5. REINSURANCE

In the ordinary course of business, the insurance subsidiaries assume and cede premiums and selected insured risks with other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk (known as facultative reinsurance). In addition, there are several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. The arrangements allow us to pursue greater diversification of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, we monitor the concentration of risks exposed to catastrophic events.

Through the purchase of reinsurance, we also generally limit our net loss on any individual risk to a maximum of $3.0 million, although retentions can range from $1.0 million to $11.0 million.

Premiums written and earned along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:


(in thousands)	2015		2014		2013
WRITTEN
Direct	$	819,130	$	787,267	$	770,142
Reinsurance assumed		34,456		76,581		73,053
Reinsurance ceded		(131,615)		(160,696)		(176,873)
Net	$	721,971	$	703,152	$	666,322

EARNED
Direct	$	797,180	$	781,640	$	741,569
Reinsurance assumed		35,724		72,878		78,891
Reinsurance ceded		(132,743)		(167,143)		(189,658)
Net	$	700,161	$	687,375	$	630,802

LOSSES AND SETTLEMENT EXPENSES INCURRED
Direct	$	307,445	$	315,226	$	279,358
Reinsurance assumed		23,184		61,923		72,508
Reinsurance ceded		(31,584)		(80,540)		(92,065)
Net	$	299,045	$	296,609	$	259,801

The assumed business is made up of short-tail property, casualty, catastrophe and multi-peril crop and hail reinsurance. The majority of this assumed reinsurance is proportional and a large portion of the assumed incurred losses can be attributed to crop-related reinsurance and specialty property treaties. As noted in previous filings, our portion of assumed crop reinsurance was reduced for 2015 and will end with the 2015 crop year due to the acquisition of the cedant. Losses for each crop season are ultimately determined and paid subsequent to December 31 of the crop year reinsured.

At December 31, 2015, we had prepaid reinsurance premiums and recoverables on paid and unpaid losses and settlement expenses totaling $332.9 million. More than 96 percent of our reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best and S&P rating services.

The following table displays net reinsurance balances recoverable, after consideration of collateral, from our top 10 reinsurers as of December 31, 2015. These reinsurers all have financial strength ratings of “A” or better by A.M. Best and Standard and Poor’s ratings services. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year 2015.


			Net Reinsurer				Ceded
	A.M. Best	S & P	Exposure as of		Percent of		Premiums		Percent of
(dollars in thousands)	Rating	Rating	12/31/2015		Total		Written		Total
Munich Re / HSB	A+, Superior	AA-, Very Strong	$	58,169	17.5	%	$	20,273	15.4	%
Endurance Re	A, Excellent	A, Strong		47,987	14.4	%		9,828	7.5	%
Swiss Re / Westport Ins. Corp.	A+, Superior	AA-, Very Strong		33,162	10.0	%		12,953	9.8	%
Aspen UK Ltd.	A, Excellent	A, Strong		28,754	8.6	%		5,618	4.3	%
Transatlantic Re	A, Excellent	A+, Strong		22,447	6.7	%		7,404	5.6	%
Berkley Insurance Co.	A+, Superior	A+, Strong		20,974	6.3	%		4,848	3.7	%
Scor Reinsurance Co.	A, Excellent	AA-, Very Strong		13,265	4.0	%		8,242	6.3	%
Allied World Re - US	A, Excellent	A, Strong		13,165	4.0	%		2,544	1.9	%
Axis Re	A+, Superior	A+, Strong		11,552	3.5	%		4,235	3.2	%
General Re	A++, Superior	AA+, Very Strong		11,337	3.4	%		2,702	2.1	%
All other reinsurers*				72,098	21.6	%		52,968	40.2	%
Total ceded exposure			$	332,910	100.0	%	$	131,615	100.0	%

*All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of shareholders’ equity.

Ceded unearned premiums and reinsurance balances recoverable on paid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve us of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review their annual financial statements and SEC filings for those reinsurers that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the A.M. Best and S&P ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment based analysis using the average default rating percentage by S&P rating, which assists us in assessing the sufficiency of the existing allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the remaining allowance and determine whether the balance is sufficient as detailed above and if needed, an additional allowance is recognized and income charged. The amounts of allowances for uncollectible amounts on paid and unpaid recoverables were $14.0 million and $11.9 million, respectively, at December 31, 2015. At December 31, 2014, the amounts were $13.3 million and $13.1 million, respectively. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.