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Reinsurance | 12 Months Ended
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Dec. 31, 2021
Reinsurance Disclosures [Abstract] |
Reinsurance | 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 (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 2022, our deductible, before tax, is approximately $419 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%. The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. The following tables provide (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of December 31, 2021 and 2020:
|  | December 31, 2021
($ in thousands) |  | Current |  | Past Due |  | Total Reinsurance Recoverables
Financial strength rating of rated reinsurers |  |  |  |  |  |
A++ |  | $ | 38,601 |  |  | $ | 9 |  |  | $ | 38,610 |
A+ |  | 339,857 |  |  | 1,520 |  |  | 341,377 |
A |  | 95,675 |  |  | 1,227 |  |  | 96,902 |
A- |  | 3,209 |  |  | 145 |  |  | 3,354 |
B++ |  | — |  |  | — |  |  | — |
B+ |  | — |  |  | — |  |  | — |
Total rated reinsurers |  | $ | 477,342 |  |  | $ | 2,901 |  |  | $ | 480,243 |
Non-rated reinsurers |  |  |  |  |  |
Federal and state pools |  | $ | 116,378 |  |  | $ | — |  |  | $ | 116,378 |
Other than federal and state pools |  | 4,597 |  |  | 450 |  |  | 5,047 |
Total non-rated reinsurers |  | $ | 120,975 |  |  | $ | 450 |  |  | $ | 121,425 |
Total reinsurance recoverable, gross |  | $ | 598,317 |  |  | $ | 3,351 |  |  | $ | 601,668 |
Less: ACL |  |  |  |  |  | (1,600) |
Total reinsurance recoverable, net |  |  |  |  |  | $ | 600,068 |
|  | 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 2021 and 2020:
($ in thousands) |  |  |  | December 31, 2021 |  | December 31, 2020
Balance at beginning of year |  |  |  | $ | 1,777 |  |  | $ | 4,400 |
Cumulative effect adjustment |  |  |  | — |  |  | (2,903) |
Balance at beginning of year, as adjusted |  |  |  | $ | 1,777 |  |  | $ | 1,497 |
Current period change for expected credit losses |  |  |  | (177) |  |  | 280 |
Write-offs charged against the allowance for credit losses |  |  |  | — |  |  | — |
Recoveries |  |  |  | — |  |  | — |
ACL, end of year |  |  |  | $ | 1,600 |  |  | $ | 1,777 |
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, 2021 |  | As of December 31, 2020
($ in thousands) |  | Reinsurance Balances |  | % of Reinsurance Balance |  | Reinsurance Balances |  | % of Reinsurance Balance
Total reinsurance recoverables, net of allowance for credit losses |  | $ | 600,068 |  |  |  |  | $ | 587,492 |  |  |
Total prepaid reinsurance premiums |  | 183,007 |  |  |  |  | 170,531 |  |  |
Total reinsurance balance |  | 783,075 |  |  |  |  | 758,023 |  |  |
Federal and state pools 1: |  |  |  |  |  |  |  |
NFIP |  | 223,845 |  |  | 29 | % |  | 178,532 |  |  | 25 | %
New Jersey Unsatisfied Claim Judgment Fund |  | 49,738 |  |  | 6 |  |  | 52,053 |  |  | 6 |
Other |  | 2,385 |  |  | — |  |  | 1,625 |  |  | — |
Total federal and state pools |  | 275,968 |  |  | 35 |  |  | 232,210 |  |  | 31 |
Remaining reinsurance balance |  | $ | 507,107 |  |  | 65 |  |  | $ | 525,813 |  |  | 69 |
Munich Re Group (AM Best rated "A+") |  | $ | 108,381 |  |  | 14 |  |  | $ | 117,028 |  |  | 15 |
Hannover Ruckversicherungs AG (AM Best rated "A+") |  | 107,110 |  |  | 14 |  |  | 115,251 |  |  | 15 |
AXIS Reinsurance Company (AM Best rated "A") |  | 70,814 |  |  | 9 |  |  | 78,617 |  |  | 10 |
Swiss Re Group (AM Best rated "A+") |  | 29,186 |  |  | 4 |  |  | 33,249 |  |  | 4 |
Transatlantic Reinsurance Company (AM Best rated “A+”) |  | 26,490 |  |  | 3 |  |  | 24,374 |  |  | 3 |
