What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-03-02 · 214 added, 207 removed, 441 unchanged (49% of the section changed)

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For a comparison of years ended December 31, 2019 and December 2018, see “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on February 28, 2019.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 2, 2020.

Founded in 2009, we are an established and growing specialty insurance company.

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In 2020, the percentage breakdown of our gross written premiums was 85.6% casualty and 14.4% property.

Our commercial lines offerings include construction, small business, excess casualty, commercial property, product liability, allied health, general casualty, professional liability, life sciences, energy, management liability, health care, environmental, inland marine, commercial insurance and public entity.

Our commercial lines offerings include construction, small business, excess casualty, commercial property, product liability, allied health, life sciences, general casualty, professional liability, management liability, energy, environmental, health care, 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 3.9% of our gross written premiums in 2020.

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We believe that we have differentiated ourselves from our competitors by effectively leveraging technology, vigilantly controlling expenses and maintaining control over our underwriting and claims management.

We are closely monitoring the impact of the COVID-19 pandemic and related economic effects on all aspects of our business, including how it will impact premium volume, losses and the fair value of our investment portfolio.

To date, management has not seen a significant decrease in the growth rate of its gross written premiums since the beginning of the COVID-19 pandemic and related economic downturn.

Over the past year, including a time period

preceding COVID-19, the E&S segment of the P&C market has been experiencing rapid growth due to dislocation in the overall property and casualty market.

With respect to reported claims, Kinsale does not write lines of business with heightened exposure to COVID-19 related claims.

Specifically, Kinsale does not write event cancellation, mortgage insurance, trade credit or surety, workers compensation or reinsurance business.

Lines of business written by Kinsale that could be subject to COVID-19 related claims include general liability, management liability, healthcare-related professional liability and commercial property.

In each case, policy terms and conditions would be expected to preclude coverage for virus-related claims.

Although management cannot definitively determine the ultimate impact of COVID-19 and related economic conditions at this time, management does not currently expect a material adverse effect on Kinsale’s loss ratios due to COVID-19 related claims.

With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments.

During the first quarter of 2020, we experienced a significant decline in the fair value of our investment portfolio due to disruption in the global financial markets associated with COVID-19.

Subsequent to the first quarter of 2020, the fair values of our investment portfolio rebounded sharply, gaining back all of the decline in fair value.

However, during economic downturns, certain investments may default or become impaired due to deterioration in the financial condition or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments.

Given the conservative nature of our investment portfolio, we do not expect a material adverse impact on the value of our investment portfolio or a long-term negative impact on our financial condition, results of operations or cash flows as it relates to COVID-19.

Components of Our Results of Operations

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The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life.

Other underwriting expenses represent the general and administrative expenses of our insurance business including employment costs, telecommunication and technology costs, and legal and auditing fees.

Other underwriting expenses represent the general and administrative expenses of our insurance business including but not limited to employment costs, telecommunication and technology costs, and legal and auditing fees.

Net investment income

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Net realized investment gains (losses) on investments

Net realized investment gains (losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost, as well as any "other-than-temporary" impairments recognized in earnings.

Net realized gains (losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost, as well as any allowances for credit losses recognized in earnings, if any.

Income tax expense

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Underwriting income is a non-GAAP financial measure.

We define underwriting income as pre-tax income, excluding net investment income, net investment gains and losses, and other income and expenses.

We define underwriting income as net income, excluding net investment income, net change in the fair value of equity securities, net realized gains and losses on investments, other income, other expenses and income tax expense.

See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to underwriting income.

Net operating earnings is a non-GAAP financial measure.

We define net operating earnings as net income excluding net unrealized gains and losses on equity securities, after taxes, and net realized gains and losses on investments, after taxes.

We define net operating earnings as net income excluding the net change in the fair value of equity securities, after taxes, and net realized gains and losses on investments, after taxes.

See "—Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to net operating earnings.

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Operating return on equity is a non-GAAP financial measure.

We define operating return on equity as net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period.

See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to operating income.

We define operating return on equity as net operating earnings expressed as a percentage of average beginning and ending stockholders’ equity during the period.

See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to net operating earnings.

Net retention ratio is the ratio of net written premiums to gross written premiums.

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Year Ended December 31,

($ in thousands)

($ in thousands) 2020 2019 Change Percent

Gross written premiums $ 552,814 $ 389,694 $ 163,120 41.9 %

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Underwriting income (1)

Other expenses, net

54,656 43,201 11,455 26.5 %

Other expenses, net (741) (31) (710) NM

Net investment income 26,110 20,133 5,977 29.7 %

Change in fair value of equity securities

Net realized gains on investments

Change in fair value of equity securities 16,855 12,389 4,466 NM

Net realized gains on investments 3,533 359 3,174 NM

Income before taxes 100,413 76,051 24,362 32.0 %

Income tax expense 11,994 12,735 (741) (5.8) %

Return on equity

Operating return on equity (2)

Net income $ 88,419 $ 63,316 $ 25,103 39.6 %

Net operating earnings (2)

$ 72,313 $ 53,245 $ 19,068 35.8 %

Loss ratio 63.9 % 59.9 %

Expense ratio 22.8 % 24.8 %

Combined ratio 86.7 % 84.7 %

Return on equity 18.0 % 18.9 %

Operating return on equity (2)

14.7 % 15.9 %

NM - Percentage change is not meaningful

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See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to underwriting income.

(2) Operating return on equity is a non-GAAP financial measure.

We define operating return on equity as net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period.

See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to operating income.

(2) Net operating earnings and operating return on equity are non-GAAP financial measures.

Operating return on equity is defined as net operating earnings expressed as a percentage of average beginning and ending stockholders’ equity during the period.

See "—Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to net operating earnings.

Net income was $88.4 million for the year ended December 31, 2020 compared to $63.3 million for the year ended December 31, 2019, an increase of $25.1 million, or 39.6%.

The increase in net income in 2019 over 2018 was due to a number of factors including, higher fair value of equity securities, higher underwriting income resulting from favorable E&S market conditions and strong growth in written premiums, and an increase in investment income.

The change in fair value of equity investments for the year ended December 31, 2019 reflected favorable valuations in the broader stock market compared to the prior year, which experienced a significant decline in the fourth quarter

The increase in net investment income was largely due to higher investment balances resulting from growth in the business.

The increase in net income in 2020 over 2019 was primarily due to higher earned premiums, resulting from favorable E&S market conditions and strong growth in

broker submissions, and higher returns on our investment portfolio.

In addition, the increase in net income was also attributable to a lower effective tax rate generated from the tax benefits related to stock-based compensation activity and higher favorable development of loss reserves from prior accident years.

These increases were offset in part by higher catastrophe losses incurred in 2020 compared to the prior year.

