Document
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 March 31, 2017

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
(State or other jurisdiction of
incorporation or organization)

 
98-0664337
(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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act .☒
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 May 1, 2017: 20,968,707


Table of Contents

KINSALE CAPITAL GROUP, INC.
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Item IA.
 
Item 2.
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 





1

Table of Contents

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
 
 
March 31,
2017
 
December 31,
2016
 
 
(in thousands, except share and per share data)
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost: $399,331 in 2017; $413,526 in 2016)
 
$
397,757

 
$
411,223

Equity securities available-for-sale, at fair value (cost: $17,465 in 2017; $14,350 in 2016)
 
22,410

 
18,374

Total investments
 
420,167

 
429,597

Cash and cash equivalents
 
75,556

 
50,752

Investment income due and accrued
 
2,500

 
2,293

Premiums receivable, net
 
18,696

 
16,984

Receivable from reinsurers
 

 
8,567

Reinsurance recoverables
 
40,649

 
70,317

Ceded unearned premiums
 
14,183

 
13,512

Deferred policy acquisition costs, net of ceding commissions
 
10,501

 
10,150

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
6,653

 
6,605

Other assets
 
2,012

 
2,074

Total assets
 
$
594,455

 
$
614,389

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
273,001

 
$
264,801

Unearned premiums
 
93,744

 
89,344

Payable to reinsurers
 
3,316

 
4,090

Funds held for reinsurers
 

 
36,497

Accounts payable and accrued expenses
 
3,399

 
8,752

Other liabilities
 
4,524

 
691

Total liabilities
 
377,984

 
404,175

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 20,968,707 shares issued and outstanding at March 31, 2017 and December 31, 2016

 
210

 
210

Additional paid-in capital
 
153,514

 
153,353

Retained earnings
 
58,663

 
53,640

Accumulated other comprehensive income
 
4,084

 
3,011

Stockholders’ equity
 
216,471

 
210,214

Total liabilities and stockholders’ equity
 
$
594,455

 
$
614,389


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
Gross written premiums
 
$
52,862

 
$
43,082

Ceded written premiums
 
(8,700
)
 
4,713

Net written premiums
 
44,162

 
47,795

Change in unearned premiums
 
(3,729
)
 
(17,198
)
Net earned premiums
 
40,433

 
30,597

Net investment income
 
2,286

 
1,676

Net realized investment (losses) gains
 
(32
)
 
387

Other income
 

 
58

Total revenues
 
42,687

 
32,718

 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
 
22,107

 
18,121

Underwriting, acquisition and insurance expenses
 
11,294

 
6,248

Other expenses
 

 
460

Total expenses
 
33,401

 
24,829

Income before income taxes
 
9,286

 
7,889

Total income tax expense
 
3,005

 
2,632

Net income
 
6,281

 
5,257

Other comprehensive income:
 
 
 
 
Change in unrealized gains, net of taxes of $577 in 2017 and $1,145 in 2016
 
1,073

 
2,126

Total comprehensive income
 
$
7,354

 
$
7,383

Earnings per share - basic:
 
 
 
 
Common stock
 
$
0.30

 
$

Common stock - Class A
 
$

 
$
0.37

Common stock - Class B
 
$

 
$
0.07

 
 
 
 
 
Earnings per share - diluted:
 
 
 
 
Common stock
 
$
0.29

 
$

Common stock - Class A
 
$

 
$
0.37

Common stock - Class B
 
$

 
$
0.07

 
 
 
 
 
Weighted-average shares outstanding - basic:
 
 
 
 
Common stock
 
20,969

 

Common stock - Class A
 

 
13,803

Common stock - Class B
 

 
1,531

 
 
 
 
 
Weighted-average shares outstanding - diluted:
 
 
 
 
Common stock
 
21,389

 

Common stock - Class A
 

 
13,803

Common stock - Class B
 

 
1,538


See accompanying notes to condensed consolidated financial statements.

