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Property and Casualty Insurance Activity

9 Months Ended

Sep. 30, 2020

Property and Casualty Insurance Activity

6. Property and Casualty Insurance Activity

Note 6 – Property and Casualty Insurance Activity

Premiums Earned

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net

Nine months ended September 30, 2020
Premiums written	$	125,089,571		$	-		$	(43,813,468	)	$	81,276,103
Change in unearned premiums		2,215,602			-			(2,392,318	)		(176,716	)
Premiums earned	$	127,305,173		$	-		$	(46,205,786	)	$	81,099,387

Nine months ended September 30, 2019
Premiums written	$	128,333,117		$	938		$	(20,914,074	)	$	107,419,981
Change in unearned premiums		(11,035,993	)		(559	)		(1,366,251	)		(12,402,803	)
Premiums earned	$	117,297,124		$	379		$	(22,280,325	)	$	95,017,178

Three months ended September 30, 2020
Premiums written	$	45,742,165		$	-		$	(15,747,215	)	$	29,994,950
Change in unearned premiums		(3,161,356	)		-			687,487			(2,473,869	)
Premiums earned	$	42,580,809		$	-		$	(15,059,728	)	$	27,521,081

Three months ended September 30, 2019
Premiums written	$	46,023,290		$	861		$	(5,586,278	)	$	40,437,873
Change in unearned premiums		(4,579,777	)		(761	)		(1,637,325	)		(6,217,863	)
Premiums earned	$	41,443,513		$	100		$	(7,223,603	)	$	34,220,010

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of September 30, 2020 and December 31, 2019 was $4,919,256and $3,191,512, 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:

	Nine months ended
	September, 30
	2020			2019

Balance at beginning of period	$	80,498,611		$	56,197,106
Less reinsurance recoverables		(15,728,224	)		(15,671,247	)
Net balance, beginning of period		64,770,387			40,525,859

Incurred related to:
Current year		49,597,154			60,401,821
Prior years		(279,727	)		11,186,029
Total incurred		49,317,427			71,587,850

Paid related to:
Current year		29,845,049			31,515,656
Prior years		24,068,492			18,600,946
Total paid		53,913,541			50,116,602

Net balance at end of period		60,174,273			61,997,107
Add reinsurance recoverables		24,804,751			15,412,316
Balance at end of period	$	84,979,024		$	77,409,423

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $23,826,986and $8,849,440for the nine months ended September 30, 2020 and 2019, 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 nine months ended September 30, 2020 and 2019 was $279,727favorable and $11,186,029unfavorable, respectively. During the nine months ended September 30, 2019, the Company increased case reserves for certain older open liability claims, which primarily affected the ultimate loss projections for commercial lines business. This was in response to management’s detailed review of open liability claims that resulted in new assessments of carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.

Loss and LAE reserves

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 is critical to the review of appropriate IBNR reserves and 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 may 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.

Frequency / Severity Based Methods – historical measurements of claim frequency and average paid claim size (severity) are reviewed for more mature accident years where a majority of claims have been reported and/or closed. These historical averages are trended forward to more recent periods in order to estimate ultimate losses for newer accident years that are not yet fully developed. These methods are useful for lines of business with slow and/or volatile loss development patterns, such as liability lines where information pertaining to individual cases may not be completely known for many years. The claim frequency and severity information for older periods can then be used as reasonable measures for developing a range of estimates for more recent immature periods.

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of 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.

Three 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, the loss development factor selections used in the loss development methods, and the loss severity assumptions used in the frequency / severity method 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 severity assumptions used in the frequency / severity method are determined by reviewing historical average claim severity for older more mature accident periods, trended forward to less mature accident periods.

The Company is not aware of any claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.

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 September 30, 2017 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 September 30, 2020, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of September 30, 2020 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, 2011 to December 31, 2019 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 September 30, 2020
	For the Years Ended December 31,																						Cumulative
Accident																			Nine months ended September 30,				Number of Reported Claims by Accident
Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		IBNR		Year
	(Unaudited 2011 - 2019)																		(Unaudited)

2011	$	7,603	$	7,678	$	8,618	$	9,440	$	9,198	$	9,066	$	9,144	$	9,171	$	9,127	$	9,128	$	-		1,914
2012				9,539		9,344		10,278		10,382		10,582		10,790		10,791		11,015		10,891		19		4,704	(1)
2013						10,728		9,745		9,424		9,621		10,061		10,089		10,607		10,456		33		1,561
2014								14,193		14,260		14,218		14,564		15,023		16,381		16,425		253		2,137
2015										22,340		21,994		22,148		22,491		23,386		22,974		108		2,555
2016												26,062		24,941		24,789		27,887		27,862		507		2,878
2017														31,605		32,169		35,304		36,131		383		3,389
2018																54,455		56,351		58,233		1,986		4,204
2019																		75,092		72,772		10,765		4,423
2020																				47,313		8,823		4,499
																	Total		$	312,185

(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,																		Nine months ended September 30,
Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020
	(Unaudited 2011 - 2019)																		(Unaudited)

2011	$	3,740	$	5,117	$	6,228	$	7,170	$	8,139	$	8,540	$	8,702	$	8,727	$	8,789	$	8,994
2012				3,950		5,770		7,127		8,196		9,187		10,236		10,323		10,428		10,448
2013						3,405		5,303		6,633		7,591		8,407		9,056		9,717		10,009
2014								5,710		9,429		10,738		11,770		13,819		14,901		15,428
2015										12,295		16,181		18,266		19,984		21,067		22,088
2016												15,364		19,001		21,106		23,974		25,125
2017														16,704		24,820		28,693		30,821
2018																32,383		44,516		49,247
2019																		40,933		53,910
2020																				28,688
																	Total		$	254,757

Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented	$	57,428
All outstanding liabilities before 2011, net of reinsurance		98
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance	$	57,526

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)*	September 30, 2020
Liabilities for loss and loss adjustment expenses, net of reinsurance	$	57,626
Total reinsurance recoverable on unpaid losses		24,805
Unallocated loss adjustment expenses		2,648
Total gross liability for loss and LAE reserves	$	85,079

Reinsurance

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”). The Company’s quota share reinsurance treaties in effect during the nine months ended September 30, 2019 for its personal lines business were covered through June 30, 2019 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 nine months ended September 30, 2019 was covered through June 30, 2019 under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).

Effective July 1, 2019, the 2017/2019 Treaty and the 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, 2020. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

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

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

	Treaty Year
Line of Business	January 1, 2021 to June 30, 2021		July 1, 2020 to December 31, 2020		December 15, 2019 to June 30, 2020		July 1, 2019 to December 14, 2019		July 1, 2018 to June 30, 2019

Personal Lines:
Homeowners, dwelling fire and
and canine legal liability
Quota share treaty:
Risk retained on intial
$1,000,000 of losses	NA (7)		$	750,000	$	750,000	$	1,000,000	$	900,000
Losses per occurrence subject
to quota share
reinsurance coverage	NA (7)		$	1,000,000	$	1,000,000	None		$	1,000,000
Expiration date			December 31, 2020		December 31, 2020				June 30, 2019
Excess of loss coverage and
facultative facility
coverage (1)	$	8,000,000	$	8,000,000	$	9,000,000	$	9,000,000	$	9,000,000
	in excess of		in excess of		in excess of		in excess of		in excess of
	$	1,000,000	$	1,000,000	$	1,000,000	$	1,000,000	$	1,000,000
Total reinsurance coverage
per occurrence (7)	$	8,000,000	$	8,250,000	$	9,250,000	$	9,000,000	$	9,100,000
Losses per occurrence subject
to reinsurance coverage	$	8,000,000	$	9,000,000	$	10,000,000	$	10,000,000	$	10,000,000
Expiration date (7)	June 30, 2021		June 30, 2021		June 30, 2020		June 30, 2020		June 30, 2019

Catastrophe Reinsurance:
Initial loss subject to personal
lines quota share treaty	NA (7)		$	7,500,000	$	7,500,000	None		$	5,000,000
Risk retained per catastrophe
occurrence (2) (7)	$	10,000,000	$	8,125,000	$	5,625,000	$	7,500,000	$	4,500,000
Catastrophe loss coverage
in excess of
quota share coverage (3) (7)	$	475,000,000	$	475,000,000	$	602,500,000	$	602,500,000	$	445,000,000
Reinstatement premium
protection (4) (5) (6)	Yes		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. Effective July 1, 2020, no reinsurance coverage for the $2,500,000 gap between quota share limit of $7,500,000 and first $10,000,000 layer of catastrophe coverage (see note (7) below).
(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, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
(5)	Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.
(6)	Effective July 1, 2020, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.
(7)	Quota share expires December 31, 2020; reinsurance coverage from January 1, 2021 through June 30, 2021 is only for excess of loss and catastrophe reinsurance.

	Treaty Year
	July 1, 2020			July 1, 2019			July 1, 2018
	to			to			to
Line of Business	June 30, 2021			June 30, 2020			June 30, 2019

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 of coverage		95	%		100	%		100	%
Risk retained	$	300,000		$	100,000		$	100,000
Total reinsurance coverage per occurrence	$	4,700,000		$	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, 2021			June 30, 2020			June 30, 2019

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			None
Percent ceded - first $1,000,000 of coverage								90	%
Percent ceded - excess of $1,000,000 of coverage								100	%
Risk retained							$	100,000
Total reinsurance coverage per occurrence							$	4,900,000
Losses per occurrence subject to quota share reinsurance coverage							$	5,000,000
Expiration date							June 30, 2019

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.

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 three months and nine months ended September 30, 2020 are attributable to contracts under the 2019/2020 Treaty. The Loss Ratios for treaties in effect for the nine months ended September 30, 2019 are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was not renewed. There was no current quota share treaty in effect during the three months ended September 30, 2019, and therefore no current contingent commission adjustment was recorded for the three months ended September 30, 2019.

Under the 2019/2020 Treaty and the 2017/2019 Treaty for the 2018/2019 Treaty Year, the Company received an upfront fixed provisional ceding commission rate that is not subject to a sliding scale contingent adjustment. In addition to the treaties that were in effect during the nine months ended September 30, 2020 and 2019, and three months ended September 30, 2019, 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						Nine months ended
	September 30,						September 30,
	2020			2019			2020		2019

Provisional ceding commissions earned	$	3,460,768		$	1,320,069		$	10,621,804	$	4,001,294
Contingent ceding commissions earned		(11,994	)		(290,487	)		138,283		(1,018,334	)
	$	3,448,774		$	1,029,582		$	10,760,087	$	2,982,960

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 September 30, 2020 and December 31, 2019, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,864,000and $2,886,000, respectively, which is recorded in reinsurance balances payable on the accompanying condensed consolidated balance sheets.