10-Q 1 knsl10q2q2017.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2017

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 001-37848
 
 
 
 
KINSALE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)

 
98-0664337
(I.R.S. Employer
Identification Number)
 
2221 Edward Holland Drive, Suite 600
Richmond, VA 23230

 
 
(Address of principal executive offices)
 
 
(804) 289-1300
 
 
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act .☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes  
     No  ☒
Number of shares of the registrant's common shares outstanding at August 1, 2017: 20,968,707



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 IA.
 
Item 2.
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 





1


PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
 
 
June 30,
2017
 
December 31,
2016
 
 
(in thousands, except share and per share data)
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost: $389,484 in 2017; $413,526 in 2016)
 
$
390,678

 
$
411,223

Equity securities available-for-sale, at fair value (cost: $20,651 in 2017; $14,350 in 2016)
 
26,173

 
18,374

Short-term investments
 
14,481

 

Total investments
 
431,332

 
429,597

Cash and cash equivalents
 
93,430

 
50,752

Investment income due and accrued
 
2,522

 
2,293

Premiums receivable, net
 
19,043

 
16,984

Receivable from reinsurers
 

 
8,567

Reinsurance recoverables
 
39,742

 
70,317

Ceded unearned premiums
 
13,911

 
13,512

Deferred policy acquisition costs, net of ceding commissions
 
11,578

 
10,150

Intangible assets
 
3,538

 
3,538

Deferred income tax asset, net
 
6,210

 
6,605

Other assets
 
1,660

 
2,074

Total assets
 
$
622,966

 
$
614,389

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Reserves for unpaid losses and loss adjustment expenses
 
$
284,428

 
$
264,801

Unearned premiums
 
100,193

 
89,344

Payable to reinsurers
 
3,246

 
4,090

Funds held for reinsurers
 

 
36,497

Accounts payable and accrued expenses
 
4,986

 
8,752

Other liabilities
 
4,068

 
691

Total liabilities
 
396,921

 
404,175

 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value, 400,000,000 shares authorized, 20,968,707 shares issued and outstanding at June 30, 2017 and December 31, 2016

 
210

 
210

Additional paid-in capital
 
153,677

 
153,353

Retained earnings
 
65,900

 
53,640

Accumulated other comprehensive income
 
6,258

 
3,011

Stockholders’ equity
 
226,045

 
210,214

Total liabilities and stockholders’ equity
 
$
622,966

 
$
614,389


See accompanying notes to condensed consolidated financial statements.

2


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
 
Gross written premiums
 
$
57,753

 
$
50,107

 
$
110,615

 
$
93,189

Ceded written premiums
 
(7,980
)
 
(14,446
)
 
(16,680
)
 
(9,733
)
Net written premiums
 
49,773

 
35,661

 
93,935

 
83,456

Change in unearned premiums
 
(6,721
)
 
(3,878
)
 
(10,450
)
 
(21,076
)
Net earned premiums
 
43,052

 
31,783

 
83,485

 
62,380

Net investment income
 
2,432

 
1,819

 
4,718

 
3,495

Net realized investment gains (losses)
 
24

 
(4
)
 
(8
)
 
383

Other income
 

 
78

 

 
136

Total revenues
 
45,508

 
33,676

 
88,195

 
66,394

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
21,859

 
17,456

 
43,966

 
35,577

Underwriting, acquisition and insurance expenses
 
10,492

 
6,481

 
21,786

 
12,729

Other expenses
 
402

 
486

 
402

 
946

Total expenses
 
32,753

 
24,423

 
66,154

 
49,252

Income before income taxes
 
12,755

 
9,253

 
22,041

 
17,142

Total income tax expense
 
4,260

 
3,196

 
7,265

 
5,828

Net income
 
8,495

 
6,057

 
14,776

 
11,314

Other comprehensive income:
 
 
 
 
 
 
 
 
Change in unrealized gains, net of taxes of $1,171 and $1,748 in 2017 and $1,557 and $2,702 in 2016
 
2,174

 
2,890

 
3,247

 
5,016

Total comprehensive income
 
$
10,669

 
$
8,947

 
$
18,023

 
$
16,330

Earnings per share - basic:
 
 
 
 
 
 
 
 
Common stock
 
$
0.41

 
$

 
$
0.70

 
$

Common stock - Class A
 
$

 
$
0.42

 
$

 
$
0.79

Common stock - Class B
 
$

 
$
0.19

 
$

 
$
0.26

 
 
 
 
 
 
 
 
 
Earnings per share - diluted:
 
 
 
 
 
 
 
 
Common stock
 
$
0.40

 
$

 
$
0.69

 
$

Common stock - Class A
 
$

 
$
0.42

 
$

 
$
0.79

Common stock - Class B
 
$

 
$
0.18

 
$

 
$
0.25

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic:
 
 
 
 
 
 
 
 
Common stock
 
20,969

 

 
20,969

 

Common stock - Class A
 

 
13,803

 

 
13,803

Common stock - Class B
 

 
1,583

 

 
1,557

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - diluted:
 
 
 
 
 
 
 
 
Common stock
 
21,457

 

 
21,425

 

Common stock - Class A
 

 
13,803

 

 
13,803

Common stock - Class B
 

 
1,666

 

 
1,650


See accompanying notes to condensed consolidated financial statements.

3


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
 
Shares of Class A Common Stock
 
Shares of Class B Common Stock
 
Shares of Common Stock
 
Class A Common Stock
 
Class B 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, 2015
 
13,803

 
1,514

 

 
$
1

 
$

 
$

 
$
80,229

 
$
29,570

 
$
3,651

 
$
113,451

Stock-based compensation
 

 
162

 

 

 

 

 
44

 

 

 
44

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
5,016

 
5,016

Net income
 

 

 

 

 

 

 

 
11,314

 

 
11,314

Balance at
June 30, 2016
 
13,803

 
1,676

 

 
$
1

 
$

 
$

 
$
80,273

 
$
40,884

 
$
8,667

 
$
129,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2016
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,353

 
$
53,640

 
$
3,011

 
$
210,214

Stock-based compensation
 

 

 

 

 

 

 
324

 

 

 
324

Dividends
 

 

 

 

 

 

 

 
(2,516
)
 

 
(2,516
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
3,247

 
3,247

Net income
 

 

 

 

 

 

 

 
14,776

 

 
14,776

Balance at
June 30, 2017
 

 

 
20,969

 
$

 
$

 
$
210

 
$
153,677

 
$
65,900

 
$
6,258

 
$
226,045



See accompanying notes to condensed consolidated financial statements.


4


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
(in thousands)
Operating activities:
 
 
 
 
Net cash provided by operating activities
 
$
40,782

 
$
36,480

 
 
 
 
 
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(62
)
 
(236
)
Change in short-term investments, net
 
(14,481
)
 
(4,354
)
Securities available-for-sale:
 
 
 
 
Purchases – fixed maturity securities
 
(21,161
)
 
(64,207
)
Purchases – equity securities
 
(6,301
)
 
(2,202
)
Sales – fixed maturity securities
 
719

 
13,055

Maturities and calls – fixed maturity securities
 
45,707

 
19,223

Net cash provided by (used in) investing activities
 
4,421

 
(38,721
)
 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid
 
(2,516
)
 

Payments on capital lease
 
(9
)
 
(67
)
Net cash used in financing activities
 
(2,525
)
 
(67
)
Net change in cash and cash equivalents
 
42,678

 
(2,308
)
Cash and cash equivalents at beginning of year
 
50,752

 
24,544

Cash and cash equivalents at end of period
 
$
93,430

 
$
22,236



See accompanying notes to condensed consolidated financial statements.


5


KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.    Summary of significant accounting policies
Basis of presentation
The accompanying condensed consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of Kinsale Capital Group, Inc. and its wholly owned subsidiaries (the "Company") included in the Annual Report on Form 10-K for the year ended December 31, 2016. 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.
Prospective accounting pronouncements
ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which requires equity investments to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements, which may introduce additional volatility in the Company's results of operations.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" to improve the financial reporting of leasing transactions. Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be initially measured at the present value of the future minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate at the inception of the lease. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A

6


financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
On June 16, 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" to provide more useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities
On March 30, 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. This ASU is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period. Upon adoption, the update will applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period presented. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company's consolidated financial statements.



7


2.     Investments
Available-for-sale investments
The following tables summarize the Company’s available-for-sale investments at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
 
 
(in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
9,106

 
$
6

 
$
(25
)
 
$
9,087

Obligations of states, municipalities and political subdivisions
 
132,826

 
2,694

 
(1,357
)
 
134,163

Corporate and other securities
 
91,557

 
615

 
(117
)
 
92,055

Asset-backed securities
 
76,929

 
400

 
(176
)
 
77,153

Residential mortgage-backed securities
 
79,066

 
512

 
(1,358
)
 
78,220

Total fixed maturities
 
389,484

 
4,227

 
(3,033
)
 
390,678

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
20,651

 
5,535

 
(13
)
 
26,173

Total available-for-sale investments
 
$
410,135

 
$
9,762

 
$
(3,046
)
 
$
416,851

 
 
December 31, 2016
 
 
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
 
$
12,106

 
$
8

 
$
(16
)
 
$
12,098

Obligations of states, municipalities and political subdivisions
 
124,728

 
1,470

 
(2,960
)
 
123,238

Corporate and other securities
 
118,473

 
550

 
(233
)
 
118,790

Asset-backed securities
 
73,317

 
241

 
(264
)
 
73,294

Residential mortgage-backed securities
 
84,902

 
585

 
(1,684
)
 
83,803

Total fixed maturities
 
413,526

 
2,854

 
(5,157
)
 
411,223

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
14,350

 
4,026

 
(2
)
 
18,374

Total available-for-sale investments
 
$
427,876

 
$
6,880

 
$
(5,159
)
 
$
429,597

Available-for-sale securities in a loss position
The Company regularly reviews all securities with unrealized losses to assess whether the decline in the securities’ fair value is deemed to be an other-than-temporary impairment ("OTTI"). The Company considers a number of

8


factors in completing its OTTI review, including the length of time and the extent to which fair value has been below cost and the financial condition of an issuer. In addition to specific issuer information, the Company also evaluates the current market and interest rate environment. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an OTTI, but rather a temporary decline in market value.
For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due. When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. For equity securities, the Company considers the near-term prospects of an issuer and its ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery.
For fixed maturities where a decline in fair value is considered to be other-than-temporary and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, an impairment is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity security below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the OTTI, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the noncredit portion of the OTTI, which is recognized in other comprehensive income. For equity securities, a decline in fair value that is considered to be other-than-temporary 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.

9


The following tables summarize gross unrealized losses and fair value for available-for-sale securities by length of time that the securities have continuously been in an unrealized loss position:
 
 
June 30, 2017
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
 
(in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
8,972

 
$
(25
)
 
$

 
$

 
$
8,972

 
$
(25
)
Obligations of states, municipalities and political subdivisions
 
61,143

 
(1,318
)
 
3,236

 
(39
)
 
64,379

 
(1,357
)
Corporate and other securities
 
31,520

 
(64
)
 
7,697

 
(53
)
 
39,217

 
(117
)
Asset-backed securities
 
19,211

 
(171
)
 
1,071

 
(5
)
 
20,282

 
(176
)
Residential mortgage-backed securities
 
60,390

 
(1,122
)
 
6,619

 
(236
)
 
67,009

 
(1,358
)
Total fixed maturities
 
181,236

 
(2,700
)
 
18,623

 
(333
)
 
199,859

 
(3,033
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded funds
 
1,680

 
(13
)
 

 

 
1,680

 
(13
)
Total
 
$
182,916

 
$
(2,713
)
 
$
18,623

 
$
(333
)
 
$
201,539

 
$
(3,046
)
At June 30, 2017, the Company held 199 fixed maturity securities with a total estimated fair value of $199.9 million and gross unrealized losses of $3.0 million. Of these securities, 15 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all securities within its investment portfolio to determine whether any impairment has occurred. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. At June 30, 2017, 92.2% of the Company’s fixed maturity securities were rated "A-" or better and made expected coupon payments under the contractual terms of the securities. At June 30, 2017, the Company held three exchange traded funds ("ETFs") in its equity portfolio with a total estimated fair value of $1.7 million and gross unrealized losses of $13 thousand. None of these securities were in a continuous unrealized loss position for greater than one year. Management concluded that there were no other-than-temporary impairments from fixed maturity or equity securities with unrealized losses for the six months ended June 30, 2017.

10


 
 
December 31, 2016
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
 
Gross Unrealized Holding Losses
 
 
(in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
8,980

 
$
(16
)
 
$

 
$

 
$
8,980

 
$
(16
)
Obligations of states, municipalities and political subdivisions
 
70,727

 
(2,960
)
 

 

 
70,727

 
(2,960
)
Corporate and other securities
 
50,274

 
(145
)
 
12,375

 
(88
)
 
62,649

 
(233
)
Asset-backed securities
 
14,750

 
(232
)
 
9,961

 
(32
)
 
24,711

 
(264
)
Residential mortgage-backed securities
 
65,439

 
(1,403
)
 
7,186

 
(281
)
 
72,625

 
(1,684
)
Total fixed maturities
 
210,170

 
(4,756
)
 
29,522

 
(401
)
 
239,692

 
(5,157
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded funds
 
388

 
(2
)
 

 

 
388

 
(2
)
Total
 
$
210,558

 
$
(4,758
)
 
$
29,522

 
$
(401
)
 
$
240,080

 
$
(5,159
)
At December 31, 2016, the Company held 231 fixed maturity securities with a total estimated fair value of $239.7 million and gross unrealized losses of $5.2 million. Of those securities, 24 were in a continuous unrealized loss position for greater than one year. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. At December 31, 2016, 92.6% of the Company’s fixed maturity securities were rated "A-" or better and made expected coupon payments under the contractual terms of the securities. Based on its review, the Company concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2016 experienced an other-than-temporary impairment.
Within its equity portfolio, the Company holds an ETF with exposure across developed and emerging non-U.S. equity markets around the world. This ETF had been in an unrealized loss position for greater than one year and, management concluded based upon its review, it was other-than-temporarily impaired. The Company recognized an impairment loss of $0.3 million on this fund for the year ended December 31, 2016.

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 June 30, 2017 are summarized, by contractual maturity, as follows:
 
 
June 30, 2017
 
 
Amortized
 
Estimated
 
 
Cost
 
Fair Value
 
 
(in thousands)
Due in one year or less
 
$
59,336

 
$
59,330

Due after one year through five years
 
45,464

 
46,012

Due after five years through ten years
 
24,489

 
25,425

Due after ten years
 
104,200

 
104,538

Asset-backed securities
 
76,929

 
77,153

Residential mortgage-backed securities
 
79,066

 
78,220

Total fixed maturities
 
$
389,484

 
$
390,678

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 six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Interest:
 
 
 
 
 
 
 
 
Taxable bonds
 
$
1,508

 
$
1,524

 
$
3,045

 
$
2,913

Municipal bonds (tax exempt)
 
818

 
375

 
1,612

 
781

Cash, cash equivalents, and short-term investments
 
167

 
12

 
254

 
20

Dividends on equity securities
 
185

 
118

 
295

 
202

Gross investment income
 
2,678

 
2,029

 
5,206

 
3,916

Investment expenses
 
(246
)
 
(210
)
 
(488
)
 
(421
)
Net investment income
 
$
2,432

 
$
1,819

 
$
4,718

 
$
3,495



12


Realized investment gains and losses
The following table presents realized investment gains and losses for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Realized gains:
 
 
 
 
 
 
 
 
Sales of fixed maturities
 
$
24

 
$
23

 
$
24

 
$
410

Sales of short-term and other
 

 
1

 

 
1

Total realized gains
 
24

 
24

 
24

 
411

 
 
 
 
 
 
 
 
 
Realized losses:
 
 
 
 
 
 
 
 
Sales of fixed maturities
 

 
(28
)
 
(32
)
 
(28
)
Total realized losses
 

 
(28
)
 
(32
)
 
(28
)
Net investment gains (losses)
 
$
24

 
$
(4
)
 
$
(8
)
 
$
383

Change in net unrealized gains on investments
The following table presents the change in available-for-sale net unrealized gains by investment type for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Change in net unrealized gains:
 
 
 
 
 
 
 
 
Fixed maturities
 
$
2,768

 
$
4,087

 
$
3,497

 
$
7,016

Equity securities
 
577

 
360

 
1,498

 
701

Net increase
 
$
3,345

 
$
4,447

 
$
4,995

 
$
7,717

Insurance – statutory deposits
The Company had invested assets with a carrying value of $7.1 million and $7.0 million on deposit with state regulatory authorities at June 30, 2017 and December 31, 2016, respectively.
Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $3.0 million at June 30, 2017 and $0.6 million at December 31, 2016. The payable balances were included in the "other liabilities" line item of the balance sheet and treated as non-cash transactions for purposes of cash flow presentation. 


13


3.     Fair value measurements
Fair value was estimated for each class of financial instrument for which it was practical to estimate fair value. Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.
The three levels of the fair value hierarchy are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment manager from third party pricing services, where available. For securities where the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company's investment manager. Management performs several procedures to ascertain the reasonableness of investment values included in the condensed consolidated financial statements including 1) obtaining and reviewing internal control reports from the Company's investment manager that obtain fair values from third party pricing services, 2) discussing with the Company's investment manager its process for reviewing and validating pricing obtained from outside pricing services and 3) reviewing the security pricing received from the Company's investment manager and monitoring changes in unrealized gains and losses. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.

14


The following tables present the balances of assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, by level within the fair value hierarchy.
 
 
June 30, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
9,087

 
$

 
$

 
$
9,087

Obligations of states, municipalities and political subdivisions
 

 
134,163

 

 
134,163

Corporate and other securities
 

 
92,055

 

 
92,055

Asset-backed securities
 

 
74,653

 
2,500

 
77,153

Residential mortgage-backed securities
 

 
78,220

 

 
78,220

Total fixed maturities
 
9,087

 
379,091

 
2,500

 
390,678

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
26,173

 

 

 
26,173

Total
 
$
35,260

 
$
379,091

 
$
2,500

 
$
416,851

 
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
 
$
12,098

 
$

 
$

 
$
12,098

Obligations of states, municipalities and political subdivisions
 

 
123,238

 

 
123,238

Corporate and other securities
 

 
118,790

 

 
118,790

Asset-backed securities
 

 
73,294

 

 
73,294

Residential mortgage-backed securities
 

 
83,803

 

 
83,803

Total fixed maturities
 
12,098

 
399,125

 

 
411,223

 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Exchange traded funds
 
18,374

 

 

 
18,374

Total
 
$
30,472

 
$
399,125

 
$

 
$
429,597

During the second quarter of 2017, the Company purchased one asset-backed security for $2.5 million, which was classified as a Level 3 investment since the fair value of the security was estimated using a single broker quote.
There were no transfers into or out of Level 1 and Level 2 during the six months ended June 30, 2017. There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016.
Due to the relatively short-term nature of cash and cash equivalents, short-term investments, receivables and payables, their carrying amounts are reasonable estimates of fair value.

15


4.     Deferred policy acquisition costs
The following table presents the amounts of policy acquisition costs deferred and amortized for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Balance, beginning of period
 
$
10,501

 
$
5,305

 
$
10,150

 
$
(1,696
)
Policy acquisition costs deferred:
 
 
 
 
 
 
 
 
Direct commissions
 
8,625

 
7,448

 
16,505

 
13,848

Ceding commissions
 
(2,392
)
 
(4,995
)
 
(4,983
)
 
(2,204
)
Other underwriting and policy acquisition costs
 
756

 
700

 
1,517

 
1,426

Policy acquisition costs deferred
 
6,989

 
3,153

 
13,039

 
13,070

Amortization of net policy acquisition costs
 
(5,912
)
 
(2,943
)
 
(11,611
)
 
(5,859
)
Balance, end of period
 
$
11,578

 
$
5,515

 
$
11,578

 
$
5,515

For the three and six months ended June 30, 2016, the deferred ceding commissions were affected by the change in the ceding percentage under the Company's multi-line quota share reinsurance treaty ("MLQS"). See Note 8 for further details regarding the MLQS.

5.     Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses for the three and six months ended June 30, 2017 and 2016 consist of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
 
 
 
 
 
 
 
 
Direct commissions
 
$
7,544

 
$
6,668

 
$
14,693

 
$
13,074

Ceding commissions
 
(2,466
)
 
(5,218
)
 
(4,812
)
 
(10,626
)
Other operating expenses
 
5,414

 
5,031

 
11,905

 
10,281

Total
 
$
10,492

 
$
6,481

 
$
21,786

 
$
12,729

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $4.5 million and $4.2 million for the three months ended June 30, 2017 and 2016, respectively. Salaries, bonus and employee benefits expenses were $9.5 million and $8.8 million for the six months ended June 30, 2017 and 2016.

16


6.    Earnings per share
The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the consolidated financial statements:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except per share data)
Earnings allocable to common stockholders
 
$
8,495

 
$

 
$
14,776

 
$

Earnings allocable to Class A stockholders
 
$

 
$
5,754

 
$

 
$
10,909

Earnings allocable to Class B stockholders
 
$

 
$
303

 
$

 
$
405

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Common stock
 
$
0.41

 
$

 
$
0.70

 
$

Class A common stock
 
$

 
$
0.42

 
$

 
$
0.79

Class B common stock
 
$

 
$
0.19

 
$

 
$
0.26

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Common stock
 
$
0.40

 
$

 
$
0.69

 
$

Class A common stock
 
$

 
$
0.42

 
$

 
$
0.79

Class B common stock
 
$

 
$
0.18

 
$

 
$
0.25

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding:
 
 
 
 
 
 
 
 
Common stock
 
20,969

 

 
20,969

 

Class A common stock
 

 
13,803

 

 
13,803

Class B common stock
 

 
1,583

 

 
1,557

 
 
 
 
 
 
 
 
 
Dilutive effect of shares issued under stock compensation arrangements:
 
 
 
 
 
 
 
 
Common stock - stock options
 
488

 

 
456

 

Class B common stock - unvested restricted stock grants
 

 
83

 

 
93

 
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding:
 
 
 
 
 
 
 
 
Common stock
 
21,457

 

 
21,425

 

Class A common stock
 

 
13,803

 

 
13,803

Class B common stock
 

 
1,666

 

 
1,650

Prior to the reclassification of common stock on July 28, 2016, all of the earnings of the Company were allocated to Class A and Class B common stock and earnings per share was calculated using the two-class method. Under the two-class method, earnings attributable to Class A and Class B common stockholders were determined by allocating undistributed earnings to each class of stock. The undistributed earnings attributable to common stockholders were allocated based on the contractual participation rights of the Class A common stock and Class B common stock as if those earnings for the period had been distributed. Earnings attributable to Class A common stockholders equaled the sum of dividends at the rate per annum of 12% compounding annually during the period ("Accruing Dividends")

17


plus seventy-five percent of any remaining assets of the Company available for distribution to its stockholders in the event of a liquidation, dissolution, winding up or sale of the Company after payment of the Accruing Dividends ("Residual Proceeds"). Earnings attributable to Class B common stockholders equaled twenty-five percent of the Residual Proceeds. After the reclassification of common stock on July 28, 2016, all of the earnings of the Company were attributable to the single class of common stock.
Basic earnings per share for each class of common stock was computed by dividing the earnings attributable to the common stockholders by the weighted average number of shares of each respective class of common stock outstanding during the period. Diluted earnings per share attributable to each class of common stock was computed by dividing earnings attributable to common stockholders by the weighted average shares outstanding for each respective class of common stock outstanding during the period, including potentially dilutive shares of common stock for the period determined using the treasury stock method. There were no potentially dilutive shares attributable to Class A common stockholders for the three and six months ended June 30, 2016. For purposes of the diluted earnings per share attributable to Class B common stockholders calculation, unvested restricted grants of common stock were considered to be potentially dilutive shares of common stock. There were no material anti-dilutive Class B shares for the three and six months ended June 30, 2016.
There were no anti-dilutive stock options for the three and six months ended June 30, 2017.

7.     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:
 
 
June 30,
 
 
2017
 
2016
 
 
(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year
 
$
194,602

 
$
124,126

Commutation of MLQS
 
27,929

 
24,296

Adjusted net reserves for losses and loss adjustment expenses, beginning of year
 
222,531

 
148,422

Incurred losses and loss adjustment expenses:
 
 
 
 
Current year
 
52,902

 
40,984

Prior years
 
(8,936
)
 
(5,407
)
Total net losses and loss adjustment expenses incurred
 
43,966

 
35,577

 
 
 
 
 
Payments:
 
 
 
 
Current year
 
2,185

 
1,078

Prior years
 
19,508

 
13,026

Total payments
 
21,693

 
14,104

Net reserves for unpaid losses and loss adjustment expenses, end of period
 
244,804

 
169,895

Reinsurance recoverable on unpaid losses
 
39,624

 
75,315

Gross reserves for unpaid losses and loss adjustment expenses, end of period
 
$
284,428

 
$
245,210


18


During the six months ended June 30, 2017, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2016 developed favorably by $8.9 million. The favorable development was primarily attributable to $5.8 million and $3.7 million from the 2016 and 2015 accident years, respectively and due to reported losses emerging at a lower level than expected.
During the six months ended June 30, 2016, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2015 developed favorably by $5.4 million. The favorable development was attributable primarily to $2.8 million and $3.3 million from the 2015 and 2014 accident years, respectively and due to reported losses emerging at a lower level than expected.
See Note 8 for further details regarding the commutation of the MLQS.

8.     Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Written:
 
 
 
 
 
 
 
 
Direct
 
$
57,753

 
$
50,161

 
$
110,615

 
$
93,151

Assumed
 

 
(54
)
 

 
38

Ceded
 
(7,980
)
 
(14,446
)
 
(16,680
)
 
(9,733
)
Net written
 
$
49,773

 
$
35,661

 
$
93,935

 
$
83,456

 
 
 
 
 
 
 
 
 
Earned:
 
 
 
 
 
 
 
 
Direct
 
$
51,304

 
$
44,895

 
$
99,766

 
$
87,987

Assumed
 

 
2

 

 
34

Ceded
 
(8,252
)
 
(13,114
)
 
(16,281
)
 
(25,641
)
Net earned
 
$
43,052

 
$
31,783

 
$
83,485

 
$
62,380

Incurred losses and loss adjustment expenses were net of reinsurance (ceded incurred losses and loss adjustment expenses) of $(0.6) million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively. Ceded incurred losses and loss adjustment expenses were $1.8 million and $7.8 million for the six months ended June 30, 2017 and 2016, respectively.  At June 30, 2017 reinsurance recoverables on paid and unpaid losses were $0.1 million and $39.6 million, respectively. At December 31, 2016, reinsurance recoverables on paid and unpaid losses were $0.1 million and $70.2 million, respectively.
Multi-line quota share reinsurance
Historically, the Company participated in a MLQS treaty that transferred a proportion of the risk related to certain lines of business written by its subsidiary, Kinsale Insurance Company, an Arkansas insurance company ("Kinsale Insurance"), to third-party reinsurers in exchange for a proportion of the direct written premiums on that business. The MLQS was subject to annual renewal and, in accordance with the terms of the MLQS, the Company could adjust the amount of business ceded on a quarterly basis. Under the terms of the MLQS covering the period January 1, 2016 to December 31, 2016 (the "2016 MLQS"), Kinsale Insurance received a provisional ceding commission

19


equal to 41% of ceded written premiums and paid a reinsurance margin equal to 4% of ceded written premium. The 2016 MLQS included a sliding scale commission provision that adjusted the ceding commissions within a range of 25% to 41% based on the loss experience of the business ceded. As a result of the successful completion of the initial public offering ("IPO") in August 2016, the Company terminated and commuted the 2016 MLQS on October 1, 2016.
Effective January 1, 2017, the Company commuted the MLQS covering the period January 1, 2015 to December 31, 2015 (the "2015 MLQS"). The commutation reduced reinsurance recoverables on unpaid losses and receivable from reinsurers by approximately $36.5 million, with a corresponding reduction to funds held for reinsurers. The Company did not renew the MLQS for the 2017 calendar year and there are no remaining MLQS balances outstanding as of January 1, 2017. The commutations did not have any effect on the Company's results of operations or cash flows for the applicable periods.
9.     Other comprehensive income
The following table summarizes the components of other comprehensive income for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Unrealized gains arising during the period, before income taxes
 
$
3,369

 
$
4,421

 
$
4,987

 
$
8,079

Income taxes
 
(1,179
)
 
(1,548
)
 
(1,745
)
 
(2,828
)
Unrealized gains arising during the period, net of income taxes
 
2,190

 
2,873

 
3,242

 
5,251

Less reclassification adjustment:
 
 
 
 
 
 
 
 
Net realized investment gains (losses)
 
24

 
(26
)
 
(8
)
 
361

Income taxes
 
(8
)
 
9

 
3

 
(126
)
Reclassification adjustment included in net income
 
16

 
(17
)
 
(5
)
 
235

Other comprehensive income
 
$
2,174

 
$
2,890

 
$
3,247

 
$
5,016

The sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to realized gains or losses in current period earnings. The related tax effect of the reclassification adjustment is recorded in income tax expense in current period earnings. See Note 2 for additional information.

20


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in the Annual Report on Form 10-K for the year ended December 31, 2016. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.
The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2017, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016.
References to the "Company," "Kinsale," "we," "us," and "our" are to Kinsale Capital Group, Inc. and its subsidiaries, unless the context otherwise requires.

Overview
Founded in 2009, Kinsale is an established and growing specialty insurance company. Kinsale focuses exclusively on the excess and surplus lines ("E&S") market in the U.S., where we use our underwriting expertise to write coverages for hard-to-place small business risks and personal lines risks. We market and sell these insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, primarily through a network of independent insurance brokers.
We have one reportable segment, our Excess and Surplus Lines Insurance segment, which offers property and casualty ("P&C") insurance products through the E&S market. For the first six months of 2017, the percentage breakdown of our gross written premiums was 93.0% casualty and 7.0% property. Our commercial lines offerings include construction, small business, general casualty, energy, excess casualty, professional liability, life sciences, product liability, allied health, health care, commercial property, environmental, management liability, inland marine, public entity and commercial insurance. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 4.2% of our gross written premiums in the first six months of 2017.
Factors affecting our results of operations
The MLQS
Historically, a significant amount of our business had been reinsured through our MLQS with third-party reinsurers. This agreement allowed us to cede a portion of the risk related to certain lines of underwritten business in exchange for a portion of our direct written premiums on that business, less a ceding commission. The MLQS was subject to annual renewal; however, we retained the right to adjust the amount of business we ceded on a quarterly basis in accordance with the terms of the MLQS. We monitored the ceding percentage under the MLQS and adjusted this percentage based on our projected direct written premiums. We adjusted the ceding percentage under the MLQS for future periods depending on future business conditions in our industry. Generally, we increased the ceding percentage when the growth rate of gross written premiums was higher relative to the growth rate of Kinsale Insurance’s capital position, and decreased the ceding percentage when the growth rate of Kinsale Insurance’s capital position was higher relative to the growth rate of gross written premiums.
As a result of the successful completion of our IPO in August 2016, we terminated and commuted the 2016 MLQS contract on October 1, 2016. Effective January 1, 2017, the remaining MLQS was commuted, which covered the 2015 calendar year. We did not renew the MLQS for the 2017 calendar year and there are no remaining MLQS balances outstanding as of January 1, 2017.
The effect of the MLQS on our results of operations was primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses. The following tables

21


summarize the effect of the MLQS on our underwriting income for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
($ in thousands)
 
Including
Quota Share
 
Effect of
Quota Share
 
Excluding Quota Share
 
Including
Quota Share
 
Effect of
Quota Share
 
Excluding Quota Share
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross written premiums
 
$
57,753

 
$

 
$
57,753

 
$
50,107

 
$

 
$
50,107

Ceded written premiums
 
(7,980
)
 

 
(7,980
)
 
(14,446
)
 
(6,363
)
 
(8,083
)
Net written premiums
 
$
49,773

 
$

 
$
49,773

 
$
35,661

 
$
(6,363