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, 2018

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 April 27, 2018: 21,072,452


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 1A.
 
Item 2.
 
Item 6.
 
 
 


1

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
 
 
March 31,
2018
 
December 31,
2017
 
 
(in thousands, except share and per share data)
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $465,744 in 2018; $422,255 in 2017)
 
$
462,534

 
$
425,191

Equity securities, at fair value (cost: $48,129 in 2018; $45,916 in 2017)
 
55,065

 
54,132

Total investments
 
517,599

 
479,323

Cash and cash equivalents
 
56,659

 
81,747

Investment income due and accrued
 
3,200

 
3,077

Premiums receivable, net
 
22,892

 
19,787

Reinsurance recoverables
 
50,742

 
49,593

Ceded unearned premiums
 
14,081

 
13,858

Deferred policy acquisition costs, net of ceding commissions
 
12,768

 
11,775

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
4,201

 
2,492

Other assets
 
2,087

 
2,659

Total assets
 
$
687,767

 
$
667,849

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
328,209

 
$
315,717

Unearned premiums
 
110,364

 
103,110

Payable to reinsurers
 
3,244

 
3,226

Accounts payable and accrued expenses
 
3,170

 
6,519

Other liabilities
 
2,930

 
1,088

Total liabilities
 
447,917

 
429,660

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 21,072,152 and 21,036,087 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
 
210

 
210

Additional paid-in capital
 
155,785

 
155,082

Retained earnings
 
84,498

 
73,502

Accumulated other comprehensive (loss) income
 
(643
)
 
9,395

Total stockholders’ equity
 
239,850

 
238,189

Total liabilities and stockholders’ equity
 
$
687,767

 
$
667,849


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,
 
 
2018
 
2017
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
Gross written premiums
 
$
63,847

 
$
52,862

Ceded written premiums
 
(8,756
)
 
(8,700
)
Net written premiums
 
55,091

 
44,162

Change in unearned premiums
 
(7,030
)
 
(3,729
)
Net earned premiums
 
48,061

 
40,433

Net investment income
 
3,229

 
2,286

Net unrealized losses on equity securities
 
(1,279
)
 

Net realized gains (losses) on investments
 
112

 
(32
)
Other income
 
3

 

Total revenues
 
50,126

 
42,687

 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
 
28,899

 
22,107

Underwriting, acquisition and insurance expenses
 
12,398

 
11,294

Other expenses
 
14

 

Total expenses
 
41,311

 
33,401

Income before income taxes
 
8,815

 
9,286

Total income tax expense
 
1,528

 
3,005

Net income
 
7,287

 
6,281

Other comprehensive income:
 
 
 
 
Change in unrealized (losses) gains on available-for-sale investments, net of taxes of ($1,291) in 2018 and $577 in 2017
 
(4,856
)
 
1,073

Total comprehensive income
 
$
2,431

 
$
7,354

Earnings per share:
 
 
 
 
Basic
 
$
0.35

 
$
0.30

Diluted
 
$
0.34

 
$
0.29

 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
Basic
 
21,045

 
20,969

Diluted
 
21,628

 
21,389

 
 
 
 
 
Cash dividends declared per share
 
$
0.07

 
$
0.06

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 Common Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumu-
lated
 Other
Compre-
hensive
Income (Loss)
 
Total
Stock-
holders' Equity
 
 
(in thousands)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
21,036

 
$
210

 
$
155,082

 
$
73,502

 
$
9,395

 
$
238,189

Cumulative effect adjustment - net unrealized gains on equity securities, net of tax
 

 

 

 
6,490

 
(6,490
)
 

Balance at December 31, 2017, as adjusted
 
21,036

 
210

 
155,082

 
79,992

 
2,905

 
238,189

Reclassification of tax effects resulting from the TCJA
 

 

 

 
(1,308
)
 
1,308

 

Issuance of common stock under stock-based compensation plan
 
36

 

 
545

 

 

 
545

Stock-based compensation
 

 

 
158

 

 

 
158

Dividends
 

 

 

 
(1,473
)
 

 
(1,473
)
Other comprehensive loss, net of tax
 

 

 

 

 
(4,856
)
 
(4,856
)
Net income
 

 

 

 
7,287

 

 
7,287

Balance at March 31, 2018
 
21,072

 
$
210

 
$
155,785

 
$
84,498

 
$
(643
)
 
$
239,850



See accompanying notes to condensed consolidated financial statements.


