UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2016
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______

Commission File Number: 001-37848
 

KINSALE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
98-0664337
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

2221 Edward Holland Drive, Suite 600
Richmond, VA 23230
(Address of principal executive offices)
 
 (804) 289-1300
 (Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
   
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes       No 

Number of shares of the registrant’s common shares outstanding at November 8, 2016: 20,968,707
 


KINSALE CAPITAL GROUP, INC.

TABLE OF CONTENTS
 
   
Page
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
 
2
 
3
 
4
 
5
 
6
Item 2.
25
Item 3.
48
Item 4.
49
     
PART II. OTHER INFORMATION
 
     
Item 1.
50
Item IA.
50
Item 2.
50
Item 6.
50
     
51
     
52
 
PART 1. FINANCIAL INFORMATION

Item 1.
Financial Statements

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
 
   
September 30,
2016
   
December 31,
2015
 
   
(in thousands, except share and per
share data)
 
Assets
           
Fixed maturity securities available-for-sale, at fair value (amortized cost: $391,659 in 2016; $326,953 in 2015)
 
$
398,779
   
$
327,602
 
Equity securities available-for-sale, at fair value (cost: $14,487 in 2016; $12,184 in 2015)
   
17,788
     
14,240
 
Short-term investments
   
254
     
2,299
 
Total investments
   
416,821
     
344,141
 
Cash and cash equivalents
   
103,757
     
24,544
 
Investment income due and accrued
   
1,833
     
1,844
 
Premiums receivable, net
   
15,483
     
15,550
 
Receivable from reinsurers
   
7,306
     
11,928
 
Reinsurance recoverables
   
77,610
     
95,670
 
Ceded unearned premiums
   
24,143
     
39,329
 
Deferred policy acquisition costs, net of ceding commissions
   
5,558
     
 
Intangible assets
   
3,538
     
3,538
 
Deferred income tax asset, net
   
4,940
     
6,822
 
Other assets
   
2,282
     
1,912
 
Total assets
 
$
663,271
   
$
545,278
 
Liabilities and Stockholders’ Equity
               
Reserves for unpaid losses and loss adjustment expenses
 
$
253,458
   
$
219,629
 
Unearned premiums
   
88,276
     
81,713
 
Funds held for reinsurers
   
52,545
     
87,206
 
Payable to reinsurers
   
3,914
     
3,833
 
Accounts payable and accrued expenses
   
6,239
     
7,410
 
Deferred policy acquisition costs, net of ceding commissions
   
     
1,696
 
Note payable
   
27,223
     
29,603
 
Other liabilities
   
21,732
     
737
 
Total liabilities
   
453,387
     
431,827
 
Stockholders’ equity:
               
Class A common stock, $0.0001 par value, none authorized, issued or outstanding as of September 30, 2016; 15,000,000 shares authorized; 13,803,183 shares issued and outstanding as December 31, 2015
   
     
1
 
Class B common stock, $0.0001 par value, none authorized, issued or outstanding as of September 30, 2016; 3,333,333 shares authorized; 1,513,592 shares issued and outstanding as of December 31, 2015
   
     
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 20,968,707 shares issued and outstanding as of September 30, 2016; none authorized, issued or outstanding as of December 31, 2015
   
210
     
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued or outstanding as of September 30, 2016; none authorized, issued or outstanding as of December 31, 2015
   
     
 
Additional paid-in capital
   
153,189
     
80,229
 
Retained earnings
   
47,818
     
29,570
 
Accumulated other comprehensive income
   
8,667
     
3,651
 
Stockholders’ equity
   
209,884
     
113,451
 
Total liabilities and stockholders’ equity
 
$
663,271
   
$
545,278
 
 
See accompanying notes to condensed consolidated financial statements.
 
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands, except share and per share data)
 
Revenues:
                       
Gross written premiums
 
$
47,823
   
$
45,798
   
$
141,012
   
$
131,840
 
Ceded written premiums
   
(14,177
)
   
(26,919
)
   
(23,910
)
   
(77,137
)
Net written premiums
   
33,646
     
18,879
     
117,102
     
54,703
 
Change in unearned premiums
   
(672
)
   
(600
)
   
(21,748
)
   
(2,967
)
Net earned premiums
   
32,974
     
18,279
     
95,354
     
51,736
 
Net investment income
   
1,894
     
1,436
     
5,389
     
4,027
 
Net realized investment (losses) gains
   
     
(8
)
   
383
     
8
 
Other income
   
     
128
     
136
     
443
 
Total revenues
   
34,868
     
19,835
     
101,262
     
56,214
 
Expenses:
                               
Losses and loss adjustment expenses
   
15,949
     
10,369
     
51,526
     
27,648
 
Underwriting, acquisition and insurance expenses
   
6,302
     
46
     
19,031
     
408
 
Other expenses
   
523
     
468
     
1,469
     
1,481
 
Total expenses
   
22,774
     
10,883
     
72,026
     
29,537
 
Income before income taxes
   
12,094
     
8,952
     
29,236
     
26,677
 
Total income tax expense
   
4,112
     
3,008
     
9,940
     
9,008
 
Net income
 
$
7,982
   
$
5,944
   
$
19,296
   
$
17,669
 
Other comprehensive income:
                               
Unrealized gains (losses), net of taxes of $(1) and $2,700 in 2016 and $63 and $(590) in 2015
   
(1
   
118
     
5,016
     
(1,095
)
Total comprehensive income
 
$
7,981
 
$
6,062
   
$
24,312
   
$
16,574
 
Earnings per share:
                       
Basic:
                       
Common Stock
 
$
0.24
   
$
   
$
0.24
   
$
 
Class A common stock
 
$
0.19
   
$
0.40
   
$
0.98
   
$
1.20
 
Class B common stock
 
$
0.21
   
$
0.27
   
$
0.48
   
$
0.83
 
Diluted:
                               
Common Stock
 
$
0.24
   
$
   
$
0.24
   
$
 
Class A common stock
 
$
0.19
   
$
0.40
   
$
0.98
   
$
1.20
 
Class B common stock
 
$
0.20
   
$
0.27
   
$
0.46
   
$
0.81
 
Weighted average common shares outstanding:
                               
Basic:
                               
Common Stock
   
20,656,207
     
     
20,656,207
     
 
Class A common stock
   
14,110,967
     
13,795,530
     
13,844,221
     
13,795,530
 
Class B common stock
   
1,681,685
     
1,477,800
     
1,573,702
     
1,381,055
 
Diluted:
                               
Common Stock
   
20,741,400
     
     
20,741,400
     
 
Class A common stock
   
14,110,967
     
13,795,530
     
13,844,221
     
13,795,530
 
Class B common stock
   
1,817,679
     
1,477,800
     
1,643,618
     
1,408,661
 
                                 
Cash dividends paid per common share
 
$
0.05
   
$
   
$
0.05
   
$
 
 
See accompanying notes to condensed consolidated financial statements.
 