Our underwriting income was $54.7 million for the year ended December 31, 2020 compared to $43.2 million for the year ended December 31, 2019, an increase of $11.5 million, or 26.5%.

The increase in our underwriting income was attributable to a combination of growth in the business, lower catastrophe losses and higher net favorable development of loss reserves for prior accident years.

The increase in our underwriting income was attributable to a combination of growth in the business and higher net favorable development of loss reserves for prior accident years, offset in part by higher catastrophe losses incurred during the year.

The corresponding combined ratios were 86.7% for the year ended December 31, 2020 compared to 84.7% for the year ended December 31, 2019.

Gross written premiums were $552.8 million for the year ended December 31, 2020 compared to $389.7 million for the year ended December 31, 2019, an increase of $163.1 million, or 41.9%.

The increase in gross written premiums for the for the year ended December 31, 2019 over the prior year was due to higher submission activity from brokers across most lines of business and better pricing on bound accounts, resulting from favorable market conditions.

The increase in gross written premiums for the for the year ended December 31, 2020 over the prior year was due to higher submission activity from brokers across most lines of business and higher rates on bound accounts, resulting from continued favorable market conditions.

The average premium per policy written by us was $9,100 in 2020 compared to $8,200 in 2019.

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The changes in gross written premiums were most notable in the following lines of business:

Construction, which represented approximately 18.2% of our gross written premiums in 2019, increased by $20.2 million , or 39.6% , for the year ended December 31, 2019 over the prior year;

• Excess casualty, which represented approximately 13.9% of our gross written premiums in 2020, increased by $25.5 million, or 49.8%, for the year ended December 31, 2020 over the prior year;

• Commercial property, which represented approximately 9.4% of our gross written premiums in 2020, increased by $22.7 million, or 77.9%, for the year ended December 31, 2020 over the prior year;

• Small business, which represented approximately 15.1% of our gross written premiums in 2020, increased by $20.1 million, or 31.8%, for the year ended December 31, 2020 over the prior year, and

Excess casualty, which represented approximately 13.1% of our gross written premiums in 2019, increased by $13.8 million , or 37.0% , for the year ended December 31, 2019 over the prior year.

• Construction, which represented approximately 15.8% of our gross written premiums in 2020, increased by $16.2 million, or 22.8%, for the year ended December 31, 2020 over the prior year.

Net written premiums increased by $136.2 million, or 39.8%, to $478.2 million for the year ended December 31, 2020 from $342.1 million for the year ended December 31, 2019.

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Our net retention ratio was 86.5% for the year ended December 31, 2020 compared to 87.8% for the year ended December 31, 2019.

The increase in the net retention ratio was largely due to raising our retentions on our reinsurance treaties effective with the June 1, 2019 contract renewal.

The decrease in the net retention ratio was primarily due to change in the mix of business.

Net earned premiums were $412.8 million for the year ended December 31, 2020 compared to $283.0 million for the year ended December 31, 2019, an increase of $129.8 million, or 45.9%.

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Our loss ratio was 63.9% for the year ended December 31, 2020 compared to 59.9% for the year ended December 31, 2019.

The slight decrease in the loss ratio for the year ended December 31, 2019 was due to lower current year catastrophe losses in 2019 compared to 2018.

The increase in the loss ratio for the year ended December 31, 2020 was primarily due to higher

catastrophe losses incurred in 2020 compared to 2019.

Catastrophe losses incurred during the current accident year in 2020 were largely related to Hurricanes Laura, Sally and Zeta and the California wildfires.

For each year of 2020 and 2019, the overall favorable development of loss reserves for prior accident years was primarily due to reported losses emerging at lower levels than expected for certain accident years.

During the year ended December 31, 2019, prior accident years developed favorably by $9.4 million , of which $14.6 million was

attributable to accident years 2017 and 2018.

This favorable development was offset in part by adverse development from accident years 2011 through 2015 of $5.2 million .

This adverse development largely resulted from management’s decision to lengthen the actuarial loss development factors in certain lines to provide for emergence of reported losses over a longer period of time, which added a modest amount of conservatism to the Company’s incurred but not reported ("IBNR") reserves.

On an inception-to-date basis, all accident years have developed favorably, with the exception of the 2011 accident year.

During the year ended December 31, 2020, prior accident years developed favorably by $13.3 million, of which $12.3 million was attributable to accident years 2019 and 2018.

During the year ended December 31, 2019, loss reserves for prior accident years developed favorably by $9.4 million, which was largely attributable to accident years 2018 and 2017 of $14.6 million.

This favorable development was offset in part by adverse development in the accident years 2011 through 2015 of $3.6 million .

This favorable development was offset in part by adverse development in the accident years 2011 through 2015 of $5.2 million, which resulted from higher IBNR reserves to provide for emergence of reported losses over a longer period of time based on observed trends.

On an inception-to-date basis as of December 31, 2020, all accident years have developed favorably, with the exception of the 2011 accident year.

The following tables summarize the effect of the factors indicated above on the loss ratios for the years ended December 31, 2020 and 2019:

Year Ended December 31,

($ in thousands)

Losses and Loss Adjustment Expenses

% of Earned Premiums

Losses and Loss Adjustment Expenses

($ in thousands) Losses and Loss Adjustment Expenses

% of Earned Premiums Losses and Loss Adjustment Expenses

% of Earned Premiums

Current accident year

$ 253,948 61.5 % $ 175,939 62.1 %

Current accident year - catastrophe losses

23,192 5.6 % 3,047 1.1 %

Effect of prior year development (13,338) (3.2) % (9,423) (3.3) %

Total $ 263,802 63.9 % $ 169,563 59.9 %

Expense ratio

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Year Ended December 31,

($ in thousands)

Underwriting Expenses

% of Earned Premiums

Underwriting Expenses

% of Earned Premiums

($ in thousands) Underwriting Expenses % of Earned Premiums Underwriting Expenses % of Earned Premiums

Commissions incurred:

Direct $ 69,922 16.9 % $ 48,382 17.1 %

Ceding (16,145) (3.9) % (12,347) (4.4) %

Net commissions incurred 53,777 13.0 % 36,035 12.7 %

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Underwriting, acquisition, and insurance expenses

The overall expense ratio was lower for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

The decrease in the expense ratio was due to higher net earned premiums without a proportional increase in the amount of other underwriting expenses.

This decrease was offset in part by higher net commissions incurred as a percentage of earned premiums year over year, which was largely due to lower ceding commissions as a result of a change in the mix of business, some of which has no ceding commissions.

In addition, as previously discussed, we increased the retention on our reinsurance treaties, which resulted in lower ceded premiums and

associated commissions for the year ended December 31, 2019.

