Kinsale Capital Group Inc.

04/28/2022 | Press release | Distributed by Public on 04/28/2022 14:38

Quarterly Report (Form 10-Q)

knsl-20220331

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______

Commission File Number: 001-37848
KINSALE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
98-0664337
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)
2035 Maywill Street
Suite 100
Richmond, Virginia23230
(Address of principal executive offices, including zip code)
(804) 289-1300
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share KNSL New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Number of shares of the registrant's common stock outstanding at April 22, 2022: 22,908,023

Table of Contents
KINSALE CAPITAL GROUP, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
4
Consolidated Balance Sheets at March 31, 2022 (Unaudited) and December 31, 2021
4
Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2022 and 2021
5
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three Months Ended March 31, 2022 and 2021
6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2022 and 2021
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
37
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
39
Item 1A.
Risk Factors
39
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
39
Item 6.
Exhibits
39
Signatures
40
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to historical or current fact. These statements may discuss, among others, our future financial performance, our business prospects and strategy, our anticipated financial position, liquidity and capital, dividends and general market and industry conditions. You can identify forward-looking statements by words such as "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," "believes," "seeks," "outlook," "future," "will," "would," "should," "could," "may," "can have," "prospects" or similar terms. Forward-looking statements are based on management's current expectations and assumptions about future events, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements are only predictions and are not guarantees of future performance. Actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include, without limitation:
•the possibility that our loss reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows;
•the inherent uncertainty of models resulting in actual losses that are materially different than our estimates;
•the failure of any of the loss limitations or exclusions we employ, or change in other claims or coverage issues, having a material adverse effect on our financial condition or results of operations;
•the inability to obtain reinsurance coverage at reasonable prices and on terms that adequately protect us;
•the possibility that severe weather conditions and catastrophes, including due to climate change, pandemics and similar events adversely affecting our business, results of operations and financial condition;
•adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity resulting in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, affecting our growth and profitability;
•a decline in our financial strength rating adversely affecting the amount of business we write;
•the potential loss of one or more key executives or an inability to attract and retain qualified personnel adversely affecting our results of operations;
•our reliance on a select group of brokers;
•the changing market conditions of our excess and surplus lines ("E&S") insurance operations, as well as the cyclical nature of our business, affecting our financial performance;
•our employees taking excessive risks;
•the intense competition for business in our industry;
•the effects of litigation having an adverse effect on our business;
•the performance of our investment portfolio adversely affecting our financial results;
•the ability to pay dividends being dependent on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary;
•being forced to sell investments to meet our liquidity requirements;
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•extensive regulation adversely affecting our ability to achieve our business objectives or the failure to comply with these regulations adversely affecting our financial condition and results of operations;
•the other risks and uncertainties discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021.
Forward-looking statements speak only as of the date on which they are made. Except as expressly required under federal securities laws or the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31,
2022 		December 31,
2021
(in thousands, except share and per share data)
Assets
Investments:
Fixed-maturity securities, available for sale, at fair value (amortized cost: $1,521,792-2022; $1,371,519-2021)
$ 1,461,415 $ 1,392,066
Equity securities, at fair value (cost: $117,609-2022; $118,895-2021)
163,574 172,611
Short-term investments 825 -
Total investments 1,625,814 1,564,677
Cash and cash equivalents 104,158 121,040
Investment income due and accrued 8,225 7,658
Premiums receivable, net 86,397 71,004
Reinsurance recoverables, net 129,287 122,970
Ceded unearned premiums 35,628 33,679
Deferred policy acquisition costs, net of ceding commissions 47,483 41,968
Intangible assets 3,538 3,538
Deferred income tax asset, net 22,314 2,109
Other assets 51,711 57,012
Total assets $ 2,114,555 $ 2,025,655
Liabilities and Stockholders' Equity
Liabilities:
Reserves for unpaid losses and loss adjustment expenses $ 957,575 $ 881,344
Unearned premiums 387,615 347,730
Payable to reinsurers 16,080 16,112
Accounts payable and accrued expenses 8,913 23,250
Credit facility 42,727 42,696
Other liabilities 36,075 15,188
Total liabilities 1,448,985 1,326,320
Stockholders' equity:
Common stock, $0.01 par value, 400,000,000 shares authorized, 22,907,548 and 22,834,377 shares issued and outstanding at March 31, 2022 and December 31, 2021 respectively
229 228
Additional paid-in capital 296,390 295,040
Retained earnings 414,756 385,942
Accumulated other comprehensive (loss) income (45,805) 18,125
Total stockholders' equity 665,570 699,335
Total liabilities and stockholders' equity $ 2,114,555 $ 2,025,655
See accompanying notes to condensed consolidated financial statements.
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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended March 31,
2022 2021
(in thousands, except per share data)
Revenues:
Gross written premiums $ 245,513 $ 168,876
Ceded written premiums (29,015) (24,578)
Net written premiums 216,498 144,298
Change in unearned premiums (37,936) (21,257)
Net earned premiums 178,562 123,041
Net investment income 9,088 6,942
Change in the fair value of equity securities
(7,751) 7,091
Net realized investment gains 295 1,198
Other income 124 11
Total revenues 180,318 138,283
Expenses:
Losses and loss adjustment expenses 102,505 70,260
Underwriting, acquisition and insurance expenses 38,545 28,136
Other expenses 396 448
Total expenses 141,446 98,844
Income before income taxes 38,872 39,439
Total income tax expense 7,081 7,360
Net income 31,791 32,079
Other comprehensive (loss) income:
Change in net unrealized losses on available-for-sale investments, net of taxes (63,930) (19,622)
Total comprehensive (loss) income $ (32,139) $ 12,457
Earnings per share:
Basic $ 1.40 $ 1.42
Diluted $ 1.38 $ 1.39
Weighted-average shares outstanding:
Basic 22,753 22,665
Diluted 23,093 23,069

See accompanying notes to condensed consolidated financial statements.
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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Shares of Common Stock Common Stock Additional Paid-in Capital Retained Earnings Accumu-
lated
Other
Compre-
hensive
Income (Loss) 		Total
Stock-
holders' Equity
(in thousands, except per share data)
Balance at December 31, 2021 22,834 $ 228 $ 295,040 $ 385,942 $ 18,125 $ 699,335
Issuance of common stock under stock-based compensation plan
76 1 377 - - 378
Stock-based compensation expense
- - 1,489 - - 1,489
Restricted shares withheld for taxes (2) - (516) - - (516)
Dividends declared ($0.13 per share)
- - - (2,977) - (2,977)
Other comprehensive loss, net of tax - - - - (63,930) (63,930)
Net income - - - 31,791 - 31,791
Balance at March 31, 2022 22,908 $ 229 $ 296,390 $ 414,756 $ (45,805) $ 665,570
Balance at December 31, 2020 22,757 $ 228 $ 291,315 $ 243,315 $ 41,380 $ 576,238
Issuance of common stock under stock-based compensation plan
55 - 339 - - 339
Stock-based compensation expense
- - 1,036 - - 1,036
Dividends declared ($0.11 per share)
- - - (2,504) - (2,504)
Other comprehensive loss, net of tax - - - - (19,622) (19,622)
Net income - - - 32,079 - 32,079
Balance at March 31, 2021 22,812 $ 228 $ 292,690 $ 272,890 $ 21,758 $ 587,566

See accompanying notes to condensed consolidated financial statements.