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

   
Class A
Common
Stock
   
Class B
Common
Stock
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Compre-
hensive
Income
   
Total
Stock-
holders’
Equity
 
   
(in thousands)
 
Balance at December 31, 2014
 
$
1
   
$
   
$
   
$
80,074
   
$
7,297
   
$
5,214
   
$
92,586
 
                                                         
Stock-based compensation
   
     
     
     
60
     
     
     
60
 
                                                         
Other comprehensive loss, net of tax
   
     
     
     
     
     
(1,095
)
   
(1,095
)
                                                         
Net income
   
     
     
     
     
17,669
     
     
17,669
 
                                                         
Balance at September 30, 2015
 
$
1
   
$
   
$
   
$
80,134
   
$
24,966
   
$
4,119
   
$
109,220
 
                                                         
Balance at December 31, 2015
 
$
1
   
$
   
$
   
$
80,229
   
$
29,570
   
$
3,651
   
$
113,451
 
                                                         
Reclassification of capital structure
   
(1
)
   
     
160
     
(159
)
   
     
     
 
                                                         
Common stock issuance, net of transaction costs
   
     
     
50
     
72,791
     
     
     
72,841
 
                                                         
Stock-based compensation
   
     
     
     
328
     
     
     
328
 
                                                         
Dividends
   
     
     
     
     
(1,048
)
   
     
(1,048
)
                                                         
Other comprehensive income, net of tax
   
     
     
     
     
     
5,016
     
5,016
 
                                                         
Net income
   
     
     
     
     
19,296
     
     
19,296
 
                                                         
Balance at September 30, 2016
 
$
   
$
   
$
210
   
$
153,189
   
$
47,818
   
$
8,667
   
$
209,884
 

See accompanying notes to condensed consolidated financial statements.
 
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
 
   
Nine Months Ended September 30,
 
   
2016
   
2015
 
   
(in thousands)
 
Operating activities:
           
Net cash provided by operating activities
 
$
56,603
   
$
58,408
 
                 
Investing activities:
               
Purchase of property and equipment
   
(376
)
   
(176
)
Change in short-term investments, net
   
2,045
     
1,959
 
Securities available-for-sale:
               
Purchases – fixed maturity securities
   
(89,921
)
   
(88,053
)
Purchases – equity securities
   
(2,303
)
   
(223
)
Sales – fixed maturity securities
   
13,541
     
7,767
 
Maturities and calls – fixed maturity securities
   
30,441
     
24,641
 
Net cash used in investing activities
   
(46,573
)
   
(54,085
)
                 
Financing activities:
               
Common stock issued, net of transaction costs
   
72,841
     
 
Repayment of note payable
   
(2,500
)
   
 
Dividends paid
   
(1,048
)
   
 
Payments on capital lease
   
(110
)
   
(99
)
Net cash provided by (used in) financing activities
   
69,183
     
(99
)
Net change in cash and cash equivalents
   
79,213
     
4,224
 
Cash and cash equivalents at beginning of year
   
24,544
     
23,958
 
Cash and cash equivalents at end of period
 
$
103,757
   
$
28,182
 

See accompanying notes to condensed consolidated financial statements.
 
Kinsale Capital Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

1.
Summary of significant accounting policies

Basis of presentation

The accompanying condensed consolidated financial statements and notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated interim financial statements should be read in conjunction with the 2015 audited consolidated financial statements of Kinsale Capital Group, Inc. and its wholly owned subsidiaries (the “Company”) included in the final prospectus filed with the SEC on July 29, 2016. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All significant intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

On August 2, 2016, the Company completed its IPO of 7,590,000 shares of common stock at a price to the public of $16.00 per share. The Company issued 5,000,000 shares of common stock and the selling stockholders sold 2,590,000 shares of common stock, which included 990,000 shares sold to the underwriters pursuant to their option to purchase additional shares. See Note 6, “Stockholders’ Equity,” for further discussion.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management periodically reviews its estimates and assumptions.

Adopted accounting pronouncements

ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU was issued to simplify the accounting for share-based payment awards, including income tax consequences, statutory tax withholding requirements, forfeitures and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. Early adoption is permitted in any interim or annual reporting period. The standard requires the guidance related to forfeitures and the timing of when excess tax benefits are recognized to be applied using a modified retrospective transition method, the guidance related to the accounting for income taxes to be applied prospectively, and the guidance related to the presentation of excess tax benefits on the statement of cash flows to be applied either prospectively or retrospectively. The Company early adopted ASU 2016-09 in the third quarter of 2016 and elected to account for forfeitures as they occur. The adoption of this standard did not have a significant impact on the consolidated financial statements and related disclosures.
 
Prospective accounting pronouncements

ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts

In May 2015, the FASB issued ASU 2015-09, “Insurance (Topic 944), Disclosures about Short-Duration Contracts.” This ASU was issued to enhance disclosures about an entity’s insurance liabilities, including the nature, amount, timing and uncertainty of cash flows related to those liabilities. The new guidance requires the disclosure of the following information related to unpaid claims and claim adjustment expenses:

net incurred and paid claims development information by accident year for the number of years for which claims incurred typically remain outstanding, but need not exceed 10 years;

a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position;

for each accident year presented, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses;

for each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information; and

for all claims, the average annual percentage payout of incurred claims by age.

This ASU is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. The Company has not early-adopted this ASU and while disclosures will be increased, the Company does not believe adoption will have a material effect on its consolidated financial statements.

ASU 2016-01, Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires equity investments to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
 
ASU 2016-02, Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)” to improve the financial reporting of leasing transactions. Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future minimum lease payments taking into account renewal options (if probable of exercise) plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)” to provide more useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down.

This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.

