Reinsurance

12 Months Ended

Dec. 31, 2020

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 (proportional) pooling arrangement and other minor reinsurance 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, 2027. TRIPRA requires private insurers and the U. S. 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 2021, our deductible, before tax, is approximately $369 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%.

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 and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. Contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance.

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 December 31, 2020:


	December 31, 2020
($ in thousands)	Current		Past Due		Total Reinsurance Recoverables
Financial strength rating of rated reinsurers
A++	$	37,464	$	102	$	37,566
A+	354,846		2,452		357,298
A	105,652		415		106,067
A-	2,139		—		2,139
B++	56		324		380
B+	—		—		—
Total rated reinsurers	$	500,157	$	3,293	$	503,450

Non-rated reinsurers
Federal and state pools	$	82,575	$	—	$	82,575
Other than federal and state pools	2,676		568		3,244
Total non-rated reinsurers	$	85,251	$	568	$	85,819

Total reinsurance recoverable, gross	$	585,408	$	3,861	$	589,269
Less: ACL					(1,777)
Total reinsurance recoverable, net					$	587,492

The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for 2020:


($ in thousands)	December 31, 2020
Balance at beginning of year	$	4,400
Cumulative effect adjustment1	(2,903)
Balance at beginning of year, as adjusted	$	1,497
Current period provision for expected credit losses	280

Write-offs charged against the allowance for credit losses	—
Recoveries	—
ACL, end of year	$	1,777

1See Note 3. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13.

The following table represents our total reinsurance balances segregated by reinsurer to illustrate our concentration of risk throughout our reinsurance portfolio:


	As of December 31, 2020				As of December 31, 2019
($ in thousands)	Reinsurance Balances		% of Reinsurance Balance		Reinsurance Balances		% of Reinsurance Balance
Total reinsurance recoverables	$	587,492			$	573,235
Total prepaid reinsurance premiums	170,531				166,705
Total reinsurance balance	758,023				739,940

Federal and state pools1:
NFIP	178,532		25	%	175,472		24 %
New Jersey Unsatisfied Claim Judgment Fund	52,053		6		53,732		6 %
Other	1,625		—		2,449		1
Total federal and state pools	232,210		31		231,653		31
Remaining reinsurance balance	$	525,813	69		$	508,287	69

Munich Re Group (AM Best rated "A+")	$	116,885	15		$	119,748	16
Hannover Ruckversicherungs AG (AM Best rated "A+")	115,084		15		107,474		15
AXIS Reinsurance Company (AM Best rated "A")	78,090		10		73,009		10
Swiss Re Group (AM Best rated "A+")	33,179		4		37,190		5
Transatlantic Reinsurance Company (AM Best rated “A+”)	24,320		3		21,824		3
All other reinsurers	158,255		22		149,042		20
Total reinsurers	525,813		69	%	508,287		69	%
Less: collateral2	(130,169)				(110,549)
Reinsurers, net of collateral	$	395,644			$	397,738

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)	2020		2019	2018
Premiums written:
Direct	$	3,204,512	3,084,451	2,890,633
Assumed	24,288		24,339	26,250
Ceded	(455,708)		(429,366)	(402,597)
Net	$	2,773,092	2,679,424	2,514,286

Premiums earned:
Direct	$	3,108,687	2,993,157	2,808,764
Assumed	25,010		24,399	25,831
Ceded	(451,883)		(420,385)	(398,366)
Net	$	2,681,814	2,597,171	2,436,229

Loss and loss expense incurred:
Direct	$	1,822,034	1,714,880	1,706,951
Assumed	17,201		22,879	21,469
Ceded	(203,412)		(186,268)	(230,286)
Net	$	1,635,823	1,551,491	1,498,134

Direct premiums written ("DPW") increased by 4% in 2020 compared to an increase of 7% in 2019. The decline in our DPW growth rate was primarily attributable to the following:

i.Audit and endorsement premiums that decreased by $82.5 million compared to the prior year. This decrease was primarily due to lower payroll and sales exposures on the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic and includes the impact of the $75 million accrual that was recorded in the first quarter of 2020, $24.8 million of which remained an accrual at December 31, 2020.

ii.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.

Consistent with the fluctuations in DPW, the increase in direct premiums earned in 2020 compared to 2019 was muted by the items discussed above.

Direct and ceded loss and loss expenses incurred in 2020 were primarily impacted by increased catastrophe losses. The increase was due to the severity of the storms and individual claims that met the retention for our property excess of loss treaty. Net catastrophe losses were $215.4 million in 2020 compared to $81.0 million in 2019.

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, were as follows:


Ceded to NFIP ($ in thousands)	2020		2019	2018
Ceded premiums written	$	(274,042)	(266,925)	(248,053)
Ceded premiums earned	(271,598)		(259,119)	(244,238)
Ceded loss and loss expense incurred	(78,993)		(71,676)	(144,967)