Note 6.

Ceded Reinsurance

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, and to stabilize loss ratios and underwriting results. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.

Our Company’s ceded earned premiums were $440.7 million, $456.0 million and $396.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Our Company’s ceded incurred losses were $230.2 million, $188.7 million and $262.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We have established a reserve for uncollectible reinsurance in the amount of $11.3 million as of December 31, 2014 and 2013, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings as well as additional default risk for Asbestos and Environmental related recoverables. Actual uncollectible reinsurance could exceed or be less than our estimate.

We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have a rating from A.M. Best Company (“A.M. Best”) and/or S&P of “A” or better, or an equivalent financial strength if not rated, plus at least $500 million in policyholders’ surplus. Our Reinsurance Security Committee, which is part of our Enterprise Risk Management Finance and Credit Sub-Committee, monitors the financial strength of our reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

The credit quality distribution of our Company’s reinsurance recoverables of $1.1 billion as of December 31, 2014 for ceded paid and unpaid losses and LAE and ceded unearned premiums based on insurer financial strength ratings from A.M. Best or S&P were as follows:


In thousands	Rating	Carrying Value ⁽²⁾		Percent of Total
A.M. Best Rating description ⁽¹⁾:
Superior	A++, A+	$	575,205		50	%
Excellent	A, A-		547,314		48	%
Very good	B++, B+		8,483		1	%
Fair	B, B-		—		0	%
Not rated	NR		9,694		1	%

Total		$	1,140,696		100	%


(1)	-	When an A.M. Best rating is unavailable, the equivalent S&P rating is used.
(2)	-	The carrying value is comprised of prepaid reinsurance premium as well as reinsurance recoverables on paid and unpaid losses which are net of the reserve for uncollectible reinsurance.

Our Company holds collateral of $202.0 million, which consists of $152.8 million in ceded balances payable, $43.1 million in letters of credit and $6.1 million of funds held and trust account balances, all of which are held by our Insurance Companies and Lloyd’s Operations. In total, the collateral represents 17.7% of the carrying value of the reinsurance recoverables. Collateral of $5.2 million or 53.6% of the carrying value is held for NR rated reinsurance recoverables.

The following table lists our Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium (constituting 75.7% of the total recoverable), together with the reinsurance recoverable and collateral as of December 31, 2014, and the reinsurers’ ratings from A.M. Best or S&P:


In thousands	Unearned Premium		Paid/Unpaid Losses		Total ⁽¹⁾		Collateral Held		A.M. Best	S&P
National Indemnity Company	$	25,202	$	117,562	$	142,764	$	22,069	A++	AA+
Everest Reinsurance Company		21,573		75,063		96,636		7,326	A+	A+
Swiss Reinsurance America Corporation		22,815		73,305		96,120		14,587	A+	AA-
Transatlantic Reinsurance Company		11,916		74,072		85,988		4,038	A	A+
Munich Reinsurance America Inc.		11,366		58,768		70,134		5,539	A+	AA-
Allied World Reinsurance		9,048		37,088		46,136		1,666	A	A
Lloyd’s Syndicate #2003		4,399		35,123		39,522		5,191	A	A+
Partner Reinsurance Europe		10,986		25,409		36,395		16,052	A+	A+
Employers Mutual Casualty Company		11,928		21,851		33,779		10,935	A	NR
Scor Global P&C SE		10,190		17,572		27,762		5,558	A	A+
Ace Property and Casualty Insurance Company		11,165		12,741		23,906		2,907	A++	AA
Tower Insurance Company		—		21,509		21,509		2,455	A-	NR
Aspen Insurance UK Ltd.		8,928		11,227		20,155		4,869	A	A
Ironshore Indemnity Inc.		6,234		13,395		19,629		8,645	A	NR
Validus Reinsurance Ltd.		2,020		16,873		18,893		10,975	A	A
Atlantic Specialty Insurance		2,542		15,812		18,354		—	A	A-
QBE Reinsurance Corp		2,636		15,539		18,175		—	A	A+
National Union Fire Ins.		8,067		8,459		16,526		6,158	A	A+
Endurance Reinsurance Corporation		5,695		9,936		15,631		1,337	A	A
Odyssey American Reinsurance Corporation		3,506		11,650		15,156		1,604	A	A-

Top 20	$	190,216	$	672,954	$	863,170	$	131,911
Others		47,635		229,891		277,526		70,065

Total	$	237,851	$	902,845	$	1,140,696	$	201,976

(1) - Net of reserve for uncollectible reinsurance of approximately $11.3 million.

Approximately 21% of the collateral held consists of letters of credit obtained from reinsurers in accordance with New York Insurance Regulation Nos. 20 and 133. Regulation 20 requires collateral to be held by the ceding company from reinsurers not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the letters of credit are contained in Regulation 133 and include a clean and unconditional letter of credit and an “evergreen” clause which prevents the expiration of the letter of credit without due notice to our Company. Only banks considered qualified by the National Association of Insurance Commissioners (“NAIC”) may be deemed acceptable issuers of letters. In addition, based on our credit assessment of the reinsurer, there are certain instances where we require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counterparty to our collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counterparty bank in the event such counterparty bank becomes unqualified and the reinsurer experiences significant financial deterioration. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer. In November 2010, Regulation No. 20 was amended to provide the New York Superintendent of Financial Services (the “New York Superintendent”) discretion to allow a reduction in collateral that qualifying reinsurers must post in order for New York domestic ceding insurers such as Navigators Insurance Company and Navigators Specialty Insurance Company to receive full financial statement credit. The “collateral required” percentages range from 0% – 100%, are based upon the New York Superintendent’s evaluation of a number of factors, including the reinsurer’s financial strength ratings, and apply to contracts entered into, renewed or having an anniversary date on or after January 1, 2011. In November 2011, the NAIC adopted similar amendments to its Credit for Reinsurance Model Act that would apply to certain non-U.S. reinsurers. States will have the option to retain a 100% funding requirement if they so choose and it remains to be seen whether and when states will amend their credit for reinsurance laws and regulations in accordance with such model act.

As of December 31, 2014, the reinsurance recoverables for paid and unpaid losses due from reinsurers in connection with all catastrophic losses was $43.3 million. Included in this figure is $25.4 million for Superstorm Sandy and $7.3 million for the 2008 Hurricanes. As of December 31, 2013, the reinsurance recoverables for paid and unpaid losses due from reinsurers in connection with all catastrophic losses was $46.5 million. Included in this figure is $30.7 million for Superstorm Sandy and $3.3 million for the 2008 Hurricanes.

The following table summarizes the components of Net Written Premium:


	Year Ended December 31,
In thousands	2014			2013			2012
Direct	$	1,184,538		$	1,127,331		$	1,034,658
Assumed		247,815			243,187			251,807
Ceded		(432,215	)		(482,596	)		(452,810	)

Net Written Premiums	$	1,000,138		$	887,922		$	833,655

The following table summarizes the components of Net Earned Premium:


	Year Ended December 31,
In thousands	2014			2013			2012
Direct	$	1,133,336		$	1,069,677		$	972,844
Assumed		243,215			228,247			205,759
Ceded		(440,656	)		(455,985	)		(396,639	)

Net Earned Premiums	$	935,895		$	841,939		$	781,964

The following table summarizes the components of Net Losses and LAE incurred:


	Year Ended December 31,
In thousands	2014			2013			2012
Direct	$	631,730		$	552,381		$	608,945
Assumed		143,681			155,313			151,137
Ceded		(230,182	)		(188,733	)		(262,649	)

Net Losses and LAE	$	545,229		$	518,961		$	497,433