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 September 30, 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 October 31, 2017: 21,030,005


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)
 
 
September 30,
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: $413,314 in 2017; $413,526 in 2016)
 
$
415,893

 
$
411,223

Equity securities available-for-sale, at fair value (cost: $36,352 in 2017; $14,350 in 2016)
 
43,010

 
18,374

Total investments
 
458,903

 
429,597

Cash and cash equivalents
 
96,684

 
50,752

Investment income due and accrued
 
3,012

 
2,293

Premiums receivable, net
 
19,103

 
16,984

Receivable from reinsurers
 

 
8,567

Reinsurance recoverables
 
46,487

 
70,317

Ceded unearned premiums
 
13,976

 
13,512

Deferred policy acquisition costs, net of ceding commissions
 
11,725

 
10,150

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
4,833

 
6,605

Other assets
 
4,733

 
2,074

Total assets
 
$
662,994

 
$
614,389

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
310,934

 
$
264,801

Unearned premiums
 
102,299

 
89,344

Payable to reinsurers
 
3,553

 
4,090

Funds held for reinsurers
 

 
36,497

Accounts payable and accrued expenses
 
5,947

 
8,752

Other liabilities
 
8,503

 
691

Total liabilities
 
431,236

 
404,175

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 21,029,205 and 20,968,707 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 
210

 
210

Additional paid-in capital
 
154,811

 
153,353

Retained earnings
 
68,840

 
53,640

Accumulated other comprehensive income
 
7,897

 
3,011

Total stockholders’ equity
 
231,758

 
210,214

Total liabilities and stockholders’ equity
 
$
662,994

 
$
614,389


See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
 
Gross written premiums
 
$
55,633

 
$
47,823

 
$
166,248

 
$
141,012

Ceded written premiums
 
(8,562
)
 
(14,177
)
 
(25,242
)
 
(23,910
)
Net written premiums
 
47,071

 
33,646

 
141,006

 
117,102

Change in unearned premiums
 
(2,041
)
 
(672
)
 
(12,491
)
 
(21,748
)
Net earned premiums
 
45,030

 
32,974

 
128,515

 
95,354

Net investment income
 
2,765

 
1,894

 
7,483

 
5,389

Net realized investment gains
 
44

 

 
36

 
383

Other income
 

 

 

 
136

Total revenues
 
47,839

 
34,868

 
136,034

 
101,262

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
31,568

 
15,949

 
75,534

 
51,526

Underwriting, acquisition and insurance expenses
 
10,989

 
6,302

 
32,775

 
19,031

Other expenses
 
27

 
523

 
429

 
1,469

Total expenses
 
42,584

 
22,774

 
108,738

 
72,026

Income before income taxes
 
5,255

 
12,094

 
27,296

 
29,236

Total income tax expense
 
1,054

 
4,112

 
8,319

 
9,940

Net income
 
4,201

 
7,982

 
18,977

 
19,296

Other comprehensive income:
 
 
 
 
 
 
 
 
Change in unrealized gains (losses), net of taxes of $882 and $2,630 in 2017 and $(1) and $2,700 in 2016
 
1,639

 
(1
)
 
4,886

 
5,016

Total comprehensive income
 
$
5,840

 
$
7,981

 
$
23,863

 
$
24,312

Earnings per share - basic:
 
 
 
 
 
 
 
 
Common stock
 
$
0.20

 
$
0.24

 
$
0.90

 
$
0.24

Common stock - Class A
 
$

 
$
0.19

 
$

 
$
0.98

Common stock - Class B
 
$

 
$
0.21

 
$

 
$
0.48

Earnings per share - diluted:
 
 
 
 
 
 
 
 
Common stock
 
$
0.20

 
$
0.24

 
$
0.88

 
$
0.24

Common stock - Class A
 
$

 
$
0.19

 
$

 
$
0.98

Common stock - Class B
 
$

 
$
0.20

 
$

 
$
0.46

Weighted-average shares outstanding - basic:
 
 
 
 
 
