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Reinsurance

12 Months Ended

Dec. 31, 2021

Note 7 - Reinsurance

Effective December 31, 2021, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consisted of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). Effective December 15, 2019, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consisted of homeowners’ policies, covering the period from December 15, 2019 through December 30, 2020 (“2019/2020 Treaty”). Effective December 31, 2020, the 2019/2020 Treaty expired on a cut off basis; this treaty was not renewed.

The Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2021. Effective October 18, 2021, the Company entered into a stub catastrophe reinsurance treaty covering the period from October 18, 2021 through December 31, 2021. The treaty provides reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, the Company entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

	Treaty Year
	(2021/2023 Treaty)												(2019/2020 Treaty)
	July 1,			December 31,			July 1,			December 31,			July 1,			December 15,
	2022			2021			2021			2020			2020			2019
	to			to			to			to			to			to
	January 1,			June 30,			December 30,			June 30,			December 30,			Jume 30,
Line of Business	2023			2022			2021			2021			2020			2020

Personal Lines:
Homeowners, dwelling fire and and canine legal liability
Quota share treaty:
Percent ceded		30	%		30	%		None	(7)		None	(7)		25	%		25	%
Risk retained on intial $1,000,000 of losses (7) (9)	$	700,000		$	700,000		$	1,000,000		$	1,000,000		$	750,000		$	750,000
Losses per occurrence subject to quota share reinsurance coverage	$	1,000,000		$	1,000,000			None	(7)		None	(7)	$	1,000,000		$	1,000,000
Expiration date		January 1, 2023			January 1, 2023			NA	(7)		NA	(7)		December 30, 2020			December 30, 2020
Excess of loss coverage and facultative facility coverage (1) (9) (10)	$	400,000		$	8,400,000		$	8,000,000		$	8,000,000		$	8,000,000		$	9,000,000
		in excess of			in excess of			in excess of			in excess of			in excess of			in excess of
	$	600,000		$	600,000		$	1,000,000		$	1,000,000		$	1,000,000		$	1,000,000
Total reinsurance coverage per occurrence (7) (9) (10)	$	500,000		$	8,500,000		$	8,000,000		$	8,000,000		$	8,250,000		$	9,250,000
Losses per occurrence subject to reinsurance coverage (7) (10)	$	1,000,000		$	9,000,000		$	9,000,000		$	9,000,000		$	9,000,000		$	10,000,000
Expiration date			(10)		June 30, 2022			June 30, 2022			June 30, 2021			June 30, 2021			June 30, 2020

Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty		10,000,000			10,000,000			None	(7)		None	(7)		7,500,000			7,500,000
Risk retained per catastrophe occurrence (2) (7) (11)		None	(10)	$	7,400,000		$	10,000,000		$	10,000,000		$	8,125,000		$	5,625,000
Catastrophe loss coverage in excess of quota share coverage (3) (7)		None	(10)	$	490,000,000		$	490,000,000		$	475,000,000		$	475,000,000		$	602,500,000
Catastrophe stub coverage for the period from October 18, 2021 through December 31, 2021 (8)		NA			NA		$	5,000,000			NA			NA			NA
								in excess of
							$	5,000,000
Reinstatement premium protection (4) (5) (6) (10)		Yes			Yes			Yes			Yes			Yes			Yes

	(1)	For personal lines, includes the addition of an automatic facultative facility (“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 through June 30, 2020. For the period July 1, 2020 through June 30, 2022, the Facultative Facility covers direct losses from $3,500,000 to $9,000,000.

	(2)	Plus losses in excess of catastrophe coverage. For the period July 1, 2020 through December 30, 2020, there was 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)	For the period July 1, 2019 through June 30, 2020, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

	(5)	For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

	(6)	For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

	(7)	The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.

	(8)	Excludes freeze and freeze related claims.

	(9)	For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.

	(10)	Excess of loss and catastrophe reinsurance treaties will expire on June 30, 2022; reinsurance coverage in effect from July 1, 2022 through January 1, 2023 is only for personal lines quota share (homeowners, dwelling fire and canine legal liability) and underlying excess of loss reinsurance.

	(11)	For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

				Treaty Year
	July 1, 2021			July 1, 2020			July 1, 2019
	to			to			to
Line of Business	June 30, 2022			June 30, 2021			June 30, 2020

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		95	%		95	%		100	%
Risk retained	$	300,000		$	300,000		$	100,000
Total reinsurance coverage per occurrence	$	4,700,000		$	4,700,000		$	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, 2022			June 30, 2021			June 30, 2020

Commercial Lines (1):
General liability commercial policies
Quota share treaty				None			None
Risk retained				$	750,000		$	750,000
Excess of loss coverage above risk retained				$	3,750,000		$	3,750,000
				in excess of			in excess of
				$	750,000		$	750,000
Total reinsurance coverage per occurrence				$	3,750,000		$	3,750,000
Losses per occurrence subject to reinsurance coverage				$	4,500,000		$	4,500,000

Commercial Umbrella
Quota share treaty				None			None

(1) Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

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, 2021 and 2020 are as follows:

	Unpaid		Paid
($ in thousands)	Losses		Losses		Total		Security
December 31, 2021
Cavello Bay Reinsurance Limited (1)	$	2,134	$	3,245	$	5,379	$	10,086	(2)
Swiss Reinsurance America Corporation		4,069		631		4,700		-
Hanover Rueck SE		2,474		1,176		3,650		-
Allied World Assurance Company		1,098		29		1,127		-
Others		863		1,415		2,278		791	(3)
Total	$	10,638	$	6,496	$	17,134	$	10,877

December 31, 2020
Cavello Bay Reinsurance Limited (1)	$	2,850	$	3,405	$	6,255	$	10,086	(2)
Swiss Reinsurance America Corporation		7,778		5,840		13,618		-
Hanover Rueck SE		4,909		2,897		7,806		-
Allied World Assurance Company		2,019		1,761		3,780		-
Others		2,598		884		3,482		732	(3)
Total	$	20,154	$	14,788	$	34,941	$	10,818

(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)	As of December 31, 2021 and 2020, represents $791,000 and $732,000, respectively, guaranteed by irrevocable letters of credit.

Assets held in the trusts referred to in footnote (2) 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, 2021 and 2020 include unearned ceded premiums of approximately $23,159,000 and $282,000, respectively.

Ceding Commission Revenue

The Company will earn ceding commission revenue under the 2021/2023 Treaty based on a fixed provisional commission rate at which provisional ceding commissions will be earned. The Company earned ceding commission revenue under its expired quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions were earned, and (ii) a continuing 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, 2020 are attributable to contracts under the 2019/2020 Treaty. There was no quota share treaty in effect during the period from January 1, 2021 through December 30, 2021. In addition to the treaty that was in effect during the year ended December 31, 2020, 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:

	Year ended
	December 31,
	2021			2020

Provisional ceding commissions earned	$	233,990		$	14,119,180
Contingent ceding commissions earned		(144,309	)		83,173
	$	89,681		$	14,202,353

Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled periodically based on the Loss Ratio of each treaty year that ends on June 30, for the expired treaties that were subject to contingent commissions. 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, 2021 and 2020, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,881,000 and $2,604,000, respectively, which is recorded in reinsurance balances payable on the accompanying consolidated balance sheets.