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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
 
Shares of Class A Common Stock
 
Shares of Class B Common Stock
 
Shares of Common Stock
 
Class A Common Stock
 
Class B Common Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumu-
lated
 Other
Compre-
hensive
Income
 
Total
Stock-
holders' Equity
 
 
(in thousands)
Balance at
December 31, 2015
 
13,803

 
1,514

 

 
$
1

 
$

 
$

 
$
80,229

 
$
29,570

 
$
3,651

 
$
113,451

Stock-based compensation
 

 
21

 

 

 

 

 
7

 

 

 
7

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
2,126

 
2,126

Net income
 

 

 

 

 

 

 

 
5,257

 

 
5,257

Balance at
March 31, 2016
 
13,803

 
1,535

 

 
$
1

 
$

 
$

 
$
80,236

 
$
34,827

 
$
5,777

 
$
120,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2016
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,353

 
$
53,640

 
$
3,011

 
$
210,214

Stock-based compensation
 

 

 

 

 

 

 
161

 

 

 
161

Dividends
 

 

 

 

 

 

 

 
(1,258
)
 

 
(1,258
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
1,073

 
1,073

Net income
 

 

 

 

 

 

 

 
6,281

 

 
6,281

Balance at
March 31, 2017
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,514

 
$
58,663

 
$
4,084

 
$
216,471



See accompanying notes to condensed consolidated financial statements.


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Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
15,447

 
$
16,169

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(31
)
 
(122
)
Change in short-term investments, net
 

 
(7,684
)
Securities available-for-sale:
 
 
 
 
Purchases – fixed maturity securities
 
(6,147
)
 
(24,039
)
Purchases – equity securities
 
(3,114
)
 
(2,084
)
Sales – fixed maturity securities
 
718

 
9,328

Maturities and calls – fixed maturity securities
 
19,198

 
9,901

Net cash provided by (used in) investing activities
 
10,624

 
(14,700
)
 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid
 
(1,258
)
 

Payments on capital lease
 
(9
)
 
(33
)
Net cash used in financing activities
 
(1,267
)
 
(33
)
Net change in cash and cash equivalents
 
24,804

 
1,436

Cash and cash equivalents at beginning of year
 
50,752

 
24,544

Cash and cash equivalents at end of period
 
$
75,556

 
$
25,980



See accompanying notes to condensed consolidated financial statements.


5

Table of Contents

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 U.S. generally accepted accounting principles ("U.S. 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 2016 audited consolidated financial statements of Kinsale Capital Group, Inc. and its wholly owned subsidiaries (the "Company") included in the Annual Report on Form 10-K. 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.
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.
Prospective accounting pronouncements
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 of this ASU on its consolidated financial statements, which may introduce additional volatility in the Company's results of operations.
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 initially measured at the present value of the future minimum lease payments taking into account renewal options if applicable 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 at the inception of the lease. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A

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Table of Contents

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 as in today’s practice. 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.
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities
On March 30, 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. This ASU is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period. Upon adoption, the update will applied on a modified retrospective basis, with a cumulative-effect adjustment 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.



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Table of Contents

2.     Investments
Available-for-sale investments
The following tables summarize the Company’s available-for-sale investments at March 31, 2017 and December 31, 2016:
 
 
March 31, 2017
 
 
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
 
$
12,106

 
$
6

 
$
(22
)
 
$
12,090

Obligations of states, municipalities and political subdivisions
 
128,662

 
1,756

 
(2,574
)
 
127,844

Corporate and other securities
 
107,713

 
560

 
(154
)
 
108,119

Asset-backed securities
 
68,965

 
241

 
(218
)
 
68,988

Residential mortgage-backed securities
 
81,885

 
554

 
(1,723
)
 
80,716

Total fixed maturities
 
399,331

 
3,117

 
(4,691
)
 
397,757

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
17,465

 
4,952

 
(7
)
 
22,410

Total available-for-sale investments
 
$
416,796

 
$
8,069

 
$
(4,698
)
 
$
420,167

 
 
December 31, 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
 
$
12,106

 
$
8

 
$
(16
)
 
$
12,098

Obligations of states, municipalities and political subdivisions
 
124,728

 
1,470

 
(2,960
)
 
123,238

Corporate and other securities
 
118,473

 
550

 
(233
)
 
118,790

Asset-backed securities
 
73,317

 
241

 
(264
)
 
73,294

Residential mortgage-backed securities
 
84,902

 
585

 
(1,684
)
 
83,803

Total fixed maturities
 
413,526

 
2,854

 
(5,157
)
 
411,223

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
14,350

 
4,026

 
(2
)
 
18,374

Total available-for-sale investments
 
$
427,876

 
$
6,880

 
$
(5,159
)
 
$
429,597

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

8

Table of Contents

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 market 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 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.

