Kinsale Capital Group
Annual Report 2019

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 001-37848 KINSALE CAPITAL GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 98-0664337 (I.R.S. Employer Identification Number) 2221 Edward Holland Drive, Suite 600 Richmond, Virginia 23230 (Address of principal executive offices, including zip code) (804) 289-1300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.01 KNSL Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No ☒ 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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934 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 ☒ The aggregate market value of the shares of the registrant's common stock held by non-affiliates as of June 30, 2019 was approximately $1,836,524,103. The number of the registrant’s common shares outstanding was 22,227,323 as of February 20, 2020. Portions of the registrant’s definitive proxy statement relating to its 2020 annual meeting of stockholders (the "2020 Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K. The 2020 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE: Table of Contents Table of Contents PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial and Other Data Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary i Page 1 18 32 32 32 32 33 35 38 61 63 107 107 107 108 108 108 108 108 109 109 Table of Contents Unless the context requires otherwise, the words "Kinsale," the "Company," "we," "us" and "our'" in this Annual Report on Form 10-K refer to Kinsale Capital Group, Inc. and its subsidiaries. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to historical or current fact. These statements may discuss, among others, our future financial performance, our business prospects and strategy, our anticipated financial position, liquidity and capital, dividends and general market and industry conditions. You can identify forward-looking statements by words such as "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," "believes," "seeks," "outlook," "future," "will," "would," "should," "could," "may," "can have" and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements are only predictions and are not guarantees of future performance. Actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include, without limitation: • • • • • • • • • • • • • • the possibility that our loss reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows; the inherent uncertainty of models resulting in actual losses that are materially different than our estimates; 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 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 performance of our investment portfolio adversely affecting our financial results; 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; 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 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; the inability to obtain reinsurance coverage at reasonable prices and on terms that adequately protect us; our employees taking excessive risks; ii Table of Contents • • • • • • the possibility that severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us; the inability to manage our growth effectively; the intense competition for business in our industry; the effects of litigation having an adverse effect on our business; the failure to maintain effective internal controls in accordance with the Sarbanes-Oxley of 2002 (the "Sarbanes-Oxley Act"); and the other risks and uncertainties discussed in Part I, Item 1A of this Annual Report on Form 10-K. 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. iii Table of Contents Item 1. Business PART I Kinsale is a property and casualty insurance company that focuses exclusively on the excess and surplus lines ("E&S") market in the U.S., where we can use our underwriting expertise to write coverages for hard-to-place small business risks and personal lines risks. We market and sell these insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands primarily through a network of independent insurance brokers. Our experienced and cohesive management team has an average of over 25 years of experience in the E&S market. Many of our employees and members of our management team have also worked together for decades at other E&S insurance companies. Our goal is to deliver long-term value for our stockholders by growing our business and generating attractive returns. We seek to accomplish this by generating consistent and attractive underwriting profits while managing our capital prudently. Using our proprietary technology platform and leveraging the expertise of our highly experienced employees in our daily operations, we have built a company that is entrepreneurial and highly efficient. We believe our systems and technology are at the digital forefront of the insurance industry and allow us to quickly collect and analyze data, thereby improving our ability to manage our business and reduce our response times for our customers. We believe that we have differentiated ourselves from our competitors by effectively leveraging technology, vigilantly controlling expenses and maintaining control over our underwriting and claims operations. We have significantly grown our business and have generated attractive returns. During 2019, our gross written premiums increased over 40%, to $389.7 million for the year ended December 31, 2019. Our return on equity and combined ratios were 18.9% and 84.7%, respectively, for the year ended December 31, 2019. Our operating return on equity, a non-GAAP measure, was 15.9% for the year ended December 31, 2019. We believe that we are well positioned to continue to capitalize on attractive opportunities in our target market and to prudently grow our business. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAP Financial Measures" for a reconciliation of return on equity to operating return on equity. History Kinsale Capital Group, Inc., a Delaware domiciled insurance holding company, was formed on June 3, 2009 for the purpose of acquiring and managing insurance entities. Prior to September 5, 2014, the Company was a Bermuda registered holding company, formerly known as Kinsale Capital Group, Ltd. ("KCGL"). Effective September 5, 2014, KCGL was re-domesticated from Bermuda to Delaware. A wholly-owned subsidiary of KCGL, Kinsale Capital Group, Inc., which was formed on June 4, 2009 as a U.S. holding company, was immediately merged into the re-domesticated entity and Kinsale Capital Group, Ltd. changed its name to Kinsale Capital Group, Inc. On June 4, 2009, we incorporated Kinsale Management, Inc. ("Kinsale Management") as a wholly-owned subsidiary domiciled in Delaware, in order to provide management services to all of our U.S.-based subsidiaries. On February 5, 2010, we acquired American Healthcare Specialty Insurance Company and changed its name to Kinsale Insurance Company ("Kinsale Insurance"). Kinsale Insurance is an Arkansas-domiciled insurance company and is eligible to operate on an excess and surplus lines basis in 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. On August 21, 2013, we established Aspera Insurance Services, Inc. ("Aspera"), an insurance broker. Aspera is domiciled in Virginia and is authorized to conduct business in Virginia, Alabama, California, Colorado, Connecticut, Delaware, Florida, Georgia, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont and Washington. On December 3, 2018, we incorporated Kinsale Real Estate, Inc. ("Kinsale Real Estate"), as a wholly-owned subsidiary domiciled in Delaware, in order to acquire and hold real estate. On December 3, 2018, we incorporated 2001 Maywill, LLC, as a wholly-owned subsidiary of Kinsale Real Estate, domiciled in Delaware, in order to acquire and hold real estate. 1 Table of Contents Our Products We write a broad array of insurance coverages for risks that are unique or hard to place in the standard insurance market. Typical E&S risks include newly established companies or industries, high-risk operations, insureds in litigious venues, or companies with poor loss histories. We target classes of business where our underwriters have extensive experience allowing us to compete effectively and earn attractive returns. Our underwriters specialize in individual lines of business which allow them to develop in-depth knowledge and experience of the risks they underwrite. Our core client focus is small to medium-sized accounts, which we believe tend to be subject to less competition and have better pricing. The average premium per policy written by us in 2019 was approximately $8,200. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium per policy written was approximately $10,800 in 2019. We believe that our strategy, experience and expertise allow us to compete effectively in the E&S market and will enable us to generate attractive long-term stockholder value. In 2019, the percentage breakdown of our gross written premiums was 87.6% casualty and 12.4% property. Our commercial lines offerings include construction, small business, excess casualty, commercial property, product liability, allied health, general casualty, professional liability, life sciences, energy, management liability, health care, environmental, inland marine, commercial insurance and public entity. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 4.3% of our gross written premiums in 2019 and is included with our property division. Our Competitive Strengths We believe that our competitive strengths include: Exclusive focus on the E&S market. The E&S, or non-admitted, market has historically operated at lower loss ratios and higher margins, and has grown direct premiums written more quickly than the admitted market. From 2001 to 2018, A.M. Best Company's ("A.M. Best") domestic professional surplus lines composite produced an average net loss and loss adjustment expense ratio of 69.6% and grew direct premiums written by 7.0% annually, versus 73.9% and 3.7% respectively for the property and casualty ("P&C") industry. Underwriting expertise across a broad spectrum of hard-to-place risks. We have a broad appetite to underwrite a diverse set of risks across the E&S market. Our underwriting team is highly experienced, and individually underwrites each risk to appropriately price and structure solutions. We balance our broad risk appetite by maintaining a diversified book of smaller accounts with strong pricing and well-defined coverages. Unlike many of our competitors, we do not extend underwriting authority to brokers, agents or other third parties. For the year ended December 31, 2019, our loss and loss adjustment expense ratio was 59.9%. Technology is a core competency. As an insurance company that was founded in 2009, we have the benefit of having built a proprietary technology platform that reflects the best practices our management team has learned from its extensive prior experience. We operate on an integrated digital platform with a data warehouse that collects an array of statistical data. Our platform provides a high degree of efficiency, accuracy and speed across all of our processes. We are able to use the data that we collect to quickly analyze trends across all functions in our business. Our customized proprietary system helps us to reduce the risk of administrative errors in our policy forms and include all of the necessary exclusions for the specified risk, and provides for the efficient and accurate handling of claims. Additionally, our systems enable us to rapidly respond to brokers, allowing our underwriters to reply to the majority of submissions within 24 hours, a significant benefit to our brokers. We believe that our technology platform will provide us with an enduring competitive advantage as it allows us to quickly respond to market opportunities, and will continue to scale as our business grows. Significantly lower expense ratio than our competitors. Expense management is ingrained in our business culture. We believe that our proprietary technology platform coupled with our low-cost operation allow us to process policy quotes, underwrite policies and operate at a lower cost than our direct competitors. In particular, our efficient platform allows us to provide a higher level of service to our brokers and to target smaller accounts which we believe are generally subject to less competition. For the year ended December 31, 2019, our expense ratio was 24.8%. Fully integrated claims management. We believe that actively managing our claims is an important aspect of keeping losses low, while accurately setting reserves. We manage all of our claims in-house and do not delegate claims 2 Table of Contents management authority to third parties. We promptly and thoroughly investigate all claims, generally through direct contact with the insured, and leverage both our systems and our underwriters to gather the relevant facts. When we believe claims are without merit, we vigorously contest payment. We currently average 86 open claims per claims adjuster (84 open claims per claims adjuster excluding catastrophe claims), which we believe is significantly lower than industry average. As of December 31, 2019, our reserves for claims incurred but not reported were approximately 83.2% of our total net loss reserves. Of the total open claims as of December 31, 2019, only 38.6% were open for accident years 2017 and prior. Entrepreneurial management team with a track record of success. Our management team is highly experienced with an average of over 25 years of relevant experience, bringing together a full suite of underwriting, claims, technology and operating skills that we believe will drive our long-term success. The majority of our management team has a proven track record of successfully building high performing specialty insurance companies. We are led by Michael Kehoe who, prior to founding Kinsale, was the president and chief executive officer of James River Insurance Company from 2002 until 2008. Prior to James River Insurance Company, Mr. Kehoe held several senior positions at Colony Insurance Company. Many of our other employees and members of our management team worked with Mr. Kehoe at James River Insurance Company and have decades of experience at other E&S insurance companies. As meaningful owners of Kinsale, we believe our management team has closely aligned interests with our stockholders. Our Board of Directors has deep insurance and financial services industry experience. Our Board of Directors is comprised of accomplished industry veterans. Collectively, our board members bring decades of experience from their prior roles operating and working in insurance and other financial services companies. Our Strategy We believe that our approach to our business will allow us to achieve our goals of both growing our business and generating attractive returns. Our approach involves: Expand our presence in the E&S market. According to A.M. Best, the total E&S market was approximately $49.9 billion of direct written premiums in 2018. Based on our 2019 gross written premiums of $389.7 million, our current market share is approximately 0.8%. We believe that our exclusive focus on the E&S market and our high levels of service, including our ability to quote, underwrite and bind insurance policies in a timely manner given our efficient systems, allow us to better serve our brokers and position us to profitably increase our market share. Generate underwriting profits. We will continue to focus on underwriting profitability regardless of market cycles. Our strategy is to concentrate on hard-to- place risks and to maintain adequate rate levels for the risks that we underwrite. We maintain control over our underwriting process to ensure consistent quality of work. We underwrite each account individually and never delegate authority to any outside agents or brokers. Maintain a contrarian risk appetite. Our flexibility as an E&S insurer enables us to write business at attractive returns while offering competitive policies to our brokers and insureds. We believe we distinguish ourselves in the market with our contrarian risk appetite and our willingness to offer terms on risks requiring more extensive underwriting that some of our competitors may decline to consider. Such accounts frequently offer us a better risk-adjusted return than those preferred by our competitors due to reduced competition. Leverage investment in technology to drive efficiencies. We use a proprietary technology platform to drive a high level of efficiency, accuracy and speed in our underwriting and quoting process. We have organized our workflows, designed our systems and aligned our staff to provide superior service levels to brokers while achieving a level of efficiency that we believe provides us with a competitive advantage and helps contribute to our low expense ratio. We believe that automation also reduces human error in our underwriting, policy processing, accounting, collections, and claims adjusting processes. Additionally, we are able to track quotes, monitor historical loss experience and reserve development, and measure other relevant metrics at a granular level of detail. We believe that our technology is scalable and will allow us to maintain a low expense ratio as we continue to organically grow our business. Maintain a strong balance sheet. In order to maintain the confidence of policyholders, brokers, reinsurers, investors, regulators and rating agencies, we seek to establish and maintain a conservative balance sheet. We have a robust process for setting our loss reserves and regularly reviewing our estimates. In addition, we maintain a conservative investment 3 Table of Contents portfolio. Our strong balance sheet allows us to maintain the confidence of our investors and other constituencies, and thereby position ourselves to better achieve our goals. Our Structure The chart below displays our corporate structure: Kinsale Capital Group, Inc. (Delaware corporation) Kinsale Management, Inc. (Delaware corporation; management services company) Kinsale Insurance Company (Arkansas corporation; stock insurance company) Aspera Insurance Services, Inc. (Virginia corporation; insurance broker) Kinsale Real Estate, Inc. (Delaware corporation; real estate holding company) 2001 Maywill, LLC (Delaware limited liability company; real estate entity) Marketing and Distribution We market our products through a broad group of independent insurance brokers that we believe can consistently produce reasonable volumes of quality business for us. We also sell policies through our wholly-owned broker, Aspera. Aspera distributes 4.9% of Kinsale’s premiums, primarily personal lines, through independent brokers. Kinsale does not grant its brokers any underwriting or claims authority. We select our brokers based on management's review of the experience, knowledge and business plan of each broker. While many of our brokers have more than one office, we evaluate each office as if it were a separate brokerage and may appoint some but not all offices owned by a broker for specialized lines of business. We seek brokers with business plans that are consistent with our strategy and underwriting objectives. Brokers must be able to demonstrate an ability to competently produce both the quality and quantity of business that we seek. For our more specialized divisions, we seek to appoint brokers that have a similar focus and demonstrated experience in the particular line of business. Brokers who produce unacceptably low volumes of business may be terminated. Our underwriters regularly visit with brokers in their offices in order to market to these brokers and discuss the products we offer. For the year ended December 31, 2019, our largest brokers were R-T Specialty, LLC, which produced $47.2 million, or 12.1%, of our gross written premiums, and AmWINS Group, LLC, which produced $41.1 million, or 10.5%, of our gross written premiums. No other broker accounted for more than 10% of our gross written premiums in the year ended December 31, 2019. It is important to us that we maintain excellent relationships with the group of brokers who present business to us. Commissions are an important part of that relationship, but brokers will also typically consider the ultimate price to the insured, and the service and expertise offered by the carrier when determining where to place their business. In 2019, we paid an average commission to our brokers of 14.6% of gross written premiums. We believe this is slightly lower than the average commission paid by our competitors. We believe that our specialization in hard-to-place risks, combined with our high degree of service, including our rapid speed-to-quote, permits us to manage our commission expense as part of our overall management of the underwriting process. Additionally, we do not contract out our underwriting to program 4 Table of Contents managers or general agents which typically requires a higher commission level to compensate the third party for its work on behalf of the carrier. We sell policies in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The following tables show our gross written premiums by state for the years ended December 31, 2019, 2018 and 2017. 2019 % of Total 2018 % of Total 2017 % of Total Year Ended December 31, ($ in thousands) $ 95,889 48,829 48,473 27,441 17,339 11,887 11,732 8,116 7,293 7,228 24.6% $ 12.5% 12.4% 7.0% 4.4% 3.1% 3.0% 2.1% 1.9% 1.9% 71,645 40,102 32,414 14,311 13,071 6,890 6,395 5,469 5,859 4,671 26.0% $ 14.6% 11.8% 5.2% 4.7% 2.5% 2.3% 2.0% 2.1% 1.7% 60,632 31,732 24,964 10,378 11,454 7,208 4,353 4,587 4,871 3,663 105,467 389,694 27.1% 100.0% $ 74,711 275,538 27.1% 100.0% $ 59,349 223,191 $ 27.2% 14.2% 11.2% 4.6% 5.1% 3.2% 2.0% 2.1% 2.2% 1.6% 26.6% 100.0% Gross written premiums by state: California Texas Florida New York Washington New Jersey Colorado Arizona Nevada Oregon All other states Underwriting Our underwriting department consisted of approximately 130 employees as of December 31, 2019. We use our proprietary technology platform to drive a high level of efficiency, accuracy and speed in our underwriting and quoting process. We believe our internal business processing systems allow us to maintain a high ratio of underwriters to total employees, as we do not require a significant number of administrative personnel to facilitate our underwriting process. We also believe that our digital environment allows us to engage fewer employees in policy administration. We are very selective in the policies we choose to bind, with approximately one in every 9 submissions bound. If our underwriters cannot reasonably expect to bind coverage at the combination of premium and coverage that meets our standards, they are encouraged to quickly move on to another prospective opportunity. For the year ended December 31, 2019, we received approximately 380,000 new business submissions, issued approximately 234,000 new quotes and bound 25,000 new policies for a policy to new submission ratio of 6.6%. We are careful to establish terms that are suited to the risk and the pricing of our policies. As an E&S company, we use our freedom of rate and form assertively in order to appropriately underwrite risks that have already been rejected by licensed carriers constrained by approved forms and filed rates. Beyond simply selecting risks, we attempt to craft policies that offer affordable protection to insureds by tailoring coverages in ways that make potential losses more predictable and reduce claims costs. For example, our "defense inside the limits" clause, which we applied to more than 99.8% of our Professional Liability premiums written in 2019, means that funds we expend defending an insured against a claim are counted against the total policy limit. We believe we do not have any material exposure to claims from asbestos, lead paint, silica, mold or nuclear, biological or chemical terrorism. Claims Our claims department consisted of approximately 30 claims professionals who had an average of 12 years of claims experience in the P&C industry as of December 31, 2019. Our Chief Claims Officer has over 30 years of claims experience in large commercial and specialty insurance claims departments. Our claims department is fully integrated 5 Table of Contents with our other functional departments. We manage all of our claims in-house and do not delegate claims management authority to third parties. We focus on the effective management of the claims adjusting process. This process is achieved by extending low reserve and settlement authority levels to our front-line claim examiners; keeping the adjuster-to-supervisor ratios low to allow for greater supervision over the adjusting process; and monitoring the number of claims handled by each claims examiner. This method ensures that two or more members of the department participate in the decision-making process when appropriate; our claim examiners recognize and address key issues; and reserves are adjusted to the appropriate amount as necessary. We seek to manage the number of claims per claims examiner to allow our claim examiners sufficient time to review and investigate claims submitted. Moreover, prior to any scheduled mediation or trial, claims personnel conduct further peer review to ensure that issues and exposures have been adequately analyzed. In addition, our claim examiners work closely with members of the underwriting staff to keep them apprised of claim trends. Vendor management is also important, and our claim examiners work closely with our vendors to manage expenses and costs. Information Technology Our information technology department consisted of approximately 53 full time employees and contractors as of December 31, 2019. Our Chief Information Officer has over 30 years of experience in the technology field. Our information technology staff utilizes an agile methodology to develop best-in-class software solutions and to attract and retain quality staff. We have built a proprietary technology platform that reflects the best practices our management team has learned from its extensive prior experiences. Our proprietary technology platform is comprised of multiple applications and services linked together in an integrated system. Key applications and services supporting the core business were developed in-house. We designed the architecture for our information systems in a fashion that would allow us to reduce our administrative costs and quickly provide us with useful information. Our insurance company subsidiary operates in a digital environment, which eliminates the costs of printing, storing and handling thousands of documents each week. Moreover, by maintaining electronic files on each account, we have been able to facilitate clear communication among personnel responsible for handling matters related to underwriting, servicing and claims as each has access to full information regarding the account. We use a browser-based platform approach to processing business. When a broker makes a submission, the information is transferred into our browser-based underwriting system. This eliminates costly data-entry steps in our underwriting process and permits the underwriter to focus on underwriting the account accurately and rapidly. Since inception, we have been intent on capturing and analyzing our data and building, over time, a robust repository of information that we can use to improve our decision making. We refer to this repository as our data warehouse. The design of our data warehouse permits us to capture an array of statistical data, collected by the policy management systems at Kinsale. The data warehouse is easily searchable, collects and labels information in a consistent format and contains most of the underwriting and claims information we collect at every level. The data warehouse permits us flexibility with regard to analyzing our business by segment or in the aggregate. We believe the proprietary technology platform, which includes the data warehouse, is a competitive advantage for us. Reinsurance We enter into various reinsurance contracts to limit our exposure to potential losses arising from large risks and to provide additional capacity for growth. 