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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, 2021
| | | | | |
| ☐ | 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) |
2035 Maywill Street
Suite 100
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 per share | 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 October 22, 2021: 22,818,845
KINSALE CAPITAL GROUP, INC.
TABLE OF CONTENTS
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| | | Page |
| PART I. FINANCIAL INFORMATION | | |
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| Item 1. | | | |
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| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
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| PART II. OTHER INFORMATION | | |
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| Item 1. | | | |
| Item 1A. | | | |
| Item 2. | | | |
| Item 6. | | | |
| | | |
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," "prospects" or 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;
•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 inability to obtain reinsurance coverage at reasonable prices and on terms that adequately protect us;
•the possibility that severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us;
•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 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;
•our employees taking excessive risks;
•the intense competition for business in our industry;
•the effects of litigation having an adverse effect on our business;
•the performance of our investment portfolio adversely affecting our financial results;
•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;
•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 other risks and uncertainties discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2020.
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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
| | | | | | | | | | | | | | |
| | September 30,
2021 | | December 31,
2020 |
| | (in thousands, except share and per share data) |
| Assets | | | | |
| Investments: | | | | |
Fixed-maturity securities, available for sale, at fair value (amortized cost: $1,313,284 – 2021; $1,031,817 – 2020) | | $ | 1,342,873 | | | $ | 1,081,800 | |
Equity securities, at fair value (cost: $107,244 – 2021; $98,758 – 2020) | | 151,792 | | | 129,662 | |
| | | | |
| Total investments | | 1,494,665 | | | 1,211,462 | |
| Cash and cash equivalents | | 90,012 | | | 77,093 | |
| Investment income due and accrued | | 7,276 | | | 6,637 | |
| Premiums receivable, net | | 63,709 | | | 48,641 | |
| Reinsurance recoverables | | 112,026 | | | 93,215 | |
| Ceded unearned premiums | | 32,783 | | | 24,265 | |
| Deferred policy acquisition costs, net of ceding commissions | | 40,273 | | | 31,912 | |
| Intangible assets | | 3,538 | | | 3,538 | |
| Deferred income tax asset, net | | 392 | | | — | |
| Other assets | | 54,221 | | | 50,133 | |
| Total assets | | $ | 1,898,895 | | | $ | 1,546,896 | |
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| Liabilities and Stockholders' Equity | | | | |
| Liabilities: | | | | |
| Reserves for unpaid losses and loss adjustment expenses | | $ | 814,856 | | | $ | 636,013 | |
| Unearned premiums | | 334,620 | | | 260,986 | |
| Payable to reinsurers | | 15,097 | | | 12,672 | |
| Accounts payable and accrued expenses | | 16,725 | | | 13,651 | |
| Credit facility | | 42,664 | | | 42,570 | |
| Deferred income tax liability, net | | — | | | 4,648 | |
| Other liabilities | | 15,768 | | | 118 | |
| Total liabilities | | 1,239,730 | | | 970,658 | |
|
| Stockholders’ equity: | | | | |
Common stock, $0.01 par value, 400,000,000 shares authorized, 22,818,527 and 22,757,251 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 228 | | | 228 | |
| Additional paid-in capital | | 293,535 | | | 291,315 | |
| Retained earnings | | 340,133 | | | 243,315 | |
| Accumulated other comprehensive income | | 25,269 | | | 41,380 | |
| Total stockholders’ equity | | 659,165 | | | 576,238 | |
| Total liabilities and stockholders’ equity | | $ | 1,898,895 | | | $ | 1,546,896 | |
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See accompanying notes to condensed consolidated financial statements.