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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2022 2021
(in thousands)
Operating activities:
Net cash provided by operating activities $ 121,929 $ 91,322
Investing activities:
Purchase of property and equipment (703) (1,282)
Change in short-term investments, net (840) -
Purchases - fixed-maturity securities (226,496) (105,010)
Purchases - equity securities (487) (3,282)
Sales - fixed-maturity securities 54,238 30,797
Sales - equity securities 1,625 -
Maturities and calls - fixed-maturity securities 36,953 45,053
Net cash used in investing activities (135,710) (33,724)
Financing activities:
Payroll taxes withheld and remitted on share-based payments (516) -
Proceeds from stock options exercised 378 339
Dividends paid (2,963) (2,495)
Net cash used in financing activities (3,101) (2,156)
Net change in cash and cash equivalents (16,882) 55,442
Cash and cash equivalents at beginning of year 121,040 77,093
Cash and cash equivalents at end of period $ 104,158 $ 132,535
See accompanying notes to condensed consolidated financial statements.

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KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies
Basis of presentation
The unaudited condensed consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of Kinsale Capital Group, Inc. and its subsidiaries ("the Company") included in the Annual Report on Form 10-K for the year ended December 31, 2021. 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.
Prospective accounting pronouncements
There are no prospective accounting standards which, upon their effective date, would have a material impact on the Company's condensed consolidated financial statements.
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2. Investments
Available-for-sale investments
The following tables summarize the available-for-sale investments at March 31, 2022 and December 31, 2021:
March 31, 2022
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies
$ 14,544 $ - $ (560) $ 13,984
Obligations of states, municipalities and political subdivisions
222,054 2,611 (6,906) 217,759
Corporate and other securities 557,822 2,312 (31,048) 529,086
Asset-backed securities 275,052 789 (2,183) 273,658
Residential mortgage-backed securities
381,691 332 (23,988) 358,035
Commercial mortgage-backed securities 70,629 126 (1,862) 68,893
Total fixed-maturity investments $ 1,521,792 $ 6,170 $ (66,547) $ 1,461,415

December 31, 2021
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies
$ 6,936 $ - $ (89) $ 6,847
Obligations of states, municipalities and political subdivisions
216,375 12,139 (469) 228,045
Corporate and other securities 450,594 11,714 (3,821) 458,487
Asset-backed securities 299,810 2,217 (252) 301,775
Residential mortgage-backed securities
340,804 1,804 (4,923) 337,685
Commercial mortgage-backed securities 57,000 2,433 (206) 59,227
Total fixed-maturity investments $ 1,371,519 $ 30,307 $ (9,760) $ 1,392,066
Available-for-sale securities in a loss position
The Company regularly reviews all its available-for-sale investments with unrealized losses to assess whether the decline in the fair value is deemed to be a credit loss. The Company considers a number of factors in completing its review of credit losses, including the extent to which a security's fair value has been below cost and the financial condition of an issuer. In addition to specific issuer information, the Company also evaluates the current market and interest rate environment. Generally, a decline in a security's value caused by a change in the market or interest rate environment does not constitute a credit loss.
For fixed-maturity securities, the Company also considers whether it intends to sell the security or, if it is more likely than not that it will be required to sell the security before recovery, and its ability to recover all amounts outstanding when contractually due. When assessing whether it intends to sell a fixed-maturity security or, if it is
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likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing.
For fixed-maturity securities where a decline in fair value is below the amortized cost basis and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, an impairment is recognized in net income based on the fair value of the security at the time of assessment. For fixed-maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before recovery of its amortized cost, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the impairment, which is recognized in net income through an allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment, which is recognized in other comprehensive income.
The Company reports investment income due and accrued separately from available-for-sale investments and has elected not to measure an allowance for credit losses for investment income due and accrued. Investment income due and accrued is written off through earnings at the time the issuer of the bond defaults or is expected to default on payments.
The following tables summarize gross unrealized losses and estimated fair value for available-for-sale investments by length of time that the securities have continuously been in an unrealized loss position:
March 31, 2022
Less than 12 Months 12 Months or Longer Total
Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of the U.S. government agencies $ 13,984 $ (560) $ - $ - $ 13,984 $ (560)
Obligations of states, municipalities and political subdivisions
87,590 (6,590) 1,709 (316) 89,299 (6,906)
Corporate and other securities
414,688 (28,493) 16,100 (2,555) 430,788 (31,048)
Asset-backed securities 207,664 (2,088) 5,788 (95) 213,452 (2,183)
Residential mortgage-backed securities
284,332 (17,784) 58,926 (6,204) 343,258 (23,988)
Commercial mortgage-backed securities 60,731 (1,697) 1,672 (165) 62,403 (1,862)
Total fixed-maturity investments $ 1,068,989 $ (57,212) $ 84,195 $ (9,335) $ 1,153,184 $ (66,547)

At March 31, 2022, the Company held 600 fixed-maturity securities in an unrealized loss position with a total estimated fair value of $1.2 billion and gross unrealized losses of $66.5 million. Of these securities, 35 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all fixed-maturity securities within its investment portfolio to determine whether a credit loss has occurred. Based on the Company's review as of March 31, 2022, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At March 31, 2022, 80.8% of the Company's fixed-maturity securities
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were rated "A-" or better and all of the Company's fixed-maturity securities made expected coupon payments under the contractual terms of the securities. For the three months ended March 31, 2022, the Company concluded that there were no credit losses from fixed-maturity securities with unrealized losses.
December 31, 2021
Less than 12 Months
12 Months or Longer
Total
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies
$ 6,847 $ (89) $ - $ - $ 6,847 $ (89)
Obligations of states, municipalities and political subdivisions
23,870 (469) - - 23,870 (469)
Corporate and other securities
188,522 (3,718) 1,092 (103) 189,614 (3,821)
Asset-backed securities 136,669 (204) 4,452 (48) 141,121 (252)
Residential mortgage-backed securities
260,251 (4,329) 17,968 (594) 278,219 (4,923)
Commercial mortgage-backed securities 10,773 (206) - - 10,773 (206)
Total fixed-maturity investments $ 626,932 $ (9,015) $ 23,512 $ (745) $ 650,444 $ (9,760)

Contractual maturities of available-for-sale fixed-maturity securities
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities at March 31, 2022 are summarized, by contractual maturity, as follows:
March 31, 2022
Amortized Estimated
Cost Fair Value
(in thousands)
Due in one year or less $ 7,749 $ 7,766
Due after one year through five years 258,045 251,927
Due after five years through ten years 244,902 233,059
Due after ten years 283,724 268,077
Asset-backed securities 275,052 273,658
Residential mortgage-backed securities 381,691 358,035
Commercial mortgage-backed securities 70,629 68,893
Total fixed-maturity securities $ 1,521,792 $ 1,461,415

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.
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Net investment income
The following table presents the components of net investment income for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Interest:
Taxable bonds $ 7,795 $ 5,729
Tax exempt municipal bonds 857 885
Cash equivalents and short-term investments 19 1
Dividends on equity securities 1,030 869
Gross investment income 9,701 7,484
Investment expenses (613) (542)
Net investment income $ 9,088 $ 6,942

Realized investment gains and losses
The following table presents realized investment gains and losses for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Fixed-maturity securities:
Realized gains $ 842 $ 1,199
Realized losses (365) (1)
Net realized gains from fixed-maturity securities 477 1,198
Equity securities:
Realized losses (148) -
Net realized losses from equity securities (148) -
Realized losses from the sales of short-term investments (34) -
Net realized investment gains $ 295 $ 1,198

