16. REINSURANCE

In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance transactions are accounted for in accordance with the provisions of ASC 944.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound. This belief is based upon an ongoing review of its reinsurers' financial statements, reported financial strength ratings from rating agencies, reputations in the marketplace, and the analysis and guidance of THG's reinsurance advisors.

The Company is subject to concentration of risk with respect to reinsurance ceded to various residual market mechanisms. As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms and pooling arrangements which provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily. These market mechanisms and pooling arrangements include, among others, the Michigan Catastrophic Claims Association ("MCCA"). Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. The Company ceded to the MCCA premiums earned and losses and LAE of $64.7 million and $135.6 million in 2010, $55.8 million and $97.7 million in 2009 and $60.9 million and $129.8 million in 2008, respectively. MCCA, which represented 60% of the total reinsurance receivable balance at December 31, 2010, is the Company's only reinsurer representing at least 10% of its reinsurance assets.

Reinsurance recoverables related to MCCA were $752.5 million and $672.4 million at December 31, 2010 and 2009, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2010, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.

Coincident with the sale of FAFLIC to Commonwealth Annuity on January 2, 2009. Hanover and FAFLIC entered into a reinsurance contract whereby Hanover directly assumed a portion, and reinsured the remainder, of FAFLIC's discontinued accident and health business. Additionally, during 2008 FAFLIC had ceded $106.9 million of its variable universal life insurance and annuity business pursuant to a reinsurance agreement with Commonwealth Annuity (See Note 2 – Discontinued Operations on pages 92 and 94 of this Form 10-K).

The effects of reinsurance were as follows:


FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
*(In millions)*
Property and casualty premiums written:
Direct	$	3,087.9		$	2,883.8		$	2,715.0
Assumed ⁽¹⁾		270.6			8.6			22.6
Ceded		(310.5	)		(283.7	)		(219.6	)

Net premiums written	$	3,048.0		$	2,608.7		$	2,518.0

Property and casualty premiums earned:
Direct	$	2,970.6		$	2,824.3		$	2,700.0
Assumed ⁽¹⁾		174.8			13.8			26.8
Ceded		(304.4	)		(291.7	)		(241.9	)

Net premiums earned	$	2,841.0		$	2,546.4		$	2,484.9

Property and casualty losses and LAE:
Direct	$	2,001.8		$	1,909.1		$	1,790.0
Assumed ⁽¹⁾ ⁽ ² ⁾		96.9			(11.7	)		19.2
Ceded		(242.4	)		(258.2	)		(183.0	)

Net losses and LAE	$	1,856.3		$	1,639.2		$	1,626.2

⁽ ¹ ⁾

Assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction (See Note 3 – Other Significant Transactions).

⁽ ² ⁾

Assumed reinsurance activity in 2009 primarily related to favorable reserve development on the Excess and Casualty Reinsurance Association ("ECRA") and Massachusetts Commonwealth Automobile Reinsures ("CAR") pools.