 
 
 
Common stock
 
20,995

 
20,656

 
20,978

 
20,656

Common stock - Class A
 

 
14,111

 

 
13,844

Common stock - Class B
 

 
1,682

 

 
1,574

Weighted-average shares outstanding - diluted:
 
 
 
 
 
 
 
 
Common stock
 
21,520

 
20,741

 
21,461

 
20,741

Common stock - Class A
 

 
14,111

 

 
13,844

Common stock - Class B
 

 
1,818

 

 
1,644

 
 
 
 
 
 
 
 
 
Cash dividends declared and paid per share
 
$
0.06

 
$
0.05

 
$
0.18

 
$
0.05

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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

Share dividend
 
8,618

 

 

 

 

 

 

 

 

 

Reclassification of capital structure
 
(22,421
)
 
(1,784
)
 
15,969

 
(1
)
 

 
160

 
(159
)
 

 

 

Issuance of common stock in initial public offering, net of transaction costs
 

 

 
5,000

 

 

 
50

 
72,791

 

 

 
72,841

Stock-based compensation
 

 
270

 

 

 

 

 
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
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,189

 
$
47,818

 
$
8,667

 
$
209,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2016
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,353

 
$
53,640

 
$
3,011

 
$
210,214

Issuance of common stock under stock-based compensation plan
 

 

 
60

 

 

 

 
968

 

 

 
968

Stock-based compensation
 

 

 

 

 

 

 
490

 

 

 
490

Dividends
 

 

 

 

 

 

 

 
(3,777
)
 

 
(3,777
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
4,886

 
4,886

Net income
 

 

 

 

 

 

 

 
18,977

 

 
18,977

Balance at
September 30, 2017
 

 

 
21,029

 
$

 
$

 
$
210

 
$
154,811

 
$
68,840

 
$
7,897

 
$
231,758



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)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
64,547

 
$
56,603

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(103
)
 
(376
)
Change in short-term investments, net
 

 
2,045

Securities available-for-sale:
 
 
 
 
Purchases – fixed maturity securities
 
(70,086
)
 
(89,921
)
Purchases – equity securities
 
(20,915
)
 
(2,303
)
Sales – fixed maturity securities
 
6,939

 
13,541

Maturities and calls – fixed maturity securities
 
68,368

 
30,441

Net cash used in investing activities
 
(15,797
)
 
(46,573
)
 
 
 
 
 
Financing activities:
 
 
 
 
Net proceeds from initial public offering
 

 
72,841

Proceeds from stock options exercised
 
968

 

Dividends paid
 
(3,777
)
 
(1,048
)
Repayment of note payable
 

 
(2,500
)
Payments on capital lease
 
(9
)
 
(110
)
Net cash (used in) provided by financing activities
 
(2,818
)
 
69,183

Net change in cash and cash equivalents
 
45,932

 
79,213

Cash and cash equivalents at beginning of year
 
50,752

 
24,544

Cash and cash equivalents at end of period
 
$
96,684

 
$
103,757



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 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 for the year ended December 31, 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.
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, the 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. Upon adoption, a cumulative-effect adjustment to the balance sheet will be made as of the beginning of the fiscal year of adoption. Adoption of this ASU is not expected to have a material impact on the Company's financial position or cash flows, but may have a material impact on the Company's results of operations in the future as changes in the fair value of equity instruments will be presented in net income rather than other comprehensive income.
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

6

Table of Contents

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 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 September 30, 2017 and December 31, 2016:
 
 
September 30, 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
 
$
9,108

 
$
5

 
$
(16
)
 
$
9,097

Obligations of states, municipalities and political subdivisions
 
157,589

 
3,252

 
(941
)
 
159,900

Corporate and other securities
 
79,978

 
649

 
(78
)
 
80,549

Asset-backed securities
 
81,491

 
464

 
(159
)
 
81,796

Residential mortgage-backed securities
 
85,148

 
507

 
(1,104
)
 
84,551

Total fixed maturities
 
413,314

 
4,877

 
(2,298
)
 