There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company’s consolidated financial statements.
 
2.
Investments

Available-for-sale investments

The following tables summarize the Company’s available-for-sale investments:
 
   
September 30, 2016
 
   
Amortized
Cost
   
Gross
Unrealized
Holding
Gains
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
 
   
(in thousands)
 
Fixed maturities:
                       
U.S. Treasury securities and obligations of U.S. government agencies
 
$
12,407
   
$
32
   
$
   
$
12,439
 
Obligations of states, municipalities and political subdivisions
   
87,059
     
4,011
     
(126
)
   
90,944
 
Corporate and other securities
   
128,387
     
1,165
     
(193
)
   
129,359
 
Asset-backed securities
   
74,906
     
829
     
(78
)
   
75,657
 
Residential mortgage-backed securities
   
88,900
     
1,519
     
(39
)
   
90,380
 
Total fixed maturities
   
391,659
     
7,556
     
(436
)
   
398,779
 
                                 
Equity securities:
                               
Exchange traded funds
   
14,487
     
3,501
     
(200
)
   
17,788
 
Total available-for-sale investments
 
$
406,146
   
$
11,057
   
$
(636
)
 
$
416,567
 

   
December 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Holding
Gains
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
 
   
(in thousands)
 
Fixed maturities:
                       
U.S. Treasury securities and obligations of U.S. government agencies
 
$
3,422
   
$
13
   
$
(2
)
 
$
3,433
 
Obligations of states, municipalities and political subdivisions
   
69,997
     
2,562
     
(46
)
   
72,513
 
Corporate and other securities
   
130,758
     
306
     
(1,543
)
   
129,521
 
Asset-backed securities
   
58,680
     
58
     
(431
)
   
58,307
 
Residential mortgage-backed securities
   
64,096
     
760
     
(1,028
)
   
63,828
 
Total fixed maturities
   
326,953
     
3,699
     
(3,050
)
   
327,602
 
                                 
Equity securities:
                               
Exchange traded funds
   
12,184
     
2,392
     
(336
)
   
14,240
 
Total available-for-sale investments
 
$
339,137
   
$
6,091
   
$
(3,386
)
 
$
341,842
 
 
Available-for-sale securities in a loss position

The Company regularly reviews all securities with unrealized losses to assess whether the decline in the securities’ fair value is deemed to be an other-than-temporary impairment (“OTTI”). The Company considers a number of factors in completing its OTTI review, including the length of time and the extent to which fair value has been below cost and the financial condition of an issuer. In addition to specific issuer information, the Company also evaluates the current market and interest rate environment. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an OTTI, but rather a temporary decline in fair value.

For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due. When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. For equity securities, the Company considers the near-term prospects of an issuer and its ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery.

For fixed maturities where a decline in fair value is considered to be other-than-temporary and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, an impairment is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity security below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value at the security’s effective yield of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the OTTI, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the noncredit portion of the OTTI, which is recognized in other comprehensive income (loss). For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.
 
The following tables summarize gross unrealized losses and fair value for available-for-sale securities by length of time that the securities have continuously been in an unrealized loss position:
 
   
September 30, 2016
 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
 
   
(in thousands)
 
Fixed maturities:
                                   
                                     
U.S. Treasury securities and obligations of U.S. government agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
                                                 
Obligations of states, municipalities and political subdivisions
   
17,331
     
(126
)
   
     
     
17,331
     
(126
)
                                                 
Corporate and other securities
   
13,543
     
(12
)
   
15,340
     
(181
)
   
28,883
     
(193
)
                                                 
Asset-backed securities
   
3,749
     
(7
)
   
11,423
     
(71
)
   
15,172
     
(78
)
                                                 
Residential mortgage-backed securities
   
7,721
     
(20
)
   
6,811
     
(19
)
   
14,532
     
(39
)
                                                 
Total fixed maturities
   
42,344
     
(165
)
   
33,574
     
(271
)
   
75,918
     
(436
)
                                                 
Equity securities:
                                               
                                                 
Exchange traded funds
   
     
     
2,759
     
(200
)
   
2,759
     
(200
)
                                                 
Total
 
$
42,344
   
$
(165
)
 
$
36,333
   
$
(471
)
 
$
78,677
   
$
(636
)
 
As discussed above, the Company regularly reviews all securities within its investment portfolio to determine whether any impairment has occurred. At September 30, 2016, the Company held 84 fixed maturity securities with a total estimated fair value of $75.9 million and gross unrealized losses of $0.4 million. Of these securities, 28 were in a continuous unrealized loss position for greater than one year. Unrealized losses on these fixed maturity securities were caused by interest rate changes or other market factors and were not credit specific issues. At September 30, 2016, 90.5% of the Company’s fixed maturity securities were rated “A-” or better and continue to pay the expected coupon payments under the contractual terms of the securities. At September 30, 2016, the Company held one exchange traded fund (“ETFs”) with a total estimated fair value of $2.8 million and gross unrealized losses of $0.2 million, which was in a continuous unrealized loss position for greater than one year. Based on its review, the Company concluded that there were no OTTIs from fixed maturity or equity securities with unrealized losses for the nine months ended September 30, 2016.
 
   
December 31, 2015
 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
   
Estimated
Fair Value
   
Gross
Unrealized
Holding
Losses
 
   
(in thousands)
 
Fixed maturities:
                                   
                                     
U.S. Treasury securities and obligations of U.S. government agencies
 
$
2,999
   
$
(2
)
 
$
   
$
   
$
2,999
   
$
(2
)
                                                 
Obligations of states, municipalities and political subdivisions
   
844
     
(2
)
   
2,550
     
(44
)
   
3,394
     
(46
)
                                                 
Corporate and other securities
   
89,334
     
(1,515
)
   
6,978
     
(28
)
   
96,312
     
(1,543
)
                                                 
Asset-backed securities
   
30,002
     
(209
)
   
13,070
     
(222
)
   
43,072
     
(431
)
                                                 
Residential mortgage-backed securities
   
30,243
     
(434
)
   
16,072
     
(594
)
   
46,315
     
(1,028
)
                                                 
Total fixed maturities
   
153,422
     
(2,162
)
   
38,670
     
(888
)
   
192,092
     
(3,050
)
                                                 
Equity securities:
                                               
                                                 
Exchange traded funds
   
3,256
     
(331
)
   
