The 8K is really a worthwhile read for details on the reinsurance deals. Especially the exhibits that include the actual contracts. Note that the quota-share reinsurers' losses are capped and that SinkHole gets to bear all losses above that amount. And as I speculated last evening, the ceding commissions back to SinkHole are indeed of the sliding scale variety, with the top end just barely covering the company's expenses on the ceded business, while the lower end represents a considerable expense. The exact payout depends on the profitability of the business and given what has happened so far, there is no reason to think that the business being reinsured will suddenly turn profitable.
As for the stop-loss cover on the reserves, note that the reinsurance does not cover all further adverse development, but only defined percentages in multiple layers of loss. For the privilege of obtaining this cover, SinkHole paid a premium equal to the entire reserve that is being protected, meaning the company loses the benefit of this float with respect to future investment income.
As I earlier suggested, these deals did not come cheap.
Looking quickly at the Southport Re deal for workers' comp (exhibit 10.3). At 71% or greater loss ratio they get 19% ceding commissions. At 62% or less they get 28%. In between they get exactly what the difference in earnings is. So they basically have to guarantee Southport Re a 10% profit on the deal, plus give them the float. If their combined ratio ends up being over 90% then they lose money on the portion reinsured, correct? I thought their combined ratio on workers comp was much higher than that.
Great commentary. So how would the accounting work for the premium equal to the entire reserve being paid? A portion of existing or future unearned premium gets shifted into deposits held for reinsurers?