Note 6. 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. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business. We are required to pay the losses even if the reinsurer fails to meet its obligations under the reinsurance agreement. Hurricanes Gustav and Ike in 2008 and Hurricanes Katrina and Rita in 2005 significantly increased our reinsurance recoverables which increased our credit risk.

We have established a reserve for uncollectible reinsurance in the amount of $13.0 million, which is determined by considering reinsurer specific default risk as indicated by their financial strength ratings.

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 Reinsurance 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 reinsurance recoverables of $1.05 billion as of December 31, 2011 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned premiums based on insurer financial strength ratings from A. M. Best or S&P was as follows:

	September 30,		September 30,		September 30,
				Percent of
In thousands	Rating	Fair Value⁽²⁾		Total⁽³⁾
A.M. Best Rating description ⁽¹⁾ :
Superior	A++, A+	$	535,060		51	%
Excellent	A, A-		505,314		48	%
Very good	B++, B+		552		0	%
Not rated	NR		12,472		1	%

Total		$	1,053,398		100	%

(1)	— Equivalent S&P rating used for certain companies when an A.M. Best rating was unavailable.

(2)

— Net of reserve for uncollectible reinsurance of approximately $13.0 million. The fair value consists of reinsurance recoverables on paid losses due within 30-45 days and reinsurance on unpaid losses which by nature of our reserving process is our best estimate of the value as of December 31, 2011.

(3)	— The Company holds offsetting collateral of approximately 16.8%, including 50.5% for B++ and B+ companies and 62.5% for not rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd’s Operations.

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 74.7% of the total recoverable), together with the reinsurance recoverable and collateral as of December 31, 2011, and the reinsurers’ rating from the indicated rating agency:

		September 30,		September 30,		September 30,		September 30,	September 30,	September 30,
	Reinsurance Recoverables
In thousands	Unearned Premium		Paid/Unpaid Losses		Total⁽¹⁾		Collateral Held⁽²⁾		AMB	S&P
Munich Reinsurance America Inc.	$	11,286	$	78,562	$	89,848	$	386	A+	AA-
Everest Reinsurance Company		14,528		75,094		89,622		6,634	A+	A+
Swiss Reinsurance America Corporation		4,730		84,343		89,073		8,041	A+	AA-
Transatlantic Reinsurance Company		15,177		71,530		86,707		6,416	A	A+
National Indemnity Company		15,591		37,251		52,842		5,774	A++	AA+
Partner Reinsurance Europe		7,227		32,682		39,909		20,272	A+	AA-
Berkley Insurance Company		1,755		31,278		33,033		243	A+	A+
Scor Holding (Switzerland) AG		2,234		29,822		32,056		7,754	A	A
Lloyd's Syndicate #2003		5,581		25,380		30,961		6,481	A	A+
General Reinsurance Corporation		703		27,630		28,333		852	A++	AA+
Allied World Reinsurance		6,773		20,291		27,064		2,293	A	A
Munchener Ruckversicherungs-Gesellschaft		858		25,815		26,673		6,614	A+	AA-
Ace Property and Casualty Insurance Company		1,525		22,339		23,864		—	A+	AA-
Platinum Underwriters Re		800		22,186		22,986		2,829	A	A-
White Mountains Reinsurance of America		117		22,544		22,661		96	A	A-
AXIS Re Europe		6,188		15,853		22,041		5,434	A	A+
Tower Insurance Company		8,191		12,980		21,171		1,798	A-	NR
Scor Global P&C SE		10,871		5,911		16,782		6,002	A	A
Lloyd's Syndicate #4000		1,999		13,571		15,570		1,814	A	A+
Validus Reinsurance Ltd.		3,004		12,457		15,461		9,981	A-	A-

Top 20 Total	$	119,138	$	667,519	$	786,657	$	99,714
All Others		45,024		221,717		266,741		77,717

Total	$	164,162	$	889,236	$	1,053,398	$	177,431

(1)	— Net of reserve for uncollectible reinsurance of approximately $13.0 million.

(2)	— Collateral includes letter of credit, ceded balances payable and other balances held by the Company's Insurance Companies and Lloyd’s Operations.

The largest portion of our collateral consists of letters of credit obtained from reinsurers in accordance with New York Insurance Department Regulation No. 133. This regulation requires collateral to be held by the ceding company from assuming companies 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 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 the Company. Only banks considered qualified by the NAIC may be deemed acceptable issuers of letters of credit by the New York Insurance Department. 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 counter-party 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 counter-party bank in the event such counter-party bank becomes unqualified and the reinsurer experiences significant financial deterioration or becomes insolvent. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer.

Approximately $50.9 million of the reinsurance recoverables for paid and unpaid losses as of December 31, 2011 was due from reinsurers as a result of the losses from the 2008 and 2005 Hurricanes. In addition, as of December 31, 2011, reinsurance recoverables for paid and unpaid losses of approximately $80.9 million was due from reinsurers in connection with the Deepwater Horizon incident.

The following table summarizes written premium:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	929,778		$	916,817		$	966,251
Assumed		178,438			70,384			78,667
Ceded		(354,418	)		(333,263	)		(343,663	)

Net	$	753,798		$	653,938		$	701,255

The following table summarizes earned premium:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	912,020		$	925,935		$	977,170
Assumed		125,797			72,643			78,932
Ceded		(346,172	)		(338,647	)		(372,739	)

Net	$	691,645		$	659,931		$	683,363

The following table summarizes losses and loss adjustment expenses incurred:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	608,445		$	669,949		$	625,558
Assumed		81,945			32,505			44,318
Ceded		(213,393	)		(281,299	)		(233,878	)

Net	$	476,997		$	421,155		$	435,998

We are required to pay losses in the event the assuming reinsurers are unable to meet their obligations under their reinsurance agreements. Charges for uncollectible reinsurance amounts, all of which were recorded to incurred losses, were $.05 million, $(0.8) million, and $2.0 million for 2011, 2010 and 2009, respectively.