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 $5.1 million at December 31, 2013 and $4.8 million at December 31, 2012.

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, 2013					As of December 31, 2012
($ in thousands)	Reinsurance Balances			% of Net Unsecured Reinsurance		Reinsurance Balances			% of Net Unsecured Reinsurance
Total reinsurance recoverables	$	550,897				$	1,421,109
Total prepaid reinsurance premiums	143,000					132,637
Less: collateral¹	(119,732		)			(139,335		)
Net unsecured reinsurance balances	574,165					1,414,411

Federal and state pools²:
NFIP	177,637			31		1,028,685			73
NJ Unsatisfied Claim Judgment Fund	71,732			12		68,655			5
Other	3,034			1		5,749			—
Total federal and state pools	252,403			44		1,103,089			78

Remaining unsecured reinsurance	321,762			56		311,322			22

Hannover Ruckversicherungs AG (A.M. Best rated “A+”)	72,565			13		60,358			4
Munich Re Group (A.M. Best rated “A+”)	69,749			12		66,283			5
Swiss Re Group (A.M. Best rated “A+”)	48,234			8		52,189			4
AXIS Reinsurance Company (A.M. Best rated “A+”)	45,114			8		35,064			3
Partner Reinsurance Company of the U.S. (A.M. Best rated “A+”)	25,730			4		20,074			1
QBE Reinsurance Corporation (A.M. Best rated "A")	15,665			3		13,871			1
All other reinsurers	44,705			8		63,483			4
Total	$	321,762		56	%	$	311,322		22

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 decrease in the reinsurance recoverable balance as of December 31, 2013 compared to December 31, 2012 is driven by the impact of Hurricane Sandy on the 2012 balance, including: (i) a $809.6 million decrease related to NFIP flood claims; and (ii) a $55.8 million decrease related to claims covered under our catastrophe excess of loss treaty.

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)	2013			2012		2011
Premiums written:
Direct	$	2,133,793		1,955,667		1,725,396
Assumed	43,650			50,938		51,515
Ceded	(367,284		)	(339,722	)	(291,559	)
Net	$	1,810,159		1,666,883		1,485,352

Premiums earned:
Direct	$	2,048,530		1,873,007		1,693,021
Assumed	44,464			65,884		29,011
Ceded	(356,922		)	(354,772	)	(282,719	)
Net	$	1,736,072		1,584,119		1,439,313

Losses and loss expenses incurred:
Direct	$	1,370,293		2,394,640		1,499,340
Assumed	32,678			29,175		20,788
Ceded	(281,233		)	(1,302,825	)	(445,141	)
Net	$	1,121,738		1,120,990		1,074,987

The growth in direct premium written (“DPW”) for the Insurance Subsidiaries in both 2013 and 2012 compared to the prior years reflects: (i) pure price increases that we have achieved in our Standard Insurance Operations; (ii) strong retention in our Standard Insurance Operations; and (iii) premium from our newly acquired E&S business. Direct premium earned increases in 2013 and 2012 were consistent with the fluctuation in DPW for 2013 and 2012 compared to the prior year.

Assumed premium levels were high in 2011 as we began writing E&S business through a fronting arrangement in August 2011. This arrangement continued through April 2012, causing an increase in assumed premiums earned in 2012. The subsequent runoff of these earnings in 2013 caused the reduction in assumed net premiums earned in 2013.

Direct losses and loss expenses decreased significantly in 2013, primarily due to the impact of Hurricane Sandy in 2012 which included the following: (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. Partially offsetting these direct losses were flood claims handling fees of $18.3 million in 2012.

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)	2013			2012		2011
Ceded premiums written	$	(236,309	)	(221,094	)	(206,711	)
Ceded premiums earned	(228,650		)	(212,177	)	(198,153	)
Ceded losses and loss expenses incurred	(183,142		)	(1,119,303	)	(352,619	)