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands, except per share data) |
| Revenues: | | | | | | | | |
| Gross written premiums | | $ | 197,616 | | | $ | 144,777 | | | $ | 560,553 | | | $ | 402,904 | |
| Ceded written premiums | | (26,939) | | | (22,529) | | | (77,825) | | | (54,996) | |
| Net written premiums | | 170,677 | | | 122,248 | | | 482,728 | | | 347,908 | |
| Change in unearned premiums | | (13,806) | | | (14,004) | | | (65,116) | | | (52,946) | |
| Net earned premiums | | 156,871 | | | 108,244 | | | 417,612 | | | 294,962 | |
| Net investment income | | 8,095 | | | 7,008 | | | 22,466 | | | 19,613 | |
Change in the fair value of equity securities | | (1,012) | | | 6,031 | | | 13,644 | | | 3,709 | |
| Net realized investment gains | | 895 | | | 647 | | | 2,397 | | | 1,676 | |
| Other income | | 35 | | | 571 | | | 58 | | | 594 | |
| Total revenues | | 164,884 | | | 122,501 | | | 456,177 | | | 320,554 | |
| | | | | | | | |
| Expenses: | | | | | | | | |
| Losses and loss adjustment expenses | | 87,352 | | | 82,431 | | | 236,727 | | | 194,468 | |
| Underwriting, acquisition and insurance expenses | | 31,465 | | | 22,927 | | | 89,490 | | | 67,471 | |
| Other expenses | | 388 | | | 1,022 | | | 1,234 | | | 1,022 | |
| Total expenses | | 119,205 | | | 106,380 | | | 327,451 | | | 262,961 | |
| Income before income taxes | | 45,679 | | | 16,121 | | | 128,726 | | | 57,593 | |
| Total income tax expense | | 9,054 | | | 1,231 | | | 24,387 | | | 7,355 | |
| Net income | | 36,625 | | | 14,890 | | | 104,339 | | | 50,238 | |
| Other comprehensive (loss) income: | | | | | | | | |
| Change in net unrealized gains on available-for-sale investments, net of taxes | | (6,072) | | | 6,554 | | | (16,111) | | | 24,339 | |
| Total comprehensive income | | $ | 30,553 | | | $ | 21,444 | | | $ | 88,228 | | | $ | 74,577 | |
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| Earnings per share: | | | | | | | | |
| Basic | | $ | 1.61 | | | $ | 0.66 | | | $ | 4.60 | | | $ | 2.26 | |
| Diluted | | $ | 1.59 | | | $ | 0.65 | | | $ | 4.53 | | | $ | 2.21 | |
| | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | |
| Basic | | 22,714 | | | 22,398 | | | 22,681 | | | 22,220 | |
| Diluted | | 23,064 | | | 22,928 | | | 23,057 | | | 22,775 | |
See accompanying notes to condensed consolidated financial statements.
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, except per share data) |
| Balance at December 31, 2020 | | 22,757 | | | $ | 228 | | | $ | 291,315 | | | $ | 243,315 | | | $ | 41,380 | | | $ | 576,238 | |
Issuance of common stock under stock-based compensation plan | | 55 | | | — | | | 339 | | | — | | | — | | | 339 | |
Stock-based compensation expense | | — | | | — | | | 1,036 | | | — | | | — | | | 1,036 | |
Dividends declared ($0.11 per share) | | — | | | — | | | — | | | (2,504) | | | — | | | (2,504) | |
| Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (19,622) | | | (19,622) | |
| Net income | | — | | | — | | | — | | | 32,079 | | | — | | | 32,079 | |
| Balance at March 31, 2021 | | 22,812 | | | 228 | | | 292,690 | | | 272,890 | | | 21,758 | | | 587,566 | |
Issuance of common stock under stock-based compensation plan | | 7 | | | — | | | 163 | | | — | | | — | | | 163 | |
Stock-based compensation expense | | — | | | — | | | 1,279 | | | — | | | — | | | 1,279 | |
| Restricted shares withheld for taxes | | (13) | | | — | | | (2,082) | | | — | | | — | | | (2,082) | |
Dividends declared ($0.11 per share) | | — | | | — | | | — | | | (2,508) | | | — | | | (2,508) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 9,583 | | | 9,583 | |
| Net income | | — | | | — | | | — | | | 35,635 | | | — | | | 35,635 | |
| Balance at June 30, 2021 | | 22,806 | | | 228 | | | 292,050 | | | 306,017 | | | 31,341 | | | 629,636 | |
Issuance of common stock under stock-based compensation plan | | 13 | | | — | | | 220 | | | — | | | — | | | 220 | |
