Reinsurance

6 Months Ended

Jun. 30, 2020

We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. The following table provides (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of June 30, 2020:



	June 30, 2020
($ in thousands)	Current			Past Due		Total Reinsurance Recoverables
Financial strength rating of rated reinsurers¹
A++	$	21,644		$	71	$	21,715
A+	361,511			2,926		364,437
A	103,553			670		104,223
A-	2,045			—		2,045
B++	500			275		775
B+	10			—		10
Total rated reinsurers	$	489,263		$	3,942	$	493,205

Non-rated reinsurers
Federal and state pools	88,531			—		88,531
Other than federal and state pools	5,359			32		5,391
Total non-rated reinsurers	$	93,890		$	32	$	93,922

Total reinsurance recoverable, gross	$	583,153		$	3,974	$	587,127
Less: allowance for credit losses²	(2,396		)	—		(2,396		)
Total reinsurance recoverable, net	$	580,757		$	3,974	$	584,731

¹Credit ratings as of June 30, 2020.

²Represents our current expectation of credit losses on total current and past due reinsurance recoverables, and is not identifiable by reinsurer.

We evaluate our estimate of expected credit losses through the methodology outlined in Note 1. “Basis of Presentation and Accounting Policies” above.

The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for the periods indicated:



($ in thousands)	Quarter ended June 30, 2020		Six Months ended June 30, 2020
Balance at beginning of period	$	1,502	$	4,400
Cumulative effect adjustment¹	—		(2,903		)
Balance at beginning of period, as adjusted	$	1,502	$	1,497
Current period provision for expected credit losses	894		899
Write-offs charged against the allowance for credit losses	—		—
Recoveries	—		—
Allowance for credit losses, end of period	$	2,396	$	2,396

¹See Note 2. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13.

The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expenses incurred for the periods indicated. For more information concerning reinsurance, refer to Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.



	Quarter ended June 30,					Six Months ended June 30,
($ in thousands)	2020			2019		2020			2019
Premiums written:
Direct	$	834,643		807,367		$	1,581,074		1,573,761
Assumed	6,410			5,333		12,453			11,888
Ceded	(116,301		)	(111,303	)	(221,448		)	(211,305	)
Net	$	724,752		701,397		$	1,372,079		1,374,344
Premiums earned:
Direct	$	733,647		740,348		$	1,488,538		1,468,385
Assumed	6,055			5,742		12,228			12,304
Ceded	(109,031		)	(103,471	)	(218,392		)	(205,497	)
Net	$	630,671		642,619		$	1,282,374		1,275,192
Loss and loss expenses incurred:
Direct	$	451,013		435,700		$	876,808		860,357
Assumed	4,300			4,348		9,198			9,613
Ceded	(51,364		)	(59,064	)	(81,733		)	(102,407	)
Net	$	403,949		380,984		$	804,273		767,563

While direct premiums written increased in Second Quarter 2020 and Six Months 2020 compared to Second Quarter 2019 and Six Months 2019, respectively, Second Quarter 2020 was reduced by a $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.

Additionally, direct premiums written in Six Months 2020 was reduced by a $75 million return audit and mid-term endorsement premium accrual recorded during the first quarter of 2020. This accrual reflects a premium reduction due to lower sales and payroll exposures on the general liability and workers compensation lines of business resulting from the economic impacts of the COVID-19 pandemic.

The premium actions described above impacted direct premiums written and direct premiums earned. In addition, due to the lower exposures that drove the reduction in premium, there was a reduction in direct loss and loss expenses incurred. The reduction in direct loss and loss expenses incurred for the premium credit included a $13.3 million reduction in casualty lines and a $6.4 million reduction in non-catastrophe property losses. Direct loss and loss expenses were also impacted in Six Months 2020 by a $10.0 million incurred but not reported ("IBNR") reserve estimate recorded in the first quarter of 2020 for losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health.



COVID-19 Impact	Quarter ended June 30, 2020							Six Months ended June 30, 2020
($ in thousands)	Premium Audit			Premium Credit		Total		Premium Audit			Property IBNR	Premium Credit		Total
Direct premiums written	$	—		(19,740	)	(19,740	)	$	(75,000	)	—	(19,740	)	(94,740	)
Direct premiums earned	(31,824		)	(19,740	)	(51,564	)	(48,333		)	—	(19,740	)	(68,073	)
Direct loss and loss expenses incurred	(18,198		)	(19,740	)	(37,938	)	(28,073		)	10,000	(19,740	)	(37,813	)

Ceded premiums written, ceded premiums earned, and ceded loss and loss expenses incurred 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	Quarter ended June 30,					Six Months ended June 30,
($ in thousands)	2020			2019		2020			2019
Ceded premiums written	$	(74,187	)	(71,574	)	$	(136,274	)	(131,587	)
Ceded premiums earned	(67,369		)	(63,804	)	(134,230		)	(126,067	)
Ceded loss and loss expenses incurred	(12,991		)	(21,063	)	(18,087		)	(34,749	)