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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, 2019
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______

Commission File Number: 001-37848
 
 
 
 
KINSALE CAPITAL GROUP, INC.
 
 
(Exact name of registrant as specified in its charter)

 
Delaware
 
98-0664337
(State or other jurisdiction of
incorporation or organization)

 
(I.R.S. Employer
Identification Number)
2221 Edward Holland Drive
 
 
Suite 600
 
 
 
Richmond,
Virginia
 
 
23230
(Address of principal executive offices)
 
(Zip Code)
(804) 289-1300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
KNSL
NASDAQ
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 every Interactive Data File required to be submitted 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 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
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 13(a) of the Exchange 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 stock outstanding at October 25, 2019: 22,158,497


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


Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to historical or current fact. These statements may discuss, among others, our future financial performance, our business prospects and strategy, our anticipated financial position, liquidity and capital, dividends and general market and industry conditions. You can identify forward-looking statements by words such as "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," "believes," "seeks," "outlook," "future," "will," "would," "should," "could," "may," "can have" and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements are only predictions and are not guarantees of future performance. Actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include, without limitation:
the possibility that our loss reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows;
the inherent uncertainty of models resulting in actual losses that are materially different than our estimates;
adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity resulting in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, affecting our growth and profitability;
a decline in our financial strength rating adversely affecting the amount of business we write;
the potential loss of one or more key executives or an inability to attract and retain qualified personnel adversely affecting our results of operations;
our reliance on a select group of brokers;
the failure of any of the loss limitations or exclusions we employ, or change in other claims or coverage issues, having a material adverse effect on our financial condition or results of operations;
the performance of our investment portfolio adversely affecting our financial results;
the changing market conditions of our excess and surplus lines ("E&S") insurance operations, as well as the cyclical nature of our business, affecting our financial performance;
extensive regulation adversely affecting our ability to achieve our business objectives or the failure to comply with these regulations adversely affecting our financial condition and results of operations;
the ability to pay dividends being dependent on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary;
being forced to sell investments to meet our liquidity requirements;
the inability to obtain reinsurance coverage at reasonable prices and on terms that adequately protect us;
our employees taking excessive risks;
the possibility that severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us;
the inability to manage our growth effectively;

2

Table of Contents

the intense competition for business in our industry;
the effects of litigation having an adverse effect on our business;
the failure to maintain effective internal controls in accordance with the Sarbanes-Oxley of 2002 (the "Sarbanes-Oxley Act"); and
the other risks and uncertainties discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2018.
Forward-looking statements speak only as of the date on which they are made. Except as expressly required under federal securities laws or the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.


3

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
 
 
September 30,
2019
 
December 31,
2018
 
 
(in thousands, except share and per share data)
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $699,641 in 2019; $514,237 in 2018)
 
$
716,639

 
$
510,251

Equity securities, at fair value (cost: $56,207 in 2019 $56,051 in 2018)
 
65,917

 
57,711

Total investments
 
782,556

 
567,962

Cash and cash equivalents
 
86,308

 
75,089

Investment income due and accrued
 
4,106

 
3,783

Premiums receivable, net
 
33,424

 
24,253

Reinsurance recoverables
 
65,345

 
56,788

Ceded unearned premiums
 
16,445

 
16,072

Deferred policy acquisition costs, net of ceding commissions
 
21,060

 
14,801

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
2,891

 
7,176

Other assets
 
20,776

 
3,601

Total assets
 
$
1,036,449

 
$
773,063

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
429,532

 
$
369,152

Unearned premiums
 
170,931

 
128,250

Payable to reinsurers
 
5,697

 
4,565

Accounts payable and accrued expenses
 
9,884

 
7,090

Credit facility
 
11,212

 

Other liabilities
 
19,157

 
20

Total liabilities
 
646,413

 
509,077

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 22,158,663 and 21,241,504 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 
222

 
212

Additional paid-in capital
 
227,661

 
158,485

Retained earnings
 
146,832

 
106,545

Accumulated other comprehensive income (loss)
 
15,321

 
(1,256
)
Total stockholders’ equity
 
390,036

 
263,986

Total liabilities and stockholders’ equity
 
$
1,036,449

 
$
773,063


See accompanying notes to condensed consolidated financial statements.

