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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 March 31, 2020
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, including 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 Global Select Market
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 (§232.405 of this chapter) 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 April 24, 2020: 22,254,573



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



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, catastrophes, pandemics and similar events may adversely affect our business, results of operations and financial condition;
the inability to manage our growth effectively;

2


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, 2019.
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


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
 
 
March 31,
2020
 
December 31,
2019
 
 
(in thousands, except share and per share data)
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $815,865 in 2020; $714,817 in 2019)
 
$
818,905

 
$
729,532

Equity securities, at fair value (cost: $85,678 in 2020 $64,245 in 2019)
 
83,566

 
78,294

Total investments
 
902,471

 
807,826

Cash and cash equivalents
 
52,554

 
100,408

Investment income due and accrued
 
5,499

 
4,743

Premiums receivable, net
 
42,187

 
34,483

Reinsurance recoverables
 
71,422

 
72,574

Ceded unearned premiums
 
18,112

 
16,118

Deferred policy acquisition costs, net of ceding commissions
 
26,005

 
23,564

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
9,869

 
3,374

Other assets
 
33,832

 
23,922

Total assets
 
$
1,165,489

 
$
1,090,550

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
491,333

 
$
460,058

Unearned premiums
 
207,662

 
187,374

Payable to reinsurers
 
10,658

 
7,151

Accounts payable and accrued expenses
 
7,528

 
12,366

Credit facility
 
24,075

 
16,744

Other liabilities
 
22,899

 
977

Total liabilities
 
764,155

 
684,670

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 22,253,823 and 22,205,665 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
223

 
222

Additional paid-in capital
 
230,742

 
229,229

Retained earnings
 
166,074

 
162,911

Accumulated other comprehensive income
 
4,295

 
13,518

Total stockholders’ equity
 
401,334

 
405,880

Total liabilities and stockholders’ equity
 
$
1,165,489

 
$
1,090,550


See accompanying notes to condensed consolidated financial statements.

4


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
Gross written premiums
 
$
124,036

 
$
84,626

Ceded written premiums
 
(15,983
)
 
(11,559
)
Net written premiums
 
108,053

 
73,067

Change in unearned premiums
 
(18,292
)
 
(11,576
)
Net earned premiums
 
89,761

 
61,491

Net investment income
 
5,960

 
4,515

Change in the fair value of equity securities
 
(16,161
)
 
5,895

Net realized investment gains
 
776

 
280

Other income
 
10

 
4

Total revenues
 
80,346

 
72,185

 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
 
53,733

 
33,732

Underwriting, acquisition and insurance expenses
 
21,583

 
15,616

Other expenses
 

 
36

Total expenses
 
75,316

 
49,384

Income before income taxes
 
5,030

 
22,801

Total income tax (benefit) expense
 
(56
)
 
4,081

Net income
 
5,086

 
18,720

Other comprehensive (loss) income:
 
 
 
 
Change in unrealized (losses) gains on available-for-sale investments, net of taxes of $(2,452) in 2020 and $1,802 in 2019
 
(9,223
)
 
6,780

Total comprehensive (loss) income
 
$
(4,137
)
 
$
25,500

Earnings per share:
 
 
 
 
Basic
 
$
0.23

 
$
0.88

Diluted
 
$
0.22

 
$
0.86

 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
Basic
 
22,109

 
21,169

Diluted
 
22,678

 
21,763

See accompanying notes to condensed consolidated financial statements.

5


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
 
Total
Stock-
holders' Equity
 
 
(in thousands)
Balance at December 31, 2019
 
22,206

 
$
222

 
$
229,229

 
$
162,911

 
$
13,518

 
$
405,880

Adoption of new accounting standard for credit losses, net
 

 

 

 
78

 

 
78

Issuance of common stock under stock-based compensation plan
 
48

 
1

 
701

 

 

 
702

Stock-based compensation expense
 

 

 
812

 

 

 
812

Dividends declared ($0.09 per share)
 

 

 

 
(2,001
)
 

 
(2,001
)
Other comprehensive loss, net of tax
 

 

 

 

 
(9,223
)
 
(9,223
)
Net income
 

 

 

 
5,086

 

 
5,086

Balance at March 31, 2020
 
22,254

 
$
223

 
$
230,742

 
$
166,074

 
$
4,295

 
$
401,334

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


See accompanying notes to condensed consolidated financial statements.


6


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
59,683

 
$
33,804

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(9,264
)
 
(3,925
)
Sale of property and equipment
 
4,999

 

Purchases – fixed-maturity securities
 
(146,963
)
 
(43,040
)
Purchases – equity securities
 
(13,443
)
 
(1,831
)
Sales – fixed-maturity securities
 
31,641

 
28,416

Sales – equity securities
 

 
915

Maturities and calls – fixed-maturity securities
 
19,482

 
14,545

Net cash used in investing activities
 
(113,548
)
 
(4,920
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from credit facility
 
7,300

 

Common stock issued, stock options exercised
 
702

 
597

Dividends paid
 
(1,991
)
 
(1,696
)
Net cash provided by (used in) financing activities
 
6,011

 
(1,099
)
Net change in cash and cash equivalents
 
(47,854
)
 
27,785

Cash and cash equivalents at beginning of year
 
100,408

 
75,089

Cash and cash equivalents at end of period
 
$
52,554

 
$
102,874



See accompanying notes to condensed consolidated financial statements.


7


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 Kinsale Capital Group, Inc. and its wholly owned subsidiaries' (the "Company") business and accounting policies, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2019. 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
Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326)
On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" to provide more useful information about the expected credit losses on financial instruments. The update requires 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 must also be recorded through an allowance for credit losses. However, the amendments 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 previous GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. The FASB has issued additional ASUs on Topic 326 that do not change the core principle of the guidance in ASU 2016-13 but clarify certain aspects of it.
Effective January 1, 2020, the Company adopted this ASU using the modified-retrospective approach and recorded a cumulative effect adjustment to beginning retained earnings. The adoption of this ASU resulted in the recognition of an allowance for credit loss related to the Company’s reinsurance recoverables. However, since the Company enters into contracts with reinsurers that have A.M. Best ratings of “A” (Excellent) or better, the allowance was not material to the Company’s consolidated financial statements.

8


ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
On August 29, 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up and other up-front costs incurred in a cloud computing arrangement hosted by the vendor. The new guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The new guidance also requires the entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. Effective January 1, 2020, the Company adopted ASU 2018-15 using a modified-retrospective approach. The adoption of ASU 2018-15 did not have a material impact on the Company's financial statements.
There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company's consolidated financial statements.
2.     Investments
Available-for-sale investments
The following tables summarize the available-for-sale investments at March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
 
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

 
$
4

 
$

 
$
114

Obligations of states, municipalities and political subdivisions
 
173,422

 
8,830

 
(702
)
 
181,550

Corporate and other securities
 
255,784

 
5,849

 
(7,418
)
 
254,215

Commercial mortgage and asset-backed securities
 
232,773

 
2,112

 
(7,820
)
 
227,065

Residential mortgage-backed securities
 
153,776

 
3,527

 
(1,342
)
 
155,961

Total available-for-sale investments
 
$
815,865

 
$
20,322

 
$
(17,282
)
 
$
818,905

 
 
December 31, 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
 
166,312

 
7,542

 
(961
)
 
172,893

Corporate and other securities
 
180,287

 
4,736

 
(255
)
 
184,768

Commercial mortgage and asset-backed securities
 
195,750

 
2,930

 
(710
)
 
197,970

Residential mortgage-backed securities
 
172,358

 
1,819

 
(388
)
 
173,789

Total available-for-sale investments
 
$
714,817

 
$
17,029

 
$
(2,314
)
 
$
729,532



9


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 a credit loss. The Company considers a number of factors in completing its review of credit losses, including 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 a credit loss.
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 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 below the amortized cost basis 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. For fixed-maturity securities that the Company has the intent and ability to hold, 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 impairment, 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 impairment, which is recognized in other comprehensive income. Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 1 - Recently adopted accounting pronouncements - ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) for additional information.
The Company reports investment income due and accrued separately from fixed-maturity securities, available for sale, and has elected not to measure an allowance for credit losses for investment income due and accrued. Investment income due and accrued is written off through net realized gains (losses) on investments at the time the issuer of the bond defaults or is expected to default on payments.


