Reinsurance Ceded

9 Months Ended

Sep. 30, 2020

4. 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 generally purchase reinsurance and retrocessional coverages from highly- rated third-party reinsurers or on a collateralized basis. 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. A summary of the more significant programs follows.

TransRe enters into various retrocession arrangements, including property catastrophe retrocession contracts, to manage the effects of individual or aggregate exposure to losses, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns, strengthen its market position and enhance capital efficiency. These include excess-of-loss and quota share treaties in traditional rated form as well as catastrophe bonds and other collateralized insurance-linked structures. TransRe’s retrocession protections generally have a one-year term and renewal dates occur throughout the year, with the majority renewing at January 1 and June 1. The catastrophe bonds, however, have a four-year term, with maturities in 2022 and 2023.

RSUI reinsures its property lines of business through a program consisting of surplus share treaties, facultative placements, and per risk and catastrophe excess of loss treaties. RSUI’s catastrophe reinsurance program and property per risk reinsurance program each run on an annual basis from May 1 to the following April 30 and portions expired on April 30, 2020. Both programs were renewed on May 1, 2020 with substantially similar terms as the expired programs.

(b) Reinsurance Recoverables

Amounts recoverable from reinsurers are recognized in a manner consistent with the loss and loss adjustment expense (“LAE”) liabilities associated with the reinsurance placement and presented on the balance sheet as reinsurance recoverables, and are recorded after an allowance for credit losses. Reinsurance recoverable balances as of September 30, 2020 and December 31, 2019 are presented in the table below:

	As of September 30,			As of December 31,
	2020			2019
	($ in millions)
Reinsurance recoverables on paid losses	$	83.0		$	98.1
Ceded outstanding loss and LAE		1,620.9			1,583.9
Reinsurance recoverables, before allowance for credit losses		1,703.9			1,682.0
Allowance for credit losses		(6.9	)		—
Total	$	1,697.0		$	1,682.0

The following table presents information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of our reinsurers as of September 30, 2020:

Reinsurer⁽¹⁾	Rating⁽²⁾	Amount			Percentage
	($ in millions)
Syndicates at Lloyd's of London	A (Excellent)	$	143.7			8.4	%
Kane SAC Ltd, Rondout Segregated Account⁽³⁾	not rated		113.2			6.6	%
PartnerRe Ltd	A (Excellent)		110.3			6.5	%
Fairfax Financial Holdings Ltd	A (Superior)		102.5			6.0	%
RenaissanceRe Holdings Ltd	A+ (Superior)		102.2			6.0	%
Swiss Reinsurance Company	A+ (Superior)		99.8			5.9	%
Third Point Reinsurance Group	A- (Excellent)		79.9			4.7	%
W.R. Berkley Corporation	A+ (Superior)		73.5			4.3	%
Chubb	A+ (Superior)		66.6			3.9	%
Liberty Mutual Insurance Company	A (Superior)		60.4			3.5	%
All other reinsurers			751.8			44.2	%
Total reinsurance recoverables, before allowance for credit losses⁽⁴⁾		$	1,703.9			100.0	%
Allowance for credit losses			(6.9	)
Total		$	1,697.0
Secured reinsurance recoverables⁽³⁾		$	595.0			34.9	%

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

(4)

Approximately 72 percent of our reinsurance recoverables balance as of September 30, 2020 was due from reinsurers having an A.M. Best Company, Inc. financial strength rating of A (Excellent) or higher, with a majority of the other reinsurance recoverables being secured by funds held, trust agreements or letters of credit.

The following table presents a rollforward of Alleghany’s allowance for credit losses on reinsurance recoverables for the three and nine months ended September 30, 2020:

	Three Months Ended		Nine Months Ended
	September 30, 2020		September 30, 2020
Allowance for Credit Losses	($ in millions)
Beginning balance	$	6.9	$	—
Beginning balance - cumulative effect of an accounting change⁽¹⁾		—		3.3
Provision for credit losses⁽²⁾		—		3.6
Charge-offs		—		—
Recoveries		—		—
Balance as of September 30, 2020	$	6.9	$	6.9

(1)	See Note 1(c) of this Form 10-Q for further information regarding Alleghany’s adoption of new credit loss accounting guidance.

(2)	For the nine months ended September 30, 2020, primarily reflects the change in estimates of expected credit losses based on current conditions and reasonable and supportable forecasts, including estimates from the Pandemic, as defined in Note 9(a) of this Form 10-Q.