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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:
 
 
March 31, 2017
 
 
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
 
$
11,975

 
$
(22
)
 
$

 
$

 
$
11,975

 
$
(22
)
Obligations of states, municipalities and political subdivisions
 
63,280

 
(2,517
)
 
3,214

 
(57
)
 
66,494

 
(2,574
)
Corporate and other securities
 
41,345

 
(114
)
 
6,962

 
(40
)
 
48,307

 
(154
)
Asset-backed securities
 
13,408

 
(194
)
 
7,267

 
(24
)
 
20,675

 
(218
)
Residential mortgage-backed securities
 
63,050

 
(1,443
)
 
7,279

 
(280
)
 
70,329

 
(1,723
)
Total fixed maturities
 
193,058

 
(4,290
)
 
24,722

 
(401
)
 
217,780

 
(4,691
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded funds
 
1,013

 
(7
)
 

 

 
1,013

 
(7
)
Total
 
$
194,071

 
$
(4,297
)
 
$
24,722

 
$
(401
)
 
$
218,793

 
$
(4,698
)
At March 31, 2017, the Company held 210 fixed maturity securities with a total estimated fair value of $217.8 million and gross unrealized losses of $4.7 million. Of these securities, 21 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all securities within its investment portfolio to determine whether any impairment has occurred. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. At March 31, 2017, 92.1% 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 March 31, 2017, the Company held three exchange traded funds ("ETFs") in its equity portfolio with a total estimated fair value of $1.0 million and gross unrealized losses of $7 thousand. None of these securities were in a continuous unrealized loss position for greater than one year. Management concluded that there were no other-than-temporary impairments from fixed maturity or equity securities with unrealized losses for the three months ended March 31, 2017.

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December 31, 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
 
$
8,980

 
$
(16
)
 
$

 
$

 
$
8,980

 
$
(16
)
Obligations of states, municipalities and political subdivisions
 
70,727

 
(2,960
)
 

 

 
70,727

 
(2,960
)
Corporate and other securities
 
50,274

 
(145
)
 
12,375

 
(88
)
 
62,649

 
(233
)
Asset-backed securities
 
14,750

 
(232
)
 
9,961

 
(32
)
 
24,711

 
(264
)
Residential mortgage-backed securities
 
65,439

 
(1,403
)
 
7,186

 
(281
)
 
72,625

 
(1,684
)
Total fixed maturities
 
210,170

 
(4,756
)
 
29,522

 
(401
)
 
239,692

 
(5,157
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded funds
 
388

 
(2
)
 

 

 
388

 
(2
)
Total
 
$
210,558

 
$
(4,758
)
 
$
29,522

 
$
(401
)
 
$
240,080

 
$
(5,159
)
At December 31, 2016, the Company held 231 fixed maturity securities with a total estimated fair value of $239.7 million and gross unrealized losses of $5.2 million. Of those securities, 24 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. At December 31, 2016, 92.6% of the Company’s fixed maturity securities were rated "A-" or better and made expected coupon payments under the contractual terms of the securities. Based on its review, the Company concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2016 experienced an other-than-temporary impairment.
Within its equity portfolio, the Company holds an ETF with exposure across developed and emerging non-U.S. equity markets around the world. This ETF had been in an unrealized loss position for greater than one year and, management concluded based upon its review, it was other-than-temporarily impaired. The Company recognized an impairment loss of $0.3 million on this fund for the year ended December 31, 2016.

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Contractual maturities of available-for-sale fixed maturity securities
The amortized cost and estimated fair value of available-for-sale fixed maturity securities at March 31, 2017 are summarized, by contractual maturity, as follows:
 
 
March 31, 2017
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
67,053

 
$
67,053

Due after one year through five years
 
56,664

 
57,157

Due after five years through ten years
 
24,556

 
25,124

Due after ten years
 
100,208

 
98,719

Asset-backed securities
 
68,965

 
68,988

Residential mortgage-backed securities
 
81,885

 
80,716

Total fixed maturities
 
$
399,331

 
$
397,757

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 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Interest:
 
 
 
 
Taxable bonds
 
$
1,537

 
$
1,389

Municipal bonds (tax exempt)
 
794

 
406

Cash, cash equivalents, and short-term investments
 
87

 
8

Dividends on equity securities
 
110

 
84

Gross investment income
 
2,528

 
1,887

Investment expenses
 
(242
)
 
(211
)
Net investment income
 
$
2,286

 
$
1,676



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Realized investment gains and losses
The following table presents realized investment gains and losses for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Realized gains:
 
