NOTE 4. REINSURANCE

Property and Casualty Insurance Segment

Ceded and Assumed Reinsurance

Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a portion of the premium received and a portion of the risk under the policies written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses from a single catastrophe, such as a hurricane or tornado. We do not engage in any reinsurance transactions classified as finite risk reinsurance.

We account for premiums, written and earned, and losses incurred net of reinsurance ceded. The ceding of insurance does not legally discharge us from primary liability under our policies, and we must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable. We believe that all of our reinsurers are in an acceptable financial condition and there were no reinsurance balances at December 31, 2011, for which collection is at risk that would result in a material impact on our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $2,590,000 and $2,207,000 at December 31, 2011 and 2010, respectively.

We also assume both property and casualty insurance from other insurance or reinsurance companies. Most of the business we have assumed is property insurance, with an emphasis on catastrophe coverage.

Premiums and loss and loss settlement expenses related to our ceded and assumed business is as follows:



(In Thousands)
Years Ended December 31	2011		2010			2009
Ceded Business
Ceded premiums written	$	43,921	$	32,511		$	37,039
Ceded premiums earned	45,604		32,598			36,925
Loss and loss settlement expenses ceded	39,335		17,381			5,942

Assumed Business
Assumed premiums written	$	14,954	$	11,713		$	7,820
Assumed premiums earned	14,869		11,668			7,904
Loss and loss settlement expenses assumed	24,151		(4,276		)	5,818

In 2011, we renewed our participation in all of our assumed programs, while increasing the participation level on one contract, which generated the growth of our assumed premiums written and earned. Loss and loss settlement expenses increased significantly in 2011 due to several natural disasters, primarily in New Zealand and Japan, that impacted our assumed program.

In 2010, we increased our participation in assumed business, which led to the increase in assumed premium writings for the year. The benefit reported for loss and loss settlement expenses incurred from assumed business in 2010 is the result of our process to evaluate the overall reserve adequacy of our property and casualty insurance segment. We re-estimated our reserve requirement for assumed business as our largest assumed reinsurance contract has been in run-off for many years and we believe any new claims on this contract would not be significant. In addition, our participation level in assumed business was much lower than our historical participation level. The re-estimation of reserve estimates specific to the assumed reinsurance line of business was part of an overall review of reserves by line of business and did not have a direct impact on the net income reported for our property and casualty insurance segment in 2010.

Refer to Note 5 “Reserves for Loss and Loss Settlement Expenses” for an analysis of changes in our overall property and casualty insurance reserves.

Reinsurance Programs and Retentions

We have several programs that provide reinsurance coverage. This reinsurance coverage limits the risk of loss that we retain by reinsuring direct risks in excess of our retention limits. The following table provides a summary of our primary reinsurance programs, for 2011 and 2010. Retention amounts reflect the accumulated retentions and co-participation of all layers within a program.



(In Thousands)	2011 & 2010 Reinsurance Programs
Type of Reinsurance	Stated Retention		Limits		Coverage
Casualty excess of loss	$	2,000	$	40,000	100% of $38,000
Property excess of loss	2,000		15,000		100% of $13,000
Surety excess of loss	1,500		28,000		91% of $26,500
Property catastrophe, excess	20,000		200,000		95% of $180,000
Boiler and machinery	N/A		50,000		100% of $50,000

The following table provides a summary of Mercer Insurance Group's primary reinsurance programs for 2011:



(In Thousands)	2011 Reinsurance Programs
Type of Reinsurance	Stated Retention		Limits		Coverage
Casualty excess of loss ⁽¹⁾	$	1,000	$	5,000	100% of $4,000
Property excess of loss⁽¹⁾	1,000		10,000		100% of $9,000
Umbrella excess of loss⁽¹⁾	1,000		11,000		75% of first $1,000 and 100% of remaining $9,000
Surety excess of loss	500		4,500		90% of $4,000 less $500 deductible
Property catastrophe, excess	5,000		55,000		100% of $50,000
Boiler and machinery	N/A		50,000		100% of $50,000

(1) On August 1, 2011, Mercer Insurance Group's property and casualty reinsurance retention and limits were changed to match the rest of the property and casualty insurance segment.

If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance program, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are required to pay the reinsurers a reinstatement premium equal to the full amount of the original premium, which will reinstate the full amount of reinsurance available under the property catastrophe program.

Life Insurance Segment

Ceded and Assumed Reinsurance

United Life purchases reinsurance to limit the dollar amount of any one risk of loss. Beginning in 2011, our retention on standard individual life cases is $300,000. Our accidental death benefit rider on an individual policy is reinsured at 100 percent, up to a maximum benefit of $250,000. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50.0 percent. Catastrophe excess reinsurance coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1,000,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000,000. We supplement this coverage when appropriate with “known concentration” coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (stated retention limit) and a maximum payout.

Premiums and losses and loss settlement expenses related to our ceded business is as follows:



(In Thousands)
Years Ended December 31	2011		2010		2009
Ceded Business
Ceded insurance in-force	$	974,556	$	959,145	$	910,775
Ceded premiums earned	2,318		2,123		1,935
Loss and loss settlement expenses ceded	3,786		3,072		809

The ceding of insurance does not legally discharge United Life from primary liability under its policies. United Life must pay the loss if the reinsurer fails to meet its obligations. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable. We believe that all of our reinsurers are in an acceptable financial condition. Approximately 99.0 percent of ceded life insurance in force as of December 31, 2011, has been ceded to five reinsurers.