5. Reinsurance Ceded

(a) Overview

Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite 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 them to increase gross premium writings and risk capacity without requiring additional capital. Although our reinsurance and insurance subsidiaries purchase reinsurance from highly-rated third party reinsurers, if the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, Alleghany’s reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of our reinsurance recoverables and Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs.

(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 December 31, 2013 and 2012 consist of the following:


	As of December 31,
	2013		2012
	(in millions)
Reinsurance recoverables on paid losses	$	61.6	$	42.7
Ceded outstanding loss and LAE		1,302.1		1,305.9

Total reinsurance recoverables	$	1,363.7	$	1,348.6

Information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of December 31, 2013 is as follows:


Reinsurer(1)	Rating(2)		Amount		Percentage
	(dollars in millions)
Swiss Reinsurance Company		A+ (Superior)	$	157.6		11.4	%
American International Group, Inc.		A (Excellent)		132.6		9.6
PartnerRe Ltd.		A+ (Superior)		107.1		7.7
Platinum Underwriters Holdings, Ltd.		A (Excellent)		94.9		6.9
Syndicates at Lloyd’s of London		A (Excellent)		93.2		6.7
W.R. Berkley Corporation		A+ (Superior)		79.2		5.7
Chubb Corporation		A+ (Superior)		73.4		5.3
Ace Ltd		A+ (Superior)		53.8		3.9
XL Group		A (Excellent)		50.7		3.7
Munich Reinsurance		A+ (Superior)		42.8		3.1
All other reinsurers				478.4		36.0

Total reinsurance recoverables(3)			$	1,363.7		100.0	%

Secured reinsurance recoverables(4)			$	152.0		11.0	%

(1)

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

(2)

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

(3)

Approximately 94.8 percent of Alleghany’s reinsurance recoverables balance as of December 31, 2013 was due from reinsurers having an A.M. Best Company, Inc. 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 December 31, 2013 and 2012.

Reinsured loss and LAE ceded included in Alleghany’s consolidated statements of earnings were $263.0 million, $290.4 million and $140.1 million for 2013, 2012 and 2011, respectively.

(c) Premiums written and earned

The following table indicates property and casualty premiums written and earned for 2013, 2012 and 2011:


	Year Ended December 31,
	2013			2012			2011
	(in millions)
Gross premiums written — direct	$	1,474.5		$	1,231.4		$	1,088.6
Gross premiums written — assumed*		3,411.8			2,991.5			52.4
Ceded premiums written*		(598.9	)		(499.0	)		(366.3	)

Net premiums written	$	4,287.4		$	3,723.9		$	774.7

Gross premiums earned — direct	$	1,372.2		$	1,161.5		$	1,069.1
Gross premiums earned — assumed*		3,459.6			3,093.5			45.9
Ceded premiums earned*		(592.6	)		(522.0	)		(367.4	)

Net premiums earned	$	4,239.2		$	3,733.0		$	747.6

Include TransRe amounts starting from the TransRe Acquisition Date. See Note 2 for additional information on TransRe.

(d) Significant Reinsurance Contracts

Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs. A discussion of the more significant programs follows.

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 will expire on April 30, 2014.

On May 1, 2013, RSUI placed its catastrophe reinsurance program for the 2013-2014 period. The 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, in excess of the $100.0 million net retention, the second layer provides coverage for $300.0 million of losses, before a 5.0 percent co-participation by RSUI, in excess of $200.0 million and the third layer provides coverage for $100.0 million of losses in excess of $500.0 million, with no co-participation by RSUI. In addition, RSUI’s property per risk reinsurance program for the 2013-2014 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.

(e) Significant Intercompany Reinsurance Contracts

In the second quarter of 2013, AIHL Re and PCC’s wholly-owned subsidiary, Pacific Compensation Insurance Company (“PCIC”), entered into an intercompany reinsurance contract, effective January 1, 2013, pursuant to which AIHL Re provides PCIC with coverage for adverse development on net loss and allocated loss adjustment expenses in excess of PCIC’s carried reserves at December 31, 2012 and accident year stop-loss coverage for any net losses and allocated loss adjustment expenses in excess of 75.0 percent of net premiums earned for PCIC for accident years 2013, 2014 and 2015. AIHL Re’s commitments also are intended to cover the statutory collateral requirements at PCIC, if and when necessary. AIHL Re’s obligations are subject to an aggregate limit of $100.0 million. In connection with such intercompany reinsurance agreement, Alleghany and AIHL Re entered into a contract whereby Alleghany will guarantee the recoverable balances owed to PCIC from AIHL Re up to $100.0 million. Subsequent to the entry into the above agreements, A.M. Best Company, Inc. upgraded PCIC’s rating to A- (Excellent) from B++ (Good). The above agreements had no impact on Alleghany’s consolidated results of operations and financial condition. From a segment reporting perspective, the financial results of AIHL Re, which are substantially attributable to its intercompany contract with PCIC, have been included in the results of PCC, with all intercompany balances eliminated.