Stock-based compensation expense | | — | | | — | | | 1,265 | | | — | | | — | | | 1,265 | |
Dividends declared ($0.11 per share) | | — | | | — | | | — | | | (2,509) | | | — | | | (2,509) | |
| Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (6,072) | | | (6,072) | |
| Net income | | — | | | — | | | — | | | 36,625 | | | — | | | 36,625 | |
| Balance at September 30, 2021 | | 22,819 | | | $ | 228 | | | $ | 293,535 | | | $ | 340,133 | | | $ | 25,269 | | | $ | 659,165 | |
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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 | | Total
Stock-
holders' Equity |
| | (in thousands, except per share data) |
| 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 | |
Issuance of common stock under stock-based compensation plan | | 61 | | | — | | | 395 | | | — | | | — | | | 395 | |
Stock-based compensation expense | | — | | | — | | | 931 | | | — | | | — | | | 931 | |
| Restricted shares withheld for taxes | | (12) | | | — | | | (1,803) | | | — | | | — | | | (1,803) | |
Dividends declared ($0.09 per share) | | — | | | — | | | — | | | (2,013) | | | — | | | (2,013) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 27,008 | | | 27,008 | |
| Net income | | — | | | — | | | — | | | 30,262 | | | — | | | 30,262 | |
| Balance at June 30, 2020 | | 22,303 | | | 223 | | | 230,265 | | | 194,323 | | | 31,303 | | | 456,114 | |
| Issuance of common stock, net of issuance costs | | 311 | | | 3 | | | 56,698 | | | — | | | — | | | 56,701 | |
Issuance of common stock under stock-based compensation plan | | 48 | | | 1 | | | 953 | | | — | | | — | | | 954 | |
Stock-based compensation expense | | — | | | — | | | 952 | | | — | | | — | | | 952 | |
Dividends declared ($0.09 per share) | | — | | | — | | | — | | | (2,034) | | | — | | | (2,034) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 6,554 | | | 6,554 | |
| Net income | | — | | | — | | | — | | | 14,890 | | | — | | | 14,890 | |
| Balance at September 30, 2020 | | 22,662 | | | $ | 227 | | | $ | 288,868 | | | $ | 207,179 | | | $ | 37,857 | | | $ | 534,131 | |
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See accompanying notes to condensed consolidated financial statements.
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| | (in thousands) |
| Operating activities: | | | | |
| Net cash provided by operating activities | | $ | 301,881 | | | $ | 206,461 | |
| | | | |
| Investing activities: | | | | |
| Purchase of property and equipment | | (4,770) | | | (29,088) | |
| Sale of property and equipment | | — | | | 4,999 | |
| | | | |
| Purchases – fixed-maturity securities | | (509,000) | | | (389,713) | |
| Purchases – equity securities | | (11,717) | | | (33,830) | |
| Sales – fixed-maturity securities | | 102,552 | | | 79,042 | |
| Sales – equity securities | | 3,185 | | | — | |
| Maturities and calls – fixed-maturity securities | | 139,669 | | | 66,204 | |
| Net cash used in investing activities | | (280,081) | | | (302,386) | |
| | | | |
| Financing activities: | | | | |
| Proceeds from issuance of common stock, net of issuance costs | | — | | | 56,701 | |
| Proceeds from credit facility | | — | | | 23,300 | |
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| Payroll taxes withheld and remitted on share-based payments | | (2,082) | | | (1,803) | |
| Proceeds from stock options exercised | | 722 | | | 2,051 | |
| Dividends paid | | (7,521) | | | (6,036) | |
| Net cash (used in) provided by financing activities | | (8,881) | | | 74,213 | |
| Net change in cash and cash equivalents | | 12,919 | | | (21,712) | |
| Cash and cash equivalents at beginning of year | | 77,093 | | | 100,408 | |
| Cash and cash equivalents at end of period | | $ | 90,012 | | | $ | 78,696 | |
See accompanying notes to condensed consolidated financial statements.
