverage (3)	$	602,500,000	$	602,500,000	$	445,000,000	$	315,000,000
Reinstatement premium
protection (4) (5) (6)		Yes		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.

	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:
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

The Company’s reinsurance program has been structured to enable the Company to 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.

Approximate reinsurance recoverables on unpaid and paid losses by reinsurer at December 31, 2019 and 2018 are as follows:

	Unpaid		Paid
($ in thousands)	Losses		Losses		Total		Security
December 31, 2019
Cavello Bay Reinsurance Limited (1)	$	4,036	$	2,427	$	6,463	$	5,995	(2	)
Swiss Reinsurance America Corporation		4,418		1,336		5,754		-
Hanover Rueck SE		3,156		522		3,678		-
SCOR Reinsurance Company		394		458		852		-
Allied World Assurance Company		760		170		930		-
Others		2,964		471		3,435		-
Total	$	15,728	$	5,384	$	21,113	$	5,995

December 31, 2018
Cavello Bay Reinsurance Limited (1)	$	5,319	$	1,277	$	6,596	$	7,548	(2	)
Swiss Reinsurance America Corporation		4,499		1,251		5,750		-
Hanover Rueck SE		2,728		1,181		3,909		-
SCOR Reinsurance Company		528		89		617		-
Allied World Assurance Company		306		373		679		-
Others		2,291		282		2,573		58	(3	)
Total	$	15,671	$	4,453	$	20,125	$	7,606

(Columns in the tables above may not sum to totals due to rounding)

(1) On December 27, 2018, Enstar Group Limited announced that one of its wholly owned subsidiaries, Cavello Bay Reinsurance Limited acquired Maiden Reinsurance North America, Inc.

(2) Secured pursuant to collateralized trust agreements.

(3) Represents $53,000 secured pursuant to collateralized trust agreement and $5,000 guaranteed by an irrevocable letter of credit.

Assets held in the trusts referred to in footnotes (2) and (3) in the table above are not included in the Company’s invested assets and investment income earned on these assets is credited to the reinsurers respectively. In addition to reinsurance recoverables on unpaid and paid losses, reinsurance receivables in the accompanying consolidated balance sheets as of December 31, 2019 and 2018 include unearned ceded premiums of approximately $19,638,000 and $6,243,000, respectively.

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 during the year ended December 31, 2019 are attributable to contracts under: (1) the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was not renewed, and (2) the 2019/20 Treaty. The Loss Ratios for treaties in effect for the year ended December 31, 2018 are attributable to contracts under the 2017/2019 Treaty for both the 2017/2018 Treaty Year and the 2018/2019 Treaty Year.

Treaties in effect for the year ended December 31, 2019

Under the 2019/2020 Treaty, the Company receives an upfront fixed provisional rate that is not subject to a sliding scale contingent adjustment. 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 were 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 year ended December 31, 2019.

Treaty in effect for the year ended December 31, 2018

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”). For the year ended December 31, 2018, the Company incurred negative contingent ceding commissions as a result of the Loss Period Loss Ratio for the 2017/2019 Treaty, which reduced contingent ceding commissions earned.

In addition to the treaties that were in effect during the years ended December 31, 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 revenues earned consists of the following:

	Years ended
	December 31,
	2019			2018

Provisional ceding commissions earned	$	5,446,370		$	6,745,928
Contingent ceding commissions earned		(795,519	)		(1,413,298	)
	$	4,650,851		$	5,332,630

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 December 31, 2019 and 2018, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,886,000 and $1,581,000, respectively, which is recorded in reinsurance balances payable on the accompanying consolidated balance sheets.