Reinsurance Ceded

9 Months Ended

Sep. 30, 2012

Reinsurance Ceded

5. Reinsurance Ceded

(a) Overview

Alleghany reinsures portions of the risks it underwrites in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines, improve risk-adjusted portfolio returns, and enable Alleghany to increase gross premium writings and risk capacity without requiring additional capital. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, Alleghany’s reinsurance and insurance operating units would remain liable for such reinsurance portion not paid by their reinsurers.

Reinsurance contracts are typically pro rata treaties, which includes surplus share treaties, and excess-of-loss treaties. Under pro rata reinsurance, Alleghany and its reinsurers share premiums, losses and expenses in an agreed upon proportion. Excess-of-loss reinsurance provides reimbursement to Alleghany for losses in excess of a certain amount up to a predetermined limit in exchange for consideration generally based on a percentage of premiums of the individual policy or policies.

(b) Reinsurance Recoverables

Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the balance sheet as reinsurance recoverables. Such balances as of September 30, 2012 and December 31, 2011 consist of the following (in millions):

	September 30, 2012		December 31, 2011
Reinsurance recoverables on paid losses	$	39.3	$	21.0
Ceded outstanding loss and LAE		1,232.3		831.8
Total reinsurance recoverables	$	1,271.6	$	852.8

Information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of September 30, 2012 is as follows (dollars in millions):

Reinsurer(1)	Rating(2)	Amount		Percentage
Swiss Reinsurance Company	A+(Superior)	$	162.2		12.8	%
American International Group, Inc.	A (Excellent)		107.6		8.5
Platinum Underwriters Holdings, Ltd.	A (Excellent)		95.7		7.5
PartnerRe Ltd.	A+(Superior)		90.8		7.1
Syndicates at Lloyd’s of London	A (Excellent)		75.3		5.9
All other reinsurers(3)			740.0		58.2
Total reinsurance recoverables		$	1,271.6		100.0	%
Secured reinsurance recoverables(4)		$	179.9		14.1	%

(1) Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company.

(2) Represents the A.M. Best Company financial strength rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due.

(3) Approximately 92.1 percent of Alleghany’s reinsurance recoverables balance as of September 30, 2012 was due from reinsurers having an A.M. Best Company financial strength rating of “A” (Excellent) or higher.

(4) Represents reinsurance recoverables secured by funds held, trust agreements and letters of credit.

Alleghany had no allowance for uncollectible reinsurance as of September 30, 2012 or December 31, 2011.

Reinsured loss and LAE ceded included in Alleghany’s consolidated statements of earnings were $157.2 million and $84.4 million for the nine months ended September 30, 2012 and 2011, respectively.

(c) Premiums written and earned

The following table indicates property and casualty premiums written and earned for the three and nine months ended September 30, 2012 and 2011 (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross premiums written – direct	$	280.6		$	256.0		$	933.3		$	836.2
Gross premiums written – assumed*		895.8			14.4			2,145.5			44.4
Ceded premiums written*		(133.9	)		(80.5	)		(378.4	)		(279.5	)
Net premiums written	$	1,042.5		$	189.9		$	2,700.4		$	601.1
Gross premiums earned – direct	$	296.0		$	267.7		$	855.2		$	796.5
Gross premiums earned – assumed*		943.3			14.0			2,134.3			30.3
Ceded premiums earned*		(146.5	)		(91.5	)		(366.6	)		(271.7	)
Net premiums earned	$	1,092.8		$	190.2		$	2,622.9		$	555.1

* Amounts for the nine months ended September 30, 2012 include Transatlantic amounts from the Acquisition Date through September 30, 2012. See Note 2 for additional information on Transatlantic.

(d) Update to Material Reinsurance Contracts

As discussed in the 2011 10-K, RSUI reinsures its property lines of business through a program consisting of surplus share treaties, facultative placements, per risk, and catastrophe excess of loss treaties. RSUI’s catastrophe reinsurance program (which covers catastrophe risks including, among others, windstorms and earthquakes) and per risk reinsurance program run on an annual basis from May 1 to the following April 30 and thus expired on April 30, 2012.

On May 1, 2012, RSUI placed its catastrophe reinsurance program for the 2012-2013 period. The new catastrophe reinsurance program provides coverage in three layers for $500.0 million of losses in excess of a $100.0 million net retention after application of the surplus share treaties, facultative reinsurance and per risk covers. The first layer provides coverage for $100.0 million of losses, before a 60.0 percent co-participation by RSUI (compared with 47.0 percent co-participation under the expired program), in excess of the $100.0 million net retention, and the second layer provides coverage for $300.0 million of losses, before a 5.0 percent co-participation by RSUI (the same percent co-participation under the expired program), in excess of $200.0 million. RSUI expanded the new catastrophe reinsurance program to provide a new third layer of coverage of $100 million in excess of $500 million, with no co-participation by RSUI. In addition, RSUI’s property per risk reinsurance program for the 2012-2013 period provides RSUI with coverage for $90.0 million of losses, before a 10.0 percent co-participation by RSUI, in excess of a $10.0 million net retention per risk after application of the surplus share treaties and facultative reinsurance.