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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
 
Gross written premiums
 
$
97,984

 
$
69,546

 
$
277,557

 
$
203,374

Ceded written premiums
 
(11,232
)
 
(11,602
)
 
(35,051
)
 
(29,448
)
Net written premiums
 
86,752

 
57,944

 
242,506

 
173,926

Change in unearned premiums
 
(14,131
)
 
(3,648
)
 
(42,307
)
 
(20,676
)
Net earned premiums
 
72,621

 
54,296

 
200,199

 
153,250

Net investment income
 
5,265

 
4,085

 
14,586

 
11,096

Net unrealized gains on equity securities
 
246

 
1,760

 
8,050

 
575

Net realized gains (losses) on investments
 
185

 
(6
)
 
230

 
280

Other income
 
10

 
2

 
19

 
9

Total revenues
 
78,327

 
60,137

 
223,084

 
165,210

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
44,810

 
32,085

 
118,121

 
90,951

Underwriting, acquisition and insurance expenses
 
18,324

 
13,850

 
50,377

 
38,767

Other expenses
 

 
107

 
57

 
121

Total expenses
 
63,134

 
46,042

 
168,555

 
129,839

Income before income taxes
 
15,193

 
14,095

 
54,529

 
35,371

Total income tax expense
 
2,217

 
2,155

 
9,066

 
6,032

Net income
 
12,976

 
11,940

 
45,463

 
29,339

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) on available-for-sale investments, net of taxes of $863 and $4,407 in 2019 and $(519) and $(2,080) in 2018
 
3,242

 
(1,953
)
 
16,577

 
(7,825
)
Total comprehensive income
 
$
16,218

 
$
9,987

 
$
62,040

 
$
21,514

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.57

 
$
2.13

 
$
1.39

Diluted
 
$
0.58

 
$
0.55

 
$
2.07

 
$
1.35

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
21,660

 
21,102

 
21,348

 
21,073

Diluted
 
22,277

 
21,721

 
21,965

 
21,671

See accompanying notes to condensed consolidated financial statements.

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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
 
Shares of 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, 2018
 
21,242

 
$
212

 
$
158,485

 
$
106,545

 
$
(1,256
)
 
$
263,986

Issuance of common stock under stock-based compensation plan
 
43

 
1

 
597

 

 

 
598

Stock-based compensation expense
 

 

 
507

 

 

 
507

Dividends declared ($0.08 per share)
 

 

 

 
(1,702
)
 

 
(1,702
)
Other comprehensive income, net of tax
 

 

 

 

 
6,780

 
6,780

Net income
 

 

 

 
18,720

 

 
18,720

Balance at March 31, 2019
 
21,285

 
213

 
159,589

 
123,563

 
5,524

 
288,889

Issuance of common stock under stock-based compensation plan
 
78

 
1

 
393

 

 

 
394

Stock-based compensation expense
 

 

 
621

 

 

 
621

Restricted shares withheld for taxes
 
(7
)
 

 
(617
)
 

 

 
(617
)
Dividends declared ($0.08 per share)
 

 

 

 
(1,702
)
 

 
(1,702
)
Other comprehensive income, net of tax
 

 

 

 

 
6,555

 
6,555

Net income
 

 

 

 
13,767

 

 
13,767

Balance at June 30, 2019
 
21,356

 
214

 
159,986

 
135,628

 
12,079

 
307,907

Issuance of common stock, net of issuance costs
 
742

 
7

 
65,872

 

 

 
65,879

Issuance of common stock under stock-based compensation plan
 
61

 
1

 
989

 

 

 
990

Stock-based compensation expense
 

 

 
814

 

 

 
814

Dividends declared ($0.08 per share)
 

 

 

 
(1,772
)
 

 
(1,772
)
Other comprehensive income, net of tax
 

 

 

 

 
3,242

 
3,242

Net income
 

 

 

 
12,976

 

 
12,976

Balance at September 30, 2019
 
22,159

 
$
222

 
$
227,661

 
$
146,832

 
$
15,321

 
$
390,036















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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - Continued
 
 
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, 2017
 
21,036

 
$
210

 
$
155,082

 
$
73,502

 
$
9,395

 
$
238,189

Cumulative effect adjustment - 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 effect of TCJA
 

 

 

 
(1,308
)
 
1,308

 

Issuance of common stock under stock-based compensation plan
 
36

 

 
545

 

 

 
545

Stock-based compensation expense
 

 

 
158

 

 

 
158

Dividends declared ($0.07 per share)
 

 

 

 
(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

Issuance of common stock under stock-based compensation plan
 
97

 
1

 
78

 

 

 
79

Stock-based compensation expense
 

 

 
401

 

 

 
401

Dividends declared ($0.07 per share)
 

 

 

 
(1,481
)
 

 
(1,481
)
Other comprehensive loss, net of tax
 

 

 

 

 
(1,016
)
 
(1,016
)
Net income
 

 

 

 
10,112

 

 
10,112

Balance at June 30, 2018
 
21,169

 
211

 
156,264

 
93,129

 
(1,659
)
 
247,945

Issuance of common stock under stock-based compensation plan
 
58

 
1

 
933

 

 

 
934

Stock-based compensation expense
 

 

 
524

 

 

 
524

Dividends declared ($0.07 per share)
 

 

 

 
(1,485
)
 

