Reinsurance

The Company purchases reinsurance from other insurance companies ("reinsurers") in order to limit its exposure to large losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. In a reinsurance transaction, an insurance company transfers, or cedes, part or all of its exposure to the reinsurer that receives 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 policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement.

The following table summarizes the effect of reinsurance on premiums written and earned:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Written:
Direct	$	275,538		$	223,191		$	188,440
Assumed	—			—			38
Ceded	(39,924		)	(33,719		)	(21,214		)
Net written	$	235,614		$	189,472		$	167,264

Earned:
Direct	$	250,397		$	209,426		$	180,794
Assumed	—			—			53
Ceded	(37,709		)	(33,373		)	(47,031		)
Net earned	$	212,688		$	176,053		$	133,816

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $25.5 million, $12.2 million and $13.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Multi-line quota share reinsurance

Prior to 2017, the Company participated in a MLQS treaty that transferred a proportion of the risk related to certain lines of business written by its subsidiary, Kinsale Insurance, to reinsurers that received a proportion of the direct written premiums on that business. The Company's MLQS contract also reduced the amount of capital required to support the insurance operations of Kinsale Insurance. Under the terms of the MLQS contract, the Company received a provisional ceding commission and paid a reinsurance margin, as long as the reinsurers were not in a loss position on the contract. The MLQS contract included a sliding scale commission provision that reduced or increased the ceding commission based on the loss experience of the business ceded. Under the contract, the Company was entitled to an additional contingent profit commission up to an amount equal to all of the reinsurers’ profits above the margin based on the underwriting results of the business ceded, upon commutation of the contract. The contracts had a loss ratio cap of 110%, which restricted the Company from ceding any losses in excess of 110% of ceded earned premiums to the reinsurers. The Company maintained a funds-held account for the reinsurers who were a party to the MLQS contracts, which was credited with interest at a rate equal to the 10 year U.S. Treasury rate plus a spread. The funds-held account represented the excess of the ceded written premium and interest credited over ceded paid losses and LAE, the Company’s ceding commission and the reinsurers’ margin. As a result of the initial public offering, the Company terminated and commuted the MLQS contract effective October 1, 2016 and did not renew the MLQS contract for calendar year 2017 or 2018.

Under the terms of the MLQS covering calendar year 2016 (the "2016 MLQS"), the Company ceded 15% of the risk related to certain lines of business written, received a provisional ceding commission equal to 41% of ceded written premiums and paid a reinsurance margin equal to 4.00% of ceded written premium. The 2016 MLQS contract included a sliding scale commission provision that adjusted the ceding commissions within a range of 25% to 41% based on the loss experience of the business ceded.

The following table summarizes the amounts related to the MLQS contracts:



	Year Ended December 31, 2016
	(in thousands)
Ceded earned premiums	$	16,996
Ceded losses and loss adjustment expenses	4,380
Ceding commissions earned	11,936
Reinsurers' margin incurred	$	680

Commutations of the MLQS

Effective January 1, 2016, the Company commuted the 2014 MLQS, which reduced reinsurance recoverables on unpaid losses by and receivable from reinsurers by $34.2 million, with a corresponding reduction to funds held for reinsurers. Effective October 1, 2016, the Company terminated and commuted the 2016 MLQS. The commutation reduced reinsurance recoverables on unpaid losses and receivable from reinsurers by approximately $15.5 million with a corresponding reduction to funds held for reinsurers.

Effective January 1, 2017, the Company commuted the 2015 MLQS. The commutation reduced reinsurance recoverables on unpaid losses and receivable from reinsurers by approximately $36.5 million, with a corresponding reduction to funds held for reinsurers. There were no remaining MLQS contracts outstanding as of January 1, 2017.

Reinsurance balances

Credit risk exists with reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. Reinsurance recoverables for unpaid losses were $55.4 million and $48.2 million, at December 31, 2018 and 2017, respectively. Reinsurance recoverables for paid losses were $1.4 million at December 31, 2018 and 2017. Ceded unearned premiums related to reinsurance were $16.1 million and $13.9 million, at December 31, 2018 and 2017, respectively. Allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. All reinsurance receivables are from companies with A.M. Best ratings of "A" (Excellent) or better. To further reduce credit exposure to reinsurance recoverable balances, the Company has received letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. The Company has not recorded an allowance for doubtful accounts related to its reinsurance balances at December 31, 2018 and 2017 and believes this to be appropriate after consideration of all currently available information; however, the deterioration in the credit quality of existing reinsurers or disputes over reinsurance agreements could result in future charges.

At December 31, 2018, the net reinsurance receivable, defined as the sum of paid and unpaid reinsurance recoverables and ceded unearned premiums less reinsurance payables, from five reinsurers represented 92.7% of the total balance.