 
 
 
Sales of fixed maturities
 
$

 
$
387

Total realized gains
 

 
387

 
 
 
 
 
Realized losses:
 
 
 
 
Sales of fixed maturities
 
(32
)
 

Total realized losses
 
(32
)
 

Net investment (losses) gains
 
$
(32
)
 
$
387

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 for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Change in net unrealized gains (losses):
 
 
 
 
Fixed maturities
 
$
729

 
$
2,930

Equity securities
 
921

 
341

Net increase
 
$
1,650

 
$
3,271

Insurance – statutory deposits
The Company had invested assets with a carrying value of $7.0 million on deposit with state regulatory authorities at March 31, 2017 and December 31, 2016.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $0.8 million at March 31, 2017 and $0.6 million at December 31, 2016. The payable balances were included in the "other liabilities" line item of the balance sheet and treated as a non-cash transaction for purposes of cash flow presentation. 


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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 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.

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The following tables present the balances of assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, by level within the fair value hierarchy.
 
 
March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
12,090

 
$

 
$

 
$
12,090

Obligations of states, municipalities and political subdivisions
 

 
127,844

 

 
127,844

Corporate and other securities
 

 
108,119

 

 
108,119

Asset-backed securities
 

 
68,988

 

 
68,988

Residential mortgage-backed securities
 

 
80,716

 

 
80,716

Total fixed maturities
 
12,090

 
385,667

 

 
397,757

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
22,410

 

 

 
22,410

Total
 
$
34,500

 
$
385,667

 
$

 
$
420,167

 
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
12,098

 
$

 
$

 
$
12,098

Obligations of states, municipalities and political subdivisions
 

 
123,238

 

 
123,238

Corporate and other securities
 

 
118,790

 

 
118,790

Asset-backed securities
 

 
73,294

 

 
73,294

Residential mortgage-backed securities
 

 
83,803

 

 
83,803

Total fixed maturities
 
12,098

 
399,125

 

 
411,223

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
18,374

 

 

 
18,374

Total
 
$
30,472

 
$
399,125

 
$

 
$
429,597

There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2017. There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016.
Due to the relatively short-term nature of cash and cash equivalents, receivables and payables, their carrying amounts are reasonable estimates of fair value.


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4.     Deferred policy acquisition costs
The following table presents the amounts of policy acquisition costs deferred and amortized for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Balance, beginning of period
 
$
10,150

 
$
(1,696
)
Policy acquisition costs deferred:
 
 
 
 
Direct commissions
 
7,880

 
6,400

Ceding commissions
 
(2,591
)
 
2,791

Other underwriting and policy acquisition costs
 
761

 
726

Policy acquisition costs deferred
 
6,050

 
9,917

Amortization of net policy acquisition costs
 
(5,699
)
 
(2,916
)
Balance, end of period
 
$
10,501

 
$
5,305

For the three months ended March 31, 2016, the deferred ceding commissions were affected by the change in the ceding percentage under the Company's multi-line quota share reinsurance treaty ("MLQS"). See Note 8 for further details regarding the MLQS.

5.     Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses for the three months ended March 31, 2017 and 2016 consist of the following:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
 
 
 
 
Gross commissions
 
$
7,149

 
$
6,406

Ceding commissions
 
(2,346
)
 
(5,408
)
Other operating expenses
 
6,491

 
5,250

Total
 
$
11,294

 
$
6,248

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $5.0 million and $4.5 million for the three months ended March 31, 2017 and 2016, respectively.

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6.    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 March 31,
 
 
2017
 
2016
 
 
(in thousands, except per share data)
Earnings allocable to common stockholders
 
$
6,281

 
$

Earnings allocable to Class A stockholders
 
$

 
$
5,154

Earnings allocable to Class B stockholders
 
$

 
$
103

 
 
 
 
 
Basic earnings per share:
 
 
 
 
Common stock
 
$
0.30

 
$

Class A common stock
 
$

 
$
0.37

Class B common stock
 
$

 
$
0.07

 
 
 
 
 
Diluted earnings per share:
 
 
 
 
Common stock
 
$
0.29

 
$

Class A common stock
 
$

 
$
0.37

Class B common stock
 
$

 
$
0.07

 
 
 
 
 
Basic weighted average shares outstanding:
 
 
 
 
Common stock
 
20,969

 