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Summary of significant accounting policies
Basis of presentation
The unaudited 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. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of Kinsale Capital Group, Inc. and its subsidiaries ("the Company") included in the Annual Report on Form 10-K for the year ended December 31, 2020. 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.
Recently adopted accounting pronouncements
Accounting Standard Update ("ASU") 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board ("FASB") issued updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. Effective January 1, 2021, the Company adopted ASU 2019-12, which did not have a material impact on the Company's condensed consolidated financial statements.
There are no prospective accounting standards which, upon their effective date, would have a material impact on the Company's condensed consolidated financial statements.
2. Investments
Available-for-sale investments
The following tables summarize the available-for-sale investments at September 30, 2021 and December 31, 2020:
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| | September 30, 2021 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | | Estimated Fair Value |
| | (in thousands) |
| Fixed maturities: | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government agencies | | $ | 6,932 | | | $ | — | | | $ | (10) | | | | | $ | 6,922 | |
Obligations of states, municipalities and political subdivisions | | 214,776 | | | 11,739 | | | (454) | | | | | 226,061 | |
| Corporate and other securities | | 434,489 | | | 14,101 | | | (2,100) | | | | | 446,490 | |
| Asset-backed securities | | 298,492 | | | 3,255 | | | (79) | | | | | 301,668 | |
| Commercial mortgage-backed securities | | 58,579 | | | 2,942 | | | (81) | | | | | 61,440 | |
Residential mortgage-backed securities | | 300,016 | | | 2,817 | | | (2,541) | | | | | 300,292 | |
| Total fixed-maturity investments | | $ | 1,313,284 | | | $ | 34,854 | | | $ | (5,265) | | | | | $ | 1,342,873 | |
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| | December 31, 2020 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | | Estimated Fair Value |
| | (in thousands) |
| Fixed maturities: | | | | | | | | | | |
| | | | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | 216,181 | | | $ | 14,792 | | | $ | (67) | | | | | $ | 230,906 | |
| Corporate and other securities | | 294,854 | | | 21,840 | | | (86) | | | | | 316,608 | |
| Asset-backed securities | | 236,813 | | | 4,230 | | | (382) | | | | | 240,661 | |
| Commercial mortgage-backed securities | | 66,110 | | | 4,886 | | | (27) | | | | | 70,969 | |
Residential mortgage-backed securities | | 217,859 | | | 4,938 | | | (141) | | | | | 222,656 | |
| Total fixed-maturity investments | | $ | 1,031,817 | | | $ | 50,686 | | | $ | (703) | | | | | $ | 1,081,800 | |
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 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 its 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. For fixed-maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before recovery of its amortized cost, 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 through an allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment, which is recognized in other comprehensive income.
The Company reports investment income due and accrued separately from available-for-sale investments 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.