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. The ceding of liability to a reinsurer does not legally discharge the primary insurer from its liability for the full amount of the policies on which it obtains reinsurance. The primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement. We use treaty reinsurance and, on a limited basis, facultative reinsurance coverage. Treaty coverage refers to a reinsurance contract that is applied to a group or class of business where all the risks written meet the criteria for that class. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is 6 Table of Contents used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance. The following is a summary of our significant reinsurance programs as of December 31, 2019: Line of Business Covered Property - per risk Property - catastrophe (1) Primary casualty (2) Excess casualty (3) Company Policy Limit Reinsurance Coverage Company Retention Up to $10.0 million per risk $8.0 million excess of $2.0 million $2.0 million per occurrence N/A $77.5 million excess of $7.5 million $7.5 million per catastrophe Up to $10.0 million per occurrence $8.0 million excess of $2.0 million $2.0 million per occurrence Up to $10.0 million per occurrence Variable quota share $2.0 million per occurrence except as described in note (3) below (1) 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 reinstatement provision, the maximum aggregate loss recovery limit is $155 million and is in addition to the per-occurrence coverage provided by our facultative and other treaty coverages. (2) Reinsurance is not applicable to any individual policy with a per occurrence limit of $2.0 million or less. (3) For policies with a per occurrence limit higher than $2.0 million, the quota-share 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. 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. 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 if such an event occurred, we would establish an allowance for those amounts considered uncollectible. 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 December 31, 2019, all reinsurance contracts that our insurance subsidiary was party to were either with companies with A.M. Best ratings of "A" (Excellent) or better. As of December 31, 2019, we have never had a loss for uncollectible reinsurance. 7 Table of Contents We had reinsurance recoverables on unpaid losses of $69.8 million at December 31, 2019, and recoverables on paid losses of $2.8 million at December 31, 2019. The following table provides a summary of our top five reinsurers, based on the amount recoverable, at December 31, 2019: Reinsurers Swiss Reinsurance America Corp. Munich Reinsurance America, Inc. SCOR Reinsurance Co. Arch Reinsurance Co. Odyssey America Reinsurance Corp. Total for Top Five All others Total A.M. Best Rating Reinsurance Recoverable ($ in thousands) A+ A+ A+ A+ A $ $ 28,368 14,627 9,616 5,924 5,240 63,775 8,799 72,574 We did not have reinsurance recoverables greater than $3.0 million at December 31, 2019 from any individual reinsurer other than the five listed above. To reduce credit exposure to reinsurance recoverable balances, we obtain letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms of our reinsurance contracts discussed above, we may retain funds due from reinsurers as security for those recoverable balances. Catastrophe Risk Management In addition to the reinsurance protection noted above, we use other techniques to carefully manage our exposure to catastrophe losses. We use computer models to analyze the risk of severe losses from natural catastrophes. 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. Our main catastrophe risk arises from hurricanes. We manage this exposure through careful and disciplined underwriting, extensive reinsurance protection purchased from financially strong counterparties and monthly catastrophe modeling of the portfolio. Additionally, we limit the concentration of property business by geographic area to reduce loss exposure from extreme events. Reserve Development We maintain reserves for specific claims incurred and reported, reserves for claims incurred but not reported and reserves for uncollectible reinsurance when appropriate. Our ultimate liability may be greater or less than current reserves. In the insurance industry, there is always the risk that reserves may prove inadequate. We continually monitor reserves using new information on reported claims and a variety of statistical techniques. Anticipated inflation is reflected implicitly in the reserving process through analysis of cost trends and the review of historical development. We do not discount our reserves for unpaid losses and loss adjustment expenses to reflect estimated present value. See Note 7 of the notes to the consolidated financial statements and "Critical Accounting Estimates" for a discussion of estimates and assumptions related to the reserves for unpaid losses and loss adjustment expenses. Investments Investment income is an important component of our earnings. We collect premiums from our insureds and invest a portion of these funds until claims are paid. We seek to maximize investment returns using investment guidelines that stress prudent allocation among cash and cash equivalents, fixed-maturity securities and, to a lesser extent, equity securities. 8 Table of Contents Our cash and invested assets generally consist of fixed-maturity securities, short-term investments, cash and cash equivalents, exchange traded funds and preferred stock (classified as equity securities on the balance sheet). Our fixed-maturity securities are classified as "available-for-sale" and are carried at fair value with unrealized gains and losses on those securities reported, net of tax, as a separate component of accumulated other comprehensive income (loss). Our equity securities are carried at fair value. Effective January 1, 2018, we adopted a new accounting standard ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," ("ASU 2016-01"), which eliminated the available-for-sale classification for equity securities and required changes in unrealized gains and losses in fair value of these investments to be recognized in net income. Before the adoption of ASU 2016-01, our equity securities were classified as "available-for-sale" and are carried at fair value with unrealized gains and losses on these securities reported, net of tax, as a separate component of accumulated other comprehensive income (loss). Fair value generally represents quoted market value prices for securities traded in the public market or prices analytically determined using bid or closing prices for securities not traded in the public marketplace. Short-term investments, if any, are reported at cost and include investments that are both readily convertible to known amounts of cash and have maturities of 12 months or less upon acquisition by us. Our cash and invested assets totaled $908.2 million at December 31, 2019 and $643.1 million at December 31, 2018, and is summarized as follows: Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities Equity securities: Exchange traded funds Nonredeemable preferred stock Total equity securities Cash and cash equivalents Total December 31, 2019 December 31, 2018 Fair Value % of Portfolio Fair Value % of Portfolio 112 172,893 184,768 197,970 173,789 729,532 54,463 23,831 78,294 ($ in thousands) —% $ 19.0% 20.4% 21.8% 19.1% 80.3% 611 154,600 96,752 149,867 108,421 510,251 6.0% 2.6% 8.6% 38,987 18,724 57,711 0.1% 24.0% 15.0% 23.3% 16.9% 79.3% 6.1% 2.9% 9.0% 100,408 908,234 $ 11.1% 75,089 100.0% $ 643,051 11.7% 100.0% Our policy is to invest primarily in high quality fixed-maturity securities with a primary focus on preservation of capital and a secondary focus on maximizing our risk adjusted investment returns. Investment policy is set by the Investment Committee of the Board of Directors, subject to the limits of applicable regulations. Our investment policy is designed to comply with the regulatory investment requirements and restrictions to which our insurance subsidiary is subject. Our fixed-maturity portfolio is managed by an outside investment advisory firm, which operates under guidelines approved by our Investment Committee. Our Investment Committee meets periodically and reports to our Board of Directors. Our investment policy also imposes strict requirements for credit quality, with a minimum average credit quality of the portfolio being rated "AA-" or higher by Standard & Poor's or the equivalent rating from another nationally recognized rating agency. Our investment policy also imposes restrictions on concentrations of securities by class and issuer. As of 9 Table of Contents December 31, 2019, our fixed-maturity portfolio, including cash equivalents, had an average duration of 4.3 years and had an average rating of "AA." The following table sets forth the composition of our portfolio of fixed-maturity securities by rating as of December 31, 2019: U.S. Treasury securities and obligations of U.S. government agencies Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities AAA AA A BBB Below BBB Total ($ in thousands) $ — $ 112 $ — $ — $ — $ 112 14,928 — 141,703 56,543 112,817 9,234 25,630 112,080 45,097 107,230 20,418 3,593 — 63,950 10,219 703 51 4,354 — 870 Total fixed maturities $ 213,174 $ 259,873 $ 176,338 $ 74,872 $ 5,275 $ The fair value of our investments in fixed-maturity securities at December 31, 2019, summarized by stated maturities follows: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities December 31, 2019 Estimated Fair Value % of Fair Value ($ in thousands) $ $ 9,990 118,611 82,314 146,858 197,970 173,789 729,532 172,893 184,768 197,970 173,789 729,532 1.4% 16.3% 11.3% 20.1% 27.1% 23.8% 100.0% Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties. As of December 31, 2019, our fixed-maturity security portfolio contained $173.8 million (23.8%) of residential mortgage-backed securities ("RMBS"). RMBS, including collateralized mortgage obligations, are subject to prepayment risks that vary with, among other things, interest rates. During periods of declining interest rates, RMBS generally prepay faster as the underlying mortgages are prepaid and refinanced by the borrowers in order to take advantage of the lower rates. As a result, during periods of falling interest rates, proceeds from such prepayments generally must be reinvested at lower prevailing yields. In addition, RMBS that have an amortized cost that is greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. Conversely, during periods of rising interest rates, the rate of prepayments generally slows. RMBS that have an amortized value that is less than par (i.e., purchased at a discount) may incur a decrease in yield as a result of a slower rate of prepayments. Changes in estimated cash flows due to changes in prepayment assumptions from the original purchase assumptions are revised based on current interest rates and the economic environment. Our investment policy does not permit us to own any interest only, principal only or residual tranches of RMBS. 10 Table of Contents At December 31, 2019, our portfolio of fixed-maturity securities contained corporate bonds with a fair value of $184.8 million. A summary of these securities by industry segment is shown below as of December 31, 2019: Industry Industrials and other Financial Utilities Total December 31, 2019 Fair Value % of Total $ $ ($ in thousands) 111,904 58,681 14,183 184,768 Approximately 6% of our total cash and investments were invested in exchange traded funds ("ETFs"), which provide low-cost diversification. At December 31, 2019, our ETF balance was comprised of the following funds: Fund Domestic stock market fund Dividend yield equity fund Total December 31, 2019 Fair Value % of Total $ $ ($ in thousands) 42,873 11,590 54,463 60.6% 31.7% 7.7% 100.0% 78.7% 21.3% 100.0% Approximately 3% of our total cash and investments were invested in nonredeemable preferred stock. A summary of these securities by industry segment is shown below as of December 31, 2019: Industry Industrials and other Financial Utilities Total Competition December 31, 2019 Fair Value % of Total $ $ ($ in thousands) 20,369 2,992 470 23,831 85.5% 12.5% 2.0% 100.0% The P&C insurance industry is highly competitive. We compete with domestic and international insurers, some of which have greater financial, marketing and management resources and experience than we do. We may also compete with new market entrants in the future. Competition is based on many factors, including the perceived market strength of the insurer, pricing and other terms and conditions, services provided, the speed of claims payment, the reputation and experience of the insurer and ratings assigned by independent rating organizations such as A.M. Best. Our insurance subsidiary, Kinsale Insurance, currently has a rating from A.M. Best of "A-" (Excellent). Ratings for an insurance company are based on its ability to pay policyholder obligations and are not directed toward the protection of investors. Today, our primary competitors in the E&S sector include Alleghany Corporation, Argo Group International Holdings, Ltd., James River Group Holdings, Ltd., Markel Corporation, ProSight Global, Inc., RLI Corp. and W. R. Berkley Corporation. Regulation Insurance regulation We are regulated by insurance regulatory authorities in the states in which we conduct business. State insurance laws and regulations generally are designed to protect the interests of policyholders, consumers and claimants rather than 11 Table of Contents stockholders or other investors. The nature and extent of state regulation varies by jurisdiction, and state insurance regulators generally have broad administrative power relating to, among other matters, setting capital and surplus requirements, licensing of insurers and agents, establishing standards for reserve adequacy, prescribing statutory accounting methods, determining the form and content of statutory financial reports, regulating certain transactions with affiliates and prescribing types and amounts of investments. Regulation of insurance companies constantly changes as governmental agencies and legislatures react to real or perceived issues. In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that alter and, in many cases, increase, state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners ("NAIC") and state insurance regulators are continually re-examining existing laws and regulations, specifically focusing on issues relating to the solvency of insurance companies, group capital requirements, interpretations of existing laws and the development of new laws. Although the federal government does not directly regulate the business of insurance, federal initiatives often affect the insurance industry in a variety of ways. In addition, the Federal Insurance Office (the "FIO") was established within the U.S. Department of the Treasury by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") in July 2010 to monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system. See "—Federal and state legislative and regulatory changes" below. Required licensing Kinsale Insurance is organized and domiciled in the State of Arkansas and is authorized (licensed) in the State of Arkansas to transact certain lines of P&C insurance. This license is in good standing, and, pursuant to applicable Arkansas laws and regulations, will continue in force unless suspended, revoked or otherwise terminated, subject to certain conditions, including the payment by Kinsale Insurance of annual continuation fees, the filing of annual statutory financial statements and the filing of an annual registration statement with the Arkansas Insurance Department. Kinsale Insurance currently operates on an excess and surplus lines basis in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. While Kinsale Insurance does not have to apply for and maintain a license in those states (with the exception of Arkansas, its domiciliary state), it is subject to maintaining suitability standards under each particular state’s surplus lines laws to be included as an eligible surplus lines carrier (as discussed below, the Dodd-Frank Act has brought uniformity to these standards (see "—Federal and state legislative and regulatory changes")). In states in which it operates on a surplus line basis, Kinsale Insurance has freedom of rate and form on the majority of its business. This means that Kinsale Insurance can implement a change in policy form, underwriting guidelines, or rates for a product without regulatory approval. Almost all insurance is written through licensed agents and brokers. In states in which we operate on a non-admitted basis, general agents and their retail insurance brokers generally are required to certify that a certain number of licensed admitted insurers had been offered and declined to write a particular risk prior to placing that risk with us. In addition, Aspera, our insurance broker, and designated employees must be licensed to act as insurance producers, adjusters or third-party administrators, as applicable, by insurance regulatory authorities in the states where they operate. Such insurance regulatory authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension, and renewal of licenses. Insurance holding company regulation We operate as an insurance holding company system and are subject to the insurance holding company laws of the State of Arkansas, the state in which Kinsale Insurance is organized and domiciled. These statutes require that each insurance company in the system register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system and domiciled in that state. These statutes also provide that all transactions among members of a holding company system must be fair and reasonable. Transactions between insurance subsidiaries and their parents and affiliates generally must be disclosed to the state regulators, and notice to or prior approval of the applicable state insurance regulator generally is required for any material or extraordinary transaction. 12 Table of Contents Changes of control Before a person can acquire control of a U.S. domestic insurer, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the domiciliary state insurance commissioner will consider a number of factors, which include the financial strength of the proposed acquiror, the acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state insurance statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent or more of the voting securities of the domestic insurer. This statutory presumption of control may be rebutted by a showing that control does not exist in fact. The state regulators, however, may find that "control" exists in circumstances in which a person owns or controls less than ten percent of the voting securities of the domestic insurer. As Kinsale Insurance is domiciled in Arkansas, the insurance laws and regulations of that state would be applicable to any proposed acquisition of control of Kinsale Insurance. Under applicable Arkansas insurance laws and regulations, no person may acquire control of a domestic insurer until written approval is obtained from the state insurance commissioner following a public hearing on the proposed acquisition. Such approval would be contingent upon the state insurance commissioner’s consideration of a number of factors, including among others, the financial strength of the proposed acquiror, the integrity and management of the acquiror’s board of directors and executive officers, the acquiror’s plans for the future operations of the domestic insurer and any anti- competitive results that may arise from the consummation of the acquisition of control. Arkansas insurance laws and regulations contain a rebuttable presumption of control if any person directly or indirectly acquires ten percent or more of the voting stock of an Arkansas-domiciled insurer. Accordingly, the acquisition of ten percent or more of our common stock would be considered an indirect change of control of Kinsale Insurance and would trigger the applicable change of control filing requirements under Arkansas insurance laws and regulations, absent a disclaimer of control filing and its acceptance by the Arkansas Insurance Department. These requirements may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions that some or all of our stockholders might consider to be desirable. Restrictions on paying dividends State insurance laws restrict the ability of insurance companies to declare and pay stockholder dividends. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. The maximum dividend distribution absent the approval or non-disapproval of the insurance regulatory authority in Arkansas is limited by Arkansas law to the greater of 10% of policyholder surplus as of December 31 of the previous year or net income, not including realized capital gains, for the previous calendar year. Dividend payments are further limited to that part of available policyholder surplus which is derived from net profits on an insurer’s business. Investment regulation Kinsale Insurance is subject to state laws which require diversification of our investment portfolios and limits on the amount of our investments in certain categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets in the states in which we are licensed to sell insurance policies for purposes of measuring statutory surplus and, in some instances, would require us to sell those investments. Restrictions on cancellation, non-renewal or withdrawal Many states have laws and regulations that limit the ability of an insurance company licensed by that state to exit a market. Some states prohibit an insurer from withdrawing from one or more lines of business in the state except pursuant to a plan approved by the state insurance regulator, which may disapprove a plan that may lead to market disruption. Some state statutes may explicitly or by interpretation apply these restrictions to insurers operating on a surplus lines basis. Enterprise risk and other developments The NAIC, as part of its solvency modernization initiative, has engaged in a concerted effort to strengthen the ability of U.S. state insurance regulators to monitor U.S. insurance holding company groups. Recent efforts by the NAIC to 13 Table of Contents establish group capital standards are consistent with this initiative. State insurance holding company laws, including those in Arkansas, address "enterprise" risk - the risk that an activity, circumstance, event or series of events involving one or more affiliates of an insurer will, if not remedied promptly, be likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole - and require annual reporting of potential enterprise risk as well as access to information to allow the state insurance regulator to assess such risk. Under Arkansas insurance holding company laws, the ultimate controlling person of insurers subject to registration is required to file an annual enterprise risk report with the lead state commissioner, when applicable, of the insurance holding company system as determined by the procedures within the Financial Analysis Handbook adopted by the NAIC. In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment ("ORSA") Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. Effective July 2015, Arkansas adopted its version of the ORSA Model Act. Our subsidiary, Kinsale Insurance, will be subject to the requirements of the ORSA Model Act adopted in Arkansas when its direct written premiums and unaffiliated assumed premiums, if any, exceed $500 million (Kinsale Insurance is currently exempt from such requirements based on the amount of its direct written premiums and unaffiliated assumed premiums). Additionally, in response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider new cybersecurity measures, including the adoption of cybersecurity regulations which, among other things, would require insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. The New York Department of Financial Services (DFS) issued new regulations governing cybersecurity requirements for financial services companies, which became effective on March 1, 2017. The regulations require insurance companies, among others, licensed in New York to assess their specific cyber risk profiles and design cyber security programs to address such risks. We annually file our program compliance certifications pertaining to the DFS cybersecurity requirements in New York. Federal and state legislative and regulatory changes The U.S. federal government’s oversight of the insurance industry was expanded under the Dodd-Frank Act. Prior to the enactment of the Dodd-Frank Act in July 2010, the U.S. federal government’s regulation of the insurance industry was essentially limited to certain insurance products, such as flood insurance, multi-peril crop insurance and reinsurance of losses from terrorism. As part of the overall federal financial regulatory reform package contained in the Dodd- Frank Act, Congress has legislated reforms in the surplus lines sector (among others). The Dodd-Frank Act incorporates the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which became effective on July 21, 2011. Among other things, the NRRA establishes national uniform standards on how states may regulate and tax surplus lines insurance and sets national standards concerning the regulation of reinsurance. In particular, the NRRA gives regulators in the home state of an insured exclusive authority to regulate and tax surplus lines insurance transactions, and regulators in a ceding insurer’s state of domicile the sole responsibility for regulating the balance sheet credit that the ceding insurer may take for reinsurance recoverables. The Dodd-Frank Act also established the FIO in the U.S. Department of the Treasury and vested the FIO with the authority to monitor all aspects of the insurance sector, monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors (the "IAIS"). In addition, the FIO serves as an advisory member of the Financial Stability Oversight Council, assists the secretary of the U.S. Department of the Treasury with administration of the Terrorism Risk Insurance Program, and advises the secretary of the U.S. Department of the Treasury on important national and international insurance matters. In addition, the FIO has the ability to recommend to the Financial Stability Oversight Council the designation of an insurer as "systemically significant" and therefore subject to regulation by the Federal Reserve as a bank holding company. 14 Table of Contents In limited circumstances, the FIO can declare a state insurance law or regulation "preempted," but this can be done only after extensive consultation with state insurance regulators, the Office of the U.S. Trade Representative and key insurance industry players (in trade associations representing insurers and intermediaries). Additionally, the FIO must publish a notice regarding the basis for the preemption in the Federal Register, allowing a reasonable opportunity for comments. The FIO cannot preempt state antitrust laws governing rate making, underwriting, sales practices or coverage requirements. No later than September 30th of each year, the FIO must submit an annual report to Congress explaining any use of the preemption authority during the prior year. In addition, a number of federal laws affect and apply to the insurance industry, including various privacy laws and the economic and trade sanctions implemented by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury. OFAC maintains and enforces economic sanctions against certain foreign countries and groups and prohibits U.S. persons from engaging in certain transactions with certain persons or entities. OFAC has imposed civil penalties on persons, including insurance and reinsurance companies, arising from violations of its economic sanctions program. On November 20, 2015, the FIO and the Office of the U.S. Trade Representative announced their intention to exercise their authority under the Dodd-Frank Act to negotiate a “covered agreement” with the European Union (the “Covered Agreement”). After a number of private negotiating sessions, on January 13, 2017, the U.S. Department of Treasury and the Office of the U.S. Trade Representative notified Congress that they had completed negotiations with the European Union for the Covered Agreement, which addressed reinsurance, insurance group supervision and the exchange of information between insurance supervisors. The Covered Agreement was formally entered into on September 22, 2017. A covered agreement between the United States and the United Kingdom extending terms nearly identical to the EU Covered Agreement to insurers and reinsurers operating in the UK following Brexit was entered into on December 11, 2018. With respect to reinsurance, under the Covered Agreement, both the U.S. and the European Union agreed that their supervisory authorities will not impose reinsurance collateral requirements or "local presence" requirements on a reinsurer domiciled in (or with a head office in) the other’s territory that are less favorable than collateral or local presence requirements applied to a domestic reinsurer. However, the collateral or local presence provisions apply only if the insurer or reinsurer satisfies certain conditions and standards, including among others, minimum capital and risk-based capital, confirmation of financial condition by the reinsurer’s domestic regulator and claims payment standards. U.S. states have five years from execution of the Covered Agreement to adopt reinsurance reforms removing collateral requirements for European Union reinsurers that meet the prescribed conditions in the Covered Agreement. If the FIO determines that state laws are inconsistent with the Covered Agreement (the process of making potential preemption determinations will begin 42 months following execution of the Covered Agreement), such states laws may be preempted. On June 25, 2019, the NAIC adopted revisions to the Credit for Reinsurance Model Law and Regulation in order to satisfy the substantive and timing requirements of the Covered Agreement. These amendments pave the way for state legislatures to bring their credit for reinsurance laws into compliance with the Covered Agreement's zero reinsurance collateral provisions by September 2022, thereby avoiding a potential federal preemption of these laws. Trade practices The manner in which insurance companies and insurance agents and brokers conduct the business of insurance is regulated by state statutes in an effort to prohibit practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Prohibited practices include, but are not limited to, disseminating false information or advertising, unfair discrimination, rebating and false statements. We set business conduct policies and provide training to make our employee-agents and other sales personnel aware of these prohibitions, and we require them to conduct their activities in compliance with these statutes. Unfair claims practices Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions; 15 Table of Contents failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled. We set business conduct policies and conduct training to make our employee-adjusters and other claims personnel aware of these prohibitions, and we require them to conduct their activities in compliance with these statutes. Credit for reinsurance State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. The NRRA contained in the Dodd-Frank Act provides that if the state of domicile of a ceding insurer is an NAIC accredited state, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk, then no other state may deny such credit for reinsurance. Because all states are currently accredited by the NAIC, the Dodd-Frank Act prohibits a state in which a U.S. ceding insurer is licensed but not domiciled from denying credit for reinsurance for the insurer’s ceded risk if the cedant’s domestic state regulator recognizes credit for reinsurance. The ceding company in this instance is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premium (which are that portion of written premiums which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves to the extent ceded to the reinsurer. Periodic financial and market conduct examinations The insurance regulatory authority in the State of Arkansas, our insurance subsidiary’s state of domicile, conducts on-site visits and examinations of the affairs of our insurance subsidiary, including its financial condition, its relationships and transactions with affiliates and its dealings with policyholders, every three to five years, and may conduct special or targeted examinations to address particular concerns or issues at any time. Insurance regulators of other states in which we do business also may conduct examinations. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action. Insurance regulatory authorities have broad administrative powers to regulate trade practices and, in that connection, to restrict or rescind licenses to transact business and to levy fines and monetary penalties against insurers and insurance agents and brokers found to be in violation of applicable laws and regulations. Risk-based capital Risk-based capital ("RBC") laws are designed to assess the minimum amount of capital that an insurance company needs to support its overall business operations and to ensure that it has an acceptably low expectation of becoming financially impaired. State insurance regulators use RBC to set capital requirements, considering the size and degree of risk taken by the insurer and taking into account various risk factors including asset risk, credit risk, underwriting risk and interest rate risk. As the ratio of an insurer’s total adjusted capital and surplus decreases relative to its risk-based capital, the RBC laws provide for increasing levels of regulatory intervention culminating with mandatory control of the operations of the insurer by the domiciliary insurance department at the so-called mandatory control level. The Arkansas Insurance Department has largely adopted the model legislation promulgated by the NAIC pertaining to RBC, and requires annual reporting by Arkansas-domiciled insurers to confirm that the minimum amount of RBC necessary for an insurer to support its overall business operations has been met. Arkansas-domiciled insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation by the Arkansas Insurance Department. Failure to maintain our risk-based capital at the required levels could adversely affect the ability of Kinsale Insurance to maintain the regulatory authority necessary to conduct our business. However, as of December 31, 2019, Kinsale Insurance maintained RBC levels significantly in excess of amounts that would require any corrective actions. IRIS ratios The NAIC Insurance Regulatory Information System, or IRIS, is part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. IRIS is intended to assist state insurance regulators in targeting 16 Table of Contents resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial. Ratings A.M. Best, which rates insurance companies based on factors of concern to policyholders, rates our insurance subsidiary. Our insurance subsidiary, Kinsale Insurance, has a rating of "A-" (Excellent) from A.M. Best. A.M. Best currently assigns 16 ratings to insurance companies, which currently range from "A++" (Superior) to "S" (Rating Suspended). "A-" (Excellent) is the fourth highest rating. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss and loss expense reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best's ratings reflect its opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders. These evaluations are not directed to purchasers of an insurance company's securities. Employees As of February 20, 2020, we had 275 employees, all of whom were employed by us through arrangements with Kinsale Management, Inc. Our employees are not subject to any collective bargaining agreements, and we are not aware of any current efforts to implement such an agreement. Available Information We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the SEC. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information filed by us with the SEC are available, without charge, on our Internet web site, http://www.kinsalecapitalgroup.com, as soon as reasonably practicable after they are filed electronically with the SEC. The information on our website is not a part of this Annual Report. 17 Table of Contents Item 1A. Risk Factors You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones facing us. There may be additional risks and uncertainties of which we currently are unaware or currently believe to be immaterial. The occurrence of any of these risks could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Risks Related to Our Business and Our Industry 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. Our success depends on our ability to accurately assess the risks related to the businesses and people that we insure. We establish loss and loss adjustment expense reserves for the ultimate payment of all claims that have been incurred, and the related costs of adjusting those claims, as of the date of our financial statements. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost us, and our ultimate liability may be greater or less than our estimate. As part of the reserving process, we review historical data and consider the impact of such factors as: • • • • • claims inflation, which is the sustained increase in cost of raw materials, labor, medical services and other components of claims cost; claims development patterns by line of business and by "claims made" versus "occurrence" policies; legislative activity; social and economic patterns; and litigation, judicial and regulatory trends. These variables are affected by both internal and external events that could increase our exposure to losses, and we continually monitor our reserves using new information on reported claims and a variety of statistical techniques. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is, however, no precise method for evaluating the impact of any specific factor on the adequacy of reserves, and actual results may deviate, perhaps substantially, from our reserve estimates. For instance, the following uncertainties may have an impact on the adequacy of our resources: • When we write "occurrence" policies, we are obligated to pay covered claims, up to the contractually agreed amount, for any covered loss that occurs while the policy is in force. Accordingly, claims may arise many years after a policy has lapsed. Approximately 81.4% of our net casualty loss reserves were associated with "occurrence" policies as of December 31, 2019. • • • Even when a claim is received (irrespective of whether the policy is a "claims made" or "occurrence" basis form), it may take considerable time to fully appreciate the extent of the covered loss suffered by the insured and, consequently, estimates of loss associated with specific claims can increase over time. New theories of liability are enforced retroactively from time to time by courts. See also "—The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations." Volatility in the financial markets, economic events and other external factors may result in an increase in the number of claims and/or severity of the claims reported. In addition, elevated inflationary conditions would, among other things, cause loss costs to increase. See also "—Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability." 18 Table of Contents • If claims were to become more frequent, even if we had no liability for those claims, the cost of evaluating such potential claims could escalate beyond the amount of the reserves we have established. As we enter new lines of business, or as a result of new theories of claims, we may encounter an increase in claims frequency and greater claims handling costs than we had anticipated. In addition, there may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to us and additional lags between the time of reporting and final settlement of any claims. Consequently, estimates of loss associated with specified claims can increase as new information emerges, which could cause the reserves for the claim to become inadequate. If any of our reserves should prove to be inadequate, we will be required to increase our reserves resulting in a reduction in our net income and stockholders’ equity in the period in which the deficiency is identified. Future loss experience substantially in excess of established reserves could also have a material adverse effect on our future earnings and liquidity and our financial rating. For further discussion of our reserve experience, please see "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Reserves for Unpaid Losses and Loss Adjustment Expenses." Given the inherent uncertainty of models, the usefulness of such models as a tool to evaluate risk is subject to a high degree of uncertainty that could result in actual losses that are materially different than our estimates, including PMLs. A deviation from our loss estimates may adversely impact, perhaps significantly, our financial results. Our approach to risk management relies on subjective variables that entail significant uncertainties. For example, we rely heavily on estimates of PMLs for certain events that are generated by computer-run models. In addition, we rely on historical data and scenarios in managing credit and interest rate risks in our investment portfolio. These estimates, models, data and scenarios may not produce accurate predictions and consequently, we could incur losses both in the risks we underwrite and to the value of our investment portfolio. We use third-party vendor analytic and modeling capabilities to provide us with objective risk assessment relating to other risks in our reinsurance portfolio. We use these models to help us control risk accumulation, inform management and other stakeholders of capital requirements and to improve the risk/return profile or minimize the amount of capital required to cover the risks in each of our reinsurance contracts. However, given the inherent uncertainty of modeling techniques and the application of such techniques, these models and databases may not accurately address a variety of matters which might impact certain of our coverages. Small changes in assumptions, which depend heavily on our judgment and foresight, can have a significant impact on the modeled outputs. For example, catastrophe models that simulate loss estimates based on a set of assumptions are important tools used by us to estimate our PMLs. These assumptions address a number of factors that impact loss potential including, but not limited to, the characteristics of a given natural catastrophe event; the increase in claim costs resulting from limited supply of labor and materials needed for repairs following a catastrophe event (demand surge); the types, function, location and characteristics of exposed risks; susceptibility of exposed risks to damage from an event with specific characteristics; and the financial and contractual provisions of the (re)insurance contracts that cover losses arising from an event. We run many model simulations in order to understand the impact of these assumptions on a catastrophe’s loss potential. Furthermore, there are risks associated with catastrophe events, which are either poorly represented or not represented at all by catastrophe models. Each modeling assumption or un-modeled risk introduces uncertainty into PML estimates that management must consider. These uncertainties can include, but are not limited to, the following: • • • • The models do not address all the possible hazard characteristics of a catastrophe peril (e.g. the precise path and wind speed of a hurricane); The models may not accurately reflect the true frequency of events; The models may not accurately reflect a risk's vulnerability or susceptibility to damage for a given event characteristic; The models may not accurately represent loss potential to insurance or reinsurance contract coverage limits, terms 19 Table of Contents and conditions; and • The models may not accurately reflect the impact on the economy of the area affected or the financial, judicial, political, or regulatory impact on insurance claim payments during or following a catastrophe event. Our PMLs are reviewed by management after the assessment of outputs from multiple third-party vendor models and other qualitative and quantitative assessments, including exposures not typically modeled in vendor models. Our methodology for estimating PMLs may differ from methods used by other companies and external parties given the various assumptions and judgments required to estimate a PML. As a result of these factors and contingencies, our reliance on assumptions and data used to evaluate our entire reinsurance portfolio and specifically to estimate a PML is subject to a high degree of uncertainty that could result in actual losses that are materially different from our PML estimates and our financial results could be adversely affected. Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability. Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can affect the business and economic environment. These same factors affect our ability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is generally adversely affected, which directly affects our premium levels and profitability. Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure with our policyholders and may adversely affect the number of policies we can write, including with respect to our opportunities to underwrite profitable business. In an economic downturn, our customers may have less need for insurance coverage, cancel existing insurance policies, modify their coverage or not renew the policies they hold with us. Existing policyholders may exaggerate or even falsify claims to obtain higher claims payments. These outcomes would reduce our underwriting profit to the extent these factors are not reflected in the rates we charge. We underwrite a significant portion of our insurance in California, Texas and Florida. Any economic downturn in any such state could have an adverse effect on our financial condition and results of operations. A decline in our financial strength rating may adversely affect the amount of business we write. Participants in the insurance industry use ratings from independent ratings agencies, such as A.M. Best, as an important means of assessing the financial strength and quality of insurers. In setting its ratings, A.M. Best uses a quantitative and qualitative analysis of a company’s balance sheet strength, operating performance and business profile. This analysis includes comparisons to peers and industry standards as well as assessments of operating plans, philosophy and management. A.M. Best financial strength ratings range from "A++" (Superior) to "F" for insurance companies that have been publicly placed in liquidation. As of the date of this Annual Report on Form 10-K, A.M. Best has assigned a financial strength rating of "A-" (Excellent) to our operating subsidiary, Kinsale Insurance. A.M. Best assigns ratings that are intended to provide an independent opinion of an insurance company’s ability to meet its obligations to policyholders and such ratings are not evaluations directed to investors and are not a recommendation to buy, sell or hold our common stock or any other securities we may issue. A.M. Best periodically reviews our financial strength rating and may revise it downward or revoke it at its sole discretion based primarily on its analysis of our balance sheet strength (including capital adequacy and loss adjustment expense reserve adequacy), operating performance and business profile. Factors that could affect such analysis include but are not limited to: • • • • if we change our business practices from our organizational business plan in a manner that no longer supports A.M. Best’s rating; if unfavorable financial, regulatory or market trends affect us, including excess market capacity; if our losses exceed our loss reserves; if we have unresolved issues with government regulators; 20 Table of Contents • • • if we are unable to retain our senior management or other key personnel; if our investment portfolio incurs significant losses; or if A.M. Best alters its capital adequacy assessment methodology in a manner that would adversely affect our rating. These and other factors could result in a downgrade of our financial strength rating. A downgrade or withdrawal of our rating could result in any of the following consequences, among others: • • • causing our current and future brokers and insureds to choose other, more highly-rated competitors; increasing the cost or reducing the availability of reinsurance to us; or severely limiting or preventing us from writing new and renewal insurance contracts. In addition, in view of the earnings and capital pressures recently experienced by many financial institutions, including insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply to such institutions, will increase the frequency and scope of their credit reviews, will request additional information from the companies that they rate or will increase the capital and other requirements employed in the rating organizations’ models for maintenance of certain ratings levels. We can offer no assurance that our rating will remain at its current level. It is possible that such reviews of us may result in adverse ratings consequences, which could have a material adverse effect on our financial condition and results of operations. We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel. We depend on our ability to attract and retain experienced personnel and seasoned key executives who are knowledgeable about our business. The pool of talent from which we actively recruit is limited and may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions. As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels. Only our Chief Executive Officer has an employment agreement with us and is subject to a non-compete agreement. Should any of our key executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our results of operations. We rely on a select group of brokers, and such relationships may not continue. We distribute the majority of our products through a select group of brokers. Of our 2019 gross written premiums, 49.6%, or $193.2 million, were distributed through six of our approximately 169 brokers, two of which accounting for 22.6%, or $88.3 million, of our 2019 gross written premiums. Our relationship with any of these brokers may be discontinued at any time. Even if the relationships do continue, they may not be on terms that are profitable for us. The termination of a relationship with one or more significant brokers could result in lower gross written premiums and could have a material adverse effect on our results of operations or business prospects. The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations. Although we seek to mitigate our loss exposure through a variety of methods, the future is inherently unpredictable. It is difficult to predict the timing, frequency and severity of losses with statistical certainty. It is not possible to completely eliminate our exposure to unforecasted or unpredictable events and, to the extent that losses from such risks occur, our financial condition and results of operations could be materially adversely affected. For instance, various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time, we employ a 21 Table of Contents variety of endorsements to our policies that limit exposure to known risks. As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. In addition, we design our policy terms to manage our exposure to expanding theories of legal liability like those which have given rise to claims for lead paint, asbestos, mold, construction defects and environmental matters. Many of the policies we issue also include conditions requiring the prompt reporting of claims to us and entitle us to decline coverage in the event of a violation of those conditions. Also, many of our policies limit the period during which a policyholder may bring a claim under the policy, which in many cases is shorter than the statutory period under which such claims can be brought against our policyholders. While these exclusions and limitations help us assess and reduce our loss exposure and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Three examples of unanticipated risks that have adversely affected the insurance industry are: • • • Asbestos liability applied to manufacturers of products and contractors who installed those products. Apportionment of liability arising from subsidence claims assigned to subcontractors who may have been involved in mundane tasks (such as installing sheetrock in a home). Court decisions, such as the 1995 Montrose decision in California, that read policy exclusions narrowly so as to expand coverage, thereby requiring insurers to create and write new exclusions. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued. Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results. Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a high-quality, diversified portfolio of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee. However, our investments are subject to general economic conditions and market risks as well as risks inherent to particular securities. Our primary market risk exposures are to changes in interest rates and equity prices. See "Management's Discussion and Analysis of Financial Condition and Results of Operation — Quantitative and Qualitative Disclosures About Market Risk." In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely affect our operating results. Future increases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the duration of securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as mortgage-backed and asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected. The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities. Such factors could reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more 22 Table of Contents subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions would occur. We also invest in marketable equity securities. These securities are carried on the balance sheet at fair value and are subject to potential losses and declines in value, which may never recover. Our equity investments totaled $78.3 million as of December 31, 2019. Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC and the Arkansas State Insurance Department. Although we seek to preserve our capital, we cannot be certain that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us. Our E&S insurance operations are subject to increased risk from changing market conditions and our business is cyclical in nature, which may affect our financial performance. E&S insurance covers risks that are typically more complex and unusual than standard risks and require a high degree of specialized underwriting. As a result, E&S risks do not often fit the underwriting criteria of standard insurance carriers, and are generally considered higher risk than those covered in the standard market. If our underwriting staff inadequately judges and prices the risks associated with the business underwritten in the E&S market, our financial results could be adversely impacted. Historically, the financial performance of the P&C insurance industry has tended to fluctuate in cyclical periods of price competition and excess capacity (known as a soft market) followed by periods of high premium rates and shortages of underwriting capacity (known as a hard market). Soft markets occur when the supply of insurance capital in a given market or territory is greater than the amount of insurance coverage demanded by all potential insureds in that market. When this occurs, insurance prices tend to decline and policy terms and conditions become more favorable to the insureds. Conversely, hard markets occur when there is not enough insurance capital capacity in the market to meet the needs of potential insureds, causing insurance prices to generally rise and policy terms and conditions to become more favorable to the insurers. Although an individual insurance company's financial performance depends on its own specific business characteristics, the profitability of most P&C insurance companies tends to follow this cyclical market pattern. Further, this cyclical market pattern can be more pronounced in the E&S market than in the standard insurance market. When the standard insurance market hardens, the E&S market hardens, and growth in the E&S market can be significantly more rapid than growth in the standard insurance market. Similarly, when conditions begin to soften, many customers that were previously driven into the E&S market may return to the admitted market, exacerbating the effects of rate decreases. We cannot predict the timing or duration of changes in the market cycle because the cyclicality is due in large part to the actions of our competitors and general economic factors. These cyclical patterns cause our revenues and net income to fluctuate, which may cause the price of our common stock to be volatile. We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. In addition, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations. Our insurance subsidiary, Kinsale Insurance, is subject to extensive regulation in Arkansas, its state of domicile, and to a lesser degree, the other states in which it operates. Most insurance regulations are designed to protect the interests of insurance policyholders, as opposed to the interests of investors or stockholders. These regulations generally are administered by a department of insurance in each state and relate to, among other things, authorizations to write E&S lines of business, capital and surplus requirements, investment and underwriting limitations, affiliate transactions, dividend limitations, changes in control, solvency and a variety of other financial and non-financial aspects of our business. Significant changes in these laws and regulations could further limit our discretion or make it more expensive to 23 Table of Contents conduct our business. State insurance regulators also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may impose timing and expense constraints that could adversely affect our ability to achieve some or all of our business objectives. In addition, state insurance regulators have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, where there is uncertainty as to applicability, we follow practices based on our interpretations of regulations or practices that we believe generally to be followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, state insurance regulators could preclude or temporarily suspend us from carrying on some or all of our activities or could otherwise penalize us. This could adversely affect our ability to operate our business. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could interfere with our operations and require us to bear additional costs of compliance, which could adversely affect our ability to operate our business. The NAIC has adopted a system to test the adequacy of statutory capital of insurance companies, known as "risk-based capital." This system establishes the minimum amount of risk-based capital necessary for a company to support its overall business operations. It identifies P&C insurers that may be inadequately capitalized by looking at certain inherent risks of each insurer's assets and liabilities and its mix of net written premiums. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation. Failure to maintain our risk-based capital at the required levels could adversely affect the ability of our insurance subsidiary to maintain regulatory authority to conduct our business. See also "Regulation — Required licensing." Because we are a holding company and substantially all of our operations are conducted by our insurance subsidiary, our ability to pay dividends depends on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary. Because we are a holding company with no business operations of our own, our ability to pay dividends to stockholders largely depends on dividends and other distributions from our insurance subsidiary, Kinsale Insurance. State insurance laws, including the laws of Arkansas, restrict the ability of Kinsale Insurance to declare stockholder dividends. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. Consequently, the maximum dividend distribution is limited by Arkansas law to the greater of 10% of policyholder surplus as of December 31 of the previous year or net income, not including realized capital gains, for the previous calendar year. Dividend payments are further limited to that part of available policyholder surplus which is derived from net profits on our business. The maximum amount of dividends Kinsale Insurance could pay us during 2020 without regulatory approval is $40.7 million. State insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividends up to the maximum amounts calculated under any applicable formula would be permitted. Moreover, state insurance regulators that have jurisdiction over the payment of dividends by our insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors. See "Dividend Policy." We could be forced to sell investments to meet our liquidity requirements. We invest the premiums we receive from our insureds until they are needed to pay policyholder claims. Consequently, we seek to manage the duration of our investment portfolio based on the duration of our loss and loss adjustment expense reserves to ensure sufficient liquidity and avoid having to liquidate investments to fund claims. Risks such as inadequate loss and loss adjustment reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. We may not be able to sell our investments at favorable prices or at all. Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities. 24 Table of Contents We may be unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us. We use reinsurance to help manage our exposure to insurance risks. Reinsurance is a practice whereby one insurer, called the reinsurer, agrees to indemnify another insurer, called the ceding insurer, for all or part of the potential liability arising from one or more insurance policies issued by the ceding insurer. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and profitability. In addition, reinsurance programs are generally subject to renewal on an annual basis. We may not be able to obtain reinsurance on acceptable terms or from entities with satisfactory creditworthiness. If we are unable to obtain new reinsurance facilities or to renew expiring facilities, our net exposures would increase. In such event, if we are unwilling to bear an increase in our net exposure, we would have to reduce the level of our underwriting commitments, which would reduce our revenues. Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, the reinsurance contracts we enter into with them. Some exclusions are with respect to risks that we cannot exclude in policies we write due to business or regulatory constraints. In addition, reinsurers are imposing terms, such as lower per occurrence and aggregate limits, on direct insurers that do not wholly cover the risks written by these direct insurers. As a result, we, like other direct insurance companies, write insurance policies which to some extent do not have the benefit of reinsurance protection. These gaps in reinsurance protection expose us to greater risk and greater potential losses. For example, certain reinsurers have excluded coverage for terrorist acts or priced such coverage at rates higher than the underlying risk. Many direct insurers, including us, have written policies without terrorist act exclusions and in many cases we cannot exclude terrorist acts because of regulatory constraints. We may, therefore, be exposed to potential losses as a result of terrorist acts. See also "Business — Reinsurance." Our employees could take excessive risks, which could negatively affect our financial condition and business. As an insurance enterprise, we are in the business of binding certain risks. The employees who conduct our business, including executive officers and other members of management, underwriters, product managers and other employees, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining which business opportunities to pursue and other decisions. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our employees incentives to take excessive risks. Employees may, however, take such risks regardless of the structure of our compensation programs and practices. Similarly, although we employ controls and procedures designed to monitor employees’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our employees take excessive risks, the impact of those risks could have a material adverse effect on our financial condition and business operations. Severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us. Our business is exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by various events, including natural events such as severe winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms and fires, and other events such as explosions, terrorist attacks and riots. The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Severe weather conditions and catastrophes can cause losses in our property lines and generally result in both an increase in the number of claims incurred and an increase in the dollar amount of each claim asserted, which might require us to increase our reserves, causing our liquidity and financial condition to deteriorate. In addition, our inability to obtain reinsurance coverage at reasonable rates and in amounts adequate to mitigate the risks associated with severe weather conditions and other catastrophes could have a material adverse effect on our business and results of operation. 25 Table of Contents We may not be able to manage our growth effectively. We intend to grow our business in the future, which could require additional capital, systems development and skilled personnel. However, we must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees or effectively incorporate the components of any businesses we may acquire in our effort to achieve growth. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations. Competition for business in our industry is intense. We face competition from other specialty insurance companies, standard insurance companies and underwriting agencies, as well as from diversified financial services companies that are larger than we are and that have greater financial, marketing and other resources than we do. Some of these competitors also have longer experience and more market recognition than we do in certain lines of business. In addition, it may be difficult or prohibitively expensive for us to implement technology systems and processes that are competitive with the systems and processes of these larger companies. In particular, competition in the insurance industry is based on many factors, including price of coverage, the general reputation and perceived financial strength of the company, relationships with brokers, terms and conditions of products offered, ratings assigned by independent rating agencies, speed of claims payment and reputation, and the experience and reputation of the members of our underwriting team in the particular lines of insurance and reinsurance we seek to underwrite. See "Business — Competition." In recent years, the insurance industry has undergone increasing consolidation, which may further increase competition. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: • • • An increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry; The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers; and Changing practices caused by the internet, including shifts in the way in which E&S insurance is purchased. We currently depend largely on the wholesale distribution model. If the wholesale distribution model were to be significantly altered by changes in the way E&S insurance were marketed, including, without limitation, through use of the Internet, it could have a material adverse effect on our premiums, underwriting results and profits. We may not be able to continue to compete successfully in the insurance markets. Increased competition in these markets could result in a change in the supply and demand for insurance, affect our ability to price our products at risk-adequate rates and retain existing business, or underwrite new business on favorable terms. If this increased competition so limits our ability to transact business, our operating results could be adversely affected. The effects of litigation on our business are uncertain and could have an adverse effect on our business. As is typical in our industry, we continually face risks associated with litigation of various types, including disputes relating to insurance claims under our policies as well as other general commercial and corporate litigation. Although we are not currently involved in any material litigation with our customers, other members of the insurance industry are the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues, including insurance and claim settlement practices. We cannot predict with any certainty whether we will be involved in such litigation in the future or what impact such litigation would have on our business. We may be unable to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. In addition, we are required to furnish with each annual report on Form 10-K, a 26 Table of Contents report by management on the effectiveness of our internal control over financial reporting and our independent registered public accountants are required to attest to the effectiveness of our internal control over financial reporting, in each case pursuant to Section 404 of the Sarbanes-Oxley Act. Any failure to maintain or develop effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or impede our ability to file timely and accurate reports with the SEC. Any of the above could cause investors to lose confidence in the accuracy and completeness of our financial statements, which could cause the price of our common stock to decline. In addition, we may become subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq. Because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results. Certain premiums from policyholders, where the business is produced by brokers, are collected directly by the brokers and forwarded to our insurance subsidiary. In certain jurisdictions, when the insured pays its policy premium to its broker for payment on behalf of our insurance subsidiary, the premium might be considered to have been paid under applicable insurance laws and regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premium from that broker. Consequently, we assume a degree of credit risk associated with the brokers with whom we work. Where necessary, we review the financial condition of potential new brokers before we agree to transact business with them. Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the absence of related premiums being paid to us. Because the possibility of these events occurring depends in large part upon the financial condition and internal operations of our brokers, we monitor broker behavior and review financial information on an as-needed basis. If we are unable to collect premiums from our brokers in the future, our underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected. We may become subject to additional government or market regulation which may have a material adverse impact on our business. Our business could be adversely affected by changes in state laws, including those relating to asset and reserve valuation requirements, surplus requirements, limitations on investments and dividends, enterprise risk and risk-based capital requirements and, at the federal level, by laws and regulations that may affect certain aspects of the insurance industry, including proposals for preemptive federal regulation. The U.S. federal government generally has not directly regulated the insurance industry except for certain areas of the market, such as insurance for flood, nuclear and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may affect the insurance industry, including tort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank Act also established the FIO and vested the FIO with the authority to monitor all aspects of the insurance sector, including to monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products. In addition, the FIO has the ability to recommend to the Financial Stability Oversight Council the designation of an insurer as "systemically significant" and therefore subject to regulation by the Federal Reserve as a bank holding company. In December 2013, the FIO issued a report on alternatives to modernize and improve the system of insurance regulation in the United States (the "Modernization Report"), including increasing national uniformity through either a federal charter or effective action by the states. Any additional regulations established as a result of the Dodd-Frank Act or actions in response to the Modernization Report could increase our costs of compliance or lead to disciplinary action. In addition, legislation has been introduced from time to time that, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry, including federal licensing in addition to or in lieu of state licensing and requiring reinsurance for natural catastrophes. We are unable to predict whether any legislation will be enacted or any regulations will be adopted, or the effect any such developments could have on our business, financial condition or results of operations. 27 Table of Contents Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects. Our operating results are subject to fluctuation and have historically varied from quarter to quarter. We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophic or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected renewal rates of our existing policies and contracts, adverse investment performance and the cost of reinsurance coverage. In particular, we seek to underwrite products and make investments to achieve favorable returns on tangible stockholders' equity over the long term. In addition, our opportunistic nature and focus on long-term growth in tangible equity may result in fluctuations in gross written premiums from period to period as we concentrate on underwriting contracts that we believe will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not be indicative of our long-term prospects. We are subject to reinsurance counterparty credit risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the ceding insurer) of our primary liability to our policyholders. Our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. For example, reinsurers may default in their financial obligations to us as the result of insolvency, lack of liquidity, operational failure, fraud, asserted defenses based on agreement wordings or the principle of utmost good faith, asserted deficiencies in the documentation of agreements or other reasons. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly and uncertain of success. We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and include any amounts deemed uncollectible from the reinsurer in our reserve for uncollectible reinsurance. As of December 31, 2019, we had $88.7 million of aggregate reinsurance balances on paid and unpaid losses and ceded unearned premiums. These risks could cause us to incur increased net losses, and, therefore, adversely affect our financial condition. We may act based on inaccurate or incomplete information regarding the accounts we underwrite. We rely on information provided by insureds or their representatives when underwriting insurance policies. While we may make inquiries to validate or supplement the information provided, we may make underwriting decisions based on incorrect or incomplete information. It is possible that we will misunderstand the nature or extent of the activities or facilities and the corresponding extent of the risks that we insure because of our reliance on inadequate or inaccurate information. We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that the funds generated by this offering are insufficient to fund future operating requirements and cover claim losses, we may need to raise additional funds through financings or curtail our growth. Many factors will affect the amount and timing of our capital needs, including our growth rate and profitability, our claims experience, and the availability of reinsurance, market disruptions and other unforeseeable developments. If we need to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders could result. In the case of debt financings, we may be subject to covenants that restrict our ability to freely operate our business. In any case, such securities may have rights, preferences and privileges that are senior to those of the shares of common stock currently outstanding. If we cannot obtain adequate capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our business, financial condition or results of operations could be materially adversely affected. 28 Table of Contents The failure of our information technology and telecommunications systems could adversely affect our business. Our business is highly dependent upon our information technology and telecommunications systems, including our browser-based underwriting system. Among other things, we rely on these systems to interact with brokers and insureds, to underwrite business, to prepare policies and process premiums, to perform actuarial and other modeling functions, to process claims and make claims payments and to prepare internal and external financial statements and information. In addition, some of these systems include or rely on third-party systems not located on our premises or under our control. Events such as natural catastrophes, terrorist attacks, industrial accidents, third-party system or network outages or computer malware may cause our systems to fail or be inaccessible for extended periods of time. While we have implemented business contingency and other plans to protect our systems, sustained or repeated system failures or service denials could severely limit our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or otherwise operate in the ordinary course of business. Our operations depend on the reliable and secure processing, storage and transmission of confidential and other data and information in our computer systems and networks. Computer malware, hackers, employee misconduct and other external hazards could expose our systems to security breaches, cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal, personally identifiable, sensitive, confidential and proprietary data by electronic means and are subject to data privacy laws and regulations enacted in the jurisdictions in which we do business. While we have implemented security measures designed to protect against breaches of security and other interference with our systems and networks, our systems and networks may be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access to or the disclosure or loss of our proprietary information or our customers’ data and information, which in turn may result in legal claims, regulatory scrutiny and liability, the incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated advisors, reputational harm or other damage to our business. In addition, the trend toward general public notification of such incidents could exacerbate the harm to our business, financial condition and results of operations. Even if we successfully protect our technology infrastructure and the confidentiality of sensitive data, we could suffer harm to our business and reputation if attempted security breaches are publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks and systems used in connection with our business. We employ third-party and open source licensed software for use in our business, and the inability to maintain these licenses, errors in the software we license or the terms of open source licenses could result in increased costs, or reduced service levels, which would adversely affect our business. Our business relies on certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third- party software in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of new third-party software may require significant work and require substantial investment of our time and resources. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which may not be available on commercially reasonable terms or at all. Many of the risks associated with the use of third-party software cannot be eliminated, and these risks could negatively affect our business. Additionally, the software powering our technology systems incorporates software covered by open source licenses. The terms of many open source licenses have not been interpreted by U.S. courts and there is a risk that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our systems. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code or re-engineer all or a portion of our technology systems, each of which could reduce or eliminate the value of our technology systems. Such risk could be difficult or impossible to eliminate and could adversely affect our business, financial condition and results of operations. 29 Table of Contents Any cloud provider service failure or control weakness could adversely affect our business. We employ cloud-based services to host our applications and intend to expand our use. As we expand our use of cloud-based services, we will increasingly rely on third-party cloud providers to maintain appropriate controls and safeguards to protect confidential information we receive, including personal, personally identifiable, sensitive, confidential or proprietary data, and the integrity and continuous operation of our proprietary technology platform. While we conduct due diligence on these cloud providers with respect to their security and business controls, we may not have the visibility to effectively monitor the implementation and efficacy of these controls. Outside parties may be able to circumvent controls or exploit vulnerabilities, resulting in operational disruption, data loss, defects or a security event. Migrating to the cloud increases the risk of operational disruption should internet service be interrupted. While we have implemented business contingency and other plans to facilitate continuous internet access, sustained or concurrent service denials or similar failures could limit our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or otherwise operate our business. Any such event or failure could have a material adverse effect on our business, financial condition and results of operations. If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our policyholders, our business, financial condition and results of operations will be adversely affected. In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses, loss adjustment expenses and other underwriting costs and to earn a profit. If we do not accurately assess the risks that we assume, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues. Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies, we must: • • • • collect and properly analyze a substantial volume of data from our insureds; develop, test and apply appropriate actuarial projections and ratings formulas; closely monitor and timely recognize changes in trends; and project both frequency and severity of our insureds’ losses with reasonable accuracy. We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including: • • • • • • • insufficient or unreliable data; incorrect or incomplete analysis of available data; uncertainties generally inherent in estimates and assumptions; our failure to implement appropriate actuarial projections and ratings formulas or other pricing methodologies; regulatory constraints on rate increases; our failure to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses; and unanticipated court decisions, legislation or regulatory action. If actual renewals of our existing contracts do not meet expectations, our written premiums in future years and our future results of operations could be materially adversely affected. Many of our contracts are written for a one-year term. In our financial forecasting process, we make assumptions about the rates of renewal of our prior year’s contracts. The insurance and reinsurance industries have historically been cyclical businesses with intense competition, often based on price. If actual renewals do not meet expectations or if we choose not 30 Table of Contents to write a renewal because of pricing conditions, our written premiums in future years and our future operations would be materially adversely affected. We may change our underwriting guidelines or our strategy without stockholder approval. Our management has the authority to change our underwriting guidelines or our strategy without notice to our stockholders and without stockholder approval. As a result, we may make fundamental changes to our operations without stockholder approval, which could result in our pursuing a strategy or implementing underwriting guidelines that may be materially different from the strategy or underwriting guidelines described in the section titled "Business" or elsewhere in this Annual Report on Form 10-K. Changes in accounting practices and future pronouncements may materially affect our reported financial results. Developments in accounting practices may require us to incur considerable additional expenses to comply, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, stockholders’ equity and other relevant financial statement line items. Our insurance subsidiary, Kinsale Insurance, is required to comply with statutory accounting principles ("SAP"). SAP and various components of SAP are subject to constant review by the NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting. Various proposals are pending before committees and task forces of the NAIC, some of which, if enacted, could have negative effects on insurance industry participants. The NAIC continuously examines existing laws and regulations. We cannot predict whether or in what form such reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect us. Our failure to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations and prospects. We must accurately and timely evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately and timely, including the training and experience of our claims representatives, our claims organization’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately and timely could lead to regulatory and administrative actions or material litigation, undermine our reputation in the marketplace and materially and adversely affect our business, financial condition, results of operations and prospects. In addition, if we do not train new claims employees effectively or if we lose a significant number of experienced claims employees, our claims department’s ability to handle an increasing workload could be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work which, in turn, could adversely affect our operating margins. Global climate change may have an adverse effect on our financial results. Although uncertainty remains as to the nature and effect of future efforts to curb greenhouse gas emissions and thereby mitigate their potential long-term effects on the climate, a broad spectrum of scientific evidence suggests that manmade production of greenhouse gas has had an adverse effect on the global climate. Our insurance policies are generally written for one year and repriced annually to reflect changing exposures. However, assessing the risk of loss and damage associated with the adverse effects of climate change and the range of approaches to address loss and damage associated with the adverse effects of climate change, including impacts related to extreme weather events and slow onset events, remains a challenge and might adversely impact our business, results of operations and financial condition. 31 Table of Contents Item 1B. Unresolved Staff Comments None. Item 2. Properties Our executive offices and insurance operations are located in Richmond, Virginia, which occupy approximately 53,000 square feet of office space for annual rent of approximately $0.4 million. The lease for this space expires in 2020. During 2019, we purchased land in Henrico County, Virginia and began construction of a new corporate headquarters. We believe that our facilities are adequate for our current needs. Item 3. Legal Proceedings We are subject to legal proceedings in the normal course of operating our insurance business. We are not involved in any legal proceedings which reasonably could be expected to have a material adverse effect on our business, results of operations or financial condition. Item 4. Mine Safety Disclosures Not applicable. 32 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Price for Common Stock Our common stock began trading on the Nasdaq Global Select Market ("Nasdaq") under the symbol "KNSL" on July 28, 2016. Before then, there was no public market for our common stock. As of February 20, 2020, we had 97 stockholders of record of our common stock. Dividend Policy We currently expect to pay quarterly cash dividends in the future; however, the declaration, payment and amount of future dividends is subject to the discretion of our Board of Directors. Our Board of Directors give consideration to various risks and uncertainties, including those discussed under the headings "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K when determining whether to declare and pay dividends, as well as the amount thereof. Our Board of Directors may take into account a variety of factors when determining whether to declare any dividends, including (1) our financial condition, liquidity, results of operations (including our ability to generate cash flow in excess of expenses and our expected or actual net income), retained earnings and capital requirements, (2) general business conditions, (3) legal, tax and regulatory limitations, (4) contractual prohibitions and other restrictions, (5) the effect of a dividend or dividends on our financial strength ratings and (6) any other factors that our Board of Directors deem relevant. Our status as a holding company and a legal entity separate and distinct from our subsidiaries affects our ability to pay dividends and make other payments. As a holding company without significant operations of our own, the principal sources of our funds are dividends and other payments from our subsidiaries. The ability of our insurance subsidiary to pay dividends to us is subject to limits under insurance laws of the state in which our insurance subsidiary is domiciled. See "Risk Factors – Risks Related to Our Business and Our Industry – Because we are a holding company and substantially all of our operations are conducted by our insurance subsidiary, our ability to pay dividends and service our debt obligations depends on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." Performance Graph The following performance graph compares the cumulative total shareholder return of an investment in (1) our common stock, (2) the cumulative total returns to the Nasdaq Composite Index and (3) the cumulative total returns to the Nasdaq Insurance Index, for the period from July 28, 2016 (the date our common stock began trading on Nasdaq) through December 31, 2019. 33 Table of Contents The graph assumes an initial investment of $100 and the reinvestment of dividends, if any. Such returns are based on historical results and are not indicative of future performance. July 28, 2016 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019 Kinsale Capital Group, Inc. Nasdaq Composite Index Nasdaq Insurance Index $ $ $ 100.00 $ 100.00 $ 100.00 $ 247.91 $ 136.14 $ 133.66 $ 307.63 $ 132.27 $ 126.11 $ 565.00 180.80 152.18 186.12 $ 105.01 $ 114.29 $ 34 Table of Contents Item 6. Selected Consolidated Financial and Other Data The following tables present our selected consolidated financial and other data, at the dates and for the periods indicated. The selected consolidated financial and other data set forth below as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements for those years. These historical results are not necessarily indicative of the results that may be expected for any future period. The following information is only a summary and should be read in conjunction with the section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2019 2018 2017 2016 2015 ($ in thousands, except for per share data) Revenues: Gross written premiums Ceded written premiums(1) Net written premiums Net earned premiums Net investment income Net investment gains (losses)(2) Other income Total revenues Expenses: Losses and loss adjustment expenses(1) Underwriting, acquisition and insurance expenses(1) Other expenses Total expenses Income before income taxes Income tax expense(3) Net income Underwriting income(4) Per common share data: Basic earnings per share: Common stock Class A common stock(5) Class B common stock(5) Diluted earnings per share: Common stock Class A common stock(5) Class B common stock(5) Cash dividends declared and paid $ $ $ $ $ $ $ 389,694 $ (47,633) 342,061 $ 275,538 $ (39,924) 235,614 $ 282,981 $ 212,688 $ 20,133 12,748 26 315,888 169,563 70,217 57 239,837 76,051 12,735 63,316 $ 43,201 $ 15,688 (6,274) 12 222,114 128,041 53,425 168 181,634 40,480 6,693 33,787 $ 31,222 $ 2.94 $ 1.60 $ — — 2.86 $ — — 0.32 — — 1.56 $ — — 0.28 35 223,191 $ (33,719) 189,472 $ 176,053 $ 10,569 151 3 188,478 $ (21,214) 167,264 $ 133,816 $ 7,487 176 136 186,776 141,615 103,680 44,146 429 148,255 38,521 13,620 24,901 $ 28,227 $ 1.19 $ — — 1.16 $ — — 0.24 70,961 28,551 2,567 102,079 39,536 13,369 26,167 $ 34,304 $ 0.57 $ 0.98 0.48 0.56 $ 0.98 0.46 0.10 177,009 (92,991) 84,018 74,322 5,643 59 572 80,596 42,238 2,809 1,992 47,039 33,557 11,284 22,273 29,275 — 1.53 0.84 — 1.53 0.81 — Table of Contents Balance sheet data: Cash and invested assets Premiums receivable, net Reinsurance recoverables(1) Ceded unearned premiums(1) Intangible assets Total assets Reserves for unpaid losses and loss adjustment expenses Unearned premiums Funds held for reinsurers(1) Debt Total liabilities Total stockholders' equity Other data: Tangible stockholders' equity(6) Debt to total capitalization ratio(7) Statutory capital and surplus(8) Underwriting and other ratios: Loss ratio(9) Expense ratio(10) Combined ratio(11) Adjusted loss ratio(12) Adjusted expense ratio(12) Adjusted combined ratio(12) Return on equity(13) Operating return on equity(14) 2019 2018 2017 2016 2015 At December 31, ($ in thousands) $ 908,234 $ 643,051 $ 561,070 $ 480,349 $ 34,483 72,574 16,118 3,538 1,090,550 460,058 187,374 — 16,744 684,670 405,880 24,253 56,788 16,072 3,538 773,063 369,152 128,250 — — 509,077 263,986 19,787 49,593 13,858 3,538 667,849 315,717 103,110 — — 429,660 238,189 16,984 70,317 13,512 3,538 614,389 264,801 89,344 36,497 — 404,175 210,214 368,685 15,550 95,670 39,329 3,538 545,278 219,629 81,713 87,206 29,603 431,827 113,451 $ $ 403,085 $ 261,191 $ 235,394 $ 207,914 $ 4.1% —% —% —% 348,811 $ 233,500 $ 213,833 $ 193,387 $ 111,151 20.8% 127,675 2019 2018 2017 2016 2015 Year Ended December 31, 59.9% 24.8% 84.7% NA NA NA 18.9% 15.9% 60.2% 25.1% 85.3% NA NA NA 13.5% 15.4% 58.9% 25.1% 84.0% NA NA NA 11.1% 11.9% 53.0% 21.3% 74.3% 50.0% 26.8% 76.8% 16.2% 16.1% 56.8% 3.8% 60.6% 51.5% 26.0% 77.5% 21.6% 21.6% (1) Prior to our IPO in 2016, a significant amount of our business was reinsured through our multi-line quota share reinsurance treaty ("MLQS") with third-party reinsurers. The MLQS transferred a portion of the risk related to certain lines of business written by us to reinsurers in exchange for a portion of the gross written premiums on that business. Effective January 1, 2017, the Company commuted the remaining outstanding MLQS covering the period January 1, 2015 to December 31, 2015, which reduced reinsurance recoverables on unpaid losses by approximately $27.9 million. The commutation did not have any effect on the Company's results of operations or cash flows for the applicable period. 36 Table of Contents (2) Effective January 1, 2018, we adopted ASU 2016-01, which eliminated the available-for-sale classification for equity securities and required changes in unrealized gains and losses in fair value of these investments to be recognized in net income. (3) During the fourth quarter of 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted, which lowered the federal corporate tax rate from 35% to 21% starting January 1, 2018. As a result of the TCJA enactment, deferred tax balances were remeasured to reflect the lower rate, which resulted in charge to tax expense of $1.9 million for the year ended December 31, 2017. (4) Underwriting income is a non-GAAP financial measure. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income to underwriting income. (5) In connection with the IPO, the Company amended and restated its certificate of incorporation, which reclassified the Company’s former Class A Common Stock and Class B Common Stock into a single class of common stock. (6) Tangible stockholders’ equity is a non-GAAP financial measure. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financial Condition" for a reconciliation of stockholders’ equity to tangible stockholders’ equity. (7) The ratio, expressed as a percentage, of total indebtedness for borrowed money, including financing leases, to the sum of total indebtedness for borrowed money, including financing leases, and stockholders’ equity. (8) Statutory and surplus capital is the excess of assets over liabilities for our insurance subsidiary, as determined in accordance with statutory accounting principles prescribed by the NAIC. (9) The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earned premiums, net of the effects of reinsurance. (10) The expense ratio is the ratio, expressed as a percentage, of underwriting, acquisition and insurance expenses to net earned premiums. (11) The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. (12) The adjusted loss ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. As previously discussed, the Company participated in a MLQS that transferred a portion of its risk related to certain lines of business to reinsurers that received a portion of the direct written premiums on that business. We define our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio as each of our loss ratio, expense ratio and combined ratio, respectively, excluding the effects of the MLQS. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAP Financial Measures" for a reconciliation of our loss ratio, expense ratio and combined ratio to our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio. (13) Return on equity represents net income expressed as a percentage of average beginning and ending stockholders’ equity during the period. (14) Operating return on equity is net operating earnings expressed as a percentage of average beginning and ending stockholders’ equity during the period. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income to net operating income. 37 Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. The discussion and analysis below include certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" that could cause actual results to differ materially from those expressed in, or implied by, those forward-looking statements. See "Forward-Looking Statements." Year ended December 31, 2018 compared to year ended December 31, 2017 For a comparison of years ended December 31, 2018 and December 2017, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on February 28, 2019. Overview Founded in 2009, we are an established and growing specialty insurance company. We focus exclusively on the E&S market in the U.S., where we use our underwriting expertise to write coverages for hard-to-place small business risks and personal lines risks. We market and sell these insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands primarily through a network of independent insurance brokers. We have an experienced and cohesive management team, that has an average of over 25 years of relevant experience. Many of our employees and members of our management team have also worked together for decades at other E&S insurance companies. We have one reportable segment, our Excess and Surplus Lines Insurance segment, which offers P&C insurance products through the E&S market. In 2019, the percentage breakdown of our gross written premiums was 87.6% casualty and 12.4% property. Our commercial lines offerings include construction, small business, excess casualty, commercial property, product liability, allied health, general casualty, professional liability, life sciences, energy, management liability, health care, environmental, inland marine, commercial insurance and public entity. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 4.3% of our gross written premiums in 2019. Our goal is to deliver long-term value for our stockholders by growing our business and generating attractive returns. We seek to accomplish this by generating consistent and attractive underwriting profits while managing our capital prudently. We believe that we have built a company that is entrepreneurial and highly efficient, using our proprietary technology platform and leveraging the expertise of our highly experienced employees in our daily operations. We believe our systems and technology are at the digital forefront of the insurance industry, allowing us to quickly collect and analyze data, thereby improving our ability to manage our business and reducing response times for our customers. We believe that we have differentiated ourselves from our competitors by effectively leveraging technology, vigilantly controlling expenses and maintaining control over our underwriting and claims management. 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; Binding of new business submissions into policies; 38 Table of Contents • • 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 as well as to provide additional capacity for growth. 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 that are directly related to the successful acquisition of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other underwriting expenses represent the general and administrative expenses of our insurance business including employment costs, telecommunication and technology costs, and legal and auditing fees. 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 and 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, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims. 39 Table of Contents Change in fair value of equity securities Change in fair value of equity securities represents the increase or decrease in the market value of equity securities held during the period. Net realized investment gains (losses) on investments Net realized investment gains (losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost, as well as any "other-than-temporary" impairments recognized in earnings. Income tax expense Currently all of our income tax expense relates to federal income taxes. Kinsale Insurance is generally not subject to income taxes in the states in which it operates; however, our non-insurance subsidiaries are subject to state income taxes. 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 provide useful information about our business and the operational factors underlying our financial performance. Underwriting income is a non-GAAP financial measure. We define underwriting income as pre-tax income, excluding net investment income, net investment gains and losses, and other income and expenses. See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to underwriting income. Net operating earnings is a non-GAAP financial measure. We define net operating earnings as net income excluding net unrealized gains and losses on equity securities, after taxes, and net realized gains and losses on investments, after taxes. 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, net of the effects of reinsurance. Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses to net earned premiums. Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. Return on equity is net income as a percentage of average beginning and ending total stockholders’ equity during the period. Operating return on equity is a non-GAAP financial measure. We define operating return on equity as net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period. See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to operating income. Net retention ratio is the ratio of net written premiums to gross written premiums. Gross investment return is investment income from fixed-maturity and equity securities, before any deductions for fees and expenses, expressed as a percentage of average beginning and ending balances of those investments during the period. 40 Table of Contents Results of Operations Year ended December 31, 2019 compared to year ended December 31, 2018 The following table summarizes our results of operations for the years ended December 31, 2019 and 2018: ($ in thousands) Gross written premiums Ceded written premiums Net written premiums Net earned premiums Losses and loss adjustment expenses Underwriting, acquisition and insurance expenses Underwriting income (1) Other expenses, net Net investment income Change in fair value of equity securities Net realized gains on investments Income before taxes Income tax expense Net income Return on equity Operating return on equity (2) Loss ratio Expense ratio Combined ratio NM - Percentage change is not meaningful Year Ended December 31, 2019 2018 Change Percent 389,694 $ 275,538 $ (47,633) (39,924) 342,061 $ 235,614 $ 114,156 (7,709) 106,447 41.4 % 19.3 % 45.2 % 33.0 % 32.4 % 31.4 % 38.4 % (80.1)% 28.3 % NM 27.8 % 87.9 % 90.3 % 87.4 % 70,293 41,522 16,792 11,979 125 4,445 18,944 78 35,571 6,042 29,529 $ $ $ 282,981 $ 212,688 $ 169,563 70,217 43,201 (31) 20,133 12,389 359 76,051 12,735 128,041 53,425 31,222 (156) 15,688 (6,555) 281 40,480 6,693 $ 63,316 $ 33,787 $ 18.9% 15.9% 59.9% 24.8% 84.7% 13.5% 15.4% 60.2% 25.1% 85.3% (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. (2) Operating return on equity is a non-GAAP financial measure. We define operating return on equity as net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period. See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to operating income. Net income was $63.3 million for the year ended December 31, 2019 compared to $33.8 million for the year ended December 31, 2018, an increase of $29.5 million, or 87.4%. The increase in net income in 2019 over 2018 was due to a number of factors including, higher fair value of equity securities, higher underwriting income resulting from favorable E&S market conditions and strong growth in written premiums, and an increase in investment income. The change in fair value of equity investments for the year ended December 31, 2019 reflected favorable valuations in the broader stock market compared to the prior year, which experienced a significant decline in the fourth quarter 41 Table of Contents of 2018. The increase in net investment income was largely due to higher investment balances resulting from growth in the business. Our underwriting income was $43.2 million for the year ended December 31, 2019 compared to $31.2 million for the year ended December 31, 2018, an increase of $12.0 million, or 38.4%. The increase in our underwriting income was attributable to a combination of growth in the business, lower catastrophe losses and higher net favorable development of loss reserves for prior accident years. The corresponding combined ratios were 84.7% for the year ended December 31, 2019 compared to 85.3% for the year ended December 31, 2018. Premiums Gross written premiums were $389.7 million for the year ended December 31, 2019 compared to $275.5 million for the year ended December 31, 2018, an increase of $114.2 million, or 41.4%. The increase in gross written premiums for the for the year ended December 31, 2019 over the prior year was due to higher submission activity from brokers across most lines of business and better pricing on bound accounts, resulting from favorable market conditions. The average premium per policy written by us was $8,200 in 2019 compared to $7,800 in 2018. Excluding our personal lines insurance, which has relatively low premiums per policy written, the average premium per policy written was approximately $10,800 in 2019 compared to $10,400 in 2018. The increase in the average premium per policy written was due to changes in the mix of business and higher rates on bound accounts during 2019 compared to the prior year. The changes in gross written premiums were most notable in the following lines of business: • • • • Construction, which represented approximately 18.2% of our gross written premiums in 2019, increased by $20.2 million, or 39.6%, for the year ended December 31, 2019 over the prior year; Commercial property, which represented approximately 7.5% of our gross written premiums in 2019, increased by $19.9 million, or 217.6%, for the year ended December 31, 2019 over the prior year; Small business, which represented approximately 16.2% of our gross written premiums in 2019, increased by $18.8 million, or 42.4%, for the year ended December 31, 2019 over the prior year, and Excess casualty, which represented approximately 13.1% of our gross written premiums in 2019, increased by $13.8 million, or 37.0%, for the year ended December 31, 2019 over the prior year. Net written premiums increased by $106.4 million, or 45.2%, to $342.1 million for the year ended December 31, 2019 from $235.6 million for the year ended December 31, 2018. The increase in net written premiums was largely due to higher gross written premiums for the year ended December 31, 2019. Our net retention ratio was 87.8% for the year ended December 31, 2019 compared to 85.5% for the year ended December 31, 2018. The increase in the net retention ratio was largely due to raising our retentions on our reinsurance treaties effective with the June 1, 2019 contract renewal. Net earned premiums were $283.0 million for the year ended December 31, 2019 compared to $212.7 million for the year ended December 31, 2018, an increase of $70.3 million, or 33.0%. As previously discussed, the increase was due to growth in gross written premiums in 2019 compared to 2018. Loss ratio Our loss ratio was 59.9% for the year ended December 31, 2019 compared to 60.2% for the year ended December 31, 2018. The slight decrease in the loss ratio for the year ended December 31, 2019 was due to lower current year catastrophe losses in 2019 compared to 2018. For each year of 2019 and 2018, the overall favorable development of loss reserves for prior accident years was primarily due to reported losses emerging at lower levels than expected for certain accident years. During the year ended December 31, 2019, prior accident years developed favorably by $9.4 million, of which $14.6 million was 42 Table of Contents attributable to accident years 2017 and 2018. This favorable development was offset in part by adverse development from accident years 2011 through 2015 of $5.2 million. This adverse development largely resulted from management’s decision to lengthen the actuarial loss development factors in certain lines to provide for emergence of reported losses over a longer period of time, which added a modest amount of conservatism to the Company’s incurred but not reported ("IBNR") reserves. On an inception-to-date basis, all accident years have developed favorably, with the exception of the 2011 accident year. During the year ended December 31, 2018, loss reserves for prior accident years developed favorably by $7.0 million, which was largely attributable to accident years 2016 and 2017 of $10.6 million. This favorable development was offset in part by adverse development in the accident years 2011 through 2015 of $3.6 million. The following tables summarize the effect of the factors indicated above on the loss ratios for the years ended December 31, 2019 and 2018: Year Ended December 31, 2019 2018 Losses and Loss Adjustment Expenses % of Earned Premiums Losses and Loss Adjustment Expenses % of Earned Premiums $ $ 175,939 3,047 (9,423) 169,563 62.1 % $ 1.1 % (3.3)% 59.9 % $ 129,346 5,732 (7,037) 128,041 60.8 % 2.7 % (3.3)% 60.2 % ($ in thousands) Loss ratio: Current accident year Current accident year - catastrophe losses Effect of prior year development Total Expense ratio The following table summarizes the components of the expense ratio for the years ended December 31, 2019 and 2018: ($ in thousands) Commissions incurred: Direct Ceding Net commissions incurred Other underwriting expenses $ Underwriting, acquisition, and insurance expenses $ Year Ended December 31, 2019 2018 Underwriting Expenses % of Earned Premiums Underwriting Expenses % of Earned Premiums 48,382 (12,347) 36,035 34,182 70,217 17.1 % $ (4.4)% 12.7 % 12.1 % 24.8 % $ 36,885 (10,448) 26,437 26,988 53,425 17.3 % (4.9)% 12.4 % 12.7 % 25.1 % The overall expense ratio was lower for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease in the expense ratio was due to higher net earned premiums without a proportional increase in the amount of other underwriting expenses. This decrease was offset in part by higher net commissions incurred as a percentage of earned premiums year over year, which was largely due to lower ceding commissions as a result of a change in the mix of business, some of which has no ceding commissions. In addition, as previously discussed, we increased the retention on our reinsurance treaties, which resulted in lower ceded premiums and 43 Table of Contents associated commissions for the year ended December 31, 2019. Direct commissions paid as a percent of gross written premiums was 14.6% and 14.7% for the years ended December 31, 2019 and 2018, respectively. Investing results Our net investment income increased by 28.3% to $20.1 million for the year ended December 31, 2019 from $15.7 million for the year ended December 31, 2018, primarily due to growth in our investment portfolio balance generated from excess operating funds and to a lesser degree, proceeds from our equity offering in August 2019. The following table summarizes the components of net investment income and net investment gains for the years ended December 31, 2019 and 2018: ($ in thousands) Interest from fixed-maturity securities Dividends on equity securities Other Gross investment income Investment expenses Net investment income Change in the fair value of equity securities Net capital gains Net investment (losses) gains Total Year Ended December 31, 2019 2018 Change $ 18,545 $ 13,772 $ 2,136 842 21,523 (1,390) 20,133 12,389 359 12,748 2,014 1,017 16,803 (1,115) 15,688 (6,555) 281 (6,274) $ 32,881 $ 9,414 $ 4,773 122 (175) 4,720 (275) 4,445 18,944 78 19,022 23,467 The weighted average duration of our fixed income portfolio, including cash equivalents, was 4.3 years at December 31, 2019 and 3.9 years at December 31, 2018. Our investment portfolio had a gross return of 3.1% as of December 31, 2019, compared to 3.0% as of December 31, 2018. During the year ended December 31, 2019, we recognized unrealized gains related to our equity portfolio of $12.4 million. These gains resulted from higher equity valuations for the year ended December 31, 2019 and was reflective of gains in the broader stock markets during this period. For the year ended December 31, 2018, we recognized unrealized losses related to our equity portfolio of $6.6 million and was largely due to a significant decline in the broader stock markets, which occurred during the fourth quarter of 2018. We perform quarterly reviews of all available-for-sale securities within our investment portfolio to determine whether any other-than-temporary impairment has occurred. Management concluded that there were no other-than-temporary impairments from available-for-sale securities with unrealized losses for the year ended December 31, 2019 or 2018. Income tax expense Our effective tax rate for the year ended December 31, 2019 was approximately 16.7% compared to 16.5% for the year ended December 31, 2018. The effective tax rate was lower than the statutory rate of 21% principally due to stock options exercised and the recognition of tax benefits related to income tax- advantaged investment securities. 44 Table of Contents Return on equity Our return on equity was 18.9% for the year ended December 31, 2019 compared to 13.5% for the year ended December 31, 2018. Operating return on equity was 15.9% for the full year of 2019, an increase from 15.4% for the full year of 2018. The increase in the operating return on equity was primarily due to growth in the business year over year, offset in part by the impact of the equity offering of $65.9 million in August 2019. 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, which is domiciled in Arkansas. Accordingly, Kinsale may receive cash through (1) loans from banks, (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 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 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. We file a consolidated federal income tax return with our subsidiaries, and under our corporate tax allocation agreement, each participant is charged or refunded taxes according to the amount that the participant would have paid or received had it filed on a separate return basis with the Internal Revenue Service. State insurance laws restrict the ability of Kinsale Insurance to declare stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. The maximum dividend distribution Kinsale Insurance may make absent the approval or non-disapproval of the insurance regulatory authority in Arkansas is limited by Arkansas law to the greater of (1) 10% of policyholder surplus as of December 31 of the previous year, or (2) net income, not including realized capital gains, for the previous calendar year. The Arkansas statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. The maximum amount of dividends Kinsale Insurance can pay us during 2020 without regulatory approval is $40.7 million. Insurance regulators have broad powers to ensure that statutory surplus remains at adequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by Kinsale Insurance may adopt statutory provisions more restrictive than those currently in effect. Kinsale Insurance paid $5.0 million of dividends to us during 2019. See also "Risk Factors — Risks Related to Our Business and Our Industry — Because we are a holding company and substantially all of our operations are conducted by our insurance subsidiary, our ability to pay dividends depends on our ability to obtain cash dividends or other permitted payments from our insurance subsidiary." As of December 31, 2019, our holding company had $14.7 million in cash and investments, compared to $10.0 million as of December 31, 2018. Management believes there is sufficient liquidity available at the holding company and in its insurance subsidiary, Kinsale Insurance, as well as in its other operating subsidiaries, to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months. 45 Table of Contents In January 2019, we purchased land for $2.5 million in Henrico County, Virginia for the development of a new corporate headquarters and we are currently targeting a third quarter 2020 completion date. The project is estimated to cost approximately $50 million to $55 million, substantially all of which we expect will be capitalized. We expect to fund the project through a combination of existing cash flows from operations and debt financing. The current balance of construction in progress related to this project is $19.8 million at December 31, 2019, which is classified under property and equipment within "other assets" on the balance sheet. See "—Liquidity and Capital Resources, Credit agreement" below for further details regarding this financing. Credit agreement On May 28, 2019, we entered into a Credit Agreement that provided us with a $50 million Credit Facility and an uncommitted accordion feature that permits the Company to increase the commitments by an additional $30 million. The Credit Facility has a maturity of May 28, 2024. Borrowings under the Credit Facility will be used to fund construction of our new headquarters and may also be used for working capital and general corporate purposes. As of December 31, 2019, there was $16.7 million outstanding under the credit facility (the "Credit Facility"), net of debt issuance costs. 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 an interest rate per annum equal to the higher of the prime rate, the New York Federal Reserve Board Rate or the one-month adjusted LIBOR, plus the applicable margin of 0.75% or 1.75%, depending on which interest option was applicable for the particular ABR loan. In July 2017, the U.K. Financial Conduct Authority announced that, after the end of 2021, it would no longer persuade or compel contributing banks to make rate submissions to the ICE Benchmark Administration (together with any successor to the ICE Benchmark Administrator, the “IBA”) for purposes of the IBA setting the London interbank offered rate. As a result, it is possible that commencing in 2022, the London interbank offered rate may no longer be available or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on Eurodollar loans. The Credit Agreement provides procedures for determining a replacement or alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to whether such replacement or alternative base rate will be more or less favorable than LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to seek to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR. The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default. As of December 31, 2019, the Company was in compliance with all of its financial covenants under the Credit Facility. Shelf registration 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 debt securities, 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. In conjunction with filing our universal shelf registration statement, we completed an underwritten public offering and sold and issued an aggregate of 741,750 shares of common stock at a price to the public of $93 per share. We received aggregate net proceeds from the offering of approximately $65.9 million, after deducting underwriting 46 Table of Contents discounts and commissions and offering costs. Net proceeds from this offering were used for general corporate purposes, including to fund organic growth. 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 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 on 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. Our cash flows for the years ended December 31, 2019 and 2018 were: Cash and cash equivalents provided by (used in): Operating activities Investing activities Financing activities Change in cash and cash equivalents Year Ended December 31, 2019 2018 (in thousands) 178,357 $ (230,793) 77,755 25,319 $ 103,980 (106,540) (4,098) (6,658) $ $ We have historically generated positive operating cash flows. The increase in cash provided by operating activities in 2019 compared to 2018 was due primarily to growth in business and the timing of claim payments and reinsurance recoverable balances. Cash flows from operations were used to fund investing activities and to pay dividends to our stockholders. Net cash used in investing activities increased by $124.3 million in 2019 from 2018, which reflected higher proceeds from growth in our business operations and proceeds from our equity offering in August 2019 of $65.9 million. These proceeds were used to purchase fixed-maturity securities, particularly corporate bonds and residential mortgage-backed securities of $203.0 million, and to a lesser extent, other asset-backed securities of $60.4 million and municipal bonds of $42.8 million. During 2019, we also received proceeds of $35.5 million from sales of fixed-maturity securities, largely municipal bonds in order to take advantage of favorable valuations. In addition, we received proceeds of $67.9 million from redemptions of asset and mortgage-backed securities and corporate bonds. During 2019, the Company reallocated its ETFs from foreign and small-cap funds to domestic equity funds to more closely mirror the broader U.S. stock market. For the year ended December 31, 2019, purchases and sales of ETFs were $19.3 million and $13.7 million, respectively. For the year ended December 31, 2019, purchases and sales of non-redeemable preferred stocks were $10.6 million and $7.8 million, respectively. Net cash used in investing 47 Table of Contents activities during 2019 included purchases of property and equipment of $19.6 million and was principally comprised of expenditures related to the construction of our new corporate headquarters, discussed previously. Net cash used in investing activities during the year ended December 31, 2018 reflected purchases of fixed-maturity securities, particularly other asset-backed securities and, to a lesser extent, corporate bonds and residential and commercial mortgage obligations. This was offset in part by redemptions of asset and mortgage-backed securities and corporate bonds. For the year ended December 31, 2019, net cash provided by financing activities was $77.8 million and reflected the proceeds from our equity offering of $65.9 million, previously discussed, and the drawdown of $17.3 million on our Credit Facility, which was used to fund construction of our new headquarter facilities. During the year ended December 31, 2019, we paid dividends of $0.32 per common share, or $6.9 million in the aggregate. During 2019, we received proceeds of $2.8 million from the exercise of vested stock options. For the year ended December 31, 2018, net cash used in financing activities was $4.1 million and reflected dividends paid of $0.28 per common share, or $5.9 million in the aggregate. During 2018, we received proceeds of $1.8 million from the exercise of vested stock options. Reinsurance We enter into reinsurance contracts to limit our exposure to potential large losses as well as to provide additional capacity for growth. 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. In 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. For the year ended December 31, 2019, property insurance represented 12.4% of our gross written premiums. When we write property insurance, we buy reinsurance to significantly mitigate our risk. We use computer models to analyze the risk of severe losses from weather-related events and earthquakes. We measure exposure to these catastrophe losses in terms of PML, which is an estimate of what level of loss we would expect to experience in a windstorm or earthquake event occurring once in every 100 or 250 years. We manage this PML by purchasing catastrophe reinsurance coverage. Effective June 1, 2019, we purchased catastrophe reinsurance coverage of $77.5 million per event in excess of our $7.5 million per event retention. Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to us, and if such an event occurred, we would establish an allowance for amounts considered uncollectible. At December 31, 2019, there was no allowance for uncollectible reinsurance. As of December 31, 2019, Kinsale Insurance has only contracted with reinsurers with A.M. Best financial strength ratings of "A" (Excellent) or better. At December 31, 2019, the net reinsurance receivable, defined as the sum of paid and unpaid reinsurance recoverables, ceded unearned premiums less reinsurance payables, from five reinsurers represented 88.8% of the total balance. Ratings Kinsale Insurance has a financial strength rating of "A-" (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from "A++" (Superior) to "F" (In Liquidation). "A-" (Excellent) is the fourth highest rating issued by A.M. 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 48 Table of Contents directed at investors. See also "Risk Factors — Risks Related to Our Business and Our Industry — A decline in our financial strength rating may adversely affect the amount of business we write." 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 is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan. Contractual obligations and commitments The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2019: Total Less Than One Year Payments Due by Period One Year to Less Than Three Years (in thousands) Three Years to Less Than Five Years More Than Five Years Reserves for losses and loss adjustment expenses $ 460,058 $ 89,400 $ 156,214 $ 90,560 $ 123,884 Headquarters construction costs Credit facility Operating lease obligations Total 26,917 19,963 400 26,917 608 400 — 1,208 — — 18,147 — — — — $ 507,338 $ 117,325 $ 157,422 $ 108,707 $ 123,884 Reserves for losses and loss adjustment expenses Reserves for losses and loss adjustment expenses represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by period are based on industry and peer-group claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for losses and loss adjustment expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and loss adjustment expenses totaled $72.6 million at December 31, 2019. Headquarters construction costs We have entered into various agreements under which we have incurred obligations relating to our plans to build our corporate headquarters. We expect the overall project to cost approximately $50 million to $55 million and we are currently targeting a third quarter 2020 completion date. At December 31, 2019 we incurred costs of approximately $19.8 million toward the project, including approximately $2.5 million to purchase the land. Our contractual obligations include payments which will become due under the construction agreement and project development 49 Table of Contents agreement. These costs are based on our current estimates; however, the costs we actually incur and the timing of the actual payments may vary from these estimates. Credit facility As of December 31, 2019, we had $17.3 million outstanding under the Credit Facility, which has a maturity of May 28, 2024. Interest on the outstanding amounts is estimated based on 3-month LIBOR plus a margin of 1.75%. Current borrowings under the Credit Facility have been used to fund construction of our new headquarters and we anticipate utilizing the Credit Facility to fund the remaining construction costs. However, we may choose to fund the project with other resources or may decide to repay the Credit Facility without penalty. As a result, actual amounts paid and the associated interest may differ from the estimates presented. Financial Condition Stockholders' equity At December 31, 2019, total stockholders' equity was $405.9 million and tangible stockholders' equity was $403.1 million, compared to total stockholders' equity of $264.0 million and tangible stockholders' equity of $261.2 million at December 31, 2018. The increase in both total stockholders' equity and tangible stockholders' equity in 2019 compared to 2018 was primarily due to proceeds received from the public equity offering in August of 2019, profits generated during the period, an increase in unrealized gains on available-for-sale investments, net of taxes, and net activity related to stock-based compensation plans. These increases were offset in part by the dividends declared during 2019. Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as stockholders’ equity less intangible assets, net of deferred taxes. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders' equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure. Stockholders' equity at December 31, 2019, 2018, 2017, 2016 and 2015, reconciles to tangible stockholders' equity as follows: 2019 2018 2017 2016 2015 December 31, (in thousands) Stockholders' equity Less: Intangible assets, net of deferred taxes Tangible stockholders' equity $ $ 405,880 $ 263,986 $ 238,189 $ 210,214 $ 113,451 2,795 2,795 2,795 2,300 403,085 $ 261,191 $ 235,394 $ 207,914 $ 2,300 111,151 Equity-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 provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards to directors, officers and other employees, as well as independent contractors or consultants providing consulting or advisory services to the Company. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832. On July 27, 2016, the Board of Directors approved, and we granted, 1,036,916 stock options with an exercise price equal to the IPO price of $16.00 per share. The stock options have a maximum contractual term of 10 years, and vest in 4 equal annual installments following the date of the grant. 50 Table of Contents During 2019, 62,015 shares of restricted stock awards were granted under the 2016 Incentive Plan to the Company’s employees and non-employee directors. The restricted stock had a weighted average fair value on the date of grant of $80.59 per share and vest over a term of 1 to 4 years. On January 1, 2020, the Board of Directors granted 4,428 shares of restricted stock under the 2016 Incentive Plan to the Company’s non-employee directors. The restricted stock had a fair value on the date of grant of $101.66 per share and will vest over a 1 year period. Dividend declarations On February 14, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on March 14, 2019 to all stockholders of record on February 28, 2019. On May 23, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on June 13, 2019 to all stockholders of record on June 3, 2019. On August 15, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on September 12, 2019 to all stockholders of record on August 29, 2019. On November 13, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on December 12, 2019 to all stockholders of record on November 29, 2019. On February 13, 2020, the Company’s Board of Directors declared a cash dividend of $0.09 per share of common stock. This dividend is payable on March 12, 2020 to all stockholders of record on February 28, 2020. Investment portfolio At December 31, 2019, our cash and invested assets of $908.2 million consisted of fixed-maturity securities, cash and cash equivalents and equity securities. At December 31, 2019, the majority of the investment portfolio was comprised of fixed-maturity securities of $729.5 million that were classified as available- for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on those securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. At December 31, 2019, we also held $100.4 million of cash and cash equivalents and $78.3 million of equity securities, which are comprised of ETFs and non-redeemable preferred stock. Effective January 1, 2018, we adopted a new accounting standard ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," ("ASU 2016") which eliminated the available-for-sale classification for equity securities and required changes in unrealized gains and losses in fair value of these investments to be recognized in net income. Our fixed-maturity securities, including cash equivalents, had a weighted average duration of 4.3 years and an average rating of "AA" at December 31, 2019. Our investment portfolio, excluding cash equivalents, had a gross return of 3.1% as of December 31, 2019, compared to 3.0% as of December 31, 2018. 51 Table of Contents At December 31, 2019, the amortized cost and fair value of our investments were as follows: Amortized Cost Estimated Fair Value % of Total Fair Value December 31, 2019 ($ in thousands) Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ 110 $ Obligations of states, municipalities and political subdivisions Corporate and other securities Asset-backed securities Residential mortgage-backed securities Total fixed maturities Equity securities: Exchange traded funds Nonredeemable preferred stock Total equity securities Total investments 166,312 180,287 195,750 172,358 714,817 40,842 23,403 64,245 $ 779,062 $ 112 172,893 184,768 197,970 173,789 729,532 54,463 23,831 78,294 807,826 —% 21.4% 22.9% 24.5% 21.5% 90.3% 6.7% 3.0% 9.7% 100.0% The table below summarizes the credit quality of our fixed-maturity securities as of December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC ("Standard & Poor's"): Standard & Poor’s or Equivalent Designation AAA AA A BBB Below BBB Total 52 December 31, 2019 Estimated Fair Value % of Total ($ in thousands) $ $ 213,174 259,873 176,338 74,872 5,275 729,532 29.2% 35.6% 24.2% 10.3% 0.7% 100.0% Table of Contents The amortized cost and fair value of our available-for-sale investments in fixed-maturity securities summarized by contractual maturity as of December 31, 2019, were as follows: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Asset-backed securities Residential mortgage-backed securities Total fixed maturities December 31, 2019 Amortized Cost Estimated Fair Value % of Fair Value ($ in thousands) $ 9,940 $ 115,480 79,235 142,054 195,750 172,358 $ 714,817 $ 9,990 118,611 82,314 146,858 197,970 173,789 729,532 1.4% 16.3% 11.3% 20.1% 27.1% 23.8% 100.0% 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. 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 cash or certain high- grade securities. The fair value of our restricted assets was $6.9 million at December 31, 2019 and 2018. Off-balance sheet arrangements We do not have any material off-balance sheet arrangements as of December 31, 2019. Reconciliation of Non-GAAP Financial Measures Reconciliation of underwriting income Underwriting income is a non-GAAP financial measure that we believe is useful in evaluating our underwriting performance without regard to investment income. Underwriting income represents the pre-tax profitability of our insurance operations and is derived by subtracting losses and loss adjustment expenses and underwriting, acquisition and insurance expenses from net earned premiums. We use underwriting income as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations and our underlying business performance. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently. 53 Table of Contents Net income for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 reconciles to underwriting income as follows: ($ in thousands) Net income Income tax expense Income before taxes Other expenses Net investment income Change in the fair value of equity securities Net realized investment gains Other income Underwriting income 2019 2018 2017 2016 2015 Year Ended December 31, $ 63,316 $ 33,787 $ 24,901 $ 26,167 $ 12,735 76,051 57 (20,133) (12,389) (359) (26) 6,693 40,480 168 (15,688) 6,555 (281) (12) 13,620 38,521 429 (10,569) — (151) (3) 13,369 39,536 2,567 (7,487) — (176) (136) 22,273 11,284 33,557 1,992 (5,643) — (59) (572) $ 43,201 $ 31,222 $ 28,227 $ 34,304 $ 29,275 Reconciliation of adjusted loss ratio, adjusted expense ratio and adjusted combined ratio Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio as each of our loss ratio, expense ratio and combined ratio, respectively, excluding the effects of the MLQS. We use these adjusted ratios as an internal performance measure in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss ratio, expense ratio and combined ratio, respectively, which are presented in accordance with GAAP. The effect of the MLQS on our results of operations is primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses. The following tables summarize the effect of the MLQS on our underwriting income for the years ended December 31, 2016 and 2015: ($ in thousands) Net earned premiums Losses and loss adjustment expenses Underwriting, acquisition and insurance expenses Year Ended December 31, 2016 Year Ended December 31, 2015 Including Quota Share Effect of Quota Share Excluding Quota Share Including Quota Share Effect of Quota Share Excluding Quota Share $ 133,816 $ (16,996) $ 150,812 $ 74,322 $ (67,950) $ (70,961) (28,551) 4,380 11,936 (75,341) (42,238) (40,487) (2,809) 30,978 34,254 Underwriting income $ 34,304 $ (680) $ 34,984 $ 29,275 $ (2,718) $ Loss ratio Expense ratio Combined ratio Adjusted loss ratio Adjusted expense ratio Adjusted combined ratio 53.0% 21.3% 74.3% — — — 25.8% 70.2% 96.0% — — — 54 — — — 50.0% 26.8% 76.8% 56.8% 3.8% 60.6% — — — 45.6% 50.4% 96.0% — — — 142,272 (73,216) (37,063) 31,993 — — — 51.5% 26.0% 77.5% Table of Contents Reconciliation of net operating earnings Net operating earnings is defined as net income excluding the effects of net unrealized gains and losses on equity securities, after taxes, and net realized gains and losses on investments, after taxes, as well as the earnings impact of the deferred tax revaluation recognized resulting from the enactment of the TCJA in December 2017. 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., 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. Net income for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 reconcile to net operating earnings as follows: ($ in thousands) Net income Change in the fair value of equity securities, after taxes Net realized gains on investments, after taxes TCJA charge Net operating earnings: Operating return on equity: Average equity (1) Return on equity (2) Operating return on equity (3) 2019 2018 2017 2016 2015 Year Ended December 31, $ 63,316 $ 33,787 $ 24,901 $ 26,167 $ 22,273 (9,787) (284) 5,178 (222) — — — (98) 1,915 — (114) — — (38) — $ 53,245 $ 38,743 $ 26,718 $ 26,053 $ 22,235 $ 334,933 $ 251,088 $ 224,202 $ 161,833 $ 103,019 18.9% 15.9% 13.5% 15.4% 11.1% 11.9% 16.2% 16.1% 21.6% 21.6% (1) Computed by adding the total stockholders' equity as of the date indicated to the prior year-end total and dividing by two. (2) Return on equity represents net income expressed as a percentage of average beginning and ending total stockholders’ equity during the period. (3) Operating return on equity is net operating earnings expressed as a percentage of average beginning and ending total stockholders’ equity during the period. 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 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 consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies, see the "Notes to Consolidated Financial Statements" included in this Annual Report on Form 10-K. 55 Table of Contents Reserves for unpaid losses and loss adjustment expenses The reserves for unpaid losses and loss adjustment expenses are the largest and most complex estimate in our consolidated balance sheet. The reserves for unpaid losses and loss adjustment expenses represent our estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date. As a relatively new company, our historical loss experience is limited. We estimate the reserves using individual case-basis valuations of reported claims and statistical analyses. Those estimates are based on our historical information, industry information and our estimates of future trends in variable factors such as loss severity, loss frequency and other factors such as inflation. We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us. Such adjustments are included in current operations. Additionally, during the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimate included in our consolidated financial statements. We categorize our reserves for unpaid losses and loss adjustment expenses into two types: case reserves and reserves for incurred but not reported losses ("IBNR"). Our gross reserves for losses and loss adjustment expenses at December 31, 2019 were $460.1 million, and of this amount, 82.2% related to IBNR. Our reserves for losses and loss adjustment expenses, net of reinsurance, at December 31, 2019 were $390.3 million, and of this amount, 83.2% related to IBNR. A 5% change in net IBNR reserves at December 31, 2019 would equate to an $16.2 million change in the reserve for losses and loss adjustment expenses at such date, as well as $12.8 million change in net income, a 3.2% change in stockholders' equity and a 3.2% change in tangible equity, in each case at or for the year ended December 31, 2019. The following tables summarize our reserves for unpaid losses and loss adjustment expenses, on a gross basis and net of reinsurance, at December 31, 2019 and 2018: Case reserves IBNR Total Case reserves IBNR Total Gross % of Total Net % of Total December 31, 2019 82,113 377,945 460,058 ($ in thousands) 17.8% $ 82.2 100.0% $ 65,588 324,678 390,266 December 31, 2018 16.8% 83.2 100.0% Gross % of Total Net % of Total 65,660 303,492 369,152 ($ in thousands) 17.8% $ 82.2 100.0% $ 55,383 258,380 313,763 17.7% 82.3 100.0% $ $ $ $ Case reserves are established for individual claims that have been reported to us. We are notified of losses by our insureds or their brokers. Based on the information provided, we establish case reserves by estimating the ultimate losses from the claim, including defense costs associated with the ultimate settlement of the claim. Our claims department personnel use their knowledge of the specific claim along with advice from internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses. During the life cycle of a particular claim, as more information becomes available, we may revise our estimate of the ultimate value of the claim either upward or downward. The amount of the individual claim reserve is based on the most recent information available. IBNR reserves are determined using actuarial methods to estimate losses that have occurred but have not yet been reported to us. We principally use the incurred Bornhuetter-Ferguson actuarial method ("BF method") to arrive at our loss reserve estimates for each line of business. This method estimates the reserves based on our initial expected loss ratio and expected reporting patterns for losses. Because we have a limited number of years of loss experience compared to the 56 Table of Contents period over which we expect losses to be reported, we use industry and peer-group data, in addition to our own data, as a basis for selecting our expected reporting patterns. Since the incurred BF method does not directly use reported losses in the estimation of IBNR, it is less sensitive to our level of reported losses than other actuarial methods. This method avoids some of the distortions that could result from a large loss development factor being applied to a small base of reported losses to calculate ultimate losses. However, this method will react more slowly than some other loss development methods if reported loss experience deviates significantly from our expected losses. Our Reserve Committee consists of our Chief Actuary, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The Reserve Committee meets quarterly to review the actuarial recommendations made by the Chief Actuary. In establishing the actuarial recommendation for the reserves for losses and loss adjustment expenses, our actuary estimates an initial expected ultimate loss ratio for our statutory lines of business by accident year. Input from our underwriting and claims departments, including premium pricing assumptions and historical experience, is considered by our actuary in estimating the initial expected loss ratios. During each quarter, the Reserve Committee reviews the emergence of actual losses relative to expectations by line of business to assess whether the assumptions used in the reserving process continue to form a reasonable basis for the projection of liabilities for those product lines. Our reserving methodology uses a loss reserving model that calculates a point estimate for our ultimate losses. Although we believe that our assumptions and methodology are reasonable, our ultimate payments may vary, potentially materially, from the estimates we have made. In addition, we retain an independent external actuary annually to assist us in determining if the reserve levels are reasonable. The independent actuary is not involved in the establishment and recording of our loss reserve. The actuarial consulting firm prepares its own estimate of our reserves for loss and loss adjustment expenses, and we compare their estimate to the reserves for losses and loss adjustment expenses reviewed and approved by the Reserve Committee in order to gain additional comfort on the adequacy of those reserves. The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31, 2019. We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve for all prior accident years combined. We believe that potential changes such as these would not have a material impact on our liquidity. Sensitivity Accident Year Net Ultimate Loss and LAE Sensitivity Factor Net Ultimate Incurred Losses and LAE Net Loss and LAE Reserve Pre-tax income Stockholders' Equity December 31, 2019 Potential Impact on 2019 Sample increases Sample decreases Reserve development 2019 2018 2017 Prior 2019 2018 2017 Prior 10.0 % $ 5.0 % 2.5 % 2.5 % (10.0)% (5.0)% (2.5)% (2.5)% ($ in thousands) 178,986 $ 122,102 106,508 178,986 122,102 106,508 159,932 $ (17,899) $ 90,707 59,726 79,901 159,932 90,707 59,726 79,901 (6,105) (2,663) (1,998) 17,899 6,105 2,663 1,998 (14,140) (4,823) (2,104) (1,578) 14,140 4,823 2,104 1,578 The amount by which estimated losses differ from those originally reported for a period is known as "development." Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed. 57 Table of Contents During the year ended December 31, 2019, our net incurred losses for accident years 2018 and prior developed favorably by $9.4 million. This favorable development included $13.0 million for the 2018 accident year and $1.6 million for the 2017 accident year. This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $5.2 million for accident years 2015 and prior. The unfavorable development was primarily attributable to the other liability occurrence statutory line of business. This adverse development largely resulted from management’s decision to lengthen the actuarial loss development factors in certain lines to provide for emergence of reported losses over a longer period of time, which added a modest amount of conservatism to the Company’s IBNR reserves. During the year ended December 31, 2018, our net incurred losses for accident years 2017 and prior developed favorably by $7.0 million. This favorable development included $6.8 million for the 2017 accident year and $3.8 million for the 2016 accident year. This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $3.6 million for accident years 2015 and prior. The unfavorable development was primarily attributable to the other liability occurrence statutory line of business. During the year ended December 31, 2017, our net incurred losses for accident years 2016 and prior developed favorably by $11.3 million. This favorable development included $9.4 million for the 2016 accident year and $6.0 million of favorable development for accident years 2015 and 2014. The favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $4.1 million for the 2011 through 2013 accident years. The unfavorable development was primarily attributable to the other liability occurrence line of business. Investments Fair value measurements Like other accounting estimates, fair value measurements may be based on subjective information and generally involve uncertainty and judgment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 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 described below: 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. When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 and 2) and unobservable (Level 3). The use of valuation methodologies may require a significant amount of judgment. During periods of financial market disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent or market data becomes less observable. We review the fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities. 