10


The following tables summarize gross unrealized holding losses and estimated fair value for available-for-sale investments by length of time that the securities have continuously been in an unrealized loss position:
 
 
March 31, 2020
 
 
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
 
$
24,377

 
$
(702
)
 
$

 
$

 
$
24,377

 
$
(702
)
Corporate and other securities
 
104,161

 
(7,418
)
 

 

 
104,161

 
(7,418
)
Commercial mortgage and asset-backed securities
 
127,009

 
(5,608
)
 
21,917

 
(2,212
)
 
148,926

 
(7,820
)
Residential mortgage-backed securities
 
52,605

 
(1,324
)
 
282

 
(18
)
 
52,887

 
(1,342
)
Total available-for-sale investments
 
$
308,152

 
$
(15,052
)
 
$
22,199

 
$
(2,230
)
 
$
330,351

 
$
(17,282
)

At March 31, 2020, the Company held 206 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $330.4 million and gross unrealized losses of $17.3 million. Of these securities, 12 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 a credit loss has occurred. Based on the Company's review as of March 31, 2020, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At March 31, 2020, 85.2% 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 three months ended March 31, 2020, the Company concluded that there were no credit losses from fixed-maturity securities with unrealized losses.
 
 
December 31, 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
 
$
28,997

 
$
(961
)
 
$
254

 
$

 
$
29,251

 
$
(961
)
Corporate and other securities
 
22,409

 
(251
)
 
1,509

 
(4
)
 
23,918

 
(255
)
Commercial mortgage and asset-backed securities
 
37,723

 
(303
)
 
46,623

 
(407
)
 
84,346

 
(710
)
Residential mortgage-backed securities
 
36,986

 
(148
)
 
24,815

 
(240
)
 
61,801

 
(388
)
Total available-for-sale investments
 
$
126,115

 
$
(1,663
)
 
$
73,201

 
$
(651
)
 
$
199,316

 
$
(2,314
)


11


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, 2020 are summarized, by contractual maturity, as follows:
 
 
March 31, 2020
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
13,680

 
$
13,742

Due after one year through five years
 
109,574

 
111,474

Due after five years through ten years
 
134,900

 
135,904

Due after ten years
 
171,162

 
174,759

Commercial mortgage and asset-backed securities
 
232,773

 
227,065

Residential mortgage-backed securities
 
153,776

 
155,961

Total fixed-maturity securities
 
$
815,865

 
$
818,905


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, 2020 and 2019:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
(in thousands)
Interest:
 
 
 
 
Taxable bonds
 
$
4,611

 
$
3,067

Tax exempt municipal bonds
 
915

 
1,008

Cash equivalents and short-term investments
 
250

 
245

Dividends on equity securities
 
575

 
521

Gross investment income
 
6,351

 
4,841

Investment expenses
 
(391
)
 
(326
)
Net investment income
 
$
5,960

 
$
4,515



12


Realized investment gains and losses
The following table presents realized investment gains and losses for the three months ended March 31, 2020 and 2019:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
(in thousands)
Fixed-maturity securities:
 
 
 
 
Realized gains
 
$
787

 
$
371

Realized losses
 
(23
)
 
(79
)
Net realized gains from fixed-maturity securities
 
764

 
292

 
 
 
 
 
Equity securities:
 
 
 
 
Realized gains
 

 
4

Realized losses
 

 
(16
)
Net realized losses from equity securities
 

 
(12
)
Realized gains from the sales of short-term investments
 
12

 

Net realized investment gains
 
$
776

 
$
280


Change in net unrealized gains (losses) on fixed-maturity securities
For the three months ended March 31, 2020, the change in net unrealized losses for fixed-maturity securities was $11.7 million. For the three months ended March 31, 2019, the change in net unrealized gains for fixed-maturity securities was $8.6 million.
Insurance – statutory deposits
The Company had invested assets with a carrying value of $6.9 million on deposit with state regulatory authorities at both March 31, 2020 and December 31, 2019.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $13.1 million at March 31, 2020. The payable balance was included in the "other liabilities" line item of the consolidated 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 in exchange for an asset or a liability 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.

13


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 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, 2020 and December 31, 2019, by level within the fair value hierarchy.
 