Change in net unrealized losses on fixed-maturity securities
For the three months ended March 31, 2022 and 2021, the changes in net unrealized losses for fixed-maturity securities were $80.9 million and $24.8 million, respectively.
Insurance - statutory deposits
The Company had invested assets with a fair value of $6.5 million and $6.7 million on deposit with state regulatory authorities at March 31, 2022 and December 31, 2021, respectively.
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Payable for investments purchased
The Company recorded a payable for investments purchased, not yet settled, of $30.7 million and $15.0 million at March 31, 2022 and December 31, 2021, respectively. The payable balance was included in the "other liabilities" line item of the consolidated balance sheet.
3. Fair Value Measurements
Fair value is estimated for each class of financial instrument based on the framework established in the fair value accounting guidance. Fair value is defined as the price in the principal market that would be received for an asset or paid to transfer a liability to facilitate an orderly transaction between market participants on the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.
The three levels of the fair value hierarchy are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment accounting vendor from nationally recognized third-party pricing services, where available. Values for U.S. Treasuries and exchange traded funds are generally based on Level 1 inputs, which use quoted prices in active markets for identical assets. For other fixed-maturity securities and non-redeemable preferred stock, the pricing vendors use a pricing methodology involving the market approach, including pricing models which use prices and relevant market information regarding a particular security or securities with similar characteristics to establish a valuation. The estimates of fair value of these investments are included in the amounts disclosed as Level 2. For those investments where significant inputs are unobservable, the Company's investment accounting vendor obtains valuations from pricing vendors or brokers using the market approach and income approach valuation techniques and are disclosed as Level 3.
Management performs several procedures to ascertain the reasonableness of investment values included in the condensed consolidated financial statements, including 1) obtaining and reviewing internal control reports from the Company's investment accounting vendor that assess fair values from third party pricing services, 2) discussing with the Company's investment accounting vendor its process for reviewing and validating pricing obtained from third party pricing services and 3) reviewing the security pricing received from the Company's investment accounting vendor and monitoring changes in unrealized gains and losses at the individual security level. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.
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The following tables present the balances of assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, by level within the fair value hierarchy:
March 31, 2022
Level 1 Level 2 Level 3 Total
(in thousands)
Assets
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies $ 13,984 $ - $ - $ 13,984
Obligations of states, municipalities and political subdivisions
- 217,759 - 217,759
Corporate and other securities - 529,086 - 529,086
Asset-backed securities - 273,658 - 273,658
Residential mortgage-backed securities - 358,035 - 358,035
Commercial mortgage-backed securities - 68,893 - 68,893
Total fixed-maturity securities 13,984 1,447,431 - 1,461,415
Equity securities:
Exchange traded funds 119,288 - - 119,288
Non-redeemable preferred stock - 44,286 - 44,286
Total equity securities 119,288 44,286 - 163,574
Short-term investments - 825 - 825
Total $ 133,272 $ 1,492,542 $ - $ 1,625,814

December 31, 2021
Level 1 Level 2 Level 3 Total
(in thousands)
Assets
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies
$ 6,847 $ - $ - $ 6,847
Obligations of states, municipalities and political subdivisions
- 228,045 - 228,045
Corporate and other securities - 458,487 - 458,487
Asset-backed securities - 301,775 - 301,775
Residential mortgage-backed securities - 337,685 - 337,685
Commercial mortgage-backed securities - 59,227 - 59,227
Total fixed-maturity securities 6,847 1,385,219 - 1,392,066
Equity securities:
Exchange traded funds 123,389 - - 123,389
Non-redeemable preferred stock - 49,222 - 49,222
Total equity securities 123,389 49,222 - 172,611
Total $ 130,236 $ 1,434,441 $ - $ 1,564,677
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There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 or December 31, 2021.

The Company holds cash equivalents that are managed as part of its investment portfolio and, due to the short-term maturities of these assets, the carrying value of these investments approximates fair value. The Company held cash equivalents of $29.9 million and $44.7 million at March 31, 2022 and December 31, 2021, respectively. In addition, the estimated fair value of the Credit Facility approximated its carrying value as of March 31, 2022 and December 31, 2021. See Note 12 for further information regarding the Credit Facility.

4. Deferred Policy Acquisition Costs
The following table presents the amounts of policy acquisition costs deferred and amortized for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Balance, beginning of period $ 41,968 $ 31,912
Policy acquisition costs deferred:
Direct commissions 35,860 24,650
Ceding commissions (8,545) (6,204)
Other underwriting and policy acquisition costs 1,988 1,368
Policy acquisition costs deferred 29,303 19,814
Amortization of net policy acquisition costs
(23,788) (16,985)
Balance, end of period $ 47,483 $ 34,741

Amortization of net policy acquisition costs is included in the line item "Underwriting, acquisition and insurance expenses" in the accompanying consolidated statements of income and comprehensive income.
5. Property and Equipment, Net
Property and equipment are included in "other assets" in the accompanying consolidated balance sheets and consist of the following:
March 31, 2022 December 31, 2021
(in thousands)
Building $ 33,101 $ 33,101
Parking deck 5,072 5,072
Land 3,068 3,068
Equipment 3,205 3,143
Software 8,487 7,849
Furniture and fixtures 2,161 2,158
Land improvements 474 474
55,568 54,865
Accumulated depreciation (6,223) (5,570)
Total property and equipment, net $ 49,345 $ 49,295
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6. Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses for the three months ended March 31, 2022 and 2021 consist of the following:
Three Months Ended March 31,
2022 2021
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
Direct commissions $ 29,951 $ 21,165
Ceding commissions (7,829) (5,355)
Other operating expenses 16,423 12,326
Total $ 38,545 $ 28,136

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of $15.0 million and $11.3 million for the three months ended March 31, 2022 and 2021, respectively.

7. Stock-based Compensation
On July 27, 2016, the Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (the "2016 Incentive Plan") became effective. The 2016 Incentive Plan, which is administered by the Compensation, Nominating and Corporate Governance Committee of the Company's Board of Directors, provides for grants of stock options, restricted stock, restricted stock units and other stock-based awards to officers, employees, directors, independent contractors and consultants. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832.
The total compensation cost that has been charged against income for share-based compensation arrangements was $1.5 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.
Restricted Stock Awards
During the three months ended March 31, 2022, the Company granted restricted stock awards under the 2016 Incentive Plan. The restricted stock awards were valued on the date of grant and will vest over a period of 1 to 4 years corresponding to the anniversary date of the grants. The fair value of restricted stock awards was determined based on the closing trading price of the Company's shares on the grant date or, if no shares were traded on the grant date, the last preceding date for which there was a sale of shares. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder's rights, including voting rights and the right to receive dividends. Unvested shares of restricted stock awards and accrued dividends, if any, are forfeited upon the termination of service to or employment with the Company.
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A summary of restricted stock activity under the 2016 Incentive Plan for the three months ended March 31, 2022 is as follows:
For the Three Months Ended
March 31, 2022
Number of Shares Weighted Average Grant Date Fair Value per Share
Non-vested outstanding at the beginning of the period 95,984 $ 131.94
Granted 52,863 $ 211.86
Vested (10,696) $ 188.46
Forfeited (833) $ 171.33
Non-vested outstanding at the end of the period 137,318 $ 158.07