415,893

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
23,819

 
6,716

 

 
30,535

Nonredeemable preferred stock
 
12,533

 
19

 
(77
)
 
12,475

Total equity securities
 
36,352

 
6,735

 
(77
)
 
43,010

Total available-for-sale investments
 
$
449,666

 
$
11,612

 
$
(2,375
)
 
$
458,903

 
 
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


8

Table of Contents

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 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. 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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Table of Contents

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, 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
 
$
8,982

 
$
(16
)
 
$

 
$

 
$
8,982

 
$
(16
)
Obligations of states, municipalities and political subdivisions
 
54,254

 
(708
)
 
9,862

 
(233
)
 
64,116

 
(941
)
Corporate and other securities
 
22,365

 
(66
)
 
8,235

 
(12
)
 
30,600

 
(78
)
Asset-backed securities
 
13,949

 
(108
)
 
3,381

 
(51
)
 
17,330

 
(159
)
Residential mortgage-backed securities
 
59,610

 
(843
)
 
9,826

 
(261
)
 
69,436

 
(1,104
)
Total fixed maturities
 
159,160

 
(1,741
)
 
31,304

 
(557
)
 
190,464

 
(2,298
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stock
 
8,128

 
(77
)
 

 

 
8,128

 
(77
)
Total equity securities
 
8,128

 
(77
)
 

 

 
8,128

 
(77
)
Total
 
$
167,288

 
$
(1,818
)
 
$
31,304

 
$
(557
)
 
$
198,592

 
$
(2,375
)
At September 30, 2017, the Company held 188 fixed maturity securities with a total estimated fair value of $190.5 million and gross unrealized losses of $2.3 million. Of these securities, 40 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 September 30, 2017, 91.0% of the Company’s fixed maturity securities were rated "A-" or better and all of the Company’s fixed maturity securities made expected coupon payments under the contractual terms of the securities. At September 30, 2017, the Company held eight non-redeemable preferred stocks in its equity portfolio with a total estimated fair value of $8.1 million and gross unrealized losses of $77 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 nine months ended September 30, 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 all of the Company’s fixed maturity securities 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 exchange traded fund ("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 September 30, 2017 are summarized, by contractual maturity, as follows:
 
 
September 30, 2017
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
51,551

 
$
51,560

Due after one year through five years
 
37,287

 
37,819

Due after five years through ten years
 
27,275

 
28,385

Due after ten years
 
130,562

 
131,782

Asset-backed securities
 
81,491

 
81,796

Residential mortgage-backed securities
 
85,148

 
84,551

Total fixed maturities
 
$
413,314

 
$
415,893

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 for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Interest:
 
 
 
 
 
 
 
 
Taxable bonds
 
$
1,539

 
$
1,606

 
$
4,584

 
$
4,519

Municipal bonds (tax exempt)
 
990

 
384

 
2,602

 
1,165

Dividends on equity securities
 
287

 
101

 
582

 
303

Cash, cash equivalents, and short-term investments
 
206

 
32

 
460

 
52

Gross investment income
 
3,022

 
2,123

 
8,228

 
6,039

Investment expenses
 
(257
)
 
(229
)
 
(745
)
 
(650
)
Net investment income
 
$
2,765

 
$
1,894

 
$
7,483

 
$
5,389



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Realized investment gains and losses
The following table presents realized investment gains and losses for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Realized gains:
 
 
 
 
 
 
 
 
Sales of fixed maturities
 
$
44

 
$

 
$
68

 
$
410

Sales of short-term and other
 

 

 

 
1

Total realized gains
 
44

 

 
68

 
411

 
 
 
 
 
 
 
 
 
Realized losses:
 
 
 
 
 
 
 
 
Sales of fixed maturities
 

 

 
(32
)
 
(28
)
Total realized losses
 

 

 
(32
)
 
(28
)
Net realized investment gains
 
$
44

 
$

 
$
36

 
$
383

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 and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Change in net unrealized gains (losses):
 