 
March 31, 2020
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
114

 
$

 
$

 
$
114

Obligations of states, municipalities and political subdivisions
 

 
181,550

 

 
181,550

Corporate and other securities
 

 
254,215

 

 
254,215

Commercial mortgage and asset-backed securities
 

 
227,065

 

 
227,065

Residential mortgage-backed securities
 

 
155,961

 

 
155,961

Total fixed-maturity securities
 
114

 
818,791

 

 
818,905

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
59,046

 

 

 
59,046

Nonredeemable preferred stock
 

 
24,520

 

 
24,520

Total equity securities
 
59,046

 
24,520

 

 
83,566

Total
 
$
59,160

 
$
843,311

 
$

 
$
902,471



14


 
 
December 31, 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
 

 
172,893

 

 
172,893

Corporate and other securities
 

 
184,768

 

 
184,768

Commercial mortgage and asset-backed securities
 

 
197,970

 

 
197,970

Residential mortgage-backed securities
 

 
173,789

 

 
173,789

Total fixed-maturity securities
 
112

 
729,420

 

 
729,532

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
54,463

 

 

 
54,463

Nonredeemable preferred stock
 

 
23,831

 

 
23,831

Total equity securities
 
54,463

 
23,831

 

 
78,294

Total
 
$
54,575

 
$
753,251

 
$

 
$
807,826



There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2020 or December 31, 2019.

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, 2020 and 2019:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in thousands)
Balance, beginning of period
 
$
23,564

 
$
14,801

Policy acquisition costs deferred:
 
 
 
 
Direct commissions
 
18,078

 
12,363

Ceding commissions
 
(3,872
)
 
(3,256
)
Other underwriting and policy acquisition costs
 
1,187

 
965

Policy acquisition costs deferred
 
15,393

 
10,072

Amortization of net policy acquisition costs
 
(12,952
)
 
(8,559
)
Balance, end of period
 
$
26,005

 
$
16,314


Amortization of net policy acquisition costs is included in the line item "Underwriting, acquisition and insurance expenses" in the accompanying consolidated statements of income and comprehensive income.

15



5.     Property and equipment, net
Property and equipment are included in "other assets" in the accompanying consolidated balance sheets and consists of the following:
 
 
March 31, 2020
 
December 31, 2019
 
 
(in thousands)
Equipment
 
$
2,415

 
$
2,353

Software
 
2,999

 
2,356

Furniture and fixtures
 
1,025

 
1,025

Leasehold improvements
 
984

 
984

Construction in progress - corporate headquarters
 
29,332

 
19,789

 
 
36,755

 
26,507

Accumulated depreciation
 
(4,073
)
 
(3,873
)
Total property and equipment, net
 
$
32,682

 
$
22,634



Construction in progress includes the purchased land and capitalized expenses related to the construction of the new corporate headquarters' building and parking deck. Construction is expected to be completed in the third quarter of 2020.

6.     Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses for the three months ended March 31, 2020 and 2019 consist of the following:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
 
 
 
 
Direct commissions
 
$
15,142

 
$
10,674

Ceding commissions
 
(3,183
)
 
(2,938
)
Other operating expenses
 
9,624

 
7,880

Total
 
$
21,583

 
$
15,616


Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $8.8 million and $6.8 million for the three months ended March 31, 2020 and 2019, respectively.

7.    Stock-based compensation
On July 27, 2016, the Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (the "2016 Incentive Plan") became effective. The 2016 Incentive Plan, which is administered by the Compensation, Nominating and Corporate

16


Governance Committee of the Company's Board of Directors, provides for grants of stock options, restricted stock, restricted stock units and other stock-based awards to officers, employees, directors, independent contractors and consultants. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832.
The total compensation cost that has been charged against income for share-based compensation arrangements was $0.8 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively.
Restricted Stock Awards
During the three months ended March 31, 2020, the Company granted restricted stock awards under the 2016 Incentive Plan. The restricted stock awards were valued on the date of grant and will vest over a period of 1 year. The fair value of restricted stock awards was determined based on the closing trading price of the Company’s shares on the grant date or, if no shares were traded on the grant date, the last preceding date for which there was a sale of shares. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive dividends. Unvested shares of restricted stock awards and accrued dividends, if any, are forfeited upon the termination of service to or employment with the Company.
A summary of all restricted stock activity under the 2016 Incentive Plan for the three months ended March 31, 2020 is as follows:
 
 
For the Three Months Ended
March 31, 2020
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Non-vested outstanding at the beginning of the period
 
122,723

 
$
67.01

Granted
 
4,428

 
$
101.66

Vested
 
(7,020
)
 
$
55.56

Forfeited
 
(140
)
 
$
53.60

Non-vested outstanding at the end of the period
 
119,991

 
$
68.97


The weighted average grant-date fair value of the Company's restricted stock awards granted during the three months ended March 31, 2020 and 2019 was $101.66 and $55.56, respectively. The fair value of restricted stock awards that vested during the three months ended March 31, 2020 and 2019 was $0.7 million and $0.4 million, respectively. As of March 31, 2020, the Company had $6.3 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 2.7 years.