Class A common stock
 

 
13,803

Class B common stock
 

 
1,531

 
 
 
 
 
Dilutive effect of shares issued under stock compensation arrangements:
 
 
 
 
Common stock - stock options
 
420

 

Class B common stock - unvested restricted stock grants
 

 
7

 
 
 
 
 
Diluted weighted average shares outstanding:
 
 
 
 
Common stock
 
21,389

 

Class A common stock
 

 
13,803

Class B common stock
 

 
1,538

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 were determined by allocating undistributed earnings to each class of stock. The undistributed earnings attributable to common stockholders were 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

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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 the three months ended March 31, 2016. 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 ended March 31, 2016.
There were no anti-dilutive stock options for the three months ended March 31, 2017.

7.     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:
 
 
March 31,
 
 
2017
 
2016
 
 
(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year
 
$
194,602

 
$
124,126

Commutation of MLQS
 
27,929

 
24,296

Adjusted net reserves for losses and loss adjustment expenses, beginning of year
 
222,531

 
148,422

Incurred losses and loss adjustment expenses:
 
 
 
 
Current year
 
27,211

 
20,844

Prior years
 
(5,104
)
 
(2,723
)
Total net losses and loss adjustment expenses incurred
 
22,107

 
18,121

 
 
 
 
 
Payments:
 
 
 
 
Current year
 
333

 
290

Prior years
 
11,566

 
5,133

Total payments
 
11,899

 
5,423

Net reserves for unpaid losses and loss adjustment expenses, end of period
 
232,739

 
161,120

Reinsurance recoverable on unpaid losses
 
40,262

 
74,157

Gross reserves for unpaid losses and loss adjustment expenses, end of period
 
$
273,001

 
$
235,277


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During the three months ended March 31, 2017, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2016 developed favorably by $5.1 million. The favorable development was primarily attributable to the 2016 accident year of $3.3 million and the 2015 accident year of $2.5 million, which were due to reported losses emerging at a lower level than expected. The favorable development was offset in part by adverse development of $0.9 million for the 2013 accident year.
During the three months ended March 31, 2016, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2015 developed favorably by $2.7 million. The favorable development was attributable primarily to the 2015 accident year of $1.7 million and the 2014 accident year of $0.8 million, which were due to reported losses emerging at a lower level than expected.
See Note 8 for further details regarding the commutation of the MLQS.

8.     Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Written:
 
 
 
 
Direct
 
$
52,862

 
$
42,990

Assumed
 

 
92

Ceded
 
(8,700
)
 
4,713

Net written
 
$
44,162

 
$
47,795

 
 
 
 
 
Earned:
 
 
 
 
Direct
 
$
48,462

 
$
43,093

Assumed
 

 
32

Ceded
 
(8,029
)
 
(12,528
)
Net earned
 
$
40,433

 
$
30,597

Incurred losses and loss adjustment expenses were net of reinsurance (ceded incurred losses and loss adjustment expenses) of $2.4 million and $4.4 million for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, reinsurance recoverables on paid and unpaid losses were $0.3 million and $40.3 million, respectively. At December 31, 2016, reinsurance recoverables on paid and unpaid losses were and $0.1 million and $70.2 million, respectively.
Multi-line quota share reinsurance
Historically, 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 Company, an Arkansas insurance company ("Kinsale Insurance"), to third-party reinsurers in exchange for a proportion of the direct written premiums on that business. The MLQS was subject to annual renewal and, in accordance with the terms of the MLQS, the Company could adjust the amount of business ceded on a quarterly basis. Under the terms of the MLQS covering the period January 1, 2016 to December 31, 2016 (the "2016 MLQS"), Kinsale Insurance received a provisional ceding commission

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equal to 41% of ceded written premiums and paid a reinsurance margin equal to 4% of ceded written premium. The 2016 MLQS 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. Effective January 1, 2016, the Company reduced the ceding percentage from 40% as of December 31, 2015 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. As a result of the successful completion of the initial public offering ("IPO") in August 2016, the Company terminated and commuted the 2016 MLQS on October 1, 2016.
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, 2017, the Company commuted the MLQS covering the period January 1, 2015 to December 31, 2015 (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. The Company did not renew the MLQS for the 2017 calendar year and there are no remaining MLQS balances outstanding as of January 1, 2017. The commutations did not have any effect on the Company's results of operations or cash flows for the applicable periods.
9.     Other comprehensive income
The following table summarizes the components of other comprehensive income for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Unrealized gains arising during the period, before income taxes
 
$
1,618

 
$
3,658

Income taxes
 
(566
)
 
(1,280
)
Unrealized gains arising during the period, net of income taxes
 
1,052

 
2,378

Less reclassification adjustment:
 
 
 
 
Net realized investment gains (losses)
 
(32
)
 
387

Income taxes
 
11

 
(135
)
Reclassification adjustment included in net income
 
(21
)
 
252

Other comprehensive income
 
$
1,073

 
$
2,126

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.