The following tables summarize gross unrealized 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:
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| | September 30, 2021 |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Fixed maturities: | | | | | | | | | | | | |
| U.S. Treasury securities and obligations of the U.S. government agencies | | $ | 6,922 | | | $ | (10) | | | $ | — | | | $ | — | | | $ | 6,922 | | | $ | (10) | |
Obligations of states, municipalities and political subdivisions | | 24,496 | | | (454) | | | — | | | — | | | 24,496 | | | (454) | |
Corporate and other securities | | 127,870 | | | (1,984) | | | 1,080 | | | (116) | | | 128,950 | | | (2,100) | |
| Asset-backed securities | | 63,318 | | | (58) | | | 7,771 | | | (21) | | | 71,089 | | | (79) | |
| Commercial mortgage-backed securities | | 8,500 | | | (81) | | | — | | | — | | | 8,500 | | | (81) | |
Residential mortgage-backed securities | | 188,418 | | | (2,505) | | | 1,249 | | | (36) | | | 189,667 | | | (2,541) | |
| Total fixed-maturity investments | | $ | 419,524 | | | $ | (5,092) | | | $ | 10,100 | | | $ | (173) | | | $ | 429,624 | | | $ | (5,265) | |
At September 30, 2021, the Company held 165 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $429.6 million and gross unrealized losses of $5.3 million. Of these securities, 8 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 September 30, 2021, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At September 30, 2021, 80.3% 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, 2021, the Company concluded that there were no credit losses from fixed-maturity securities with unrealized losses.
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| | December 31, 2020 |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Fixed maturities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | 6,412 | | | $ | (67) | | | $ | — | | | $ | — | | | $ | 6,412 | | | $ | (67) | |
Corporate and other securities | | 3,829 | | | (86) | | | — | | | — | | | 3,829 | | | (86) | |
| Asset-backed securities | | 57,750 | | | (149) | | | 23,825 | | | (233) | | | 81,575 | | | (382) | |
| Commercial mortgage-backed securities | | 4,971 | | | (27) | | | — | | | — | | | 4,971 | | | (27) | |
Residential mortgage-backed securities | | 46,869 | | | (129) | | | 266 | | | (12) | | | 47,135 | | | (141) | |
| Total fixed-maturity investments | | $ | 119,831 | | | $ | (458) | | | $ | 24,091 | | | $ | (245) | | | $ | 143,922 | | | $ | (703) | |
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, 2021 are summarized, by contractual maturity, as follows:
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| | September 30, 2021 |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
| | (in thousands) |
| Due in one year or less | | $ | 8,471 | | | $ | 8,601 | |
| Due after one year through five years | | 172,248 | | | 178,438 | |
| Due after five years through ten years | | 211,736 | | | 219,098 | |
| Due after ten years | | 263,742 | | | 273,336 | |
| Asset-backed securities | | 298,492 | | | 301,668 | |
| Commercial mortgage-backed securities | | 58,579 | | | 61,440 | |
| Residential mortgage-backed securities | | 300,016 | | | 300,292 | |
| Total fixed-maturity securities | | $ | 1,313,284 | | | $ | 1,342,873 | |
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower.
Net investment income
The following table presents the components of net investment income for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
| Interest: | | | | | | | | |
| Taxable bonds | | $ | 6,471 | | | $ | 5,383 | | | $ | 18,356 | | | $ | 15,253 | |
| Tax exempt municipal bonds | | 874 | | | 918 | | | 2,636 | | | 2,741 | |
| Cash equivalents and short-term investments | | 1 | | | — | | | 11 | | | 261 | |
| Dividends on equity securities | | 979 | | | 1,100 | | | 2,801 | | | 2,554 | |
| Gross investment income | | 8,325 | | | 7,401 | | | 23,804 | | | 20,809 | |
| Investment expenses | | (230) | | | (393) | | | (1,338) | | | (1,196) | |
| Net investment income | | $ | 8,095 | | | $ | 7,008 | | | $ | 22,466 | | | $ | 19,613 | |
Realized investment gains and losses
The following table presents realized investment gains and losses for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
| Fixed-maturity securities: | | | | | | | | |
| Realized gains | | $ | 804 | | | $ | 719 | | | $ | 2,445 | | | $ | 1,826 | |
| Realized losses | | — | | | (72) | | | (2) | | | (162) | |
| Net realized gains from fixed-maturity securities | | 804 | | | 647 | | | 2,443 | | | 1,664 | |
| | | | | | | | |
| Equity securities: | | | | | | | | |
| Realized gains | | 97 | | | — | | | 97 | | | — | |
| Realized losses | | (6) | | | — | | | (143) | | | — | |
| Net realized gains (losses) from equity securities | | 91 | | | — | | | (46) | | | — | |
| Realized gains from the sales of short-term investments | | — | | | — | | | — | | | 12 | |
| | | | | | | | |
| Net realized investment gains | | $ | 895 | | | $ | 647 | | | $ | 2,397 | | | $ | 1,676 | |
Change in net unrealized gains (losses) on fixed-maturity securities
For the three and nine months ended September 30, 2021, the changes in net unrealized gains (losses) for fixed-maturity securities were $(7.7) million and $(20.4) million, respectively. For the three and nine months ended September 30, 2020, the changes in net unrealized gains for fixed-maturity securities were $8.3 million and $30.8 million, respectively.