 
(1,485
)
Other comprehensive loss, net of tax
 

 

 

 

 
(1,953
)
 
(1,953
)
Net income
 

 

 

 
11,940

 

 
11,940

Balance at September 30, 2018
 
21,227

 
$
212

 
$
157,721

 
$
103,584

 
$
(3,612
)
 
$
257,905





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)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
119,100

 
$
78,406

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(12,406
)
 
(622
)
Purchases – fixed-maturity securities
 
(245,335
)
 
(170,855
)
Purchases – equity securities
 
(21,139
)
 
(8,761
)
Sales – fixed-maturity securities
 
32,510

 
8,408

Sales – equity securities
 
20,755

 
1,974

Maturities and calls – fixed-maturity securities
 
44,481

 
77,314

Net cash used in investing activities
 
(181,134
)
 
(92,542
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from issuance of common stock, net of issuance costs
 
65,879

 

Proceeds from credit facility
 
11,800

 

Debt issuance costs
 
(628
)
 

Payroll taxes withheld and remitted on share-based payments

 
(617
)
 

Proceeds from stock options exercised
 
1,982

 
1,558

Dividends paid
 
(5,163
)
 
(4,425
)
Net cash provided by (used in) financing activities
 
73,253

 
(2,867
)
Net change in cash and cash equivalents
 
11,219

 
(17,003
)
Cash and cash equivalents at beginning of year
 
75,089

 
81,747

Cash and cash equivalents at end of period
 
$
86,308

 
$
64,744



See accompanying notes to condensed consolidated financial statements.


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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, 2018. 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 2016-02, 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 ("ROU") asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of 12 months or less. The lessee’s income statement treatment for leases will vary depending on the nature and classification of the lease. Effective January 1, 2019, the Company adopted this ASU and recorded a ROU asset and corresponding lease liability of approximately $0.9 million. The ROU and operating lease liability are included in "other assets" and "other liabilities," respectively, in the accompanying consolidated balance sheet.
The Company elected the package of practical expedients permitted under the adoption of the new standard, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new standard. This election kept the existing agreements as operating leases. The Company also elected the practical expedient allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease components as a single lease component. In addition, the Company has implemented the necessary internal controls relating to the adoption of the standard.
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities
In March 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. Effective January 1, 2019, the Company adopted ASU 2017-08 using a

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modified retrospective approach. The adoption of ASU 2017-08 did not have a material impact on the Company's financial statements.
Prospective accounting pronouncements
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" to provide more useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company's consolidated financial statements.

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Table of Contents

2.     Investments
Available-for-sale investments
The following tables summarize the available-for-sale investments at September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
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
 
$
110

 
$
2

 
$

 
$
112

Obligations of states, municipalities and political subdivisions
 
145,834

 
7,990

 
(189
)
 
153,635

Corporate and other securities
 
177,927

 
4,631

 
(194
)
 
182,364

Commercial mortgage and asset-backed securities
 
190,472

 
3,912

 
(478
)
 
193,906

Residential mortgage-backed securities
 
185,298

 
1,960

 
(636
)
 
186,622

Total available-for-sale investments
 
$
699,641

 
$
18,495

 
$
(1,497
)
 
$
716,639

 
 
December 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
 
$
610

 
$
2

 
$
(1
)
 
$
611

Obligations of states, municipalities and political subdivisions
 
153,884

 
2,010

 
(1,294
)
 
154,600

Corporate and other securities
 
97,889

 
264

 
(1,401
)
 
96,752

Commercial mortgage and asset-backed securities
 
151,137

 
252

 
(1,522
)
 
149,867

Residential mortgage-backed securities
 
110,717

 
354

 
(2,650
)
 
108,421

Total available-for-sale investments
 
$
514,237

 
$
2,882

 
$
(6,868
)
 
$
510,251


Available-for-sale securities in a loss position
The Company regularly reviews all its available-for-sale investments 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 a security's 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-maturity securities, the Company also 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 and the ability to recover all amounts outstanding when contractually due. When assessing whether it intends to sell a fixed-maturity security or if it is likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and

11

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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 fixed-maturity securities 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.
The following tables summarize gross unrealized losses and fair value for available-for-sale investments by length of time that the securities have continuously been in an unrealized loss position:
 
 
September 30, 2019
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states, municipalities and political subdivisions
 
$
12,993

 
$
(188
)
 
$
256

 
$
(1
)
 
$
13,249

 
$
(189
)
Corporate and other securities
 
22,122

 
(126
)
 
5,232

 
(68
)
 
27,354

 
(194
)
Commercial mortgage and asset-backed securities
 
35,140

 
(130
)
 
31,802

 
(348
)
 
66,942

 
(478
)
Residential mortgage-backed securities
 
41,691

 
(130
)
 
37,776

 
(506
)
 
79,467

 
(636
)
Total available-for-sale investments
 
$
111,946

 
$
(574
)
 
$
75,066

 
$
(923
)
 
$
187,012

 
$
(1,497
)

At September 30, 2019, the Company held 120 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $187.0 million and gross unrealized losses of $1.5 million. Of these securities, 65 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 other-than-temporary impairment has occurred. Based on the Company's review as of September 30, 2019, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At September 30, 2019, 87.9% 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. For the nine months ended September 30, 2019, the Company concluded that there were no other-than-temporary impairments from fixed-maturity securities with unrealized losses.

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Table of Contents

 
 
December 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
 
$

 
$

 
$
499

 
$
(1
)
 
$
499

 
$
(1
)
Obligations of states, municipalities and political subdivisions
 
42,718

 
(440
)
 
34,326

 
(854
)
 
77,044

 
(1,294
)
Corporate and other securities
 
62,045

 
(890
)
 
12,092

 
(511
)
 
74,137

 
(1,401
)
Commercial mortgage and asset-backed securities
 
93,247

 
(1,017
)
 
25,746

 
(505
)
 
118,993

 
(1,522
)
Residential mortgage-backed securities
 
24,571

 
(155
)
 
55,638

 
(2,495
)
 
80,209

 
(2,650
)
Total available-for-sale investments
 
$
222,581

 
$
(2,502
)
 
$
128,301

 
$
(4,366
)
 
$
350,882

 
$
(6,868
)

At December 31, 2018, the Company held 317 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $350.9 million and gross unrealized losses of $6.9 million. Of those securities, 158 were in a continuous unrealized loss position for greater than one year. Based on the Company's review as of December 31, 2018, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At December 31, 2018, 86.4% 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. For the year ended December 31, 2018, the Company concluded that there were no other-than-temporary impairments from fixed-maturity securities with unrealized losses.
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, 2019 are summarized, by contractual maturity, as follows:
 
 
September 30, 2019
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
12,905

 
$
12,990

Due after one year through five years
 
110,503

 
113,402

Due after five years through ten years
 
78,077

 
81,102

Due after ten years
 
122,386

 
128,617

Commercial mortgage and asset-backed securities
 
190,472

 
193,906

Residential mortgage-backed securities
 
185,298

 
186,622

Total fixed maturity securities
 
$
699,641

 
$
716,639


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.

13

Table of Contents

Net investment income
The following table presents the components of net investment income for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Interest:
 
 
 
 
 
 
 
 
Taxable bonds
 
$
4,050

 
$
2,548

 
$
10,593

 
$
6,548

Tax exempt municipal bonds
 
887

 
1,068

 
2,783

 
3,236

Cash equivalents and short-term investments
 
266

 
327

 
667

 
804

Dividends on equity securities
 
406

 
445

 
1,493

 
1,369

Gross investment income
 
5,609

 
4,388

 
15,536

 
11,957

Investment expenses
 
(344
)
 
(303
)
 
(950
)
 
(861
)
Net investment income
 
$
5,265

 
$
4,085

 
$
14,586

 
$
11,096


Realized investment gains and losses
The following table presents realized investment gains and losses for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
Realized gains
 
$
61

 
$

 
$
457

 
$
244

Realized losses
 

 
(6
)
 
(79
)
 
(10
)
Net realized gains (losses) from fixed-maturity securities
 
61

 
(6
)
 
378

 
234

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Realized gains
 
505

 

 
539

 
57

Realized losses
 
(381
)
 

 
(687
)
 
(11
)
Net realized gains (losses) from equity securities
 
124

 

 
(148
)
 
46

Net realized investment gains (losses)
 
$
185

 
$
(6
)
 
$
230

 
$
280



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Change in net unrealized gains (losses) on fixed-maturity securities
For the three and nine months ended September 30, 2019, the changes in net unrealized gains for fixed-maturity securities were $4.1 million and $21.0 million, respectively. For the three and nine months ended September 30, 2018, the changes in net unrealized losses for fixed-maturity securities were $2.5 million and $9.9 million, respectively.
Insurance – statutory deposits
The Company had invested assets with a carrying value of $6.9 million on deposit with state regulatory authorities at September 30, 2019 and December 31, 2018.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $18.4 million at September 30, 2019. The payable balance was included in the "other liabilities" line item of the balance sheet and treated as a non-cash transaction for purposes of cash flow presentation. 

3.     Fair value measurements
Fair value is estimated for each class of financial instrument for which it is 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 obtains 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

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types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.
The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, by level within the fair value hierarchy.
 
 
September 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
112

 
$

 
$

 
$
112

Obligations of states, municipalities and political subdivisions
 

 
153,635

 

 
153,635

Corporate and other securities
 

 
182,364

 

 
182,364

Commercial mortgage and asset-backed securities
 

 
193,906