Reinsurance Balances Receivable

6 Months Ended

Jun. 30, 2011

Reinsurance Balances Receivable [Abstract]

REINSURANCE BALANCES RECEIVABLE

7.   REINSURANCE BALANCES RECEIVABLE

	June 30,			December 31,
	2011			2010
Recoverable from reinsurers on:
Outstanding losses	$	454,402		$	425,336
Losses incurred but not reported		140,248			141,118
Fair value adjustments		(38,276	)		(41,014	)
Total reinsurance reserves recoverable		556,374			525,440
Paid losses		447,737			436,002
	$	1,004,111		$	961,442

The fair value adjustment, determined on acquisition of reinsurance subsidiaries, was based on the estimated timing of loss and loss adjustment expense recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the reinsurance receivables acquired plus a spread to reflect credit risk, and is amortized over the estimated recovery period, as adjusted for accelerations on commutation settlements, using the constant yield method.

The Company’s acquired reinsurance subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of reinsurance assumed. The Company remains liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, the Company evaluates and monitors concentration of credit risk among its reinsurers. Provisions are made for amounts considered potentially uncollectible.

At June 30, 2011, the Company’s top 10 reinsurers accounted for 73.9% (December 31, 2010: 75.5%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) and included $101.5 million of incurred but not reported (“IBNR”) recoverable (December 31, 2010: $99.6 million). Reinsurance recoverables by reinsurer were as follows:

	June 30, 2011					December 31, 2010
	Reinsurance		% of			Reinsurance		% of
	Recoverable		Total			Recoverable		Total
Top 10 reinsurers	$	741,837		73.9	%	$	726,201		75.5	%
Other reinsurers’ balances > $1 million		242,424		24.1	%		198,737		20.7	%
Other reinsurers’ balances < $1 million		19,850		2.0	%		36,504		3.8	%
Total	$	1,004,111		100.0	%	$	961,442		100.0	%

At June 30, 2011 and December 31, 2010, the provision for uncollectible reinsurance relating to losses recoverable was $421.5 million and $381.4 million, respectively. To estimate the provision for uncollectible reinsurance recoverables, the reinsurance recoverables are first allocated to applicable reinsurers. This determination is based on a detailed process rather than an estimate, although an element of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer.

The Company uses a detailed analysis to estimate uncollectible reinsurance. The primary components of the analysis are reinsurance recoverable balances by reinsurer and bad debt provisions applied to these balances to determine the portion of a reinsurer’s balance deemed to be uncollectible. These provisions require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer (in order to determine their ability to settle the reinsurance balances), as well as other key considerations and assumptions, such as claims and coverage issues.

As at June 30, 2011 and December 31, 2010, reinsurance receivables with a carrying value of $405.4 million and $398.8 million, respectively, were each associated with two reinsurers which represented 10% or more of total reinsurance balances receivable. As at June 30, 2011, the two reinsurers had credit ratings of AA- or higher. In the event that all or any of the reinsuring companies are unable to meet their obligations under existing reinsurance agreements, the Company will be liable for such defaulted amounts.