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 subject to the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended by Congress 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 2018, our deductible is approximately $323 million. For losses above the deductible, the federal government will pay 82% of losses to an industry limit of $100 billion, and the insurer retains 18%. 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. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses. 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 $4.6 million at December 31, 2017 and $5.5 million at December 31, 2016.

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, 2017					As of December 31, 2016
($ in thousands)	Reinsurance Balances			% of Reinsurance Balance		Reinsurance Balances			% of Reinsurance Balance
Total reinsurance recoverables	$	594,832				$	621,537
Total prepaid reinsurance premiums	153,493					146,282
Total reinsurance balance	748,325					767,819

Federal and state pools¹:
NFIP	204,161			27	%	211,181			27	%
New Jersey Unsatisfied Claim Judgment Fund	62,947			9		65,574			9
Other	3,634			—		3,227			—
Total federal and state pools	270,742			36		279,982			36
Remaining reinsurance balance	$	477,583		64		$	487,837		64

Munich Re Group (A.M. Best rated "A+")	$	117,460		16		$	119,520		16
Hannover Ruckversicherungs AG (A.M. Best rated "A+")	101,652			14		106,298			13
AXIS Reinsurance Company (A.M. Best rated "A+")	62,396			8		59,737			8
Swiss Re Group (A.M. Best rated "A+")	40,772			5		50,494			7
Partner Reinsurance Company of the U.S. (A.M. Best rated “A”)	16,925			2		21,125			3
All other reinsurers	138,378			19		130,663			17
Total reinsurers	477,583			64	%	487,837			64	%
Less: collateral²	(122,413		)			(113,763		)
Reinsurers, net of collateral	$	355,170				$	374,074

¹Considered to have minimal risk of default.

²Includes letters of credit, trust funds, and funds held against reinsurance recoverables.

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 loss and loss expense incurred:



($ in thousands)	2017			2016		2015
Premiums written:
Direct	$	2,733,459		2,577,259		2,403,519
Assumed	26,685			28,779		23,848
Ceded	(389,503		)	(368,750	)	(357,463	)
Net	$	2,370,641		2,237,288		2,069,904

Premiums earned:
Direct	$	2,647,488		2,484,715		2,330,267
Assumed	25,831			28,214		23,209
Ceded	(382,292		)	(363,357	)	(363,567	)
Net	$	2,291,027		2,149,572		1,989,909

Loss and loss expense incurred:
Direct	$	1,570,678		1,560,356		1,274,872
Assumed	17,588			22,708		16,996
Ceded	(243,192		)	(348,267	)	(143,327	)
Net	$	1,345,074		1,234,797		1,148,541

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



Ceded to NFIP ($ in thousands)	2017			2016		2015
Ceded premiums written	$	(241,345	)	(232,245	)	(228,907	)
Ceded premiums earned	(235,088		)	(227,882	)	(233,940	)
Ceded loss and loss expense incurred	(160,922		)	(239,891	)	(62,078	)