. Reinsurance

Our 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 their 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 uncollectible reinsurance recoverables was $4.8 million at December 31, 2012 and $3.9 million at December 31, 2011.

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, 2012					As of December 31, 2011
($ in thousands)	Reinsurance Balances			% of Net Unsecured Reinsurance		Reinsurance Balances			% of Net Unsecured Reinsurance
Total reinsurance recoverables	$	1,421,109				$	561,855
Total prepaid reinsurance premiums	132,637					147,686
Less: collateral¹	(139,335		)			(146,364		)
Net unsecured reinsurance balances	1,414,411					563,177

Federal and state pools²:
National Flood Insurance Program (“NFIP”)	1,028,685			73		267,600			48
NJ Unsatisfied Claim Judgment Fund	68,655			5		69,179			12
Other	5,749			—		4,235			1
Total federal and state pools	1,103,089			78		341,014			61

Remaining unsecured reinsurance	311,322			22		222,163			39

Munich Re Group (A.M. Best rated “A+”)	66,283			5		42,064			7
Hannover Ruckversicherungs AG (A.M. Best rated “A+”)	60,358			4		50,718			9
Swiss Re Group (A.M. Best rated “A+”)	52,189			4		30,330			5
AXIS Reinsurance Company (A.M. Best rated “A”)	35,064			3		26,172			5
Partner Reinsurance Company of the U.S.(A.M. Best rated “A+”)	20,074			1		19,105			3
All other reinsurers	77,354			5		53,774			10
Total	$	311,322		22	%	$	222,163		39

¹ Includes letters of credit, trust funds, and funds withheld.

²Considered to have minimal risk of default.

Note: Some amounts may not foot due to rounding.

The increase in the reinsurance recoverable balance as of December 31, 2012, is driven by the following related to Hurricane Sandy: (i) a recoverable balance on paid and unpaid claims of $68.4 million under our catastrophe excess of loss treaty; and (ii) a recoverable balance on unpaid NFIP flood claims of $839.1 million, which is 100% ceded to the federal government. There is no outstanding reinsurance recoverable balance on paid flood claims as we are required to make payment on these claims only after funding is received from the federal government. As of February 15, 2013, our reinsurance recoverable balances related to Hurricane Sandy were $29.9 million under our catastrophe excess of loss treaty and $621.1 million from the NFIP.

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)	2012			2011		2010
Premiums written:
Direct	$	1,955,667		1,725,393		1,634,415
Assumed	50,938			51,515		25,254
Ceded	(339,722		)	(291,559	)	(269,128	)
Net	$	1,666,883		1,485,349		1,390,541

Premiums earned:
Direct	$	1,873,007		1,693,021		1,654,301
Assumed	65,884			29,011		26,619
Ceded	(354,772		)	(282,719	)	(264,322	)
Net	$	1,584,119		1,439,313		1,416,598

Losses and loss expenses incurred:
Direct	$	2,394,640		1,499,340		1,102,326
Assumed	29,175			20,788		14,994
Ceded	(1,302,825		)	(445,141	)	(135,202	)
Net	$	1,120,990		1,074,987		982,118

Direct premium written ("DPW") increases in 2012 were attributable to higher new business primarily attributable to our newly acquired E&S business and higher renewal premiums reflecting increases in renewal pure price in our Standard Insurance Operations. Direct premium earned increases in 2012 were consistent with the fluctuation in DPW for 2012 compared to 2011. Assumed premiums written remained relatively flat in 2012 compared to 2011 while assumed premiums earned increased over the same period. Assumed premiums written include our E&S business that was written through a fronting arrangement from August of 2011 until April of 2012, at which point our recently-acquired Insurance Subsidiary, MUSIC, became the direct writer of this business. The increase in assumed premiums earned over this same period reflects the timing of our E&S acquisitions. The timing of our E&S acquisitions also drove the increase in assumed premiums written in 2011 compared to 2010 as we began writing this business on an assumed basis in August of 2011.

Direct losses and loss expenses were significantly impacted in 2012 by Hurricane Sandy as follows: (i) $136.0 million in gross losses, of which $89.4 million were covered under our catastrophe excess of loss treaty, resulting in a net impact of $46.6 million; and (ii) $1 billion in gross flood losses that are 100% ceded to the federal government, resulting in no net loss to us. Catastrophe losses in 2011 were driven by more than 20 storms that year, the most significant of which was Hurricane Irene. Irene generated: (i) $46.5 million in gross losses, of which $6.9 million were covered under our catastrophe excess of loss treaty, resulting in a net impact of $39.6 million; and (ii) $177.0 million in gross flood losses that were 100% ceded to the federal government. Partially offsetting these direct losses were flood claims handling fees of $18.3 million in 2012 and $7.1 million in 2011 primarily related to Hurricane Sandy and Hurricane Irene, respectively.

The ceded premiums and losses related to our involvement with the NFIP, in which all of our Flood premiums, losses and loss expenses are ceded to the NFIP, are as follows:



($ in thousands)	2012			2011		2010
Ceded premiums written	$	(221,094	)	(206,711	)	(190,964	)
Ceded premiums earned	(212,177		)	(198,153	)	(184,833	)
Ceded losses and loss expenses incurred	(1,119,303		)	(352,619	)	(60,479	)