Annual Report 2011 - SNL Financial

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Annual Report 2011 - SNL Financial

Per Occurrence Reinsurance Agreements. Per occurrence reinsurance agreements cover each segregated portfolio cell

for a catastrophic claim resulting from one event with respect to its segregated portfolio cell business. The specific retentions

for per occurrence coverage for segregated portfolio cells range from $250,000 to $350,000, with limits ranging from $39.75

million to $39.65 million. For example, in the case of a segregated portfolio cell with a $300,000 retention that has a

$3.0 million claim relating to the injury and/or death of a covered employee, the segregated portfolio cell would cover the

first $300,000 of the claim with the third party reinsurer paying the remaining $2.7 million in claims.

Aggregate Reinsurance Coverage. Aggregate reinsurance agreements cover each segregated portfolio cell for losses and

LAE beyond the $100,000 aggregate coverage provided by EAIG. The need for this coverage would arise in the event of a

series of losses as opposed to a single, catastrophic event. Aggregate reinsurance coverage purchased through Lloyd’s of

London has ultimate loss limits of $1.0 million or $2.0 million, depending on the underlying risks. This external reinsurance

combined with the aggregate coverage provided by EAIG provides aggregate loss limits for each segregated portfolio cell

ranging from $1.1 million to $2.1 million.

In addition to the reinsurance coverage on the segregated portfolio cell business, the dividend participants of each

segregated portfolio cell provide a letter of credit to EAIG that is equal to the difference between the loss fund (amount of

funds available to pay losses after deduction of ceding commission) and the aggregate attachment point of the reinsurance.

This is sometimes called the GAP, or unfunded liability. As an example, if a program has $1.0 million of assumed premiums,

a 40% ceding commission and a 90% aggregate attachment point, the letter of credit amount is $300,000 calculated as

follows:

Aggregate attachment point ($1,000,000 x .90) ..................................................... $900,000

Loss fund ($1,000,000 – ($1,000,000 x .40)) ....................................................... $600,000

GAP ....................................................................................... $300,000

The difference between the premium and the ceding commission is deposited in each respective segregated portfolio

cell’s Cayman Island bank account to create the loss fund.

The following table sets forth the amounts recoverable from reinsurers for the segregated portfolio cell reinsurance

segment as of December 31, 2011 (dollars in thousands):

Name

Reinsurance

Recoverable

A.M. Best

Rating

Percentage of

Shareholders’

Equity

Percentage of

Reinsurance

Recoverable

Lloyd’s of London .......................................... $1,943 A 1.5% 12.4%

Aspen Insurance UK Limited .................................. 1,027 A 0.8% 6.5%

Catalina London Limited ..................................... 221 NR(1) 0.2% 1.4%

St. Paul Reinsurance Company Ltd. ............................. 10 NR(1) 0.0% 0.1%

(1) Rating assigned to companies that are not rated by A.M. Best.

$3,201 2.5% 20.4%

Loss and LAE Reserves

The Company estimates its reserves for unpaid losses and LAE as of the balance sheet date. The adequacy of the

Company’s reserves is inherently uncertain and represents a significant risk to the business. The Company attempts to

mitigate the uncertainty inherent in its reserves by continually reviewing loss cost trends, attempting to set premium rates

that are adequate to cover anticipated future costs, and by professionally managing its claims administration function.

Additionally, the Company attempts to minimize the estimation risk inherent in its reserves by employing actuarial

techniques on a quarterly basis. Significant judgment is required in actuarial estimation to ascertain the relevance of

historical payment and claim settlement patterns under current facts and circumstances. No assurance can be given as to

whether the ultimate liability for unpaid losses and LAE will be more or less than the Company’s current estimates. While

management believes that the assumptions underlying the amounts recorded for the reserves for unpaid losses and LAE as of

December 31, 2011 are reasonable, the ultimate net liability may differ materially from the amount provided.

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