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.

We have established a reserve for uncollectible reinsurance in the amount of $11.3 million and $11.5 million as of December 31, 2013 and 2012, respectively, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings. Actual uncollectible reinsurance could potentially exceed 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 the Company’s reinsurance recoverables of $1.1 billion as of December 31, 2013 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:


		Carrying		Percent
In thousands	Rating	Value ⁽²⁾		of Total ⁽³⁾
A.M. Best Rating description ⁽¹⁾:
Superior	A++, A+	$	536,325		49	%
Excellent	A, A-		525,314		47	%
Very good	B++, B+		12,295		1	%
Fair	B, B-		23,283		2	%
Not rated	NR		11,427		1	%

Total		$	1,108,644		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 $11.3 million. The carrying 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, 2013.

(3) -

The Company holds offsetting collateral of approximately 20.2%, including 0.2% for B++, B+ and B companies and 46.7% from non rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd’s Operations.

The Company’s ceded earned premiums were $456.0 million, $396.6 million and $346.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The Company’s ceded incurred losses were $188.7 million, $262.6 million and $213.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium (constituting 76.3% of the total recoverable), together with the reinsurance recoverable and collateral as of December 31, 2013, and the reinsurers’ ratings from A.M. Best and S&P:


	Reinsurance Recoverables
	Unearned		Paid/Unpaid				Collateral
In thousands	Premium		Losses		Total ⁽¹⁾		Held ⁽²⁾		A.M. Best	S&P
National Indemnity Company		53,145		87,618		140,763		30,785	A++	AA+
Transatlantic Reinsurance Company		21,411		74,069		95,480		8,506	A	A+
Everest Reinsurance Company		21,581		68,566		90,147		7,704	A+	A+
Munich Reinsurance America Inc.		5,067		70,233		75,300		4,352	A+	AA-
Swiss Reinsurance America Corporation		5,800		68,157		73,957		9,609	A+	AA-
Lloyd’s Syndicate #2003		8,832		43,167		51,999		10,299	A	A+
Allied World Reinsurance		13,859		30,215		44,074		3,971	A	A
Partner Reinsurance Europe		10,962		29,692		40,654		17,027	A+	A+
Scor Global P&C SE		11,710		24,623		36,333		9,895	A	A+
Tower Insurance Company		—		23,283		23,283		—	B	NR
Atlantic Specialty Insurance		9,260		13,602		22,862		3,526	A	A-
Employers Mutual Casualty Company		10,738		10,796		21,534		9,709	A	NR
Validus Reinsurance Ltd.		2,403		17,308		19,711		14,501	A	A
Lloyd’s Syndicate #4000		147		19,432		19,579		407	A	A+
QBE Reinsurance Corp		7,131		11,292		18,423		1,781	A	A+
Ace Property and Casualty Insurance Company		9,862		7,687		17,549		7,342	A+	AA-
Odyssey American Reinsurance Corporation		3,550		11,997		15,547		2,175	A	A-
Berkley Insurance Company		1,983		13,439		15,422		485	A+	A+
Ironshore Indemnity Inc.		6,808		7,980		14,788		7,959	A	NR
AXIS Re Europe		4,762		9,347		14,109		3,675	A+	A+

Top 20 Reinsurers		209,011		642,503		851,514		153,708
Others		38,811		218,319		257,130		69,769

Total		247,822		860,822		1,108,644		223,477

(1) -

Net of reserve for uncollectible reinsurance of approximately $11.3 million.

(2) -

Collateral of $223.5 million consists of $167.3 million in ceded balances payable, $53.4 million in letters of credit, and $2.8 million of other balances held by the Company’s Insurance Companies and Lloyd’s Operations.

Approximately 24% 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 the 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, 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. As of December 31, 2012, the reinsurance recoverables for paid and unpaid losses due from reinsurers in connection with all catastrophic losses was $88.2 million. Included in this figure is $54.6 million for Superstorm Sandy and $15.2 million for the 2008 Hurricanes.

The following table summarizes written premium:


	Year Ended December 31,
In thousands	2013			2012			2011
Direct	$	1,127,331		$	1,034,658		$	929,778
Assumed		243,187			251,807			178,438
Ceded		(482,596	)		(452,810	)		(354,418	)

Net	$	887,922		$	833,655		$	753,798

The following table summarizes earned premium:


	Year Ended December 31,
In thousands	2013			2012			2011
Direct	$	1,069,677		$	972,844		$	912,020
Assumed		228,247			205,759			125,797
Ceded		(455,985	)		(396,639	)		(346,172	)

Net	$	841,939		$	781,964		$	691,645

The following table summarizes losses and loss adjustment expenses incurred:


	Year Ended December 31,
In thousands	2013			2012			2011
Direct	$	552,381		$	608,945		$	608,445
Assumed		155,313			151,137			81,945
Ceded		(188,733	)		(262,649	)		(213,393	)

Net	$	518,961		$	497,433		$	476,997