 
 
 
 
 
 
 
Fixed maturities
 
$
1,385

 
$
(545
)
 
$
4,882

 
$
6,471

Equity securities
 
1,136

 
544

 
2,634

 
1,245

Net increase (decrease)
 
$
2,521

 
$
(1
)
 
$
7,516

 
$
7,716

Insurance – statutory deposits
The Company had invested assets with a carrying value of $7.1 million and $7.0 million on deposit with state regulatory authorities at September 30, 2017 and December 31, 2016, respectively.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $8.5 million at September 30, 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 non-cash transactions 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 September 30, 2017 and December 31, 2016, by level within the fair value hierarchy.
 
 
September 30, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
9,097

 
$

 
$

 
$
9,097

Obligations of states, municipalities and political subdivisions
 

 
159,900

 

 
159,900

Corporate and other securities
 

 
80,549

 

 
80,549

Asset-backed securities
 

 
81,796

 

 
81,796

Residential mortgage-backed securities
 

 
84,551

 

 
84,551

Total fixed maturities
 
9,097

 
406,796

 

 
415,893

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
30,535

 

 

 
30,535

Nonredeemable preferred stock
 

 
12,475

 

 
12,475

Total equity securities
 
30,535

 
12,475

 

 
43,010

Total
 
$
39,632

 
$
419,271

 
$

 
$
458,903

 
 
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

Nonredeemable preferred stock
 

 

 

 

Total equity securities
 
18,374

 

 

 
18,374

Total
 
$
30,472

 
$
399,125

 
$

 
$
429,597

During the second quarter of 2017, the Company purchased one asset-backed security for $2.5 million, which was classified as a Level 3 investment since the fair value of the security was estimated using a single broker quote.

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During the third quarter of 2017, this investment was transferred from Level 3 to Level 2 as the Company obtained a reliable fair value estimate from a third-party pricing vendor.
There were no transfers into or out of Level 1 and Level 2 during the nine months ended September 30, 2017. There were no assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016.
Due to the relatively short-term nature of cash and cash equivalents, short-term investments, 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 and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Balance, beginning of period
 
$
11,578

 
$
5,515

 
$
10,150

 
$
(1,696
)
Policy acquisition costs deferred:
 
 
 
 
 
 
 
 
Direct commissions
 
8,024

 
7,119

 
24,529

 
20,967

Ceding commissions
 
(2,519
)
 
(4,918
)
 
(7,502
)
 
(7,122
)
Other underwriting and policy acquisition costs
 
713

 
830

 
2,230

 
2,256

Policy acquisition costs deferred
 
6,218

 
3,031

 
19,257

 
16,101

Amortization of net policy acquisition costs
 
(6,071
)
 
(2,988
)
 
(17,682
)
 
(8,847
)
Balance, end of period
 
$
11,725

 
$
5,558

 
$
11,725

 
$
5,558

For the three and nine months ended September 30, 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 9 for further details regarding the MLQS.

5.     Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses for the three and nine months ended September 30, 2017 and 2016 consist of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
 
 
 
 
 
 
 
 
Direct commissions
 
$
8,001

 
$
6,839

 
$
22,694

 
$
19,913

Ceding commissions
 
(2,479
)
 
(6,473
)
 
(7,291
)
 
(17,099
)
Other operating expenses
 
5,467

 
5,936

 
17,372

 
16,217

Total
 
$
10,989

 
$
6,302

 
$
32,775

 
$
19,031

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $4.2 million and $5.1 million for the three months ended September 30, 2017 and 2016, respectively. Salaries, bonus and employee benefits expenses were $13.7 million and $13.9 million for the nine months ended September 30, 2017 and 2016, respectively.