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Item 2. 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 the Annual Report on Form 10-K for the year ended December 31, 2016. 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2017, 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 Annual Report on Form 10-K for the year ended December 31, 2016.
References to the "Company," "Kinsale," "we," "us," and "our" are to Kinsale Capital Group, Inc. and its subsidiaries, unless the context otherwise requires.

Overview
Founded in 2009, Kinsale is an established and growing specialty insurance company. Kinsale focuses 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 and personal lines risks. We market and sell these insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, primarily 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 three months of 2017, the percentage breakdown of our gross written premiums was 93.7% casualty and 6.3% property. Our commercial lines offerings include construction, small business, general casualty, energy, excess casualty, professional liability, life sciences, product liability, allied health, health care, commercial property, environmental, management liability, inland marine, public entity and commercial insurance. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 3.6% of our gross written premiums in the first three months of 2017.
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 lines of business 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. We adjusted the ceding percentage under the MLQS for future periods depending on future business conditions in our industry. 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.
Effective January 1, 2016, we reduced the ceding percentage from 40% to 15%, while the provisional ceding commission rate remained at 41%. 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. Effective January 1, 2017, the remaining MLQS was commuted, which covered the 2015 calendar year. We did not renew the MLQS for the 2017 calendar year and there are no remaining MLQS balances outstanding as of January 1, 2017.

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The effect of the MLQS on our results of operations was primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses. The following table summarizes the effect of the MLQS on our underwriting income for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
($ 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
 
$
52,862

 
$

 
$
52,862

 
$
43,082

 
$

 
$
43,082

Ceded written premiums
 
(8,700
)
 

 
(8,700
)
 
4,713

 
11,589

 
(6,876
)
Net written premiums
 
$
44,162

 
$

 
$
44,162

 
$
47,795

 
$
11,589

 
$
36,206

Net retention (1)
 
83.5
%
 
 
 
83.5
%
 
110.9
%
 
 
 
84.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
40,433

 
$

 
$
40,433

 
$
30,597

 
$
(5,432
)
 
$
36,029

Losses and loss adjustment expenses
 
(22,107
)
 

 
(22,107
)
 
(18,121
)
 
1,810

 
(19,931
)
Underwriting, acquisition and insurance expenses

 
(11,294
)
 

 
(11,294
)
 
(6,248
)
 
3,405

 
(9,653
)
Underwriting income (2)
 
$
7,032

 
$

 
$
7,032

 
$
6,228

 
$
(217
)
 
$
6,445

 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
54.7
%
 
%
 

 
59.2
%
 
33.3
%
 

Expense ratio
 
27.9
%
 
%
 

 
20.4
%
 
62.7
%
 

Combined ratio
 
82.6
%
 
%
 

 
79.6
%
 
96.0
%
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted loss ratio (3)
 

 

 
54.7
%
 

 

 
55.3
%
Adjusted expense ratio (3)
 

 

 
27.9
%
 

 

 
26.8
%
Adjusted combined ratio (3)
 

 

 
82.6
%
 

 

 
82.1
%
(1) The ratio of net written premiums to gross written premiums.
(2) Underwriting income is a non-GAAP financial measure. See "— Reconciliation of non-GAAP financial measures" for a reconciliation of net income to underwriting income in accordance with GAAP.
(3) Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio as each of our loss ratio, expense ratio and combined ratio, respectively, excluding the effects of the MLQS. We use these adjusted ratios as an internal performance measure in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss ratio, expense ratio and combined ratio, respectively, which are presented in accordance with GAAP.
Our results of operations may be difficult to compare from year to year as we made periodic adjustments to the amount of business we ceded under the terms of the MLQS, may have changed the negotiated terms of the MLQS upon renewal, may have increased or decreased the ceding commission under the MLQS based on the loss experience of the business ceded and may have commuted and terminated the MLQS in a given period. In light of the impact of the MLQS on our results of operations, we internally evaluated our financial performance both including and excluding the effects of the MLQS.