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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
21,437

 
$
15,447

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(94
)
 
(31
)
Purchases – fixed maturity securities
 
(82,587
)
 
(6,147
)
Purchases – equity securities
 
(3,168
)
 
(3,114
)
Sales – fixed maturity securities
 
3,913

 
718

Sales – equity securities
 
982

 

Maturities and calls – fixed maturity securities
 
35,357

 
19,198

Net cash (used in) provided by investing activities
 
(45,597
)
 
10,624

 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from stock options exercised
 
545

 

Dividends paid
 
(1,473
)
 
(1,258
)
Payments on capital lease
 

 
(9
)
Net cash used in financing activities
 
(928
)
 
(1,267
)
Net change in cash and cash equivalents
 
(25,088
)
 
24,804

Cash and cash equivalents at beginning of year
 
81,747

 
50,752

Cash and cash equivalents at end of period
 
$
56,659

 
$
75,556



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, 2017. 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.
Recently adopted 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 eliminated the available-for-sale classification for equity investments, required changes in unrealized gains and losses in fair value of equity investments to be recognized in net income, required public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, required separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that was required to be disclosed for financial instruments measured at amortized cost. Effective January 1, 2018, the Company adopted this ASU and recorded a cumulative-effect adjustment, which reclassified unrealized gains of $6.5 million, net of taxes, on equity investments from accumulated other comprehensive income ("AOCI") to retained earnings. Prior periods have not been restated to conform to the current presentation. 
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which permitted companies to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the "TCJA") on items within AOCI to retained earnings. The FASB refers to these amounts as "stranded tax effects." The guidance is effective for all companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Effective January 1, 2018, the Company elected to early adopt this ASU and to reclassify the stranded income tax effects for available-

6

Table of Contents

for-sale securities of $1.3 million from AOCI to retained earnings. Other than those effects related to the TCJA, the Company uses the portfolio approach to release stranded tax effects in AOCI related to its available-for-sale fixed-maturity securities and its available-for-sale equity securities (prior to the adoption of ASU 2016-01). Under this approach, stranded tax effects remaining in AOCI are released only when the entire portfolio of the available-for-sale fixed-maturity securities and available-for-sale equity securities are liquidated, sold or extinguished.
Prospective accounting pronouncements
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 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.

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Table of Contents

There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company's consolidated financial statements.
2.     Investments
Available-for-sale investments
The following tables summarize the available-for-sale investments at March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
 
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
 
$
608

 
$
2

 
$
(4
)
 
$
606

Obligations of states, municipalities and political subdivisions
 
158,889

 
1,858

 
(2,032
)
 
158,715

Corporate and other securities
 
93,807

 
435

 
(578
)
 
93,664

Asset-backed securities
 
123,397

 
221

 
(681
)
 
122,937

Residential mortgage-backed securities
 
89,043

 
396

 
(2,827
)
 
86,612

Total available-for-sale investments
 
$
465,744

 
$
2,912

 
$
(6,122
)
 
$
462,534

 
 
December 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
 
$
9,108

 
$
4

 
$
(14
)
 
$
9,098

Obligations of states, municipalities and political subdivisions
 
161,012

 
3,726

 
(412
)
 
164,326

Corporate and other securities
 
71,224

 
579

 
(172
)
 
71,631

Asset-backed securities
 
95,223

 
405

 
(268
)
 
95,360

Residential mortgage-backed securities
 
85,688

 
466

 
(1,378
)
 
84,776

Total fixed-maturity securities
 
422,255

 
5,180

 
(2,244
)
 
425,191

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
26,041

 
8,339

 

 
34,380

Nonredeemable preferred stock
 
19,875

 
108

 
(231
)
 
19,752

Total equity securities
 
45,916

 
8,447

 
(231
)
 
54,132

Total available-for-sale investments
 
$
468,171

 
$
13,627

 
$
(2,475
)
 
$
479,323

Available-for-sale securities in a loss position
The Company regularly reviews all available-for-sale 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

8

Table of Contents

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 prior to the adoption of ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), the Company considered 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 prior to the adoption of ASU 2016-01, a decline in fair value that was considered to be other-than-temporary was recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.
The following tables summarize gross unrealized losses and fair value for available-for-sale securities by length of time that the securities have continuously been in an unrealized loss position:
 
 
March 31, 2018
 
 
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
 
$

 
$

 
$
494

 
$
(4
)
 
$
494

 
$
(4
)
Obligations of states, municipalities and political subdivisions
 
56,436

 
(849
)
 
37,173

 
(1,183
)
 
93,609

 
(2,032
)
Corporate and other securities
 
50,879

 
(461
)
 
10,643

 
(117
)
 
61,522

 
(578
)
Asset-backed securities
 
41,534

 
(419
)
 
10,006

 
(262
)
 
51,540

 
(681
)
Residential mortgage-backed securities
 
20,500

 
(304
)
 
54,166

 
(2,523
)
 
74,666

 
(2,827
)
Total fixed-maturity securities
 
$
169,349

 
$
(2,033
)
 
$
112,482

 
$
(4,089
)
 
$
281,831

 
$
(6,122
)

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At March 31, 2018, the Company held 306 fixed maturity securities in an unrealized loss position with a total estimated fair value of $281.8 million and gross unrealized losses of $6.1 million. Of these securities, 124 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all fixed-maturity 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, 2018, 89.5% 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. Management concluded that there were no other-than-temporary impairments from fixed-maturity securities with unrealized losses for the three months ended March 31, 2018.
 
