Reinsurance

In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocessional agreement. A credit risk exists with ceded reinsurance to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance or retrocessional contracts. Allowances are established for amounts deemed uncollectible.

Within its underwriting operations, the Company uses reinsurance and retrocessional reinsurance to manage its net retention on individual risks and overall exposure to losses while providing it with the ability to offer policies with sufficient limits to meet policyholder needs. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. To further reduce credit exposure to reinsurance recoverable balances, the Company has received collateral, including letters of credit and trust accounts, from certain reinsurers. Collateral related to these reinsurance agreements is available, without restriction, when the Company pays losses covered by the reinsurance agreements.

Within the Company's underwriting operations, at both December 31, 2018 and 2017, balances recoverable from the ten largest reinsurers, by group, represented 61% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and collateral. At December 31, 2018, the largest reinsurance balance was due from Fairfax Financial Group and represented 9% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and collateral.

Within the Company's program services business, acquired as a part of the State National acquisition in November 2017, the Company generally enters into 100% quota share reinsurance agreements whereby the Company cedes to the capacity provider (reinsurer) substantially all of its gross liability under all policies issued by and on behalf of the Company by the general agent. The Company remains exposed to the credit risk of the reinsurer, or the risk that one of its reinsurers becomes insolvent or otherwise unable or unwilling to pay policyholder claims. This credit risk is generally mitigated by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks.

Within the Company's program services business, at December 31, 2018 and 2017, balances recoverable from the ten largest reinsurers, by group, represented 75% and 79%, respectively, of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and collateral. At December 31, 2018, the largest reinsurance balance was due from Fosun International Holdings Ltd. and represented 24% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and collateral.

The following tables summarize the effect of reinsurance and retrocessional reinsurance on premiums written and earned.



	Year Ended December 31,
	2018
(dollars in thousands)	Direct		Assumed		Ceded			Net Premiums
Underwriting:
Written	$	4,562,256	$	1,236,740	$	(1,013,406	)	$	4,785,590
Earned	$	4,384,562	$	1,291,032	$	(964,549	)	$	4,711,045
Program services:
Written	2,022,548		42,925		(2,063,485		)	1,988
Earned	1,850,656		28,581		(1,878,222		)	1,015
Consolidated:
Written	$	6,584,804	$	1,279,665	$	(3,076,891	)	$	4,787,578
Earned	$	6,235,218	$	1,319,613	$	(2,842,771	)	$	4,712,060



	Year Ended December 31,
	2017
(dollars in thousands)	Direct		Assumed		Ceded			Net Premiums
Underwriting:
Written	$	3,919,602	$	1,333,505	$	(835,320	)	$	4,417,787
Earned	$	3,777,335	$	1,286,043	$	(815,400	)	$	4,247,978
Program services:
Written	252,865		988		(253,853		)	—
Earned	291,287		1,352		(292,639		)	—
Consolidated:
Written	$	4,172,467	$	1,334,493	$	(1,089,173	)	$	4,417,787
Earned	$	4,068,622	$	1,287,395	$	(1,108,039	)	$	4,247,978



	Year Ended December 31,
	2016
(dollars in thousands)	Direct		Assumed		Ceded			Net Premiums
Underwriting:
Written	$	3,560,635	$	1,236,010	$	(795,625	)	$	4,001,020
Earned	$	3,506,687	$	1,176,205	$	(817,022	)	$	3,865,870
Program services:
Written	—		—		—			—
Earned	—		—		—			—
Consolidated:
Written	$	3,560,635	$	1,236,010	$	(795,625	)	$	4,001,020
Earned	$	3,506,687	$	1,176,205	$	(817,022	)	$	3,865,870

Substantially all of the premium written and earned in the Company's program services business for the year ended December 31, 2018 and 2017 was ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was 38%, 21% and 17% for the years ended December 31, 2018, 2017 and 2016, respectively. The percentage of consolidated assumed earned premiums to net earned premiums was 28%, 30% and 30% for the years ended December 31, 2018, 2017 and 2016, respectively.

Substantially all of the incurred losses and loss adjustment expenses in the Company's program services business, which totaled $1.3 billion, were ceded. Incurred losses and loss adjustment expenses for the Company's underwriting operations were net of ceded incurred losses and loss adjustment expenses of $710.5 million, $856.8 million and $362.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The estimated net losses and loss adjustment expenses on the 2018 and 2017 Catastrophes were net of estimated ceded losses of $244.1 million and $490.3 million, respectively.