5 REINSURANCE

The effect of reinsurance on premiums written and earned was as follows:


	2011						2010
	Written			Earned			Written			Earned
Direct	($	171,283	)	$	429,033		($	476,270	)	$	565,657
Assumed		(7,670	)		(345	)		178			1,294
Ceded		20,835			(22,718	)		110,363			(20,976	)

Net premiums	($	158,118	)	$	405,970		($	365,729	)	$	545,975

Ceded Reinsurance:

Ambac Assurance has reinsurance in place pursuant to treaty and facultative reinsurance agreements. The reinsurance of risk does not relieve Ambac Assurance of its original liability to its policyholders. In the event that any of Ambac Assurance's reinsurers are unable to meet their obligations under reinsurance contracts, Ambac Assurance would, nonetheless, be liable to its policyholders for the full amount of its policy.

Ambac Assurance's reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $381,205 at December 31, 2011. Credit exposure existed at December 31, 2011 with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse Ambac Assurance under the terms of these reinsurance arrangements. At December 31, 2011, there were ceded reinsurance balances payable of $115,555 offsetting this credit exposure.

To minimize its exposure to significant losses from reinsurer insolvencies, Ambac Assurance (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts; and (ii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances). At the inception of each reinsurance contract, Ambac Assurance required collateral from certain reinsurers primarily to (i) receive statutory credit for the reinsurance for foreign reinsurers, and (ii) provide liquidity to Ambac Assurance in the event of claims on the reinsured exposures. Ambac Assurance held letters of credit and collateral amounting to approximately $337,430 from its reinsurers at December 31, 2011. The largest reinsurer accounted for 7.0% of gross par outstanding at December 31, 2011.

As of December 31, 2011, the aggregate amount of insured par ceded by Ambac to reinsurers under reinsurance agreements was $23,959,230. The following table represents the percentage ceded to reinsurers and reinsurance recoverable at December 31, 2011 and its rating levels as of March 1, 2011:


	Moody's			Percentage ceded par			Net unsecured reinsurance recoverable (in thousands)⁽¹⁾
Reinsurers	Rating		Outlook	Percentage ceded par
Assured Guaranty Re Ltd		A1	Negative outlook		86.07	%	$	—
Sompo Japan Insurance Inc		A1	Stable		7.44	%		—
Assured Guaranty Corporation		Aa3	Negative outlook		6.49	%		15,054

Total					100.00	%	$	15,054

(1)	Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of Ambac Assurance.

Assumed Reinsurance:

At December 31, 2011, assumed par outstanding was $257,522. On March 24, 2010, all assumed reinsurance agreements with third parties were allocated to the Segregated Account, which will not allow for cancellations without the approval of the Rehabilitator.