Insurance – statutory deposits
The Company had invested assets with a fair value of $6.7 million and $6.9 million on deposit with state regulatory authorities at September 30, 2021 and December 31, 2020, respectively.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $15.6 million at September 30, 2021. The payable balance was included in the "other liabilities" line item of the consolidated balance sheet.
3. Fair value measurements
Fair value is estimated for each class of financial instrument based on the framework established in the fair value accounting guidance. Fair value is defined as the price in the principal market that would be received for an asset or paid to transfer 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.
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 accounting vendor from nationally recognized third-party pricing services, where available. Values for exchange traded funds are generally based on Level 1 inputs, which use quoted prices in active markets for identical assets. For other fixed-maturity securities and non-redeemable preferred stock, the pricing vendors use a pricing methodology involving the market approach, including pricing models which use prices and relevant market information regarding a particular security or securities with similar characteristics to establish a valuation. The estimates of fair value of these investments are included in the amounts disclosed as Level 2. For those investments where significant inputs are unobservable, the Company's investment accounting vendor obtains valuations from pricing vendors or brokers using the market approach and income approach valuation techniques and are disclosed as Level 3.
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 accounting vendor that assess fair values from third party pricing services, 2) discussing with the Company's investment accounting vendor its process for reviewing and validating pricing obtained from third party pricing services and 3) reviewing the security pricing received from the Company's investment accounting vendor and monitoring changes in unrealized gains and losses at the individual security level. 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 September 30, 2021 and December 31, 2020, by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Assets | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | | $ | 6,922 | | | $ | — | | | $ | — | | | $ | 6,922 | |
Obligations of states, municipalities and political subdivisions | | — | | | 226,061 | | | — | | | 226,061 | |
| Corporate and other securities | | — | | | 446,490 | | | — | | | 446,490 | |
| Asset-backed securities | | — | | | 301,668 | | | — | | | 301,668 | |
| Commercial mortgage-backed securities | | — | | | 61,440 | | | — | | | 61,440 | |
| Residential mortgage-backed securities | | — | | | 300,292 | | | — | | | 300,292 | |
| Total fixed-maturity securities | | 6,922 | | | 1,335,951 | | | — | | | 1,342,873 | |
| | | | | | | | |
| Equity securities: | | | | | | | | |
| Exchange traded funds | | 112,984 | | | — | | | — | | | 112,984 | |
| Non-redeemable preferred stock | | — | | | 38,808 | | | — | | | 38,808 | |
| Total equity securities | | 112,984 | | | 38,808 | | | — | | | 151,792 | |
| | | | | | | | |
| Total | | $ | 119,906 | | | $ | 1,374,759 | | | $ | — | | | $ | 1,494,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Assets | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | — | | | $ | 230,906 | | | $ | — | | | $ | 230,906 | |
| Corporate and other securities | | — | | | 316,608 | | | — | | | 316,608 | |
| Asset-backed securities | | — | | | 240,661 | | | — | | | 240,661 | |
|