Direct commissions paid as a percent of gross written premiums was 14.6% and 14.7% for the years ended December 31, 2019 and 2018, respectively.

$ 94,296 22.8 % $ 70,217 24.8 %

The expense ratio was 22.8% for the year ended December 31, 2020 compared to 24.8% for the year ended December 31, 2019.

The decrease in the expense ratio was primarily due to higher net earned premiums, without a proportional increase in the amount of other underwriting expenses as a result of management's focus on controlling costs.

Direct commissions paid as a percent of gross written premiums was 14.6% for the years ended December 31, 2020 and 2019.

Investing results

Our net investment income increased by 28.3% to $20.1 million for the year ended December 31, 2019 from $15.7 million for the year ended December 31, 2018 , primarily due to growth in our investment portfolio balance generated from excess operating funds and to a lesser degree, proceeds from our equity offering in August 2019.

Our net investment income increased by 29.7% to $26.1 million for the year ended December 31, 2020 from $20.1 million for the year ended December 31, 2019, primarily due to growth in our investment portfolio balance generated from excess operating funds and to a lesser degree, proceeds from our equity offerings.

The following table summarizes the components of net investment income and net investment gains for the years ended December 31, 2020 and 2019:

Year Ended December 31,

($ in thousands)

($ in thousands) 2020 2019 Change

Interest from fixed-maturity securities $ 24,111 $ 18,545 $ 5,566

Dividends on equity securities 3,512 2,136 1,376

Other 262 842 (580)

Gross investment income 27,885 21,523 6,362

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Net capital gains 3,533 359 3,174

Net investment (losses) gains

The weighted average duration of our fixed income portfolio, including cash equivalents, was 4.3 years at December 31, 2019 and 3.9 years at December 31, 2018 .

Net investment gains 20,388 12,748 7,640

Total $ 46,498 $ 32,881 $ 13,617

The weighted average duration of our fixed-maturity portfolio, including cash equivalents, was 4.3 years at December 31, 2020 and 2019.

Our investment portfolio had a gross return of 2.9% as of December 31, 2020, compared to 3.1% as of December 31, 2019.

During the year ended December 31, 2019, we recognized unrealized gains related to our equity portfolio of $12.4 million .

These gains resulted from higher equity valuations for the year ended December 31, 2019 and was reflective of gains in the broader stock markets during this period.

For the year ended December 31, 2018, we recognized unrealized losses related to our equity portfolio of $6.6 million and was largely due to a significant decline in the broader stock markets, which occurred during the fourth quarter of 2018.

We perform quarterly reviews of all available-for-sale securities within our investment portfolio to determine whether any other-than-temporary impairment has occurred.

Management concluded that there were no other-than-temporary impairments from available-for-sale securities with unrealized losses for the year ended December 31, 2019 or 2018.

During the year ended December 31, 2020, we recognized unrealized gains related to our equity portfolio of $16.9 million, of which $16.4 million was related to our ETFs.

Our ETF portfolio is generally reflective of the performance in the broader domestic stock markets.

During the first quarter of 2020, the fair values our ETFs declined by $13.1 million, driven by the disruption in the financial markets associated with the COVID-19 pandemic.

The fair value of these funds rebounded sharply during the second quarter of 2020, gaining back a substantial portion of the decline in value, and fair values continued to increase during the latter half of 2020 on an improving outlook.

For the year ended December 31, 2019, we recognized unrealized gains related to our equity portfolio of $12.4 million and was reflective of gains in the broader stock markets during this period.

Net capital gains were $3.5 million for the year ended December 31, 2020, primarily due to the sale of corporate bonds to realize favorable investment valuations.

We perform quarterly reviews of all available-for-sale securities within our investment portfolio to determine whether the decline in a security's fair value is deemed to be a credit loss.

Management concluded that there were no credit losses (previously known as other-than-temporary impairments) from available-for-sale investments for the year ended December 31, 2020 or 2019.

Income tax expense

Our effective tax rate for the year ended December 31, 2019 was approximately 16.7% compared to 16.5% for the year ended December 31, 2018.

The effective tax rate was lower than the statutory rate of 21% principally due to stock options exercised and the recognition of tax benefits related to income tax-advantaged investment securities.

Our effective tax rate was approximately 11.9% for the year ended December 31, 2020 compared to 16.7% for the year ended December 31, 2019.

The effective tax rate was lower than the federal statutory rate of 21% primarily due to the tax benefits from stock-based compensation and tax-exempt investment income.

Return on equity

Our return on equity was 18.0% for the year ended December 31, 2020 compared to 18.9% for the year ended December 31, 2019.

Operating return on equity was 15.9% for the full year of 2019, an increase from 15.4% for the full year of 2018.

The increase in the operating return on equity was primarily due to growth in the business year over year, offset in part by the impact of the equity offering of $65.9 million in August 2019.

Operating return on equity was 14.7% for the full year of 2020, a decrease from 15.9% for the full year of 2019.

The decrease in the operating return on equity was due largely to the proceeds received from our equity offering in the third quarter of 2020 and catastrophe losses incurred during the year, offset in part by higher net income.

Liquidity and Capital Resources

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In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by Kinsale Insurance may adopt statutory provisions more restrictive than those currently in effect.

Kinsale Insurance paid $5.0 million of dividends to us during 2019.

Kinsale Insurance did not pay dividends to us during 2020.

See also "Risk Factors — Risks Related to Our Business and Our Industry — Because we are a holding company and substantially all of our operations are conducted by our insurance subsidiary, our ability to pay dividends depends on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary."

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Management believes there is sufficient liquidity available at the holding company and in its insurance subsidiary, Kinsale Insurance, as well as in its other operating subsidiaries, to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.

In January 2019, we purchased land for $2.5 million in Henrico County, Virginia for the development of a new corporate headquarters and we are currently targeting a third quarter 2020 completion date.

The project is estimated to cost approximately $50 million to $55 million, substantially all of which we expect will be capitalized.

We expect to fund the project through a combination of existing cash flows from operations and debt financing.

The current balance of construction in progress related to this project is $19.8 million at December 31, 2019, which is classified under property and equipment within "other assets" on the balance sheet.

See " — Liquidity and Capital Resources, Credit agreement" below for further details regarding this financing.

Credit agreement

On May 28, 2019, we entered into a Credit Agreement that provided us with a $50 million Credit Facility and an uncommitted accordion feature that permits the Company to increase the commitments by an additional $30 million.

On May 28, 2019, we entered into a Credit Agreement that provided us with a $50 million Credit Facility (the "Credit Facility") and an uncommitted accordion feature that permits the Company to increase the commitments by an additional $30 million.

The Credit Facility has a maturity of May 28, 2024.

Borrowings under the Credit Facility will be used to fund construction of our new headquarters and may also be used for working capital and general corporate purposes.

As of December 31, 2019, there was $16.7 million outstanding under the credit facility (the "Credit Facility"), net of debt issuance costs.

Borrowings under the Credit Facility were used to fund the construction of our new headquarters but may also be used for working capital and general corporate purposes.

As of December 31, 2020, there was $42.6 million outstanding under the Credit Facility, net of debt issuance costs.

Loans under the Credit Facility may be subject to varying rates of interest depending on whether the loan is a Eurodollar loan or an alternate base rate (ABR) loan, at the Company's election.

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ABR loans bear an interest rate per annum equal to the higher of the prime rate, the New York Federal Reserve Board Rate or the one-month adjusted LIBOR, plus the applicable margin of 0.75% or 1.75%, depending on which interest option was applicable for the particular ABR loan.

The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default.

As of December 31, 2020, the Company was in compliance with all of its financial covenants under the Credit Facility.

In July 2017, the U.K.

Financial Conduct Authority announced that, after the end of 2021, it would no longer persuade or compel contributing banks to make rate submissions to the ICE Benchmark Administration (together with any successor to the ICE Benchmark Administrator, the “IBA”) for purposes of the IBA setting the London interbank offered rate.

As a result, it is possible that commencing in 2022, the London interbank offered rate may no longer be available or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on Eurodollar loans.

On November 30, 2020, the IBA announced a consultation on its intention to 1) cease the publication of the one-week and two-month USD LIBOR after December 31, 2021, and 2) cease the publication of all other tenors of USD LIBOR after June 30, 2023, including the three-month USD LIBOR rate.

The IBA closed the consultations for feedback at the end of January 2021.

The Credit Agreement provides procedures for determining a replacement or alternative base rate in the event that LIBOR is discontinued.

However, there can be no assurances as to whether such replacement or alternative base rate will be more or less favorable than LIBOR.

The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to seek to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default.

As of December 31, 2019, the Company was in compliance with all of its financial covenants under the Credit Facility.

The Company intends to monitor the developments with respect to the potential phasing out of LIBOR and work with its lenders to seek to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

Shelf registration

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The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.

In conjunction with filing our universal shelf registration statement, we completed an underwritten public offering and sold and issued an aggregate of 741,750 shares of common stock at a price to the public of $93 per share.

We received aggregate net proceeds from the offering of approximately $65.9 million, after deducting underwriting

discounts and commissions and offering costs.

Net proceeds from this offering were used for general corporate purposes, including to fund organic growth.

On August 7, 2020, we completed an underwritten public offering and sold and issued 310,500 shares of our common stock at a price of $190 per share.

After deducting underwriting discounts and commissions, we received net proceeds of $56.7 million, which was used for general corporate purposes, including to fund organic growth.

Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period.

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Change in cash and cash equivalents

$ (23,315) $ 25,319

We have historically generated positive operating cash flows.

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Cash flows from operations were used to fund investing activities and to pay dividends to our stockholders.

Net cash used in investing activities increased by $124.3 million in 2019 from 2018, which reflected higher proceeds from growth in our business operations and proceeds from our equity offering in August 2019 of $65.9 million.

These proceeds were used to purchase fixed-maturity securities, particularly corporate bonds and residential mortgage-backed securities of $203.0 million, and to a lesser extent, other asset-backed securities of $60.4 million and municipal bonds of $42.8 million.

During 2019, we also received proceeds of $35.5 million from sales of fixed-maturity securities, largely municipal bonds in order to take advantage of favorable valuations.

Net cash used in investing activities increased by $148.6 million in 2020 from 2019, which reflected growth in our business operations and proceeds from our equity offering in August 2020 of $56.7 million.

For the year ended December 31, 2020, these funds were used to purchase fixed-maturity securities, particularly corporate bonds and asset- and mortgage-backed securities of $474.8 million, and to a lesser extent, municipal bonds of $54.8 million and U.S.

Treasuries of $1.1 million.

During 2020, we received proceeds of $119.7 million from sales of fixed-maturity securities, largely corporate bonds in order to take advantage of favorable valuations.

In addition, we received proceeds of $93.8 million from redemptions of asset- and mortgage-backed securities and corporate bonds.

For the year ended December 31, 2020, purchases of ETFs and non-redeemable preferred stock were $27.2 million and $9.6 million, respectively.

Net cash used in investing activities included net purchases of property and equipment of $27.8 million, primarily related to the construction of our new corporate headquarters, previously discussed.

For the year ended December 31, 2019, net cash used in investing activities of $230.8 million reflected the investment of operating funds from growth in our business operations and proceeds from our equity offering in August of 2019.

These cash inflows were used to purchase fixed-maturity securities, particularly corporate bonds and residential mortgage-backed securities of $203.0 million, and to a lesser extent, other asset-backed securities of

$60.4 million and municipal bonds of $42.8 million.

During 2019, we received proceeds of $35.5 million from sales of fixed-maturity securities, largely municipal bonds in order to take advantage of favorable valuations.

In addition, we received proceeds of $67.9 million from redemptions of asset- and mortgage-backed securities and corporate bonds.

During 2019, the Company reallocated its ETFs from foreign and small-cap funds to domestic equity funds to more closely mirror the broader U.S.

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For the year ended December 31, 2019, purchases and sales of non-redeemable preferred stocks were $10.6 million and $7.8 million, respectively.

Net cash used in investing

activities during 2019 included purchases of property and equipment of $19.6 million and was principally comprised of expenditures related to the construction of our new corporate headquarters, discussed previously.

Net cash used in investing activities during the year ended December 31, 2018 reflected purchases of fixed-maturity securities, particularly other asset-backed securities and, to a lesser extent, corporate bonds and residential and commercial mortgage obligations.

This was offset in part by redemptions of asset and mortgage-backed securities and corporate bonds.

Net cash used in investing activities during 2019 included purchases of property and equipment of $19.6 million and was principally comprised of expenditures related to the construction of our new corporate headquarters, discussed previously.

For the year ended December 31, 2020, net cash provided by financing activities was $76.1 million and reflected the proceeds from our equity offering of $56.7 million, previously discussed, and the drawdown of $25.7 million on our Credit Facility, which was used to fund construction of our new headquarter facilities.

During the year ended December 31, 2020, we paid dividends of $0.36 per common share, or $8.1 million in the aggregate.

During 2019, we received proceeds of $2.8 million from the exercise of vested stock options.

For the year ended December 31, 2018, net cash used in financing activities was $4.1 million and reflected dividends paid of $0.28 per common share, or $5.9 million in the aggregate.

During 2018, we received proceeds of $1.8 million from the exercise of vested stock options.

Proceeds received from our equity compensation plans were $3.6 million, offset by payroll taxes withheld and remitted on restricted stock awards of $1.8 million for the year ended December 31, 2020.

For the year ended December 31, 2019, net cash provided by financing activities was $77.8 million and reflected the proceeds from our equity offering of $65.9 million, previously discussed, and the drawdown of $17.3 million on our Credit Facility, which was used to fund construction of our new headquarter facilities.

During year ended December 31, 2019 we paid dividends of $0.32 per common share, or $6.9 million in the aggregate.

During 2019, we received net proceeds of $2.1 million from our equity compensation plans.

We enter into reinsurance contracts to limit our exposure to potential large losses as well as to provide additional capacity for growth.

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Effective June 1, 2020, we purchased catastrophe reinsurance coverage of $45.0 million per event in excess of our $10.0 million per event retention.

Our property catastrophe reinsurance includes a reinstatement provision which requires us to pay reinstatement premiums after a loss has occurred in order to preserve coverage.

Including the reinstatement provision, the maximum aggregate loss recovery limit is $90 million and is in addition to the per-occurrence coverage provided by our facultative and treaty coverages.

Reinsurance contracts do not relieve us from our obligations to policyholders.

Failure of the reinsurer to honor its obligations could result in losses to us, and if such an event occurred, we would establish an allowance for amounts considered uncollectible.

At December 31, 2019, there was no allowance for uncollectible reinsurance.

Failure of the reinsurer to honor its obligation could result in losses to us, and therefore, we established an allowance for credit risk based on historical analysis of credit losses for highly rated companies in the insurance industry.

The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers.

As of December 31, 2020, Kinsale Insurance has only contracted with reinsurers with A.M.

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At December 31, 2020, the net reinsurance receivable, defined as the sum of paid and unpaid reinsurance recoverables, ceded unearned premiums less reinsurance payables, from five reinsurers represented 78.1% of the total balance.

During 2020, we adopted new accounting guidance ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) a nd, as a result, we recorded an allowance for doubtful accounts of $0.3 million related to our reinsurance balances at December 31, 2020.

Kinsale Insurance has a financial strength rating of "A" (Excellent) from A.M.

Best assigns ratings to insurance companies, which currently range from "A++" (Superior) to "F" (In Liquidation).

"A-" (Excellent) is the fourth highest rating issued by A.M.

"A" (Excellent) is the third highest rating issued by A.M.

The "A" (Excellent) rating is assigned to insurers that have, in A.M.

Best's opinion, an excellent ability to meet their ongoing obligations to policyholders.

This rating is intended to provide an independent opinion of an insurer's ability to meet its obligation to policyholders and is not an evaluation

directed at investors.

This rating is intended to provide an independent opinion of an insurer's ability to meet its obligation to policyholders and is not an evaluation directed at investors.

See also "Risk Factors — Risks Related to Our Business and Our Industry — A decline in our financial strength rating may adversely affect the amount of business we write."

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Payments Due by Period

Total Less Than

One Year One Year to

Three Years Three Years

Five Years More Than

(in thousands)

Reserves for losses and loss adjustment expenses $ 636,013 $ 132,507 $ 213,669 $ 124,936 $ 164,901

Headquarters construction costs

Credit facility 45,871 846 1,686 43,339 —

Operating lease obligations

Total $ 681,884 $ 133,353 $ 215,355 $ 168,275 $ 164,901

Reserves for losses and loss adjustment expenses

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As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments.

Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.

Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our consolidated financial statements.

Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis.

The assumptions used in estimating the payments due by period are based on industry and peer-group claims payment experience.

The assumptions used in estimating the payments due by period are based on Company experience as well as on industry and peer-group claims payment experience.

Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above.

Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers.

Reinsurance balances recoverable on reserves for losses and loss adjustment expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders.

Reinsurance balances recoverable on reserves for losses and loss adjustment expenses are reported

separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders.

Reinsurance balances recoverable on reserves for paid and unpaid losses and loss adjustment expenses totaled $93.2 million at December 31, 2020.

Headquarters construction costs

We have entered into various agreements under which we have incurred obligations relating to our plans to build our corporate headquarters.

We expect the overall project to cost approximately $50 million to $55 million and we are currently targeting a third quarter 2020 completion date .

At December 31, 2019 we incurred costs of approximately $19.8 million toward the project, including approximately $2.5 million to purchase the land.

Our contractual obligations include payments which will become due under the construction agreement and project development

These costs are based on our current estimates;

however, the costs we actually incur and the timing of the actual payments may vary from these estimates.

Credit facility

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Interest on the outstanding amounts is estimated based on 3-month LIBOR plus a margin of 1.75%.

Current borrowings under the Credit Facility have been used to fund construction of our new headquarters and we anticipate utilizing the Credit Facility to fund the remaining construction costs.

However, we may choose to fund the project with other resources or may decide to repay the Credit Facility without penalty.

As a result, actual amounts paid and the associated interest may differ from the estimates presented.

Current borrowings under the Credit Facility were used to fund construction of our new headquarters, which was substantially complete at December 31, 2020.

However, we may decide to repay the Credit Facility without penalty and as a result, actual amounts paid and the associated interest may differ from the estimates presented.

Financial Condition

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At December 31, 2020, total stockholders' equity was $576.2 million and tangible stockholders' equity was $573.4 million, compared to total stockholders' equity of $405.9 million and tangible stockholders' equity of $403.1 million at December 31, 2019.

The increase in both total stockholders' equity and tangible stockholders' equity in 2019 compared to 2018 was primarily due to proceeds received from the public equity offering in August of 2019, profits generated during the period, an increase in unrealized gains on available-for-sale investments, net of taxes, and net activity related to stock-based compensation plans.

The increase in both total stockholders' equity and tangible stockholders' equity in 2020 compared to 2019 was primarily due to profits generated during the period, proceeds received from the public equity offering in August of 2020, an increase in unrealized gains on available-for-sale investments, net of taxes, and net activity related to stock-based compensation plans.

These increases were offset in part by the dividends declared during 2020.

Tangible stockholders’ equity is a non-GAAP financial measure.

We define tangible stockholders’ equity as stockholders’ equity less intangible assets, net of deferred taxes.

Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP.

We use tangible stockholders' equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Stockholders' equity at December 31, 2019, 2018, 2017, 2016 and 2015, reconciles to tangible stockholders' equity as follows:

(in thousands)

Stockholders' equity

Intangible assets, net of deferred taxes

Tangible stockholders' equity

See "—Reconciliation of non-GAAP financial measures" for a reconciliation of stockholders' equity in accordance with GAAP to tangible stockholders' equity.

Equity-based compensation

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2016 Omnibus Incentive Plan (the "2016 Incentive Plan"), became effective.

The 2016 Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards to directors, officers and other employees, as well as independent contractors or consultants providing consulting or advisory services to the Company.

The 2016 Incentive Plan provides for grants of stock options, restricted stock, restricted stock units and other stock-based awards to directors, officers and other employees, as well as independent contractors or consultants providing consulting or advisory services to the Company.

The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832.

On July 27, 2016, the Board of Directors approved, and we granted, 1,036,916 stock options with an exercise price equal to the IPO price of $16.00 per share.

The stock options have a maximum contractual term of 10 years, and vest in 4 equal annual installments following the date of the grant.

During 2020, 42,694 shares of restricted stock awards were granted under the 2016 Incentive Plan to the Company’s employees and non-employee directors.

The restricted stock had a weighted average fair value on the date of grant of $147.45 per share and vest over a term of 1 to 4 years.

On January 1, 2020, the Board of Directors granted 4,428 shares of restricted stock under the 2016 Incentive Plan to the Company’s non-employee directors.

The restricted stock had a fair value on the date of grant of $101.66 per share and will vest over a 1 year period.

On January 1, 2021, the Board of Directors granted 3,200 shares of restricted stock awards under the 2016 Incentive Plan to the Company’s non-employee directors.

The restricted stock had a fair value on the date of grant of $200.13 per share and will vest on the first anniversary date of the grant.

Dividend declarations

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Investment portfolio

At December 31, 2019, o ur cash and invested assets of $908.2 million consisted of fixed-maturity securities, cash and cash equivalents and equity securities.

At December 31, 2019, the majority of the investment portfolio was comprised of fixed-maturity securities of $729.5 million that were classified as available-for-sale.

At December 31, 2020, o ur cash and invested assets of $1.3 billion consisted of fixed-maturity securities, cash and cash equivalents and equity securities.

At December 31, 2020, the majority of the investment portfolio was comprised of fixed-maturity securities of $1.1 billion that were classified as available-for-sale.

Available-for-sale investments are carried at fair value with unrealized gains and losses on those securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

At December 31, 2020, we also held $77.1 million of cash and cash equivalents and $129.7 million of equity securities, which are comprised of ETFs and non-redeemable preferred stock.

Effective January 1, 2018, we adopted a new accounting standard ASU 2016-01, "Financial Instruments – Overall:

Recognition and Measurement of Financial Assets and Financial Liabilities," ("ASU 2016") which eliminated the available-for-sale classification for equity securities and required changes in unrealized gains and losses in fair value of these investments to be recognized in net income.

Our fixed-maturity securities, including cash equivalents, had a weighted average duration of 4.3 years and an average rating of "AA-" at December 31, 2020.

Our investment portfolio, excluding cash equivalents, had a gross return of 2.9% as of December 31, 2020, compared to 3.1% as of December 31, 2019.

At December 31, 2019, the amortized cost and fair value of our investments were as follows:

At December 31, 2020, the amortized cost and estimated fair value of our investments were as follows:

December 31, 2020

Amortized Cost

Estimated Fair Value

% of Total Fair Value

Amortized Cost Estimated Fair Value % of Total Fair Value

($ in thousands)

Fixed maturities:

Treasury securities and obligations of U.S.

government agencies

Obligations of states, municipalities and political subdivisions

$ 216,181 $ 230,906 19.1 %

Corporate and other securities 294,854 316,608 26.1 %

Asset-backed securities 236,813 240,661 19.9 %

Commercial mortgage-backed securities 66,110 70,969 5.8 %

Residential mortgage-backed securities

217,859 222,656 18.4 %

Total fixed maturities 1,031,817 1,081,800 89.3 %

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Total investments $ 1,130,575 $ 1,211,462 100.0 %

The table below summarizes the credit quality of our fixed-maturity securities as of December 31, 2019 , as rated by Standard & Poor’s Financial Services, LLC ("Standard & Poor's"):

The table below summarizes the credit quality of our fixed-maturity securities as of December 31, 2020, as rated by Standard & Poor’s Financial Services, LLC ("Standard & Poor's") or equivalent designation:

December 31, 2020

Standard & Poor’s or Equivalent Designation

Estimated Fair Value

Standard & Poor’s or Equivalent Designation Estimated Fair Value % of Total

($ in thousands)

The amortized cost and fair value of our available-for-sale investments in fixed-maturity securities summarized by contractual maturity as of December 31, 2019, were as follows:

AAA $ 312,721 28.9 %

AA 382,174 35.3 %

A 187,970 17.4 %

BBB 157,777 14.6 %

Below BBB 41,158 3.8 %

Total $ 1,081,800 100.0 %

The amortized cost and estimated fair value of our available-for-sale investments in fixed-maturity securities summarized by contractual maturity as of December 31, 2020, were as follows:

December 31, 2020

Estimated Fair Value

% of Fair Value

Cost Estimated Fair Value % of Fair Value

($ in thousands)

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Asset-backed securities 236,813 240,661 22.2 %

Commercial mortgage-backed securities 66,110 70,969 6.5 %

Residential mortgage-backed securities 217,859 222,656 20.6 %

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Underwriting income is a non-GAAP financial measure that we believe is useful in evaluating our underwriting performance without regard to investment income.

Underwriting income represents the pre-tax profitability of our insurance operations and is derived by subtracting losses and loss adjustment expenses and underwriting, acquisition and insurance expenses from net earned premiums.

Underwriting income is defined as net income excluding net investment income, the net change in the fair value of equity securities, net realized gains and losses on investments, other income, other expenses and income tax expense.

We use underwriting income as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations and our underlying business performance.

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($ in thousands) 2020 2019 2018 2017 2016

Net income $ 88,419 $ 63,316 $ 33,787 $ 24,901 $ 26,167

Income tax expense 11,994 12,735 6,693 13,620 13,369

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Net realized investment gains (3,533) (359) (281) (151) (176)

Other income (634) (26) (12) (3) (136)

Underwriting income $ 54,656 $ 43,201 $ 31,222 $ 28,227 $ 34,304

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The effect of the MLQS on our results of operations is primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses.

The following tables summarize the effect of the MLQS on our underwriting income for the years ended December 31, 2016 and 2015:

Year Ended December 31, 2016

The following table summarize the effect of the MLQS on our underwriting income for the year ended December 31, 2016:

Year Ended December 31, 2016

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Excluding Quota Share

Net earned premiums

$ 133,816 $ (16,996) $ 150,812

Losses and loss adjustment expenses

(70,961) 4,380 (75,341)

Underwriting, acquisition and insurance expenses (28,551) 11,936 (40,487)

Underwriting income

$ 34,304 $ (680) $ 34,984

53.0 % 25.8 % —

Expense ratio

21.3 % 70.2 % —

Combined ratio

74.3 % 96.0 % —

Adjusted loss ratio

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Adjusted combined ratio

Reconciliation of n et operating earnings

Net operating earnings is defined as net income excluding the effects of net unrealized gains and losses on equity

securities, after taxes, and net realized gains and losses on investments, after taxes, as well as the earnings impact of the deferred tax revaluation recognized resulting from the enactment of the TCJA in December 2017.

Reconciliation of net operating earnings

Net operating earnings is defined as net income excluding the effects of the net change in the fair value of equity securities, after taxes, and net realized gains and losses on investments, after taxes, as well as the earnings impact of the deferred tax revaluation recognized resulting from the enactment of the TCJA in December 2017.

Management believes the exclusion of these items provides a more useful comparison of the Company's underlying business performance from period to period.

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($ in thousands) 2020 2019 2018 2017 2016

Net income $ 88,419 $ 63,316 $ 33,787 $ 24,901 $ 26,167

Change in the fair value of equity securities, after taxes (13,315) (9,787) 5,178 — —

Net realized gains on investments, after taxes (2,791) (284) (222) (98) (114)

TCJA charge — — — 1,915 —

Net operating earnings $ 72,313 $ 53,245 $ 38,743 $ 26,718 $ 26,053

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Average equity (1)

$ 491,059 $ 334,933 $ 251,088 $ 224,202 $ 161,833

Return on equity (2)

18.0 % 18.9 % 13.5 % 11.1 % 16.2 %

Operating return on equity (3)

14.7 % 15.9 % 15.4 % 11.9 % 16.1 %

(1) Computed by adding the total stockholders' equity as of the date indicated to the prior year-end total and dividing by two.

(2) Return on equity represents net income expressed as a percentage of average beginning and ending total stockholders’ equity during the period.

(3) Operating return on equity is net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period.

(2) Return on equity represents net income expressed as a percentage of average beginning and ending stockholders’ equity during the period.

(3) Operating return on equity is net operating earnings expressed as a percentage of average beginning and ending stockholders’ equity during the period.

Reconciliation of tangible stockholders' equity

Tangible stockholders’ equity is a non-GAAP financial measure.

We define tangible stockholders’ equity as stockholders’ equity less intangible assets, net of deferred taxes.

We use tangible stockholders' equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Stockholders' equity at December 31, 2020, 2019, 2018, 2017, and 2016, reconciles to tangible stockholders' equity as follows:

2020 2019 2018 2017 2016

(in thousands)

Stockholders' equity $ 576,238 $ 405,880 $ 263,986 $ 238,189 $ 210,214

Intangible assets, net of deferred taxes 2,795 2,795 2,795 2,795 2,300

Tangible stockholders' equity $ 573,443 $ 403,085 $ 261,191 $ 235,394 $ 207,914

Critical Accounting Estimates

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The reserves for unpaid losses and loss adjustment expenses are the largest and most complex estimate in our consolidated balance sheet.

The reserves for unpaid losses and loss adjustment expenses represent our estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date.

As a relatively new company, our historical loss experience is limited.

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Those estimates are based on our historical information, industry information and our estimates of future trends in variable factors such as loss severity, loss frequency and other factors such as inflation.

We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us.

We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes

Such adjustments are included in current operations.

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Our reserves for losses and loss adjustment expenses, net of reinsurance, at December 31, 2020 were $552.3 million, and of this amount, 84.9% related to IBNR.

A 5% change in net IBNR reserves at December 31, 2019 would equate to an $16.2 million change in the reserve for losses and loss adjustment expenses at such date, as well as $12.8 million change in net income, a 3.2% change in stockholders' equity and a 3.2% change in tangible equity, in each case at or for the year ended December 31, 2019 .

A 5% change in net IBNR reserves at December 31, 2020 would equate to an $23.4 million change in the reserve for losses and loss adjustment expenses at such date, as well as $18.5 million change in net income, a 3.2% change in both stockholders' equity and tangible stockholders' equity, in each case at or for the year ended December 31, 2020.

The following tables summarize our reserves for unpaid losses and loss adjustment expenses, on a gross basis and net of reinsurance, at December 31, 2020 and 2019:

December 31, 2020

Gross % of Total Net % of Total

($ in thousands)

Case reserves $ 100,628 15.8 % $ 83,638 15.1 %

IBNR 535,385 84.2 468,645 84.9

Total $ 636,013 100.0 % $ 552,283 100.0 %

December 31, 2019

Gross % of Total Net % of Total

($ in thousands)

Case reserves $ 82,113 17.8 % $ 65,588 16.8 %

IBNR 377,945 82.2 324,678 83.2

Total $ 460,058 100.0 % $ 390,266 100.0 %

Case reserves are established for individual claims that have been reported to us.

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This method estimates the reserves based on our initial expected loss ratio and expected reporting patterns for losses.

Because we have a limited number of years of loss experience compared to the

period over which we expect losses to be reported, we use industry and peer-group data, in addition to our own data, as a basis for selecting our expected reporting patterns.

Because we have a limited number of years of loss experience compared to the period over which we expect losses to be reported, we use industry and peer-group data, in addition to our own data, as a basis for selecting our expected reporting patterns.

Since the incurred BF method does not directly use reported losses in the estimation of IBNR, it is less sensitive to our level of reported losses than other actuarial methods.

This method avoids some of the distortions that could result from a large loss development factor being applied to a small base of reported losses to calculate ultimate losses.

This method avoids some of the distortions that could result from a large loss development factor

being applied to a small base of reported losses to calculate ultimate losses.

However, this method will react more slowly than some other loss development methods if reported loss experience deviates significantly from our expected losses.

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We believe that potential changes such as these would not have a material impact on our liquidity.

December 31, 2019

Potential Impact on 2019

Accident Year

Net Ultimate Loss and LAE Sensitivity Factor

Net Ultimate Incurred Losses and LAE

Net Loss and LAE Reserve

Pre-tax income

Stockholders' Equity

December 31, 2020 Potential Impact on 2020

Sensitivity Accident Year Net Ultimate Loss and LAE Sensitivity Factor Net Ultimate Incurred Losses and LAE Net Loss and LAE Reserve Pre-tax income Stockholders' Equity

($ in thousands)

Sample increases 2020 10.0 % $ 277,140 $ 249,475 $ (27,714) $ (21,894)

2019 5.0 % 168,445 128,656 (8,422) (6,653)

2018 2.5 % 120,304 71,297 (3,008) (2,376)

Prior 2.5 % 102,855 (2,571) (2,031)

Sample decreases 2020 (10.0) % 277,140 249,475 27,714 21,894

2019 (5.0) % 168,445 128,656 8,422 6,653

2018 (2.5) % 120,304 71,297 3,008 2,376

Prior (2.5) % 102,855 2,571 2,031

Reserve development

The amount by which estimated losses differ from those originally reported for a period is known as "development." Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims.

Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims.

Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves

on unresolved claims.

We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

During the year ended December 31, 2020, our net incurred losses for accident years 2019 and prior developed favorably by $13.3 million.

This favorable development included $13.0 million for the 2018 accident year and $1.6 million for the 2017 accident year.

This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business.

The favorable development was offset in part by adverse development of $5.2 million for accident years 2015 and prior.

The unfavorable development was primarily attributable to the other liability occurrence statutory line of business.

During the year ended December 31, 2018, our net incurred losses for accident years 2017 and prior developed favorably by $7.0 million .

This favorable development included $6.8 million for the 2017 accident year and $3.8 million for the 2016 accident year.

This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business.

The favorable development was offset in part by adverse development of $3.6 million for accident years 2015 and prior.

The unfavorable development was primarily attributable to the other liability occurrence statutory line of business.

This favorable development included $10.5 million for the 2019 accident year and $1.8 million for the 2018 accident year, which was primarily due to reported losses emerging at a lower level than expected, largely across the other liability and excess lines of business.

During the year ended December 31, 2019, our net incurred losses for accident years 2018 and prior developed favorably by $9.4 million.

This favorable development included $9.4 million for the 2016 accident year and $6.0 million of favorable development for accident years 2015 and 2014.

The favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business.

The favorable development was offset in part by adverse development of $4.1 million for the 2011 through 2013 accident years.

The unfavorable development was primarily attributable to the other liability occurrence line of business.

This favorable development included $13.0 million for the 2018 accident year and $1.6 million for the 2017 accident year, which was primarily due to reported losses emerging at a lower level than expected, across most lines of business.

The favorable development was offset in part by adverse development of $5.2 million for accident years 2015 and prior, primarily attributable to the other liability occurrence statutory line of business.

Fair value measurements

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Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities.

Fair values of our investment portfolio are estimated using unadjusted prices obtained by our investment manager from nationally recognized third-party pricing services, where available.

For securities where we are unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from our investment manager.

We perform several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2019, including (1) obtaining and reviewing the internal control report from our investment manager that obtain fair values from third party pricing services, (2) discussing with our investment manager their process for reviewing and validating pricing obtained from outside pricing services and (3) reviewing the security pricing received from our investment manager and monitoring changes in unrealized gains and losses at the individual security level.

Fair values of our investment portfolio are estimated using unadjusted prices obtained by our investment accounting vendor from nationally recognized third-party pricing services, where available.

For securities where we are unable

to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from our investment accounting vendor.

We perform several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2020, including (1) obtaining and reviewing the internal control report from our investment accounting vendor that obtain fair values from third party pricing services, (2) discussing with our investment accounting vendor their process for reviewing and validating pricing obtained from outside pricing services and (3) reviewing the security pricing received from our investment accounting vendor and monitoring changes in unrealized gains and losses at the individual security level.

Investment securities are subject to fluctuations in fair value due to changes in issuer-specific circumstances, such as credit rating, and changes in industry-specific circumstances, such as movements in credit spreads based on the market’s perception of industry risks.

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As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security.

Under current accounting guidance, changes in the fair value of investments classified as available-for-sale are not recognized as income during the period, but rather are recognized as a separate component of stockholders’ equity until realized.

On a quarterly basis, we review all available-for-sale securities with unrealized losses on a quarterly basis to assess whether the decline in the securities’ fair value is deemed to be other-than-temporary.

The determination that an investment has incurred an other-than-temporary loss in value requires judgment, and we consider a number factors in completing our impairment review, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer.

For fixed maturities, we consider whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security before recovery, or have the ability to recover all amounts outstanding when contractually due.

Prior to the adoption of ASU 2016-01, for equity securities, we evaluated the near-term prospects of those investments in relation to the severity and duration of the impairment and, we considered our ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery.

For fixed maturities where we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net loss 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, we compare 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 other-than-temporary impairment and is recognized in net loss, resulting in a new cost basis for the security.

Any remaining decline in fair value represents the noncredit portion of the other-than-temporary impairment and is recognized in other comprehensive loss.

Prior to the adoption of ASU 2016-01, for equity securities, a decline in fair value that was considered to be other-than-temporary was recognized in net loss based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.

When assessing whether we intend to sell a fixed-maturity security, or if it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost, we evaluate facts and circumstances including, but not limited to, decisions to reposition the investment portfolio and potential sales of investments to meet cash flow needs.

The day-to-day management of our investment portfolio is outsourced to a third-party investment manager.

For securities with unrealized losses, our investment manager may believe that the preferred course of action is to hold those securities until such losses are recovered.

However, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss based upon a change in the market and other factors described above.

Our investment manager notifies us of rating agency downgrades of securities in their portfolios as well as any potential investment valuation issues at the end of each quarter.

Our investment manager is also required to notify us of, and receive approval for, any other-than-temporary impairments it has identified.

For the year ended December 31, 2019,

there were no other-than-temporary impairments recognized.

See Note 2 of the notes to the consolidated financial statements for further discussion regarding our investments.

Deferred income taxes

We record deferred income taxes as assets or liabilities on our balance sheet to reflect the net tax effect of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their respective tax bases.

Deferred tax assets and liabilities are measured by applying enacted tax rates in effect for the years in which such differences are expected to reverse.

Our deferred tax assets result from temporary differences primarily attributable to loss reserves and unearned premium reserves.

Our deferred tax liabilities result primarily from deferred acquisition costs, the transition adjustment for loss reserve discounting, resulting from the enactment of the TCJA, and unrealized gains in the investment portfolio.

We review the need for a valuation allowance related to our deferred tax assets each quarter.

We reduce our deferred tax assets by a valuation allowance when we determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The assessment of whether or not a valuation allowance is needed requires us to use significant judgment.

See Note 6 of the notes to the consolidated financial statements for further discussion regarding our deferred tax assets and liabilities.

We enter into reinsurance contracts to limit our exposure to potential large losses and to provide additional capacity for growth.

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Best financial strength ratings of "A" (Excellent) or better.

Based on our evaluation of the factors discussed above, we believe all of our recoverables are collectible and, therefore, no allowance for uncollectible reinsurance was provided for at December 31, 2019.

Based on our evaluation of the factors discussed above, the allowance for uncollectible reinsurance was $0.3 million at December 31, 2020.

See Note 1 to the consolidated financial statements – Recently adopted accounting pronouncements - ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) for additional information.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis