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. Our major treaties covering property, property catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share pooling arrangement and other minor quota share treaties.

As a Standard Commercial Lines and E&S Lines writer, we are required to participate in Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended to December 31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2015, our deductible is approximately $254 million. For losses above the deductible, the federal government will pay 85% of losses to an industry limit of $100 billion, and the insurer retains 15%. The federal share of losses will be reduced by 1% each year to 80% by 2020.

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 $6.9 million at December 31, 2014 and $5.1 million at December 31, 2013.

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, 2014					As of December 31, 2013
($ in thousands)	Reinsurance Balances			% of Net Unsecured Reinsurance		Reinsurance Balances			% of Net Unsecured Reinsurance
Total reinsurance recoverables	$	581,548				$	550,897
Total prepaid reinsurance premiums	146,993					143,000
Less: collateral¹	(114,843		)			(119,732		)
Net unsecured reinsurance balances	613,698					574,165

Federal and state pools²:
NFIP	172,547			28		177,637			31
NJ Unsatisfied Claim Judgment Fund	76,342			13		71,732			12
Other	2,557			—		3,034			1
Total federal and state pools	251,446			41		252,403			44

Remaining unsecured reinsurance	362,252			59		321,762			56

Hannover Ruckversicherungs AG (A.M. Best rated “A+”)	79,864			13		72,565			13
Munich Re Group (A.M. Best rated “A+”)	78,347			13		69,749			12
Swiss Re Group (A.M. Best rated “A+”)	55,026			9		48,234			8
AXIS Reinsurance Company (A.M. Best rated “A+”)	51,014			8		45,114			8
Partner Reinsurance Company of the U.S. (A.M. Best rated “A+”)	25,424			4		25,730			4
QBE Reinsurance Corporation (A.M. Best rated "A")	13,069			2		15,665			3
All other reinsurers	59,508			10		44,705			8
Total	$	362,252		59	%	$	321,762		56	%

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.

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)	2014			2013		2012
Premiums written:
Direct	$	2,228,270		2,133,793		1,955,667
Assumed	26,306			43,650		50,938
Ceded	(369,296		)	(367,284	)	(339,722	)
Net	$	1,885,280		1,810,159		1,666,883

Premiums earned:
Direct	$	2,183,258		2,048,530		1,873,007
Assumed	34,653			44,464		65,884
Ceded	(365,302		)	(356,922	)	(354,772	)
Net	$	1,852,609		1,736,072		1,584,119

Losses and loss expenses incurred:
Direct	$	1,314,864		1,370,293		2,394,640
Assumed	26,187			32,678		29,175
Ceded	(183,550		)	(281,233	)	(1,302,825	)
Net	$	1,157,501		1,121,738		1,120,990

Direct and ceded losses and loss expenses decreased significantly in 2013, primarily due to the impact of Superstorm Sandy, for which $1.1 billion in flood losses were ceded to the federal government in 2012.

The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, losses and loss expenses are ceded to the NFIP, are as follows:



Ceded to NFIP ($ in thousands)	2014			2013		2012
Ceded premiums written	$	(237,718	)	(236,309	)	(221,094	)
Ceded premiums earned	(234,224		)	(228,650	)	(212,177	)
Ceded losses and loss expenses incurred	(57,323		)	(183,142	)	(1,119,303	)