All other reinsurers |  | 166,726 |  |  | 21 |  |  | 159,071 |  |  | 21 |
Total reinsurers |  | 508,707 |  |  | 65 | % |  | 527,590 |  |  | 69 | %
Less: ACL |  | (1,600) |  |  |  |  | (1,777) |  |  |
Reinsurers, net of ACL |  | 507,107 |  |  |  |  | 525,813 |  |  |
Less: collateral 2 |  | (128,699) |  |  |  |  | (130,169) |  |  |
Reinsurers, net of collateral |  | $ | 378,408 |  |  |  |  | $ | 395,644 |  |  |
1 Considered to have minimal risk of default. 2 Includes 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) |  | 2021 |  | 2020 |  | 2019
Premiums written: |  |  |  |  |  |
Direct |  | $ | 3,656,537 |  |  | 3,204,512 |  |  | 3,084,451 |
Assumed |  | 22,664 |  |  | 24,288 |  |  | 24,339 |
Ceded |  | (489,488) |  |  | (455,708) |  |  | (429,366) |
Net |  | $ | 3,189,713 |  |  | 2,773,092 |  |  | 2,679,424 |
Premiums earned: |  |  |  |  |  |
Direct |  | $ | 3,472,715 |  |  | 3,108,687 |  |  | 2,993,157 |
Assumed |  | 21,550 |  |  | 25,010 |  |  | 24,399 |
Ceded |  | (477,012) |  |  | (451,883) |  |  | (420,385) |
Net |  | $ | 3,017,253 |  |  | 2,681,814 |  |  | 2,597,171 |
Loss and loss expense incurred: |  |  |  |  |  |
Direct |  | $ | 2,096,512 |  |  | 1,822,034 |  |  | 1,714,880 |
Assumed |  | 13,813 |  |  | 17,201 |  |  | 22,879 |
Ceded |  | (296,341) |  |  | (203,412) |  |  | (186,268) |
Net |  | $ | 1,813,984 |  |  | 1,635,823 |  |  | 1,551,491 |
Direct premiums written ("DPW") increased 14% in 2021 compared to 2020, and increased 4% in 2020 compared to 2019. The increase in our DPW growth rate was attributable to the following items (i) overall renewal pure price increases, (ii) strong retention, and (iii) new business growth. In addition, our strong growth in DPW in 2021 benefited from exposure growth driven by strong economic activity in the U.S., which resulted in our customers increasing their sales, payrolls, and exposure units, all of which favorably impacted our DPW. This increase included three percentage points from the $75 million return audit and endorsement premium accrual that was recorded in the first quarter of 2020 and a $19.7 million premium credit to our personal and commercial automobile policyholders in the second quarter of 2020. The return audit and endorsement premium accrual reflected lower exposure levels, which determine the premium we charge, attributable to the economic impacts of the COVID-19 pandemic and the anticipated decline in sales and payroll exposures on the general liability and workers compensation lines of business in 2020. The increase in direct premiums earned in 2021 compared to 2020 was elevated by the items discussed above for the DPW impacts. Ceded premiums written, ceded premiums earned, and ceded loss and loss expenses incurred related to our participation in the NFIP, to which we cede 100% of our NFIP flood premiums, losses, and loss expenses, were as follows:
Ceded to NFIP ($ in thousands) |  | 2021 |  | 2020 |  | 2019
Ceded premiums written |  | $ | (284,311) |  |  | (274,042) |  |  | (266,925) |
Ceded premiums earned |  | (274,384) |  |  | (271,598) |  |  | (259,119) |
Ceded loss and loss expense incurred |  | (215,224) |  |  | (78,993) |  |  | (71,676) |

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- Definition The entire disclosure pertaining to the existence, magnitude and information about insurance that has been ceded to or assumed from another insurance company, including the methodologies and assumptions used in determining recorded amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -URI http://asc.fasb.org/topic&trid=2303980 + Details
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