
	7.	Reinsurance:

We reinsure a portion of the risk we underwrite in order to control the exposure to losses and to protect capital resources. We cede to reinsurers a portion of these risks and pay premiums based upon the risk and exposure of the policies subject to such reinsurance. Ceded reinsurance involves credit risk and is generally subject to aggregate loss limits. Although the reinsurer is liable to us to the extent of the reinsurance ceded, we are ultimately liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. We monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of December 31, 2014 was with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of the last three years (in thousands):



	2014		2013		2012
Premium Written :
Direct	$	473,233	$	458,020	$	385,624
Assumed		(15)		2,007		4,218
Ceded		(148,866)		(99,262)		(57,353)
	$	324,352	$	360,765	$	332,489

Premium Earned:
Direct	$	461,367	$	434,022	$	369,735
Assumed		327		3,204		4,114
Ceded		(140,477)		(76,685)		(54,413)
	$	321,217	$	360,541	$	319,436

Reinsurance recoveries	$	99,911	$	45,456	$	29,014

Included in reinsurance recoverable on the consolidated balance sheets are paid loss recoverables of $17.0 million and $6.1 million as of December 31, 2014 and 2013, respectively.

We currently reinsure the following exposures on business generated by our business units:


		Property catastrophe. Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our commercial and personal property insurance lines. Catastrophes might include multiple claims and policyholders. Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us reinsurance coverage for losses in excess of an agreed-upon amount. We utilize catastrophe models to assist in determining appropriate retention and limits to purchase. Effective July 1, 2014 the terms of our property catastrophe reinsurance are:

	and
	o	We retain the first $3.0 million of property catastrophe losses; and


	o	Our reinsurers reimburse us 100% for any loss occurrence in excess of our $3.0 million retention up to $32.0 million for each catastrophic occurrence, subject to an aggregate limit of $64.0 million.


		Commercial property. Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results. The terms of our commercial property reinsurance are:

We retain the first $1.0 million of loss for each commercial property risk;

Our reinsurers reimburse us for the next $5.0 million for each commercial property risk, and $10.0 million for all commercial property risk involved in any one occurrence, in all cases subject to an aggregate limit of $30.0 million for all commercial property losses occurring during the treaty period; and

Individual risk facultative reinsurance is purchased on any commercial property with limits above $6.0 million.



Commercial casualty. Our commercial casualty reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event loss may have on our results. The terms of our commercial casualty reinsurance are:


	o	We retain the first $1.0 million of any commercial liability risk; and


	o	Our reinsurers reimburse us for the next $5.0 million for each commercial liability risk.


		Aviation. We purchase proportional reinsurance where we currently cede 80% of the risk to reinsurers on the aviation risks produced in all states by our Hallmark Select business unit.


		Occupational Accident. We purchase excess-of-loss reinsurance coverage for the occupational accident insurance product produced by our Standard Commercial P&C business unit. The terms of our occupational accident reinsurance are:

We retain the first $1.0 million of any occupational accident risk; and

Our reinsurers reimburse us for the next $5.0 million for each occupational accident risk up to $10.0 million for each occurrence.



Workers Compensation. We purchase excess of loss reinsurance specific to the workers compensation risks underwritten by our Workers Compensation business unit. The terms of our workers compensation reinsurance are:

		o	We retain the first $1.0 million of each workers compensation loss; and
		o	Our reinsurers reimburse us 100% for the next $14.0 million for each workers compensation loss, subject to a maximum limit of $10.0 million for any one person and an aggregate limit of $28.0 million for all workers compensation losses.

		Personal Property. Effective March 1, 2014, we purchased proportional reinsurance where we cede 80% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit. For policies written effective February 1, 2013 through February 28, 2014, we ceded 60% of these risks to reinsurers.

		Personal Auto. Effective October 1, 2014 we purchase proportional reinsurance where we cede 50% of the risks to reinsurers on the nonstandard automobile risks produced in certain states by our Personal Lines business unit. For policies written effective October 1, 2013 through September 30, 2014, we ceded 90% of these risks to reinsurers.
		Personal Auto. . Effective October 1, 2014 we purchased proportional reinsurance where we cede 50% of the risks to reinsurers on the nonstandard automobile risks produced in certain states by our Personal Lines business unit. For policies written effective October 1, 2013 through September 30, 2014, we ceded 90% of these risks to reinsurers.
		Standard Commercial P&C. We purchase proportional reinsurance where we currently cede 100% of the risks to reinsurers on the equipment breakdown coverage on our commercial multi-peril property and business owners risks and on the employment practices liability coverage on certain commercial multi-peril, general liability and business owners risks.

		Excess & Umbrella. We purchase proportional reinsurance where we currently retain 20% of each risk and cede the remaining 80% to reinsurers on the commercial umbrella and excess liability insurance produced by our Hallmark Select business unit.


	·	Professional Liability. Effective June 1, 2014, we purchased excess of loss reinsurance on our medical professional liability risks produced by our Hallmark Select business unit. The terms of our professional liability reinsurance are as follows: o We retain the first $1.0 million of any professional liability risk; and o Our reinsurers reimburse us for the next $2.0 million for each professional liability loss occurrence. Prior to June 1, 2014, we purchased proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retained 60% of each risk and ceded the remaining 40% to reinsurers.

		E&S Commercial. We purchase facultative reinsurance on our commercial umbrella and excess liability risks produced by our E&S Commercial business unit where we currently retain 10% of the first $1.0 million of risk and cede the remaining 90% to reinsurers. We currently cede to reinsurers 100% of our commercial umbrella and excess liability risks in excess of $1.0 million. Effective May 1, 2014, we purchased proportional reinsurance on the commercial auto liability risks produced by a program underwriter in our E&S Commercial business unit where we retain 20% of each risk and cede the remaining 80% to reinsurers.

		Hallmark County Mutual. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. In addition, HCM is used to front business produced by unaffiliated third parties. HCM does not retain any business.