26
     
(5
)
   
3,282
     
(336
)
                                                 
Total
 
$
156,678
   
$
(2,493
)
 
$
38,696
   
$
(893
)
 
$
195,374
   
$
(3,386
)
 
At December 31, 2015, the Company held 156 fixed maturity securities with a total estimated fair value of $192.1 million and gross unrealized losses of $3.1 million. Of those securities, 36 were in a continuous unrealized loss position for greater than one year. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. Unrealized losses of $1.1 million at December 31, 2015 were related to corporate bonds in the energy sector. At December 31, 2015, 88.1% of the Company’s fixed maturity securities were rated “A-” or better and made expected coupon payments under the contractual terms of the securities. At December 31, 2015, the Company held 5 ETFs in its equity portfolio with a total estimated fair value of $3.3 million and gross unrealized losses of $0.3 million. One of these securities was in a continuous unrealized loss position for greater than one year. Based on its review, the Company concluded that there were no OTTIs from fixed maturity or equity securities with unrealized losses at December 31, 2015.
 
Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and estimated fair value of available-for-sale fixed maturity securities at September 30, 2016 are summarized, by contractual maturity, as follows:
 
   
Amortized
Cost
   
Estimated
Fair Value
 
   
(in thousands)
 
Due in one year or less
 
$
48,080
   
$
48,139
 
Due after one year through five years
   
92,148
     
92,970
 
Due after five years through ten years
   
25,375
     
26,793
 
Due after ten years
   
62,250
     
64,840
 
Asset-backed securities
   
74,906
     
75,657
 
Residential mortgage-backed securities
   
88,900
     
90,380
 
Total fixed maturities
 
$
391,659
   
$
398,779
 
 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower.

Net investment income

The following table presents the components of net investment income:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Interest:
                       
Municipal bonds (tax exempt)
 
$
1,606
   
$
1,091
   
$
4,519
   
$
3,175
 
Taxable bonds
   
384
     
454
     
1,165
     
1,148
 
Dividends on equity securities
   
101
     
86
     
303
     
266
 
Cash, cash equivalents, and short-term investments
   
32
     
1
     
52
     
5
 
Gross investment income
   
2,123
     
1,632
     
6,039
     
4,594
 
Investment expenses
   
(229
)
   
(196
)
   
(650
)
   
(567
)
Net investment income
 
$
1,894
   
$
1,436
   
$
5,389
   
$
4,027
 
 
Realized investment gains and losses
 
There were no significant gross realized investment gains or losses for the three months ended September 30, 2016. Gross realized investment gains for the nine months ended September 30, 2016 of $0.4 million resulted from the sales of fixed maturity securities. There were no significant gross realized investment gains or losses for the three months or nine months ended September 30, 2015.

Change in net unrealized gains (losses) on investments

The following table presents the change in available-for-sale net unrealized gains (losses) by investment type:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Change in net unrealized gains (losses):
                       
Fixed maturities
 
$
(545
)
 
$
1,339
   
$
6,471
   
$
(584
)
Equity securities
   
544
     
(1,158
)
   
1,245
     
(1,101
)
Net increase (decrease)
 
$
(1
)
 
$
181
   
$
7,716
   
$
(1,685
)
 
Insurance – statutory deposits

The Company had invested assets with a carrying value of $7.4 million and $7.2 million on deposit with state regulatory authorities at September 30, 2016 and December 31, 2015, respectively.

Payable for investments purchased

The Company recorded a payable for investments purchased, not yet settled, of $19.6 million at September 30, 2016. The payable was included in the “other liabilities” line item of the balance sheet and was treated as a non-cash transaction for purposes of cash flow presentation. There were no payables for investments purchased at December 31, 2015.

3.
Fair value measurements

Fair value was estimated for each class of financial instrument for which it was practical to estimate fair value. Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. The three levels of the fair value hierarchy are described below:

The three levels of the fair value hierarchy are defined as follows:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
 
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

Fair values of the Company’s investment portfolio are estimated using unadjusted prices obtained by its investment manager from third party pricing services, where available. For securities where the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company’s investment manager. Management performs several procedures to ascertain the reasonableness of investment values included in the condensed consolidated financial statements including 1) obtaining and reviewing internal control reports from the Company’s investment manager that obtain fair values from third party pricing services, 2) discussing with the Company’s investment manager its process for reviewing and validating pricing obtained from outside pricing services and 3) reviewing the security pricing received from the Company’s investment manager and monitoring changes in unrealized gains and losses. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.

The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, by level within the fair value hierarchy.
 
   
September 30, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(in thousands)
 
Assets
                       
Fixed maturities:
                       
U.S. Treasury securities and obligations of U.S. government agencies
 
$
12,439
   
$
   
$
   
$
12,439
 
Obligations of states, municipalities and political subdivisions
   
     
90,944
     
     
90,944
 
Corporate and other securities
   
     
129,359
     
     
129,359
 
Asset-backed securities
   
     
75,657
     
     
75,657
 
Residential mortgage-backed securities
   
     
90,380
     
     
90,380
 
Total fixed maturities
   
12,439
     
386,340
     
     
398,779
 
                                 
Equity securities:
                               
Exchange traded funds
   
17,788
     
     
     
17,788
 
Short-term investments
   
     
254
     
     
254
 
Total
 
$
30,227
   
$
386,594
   
$
   
$
416,821
 
 
   
December 31, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(in thousands)
 
Assets
                       
Fixed maturities:
                       
U.S. Treasury securities and obligations of U.S. government agencies
 
$
3,433
   
$
   
$
   
$
3,433
 
Obligations of states, municipalities and political subdivisions
   
     
72,513
     
     
72,513
 
Corporate and other securities
   
     
129,521
     
     
129,521
 
Asset-backed securities
   
     
58,307
     
     
58,307
 
Residential mortgage-backed securities
   
     
63,828
     
     
63,828
 
Total fixed maturities
   
3,433
     
324,169
     
     
327,602
 
                                 
Equity securities:
                               
Exchange traded funds
   
14,240
     
     
     
14,240
 
Short-term investments
   
     
2,299
     
     
2,299
 
Total
 
$
17,673
   
$
326,468
   
$
   
$
344,141
 
 
There were no transfers into or out of Level 1 and Level 2 during the three and nine months ended September 30, 2016. There were no assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.

