15. 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.

As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms, facilities and pooling arrangements such as the Michigan Catastrophic Claims Association (“MCCA”). The Company is subject to concentration of risk with respect to reinsurance ceded to the 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 incurred of $74.0 million and $99.9 million in 2012, $69.6 million and $122.6 million in 2011, $64.7 million and $135.6 million in 2010, respectively. MCCA, which represented 34.5% of the total reinsurance receivable balance at December 31, 2012, is the Company’s only reinsurer representing at least 10% of its reinsurance assets. Reinsurance recoverables related to MCCA were $856.3 million and $816.7 million at December 31, 2012 and 2011, 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, 2012, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.

The following table provides the effects of reinsurance. Amounts reflect activity of Chaucer since the July 1, 2011 acquisition date.


FOR THE YEARS ENDED DECEMBER 31	2012			2011			2010
(in millions)
Property and casualty premiums written:
Direct	$	4,515.1		$	3,830.9		$	3,087.9
Assumed⁽¹⁾		689.1			228.3			270.6
Ceded		(835.8	)		(465.8	)		(310.5	)
Net premiums written	$	4,368.4		$	3,593.4		$	3,048.0
Property and casualty premiums earned:
Direct	$	4,352.9		$	3,695.2		$	2,970.6
Assumed⁽¹⁾		687.0			442.6			174.8
Ceded		(800.8	)		(539.2	)		(304.4	)
Net premiums earned	$	4,239.1		$	3,598.6		$	2,841.0
Percentage of assumed to net premiums earned		16.21	%		12.30	%		6.15	%
Property and casualty losses and LAE:
Direct	$	3,251.4		$	2,723.5		$	2,001.8
Assumed⁽¹⁾		311.4			249.4			96.9
Ceded		(588.4	)		(422.1	)		(242.4	)
Net losses and LAE	$	2,974.4		$	2,550.8		$	1,856.3

(1)

Assumed reinsurance activity in 2012 and 2011 primarily related to our Chaucer segment. In addition, 2011 assumed premiums earned and assumed losses and LAE included $96.0 million and $54.2 million, respectively, related to the 2010 OneBeacon renewal rights transaction. Assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction.