Kinsale Capital Group Earnings 2021-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

knsl-20210331

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, 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	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 23, 2021: 22,812,216

Table of Contents

KINSALE CAPITAL GROUP, INC.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020	4
	Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2021 and 2020	5
	Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three Months Ended March 31, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	41
	Signatures	42

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;

•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;

Table of Contents

•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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)


	March 31, 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: $1,074,618 – 2021; $1,031,817 – 2020)	$	1,099,763	$	1,081,800
Equity securities, at fair value (cost: $102,041 – 2021; $98,758 – 2020)	140,036		129,662

Total investments	1,239,799		1,211,462
Cash and cash equivalents	132,535		77,093
Investment income due and accrued	6,639		6,637
Premiums receivable, net	55,212		48,641
Reinsurance recoverables	96,191		93,215
Ceded unearned premiums	26,854		24,265
Deferred policy acquisition costs, net of ceding commissions	34,741		31,912
Intangible assets	3,538		3,538
Deferred income tax asset, net	608		—
Other assets	49,221		50,133
Total assets	$	1,645,338	$	1,546,896

Liabilities and Stockholders' Equity
Liabilities:
Reserves for unpaid losses and loss adjustment expenses	$	688,773	$	636,013
Unearned premiums	284,832		260,986
Payable to reinsurers	15,010		12,672
Accounts payable and accrued expenses	6,502		13,651
Credit facility	42,601		42,570
Deferred income tax liability, net	—		4,648
Other liabilities	20,054		118
Total liabilities	1,057,772		970,658

Stockholders’ equity:
Common stock, $0.01 par value, 400,000,000 shares authorized, 22,811,929 and 22,757,251 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	228		228
Additional paid-in capital	292,690		291,315
Retained earnings	272,890		243,315
Accumulated other comprehensive income	21,758		41,380
Total stockholders’ equity	587,566		576,238
Total liabilities and stockholders’ equity	$	1,645,338	$	1,546,896

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)


	Three Months Ended March 31,
		2021		2020
		(in thousands, except per share data)
Revenues:
Gross written premiums		$	168,876	$	124,036
Ceded written premiums		(24,578)		(15,983)
Net written premiums		144,298		108,053
Change in unearned premiums		(21,257)		(18,292)
Net earned premiums		123,041		89,761
Net investment income		6,942		5,960
Change in the fair value of equity securities		7,091		(16,161)
Net realized investment gains		1,198		776
Other income		11		10
Total revenues		138,283		80,346

Expenses:
Losses and loss adjustment expenses		70,260		53,733
Underwriting, acquisition and insurance expenses		28,136		21,583
Other expenses		448		—
Total expenses		98,844		75,316
Income before income taxes		39,439		5,030
Total income tax expense (benefit)		7,360		(56)
Net income		32,079		5,086
Other comprehensive income (loss):
Change in net unrealized gains on available-for-sale investments, net of taxes		(19,622)		(9,223)
Total comprehensive income (loss)		$	12,457	$	(4,137)


Earnings per share:
Basic	$	1.42	$	0.23
Diluted	$	1.39	$	0.22

Weighted-average shares outstanding:
Basic	22,665		22,109
Diluted	23,069		22,678

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)


	Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumu- lated Other Compre- hensive Income		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




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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,
	2021		2020
	(in thousands)
Operating activities:
Net cash provided by operating activities	$	91,322	$	59,683

Investing activities:
Purchase of property and equipment	(1,282)		(9,264)
Sale of property and equipment	—		4,999

Purchases – fixed-maturity securities	(105,010)		(146,963)
Purchases – equity securities	(3,282)		(13,443)
Sales – fixed-maturity securities	30,797		31,641

Maturities and calls – fixed-maturity securities	45,053		19,482
Net cash used in investing activities	(33,724)		(113,548)

Financing activities:

Proceeds from credit facility	—		7,300


Proceeds from stock options exercised	339		702
Dividends paid	(2,495)		(1,991)
Net cash (used in) provided by financing activities	(2,156)		6,011
Net change in cash and cash equivalents	55,442		(47,854)
Cash and cash equivalents at beginning of year	77,093		100,408
Cash and cash equivalents at end of period	$	132,535	$	52,554

See accompanying notes to condensed consolidated financial statements.

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 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, 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. Management periodically reviews its estimates and assumptions.

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.

Table of Contents

2. Investments

Available-for-sale investments

The following tables summarize the available-for-sale investments at March 31, 2021 and December 31, 2020:


	March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Fixed maturities:

Obligations of states, municipalities and political subdivisions	$	205,744	$	10,349	$	(1,730)	$	214,363
Corporate and other securities	333,572		12,682		(3,428)		342,826
Asset-backed securities	255,544		3,951		(70)		259,425
Commercial mortgage-backed securities	62,519		2,537		(230)		64,826
Residential mortgage-backed securities	217,239		3,562		(2,478)		218,323
Total fixed-maturity investments	$	1,074,618	$	33,081	$	(7,936)	$	1,099,763


	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.

Table of Contents

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:


	March 31, 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:

Obligations of states, municipalities and political subdivisions	$	38,432	$	(1,730)	$	—	$	—	$	38,432	$	(1,730)
Corporate and other securities	114,920		(3,428)		—		—		114,920		(3,428)
Asset-backed securities	25,069		(16)		17,373		(54)		42,442		(70)
Commercial mortgage-backed securities	9,556		(230)		—		—		9,556		(230)
Residential mortgage-backed securities	113,150		(2,423)		5,543		(55)		118,693		(2,478)
Total fixed-maturity investments	$	301,127	$	(7,827)	$	22,916	$	(109)	$	324,043	$	(7,936)

At March 31, 2021, the Company held 167 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $324.0 million and gross unrealized losses of $7.9 million. Of these securities, 11 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, 2021, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At March 31, 2021, 78.3% 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 three months ended March 31, 2021, the Company concluded that there were no credit losses from fixed-maturity securities with unrealized losses.

Table of Contents


	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 March 31, 2021 are summarized, by contractual maturity, as follows:


	March 31, 2021
	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Due in one year or less	$	11,278	$	11,466
Due after one year through five years	124,996		131,847
Due after five years through ten years	171,090		177,032
Due after ten years	231,952		236,844
Asset-backed securities	255,544		259,425
Commercial mortgage-backed securities	62,519		64,826
Residential mortgage-backed securities	217,239		218,323
Total fixed-maturity securities	$	1,074,618	$	1,099,763

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.

Table of Contents

Net investment income

The following table presents the components of net investment income for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Interest:
Taxable bonds		$	5,729	$	4,611
Tax exempt municipal bonds		885		915
Cash equivalents and short-term investments		1		250
Dividends on equity securities		869		575
Gross investment income		7,484		6,351
Investment expenses		(542)		(391)
Net investment income		$	6,942	$	5,960

Realized investment gains and losses

The following table presents realized investment gains and losses for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Fixed-maturity securities:
Realized gains		$	1,199	$	787
Realized losses		(1)		(23)
Net realized gains from fixed-maturity securities		1,198		764





Realized gains from the sales of short-term investments		—		12

Net realized investment gains		$	1,198	$	776

Change in net unrealized gains on fixed-maturity securities

For the three months ended March 31, 2021 and 2020, the changes in net unrealized gains for fixed-maturity securities were decreases of $24.8 million and $11.7 million, respectively.

Insurance – statutory deposits

The Company had invested assets with a carrying value of $6.8 million and $6.9 million on deposit with state regulatory authorities at March 31, 2021 and December 31, 2020, respectively.

Payable for investments purchased

The Company recorded a payable for investments purchased, not yet settled, of $13.6 million at March 31, 2021. The payable balance was included in the "other liabilities" line item of the consolidated balance sheet.

Table of Contents

3. Fair value measurements

Fair value is estimated for each class of financial instrument for which it was practical to estimate fair value. Fair value is defined as the price in the principal market that would be received for an asset 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 U.S. Treasury and 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 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.

Table of Contents

The following tables present the balances of assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, by level within the fair value hierarchy.


	March 31, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Fixed maturities:

Obligations of states, municipalities and political subdivisions	$	—	$	214,363	$	—	$	214,363
Corporate and other securities	—		342,826		—		342,826
Asset-backed securities	—		259,425		—		259,425
Commercial mortgage-backed securities	—		64,826		—		64,826
Residential mortgage-backed securities	—		218,323		—		218,323
Total fixed-maturity securities	—		1,099,763		—		1,099,763

Equity securities:
Exchange traded funds	106,014		—		—		106,014
Nonredeemable preferred stock	—		34,022		—		34,022
Total equity securities	106,014		34,022		—		140,036

Total	$	106,014	$	1,133,785	$	—	$	1,239,799


	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
Commercial mortgage-backed securities	—		70,969		—		70,969
Residential mortgage-backed securities	—		222,656		—		222,656
Total fixed-maturity securities	—		1,081,800		—		1,081,800

Equity securities:
Exchange traded funds	98,050		—		—		98,050
Nonredeemable preferred stock	—		31,612		—		31,612
Total equity securities	98,050		31,612		—		129,662

Total	$	98,050	$	1,113,412	$	—	$	1,211,462

There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2021 or December 31, 2020.

Table of Contents

The carrying value of cash equivalents approximates its fair value at March 31, 2021 and December 31, 2020, due to the short-term maturities of these assets. In addition, the estimated fair value of the Credit Facility approximated its carrying value as of March 31, 2021 and December 31, 2020. See Note 12 for further information regarding the Credit Facility.