Employees surrender shares to pay for withholding tax obligations resulting from any vesting of restricted stock awards. During the three months ended March 31, 2022, shares withheld for taxes in connection with the vesting of restricted stock awards totaled 2,459.
The weighted average grant-date fair value per share of the Company's restricted stock awards granted during the three months ended March 31, 2022 and 2021 was $211.86 and $185.00, respectively. The fair value of restricted stock awards that vested during the three months ended March 31, 2022 and 2021 was $2.3 million and $0.9 million, respectively. As of March 31, 2022, the Company had $18.7 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 3.2 years.
Stock Options
On July 27, 2016, the Board of Directors approved, and the Company granted, 1,036,916 stock options with an exercise price equal to the initial public offering price of $16.00 per share and a weighted-average grant-date fair value of $2.71 per share. The options have a maximum contractual term of 10 years and vested in 4 equal annual installments following the date of the grant.
The value of the options granted was estimated at the date of grant using the Black-Scholes pricing model using the following assumptions:
Risk-free rate of return 1.26 %
Dividend yield 1.25 %
Expected share price volatility(1)
18.50 %
Expected life in years(2)
6.3 years
(1) Expected volatility was based on the Company's competitors within the industry.
(2) Expected life was calculated using the simplified method, which was an average of the contractual term of the option and its ordinary vesting period, as the Company did not have sufficient historical data for determining the expected term of our stock option awards.
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A summary of option activity as of March 31, 2022, and changes during the period then ended is presented below:
Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Years of Contractual Term Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2022 325,433 $ 16.00
Granted - -
Forfeited - -
Exercised (23,600) 16.00
Outstanding at March 31, 2022
301,833 $ 16.00 4.3 $ 63,995
Exercisable at March 31, 2022
301,833 $ 16.00 4.3 $ 63,995

The total intrinsic value of options exercised was $4.5 million and $3.6 million during the three months ended March 31, 2022 and 2021, respectively.
8. Earnings Per Share
The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the condensed consolidated financial statements:
Three Months Ended March 31,
2022 2021
(in thousands, except per share data)
Net income $ 31,791 $ 32,079
Weighted average common shares outstanding - basic 22,753 22,665
Effect of potential dilutive securities:
Conversion of stock options 291 343
Conversion of restricted stock
49 61
Weighted average common shares outstanding - diluted 23,093 23,069
Earnings per common share:
Basic $ 1.40 $ 1.42
Diluted $ 1.38 $ 1.39

There were 53 thousand and 33 thousand anti-dilutive stock awards for the three months ended March 31, 2022 and 2021, respectively.
9. Income Taxes
The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company's best estimate of the effective tax rate expected for the full year. The estimated annual effective tax rate typically differs from the U.S. statutory tax rate, primarily as a result of tax-exempt investment income and any discrete items recognized during the period. The Company's effective tax rates were 18.2% and 18.7% for the three months ended March 31, 2022 and 2021, respectively. The effective tax rates were
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lower than the federal statutory rate of 21% due primarily to the tax benefits from stock-based compensation and from income generated by certain tax-exempt investments.
10. Reserves For Unpaid Losses and Loss Adjustment Expenses
The following table presents a reconciliation of consolidated beginning and ending reserves for unpaid losses and loss adjustment expenses:
March 31,
2022 2021
(in thousands)
Gross reserves for unpaid losses and loss adjustment expenses, beginning of year
$ 881,344 $ 636,013
Less: reinsurance recoverable on unpaid losses
117,561 83,730
Net reserves for unpaid losses and loss adjustment expenses, beginning of year
763,783 552,283
Incurred losses and loss adjustment expenses:
Current year 110,851 77,333
Prior years (8,346) (7,073)
Total net losses and loss adjustment expenses incurred 102,505 70,260
Payments:
Current year 1,142 1,018
Prior years 28,938 27,571
Total payments 30,080 28,589
Net reserves for unpaid losses and loss adjustment expenses, end of period
836,208 593,954
Reinsurance recoverable on unpaid losses 121,367 94,819
Gross reserves for unpaid losses and loss adjustment expenses, end of period
$ 957,575 $ 688,773

During the three months ended March 31, 2022, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2021 developed favorably by $8.3 million, of which $10.1 million was attributable to the 2021 and 2020 accident years due to lower than expected reported losses across most lines of business. This was offset by $2.0 million of unfavorable development from accident years 2016 and 2018 due to a few large claims.
During the three months ended March 31, 2021, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2020 developed favorably by $7.1 million. The favorable development was primarily attributable to the 2020 accident year of $9.5 million, which resulted from reported losses emerging at a lower level than expected across most lines of business.
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11. Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Premiums written:
Direct $ 245,513 $ 168,876
Ceded (29,015) (24,578)
Net written $ 216,498 $ 144,298
Premiums earned:
Direct $ 205,628 $ 145,031
Ceded (27,066) (21,990)
Net earned $ 178,562 $ 123,041

The following table summarizes ceded losses and loss adjustment expenses for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Ceded incurred losses and loss adjustment expenses $ 9,636 $ 12,501

The following table presents reinsurance recoverables on paid and unpaid losses as of March 31, 2022 and December 31, 2021:
March 31, 2022 December 31, 2021
(in thousands)
Reinsurance recoverables on paid losses $ 7,920 $ 5,409
Reinsurance recoverables on unpaid losses 121,367 117,561
Reinsurance recoverables $ 129,287 $ 122,970

12. Credit Agreement
On May 28, 2019, the Company entered into a Credit Agreement (the "Credit Agreement") that provided the Company with a $50.0 million senior unsecured revolving credit facility (the "Credit Facility") and an uncommitted accordion feature that permits the Company to increase the commitments by an additional $30.0 million. The Credit Facility has a maturity of May 28, 2024. Borrowings under the Credit Facility were used to fund construction of the Company's new headquarters but may also be used for working capital and general corporate purposes.
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. Eurodollar loans bear an interest rate per annum equal to adjusted LIBOR for the applicable interest period plus a margin of 1.75%. ABR loans bear
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an interest rate per annum equal to (a) the higher of the prime rate, the New York Federal Reserve Board Rate plus 0.50% or the one-month adjusted LIBOR plus 1%, plus (b) the applicable margin of 0.75%. As of March 31, 2022, there was $42.7 million outstanding under the Credit Facility, net of debt issuance cost of $0.3 million, with a weighted average interest rate of 2.19%.
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 provisions. As of March 31, 2022, the Company was in compliance with all of its financial covenants under the Credit Facility.

13. Other Comprehensive Loss
The following table summarizes the components of other comprehensive loss for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Unrealized losses on fixed-maturity securities arising during the period, before income taxes $ (80,485) $ (23,650)
Income tax benefit 16,902 4,966
Unrealized losses arising during the period, net of income taxes (63,583) (18,684)
Less reclassification adjustment:
Net realized gains on fixed-maturity securities, before income taxes 439 1,188
Income tax expense (92) (250)
Reclassification adjustment included in net income, net of income taxes 347 938
Other comprehensive loss $ (63,930) $ (19,622)

The sale of an available-for-sale fixed-maturity security results in amounts being reclassified from accumulated other comprehensive income (loss) 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2021. 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 months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2022, 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, 2021.
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 a 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 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 three months of 2022, the percentage breakdown of our gross written premiums was 82% casualty and 18% property. Our commercial underwriting divisions include small business, commercial property, excess casualty, construction, allied health, products liability, general casualty, life sciences, professional liability, management liability, energy, health care, environmental, entertainment, inland marine and public entity. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 3% of our gross written premiums in the first three months of 2022 and is included within our personal insurance division.
COVID-19
Consistent with 2021, the Company's results of operations, financial position and cash flows were not materially impacted by COVID-19 and the related economic effects during the first three months of 2022. For further discussion, 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 year ended December 31, 2021.
Components of Our Results of Operations
Gross written premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
•New business submissions;
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•Conversion of new business submissions into policies;
•Renewals of existing policies; and
•Average size and premium rate of bound policies.
We earn insurance premiums on a pro rata basis over the term of the policy. Our insurance policies generally have a term of one year. Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is ceded to third-party reinsurers under our reinsurance agreements.
Ceded written premiums
Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential large losses. Ceded written premiums are earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded written premiums is impacted by the level of our gross written premiums and any decision we make to increase or decrease retention levels.
Losses and loss adjustment expenses
Losses and loss adjustment expenses are a function of the amount and type of insurance contracts we write and the loss experience associated with the underlying coverage. In general, our losses and loss adjustment expenses are affected by:
•Frequency of claims associated with the particular types of insurance contracts that we write;
•Trends in the average size of losses incurred on a particular type of business;
•Mix of business written by us;
•Changes in the legal or regulatory environment related to the business we write;
•Trends in legal defense costs;
•Wage inflation; and
•Inflation in medical costs.
Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and loss adjustment expenses may be paid out over a period of years.
Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses include policy acquisition costs and other underwriting expenses. Policy acquisition costs are principally comprised of the commissions we pay our brokers, net of ceding commissions we receive on business ceded under certain reinsurance contracts. Policy acquisition costs also include underwriting expenses that are directly related to the successful acquisition of those policies which are deferred. The amortization of 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 such as employment costs, telecommunication and technology costs, and legal and auditing fees.
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Net investment income
Net investment income is an important component of our results of operations. We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed-maturity securities, and may also include cash equivalents, equity securities and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value), the size of our investment portfolio is mainly a function of our invested equity capital combined with premiums we receive from our insureds less payments on policyholder claims.
Change in fair value of equity securities
Change in fair value of equity securities represents the increase or decrease in the fair value of equity securities held during the period.
Net realized investment gains
Net realized investment gains are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost.
Income tax expense
Currently, substantially all of our income tax expense relates to federal income taxes. Our insurance subsidiary, Kinsale Insurance Company, is not subject to income taxes in the states in which it operates; however, our non-insurance subsidiaries are subject to state income taxes, but have not generated any material taxable income to date. The amount of income tax expense or benefit recorded in future periods will depend on the jurisdictions in which we operate and the tax laws and regulations in effect.
Key metrics
We discuss certain key metrics, described below, which we believe provide useful information about our business and the operational factors underlying our financial performance.
Underwriting incomeis a non-GAAP financial measure. 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 earningsis a non-GAAP financial measure. 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.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses to net earned premiums.
Combined ratiois the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.
Return on equityis net income expressed on an annualized basis as a percentage of average beginning and ending total stockholders' equity during the period.
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Operating return on equityis a non-GAAP financial measure. We define operating return on equity as net operating earnings expressed on an annualized basis 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 net operating earnings.
Net retention ratiois the ratio of net written premiums to gross written premiums.
Gross investment returnis investment income from fixed-maturity and equity securities, before any deductions for fees and expenses, expressed as a percentage of the average beginning and ending book value of those investments during the period.

Results of Operations
Threemonths ended March 31, 2022 compared to threemonths ended March 31, 2021
The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
($ in thousands) 2022 2021 Change % Change
Gross written premiums $ 245,513 $ 168,876 $ 76,637 45.4 %
Ceded written premiums (29,015) (24,578) (4,437) 18.1 %
Net written premiums $ 216,498 $ 144,298 $ 72,200 50.0 %
Net earned premiums $ 178,562 $ 123,041 $ 55,521 45.1 %
Losses and loss adjustment expenses 102,505 70,260 32,245 45.9 %
Underwriting, acquisition and insurance expenses 38,545 28,136 10,409 37.0 %
Underwriting income (1)
37,512 24,645 12,867 52.2 %
Net investment income 9,088 6,942 2,146 30.9 %
Change in fair value of equity securities (7,751) 7,091 (14,842) (209.3) %
Net realized investment gains 295 1,198 (903) (75.4) %
Other expense, net (272) (437) 165 (37.8) %
Income before taxes 38,872 39,439 (567) (1.4) %
Income tax expense 7,081 7,360 (279) (3.8) %
Net income $ 31,791 $ 32,079 $ (288) (0.9) %
Net operating earnings (2)
$ 37,681 $ 25,531 $ 12,150 47.6 %
Loss ratio 57.4 % 57.1 %
Expense ratio 21.6 % 22.9 %
Combined ratio 79.0 % 80.0 %
Annualized return on equity 18.6 % 22.1 %
Annualized operating return on equity(2)
22.1 % 17.6 %
(1) Underwriting income is a non-GAAP financial measure. See "-Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to underwriting income.
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(2) Net operating earnings and annualized operating return on equity are non-GAAP financial measures. Net operating earnings is defined as net income excluding the net change in the fair value of equity securities, after taxes, and net realized investment gains and losses, after taxes. Annualized operating return on equity is defined as net operating earnings expressed on an annualized basis 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 net operating earnings.
Overview
Net income was $31.8 million for the three months ended March 31, 2022 compared to $32.1 million for the three months ended March 31, 2021, a decrease of 0.9%. The decrease in net income for the first three months of 2022 over the same period last year was primarily due to a decline in the fair value of our equity investment portfolio driven by adverse movements in the capital markets during the quarter. This decrease was mostly offset by strong growth in the business from favorable E&S market conditions and continued rate increases and an increase in investment income quarter over quarter driven by higher investment balances.
Underwriting income was $37.5 million for the three months ended March 31, 2022 compared to $24.6 million for the three months ended March 31, 2021, an increase of 52.2%. The corresponding combined ratios were 79.0% for the three months ended March 31, 2022 compared to 80.0% for the three months ended March 31, 2021. The increase in underwriting income for the first three months of 2022 compared to the same period last year was due to higher premium growth and continued rate increases from a favorable E&S market environment.
Premiums
Our gross written premiums were $245.5 million for the three months ended March 31, 2022 compared to $168.9 million for the three months ended March 31, 2021, an increase of $76.6 million, or 45.4%. The increase in gross written premiums for the first three months of 2022 over the same period last year was due to higher submission activity from brokers and higher rates across most lines of business, resulting from continued favorable conditions in the E&S market. The average premium on a policy written was $11,800 in the first three months of 2022 compared to $9,800 in the first three months of 2021. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was $14,200 for the first three months of 2022 and $12,300 for the first three months of 2021.
Net written premiums increased by $72.2 million, or 50.0%, to $216.5 million for the three months ended March 31, 2022 from $144.3 million for the three months ended March 31, 2021. The increase in net written premiums for the first three months of 2022 compared to the same period last year was primarily due to higher gross written premiums. The net retention ratio was 88.2% for the three months ended March 31, 2022 compared to 85.4% for the same period last year. The increase in the net retention ratio was primarily due to lower reinstatement premiums on certain property reinsurance treaties and a change in the mix of business quarter over quarter.
Net earned premiums increased by $55.5 million, or 45.1%, to $178.6 million for the three months ended March 31, 2022 from $123.0 million for the three months ended March 31, 2021 due to growth in gross written premiums.
Loss ratio
The loss ratio was 57.4% for the three months ended March 31, 2022 compared to 57.1% for the three months ended March 31, 2021. The increase in the loss ratio in the first three months of 2022 compared to the first three months of 2021 was due primarily to lower favorable net development of reserves from prior accident years as a percentage of earned premiums, offset in part by lower reported losses in the current accident year as a percentage of earned premiums compared to the same period last year.
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During the three months ended March 31, 2022, prior accident years developed favorably by $8.3 million, of which $10.1 million was attributable to the 2021 and 2020 accident years due to lower than expected reported losses across most lines of business. This was offset by $2.0 million of unfavorable development from accident years 2016 and 2018 due to a few large claims.
During the three months ended March 31, 2021, loss reserves from prior accident years developed favorably by $7.1 million. The favorable development was primarily attributable to the 2020 accident year of $9.5 million, which resulted from reported losses emerging at a lower level than expected across most lines of business.

The following table summarizes the loss ratios for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
($ in thousands) Losses and Loss Adjustment Expenses % of Earned Premiums Losses and Loss Adjustment Expenses % of Earned Premiums
Loss ratio:
Current accident year before catastrophe losses
$ 110,789 62.1 % $ 77,257 62.8 %
Current year catastrophe losses 62 - % 76 - %
Effect of prior year development (8,346) (4.7) % (7,073) (5.7) %
Total $ 102,505 57.4 % $ 70,260 57.1 %

Expense ratio
The following table summarizes the components of the expense ratio for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022 2021
($ in thousands) Underwriting Expenses % of Earned Premiums Underwriting Expenses % of Earned Premiums
Commissions incurred:
Direct $ 29,951 16.8 % $ 21,165 17.2 %
Ceding (7,829) (4.4) % (5,355) (4.3) %
Net commissions incurred 22,122 12.4 % 15,810 12.9 %
Other underwriting expenses
16,423 9.2 % 12,326 10.0 %
Underwriting, acquisition and insurance expenses
$ 38,545 21.6 % $ 28,136 22.9 %

The expense ratio was 21.6% for the three months ended March 31, 2022 compared to 22.9% for the three months ended March 31, 2021. The decrease in the expense ratio was due to lower other underwriting expenses and lower net commissions incurred as a percentage of earned premiums. The decrease in the other underwriting 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. The decrease in the net commissions incurred ratio was largely due to lower reinstatement premiums on certain property reinsurance treaties that do not have ceding commissions, and a change in the mix of business. Direct commissions paid as a percentage of gross written premiums was 14.6% for both the three months ended March 31, 2022 and 2021.
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Investing results
The following table summarizes net investment income, change in the fair value of equity securities and net realized investment gains for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
($ in thousands) 2022 2021 Change
Interest from fixed-maturity securities $ 8,652 $ 6,614 $ 2,038
Dividends from equity securities 1,030 869 161
Other 19 1 18
Gross investment income 9,701 7,484 2,217
Investment expenses (613) (542) (71)
Net investment income 9,088 6,942 2,146
Change in fair value of equity securities (7,751) 7,091 (14,842)
Net realized investment gains 295 1,198 (903)
Total $ 1,632 $ 15,231 $ (13,599)

Our net investment income increased by 30.9% to $9.1 million for the three months ended March 31, 2022 from $6.9 million for the three months ended March 31, 2021. This increase in the first three months of 2022 compared to the same period last year was primarily due to growth in our investment portfolio largely generated from the investment of positive cash flow since March 31, 2021. Our fixed-maturity investment portfolio, excluding cash equivalents and unrealized gains and losses, had an annualized gross investment return of 2.5% for the three months and ended March 31, 2022 and 2.6% for the three months ended March 31, 2021.
During the first three months of 2022, the change in fair value of equity securities was comprised of unrealized losses related to exchange traded funds ("ETFs") of $4.5 million and unrealized losses related to non-redeemable preferred stock of $3.2 million. The change in unrealized losses during the first three months of 2022 attributable to ETFs was largely reflective of the broader U.S. stock market. The change in unrealized losses during the first three months of 2022 attributable to non-redeemable preferred stock was reflective of a higher interest rate environment.
During the first three months of 2021, the change in fair value of equity securities was comprised of unrealized gains related to ETFs of $7.5 million and unrealized losses related to preferred stock of $0.4 million. Unrealized gains during the first quarter of 2021 were largely reflective of the gains in the broader U.S. stock market.
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 from available-for-sale investments for the three months ended March 31, 2022 or 2021.
Income tax expense
Our effective tax rate was 18.2% for the three months ended March 31, 2022 compared to 18.7% for the three months ended March 31, 2021. 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 annualized return on equity was 18.6% for the three months ended March 31, 2022 compared to 22.1% for the three months ended March 31, 2021. Our annualized operating return on equity was 22.1% for the three months ended March 31, 2022 compared to 17.6% for the three months ended March 31, 2021. The increase in annualized
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operating return on equity for the three months ended March 31, 2022 compared to the prior period was attributable primarily to growth in the business from continuing favorable market conditions and rate increases.
Liquidity and Capital Resources
Sources and uses of funds
We are organized as a Delaware holding company with our operations primarily conducted by our wholly-owned insurance subsidiary, Kinsale Insurance Company, which is domiciled in Arkansas. Accordingly, we may receive cash through (1) loans from banks and other third parties, (2) issuance of equity and debt securities, (3) corporate service fees from our insurance subsidiary, (4) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions, and (5) dividends from our insurance subsidiary. We may use the proceeds from these sources to contribute funds to Kinsale Insurance Company in order to support premium growth, reduce our reliance on reinsurance, pay dividends and taxes and for other business purposes.
We receive corporate service fees from Kinsale Insurance Company to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.
In August 2019, we filed a universal shelf registration statement with the SEC that expires in 2022. We can use this shelf registration to issue an unspecified amount of common stock, preferred stock, depositary shares and warrants. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.
Management believes that the Company has sufficient liquidity available both in Kinsale and in its insurance subsidiary, Kinsale Insurance Company, 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.
Cash flows
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. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that earn interest and dividends. We also use cash to pay commissions to insurance brokers, as well as to pay for ongoing operating expenses such as salaries, consulting services and taxes. As described under "-Reinsurance" below, we use reinsurance to manage the risk that we take related to the issuance of our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.
The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future.
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Our cash flows for the threemonths ended March 31, 2022 and 2021 were:
Three Months Ended March 31,
2022 2021
(in thousands)
Cash and cash equivalents provided by (used in):
Operating activities
$ 121,929 $ 91,322
Investing activities (135,710) (33,724)
Financing activities
(3,101) (2,156)
Change in cash and cash equivalents $ (16,882) $ 55,442

Net cash provided by operating activities was approximately $121.9 million for the three months ended March 31, 2022, compared to $91.3 million for the same period in 2021. This increase was largely driven by higher premium volume, the timing of claim payments and reinsurance recoveries, offset in part by changes in operating assets and liabilities.
Net cash used in investing activities was $135.7 million for the three months ended March 31, 2022, compared to $33.7 million for the three months ended March 31, 2021. Net cash used in investing activities during the first three months of 2022 included purchases of fixed-maturity securities of $226.5 million, which were comprised largely of corporate bonds, mortgage-backed securities, and to a lesser extent, asset-backed securities, sovereign and municipal securities. During the first three months of 2022, we received proceeds of $54.2 million from sales of fixed-maturity securities, largely corporate bonds and mortgage- and asset-backed securities, and $37.0 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the three months ended March 31, 2022, purchases of ETFs were $0.5 million.
Net cash used in investing activities of $33.7 million for the three months ended March 31, 2021 included purchases of fixed-maturity securities of $105.0 million, and were comprised primarily of corporate bonds and asset- and mortgage-backed securities. During the first three months of 2021, we received proceeds of $30.8 million from sales of fixed-maturity securities, largely corporate bonds, and $45.1 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the three months ended March 31, 2021, purchases of ETFs and non-redeemable preferred stock were $0.5 million and $2.8 million, respectively.
During the first three months of 2022, cash used in financing activities reflected dividends paid of $0.13 per common share, or $3.0 million in aggregate. In addition, payroll taxes withheld and remitted on restricted stock awards was $0.5 million, offset in part by proceeds received from our equity compensation plans of $0.4 million, for the three months ended March 31, 2022. During the first three months of March 31, 2021, cash used in financing activities reflected dividends paid of $0.11 per common share, or $2.5 million in aggregate. Proceeds received from our equity compensation plans were $0.3 million for the three months ended March 31, 2021.
Credit agreement
In May 2019, we entered into a Credit Agreement that provided us with a $50 million Credit Facility and an uncommitted accordion feature that permits us to increase the commitments by an additional $30 million. The Credit Facility has a maturity of May 28, 2024. Borrowings under the Credit Facility were used to fund construction of our new headquarters but may also be used for working capital and general corporate purposes. Interest rates on borrowings are based on prevailing interest rates and the applicable margin, as described in the Credit Agreement. As of March 31, 2022, there was $42.7 million outstanding under the Credit Facility, net of debt issuance costs.
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Reinsurance
We enter into reinsurance contracts primarily to limit our exposure to potential large losses. Reinsurance involves an insurance company transferring ("ceding") a portion of its exposure on a risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. Our reinsurance is primarily contracted under quota-share reinsurance contracts and excess of loss contracts. In quota-share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses, in excess of a specified amount. Under excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company's losses.
We renew our reinsurance treaties annually. During each renewal cycle, there are a number of factors we consider when determining our reinsurance coverage, including (1) plans to change the underlying insurance coverage we offer, (2) trends in loss activity, (3) the level of our capital and surplus, (4) changes in our risk appetite and (5) the cost and availability of reinsurance coverage.
To manage our natural catastrophe exposure, we use computer models to analyze the risk of severe losses. We measure exposure to these losses in terms of probable maximum loss ("PML"), which is an estimate of the amount of loss we would expect to meet or exceed once in a given number of years (referred to as the return period). When managing our catastrophe exposure, we focus on the 100-year and the 250-year return periods.
The following is a summary of our significant reinsurance programs as of March 31, 2022:
Line of Business Covered Company Policy Limit Reinsurance Coverage Company Retention
Property - per risk (1) Up to $10.0 million per risk $5.75 million excess of $3.0 million $3.0 million per occurrence
Property - personal insurance (2) N/A
50% up to $30.4 million per catastrophe
50% of all personal property losses
Property - catastrophe (3) N/A $60.0 million excess of $15.0 million $15.0 million per catastrophe
Primary casualty (4) Up to $10.0 million per occurrence $8.0 million excess of $2.0 million $2.0 million per occurrence
Excess casualty (5) Up to $10.0 million per occurrence
 		Variable quota share $2.0 million per occurrence except as described in note (5) below
(1) Our property per-risk reinsurance reduces the financial impact of a large loss on a single commercial property or inland marine policy. In addition to the Company's retention, this treaty includes a deductible of the first $4.0 million of losses covered under this reinsurance treaty. This treaty also includes a reinstatement provision which requires us to pay reinstatement premiums after a loss in excess of $5 million has occurred in order to preserve coverage.
(2) Our personal insurance quota share reinsurance reduces the financial impact of property losses on our personal insurance policies.
(3) Our property catastrophe reinsurance reduces the financial impact of a catastrophe event involving multiple claims and policyholders. 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
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reinstatement provision, the maximum aggregate loss recovery limit is $120 million and is in addition to the per-occurrence coverage provided by our treaty coverages.
(4) Reinsurance is not applicable to any individual policy with a per-occurrence limit of $2.0 million or less.
(5) For casualty policies with a per-occurrence limit higher than $2.0 million, the ceding percentage varies such that the retention is always $2.0 million or less. For example, for a $4.0 million limit excess policy, our retention would be 50%, whereas for a $10.0 million limit excess policy, our retention would be 20%. For policies for which we also write an underlying primary limit, the retention on the primary and excess policy combined would not exceed $2.0 million.
Reinsurance contracts do not relieve us from our obligations to policyholders. 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. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers. At March 31, 2022, all reinsurance contracts that our insurance subsidiary was a party to were with companies with A.M. Best ratings of "A" (Excellent) or better. As of March 31, 2022, we recorded an allowance for doubtful accounts of $0.4 million related to our reinsurance balances.
Ratings
Kinsale Insurance Company has a financial strength rating of "A" (Excellent) with a stable outlook from A.M. Best. A.M. Best assigns ratings to insurance companies, which currently range from "A++" (Superior) to "F" (In Liquidation). "A" (Excellent) is the third highest rating issued by A.M. Best. 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.
The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The "A" (Excellent) rating obtained by Kinsale Insurance Company is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan.
Financial Condition
Stockholders' equity
At March 31, 2022, total stockholders' equity was $665.6 million and tangible stockholders' equity was $662.8 million, compared to total stockholders' equity of $699.3 million and tangible stockholders' equity $696.5 million at December 31, 2021. The decreases in both total and tangible stockholders' equity over the prior year-end balances were due to an increase in unrealized losses on available-for-sale investments, net of taxes, and payment of dividends, offset in part by profits generated during the period and activity related to stock-based compensation plans. Tangible stockholders' equity is a non-GAAP financial measure. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of stockholders' equity in accordance with GAAP to tangible stockholders' equity.
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Investment portfolio
At March 31, 2022, our cash and invested assets of $1.7 billionconsisted of fixed-maturity securities, equity securities, cash and cash equivalents and short-term investments.At March 31, 2022, the majority of the investment portfolio was comprised of fixed-maturity securities of $1.5 billion that were classified as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. At March 31, 2022, we also held $163.6 million of equity securities, which were comprised of ETF securities and non-redeemable preferred stock, $104.2 million of cash and cash equivalents and $0.8 million of short-term investments.
Our fixed-maturity securities, including cash equivalents,had a weighted average duration of 4.6 years and 4.3 years at March 31, 2022 and December 31, 2021, respectively, and an average rating of "AA-" at both March 31, 2022 and December 31, 2021.
At March 31, 2022 and December 31, 2021, the amortized cost and estimated fair value on fixed-maturity securities were as follows:
March 31, 2022 December 31, 2021
Amortized Cost Estimated Fair Value % of Total Fair Value Amortized Cost Estimated Fair Value % of Total Fair Value
($ in thousands)
Fixed-maturity securities:
U.S. Treasury securities and obligations of U.S. government agencies
$ 14,544 $ 13,984 1.0 % $ 6,936 $ 6,847 0.5 %
Obligations of states, municipalities and political subdivisions
222,054 217,759 14.9 % 216,375 228,045 16.4 %
Corporate and other securities 557,822 529,086 36.2 % 450,594 458,487 32.9 %
Asset-backed securities 275,052 273,658 18.7 % 299,810 301,775 21.7 %
Residential mortgage-backed securities
381,691 358,035 24.5 % 340,804 337,685 24.3 %
Commercial mortgage-backed securities 70,629 68,893 4.7 % 57,000 59,227 4.2 %
Total fixed-maturity securities $ 1,521,792 $ 1,461,415 100.0 % $ 1,371,519 $ 1,392,066 100.0 %

The table below summarizes the credit quality of our fixed-maturity securities at March 31, 2022 and December 31, 2021, as rated by Standard & Poor's Financial Services, LLC ("Standard & Poor's"):
March 31, 2022 December 31, 2021
Standard & Poor's or Equivalent Designation Estimated Fair Value % of Total Estimated Fair Value % of Total
($ in thousands)
AAA $ 382,784 26.2 % $ 375,579 27.0 %
AA 521,211 35.7 % 523,739 37.6 %
A 276,748 18.9 % 234,547 16.9 %
BBB 209,993 14.4 % 196,740 14.1 %
Below BBB and unrated 70,679 4.8 % 61,461 4.4 %
Total $ 1,461,415 100.0 % $ 1,392,066 100.0 %
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The amortized cost and estimated fair value of our fixed-maturity securities summarized by contractual maturity as of March 31, 2022 and December 31, 2021, were as follows:
March 31, 2022 December 31, 2021
Amortized
Cost 		Estimated Fair Value % of Total Fair Value Amortized
Cost 		Estimated Fair Value % of Total Fair Value
($ in thousands)
Due in one year or less $ 7,749 $ 7,766 0.5 % $ 6,742 $ 6,822 0.5 %
Due after one year through five years 258,045 251,927 17.2 % 185,273 189,497 13.6 %
Due after five years through ten years 244,902 233,059 16.0 % 226,707 232,197 16.7 %
Due after ten years 283,724 268,077 18.4 % 255,183 264,863 19.0 %
Asset-backed securities 275,052 273,658 18.7 % 299,810 301,775 21.7 %
Residential mortgage-backed securities
381,691 358,035 24.5 % 340,804 337,685 24.3 %
Commercial mortgage-backed securities 70,629 68,893 4.7 % 57,000 59,227 4.2 %
Total fixed-maturity securities $ 1,521,792 $ 1,461,415 100.0 % $ 1,371,519 $ 1,392,066 100.0 %

Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of March 31, 2022, 6.9% of our total cash and investments was invested in ETFs. At March 31, 2022 and December 31, 2021, our ETF balances were comprised of the following funds:
March 31, 2022 December 31, 2021
Fund Fair Value % of Total Fair Value % of Total
($ in thousands)
Domestic stock market fund $ 76,981 64.5 % $ 81,384 66.0 %
Dividend yield equity fund 42,307 35.5 % 42,005 34.0 %
Total $ 119,288 100.0 % $ 123,389 100.0 %

As of March 31, 2022, 2.6% of our total cash and investments was invested in non-redeemable preferred stock. A summary of these securities by industry segment is shown below as of March 31, 2022and December 31, 2021:
March 31, 2022 December 31, 2021
Industry Fair Value % of Total Fair Value % of Total
($ in thousands)
Financial $ 40,568 91.6 % $ 45,331 92.1 %
Utilities 2,882 6.5 % 2,993 6.1 %
Industrials and other 836 1.9 % 898 1.8 %
Total $ 44,286 100.0 % $ 49,222 100.0 %

Restricted investments
In order to conduct business in certain states, we are required to maintain letters of credit or assets on deposit to support state-mandated insurance regulatory requirements and to comply with certain third-party agreements. Assets held on deposit or in trust accounts are primarily in the form of high-grade securities. The fair value of our restricted assets was $6.5 millionand $6.7 million at March 31, 2022 and December 31, 2021, respectively.
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Reconciliation of Non-GAAP Financial Measures
Reconciliation of underwriting income
Underwriting income is defined as net income excluding net investment income, the net change in the fair value of equity securities, net realized investment gains, other income, other expenses and income tax expense. The Company uses underwriting income as an internal performance measure in the management of its operations because the Company believes it gives management and users of the Company's financial information useful insight into the Company's results of operations and underlying business performance. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.
Net income for three months ended March 31, 2022 and 2021, reconciles to underwriting income as follows:
Three Months Ended March 31,
($ in thousands) 2022 2021
Net income $ 31,791 $ 32,079
Income tax expense 7,081 7,360
Income before income taxes 38,872 39,439
Other expenses(1)
396 448
Net investment income (9,088) (6,942)
Change in the fair value of equity securities 7,751 (7,091)
Net realized investment gains (295) (1,198)
Other income (124) (11)
Underwriting income $ 37,512 $ 24,645
(1)Other expenses are comprised of interest expense on the Company's Credit Facility and corporate expenses not allocated to our insurance operations.

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 investment gains and losses, after taxes. Management believes the exclusion of these items provides a more useful comparison of the Company's underlying business performance from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.
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Net income for three months ended March 31, 2022 and 2021, reconciles to net operating earnings as follows:
Three Months Ended March 31,
($ in thousands) 2022 2021
Net income $ 31,791 $ 32,079
Adjustments:
Change in the fair value of equity securities, before taxes 7,751 (7,091)
Income tax expense (1)
(1,628) 1,489
Change in the fair value of equity securities, after taxes 6,123 (5,602)
Net realized investment gains, before taxes (295) (1,198)
Income tax expense (1)
62 252
Net realized investment gains, after taxes (233) (946)
Net operating earnings $ 37,681 $ 25,531
Operating return on equity:
Average stockholders' equity (2)
$ 682,453 $ 581,902
Annualized return on equity (3)
18.6 % 22.1 %
Annualized operating return on equity (4)
22.1 % 17.6 %
(1) Income taxes on adjustments to reconcile net income to net operating earnings use an effective tax rate of 21%.
(2) Computed by adding the total stockholders' equity as of the date indicated to the prior year-end total and dividing by two.
(3) Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period.
(4) Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period.

Reconciliation of tangible stockholders' equity
Tangible stockholders' equity is defined as total 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.





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Stockholders' equity at March 31, 2022 and December 31, 2021, reconciles to tangible stockholders' equity as follows:
($ in thousands) March 31, 2022 December 31, 2021
Stockholders' equity $ 665,570 $ 699,335
Less: intangible assets, net of deferred taxes 2,795 2,795
Tangible stockholders' equity $ 662,775 $ 696,540

Critical Accounting Estimates
We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities, if any. Actual results may differ materially from the estimates and assumptions used in preparing the condensed consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. Our critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. Our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We do not have any material exposure to foreign currency exchange rate risk or commodity risk.
There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of that date.
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the first quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our condensed consolidated financial position.
Item 1A. Risk Factors
Therehave been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 6. Exhibits
Exhibit
Number 		Description
3.1
3.2
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS ** XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* This certification is deemed not filed for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
** The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KINSALE CAPITAL GROUP, INC.
Date: April 28, 2022
By:
/s/ Michael P. Kehoe
Michael P. Kehoe
President and Chief Executive Officer
Date: April 28, 2022
By:
/s/ Bryan P. Petrucelli
Bryan P. Petrucelli
Executive Vice President, Chief Financial Officer and Treasurer
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