Stock Options
On July 27, 2016, the Board of Directors approved, and the Company granted, 1,036,916 stock options with an exercise price equal to the Initial Public Offering price of $16.00 per share and a weighted-average grant-date fair value of $2.71 per share. The options have a maximum contractual term of 10 years and vest in 4 equal annual installments following the date of the grant.
The value of the options granted was estimated at the date of grant using the Black-Scholes pricing model using the following assumptions:

17


Risk-free rate of return
 
1.26
%
Dividend yield
 
1.25
%
Expected share price volatility(1)
 
18.50
%
Expected life in years(2)
 
6.3 years


(1)
Expected volatility was based on the Company’s competitors within the industry.
(2)
Expected life was calculated using the simplified method, which was an average of the contractual term of the option and its ordinary vesting period, as the Company did not have sufficient historical data for determining the expected term of our stock option awards.
A summary of option activity as of March 31, 2020, and changes during the period then ended is presented below:
 
 
Number of Shares
 
Weighted-average exercise price
 
Weighted-average remaining years of contractual term
 
Aggregate intrinsic value (in thousands)
Outstanding at January 1, 2020
 
614,345

 
$
16.00

 
 
 
 
Granted
 

 

 
 
 
 
Forfeited
 

 

 
 
 
 
Exercised
 
(43,870
)
 
16.00

 
 
 
 
Outstanding at March 31, 2020
 
570,475

 
$
16.00

 
6.3
 
$
50,504

Exercisable at March 31, 2020
 
349,744

 
$
16.00

 
6.3
 
$
30,963


The total intrinsic value of options exercised was $4.6 million and $1.9 million during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the Company had $0.2 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 0.3 years.


18


8.    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,
 
 
2020
 
2019
 
 
(in thousands, except per share data)
Net income
 
$
5,086

 
$
18,720

 
 
 
 
 
Weighted average common shares outstanding - basic
 
22,109

 
21,169

Effect of potential dilutive securities:
 
 
 
 
Conversion of stock options
 
508

 
568

Conversion of restricted stock
 
61

 
26

Weighted average common shares outstanding - diluted
 
22,678

 
21,763

 
 
 
 
 
Earnings per common share:
 
 
 
 
Basic
 
$
0.23

 
$
0.88

Diluted
 
$
0.22

 
$
0.86


There were no anti-dilutive stock awards for the three months ended March 31, 2020 or March 31, 2019.

9. Income taxes
The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company's best estimate of the effective tax rate expected for the full year. The estimated annual effective tax rate typically differs from the U.S. statutory tax rate primarily as a result of tax-exempt investment income and any discrete items recognized during the period. The Company's effective tax rates were (1.1)% and 17.9% for the three months ended March 31, 2020 and 2019, respectively. In the first quarter of 2020, the effective tax rate was lower than the federal statutory rate of 21% primarily due to the tax benefits from stock options exercised and tax-exempt investment income in relation to pretax income. Pretax income in the first quarter of 2020 reflected a decline in the fair value of the Company's equity investment portfolio.
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted on March 27, 2020. The purpose of the CARES Act is to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic. The CARES Act builds on and clarifies a number of changes in corporate tax law implemented by the Tax Cuts and Jobs Act. The Company does not expect that the CARES Act will have a significant impact on its financial statements.


19


10.     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
 
 
2020
 
2019
 
 
(in thousands)
Gross reserves for unpaid losses and loss adjustment expenses, beginning of year
 
$
460,058

 
$
369,152

Less reinsurance recoverable on unpaid losses
 
69,792

 
55,389

Adoption of new accounting standard for credit losses
 
(282
)
 

Net reserves for unpaid losses and loss adjustment expenses, beginning of year
 
390,548

 
313,763

Incurred losses and loss adjustment expenses:
 
 
 
 
Current year
 
56,742

 
40,128

Prior years
 
(3,009
)
 
(6,396
)
Total net losses and loss adjustment expenses incurred
 
53,733

 
33,732

 
 
 
 
 
Payments:
 
 
 
 
Current year
 
777

 
2,042

Prior years
 
21,270