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Components of our results of operations
Gross written premiums
Gross written premiums are the amount received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
New business submissions;
Binding of new business submissions into policies;
Renewals of existing policies; and
Average size and premium rate of new and existing policies.
We earn insurance premiums on a pro rata basis over the term of a policy. Our insurance policies generally have a term of one year. Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is ceded to third-party reinsurers under our reinsurance agreements.
Ceded written premiums
Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential large losses as well as to provide additional capacity for growth. Ceded written premiums are earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded written premiums is impacted by the level of our gross written premiums and any decision we make to increase or decrease retention levels.
Net investment income
Net investment income is an important component of our results of operations. We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents, equity securities and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as from changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims.
Net investment gains (losses)
Net investment gains (losses) are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost, as well as any "other-than-temporary" impairments recognized in earnings.
Losses and loss adjustment expenses
Losses and loss adjustment expenses are a function of the amount and type of insurance contracts we write and the loss experience associated with the underlying coverage. In general, our losses and loss adjustment expenses are affected by:
Frequency of claims associated with the particular types of insurance contracts that we write;
Trends in the average size of losses incurred on a particular type of business;
Mix of business written by us;
Changes in the legal or regulatory environment related to the business we write;
Trends in legal defense costs;
Wage inflation; and
Inflation in medical costs.

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Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and loss adjustment expenses may be paid out over a period of years.
Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses include policy acquisition costs and other underwriting expenses. Policy acquisition costs are principally comprised of the commissions we pay our brokers, net of ceding commissions we receive on business ceded under certain reinsurance contracts. Policy acquisition costs that are directly related to the successful acquisition of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other underwriting expenses represent the general and administrative expenses of our insurance business including employment costs, telecommunication and technology costs, the costs of our lease, and legal and auditing fees.
Income tax expense
Currently all of our income tax expense relates to federal income taxes. Kinsale Insurance is generally not subject to income taxes in the states in which it operates; however, our non-insurance subsidiaries are subject to state income taxes. The amount of income tax expense or benefit recorded in future periods will depend on the jurisdictions in which we operate and the tax laws and regulations in effect.
Key metrics
We discuss certain key metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Underwriting income is a non-GAAP financial measure. We define underwriting income as pre-tax income, excluding net investment income, net investment gains and losses, and other income and expenses. See "—Reconciliation of non-GAAP financial measures" for a reconciliation of net income to underwriting income in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums, net of the effects of reinsurance.
Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Adjusted loss ratio is a non-GAAP financial measure. We define adjusted loss ratio as the loss ratio, excluding the effects of the MLQS. For additional detail on the impact of the MLQS on our results of operations, see "—Factors affecting our results of operations — The MLQS."
Adjusted expense ratio is a non-GAAP financial measure. We define adjusted expense ratio as the expense ratio, excluding the effects of the MLQS. For additional detail on the impact of the MLQS on our results of operations, see "—Factors affecting our results of operations — The MLQS."
Adjusted combined ratio is a non-GAAP financial measure. We define adjusted combined ratio as the loss ratio, excluding the effects of the MLQS. For additional detail on the impact of the MLQS on our results of operations, see "—Factors affecting our results of operations — The MLQS."
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. Our overall financial goal is to produce a return on equity in the mid-teens over the long-term.

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Results of operations
Three months ended March 31, 2017 compared to three months ended March 31, 2016
The following table summarizes our results of operations for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
($ in thousands)
 
2017
 
2016
 
Change
 
Percent
 
 
 
 
 
 
 
 
 
Gross written premiums
 
$
52,862

 
$
43,082

 
$
9,780

 
22.7
 %
Ceded written premiums
 
(8,700
)
 
4,713

 
(13,413
)
 
(284.6
)%
Net written premiums
 
$
44,162

 
$
47,795

 
$
(3,633
)
 
(7.6
)%
 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
40,433

 
$
30,597

 
$
9,836

 
32.1
 %
Losses and loss adjustment expenses
 
22,107

 
18,121

 
3,986

 
22.0
 %
Underwriting, acquisition and insurance expenses
 
11,294

 
6,248

 
5,046

 
80.8
 %
Underwriting income (1)
 
7,032

 
6,228

 
804

 
12.9
 %
Other expenses, net
 

 
(402
)
 