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, 2021 and 2020:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Balance, beginning of period		$	31,912	$	23,564
Policy acquisition costs deferred:
Direct commissions		24,650		18,078
Ceding commissions		(6,204)		(3,872)
Other underwriting and policy acquisition costs		1,368		1,187
Policy acquisition costs deferred		19,814		15,393
Amortization of net policy acquisition costs		(16,985)		(12,952)
Balance, end of period		$	34,741	$	26,005

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 (loss).

Table of Contents

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, 2021		December 31, 2020
	(in thousands)
Building	$	31,770	$	31,675
Parking deck	5,072		5,072
Land	3,068		3,068
Equipment	2,861		2,770
Software	5,393		4,815
Furniture and fixtures	1,778		1,731

Land improvements	317		317
Construction in progress - corporate headquarters	253		—
	50,512		49,448
Accumulated depreciation	(3,763)		(3,262)
Total property and equipment, net	$	46,749	$	46,186

During the first quarter of 2020, the Company sold a portion of both its land and parking deck for approximately $6.5 million to a real estate developer for the development of an apartment building. As of March 31, 2021, the Company had received $5.0 million of the proceeds from the sale and is expected to receive the remaining $1.5 million upon completion of the apartment building. This receivable is included in "other assets" on the accompanying consolidated balance sheet.

6. Underwriting, acquisition and insurance expenses

Underwriting, acquisition and insurance expenses for the three months ended March 31, 2021 and 2020 consist of the following:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Underwriting, acquisition and insurance expenses incurred:
Direct commissions		$	21,165	$	15,142
Ceding commissions		(5,355)		(3,183)
Other operating expenses		12,326		9,624
Total		$	28,136	$	21,583

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $11.3 million and $8.8 million for the three months ended March 31, 2021 and 2020, 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

Table of Contents

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 $1.0 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively.

Restricted Stock Awards

During the three months ended March 31, 2021, 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 to 4 years. 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 restricted stock activity under the 2016 Incentive Plan for the three months ended March 31, 2021 is as follows:


	For the Three Months Ended March 31, 2021
	Number of Shares	Weighted Average Grant Date Fair Value per Share
Non-vested outstanding at the beginning of the period	108,392	$	97.40
Granted	35,870	$	185.00
Vested	(4,428)	$	101.66
Forfeited	(2,406)	$	148.60
Non-vested outstanding at the end of the period	137,428	$	119.22

The weighted average grant-date fair value of the Company's restricted stock awards granted during the three months ended March 31, 2021 and 2020 was $185.00 and $101.66, respectively. The fair value of restricted stock awards that vested during the three months ended March 31, 2021 and 2020 was $0.9 million and $0.7 million, respectively. As of March 31, 2021, the Company had $13.5 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 3.1 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 vested 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:

Table of Contents


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, 2021, 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, 2021	387,738	$	16.00
Granted	—	—
Forfeited	—	16.00
Exercised	(21,214)	16.00
Outstanding at March 31, 2021	366,524	$	16.00	5.3	$	54,539

Price	100.75	EPS	2
Shares	22	P/E	45
MCap	2,244	P/FCF	19
Net Debt	-86	EBIT	59
TEV	2,158	TEV/EBIT	37
TTM 2019-09-30, in MM, except price, ratios

10-Q	2021-03-31	Filed 2021-04-29
10-K	2020-12-31	Filed 2021-02-25
10-Q	2020-09-30	Filed 2020-10-29
10-Q	2020-06-30	Filed 2020-07-30
10-Q	2020-03-31	Filed 2020-04-30
10-K	2019-12-31	Filed 2020-03-02
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-02
10-K	2018-12-31	Filed 2019-02-28
10-Q	2018-09-30	Filed 2018-11-01
10-Q	2018-06-30	Filed 2018-08-06
10-Q	2018-03-31	Filed 2018-05-03
10-K	2017-12-31	Filed 2018-03-01
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-03
10-Q	2017-03-31	Filed 2017-05-04
10-K	2016-12-31	Filed 2017-03-16
10-Q	2016-09-30	Filed 2016-11-10
10-Q	2016-06-30	Filed 2016-09-07

8-K	2020-10-29
8-K	2020-09-11
8-K	2020-08-04
8-K	2020-07-30
8-K	2020-06-03
8-K	2020-05-28
8-K	2020-04-30
8-K	2020-02-20
8-K	2019-10-31
8-K	2019-08-07
8-K	2019-08-01
8-K	2019-06-21
8-K	2019-05-28
8-K	2019-05-23
8-K	2019-05-02
8-K	2019-02-21
8-K	2018-11-19
8-K	2018-11-01
8-K	2018-08-06
8-K	2018-05-24
8-K	2018-05-03
8-K	2018-02-26

EX-31.1	knslexhibit31103312021.htm
EX-31.2	knslexhibit31203312021.htm
EX-32.1	knslexhibit32103312021.htm
EX-32.2	knslexhibit32203312021.htm

KNSL 10Q Quarterly Report

Kinsale Capital Group Earnings 2021-03-31