REINSURANCE

The parties to the pooling agreement cede insurance business to other insurers in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. In its consolidated financial statements, the Company treats risks to the extent they are reinsured as though they were risks for which the Company is not liable. However, insurance ceded by the pool participants does not relieve their primary liability as the originating insurers. Employers Mutual evaluates the financial condition of the reinsurers of the parties to the pooling agreement and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize exposure to significant losses from reinsurer insolvencies.

As of December 31, 2016 and 2015, amounts recoverable from nonaffiliated reinsurers (two in 2016 and three in 2015) totaled $10.4 million and $12.7 million respectively, which represents a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses. Included in these balances are amounts due from the MRB underwriting association, of which the Company (through Employers Mutual) is a member with other unaffiliated reinsurers. All members of MRB have joint and several liability for MRB's obligations. Also included in these balances is the property and casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded by Employers Mutual to organizations on a mandatory basis. Credit risk associated with these amounts are minimal, as all companies participating in the organizations are responsible for the liabilities of the organizations on a pro rata basis.

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three years ended December 31, 2016 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.



	Year ended December 31, 2016
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	383,811		$	—		$	383,811
Assumed from nonaffiliates	4,544			146,236			150,780
Assumed from affiliates	491,315			—			491,315
Ceded to nonaffiliates	(24,346		)	(10,126		)	(34,472		)
Ceded to affiliates	(391,651		)	(5,080		)	(396,731		)
Net premiums written	$	463,673		$	131,030		$	594,703

Premiums earned
Direct	$	382,300		$	—		$	382,300
Assumed from nonaffiliates	4,444			148,851			153,295
Assumed from affiliates	483,759			—			483,759
Ceded to nonaffiliates	(23,896		)	(7,830		)	(31,726		)
Ceded to affiliates	(390,140		)	(5,080		)	(395,220		)
Net premiums earned	$	456,467		$	135,941		$	592,408

Losses and settlement expenses incurred
Direct	$	229,859		$	—		$	229,859
Assumed from nonaffiliates	2,712			93,306			96,018
Assumed from affiliates	304,007			1,811			305,818
Ceded to nonaffiliates	(4,891		)	(3,056		)	(7,947		)
Ceded to affiliates	(237,318		)	467			(236,851		)
Net losses and settlement expenses incurred	$	294,369		$	92,528		$	386,897



	Year ended December 31, 2015
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	370,955		$	—		$	370,955
Assumed from nonaffiliates	4,392			138,700			143,092
Assumed from affiliates	474,323			—			474,323
Ceded to nonaffiliates	(24,281		)	(3,369		)	(27,650		)
Ceded to affiliates	(370,955		)	(10,827		)	(381,782		)
Net premiums written	$	454,434		$	124,504		$	578,938

Premiums earned
Direct	$	366,752		$	—		$	366,752
Assumed from nonaffiliates	4,240			139,839			144,079
Assumed from affiliates	466,966			—			466,966
Ceded to nonaffiliates	(24,009		)	(5,943		)	(29,952		)
Ceded to affiliates	(366,752		)	(10,827		)	(377,579		)
Net premiums earned	$	447,197		$	123,069		$	570,266

Losses and settlement expenses incurred
Direct	$	198,504		$	—		$	198,504
Assumed from nonaffiliates	2,407			83,515			85,922
Assumed from affiliates	294,324			857			295,181
Ceded to nonaffiliates	(4,848		)	(4,897		)	(9,745		)
Ceded to affiliates	(198,504		)	(622		)	(199,126		)
Net losses and settlement expenses incurred	$	291,883		$	78,853		$	370,736



	Year ended December 31, 2014
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	367,732		$	—		$	367,732
Assumed from nonaffiliates	3,955			143,564			147,519
Assumed from affiliates	455,183			—			455,183
Ceded to nonaffiliates	(25,431		)	(14,322		)	(39,753		)
Ceded to affiliates	(367,732		)	(10,339		)	(378,071		)
Net premiums written	$	433,707		$	118,903		$	552,610

Premiums earned
Direct	$	372,658		$	—		$	372,658
Assumed from nonaffiliates	3,787			144,439			148,226
Assumed from affiliates	443,440			—			443,440
Ceded to nonaffiliates	(24,846		)	(15,759		)	(40,605		)
Ceded to affiliates	(372,658		)	(10,339		)	(382,997		)
Net premiums earned	$	422,381		$	118,341		$	540,722

Losses and settlement expenses incurred
Direct	$	227,382		$	—		$	227,382
Assumed from nonaffiliates	2,201			96,281			98,482
Assumed from affiliates	304,579			1,278			305,857
Ceded to nonaffiliates	(8,747		)	(10,838		)	(19,585		)
Ceded to affiliates	(227,382		)	720			(226,662		)
Net losses and settlement expenses incurred	$	298,033		$	87,441		$	385,474

Individual lines in the above tables are defined as follows:


•	“Direct” represents business produced by the property and casualty insurance subsidiaries.

•

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.

•

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

•

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) starting in 2016, amounts ceded to purchase additional reinsurance protection from external parties for the assumed reinsurance business.

•

“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement and amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.