Note 8. Reinsurance

Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries from potential losses in excess of the amount that we are prepared to accept.

The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet our contractual obligations. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. On an ongoing basis, we review amounts outstanding, length of collection period, changes in reinsurer credit ratings, and other relevant factors to determine collectability of reinsurance recoverables. The allowance for reinsurance recoverables was $3.9 million at December 31, 2011 and $3.4 million at December 31, 2010.

The following table represents our total reinsurance balances segregated by reinsurer to depict our concentration of risk throughout our reinsurance portfolio:


		As of December 31, 2011				As of December 31, 2010
			% of Net				% of Net
		Reinsurance	Unsecured			Reinsurance	Unsecured
($ in thousands)		Balances	Reinsurance			Balances	Reinsurance

Total reinsurance recoverables	$	561,855			$	318,752
Total prepaid reinsurance premiums		147,686				110,327
Less: collateral¹		(146,364)				(81,707)
Net unsecured reinsurance balances		563,177				347,372

Federal and state pools²:
NJ Unsatisfied Claim Judgment Fund		69,179	12	%		62,098	18	%
National Flood Insurance Program ("NFIP")		267,600	48			119,241	34
Other		4,235	1			5,157	2
Total federal and state pools		341,014	61			186,496	54

Remaining unsecured reinsurance		222,163	39			160,876	46

Hannover Ruckversicherungs AG (A.M. Best rated "A")		50,636	9			33,203	10
Munich Re Group (A.M. Best rated "A+")		34,902	6			29,312	8
Swiss Re Group (A.M. Best rated "A+")		28,634	5			24,552	7
AXIS Reinsurance Company (A.M. Best rated "A")		26,172	5			15,665	5
Partner Reinsurance Company of the U.S.(A.M. Best rated "A+")		19,105	3			14,206	4
All other reinsurers		62,714	11			43,938	12
Total	$	222,163	39	%	$	160,876	46	%

¹ Includes letters of credit, trust funds, and funds withheld.
² Considered to have minimal risk of default.
Note: Some amounts may not foot due to rounding

Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred.

The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and losses and loss expenses incurred:

($ in thousands)		2011	2010	2009
Premiums written:
Direct	$	1,725,393	1,634,415	1,657,142
Assumed		51,515	25,254	22,784
Ceded		(291,559)	(269,128)	(257,271)
Net	$	1,485,349	1,390,541	1,422,655

Premiums earned:
Direct	$	1,693,021	1,654,301	1,657,911
Assumed		29,011	26,619	21,501
Ceded		(282,719)	(264,322)	(248,365)
Net	$	1,439,313	1,416,598	1,431,047

Losses and loss expenses incurred:
Direct	$	1,499,340	1,102,326	1,065,594
Assumed		20,788	14,994	14,794
Ceded		(445,141)	(135,202)	(108,483)
Net	$	1,074,987	982,118	971,905

Assumed premiums written increased by $26.3 million in 2011, as compared to 2010, primarily due to the August 2011 E&S renewal rights acquisition. Since this acquisition we have assumed $24.1 million in E&S premium.

The increases in direct and ceded losses and loss expenses incurred in 2011 primarily reflect the impact of our Flood operation, which experienced increased volume associated with the elevated levels of catastrophic weather events, the results of which are included in the table below:

($ in thousands)		2011	2010	2009
Ceded premiums written	$	(206,711)	(190,964)	(178,934)
Ceded premiums earned		(198,153)	(184,833)	(171,941)
Ceded losses and loss expenses incurred		(352,619)	(60,479)	(35,597)

In addition, on a net basis, losses and loss expenses incurred also reflect increased catastrophic losses that we have retained. These losses increased by $62.3 million, to $118.8 million in 2011, from 2010. Hurricane Irene represented the majority of the 2011 losses, with the remainder of losses in 2011 resulting from more than 20 additional events. The total impact of Hurricane Irene was $40.2 million ($47.1 million on a gross basis), including the reinstatement premium.