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 of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Alleghany’s reinsurance and insurance subsidiaries purchase reinsurance and retrocessional coverages 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 Alleghany’s 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, 2016 and 2015 consisted of the following:


	As of December 31,
	2016		2015
	($ in millions)
Reinsurance recoverables on paid losses	$	36.0	$	80.6
Ceded outstanding loss and LAE		1,236.2		1,169.3

Total	$	1,272.2	$	1,249.9

The following table presents information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of December 31, 2016:


Reinsurer⁽¹⁾	Rating⁽²⁾	Amount		Percentage
		($ in millions)
Swiss Reinsurance Company	A+(Superior)	$	172.1		13.5%
PartnerRe Ltd	A (Excellent)		116.1		9.1%
Syndicates at Lloyd’s of London	A (Excellent)		105.0		8.3%
Chubb Corporation	A++(Superior)		91.4		7.2%
RenaissanceRe Holdings Ltd	A+(Superior)		91.0		7.2%
W.R. Berkley Corporation	A+(Superior)		89.9		7.1%
Allianz SE	A+(Superior)		63.5		5.0%
Allied World Assurance Company Holdings, AG⁽³⁾	A (Excellent)		60.5		4.8%
Hannover Ruck SE	A+(Superior)		46.9		3.7%
Fairfax Financial Holdings Ltd⁽³⁾	A (Excellent)		43.6		3.4%
All other reinsurers			392.2		30.7%

Total reinsurance recoverables⁽⁴⁾		$	1,272.2		100.0%


Secured reinsurance recoverables⁽⁵⁾		$	183.3		14.4%

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

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

(3)	In December 2016, Fairfax Financial Holdings Ltd announced its agreement to acquire Allied World Assurance Company Holdings, AG.

(4)	Approximately 94 percent of our reinsurance recoverables balance as of December 31, 2016 was due from reinsurers having an A.M. Best financial strength rating of A (Excellent) or higher.

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

Alleghany had no allowance for uncollectible reinsurance as of December 31, 2016 and 2015.

Reinsured loss and LAE ceded included in Alleghany’s consolidated statements of earnings were $325.8 million, $309.6 million and $250.3 million for 2016, 2015 and 2014, respectively.

(c) Premiums Written and Earned

The following table presents property and casualty premiums written and earned for 2016, 2015 and 2014:


	Year Ended December 31,
	2016		2015		2014
	($ in millions)
Gross premiums written – direct	$	1,490.3	$	1,505.6	$	1,529.4
Gross premiums written – assumed		4,276.8		3,616.6		3,567.2
Ceded premiums written		(675.3)		(633.0)		(599.1)

Net premiums written	$	5,091.8	$	4,489.2	$	4,497.5


Gross premiums earned – direct	$	1,871.1	$	1,515.9	$	1,517.0
Gross premiums earned – assumed		3,833.9		3,403.3		3,540.5
Ceded premiums earned		(729.2)		(688.9)		(646.9)

Net premiums earned	$	4,975.8	$	4,230.3	$	4,410.6

(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 and property per risk reinsurance program run on an annual basis from May 1 to the following April 30.

RSUI’s catastrophe reinsurance program covers catastrophe risks including, among others, windstorms and earthquakes. As of December 31, 2016, the catastrophe reinsurance program consisted of three layers, with portions of the first and second layers placed on May 1, 2015 and May 1, 2016 and portions of the third layer placed on May 1, 2014 and May 1, 2016. The catastrophe reinsurance program provides coverage for $600.0 million of losses in excess of a $200.0 million net retention after application of surplus share treaties and facultative reinsurance. The first layer provides coverage for $300.0 million of losses, subject to a 5.0 percent co-participation by RSUI in excess of $200.0 million, the second layer provides coverage for $100.0 million of losses in excess of $500.0 million, with no co-participation by RSUI and the third layer provides coverage for $200.0 million of losses in excess of $600.0 million, with no co-participation by RSUI. The first and second layers of coverage include the following expiration terms: approximately 34 percent of coverage limits, which originally expired on April 30, 2016 and was renewed May 1, 2016, currently expires on April 30, 2019; approximately 33 percent of coverage limits expire on April 30, 2017; and approximately 33 percent of coverage limits expire on April 30, 2018. The third layer of coverage originally expired on April 30, 2017. However, effective May 1, 2016, approximately 39 percent of the third layer of coverage was cancelled and replaced with the same coverage for a three year period expiring on April 30, 2019. The remaining coverage limits expire on April 30, 2017.

In addition, RSUI’s property per risk reinsurance program runs on an annual basis from May 1 to the following April 30 and thus expired on April 30, 2016. On May 1, 2016, the property per risk program was renewed and the new program will expire on April 30, 2017. For the 2016 to 2017 period, RSUI’s property per risk reinsurance program provides coverage for $90.0 million of losses, subject to a 10.0 percent co-participation by RSUI, in excess of a $10.0 million net retention per risk after application of surplus share treaties and facultative reinsurance.

(e) Significant Intercompany Reinsurance Contracts

In the second quarter of 2013, AIHL Re and PacificComp’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 LAE in excess of PCIC’s carried reserves at December 31, 2012 and accident year stop-loss coverage for any net losses and allocated LAE in excess of 75.0 percent of net premiums earned for PCIC for accident years 2013 through 2017. 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.

In the third quarter of 2015, AIHL Re and CapSpecialty (specifically, the insurance subsidiaries of CapSpecialty) entered into an intercompany reinsurance contract, effective July 1, 2015, pursuant to which AIHL Re provides CapSpecialty with coverage primarily for adverse development on certain net loss and allocated LAE in excess of its carried reserves at June 30, 2015. AIHL Re’s commitments are intended to cover the statutory collateral requirements at CapSpecialty, if and when necessary, and AIHL Re’s obligations are subject to an aggregate limit of $50.0 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 CapSpecialty from AIHL Re up to $50.0 million. The above agreements had no impact on Alleghany’s consolidated results of operations and financial condition.