Due to the relatively short-term nature of cash, cash equivalents, receivables and payables, their carrying amounts are reasonable estimates of fair value. Additionally, due to variable interest rates and no change in the Company’s credit standing, the carrying value of the note payable approximates fair value as of September 30, 2016 and December 31, 2015.
 
4.
Deferred policy acquisition costs

The following table presents the amounts of policy acquisition costs deferred and amortized for the three and nine months ended September 30, 2016 and 2015:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Balance, beginning of period
 
$
5,515
   
$
(4,050
)
 
$
(1,696
)
 
$
(3,763
)
Policy acquisition costs deferred:
                               
Direct commissions
   
7,119
     
6,765
     
20,967
     
19,534
 
Ceding commissions
   
(4,918
)
   
(10,138
)
   
(7,122
)
   
(28,876
)
Other underwriting and policy acquisition costs
   
830
     
833
     
2,256
     
2,435
 
Policy acquisition costs deferred
   
3,031
     
(2,540
)
   
16,101
     
(6,907
)
Amortization of net policy acquisition costs
   
(2,988
)
   
2,309
     
(8,847
)
   
6,389
 
Balance, end of period
 
$
5,558
   
$
(4,281
)
 
$
5,558
   
$
(4,281
)
 
For the three and nine months ended September 30, 2016, the deferred ceding commissions decreased as a result of the change in the ceding percentage under the Company’s multi-line quota share reinsurance treaty (“MLQS”). The negative, or liability, balance at September 30, 2015 was also due to the effect of the deferred ceding commissions related to the MLQS. See Note 9 for further details regarding the MLQS.

5.
Underwriting, acquisition and insurance expenses

Underwriting, acquisition and insurance expenses consist of the following:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Underwriting, acquisition and insurance expenses incurred:
                       
Gross commissions
 
$
6,839
   
$
6,558
   
$
19,913
   
$
18,606
 
Ceding commissions
   
(6,473
)
   
(11,616
)
   
(17,099
)
   
(32,513
)
Other operating expenses
   
5,936
     
5,104
     
16,217
     
14,315
 
Total
 
$
6,302
   
$
46
   
$
19,031
   
$
408
 
 
Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $5.1 million and $4.2 million for the three months ended September 30, 2016 and 2015. Salaries, bonus and employee benefits expenses were $13.9 million and $11.8 million for the nine months ended September 30, 2016 and 2015.
 
6.
Stockholders’ Equity

Amendment of Certificate of Incorporation and Reclassification of Common Stock

At December 31, 2015, the Company was authorized to issue 18,333,333 shares of Common Stock, $0.0001 par value per share (“Common Stock”), of which 15,000,000 shares were designated as Class A Common Voting Shares (“Class A Common Stock”) and 3,333,333 were designated as Class B Common Non-Voting Shares (“Class B Common Stock”). On July 28, 2016, in connection with the initial public offering (the “IPO”), the Company amended and restated its certificate of incorporation to recapitalize the Company’s authorized capital stock to consist of 400,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

In addition, the amended and restated certificate of incorporation provided for automatic reclassification of the Company’s Class A Common Stock and Class B Common Stock into a single class of common stock. All shares of Class A Common Stock were reclassified into 14,682,671 shares of common stock, which were equal to the sum of:

the number of shares of common stock equal to the amount of accrued and unpaid dividends based on a reclassification date of July 28, 2016, or $90.3 million, divided by the IPO price of $16.00 per share, plus

the number of shares of common stock equal to a conversion ratio of 0.65485975, calculated based on the IPO price of $16.00 per share.

On July 28, 2016, the Company had outstanding grants of 1,783,858 restricted shares of Class B Common Stock. At that date, all restricted shares of Class B Common Stock were reclassified into 1,286,036 shares of common stock equal to a conversion ratio of 0.72095061. The conversion ratio was calculated based on the IPO price of $16.00 per share.

All fractional shares resulting from the reclassification of Class A Common Stock and Class B Common Stock into a single class of common stock were settled in cash.

Initial Public Offering

On August 2, 2016, the Company completed its IPO of 7,590,000 shares of common stock at a price to the public of $16.00 per share. The Company issued 5,000,000 shares of common stock and the selling stockholders sold 2,590,000 shares of common stock, which included 990,000 shares sold to the underwriters pursuant to the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and offering expenses, the Company received net proceeds from the offering of approximately $72.8 million. The Company did not receive any net proceeds from the sale of shares of common stock by the selling stockholders. The issuance of common stock by the Company and the related net proceeds were recorded in the consolidated financial statements on August 2, 2016, the closing date of the IPO.

Changes in the shares of common stock for the nine months ended September 30, 2016 were as follows:
 
   
Class A
Common Stock
   
Class B
Common Stock
   
Common Stock
 
Shares outstanding at beginning of year
   
13,803,183
     
1,513,592
     
 
Share dividend
   
8,617,963
     
     
 
Reclassification of capital structure
   
(22,421,146
)
   
(1,783,858
)
   
15,968,707
 
Common stock issuance, net of transaction costs
   
     
     
5,000,000
 
Stock-based compensation
   
     
270,266
     
 
Shares outstanding at September 30, 2016
   
     
     
20,968,707
 
 
Equity-based Compensation
 
On July 27, 2016, the Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (the “2016 Incentive Plan”), became effective. The 2016 Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards to directors, officers and other employees, as well as independent contractors or consultants providing consulting or advisory services to the Company. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832. On July 27, 2016, the Board of Directors approved, and the Company granted, 1,036,916 stock options with an exercise price equal to the IPO price of $16.00 per share. The options have a maximum contractual term of 10 years and will vest in 4 equal annual installments following the date of the grant.

The weighted average fair market value of options granted as of September 30, 2016 was $2.71 per share. The value of the options granted was estimated at the date of grant using the Black-Scholes pricing model using the following assumptions:
 
Risk-free rate of return
   
1.26
%
Dividend yield
   
1.25
%
Expected share price volatility (1)
   
18.50
%
Expected life (2)
 
6.3 years
 
 
(1) Expected volatility was based on the Company’s competitors within the industry.

(2) Expected life was calculated using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period, as the Company does not have sufficient historical data for determining the expected term of our stock option awards.

As discussed above, prior to the IPO the Company had granted certain employees 1,783,858 shares of restricted Class B Common Stock under the 2010 Incentive Plan. In connection with the reclassification, all unvested shares of Class B Common Stock were immediately vested and reclassified into a single class of common stock. The 2010 Incentive Plan was then terminated upon the completion of the IPO. The Company recognized equity-based compensation of $0.3 million and $0.1 million during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, total unrecognized compensation expense related to non-vested stock awards was $2.5 million.

Dividend Declaration

On August 30, 2016, the Company’s Board of Directors declared a cash dividend of $0.05 per share of common stock. This dividend was payable on September 30, 2016 to all stockholders of record on September 15, 2016.

On November 8, 2016, the Company’s Board of Directors declared a cash dividend of $0.05 per share of common stock. This dividend is payable on December 15, 2016 to all stockholders of record on December 1, 2016.
 
7.
Earnings per share

The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the consolidated financial statements:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands, except share and per share data)
 
Earnings allocable to Common stockholders
 
$
4,911
   
$
   
$
4,911
   
$
 
Earnings allocable to Class A stockholders
 
$
2,716
   
$
5,551
   
$
13,625
   
$
16,522
 
Earnings allocable to Class B stockholders
 
$
355
   
$
393
   
$
760
   
$
1,147
 
Basic earnings per share:
                               
Common stock
 
$
0.24
   
$
   
$
0.24
   
$
 
Class A common stock
 
$
0.19
   
$
0.40
   
$
0.98
   
$
1.20
 
Class B common stock
 
$
0.21
   
$
0.27
   
$
0.48
   
$
0.83
 
Diluted earnings per share:
                               
Common stock
 
$
0.24
   
$
   
$
0.24
   
$
 
Class A common stock
 
$
0.19
   
$
0.40
   
$
0.98
   
$
1.20
 
Class B common stock
 
$
0.20
   
$
0.27
   
$
0.46
   
$
0.81
 
Basic weighted average shares outstanding:
                               
Common stock
   
20,656,207
     
     
20,656,207
     
 
Class A common stock
   
14,110,967
     
13,795,530
     
13,844,221
     
13,795,530
 
Class B common stock
   
1,681,685
     
1,477,800
     
1,573,702
     
1,381,055
 
Dilutive effect of shares issued under stock compensation arrangements:
                               
Common stock
   
85,193
     
     
85,193
     
 
Class A common stock
   
     
     
     
 
Class B common stock
   
135,994
     
     
69,916
     
27,606
 
Diluted weighted average shares outstanding:
                               
Common stock
   
20,741,400
     
     
20,741,400
     
 
Class A common stock
   
14,110,967
     
13,795,530
     
13,844,221
     
13,795,530
 
Class B common stock
   
1,817,679
     
1,477,800
     
1,643,618
     
1,408,661
 
 
Prior to the reclassification of common stock on July 28, 2016, all of the earnings of the Company were allocated to Class A and Class B common stock and earnings per share was calculated using the two-class method. Under the two-class method, earnings attributable to Class A and Class B common stockholders was determined by allocating undistributed earnings to each class of stock. The undistributed earnings attributable to common stockholders was allocated based on the contractual participation rights of the Class A common stock and Class B common stock as if those earnings for the period had been distributed. Earnings attributable to Class A common stockholders equaled the sum of dividends at the rate per annum of 12% compounding annually during the period (“Accruing Dividends”) plus seventy-five percent of any remaining assets of the Company available for distribution to its stockholders in the event of a liquidation, dissolution, winding up or sale of the Company after payment of the Accruing Dividends (“Residual Proceeds”). Earnings attributable to Class B common stockholders equaled twenty-five percent of the Residual Proceeds. After the reclassification of common stock on July 28, 2016, all of the earnings of the Company were attributable to the single class of common stock.
 
Basic earnings per share for each class of common stock was computed by dividing the earnings attributable to the common stockholders by the weighted average number of shares of each respective class of common stock outstanding during the period. Diluted earnings per share attributable to each class of common stock was computed by dividing earnings attributable to common stockholders by the weighted average shares outstanding for each respective class of common stock outstanding during the period, including potentially dilutive shares of common stock for the period determined using the treasury stock method. There were no potentially dilutive shares attributable to Class A common stockholders. For purposes of the diluted earnings per share attributable to Class B common stockholders calculation, unvested restricted grants of common stock were considered to be potentially dilutive shares of common stock. There were no material anti-dilutive Class B shares for the three months and nine months ended September 30, 2015. See Note 6 for details regarding changes to the Company’s capital structure on July 28, 2016.

There were no anti-dilutive stock options for the three months and nine months ended September 30, 2016.

8.
Reserves for unpaid losses and loss adjustment expenses

The following table presents a reconciliation of consolidated beginning and ending reserves for unpaid losses and loss adjustment expenses:
 
   
Nine Months Ended
September 30,
 
   
2016
   
2015
 
   
(in thousands)
 
Net reserves for unpaid losses and loss adjustment expenses, beginning of year
 
$
124,126
   
$
91,970
 
Commutation of MLQS
   
24,296
     
8,587
 
Adjusted net reserves for losses and loss adjustment expenses, beginning of year
   
148,422
     
100,557
 
Incurred losses and loss adjustment expenses:
               
Current year
   
60,392
     
36,172
 
Prior years
   
(8,866
)
   
(8,524
)
Total net losses and loss adjustment expenses incurred
   
51,526
     
27,648
 
                 
Payments:
               
Current year
   
2,260
     
1,275
 
Prior years
   
21,693
     
12,208
 
Total payments
   
23,953
     
13,483
 
                 
Net reserves for unpaid losses and loss adjustment expenses, end of period
   
175,995
     
114,722
 
                 
Reinsurance recoverable on unpaid losses
   
77,463
     
87,369
 
                 
Gross reserves for unpaid losses and loss adjustment expenses, end of period
 
$
253,458
   
$
202,091
 
 
During the nine months ended September 30, 2016, $8.9 million of redundancy developed on the reserves for unpaid losses and loss adjustment expenses held at December 31, 2015. This favorable development was primarily attributable to loss experience in the Company’s casualty lines for accident years 2014 and 2015, which was below the Company’s initial expected loss ratios.

During the nine months ended September 30, 2015, $8.5 million of redundancy developed on the reserves for unpaid losses and loss adjustment expenses held at December 31, 2014. The favorable development was attributable primarily to loss experience in the Company’s casualty lines for accident years 2013 and 2014, which was below the Company’s initial expected loss ratios.

See Note 9 for further details regarding the commutation of the MLQS.

9.
Reinsurance

The following table summarizes the effect of reinsurance on premiums written and earned:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Written:
                       
Direct
 
$
47,823
   
$
45,798
   
$
140,974
   
$
131,696
 
Assumed
   
     
     
38
     
144
 
Ceded
   
(14,177
)
   
(26,919
)
   
(23,910
)
   
(77,137
)
Net written
 
$
33,646
   
$
18,879
   
$
117,102
   
$
54,703
 
                                 
Earned:
                               
Direct
 
$
46,418
   
$
44,082
   
$
134,405
   
$
125,287
 
Assumed
   
10
     
36
     
44
     
111
 
Ceded
   
(13,454
)
   
(25,839
)
   
(39,095
)
   
(73,662
)
Net earned
 
$
32,974
   
$
18,279
   
$
95,354
   
$
51,736
 
 
Incurred losses and loss adjustment expenses were net of reinsurance (ceded incurred losses and loss adjustment expenses) of $3.1 million and $10.2 million for the three months ended September 30, 2016 and 2015, respectively. Ceded incurred losses and loss adjustment expenses were $10.9 million and $31.8 million for the nine months ended September 30, 2016 and 2015 respectively. At September 30, 2016, reinsurance recoverables on paid and unpaid losses were $0.1 million and $77.5 million, respectively. At December 31, 2015, reinsurance recoverables on paid and unpaid losses were and $0.2 million and $95.5 million, respectively.

Multi-line quota share reinsurance

The Company participates in a MLQS treaty that transfers a proportion of the risk related to certain lines of business written by its subsidiary, Kinsale Insurance Company, an Arkansas insurance company (“Kinsale Insurance”), to reinsurers in exchange for a proportion of the direct written premiums on that business. Under the terms of the MLQS covering the period January 1, 2015 to December 31, 2015 (the “2015 MLQS”), Kinsale Insurance 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 2015 MLQS contract includes a sliding scale commission provision that can adjust the ceding commissions within a range of 25% to 41% based on the loss experience of the business ceded. The 2015 MLQS ceding percentage during the first nine months of 2015 was 50%. The ceding percentage remained at 50% until October 1, 2015, at which time the Company decreased the percentage to 40%. Effective January 1, 2016, the Company further reduced the ceding percentage from 40% to 15%. The change in the ceding percentage reduced ceded written premiums by $17.0 million at January 1, 2016, with a corresponding reduction to ceded unearned premiums.
 
Effective January 1, 2016, the Company commuted the MLQS covering the period January 1, 2014 to December 31, 2014 (the “2014 MLQS”). The commutation reduced reinsurance recoverables on unpaid losses and receivable from reinsurers by $34.2 million at January 1, 2016, with a corresponding reduction to funds held for reinsurers. Effective January 1, 2015, the Company commuted 55% of the treaty covering the period July 1, 2012 to December 31, 2013 (the “2013 MLQS”). The commutation reduced reinsurance recoverables on unpaid losses and receivable from reinsurers by $11.9 million at January 1, 2015, with a corresponding reduction to funds held for reinsurers. The commutations did not have any effect on the Company’s results of operations or cash flows for the applicable periods.

Effective October 1, 2016, the Company terminated and commuted the MLQS covering the period January 1, 2016 to September 30, 2016 (the “2016 MLQS”). The commutation will reduce reinsurance recoverables on unpaid losses and receivable from reinsurers by approximately $15.5 million on October 1, 2016, with a corresponding reduction to funds held for reinsurers.

10.
Credit Agreement

The Company has a loan and security agreement (the “Credit Agreement”) with The PrivateBank and Trust Company (“PrivateBank”) with a five-year secured term loan in the amount of $30.0 million. Pursuant to the terms of the Credit Agreement, the applicable interest rate on the term loan accrues daily at a rate equal to the 3 month LIBOR plus a margin, and is payable on the last day of each calendar quarter. The term loan has a maturity of December 4, 2020. The Company’s wholly-owned subsidiaries, Kinsale Management, Inc. (“Kinsale Management”) and Aspera Insurance Services Inc. (“Aspera”), are guarantors of the term loan. The assets of Kinsale Management and the stock of Kinsale Insurance have been pledged as collateral to PrivateBank.

On June 28, 2016, the Company amended and restated its Credit Agreement to, among other things, (1) increase the materiality thresholds and grace periods for events of default thereunder, (2) add additional permitted categories to the debt, lien, restricted payments, mergers, disposals, transactions with affiliates and investment covenants, as well as to increase the general permitted baskets under the debt, lien, restricted payments and investment covenants, (3) remove certain representations and warranties and affirmative covenants, (4) add materiality qualifiers to certain representations and warranties, (5) add reinvestment rights and a minimum threshold with respect to net cash proceeds of certain asset disposals (other than disposals of the stock of Kinsale Insurance, which has been pledged as collateral to PrivateBank) which must be used to prepay the outstanding term loans and (6) make the creation and perfection requirements with respect to collateral less onerous.

On September 30, 2016, the Company repaid $2.5 million of the term loan.
 
11.
Other comprehensive income (loss)

The following table summarizes the components of other comprehensive income (loss):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Unrealized gains (losses) arising during the period, before income taxes
 
$
(2
)
 
$
177
   
$
8,077
   
$
(1,673
)
Income taxes
   
1
     
(61
)
   
(2,826
)
   
586
 
Unrealized gains (losses) arising during the period, net of income taxes
   
(1
)
   
116
     
5,251
     
(1,087
)
Less reclassification adjustment:
                               
Net realized investment gains (losses)
   
     
(4
)
   
361
     
12
 
Income taxes
   
     
2
     
(126
)
   
(4
)
Reclassification adjustment included in net income
   
     
(2
)
   
235
     
8
 
Other comprehensive income (loss)
 
$
(1
)
 
$
118
   
$
5,016
   
$
(1,095
)
 
The sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to realized gains or losses in current period earnings. The related tax effect of the reclassification adjustment is recorded in income tax expense in current period earnings. See Note 2 for additional information.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in “Risk Factors” in this Quarterly Report on Form 10-Q (this “Quarterly Report”). Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2016, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in the final prospectus filed with the Securities and Exchange Commission (“SEC”) on July 29, 2016.

References to the “Company,” “we,” “us,” and “our” are to Kinsale Capital Group, Inc. and its subsidiaries, unless the context otherwise requires.

Overview

Founded in 2009, we are an established and growing specialty insurance company. We focus exclusively on the excess and surplus lines (“E&S”) market in the U.S., where we can use our underwriting expertise to write coverages for hard-to-place small business risks. We market and sell these insurance products in all 50 states and the District of Columbia through a network of independent insurance brokers.

We have one reportable segment, our Excess and Surplus Lines Insurance segment, which offers property and casualty (“P&C”) insurance products through the E&S market. For the first nine months of 2016, the percentage breakdown of our gross written premiums was 93.6% casualty and 6.4% property. Our commercial lines offerings include construction, small business, excess casualty, general casualty, energy, professional liability, life sciences, product liability, allied health, health care, commercial property, management liability, environmental, inland marine, commercial insurance and public entity. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 3.5% of our gross written premiums in the first nine months of 2016.

Factors affecting our results of operations

The MLQS

Historically, a significant amount of our business had been reinsured through our MLQS with third-party reinsurers. This agreement allowed us to cede a portion of the risk related to certain of the insurance that we underwrite in exchange for a portion of our direct written premiums on that business, less a ceding commission. The MLQS was subject to annual renewal; however, we retained the rights to adjust the amount of business we ceded on a quarterly basis in accordance with the terms of the MLQS. We continually monitored the ceding percentage under the MLQS and adjusted this percentage based on our projected direct written premiums. The counterparties under the MLQS for calendar year 2016 were Tokio Millennium Re AG (40%), Munich Reinsurance America, Inc. (32.5%), Everest Reinsurance Co. (20%) and Berkley Insurance Co. (7.5%).
 
Effective January 1, 2015, the ceding percentage under the MLQS was 50% and the provisional ceding commission rate was 41%.The ceding percentage remained at 50% until October 1, 2015, at which time we decreased the percentage to 40%, while the ceding commission rate remained at 41%. A lower ceding percentage generally results in higher net earned premiums and a reduction in ceding commissions in future periods.

Effective January 1, 2016, we reduced the ceding percentage from 40% to 15% while maintaining the provisional ceding commission rate at 41%. We reduced the ceding percentage under the MLQS as a result of Kinsale Insurance’s capital position growing more strongly from the profitability of the business relative to the growth rate of gross written premiums. Generally, we increased the ceding percentage when gross written premiums were growing more strongly relative to the growth rate of Kinsale Insurance’s capital position, and decreased the ceding percentage when Kinsale Insurance’s capital position was growing more strongly relative to the growth rate of gross written premiums. In periods of high premium rates and shortages of underwriting capacity (known as a hard market), the E&S market may grow significantly more rapidly than the standard insurance market as business may shift from the standard market to the E&S market dramatically. As a result of the successful completion of our IPO in August 2016, we terminated and commuted the 2016 MLQS contract on October 1, 2016.

The effect of the MLQS on our results of operations is primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses. The following tables summarize the effect of the MLQS on our underwriting income for the three and nine months ended September 30, 2016 and 2015:
 
   
Three Months Ended September 30, 2016
   
Three Months Ended September 30, 2015
 
($ in thousands)
 
Including
Quota
Share
   
Effect of
Quota
Share
   
Excluding
Quota
Share
   
Including
Quota
Share
   
Effect of
Quota
Share
   
Excluding
Quota
Share
 
                                     
Gross written premiums
 
$
47,823
   
$
   
$
47,823
   
$
45,798
   
$
   
$
45,798
 
Ceded written premiums
   
(14,177
)
   
(6,000
)
   
(8,177
)
   
(26,919
)
   
(19,572
)
   
(7,347
)
Net written premiums
 
$
33,646
   
$
(6,000
)
 
$
39,646
   
$
18,879
   
$
(19,572
)
 
$
38,451
 
Net retention (1)
   
70.4
%
           
82.9
%
   
41.2
%
           
84.0
%
                                                 
Net earned premiums
 
$
32,974
   
$
(5,872
)
 
$
38,846
   
$
18,279
   
$
(18,618
)
 
$
36,897
 
Losses and loss adjustment expenses
   
(15,949
)
   
1,402
     
(17,351
)
   
(10,369
)
   
8,303
     
(18,672
)
Underwriting, acquisition and insurance expenses
   
(6,302
)
   
4,234
     
(10,536
)
   
(46
)
   
9,571
     
(9,617
)
Underwriting income (2)
 
$
10,723
   
$
(236
)
 
$
10,959
   
$
7,864
   
$
(744
)
 
$
8,608
 
                                                 
Loss ratio
   
48.4
%
   
23.9
%
   
     
56.7
%
   
44.6
%
   
 
Expense ratio
   
19.1
%
   
72.1
%
   
     
0.3
%
   
51.4
%
   
 
Combined ratio
   
67.5
%
   
96.0
%
   
     
57.0
%
   
96.0
%
   
 
                                                 
Adjusted loss ratio (3)
   
     
     
44.7
%
   
     
     
50.6
%
Adjusted expense ratio (3)
   
     
     
27.1
%
   
     
     
26.1
%
Adjusted combined ratio (3)
   
     
     
71.8
%
   
     
     
76.7
%
 
   
Nine Months Ended September 30, 2016
   
Nine Months Ended September 30, 2015
 
($ in thousands)
 
Including
Quota
Share
   
Effect of
Quota
Share
   
Excluding
Quota
Share
   
Including
Quota
Share
   
Effect of
Quota
Share
   
Excluding
Quota
Share
 
                                     
Gross written premiums
 
$
141,012
   
$
   
$
141,012
   
$
131,840
   
$
   
$
131,840
 
Ceded written premiums
   
(23,910
)
   
(774
)
   
(23,136
)
   
(77,137
)
   
(55,482
)
   
(21,655
)
Net written premiums
 
$
117,102
   
$
(774
)
 
$
117,876
   
$
54,703
   
$
(55,482
)
 
$
110,185
 
Net retention (1)
   
83.0
%
           
83.6
%
   
41.5
%
           
83.6
%
                                                 
Net earned premiums