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Table of Contents

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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except per share data)
Earnings allocable to common stockholders
 
$
4,201

 
$
4,911

 
$
18,977

 
$
4,911

Earnings allocable to Class A stockholders
 
$

 
$
2,716

 
$

 
$
13,625

Earnings allocable to Class B stockholders
 
$

 
$
355

 
$

 
$
760

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Common stock
 
$
0.20

 
$
0.24

 
$
0.90

 
$
0.24

Class A common stock
 
$

 
$
0.19

 
$

 
$
0.98

Class B common stock
 
$

 
$
0.21

 
$

 
$
0.48

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Common stock
 
$
0.20

 
$
0.24

 
$
0.88

 
$
0.24

Class A common stock
 
$

 
$
0.19

 
$

 
$
0.98

Class B common stock
 
$

 
$
0.20

 
$

 
$
0.46

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding:
 
 
 
 
 
 
 
 
Common stock
 
20,995

 
20,656

 
20,978

 
20,656

Class A common stock
 

 
14,111

 

 
13,844

Class B common stock
 

 
1,682

 

 
1,574

 
 
 
 
 
 
 
 
 
Dilutive effect of shares issued under stock compensation arrangements:
 
 
 
 
 
 
 
 
Common stock - stock options
 
525

 
85

 
483

 
85

Class B common stock - unvested restricted stock grants
 

 
136

 

 
70

 
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding:
 
 
 
 
 
 
 
 
Common stock
 
21,520

 
20,741

 
21,461

 
20,741

Class A common stock
 

 
14,111

 

 
13,844

Class B common stock
 

 
1,818

 

 
1,644

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 and nine months ended September 30, 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 and nine months ended September 30, 2016.
There were no anti-dilutive stock options for the three and nine months ended September 30, 2017.
7. Income taxes
The Company's effective tax rates for the three and nine months ended September 30, 2017 were 20.1% and 30.5%, respectively, compared to 34.0% for the same periods in 2016. The decrease in the effective tax rates in 2017 was primarily due to the increase in interest income from investments in tax-exempt municipal bonds and the tax benefits related to stock options exercised in the third quarter.


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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:
 
 
September 30,
 
 
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
 
87,365

 
60,392

Prior years
 
(11,831
)
 
(8,866
)
Total net losses and loss adjustment expenses incurred
 
75,534

 
51,526

 
 
 
 
 
Payments:
 
 
 
 
Current year
 
4,317

 
2,260

Prior years
 
28,763

 
21,693

Total payments
 
33,080

 
23,953

Net reserves for unpaid losses and loss adjustment expenses, end of period
 
264,985

 
175,995

Reinsurance recoverable on unpaid losses
 
45,949

 
77,463

Gross reserves for unpaid losses and loss adjustment expenses, end of period
 
$
310,934

 
$
253,458

During the nine months ended September 30, 2017, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2016 developed favorably by $11.8 million. The favorable development was primarily attributable to the 2016, 2015 and 2014 accident years of $8.6 million, $4.8 million and $1.8 million, respectively, and resulted from reported losses emerging at a lower level than expected. This favorable development was offset by adverse development from the 2011 through 2013 accident years of $3.4 million.
During the nine months ended September 30, 2016, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2015 developed favorably by $8.9 million. The favorable development was attributable primarily to the 2015 and 2014 accident years of $4.8 million and $4.1 million, respectively, and resulted from reported losses emerging at a lower level than expected.
See Note 9 for further details regarding the commutation of the MLQS.


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Table of Contents

9.     Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Written:
 
 
 
 
 
 
 
 
Direct
 
$
55,633

 
$
47,823

 
$
166,248

 
$
140,974

Assumed
 

 

 

 
38

Ceded
 
(8,562
)
 
(14,177
)
 
(25,242
)
 
(23,910
)
Net written
 
$
47,071

 
$
33,646

 
$
141,006

 
$
117,102

 
 
 
 
 
 
 
 
 
Earned:
 
 
 
 
 
 
 
 
Direct
 
$
53,527

 
$
46,418

 
$
153,293

 
$
134,405

Assumed
 

 
10

 

 
44

Ceded
 
(8,497
)
 
(13,454
)
 
(24,778
)
 
(39,095
)
Net earned
 
$
45,030

 
$
32,974

 
$
128,515