 
December 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
 
$
3,497

 
$
(2
)
 
$
5,488

 
$
(12
)
 
$
8,985

 
$
(14
)
Obligations of states, municipalities and political subdivisions
 
7,258

 
(36
)
 
38,143

 
(376
)
 
45,401

 
(412
)
Corporate and other securities
 
30,944

 
(98
)
 
13,444

 
(74
)
 
44,388

 
(172
)
Asset-backed securities
 
27,609

 
(108
)
 
10,706

 
(160
)
 
38,315

 
(268
)
Residential mortgage-backed securities
 
9,081

 
(83
)
 
57,262

 
(1,295
)
 
66,343

 
(1,378
)
Total fixed-maturity securities
 
78,389

 
(327
)
 
125,043

 
(1,917
)
 
203,432

 
(2,244
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded funds
 
130

 

 

 

 
130

 

Nonredeemable preferred stocks
 
10,649

 
(231
)
 

 

 
10,649

 
(231
)
Total equity securities
 
10,779

 
(231
)
 

 

 
10,779

 
(231
)
Total investments available for sale
 
$
89,168

 
$
(558
)
 
$
125,043

 
$
(1,917
)
 
$
214,211

 
$
(2,475
)
At December 31, 2017, the Company held 195 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $203.4 million and gross unrealized losses of $2.2 million. Of those securities, 126 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, 2017, 91.1% 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 December 31, 2017, the Company held 13 securities in its equity portfolio with a total estimated fair value of $10.8 million and gross unrealized losses of $0.2 millionNone of these securities were in a continuous unrealized loss position for greater than one year. Based on its review, the Company concluded that were no other-than-temporary impairments from fixed-maturity or equity securities with unrealized losses for the year ended December 31, 2017.

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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, 2018 are summarized, by contractual maturity, as follows:
 
 
March 31, 2018
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
33,012

 
$
32,899

Due after one year through five years
 
47,430

 
47,494

Due after five years through ten years
 
38,633

 
39,111

Due after ten years
 
134,229

 
133,481

Asset-backed securities
 
123,397

 
122,937

Residential mortgage-backed securities
 
89,043

 
86,612

Total fixed maturities
 
$
465,744

 
$
462,534

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 months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Interest:
 
 
 
 
Taxable bonds
 
$
1,761

 
$
1,537

Tax exempt municipal bonds
 
1,085

 
794

Cash equivalents and short-term investments
 
260

 
87

Dividends on equity securities
 
412

 
110

Gross investment income
 
3,518

 
2,528

Investment expenses
 
(289
)
 
(242
)
Net investment income
 
$
3,229

 
$
2,286



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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, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Realized gains:
 
 
 
 
Sales of fixed maturities
 
$
55

 
$

Sales of equity securities
 
57

 

Total realized gains
 
112

 

 
 
 
 
 
Realized losses:
 
 
 
 
Sales of fixed maturities
 

 
(32
)
Total realized losses
 

 
(32
)
Net realized investment gains (losses)
 
$
112

 
$
(32
)
Change in net unrealized gains (losses) on investments
For the three months ended March 31, 2018, the change in net unrealized losses for fixed-maturity securities was $6.1 million. For the three months ended March 31, 2017, the change in net unrealized gains for fixed-maturity securities was $0.7 million and the change in net unrealized gains for equity securities was $0.9 million.
Insurance – statutory deposits
The Company had invested assets with a carrying value of $6.9 million and $7.1 million on deposit with state regulatory authorities at March 31, 2018 and December 31, 2017, respectively.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $1.8 million at March 31, 2018 and $1.0 million at December 31, 2017. 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. 

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.

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The three levels of the fair value hierarchy are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment manager from third party pricing services, where available. For securities where the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company's investment manager. Management performs several procedures to ascertain the reasonableness of investment values included in the condensed consolidated financial statements including 1) obtaining and reviewing internal control reports from the Company's investment manager that obtain fair values from third party pricing services, 2) discussing with the Company's investment manager its process for reviewing and validating pricing obtained from outside pricing services and 3) reviewing the security pricing received from the Company's investment manager and monitoring changes in unrealized gains and losses. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.
The following tables present the balances of assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, by level within the fair value hierarchy.
 
 
March 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
606

 
$

 
$

 
$
606

Obligations of states, municipalities and political subdivisions
 

 
158,715

 

 
158,715

Corporate and other securities
 

 
93,664

 

 
93,664

Asset-backed securities
 

 
122,937

 

 
122,937

Residential mortgage-backed securities
 

 
86,612

 

 
86,612

Total fixed maturities
 
606

 
461,928

 

 
462,534

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
35,939

 

 

 
35,939

Nonredeemable preferred stock
 

 
19,126

 

 
19,126

Total equity securities
 
35,939

 
19,126

 

 
55,065

Total
 
$
36,545

 
$
481,054

 
$

 
$
517,599


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December 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
 
$
9,098

 
$

 
$

 
$
9,098

Obligations of states, municipalities and political subdivisions
 

 
164,326

 

 
164,326

Corporate and other securities
 

 
71,631

 

 
71,631

Asset-backed securities
 

 
95,360

 

 
95,360

Residential mortgage-backed securities
 

 
84,776

 

 
84,776

Total fixed maturities
 
9,098

 
416,093

 

 
425,191

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
34,380

 

 

 
34,380

Nonredeemable preferred stock
 

 
19,752

 

 
19,752

Total equity securities
 
34,380

 
19,752

 

 
54,132

Total
 
$
43,478

 
$
435,845

 
$

 
$
479,323

There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2018. There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2018 or December 31, 2017.
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.

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, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Balance, beginning of period
 
$
11,775

 
$
10,150

Policy acquisition costs deferred:
 
 
 
 
Direct commissions
 
9,377

 
7,880

Ceding commissions
 
(2,541
)
 
(2,591
)
Other underwriting and policy acquisition costs
 
809

 
761

Policy acquisition costs deferred
 
7,645

 
6,050

Amortization of net policy acquisition costs
 
(6,652
)
 
(5,699
)
Balance, end of period
 
$
12,768

 
$
10,501



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5.     Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses for the three months ended March 31, 2018 and 2017 consist of the following:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
 
 
 
 
Direct commissions
 
$
8,379

 
$
7,149

Ceding commissions
 
(2,444
)
 
(2,346
)
Other operating expenses
 
6,463

 
6,491

Total
 
$
12,398

 
$
11,294

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $5.0 million for both the three months ended March 31, 2018 and 2017.

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,
 
 
2018
 
2017
 
 
(in thousands, except per share data)
Net income
 
$
7,287

 
$
6,281

Weighted average common shares outstanding - basic

 
21,045

 
20,969

Effect of potential dilutive securities:
 
 
 
 
Conversion of stock options
 
581

 
420

Conversion of restricted stock
 
2

 

Weighted average common shares outstanding - diluted

 
21,628

 
21,389

 
 
 
 
 
Earnings per common share:
 
 
 
 
Basic
 
$
0.35

 
$
0.30

Diluted
 
$
0.34

 
$
0.29

There were no anti-dilutive stock options for the three months ended March 31, 2018 and 2017.

7. Income taxes
On December 22, 2017, the President of the United States signed into law the TCJA. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates from 35% to 21% effective January 1, 2018, and modifying the manner in which property and casualty insurance loss reserves are computed for

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federal income tax purposes. The Company records a deduction for unpaid losses and loss adjustment expenses when computing its taxable income. Prior to the new legislation, the deduction was discounted using interest rates and loss payment patterns prescribed by the U.S. Treasury. The TCJA changed the prescribed interest rates, which are now based on corporate bond yield curves, and extended the applicable time periods for the loss payment pattern period for long-tailed lines of business. Beginning in 2018, a transition rule will spread the adjustments related to pre-effective-date losses and loss adjustment expenses over the next eight years.
U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The TCJA did not specify the application of certain elements of the legislation and the U.S. Treasury has yet to issue interpretive guidance to specify the loss payment patterns and the corporate bond yield curve under the new law for 2018. The Company recognized provisional tax amounts of $3.5 million related to the transition adjustment for loss discounting, which was included in its components of deferred tax assets and liabilities as part of its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. During the three months ended March 31, 2018, there were no changes to these amounts and no measurement period adjustments were recorded. The accounting is expected to be complete when the U.S. Treasury issues further guidance and the Company has completed its calculations.
The Company's effective tax rate was 17.3% for the three months ended March 31, 2018 and 32.4% for the three months ended March 31, 2017. The decrease in the effective tax rate in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to the impact of the TCJA, which lowered the federal corporate tax rate from 35% to 21% starting January 1, 2018, and the recognition of tax benefits related to stock options exercised during the first quarter of 2018.


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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:
 
 
March 31,
 
 
2018
 
2017
 
 
(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year
 
$
267,493

 
$
194,602

Commutation of MLQS
 

 
27,929

Adjusted net reserves for losses and loss adjustment expenses, beginning of year
 
267,493

 
222,531

Incurred losses and loss adjustment expenses:
 
 
 
 
Current year
 
30,183

 
27,211

Prior years
 
(1,284
)
 
(5,104
)
Total net losses and loss adjustment expenses incurred
 
28,899

 
22,107

 
 
 
 
 
Payments:
 
 
 
 
Current year
 
340

 
333

Prior years
 
17,516

 
11,566

Total payments
 
17,856

 
11,899

Net reserves for unpaid losses and loss adjustment expenses, end of period
 
278,536

 
232,739

Reinsurance recoverable on unpaid losses
 
49,673

 
40,262

Gross reserves for unpaid losses and loss adjustment expenses, end of period
 
$
328,209

 
$
273,001

During the three months ended March 31, 2018, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2017 developed favorably by $1.3 million. The favorable development was primarily attributable to the 2017 accident year of $2.5 million and the 2016 accident year of $1.2 million, which resulted from reported losses emerging at a lower level than expected. This favorable development was offset in part by adverse development from the 2011 through 2015 accident years of $2.4 million.
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 attributable primarily to the 2016 accident year of $3.3 million and the 2015 accident year of $2.5 million, which was 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.
Multi-line quota share reinsurance
Effective January 1, 2017, the Company commuted its multi-line quota share treaty ("MLQS") covering the period January 1, 2015 to December 31, 2015, which reduced reinsurance recoverables on unpaid losses by approximately $27.9 million. The commutation did not have any effect on the Company's results of operations or cash flows for the applicable period.

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9.     Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Written:
 
 
 
 
Direct
 
$
63,847

 
$
52,862

Assumed
 

 

Ceded
 
(8,756
)
 
(8,700
)
Net written
 
$
55,091

 
$
44,162

 
 
 
 
 
Earned:
 
 
 
 
Direct
 
$
56,593

 
$
48,462

Assumed
 

 

Ceded
 
(8,532
)
 
(8,029
)
Net earned
 
$
48,061

 
$
40,433

Incurred losses and loss adjustment expenses were net of reinsurance (ceded incurred losses and loss adjustment expenses) of $2.9 million and $2.4 million for the three months ended March 31, 2018 and 2017, respectively. At March 31, 2018, reinsurance recoverables on paid and unpaid losses were $1.0 million and $49.7 million, respectively. At December 31, 2017, reinsurance recoverables on paid and unpaid losses were $1.4 million and $48.2 million, respectively.


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10.     Other comprehensive (loss) income
The following table summarizes the components of other comprehensive (loss) income for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Unrealized (losses) gains arising during the period, before income taxes:
 
 
 
 
Fixed-maturity securities
 
$
(6,092
)
 
$
697

Equity securities (1)
 

 
921

Total unrealized (losses) gains arising during the period, before income taxes
 
(6,092
)
 
1,618

Income taxes
 
1,279

 
(566
)
Unrealized (losses) gains arising during the period, net of income taxes
 
(4,813
)
 
1,052

Less reclassification adjustment:
 
 
 
 
Net realized gains (losses) on fixed-maturity securities, before income taxes
 
55

 
(32
)
Income taxes
 
(12
)
 
11

Reclassification adjustment included in net income
 
43

 
(21
)
Other comprehensive (loss) income
 
$
(4,856
)
 
$
1,073

(1) Adoption of ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which was effective January 1, 2018, eliminated the available-for-sale classification for equity investments and required changes in unrealized gains and losses in fair value of equity securities to be recognized in net income.
The sale of an available-for-sale fixed-maturity 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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Table of Contents

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, 2017. 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 ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2018, 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, 2017.
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 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 2018, the percentage breakdown of our gross written premiums was 92.0% casualty and 8.0% property. Our underwriting divisions 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 3.9% of our gross written premiums in the first three months of 2018.
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;
Conversion of new business submissions into policies;
Renewals of existing policies; and
Average size and premium rate of bound 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 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. Ceded written premiums are earned over the reinsurance contract

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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, unrealized gains and losses on our equity portfolio, 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.
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.

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Table of Contents

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.
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 or higher over the long-term.
Net retention ratio is the ratio of net written premiums to gross written premiums.

Three months ended March 31, 2018 compared to three months ended March 31, 2017
The following table summarizes our results of operations for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
($ in thousands)
 
2018
 
2017
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
Gross written premiums
 
$
63,847

 
$
52,862

 
$
10,985

 
20.8
 %
Ceded written premiums
 
(8,756
)
 
(8,700
)
 
(56
)
 
0.6

Net written premiums
 
$
55,091

 
$
44,162

 
$
10,929

 
24.7
 %
 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
48,061

 
$
40,433

 
$
7,628

 
18.9
 %
Losses and loss adjustment expenses
 
28,899

 
22,107

 
6,792

 
30.7

Underwriting, acquisition and insurance expenses
 
12,398

 
11,294

 
1,104

 
9.8

Underwriting income (1)
 
6,764

 
7,032

 
(268
)
 
(3.8
)
Other expenses, net
 
(11
)
 

 
(11
)
 
NM

Net investment income
 
3,229

 
2,286

 
943

 
41.3

Net unrealized losses on equity securities
 
(1,279
)
 

 
(1,279
)
 
NM

Net realized gains (losses) on investments
 
112

 
(32
)
 
144

 
NM

Income before taxes
 
8,815

 
9,286

 
(471
)
 
(5.1
)
Income tax expense
 
1,528

 
3,005

 
(1,477
)
 
(49.2
)
Net income
 
$
7,287

 
$
6,281

 
$
1,006

 
16.0
 %
 
 
 
 
 
 
 
 
 
Annualized return on equity
 
12.2
%
 
11.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
60.1
%
 
54.7
%
 
 
 
 
Expense ratio
 
25.8
%
 
27.9
%
 
 
 
 
Combined ratio
 
85.9
%
 
82.6
%
 
 
 
 
NM - Percentage change not meaningful

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Table of Contents

(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 $7.3 million for the three months ended March 31, 2018 compared to $6.3 million for the three months ended March 31, 2017, an increase of 16.0%. The increase in net income for the first quarter of 2018 over the first quarter of 2017 was due to a lower effective tax rate of 17.3%, resulting from the TCJA and the recognition of tax benefits related to stock options exercised during the first quarter of 2018, and higher net investment income. These factors were offset in part by unrealized losses of $1.3 million related to changes in the fair value of equity investments, which were required to be recognized in net income upon the adoption of a new accounting standard.
Underwriting income was $6.8 million for the three months ended March 31, 2018 compared to $7.0 million for the three months ended March 31, 2017, a decrease of 3.8%. The corresponding combined ratios were 85.9% for the three months ended March 31, 2018 compared to 82.6% for the three months ended March 31, 2017. The decrease in our underwriting income was due to lower net favorable development of loss reserves for prior accident years in the first quarter of 2018 compared to the first quarter of 2017, offset in part by higher premium volume quarter over quarter.
Premiums
Our gross written premiums were $63.8 million for the three months ended March 31, 2018 compared to $52.9 million for the three months ended March 31, 2017, an increase of $11.0 million, or 20.8%. The increase in gross written premiums for the first three months of 2018 over the same period last year was due to increases across most lines of business. The average premium on a policy written was approximately $8,000 in the first three months of 2018 compared to approximately $8,600 in the first three months of 2017. The decrease in the average premium per policy written was due to changes in the mix of business during the first quarter of 2018 compared to the same period last year.
Net written premiums increased by $10.9 million, or 24.7%, to $55.1 million for the three months ended March 31, 2018 from $44.2 million for the three months ended March 31, 2017. The increase in net written premiums for the first three months of 2018 compared to the same period last year was primarily due to higher gross written premiums while ceded premiums remained relatively flat. The net retention ratio was 86.3% for the three months ended March 31, 2018 compared to 83.5% for the three months ended March 31, 2017. The increase in the net retention ratio was due to an increase in our retention on the excess casualty reinsurance treaty effective with the renewal on June 1, 2017 and a change in the mix of business.
Net earned premiums increased by $7.6 million, or 18.9%, to $48.1 million for the three months ended March 31, 2018 from $40.4 million for the three months ended March 31, 2017 due to growth in gross written premiums.
Loss ratio
The loss ratio was 60.1% for the three months ended March 31, 2018 compared to 54.7% for the three months ended March 31, 2017. The increase in the loss ratio for the first three months of 2018 was due to lower net favorable development of loss reserves for prior accident years in the first quarter of 2018 compared to the first quarter of 2017. The decrease in favorable development of loss reserve for prior accident years was offset in part by a lower loss ratio for the current accident year in the first quarter of 2018 compared to the same period in 2017. The decrease in the current accident year loss ratio was due in part to lower reported losses in the first quarter of 2018 compared to the first quarter of 2017.

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The following table summarizes the loss ratios for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
($ in thousands)
 
Losses and loss adjustment expenses
 
% of Earned Premiums
 
Losses and loss adjustment expenses
 
% of Earned Premiums
Loss ratio:
 
 
 
 
 
 
 
 
Current accident year before catastrophe losses
 
$
30,183

 
62.8
 %
 
$
27,137

 
67.1
 %
Current year catastrophe losses
 

 

 
74

 
0.2

Effect of prior year development
 
(1,284
)
 
(2.7
)
 
(5,104
)
 
(12.6
)
Total
 
$
28,899

 
60.1
 %
 
$
22,107

 
54.7
 %
Expense ratio
The following table summarizes the components of the expense ratio for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
($ in thousands)
 
Underwriting Expenses
 
% of Earned Premiums
 
Underwriting Expenses
 
% of Earned Premiums
 
 
 
 
 
 
 
 
 
Commissions incurred:
 
 
 
 
 
 
 
 
Direct
 
$
8,379

 
17.4
 %
 
$
7,149

 
17.7
 %
Ceding
 
(2,444
)
 
(5.1
)
 
(2,346
)
 
(5.8
)
Net commissions incurred
 
5,935

 
12.3

 
4,803

 
11.9

Other underwriting expenses
 
6,463

 
13.5

 
6,491

 
16.0

Underwriting, acquisition and insurance expenses
 
$
12,398

 
25.8
 %
 
$
11,294

 
27.9
 %
The expense ratio was 25.8% for the three months ended March 31, 2018 compared to 27.9% for the three months ended March 31, 2017. The decrease in the expense ratio for the three months ended March 31, 2018 compared to the expense ratio for the same period last year reflected the benefit of higher net earned premiums without a proportional increase in the total amount of other underwriting expenses from management's focus on controlling costs. Direct commissions paid as a percent of gross written premiums was 14.7% for the three months ended March 31, 2018 and 14.8% for the three months ended March 31, 2017.
Combined ratio
Our combined ratio was 85.9% for the three months ended March 31, 2018 compared to 82.6% for the three months ended March 31, 2017.
Investing results
Our net investment income increased by 41.3% to $3.2 million for the three months ended March 31, 2018 from $2.3 million for the three months ended March 31, 2017, primarily due to the increase in our investment portfolio balance from excess operating funds generated since the first quarter of 2017 and a higher gross investment return in the first three months of 2018 compared to the same period last year.

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The following table summarizes net investment income and net realized and unrealized investment gains and losses for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
($ in thousands)
 
2018
 
2017
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
Interest from fixed-maturity securities
 
$
2,846

 
$
2,331

 
$
515

 
22.1
 %
Dividends from equity securities
 
412

 
110

 
302

 
274.5

Other
 
260

 
87

 
173

 
198.9

Gross investment income
 
3,518

 
2,528

 
990

 
39.2

Investment expenses
 
(289
)
 
(242
)
 
(47
)
 
19.4

Net investment income
 
3,229

 
2,286

 
943

 
41.3

Net unrealized losses on equity securities
 
(1,279
)
 

 
(1,279
)
 
NM

Net realized gains (losses) on investments
 
112

 
(32
)
 
144

 
NM

Net realized and unrealized investment losses
 
(1,167
)
 
(32
)
 
(1,135
)
 
NM

Total
 
$
2,062

 
$
2,254

 
$
(192
)
 
(8.5
)%
NM - Percentage change not meaningful
Our investment portfolio, excluding cash equivalents and unrealized gains and losses, had an annualized gross investment return of 2.7% for the three months ended March 31, 2018, compared to 2.3% for the three months ended March 31, 2017. As discussed previously, effective January 1, 2018, we adopted a new accounting standard which required changes in the fair value of equity investments to be recognized in net income. During the first quarter of 2018, we recognized unrealized losses of $1.3 million related to our equity portfolio.
We perform quarterly reviews of all available-for-sale securities within our investment portfolio to determine whether any other-than-temporary impairment has occurred. Management concluded that there were no other-than-temporary impairments from available-for-sale investments for the three months ended March 31, 2018 or 2017.
Income tax expense
Our income tax expense was $1.5 million for the three months ended March 31, 2018 compared to $3.0 million for the three months ended March 31, 2017. Our effective tax rate was approximately 17.3% for the three months ended March 31, 2018 compared to 32.4% for the three months ended March 31, 2017. For the first quarter of 2018, our effective tax rate reflected the Tax Cuts and Jobs Act of 2017, which among other provisions, lowered the federal corporate tax rate from 35% to 21% starting January 1, 2018. The decrease in the effective tax rate for the three months ended March 31, 2018 compared to the prior-year period was also due to the recognition of tax benefits related to stock options exercised during the first quarter of 2018.
Return on equity
Our annualized return on equity was 12.2% for the three months ended March 31, 2018 compared to 11.8% for the three months ended March 31, 2017. The increase in annualized return on equity for the three months ended March 31, 2018 was largely due to the lower income tax rate as a result of the Tax Cuts and Jobs Act of 2017.


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Liquidity and capital resources
Sources and uses of funds
We are organized as a Delaware holding company with our operations primarily conducted by our wholly-owned insurance subsidiary, Kinsale Insurance, which is domiciled in Arkansas. Accordingly, we may receive cash through (1) loans from banks and other third parties, (2) issuance of equity and debt securities, (3) corporate service fees from our insurance subsidiary, (4) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions, and (5) dividends from our insurance subsidiary. We may use the proceeds from these sources to contribute funds to Kinsale Insurance in order to support premium growth, reduce our reliance on reinsurance, pay dividends and taxes and for other business purposes.
We receive corporate service fees from Kinsale Insurance to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.
Management believes that the Company has sufficient liquidity available both in Kinsale and in its insurance subsidiary, Kinsale Insurance, as well as in its other operating subsidiaries, to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.
Cash flows
Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that earn interest and dividends. We also use cash to pay commissions to brokers, as well as to pay for ongoing operating expenses such as salaries, rent and taxes. As described under "—Reinsurance" below, we use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.
The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future.
Our cash flows for the three months ended March 31, 2018 and 2017 were:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Cash and cash equivalents provided by (used in):
 
 
 
 
Operating activities
 
$
21,437

 
$
15,447

Investing activities
 
(45,597
)
 
10,624

Financing activities
 
(928
)
 
(1,267
)
Change in cash and cash equivalents
 
$
(25,088
)
 
$
24,804

Net cash provided by operating activities was approximately $21.4 million for the three months ended March 31, 2018, compared to $15.4 million for the same period in 2017. This increase was largely driven by premium volume, the timing of claim payments, reinsurance recoveries, and changes in operating assets and liabilities.
Net cash used in investing activities was $45.6 million for the three months ended March 31, 2018, compared to net cash provided by investing activities of $10.6 million for the three months ended March 31, 2017. Net cash used in investing activities during the first quarter of 2018 reflected purchases of fixed-maturity securities of $82.6 million, principally corporate bonds and asset-backed securities, and purchases of equity securities of $3.2 million, principally exchange

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traded funds (ETFs). During the first quarter of 2018, we received proceeds of $39.3 million from maturities and sales of fixed-maturity securities and $0.9 million from the sale of an intermediate-term bond ETF. Cash provided by investing activities during the first quarter of 2017 reflected proceeds received from maturing fixed income securities of $19.2 million, offset in part by selective purchases of fixed income securities, principally municipal bonds of $5.9 million. In addition, we purchased $3.1 million of equity securities during the first quarter of 2017.
During the first three months of 2018, cash used in financing activities primarily reflected dividends paid of $0.07 per common share, or $1.5 million in aggregate. During the first three months of 2017, cash used in financing activities primarily reflected dividends paid of $0.06 per common share, or $1.3 million in aggregate.
Reinsurance
We enter into reinsurance contracts primarily to limit our exposure to potential large losses. Reinsurance involves an insurance company transferring ("ceding") a portion of its exposure on a risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. Our reinsurance is primarily contracted under quota-share reinsurance contracts and excess of loss contracts. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses, in excess of a specified amount. Under excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company's losses.
We use facultative reinsurance coverage on a limited basis. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.
The following is a summary of our significant reinsurance programs as of March 31, 2018:
Line of Business Covered
 
Company Policy Limit
 
Reinsurance Coverage
 
Company Retention
Property - per risk
 
Up to $10.0 million per risk
 
$9.0 million excess of $1.0 million
 
$1.0 million per occurrence
Property - catastrophe (1)
 
N/A
 
$45.0 million excess of $5.0 million
 
$5.0 million per catastrophe
Primary casualty (2)
 
Up to $10.0 million per occurrence
 
$9.0 million excess of $1.0 million
 
$1.0 million per occurrence
Excess casualty (3)
 
Up to $10.0 million per occurrence

 
Variable quota share
 
$1.5 million per occurrence except as described in note (3) below
(1)
Our property catastrophe reinsurance reduces the financial impact of a catastrophe event involving multiple claims and policyholders. Our property catastrophe reinsurance includes a reinstatement provision which requires us to pay reinstatement premiums after a loss has occurred in order to preserve coverage. Including the reinstatement provision, the maximum aggregate loss recovery limit is $90 million and is in addition to the per-occurrence coverage provided by our facultative and other treaty coverages. 
(2)
Reinsurance is not applicable to any individual policy with a per occurrence limit of $1.0 million or less.
(3)
For policies with a per occurrence limit higher than $1.0 million, the quota share ceding percentage varies such that the retention is always $1.5 million or less. For example, for a $2.0 million limit excess policy, our retention would be 75%, whereas for a $10.0 million limit excess policy, our retention would be 15%. For policies for which we also write an underlying primary limit, the retention on the primary and excess policy combined would not exceed $1.5 million.

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At each renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.
Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers. At March 31, 2018, all reinsurance contracts that our insurance subsidiary was a party to were with companies with A.M. Best ratings of "A" (Excellent) or better. As of March 31, 2018, we have never had a loss for uncollectible reinsurance.
Ratings
Kinsale Insurance has a financial strength rating of "A-" (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from "A++" (Superior) to "F" (In Liquidation). "A-" (Excellent) is the fourth highest rating issued by A.M. Best. The "A-" (Excellent) rating is assigned to insurers that have, in A.M. Best's opinion, an excellent ability to meet their ongoing obligations to policyholders. This rating is intended to provide an independent opinion of an insurer's ability to meet its obligation to policyholders and is not an evaluation directed at investors.
The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The "A-" (Excellent) rating obtained by Kinsale Insurance is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan.
Financial condition
Stockholders' equity
At March 31, 2018, total stockholders' equity was $239.9 million and tangible stockholders' equity was $237.1 million, compared to total stockholders' equity of $238.2 million and tangible stockholders' equity $235.4 million at December 31, 2017. The increases in both total and tangible stockholders' equity over the prior year-end balances were primarily due to net income offset in part by an increase in unrealized losses on investments, net of taxes, and payment of dividends.
Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as stockholders’ equity less intangible assets, net of deferred taxes. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders' equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.
Stockholders' equity at March 31, 2018 and December 31, 2017, reconciles to tangible stockholders' equity as follows:
 
 
March 31, 2018
 
December 31, 2017
 
(in thousands)
Stockholders' equity
 
$
239,850

 
$
238,189

Less: intangible assets, net of deferred taxes
 
2,795

 
2,795

Tangible stockholders' equity
 
$
237,055

 
$
235,394

Investment portfolio
At March 31, 2018, our cash and invested assets of $574.3 million consisted of fixed-maturity securities, cash and cash equivalents and equity securities. At March 31, 2018, the majority of the investment portfolio was comprised of fixed-maturity securities of $462.5 million that were classified as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. At March 31, 2018, we also held $56.7 million of cash and cash equivalents

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and $55.1 million of equity securities, which are comprised of ETFs and nonredeemable preferred stock. Effective January 1, 2018, we adopted a new accounting standard ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which eliminated the available-for-sale classification for equity securities and required changes in unrealized gains and losses in fair value of these investments to be recognized in net income. Our fixed-maturity securities, including cash equivalents, had a weighted average duration of 4.1 years at March 31, 2018 compared to 3.9 years at December 31, 2017 and an average rating of "AA" at March 31, 2018 and December 31, 2017.
At March 31, 2018 and December 31, 2017, the amortized cost and fair value on fixed-maturity securities were as follows:
 
 
March 31, 2018
 
December 31, 2017
 
 
Amortized Cost
 
Estimated Fair Value
 
% of Total Fair Value
 
Amortized Cost
 
Estimated Fair Value
 
% of Total Fair Value
 
 
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
608

 
$
606

 
0.1
%
 
$
9,108

 
$
9,098