402

 
(100.0
)%
Net investment income
 
2,286

 
1,676

 
610

 
36.4
 %
Net investment gains
 
(32
)
 
387

 
(419
)
 
(108.3
)%
Income before taxes
 
9,286

 
7,889

 
1,397

 
17.7
 %
Income tax expense
 
3,005

 
2,632

 
373

 
14.2

Net income
 
$
6,281

 
$
5,257

 
$
1,024

 
19.5
 %
 
 
 
 
 
 
 
 
 
Return on equity
 
11.8
%
 
18.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
54.7
%
 
59.2
%
 
 
 
 
Expense ratio
 
27.9
%
 
20.4
%
 
 
 
 
Combined ratio
 
82.6
%
 
79.6
%
 
 
 
 
(1) Underwriting income is a non-GAAP financial measure. See "—Reconciliation of non-GAAP financial measures" for a reconciliation of net income to underwriting income in accordance with GAAP.
Net income was $6.3 million for the three months ended March 31, 2017 compared to $5.3 million for the three months ended March 31, 2016, an increase of 19.5%. Underwriting income increased by $0.8 million, or 12.9%, to $7.0 million for the three months ended March 31, 2017 compared to $6.2 million for the three months ended March 31, 2016. The increase in our underwriting income during the period was due to an increase in premium volume and higher favorable development on prior accident years, offset in part by higher employee compensation and public company operating costs.
Underwriting income, excluding the effect of the 2016 MLQS, was $7.0 million for the three months ended March 31, 2017 compared to $6.4 million for the three months ended March 31, 2016, an increase of $0.6 million, or 9.1%. The corresponding adjusted combined ratio was 82.6% for the three months ended March 31, 2017 compared to 82.1% for the three months ended March 31, 2016.

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Table of Contents

Premiums
Our gross written premiums were $52.9 million for the three months ended March 31, 2017 compared to $43.1 million for the three months ended March 31, 2016, an increase of $9.8 million, or 22.7%. Premium growth in the first quarter of 2017 was principally due to a greater number of policies written from higher broker submissions, offset in part by a decrease in the average premium per policy. The average premium on a policy written was approximately $8,600 in the first quarter of 2017 compared to approximately $8,900 in the first quarter of 2016. Gross written premiums increased across most lines of business and was most notable in the construction, small business, energy and product liability divisions.
On January 1, 2016, we renewed the MLQS (the "2016 MLQS") and reduced the ceding percentage to 15% from 40%, which decreased ceded written premiums by $17.0 million at January 1, 2016, with a corresponding reduction to ceded unearned premiums. The provisional ceding commission rate for the 2016 MLQS was 41% for the three months ended March 31, 2016. Due to the successful completion of our initial public offering in the third quarter of 2016, we did not renew the MLQS for the 2017 calendar year.
Net written premiums decreased by $3.6 million, or 7.6%, to $44.2 million for the three months ended March 31, 2017 from $47.8 million for the three months ended March 31, 2016. The decrease in net written premiums was primarily due to the accounting for the change in the ceding percentage on the 2016 MLQS, as discussed above. The net retention ratio was 83.5% for the three months ended March 31, 2017 compared to 110.9% for the three months ended March 31, 2016. Excluding the effect of the 2016 MLQS, our net retention ratio was 83.5% for the three months ended March 31, 2017 compared to 84.0% for the three months ended March 31, 2016.
Net earned premiums increased by $9.8 million, or 32.1%, to $40.4 million for the three months ended March 31, 2017 from $30.6 million for the three months ended March 31, 2016. Excluding the effect of the MLQS, net earned premiums were $40.4 million for the three months ended March 31, 2017 compared to $36.0 million for the three months ended March 31, 2016, or an increase of 12.2%, due to higher net written premiums in the first quarter of 2017 compared to the first quarter of 2016.
Loss ratio
The loss ratio was 54.7% for the three months ended March 31, 2017 compared to 59.2% for the three months ended March 31, 2016. Our adjusted loss ratio was 55.3% for the three months ended March 31, 2016. This decrease in the loss ratio for the first quarter of 2017 was due primarily to higher favorable development on prior accident years during the first quarter of 2017 compared to the same period in 2016.
The following tables summarize the effect of the factors indicated above on the loss ratio for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
($ in thousands)
 
Losses and loss adjustment expenses
 
% of Earned Premiums
 
Losses and loss adjustment expenses