58 Table of Contents Fair values of our investment portfolio are estimated using unadjusted prices obtained by our investment manager from nationally recognized third-party pricing services, where available. For securities where we are unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from our investment manager. We perform several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2019, including (1) obtaining and reviewing the internal control report from our investment manager that obtain fair values from third party pricing services, (2) discussing with our investment manager their process for reviewing and validating pricing obtained from outside pricing services and (3) reviewing the security pricing received from our investment manager and monitoring changes in unrealized gains and losses at the individual security level. Investment securities are subject to fluctuations in fair value due to changes in issuer-specific circumstances, such as credit rating, and changes in industry- specific circumstances, such as movements in credit spreads based on the market’s perception of industry risks. In addition, fixed maturities are subject to fluctuations in fair value due to changes in interest rates. As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security. Impairment Under current accounting guidance, changes in the fair value of investments classified as available-for-sale are not recognized as income during the period, but rather are recognized as a separate component of stockholders’ equity until realized. On a quarterly basis, we review all available-for-sale securities with unrealized losses on a quarterly basis to assess whether the decline in the securities’ fair value is deemed to be other-than-temporary. The determination that an investment has incurred an other-than-temporary loss in value requires judgment, and we consider a number factors in completing our impairment review, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For fixed maturities, we consider whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security before recovery, or have the ability to recover all amounts outstanding when contractually due. Prior to the adoption of ASU 2016-01, for equity securities, we evaluated the near-term prospects of those investments in relation to the severity and duration of the impairment and, we considered our ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery. For fixed maturities where we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net loss based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed-maturity security below its amortized cost is considered to be other-than-temporary based upon other considerations, we compare the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the other-than-temporary impairment and is recognized in net loss, resulting in a new cost basis for the security. Any remaining decline in fair value represents the noncredit portion of the other-than-temporary impairment and is recognized in other comprehensive loss. Prior to the adoption of ASU 2016-01, for equity securities, a decline in fair value that was considered to be other-than-temporary was recognized in net loss based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. When assessing whether we intend to sell a fixed-maturity security, or if it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost, we evaluate facts and circumstances including, but not limited to, decisions to reposition the investment portfolio and potential sales of investments to meet cash flow needs. The day-to-day management of our investment portfolio is outsourced to a third-party investment manager. For securities with unrealized losses, our investment manager may believe that the preferred course of action is to hold those securities until such losses are recovered. However, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss based upon a change in the market and other factors described above. Our investment manager notifies us of rating agency downgrades of securities in their portfolios as well as any potential investment valuation issues at the end of each quarter. Our investment manager is also required to notify us of, and receive approval for, any other-than-temporary impairments it has identified. For the year ended December 31, 2019, 59 Table of Contents there were no other-than-temporary impairments recognized. See Note 2 of the notes to the consolidated financial statements for further discussion regarding our investments. Deferred income taxes We record deferred income taxes as assets or liabilities on our balance sheet to reflect the net tax effect of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred tax assets and liabilities are measured by applying enacted tax rates in effect for the years in which such differences are expected to reverse. Our deferred tax assets result from temporary differences primarily attributable to loss reserves and unearned premium reserves. Our deferred tax liabilities result primarily from deferred acquisition costs, the transition adjustment for loss reserve discounting, resulting from the enactment of the TCJA, and unrealized gains in the investment portfolio. We review the need for a valuation allowance related to our deferred tax assets each quarter. We reduce our deferred tax assets by a valuation allowance when we determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment of whether or not a valuation allowance is needed requires us to use significant judgment. See Note 6 of the notes to the consolidated financial statements for further discussion regarding our deferred tax assets and liabilities. Reinsurance We enter into reinsurance contracts to limit our exposure to potential large losses and to provide additional capacity for growth. Reinsurance refers to an arrangement in which a company called a reinsurer agrees in a contract (often referred to as a treaty) to assume specified risks written by an insurance company (known as a ceding company) by paying the insurance company all or a portion of the insurance company's losses arising under specified classes of insurance policies in return for a share in premiums. Reinsurance recoverables recorded on insurance losses ceded under reinsurance contracts are subject to judgments and uncertainties similar to those involved in estimating gross loss reserves. In addition to these uncertainties, our reinsurance recoverables may prove uncollectible if the reinsurers are unable or unwilling to perform under the reinsurance contracts. In establishing our reinsurance allowance for amounts deemed uncollectible, we evaluate the financial condition of our reinsurers and monitor concentration of credit risk arising from our exposure to individual reinsurers. To determine if an allowance is necessary, we consider, among other factors, published financial information, reports from rating agencies, payment history, collateral held and our legal right to offset balances recoverable against balances we may owe. Our reinsurance allowance for doubtful accounts is subject to uncertainty and volatility due to the time lag involved in collecting amounts recoverable from reinsurers. Over the period of time that losses occur, reinsurers are billed and amounts are ultimately collected, economic conditions, as well as the operational and financial performance of particular reinsurers may change and these changes may affect the reinsurers’ willingness and ability to meet their contractual obligations to us. It is difficult to fully evaluate the impact of major catastrophic events on the financial stability of reinsurers, as well as the access to capital that reinsurers may have when such events occur. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear the collection risk if any reinsurer fails to meet its obligations under the reinsurance contracts. We target reinsurers with A.M. Best financial strength ratings of "A" (Excellent) or better. Based on our evaluation of the factors discussed above, we believe all of our recoverables are collectible and, therefore, no allowance for uncollectible reinsurance was provided for at December 31, 2019. Recent Accounting Pronouncements Refer to Note 1 – "Summary of significant accounting policies" of the Notes to Consolidated Financial Statements for further discussion. 60 Table of Contents Item 7A. 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. The primary components of market risk affecting us are credit risk, interest rate risk, and equity rate risk. We do not have significant exposure to foreign currency exchange rate risk or commodity risk. Credit risk Credit risk is the potential loss resulting from adverse changes in an issuer's ability to repay its debt obligations. We have exposure to credit risk as a holder of fixed-maturity investments. Our risk management strategy and investment policy are to primarily invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. At December 31, 2019, our fixed-maturity portfolio, excluding cash equivalents, had an average rating of "AA," with approximately 89.0% of securities in that portfolio rated "A" or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2019, approximately 0.7% of our fixed-maturity portfolio, excluding cash equivalents, was unrated or rated below investment grade. We monitor the financial condition of all of the issuers of fixed-maturity securities in our portfolio. In addition, we are subject to credit risk with respect to our third-party reinsurers. Although our third-party reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers that have an A.M. Best rating of "A" (Excellent) or better at the time we enter into the agreement and by performing, along with our reinsurance broker, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit. Interest rate risk Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed-maturity securities. Fluctuations in interest rates have a direct effect on the market valuation of these securities. When market interest rates rise, the fair value of our fixed-maturity securities decreases. Conversely, as interest rates fall, the fair value of our fixed-maturity securities increases. We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to the duration of our reserves. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows. We set duration targets for our fixed income investment portfolios after consideration of the estimated duration of our liabilities and other factors. The effective weighted average duration of the portfolio, including cash equivalents, was 4.3 years as of December 31, 2019. 61 Table of Contents We had fixed-maturity securities with a fair value of $729.5 million at December 31, 2019 and $510.3 million at December 31, 2018 that were subject to interest rate risk. The table below illustrates the sensitivity of the fair value of our fixed-maturity securities to selected hypothetical changes in interest rates as of December 31, 2019 and 2018. December 31, 2019 December 31, 2018 Estimated Fair Value Estimated Change in Fair Value Estimated % Increase (Decrease) in Fair Value Estimated Fair Value Estimated Change in Fair Value Estimated % Increase (Decrease) in Fair Value 200 basis points increase 100 basis points increase No change 100 basis points decrease 200 basis points decrease $ $ $ $ $ 661,569 $ 695,368 $ 729,532 $ 761,506 $ 785,961 $ (56,429) (31,974) — 34,164 67,963 ($ in thousands) (7.7)% $ (4.4)% $ — % $ 4.7 % $ 9.3 % $ 468,275 $ 488,855 $ 510,251 $ 531,291 $ 550,441 $ (41,976) (21,396) — 21,040 40,190 (8.2)% (4.2)% — % 4.1 % 7.9 % Changes in interest rates will have an immediate effect on comprehensive income and stockholders’ equity but will not ordinarily have an immediate effect on net income. Actual results may differ from the hypothetical change in market rates assumed in this disclosure. This sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical losses in fair value. Equity risk Equity risk represents the potential economic losses due to adverse changes in equity security prices. A portion of our portfolio is invested in equity securities, which have historically produced higher long-term returns relative to fixed-maturity investments. As of December 31, 2019, approximately 8.6% of the fair value of our investment portfolio (including cash and cash equivalents) was invested in equity securities. Our equity securities are comprised of exchange traded funds and nonredeemable preferred stock. We manage equity price risk of our equity portfolio primarily through asset allocation techniques. 62 Table of Contents Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Audited Consolidated Financial Statements Management's Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant - Parent Company Only Schedule V - Valuation and Qualifying Accounts Page 64 64 68 69 70 71 72 100 101 106 Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements or notes thereto or elsewhere herein. 63 Table of Contents Management's Report on Internal Control Over Financial Reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management does not expect that its internal control over financial reporting will prevent all errors and all 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 are met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Based on our evaluation, we have concluded that we maintained effective internal control over financial reporting as of December 31, 2019. KPMG LLP, our independent registered public accounting firm, has issued an opinion on the effectiveness of the Company's internal control over financial reporting, as stated in their report which is included herein. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Kinsale Capital Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Kinsale Capital Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedules I, II and V (collectively, the consolidated financial statements), and our report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying 64 Table of Contents Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Richmond, Virginia March 2, 2020 65 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Kinsale Capital Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Kinsale Capital Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedules I, II, and V (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Notes 1 and 14 to the consolidated financial statements, the Company changed its method of accounting for recognizing changes in unrealized gains and losses in fair value of equity investments in 2018 due to the adoption of Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 66 Table of Contents Assessment of the estimation of reserves for unpaid losses and loss adjustment expenses As described Notes 1 and 7 to the consolidated financial statements, the Company records reserves for unpaid losses and loss adjustment expenses (loss reserves), which represent the Company’s best estimate of ultimate unpaid cost of all reported and unreported losses and loss adjustment expenses incurred prior to the financial statement date. This estimate is based on an actuarial method that uses the Company’s expected loss ratios, expected reporting patterns for losses based on industry data, and the Company’s actual reported losses and loss adjustment expenses. All estimates are regularly reviewed and, as experience develops and new information becomes known, the loss reserves are adjusted as necessary. As of December 31, 2019, the Company recorded $460.1 million of reserves for unpaid losses and loss adjustment expenses. We identified the assessment of the estimation of loss reserves as a critical audit matter. The process of evaluating the Company’s best estimate of loss reserves involved significant auditor judgment due to the inherent uncertainty in the ultimate amount and timing of claim payments. The evaluation of the ultimate amount and timing of claims payments required specialized skills and knowledge. In addition, the evaluation of the ultimate expected loss assumptions required subjective auditor judgment due to the Company’s limited historical loss data and, therefore, also involved a consideration of industry data. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s reserving process, including controls over the actuarial method, and certain assumptions used to derive the Company’s best estimate of loss reserves and the comparison of the Company’s best estimate to the annual independent actuarial reserve estimate performed by an external consulting actuary. We involved actuarial professionals with specialized skills and knowledge, who assisted in: • Assessing the actuarial methodology used by the Company for consistency with generally accepted actuarial standards and practices; • Comparing certain assumptions about future claim reporting amounts and payment patterns to historical Company data and industry data, such as loss development trends of similar insurance products; • Performing independent estimates of loss reserves for all product lines, using a combination of the Company’s underlying historical claims data and industry data; • Developing an independent range of loss reserves using both Company and industry data with respect to future claim reporting amounts and payment patterns and prior year independent selected loss rates; and • Assessing the position of the Company’s recorded loss reserves within this independent range in the current year and comparing its relative position in the prior year. /s/ KPMG LLP We have served as the Company’s auditor since 2009. Richmond, Virginia March 2, 2020 67 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets Assets Fixed-maturity securities available-for-sale, at fair value (amortized cost: $714,817 in 2019; $514,237 in 2018) $ Equity securities, at fair value (cost: $64,245 in 2019; $56,051 in 2018) Total investments Cash and cash equivalents Investment income due and accrued Premiums receivable, net Reinsurance recoverables Ceded unearned premiums Deferred policy acquisition costs, net of ceding commissions Intangible assets Deferred income tax asset, net Other assets Total assets Liabilities and Stockholders' Equity Reserves for unpaid losses and loss adjustment expenses Unearned premiums Payable to reinsurers Accounts payable and accrued expenses Credit facility Other liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Common stock, $0.01 par value, 400,000,000 shares authorized, 22,205,665 shares issued and outstanding as of December 31, 2019; 21,241,504 shares issued and outstanding as of December 31, 2018 $ $ Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. December 31, 2019 2018 (in thousands, except share and per share data) 729,532 $ 78,294 807,826 100,408 4,743 34,483 72,574 16,118 23,564 3,538 3,374 23,922 1,090,550 $ 460,058 $ 187,374 7,151 12,366 16,744 977 684,670 222 229,229 162,911 13,518 405,880 510,251 57,711 567,962 75,089 3,783 24,253 56,788 16,072 14,801 3,538 7,176 3,601 773,063 369,152 128,250 4,565 7,090 — 20 509,077 212 158,485 106,545 (1,256) 263,986 773,063 $ 1,090,550 $ 68 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income Revenues: Gross written premiums Ceded written premiums Net written premiums Change in unearned premiums Net earned premiums Net investment income Change in fair value of equity securities Net realized investment gains Other income Total revenues Expenses: Losses and loss adjustment expenses Underwriting, acquisition and insurance expenses Other expenses Total expenses Income before income taxes Income tax expense Net income Other comprehensive income (loss): Change in unrealized gains (losses) on available-for-sale investments, net of taxes of $3,927 in 2019, $(1,453) in 2018, and $3,047 in 2017 Total comprehensive income Earnings per share: Basic Diluted Weighted-average shares outstanding: Basic Diluted Year Ended December 31, 2019 2018 2017 (in thousands, except per share data) $ 389,694 $ 275,538 $ (47,633) 342,061 (59,080) 282,981 20,133 12,389 359 26 (39,924) 235,614 (22,926) 212,688 15,688 (6,555) 281 12 223,191 (33,719) 189,472 (13,419) 176,053 10,569 — 151 3 315,888 222,114 186,776 169,563 70,217 57 239,837 76,051 12,735 63,316 128,041 53,425 168 181,634 40,480 6,693 33,787 14,774 78,090 $ (5,469) 28,318 $ 2.94 $ 2.86 $ 21,528 22,136 1.60 $ 1.56 $ 21,090 21,685 103,680 44,146 429 148,255 38,521 13,620 24,901 6,384 31,285 1.19 1.16 20,992 21,498 $ $ $ See accompanying notes to consolidated financial statements. 69 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Balance at December 31, 2016 Issuance of common stock under stock-based compensation plan Stock-based compensation expense Dividends declared Other comprehensive income, net of income taxes Net income Balance at December 31, 2017 Cumulative effect adjustment - unrealized gains on equity securities, net of tax Balance at December 31, 2017, as adjusted Reclassification of tax effect of TCJA Issuance of common stock under stock-based compensation plan Stock-based compensation expense Dividends declared Other comprehensive loss, net of income taxes Net income Balance at December 31, 2018 Issuance of common stock, net of issuance costs Issuance of common stock under stock-based compensation plan Stock-based compensation expense Restricted shares withheld for taxes Dividends declared Other comprehensive income, net of income taxes Net income Balance at December 31, 2019 Shares of Common Stock Common Stock Additional Paid- in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity 20,969 $ 210 $ 153,353 $ 53,640 $ 3,011 $ 210,214 ( in thousands) 67 — — — — 21,036 — 21,036 — 206 — — — — 21,242 742 229 — (7) — — — — — — — — 210 — 210 — 2 — — — — 212 8 2 — — — — — 22,206 $ 222 $ 1,077 652 — — — 155,082 — 155,082 — 1,806 1,597 — — — 158,485 65,871 2,748 2,742 (617) — — — 229,229 $ — — (5,039) — 24,901 73,502 6,490 79,992 (1,308) — — (5,926) — 33,787 106,545 — — — — (6,950) — 63,316 162,911 $ — — — 6,384 — 9,395 (6,490) 2,905 1,308 — — — (5,469) — (1,256) — — — — — 14,774 — 13,518 $ 1,077 652 (5,039) 6,384 24,901 238,189 — 238,189 — 1,808 1,597 (5,926) (5,469) 33,787 263,986 65,879 2,750 2,742 (617) (6,950) 14,774 63,316 405,880 See accompanying notes to consolidated financial statements. 70 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Net unrealized (gains) losses on equity securities Net realized investment gains Deferred tax (benefit) expense Depreciation and amortization Stock compensation expense Change in operating assets and liabilities: Investment income due and accrued Premiums receivable, net Reserves for unpaid loss and loss adjustment expenses Unearned premiums Reinsurance balances, net Funds held for reinsurers Deferred policy acquisition costs Income taxes payable Accounts payable and accrued expenses Other Net cash provided by operating activities Investing activities: Purchase of property and equipment Purchases – fixed-maturity securities Purchases – equity securities Sales – fixed-maturity securities Sales – equity securities Maturities and calls – fixed-maturity securities Net cash used in investing activities Financing activities: Proceeds from issuance of common stock, net of issuance costs Proceeds from credit facility Debt issuance costs Payroll taxes withheld and remitted on share-based payments Common stock issued, stock options exercised Dividends paid Payments on capital lease Net cash provided by (used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes to consolidated financial statements. Year Ended December 31, 2019 2018 (in thousands) 2017 $ 63,316 $ 33,787 $ 24,901 (12,389) (359) (125) 682 2,742 (960) (10,230) 90,906 59,124 (13,246) — (8,763) 1,221 2,972 3,466 178,357 (19,622) (306,203) (29,887) 35,526 21,459 67,934 (230,793) 65,879 17,300 (628) (617) 2,750 (6,929) — 77,755 25,319 75,089 6,555 (281) (3,230) 631 1,597 (706) (4,466) 53,435 25,140 (8,070) — (3,026) 18 464 2,132 103,980 (1,273) (194,989) (12,656) 10,427 2,429 89,522 (106,540) — — — — 1,808 (5,906) — (4,098) (6,658) 81,747 $ 100,408 $ 75,089 $ 71 — (151) 1,065 515 652 (784) (2,803) 50,916 13,766 28,081 (36,497) (1,625) (922) (2,299) 2,583 77,398 (179) (111,580) (31,608) 12,040 — 88,895 (42,432) — — — — 1,077 (5,039) (9) (3,971) 30,995 50,752 81,747 Table of Contents Kinsale Capital Group, Inc. and subsidiaries Notes to consolidated financial statements Description of business Kinsale Capital Group, Inc., an insurance holding company, is a Delaware corporation that was formed in 2009 and conducts its operations through its wholly-owned subsidiaries. Kinsale Capital Group Inc. writes excess and surplus lines insurance on a non-admitted basis principally through its insurance subsidiary, Kinsale Insurance Company ("Kinsale Insurance"), which is authorized to write business in 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. Kinsale Capital Group, Inc. also markets certain products through its subsidiary, Aspera Insurance Services, Inc. ("Aspera"), an insurance broker. 1. Summary of significant accounting policies Principles of consolidation The accompanying consolidated financial statements include the accounts of Kinsale Capital Group, Inc. and its wholly-owned subsidiaries (referred to as "Kinsale" or, with its subsidiaries, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation. Use of estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management periodically reviews its estimates and assumptions. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, allowance for doubtful accounts and uncollectible reinsurance, fair value of investments, as well as evaluating the investment portfolio for other-than-temporary declines in fair value. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Short-term investments Short-term investments are carried at cost, which approximates fair value. Short-term investments have maturities greater than three months but less than one year at the date of purchase. There were no short-term investments at December 31, 2019 or December 31, 2018. Fixed-maturity and equity securities Fixed-maturity securities are classified as available-for-sale and reported at fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate component of comprehensive income and stockholders’ equity, net of deferred income taxes. 72 Table of Contents Equity securities are reported at fair value. Prior to the adoption of new accounting guidance effective January 1, 2018, equity securities were classified as available-for-sale and, similar to fixed-maturity securities, unrealized gains and losses were recorded as a separate component of comprehensive income and stockholders’ equity, net of deferred income taxes. In accordance with new accounting guidance, the available-for-sale classification was eliminated for equity securities and changes in unrealized gains and losses in fair value of these investments are recognized in net income. The Company regularly evaluates its available-for-sale securities using both quantitative and qualitative criteria to determine impairment losses for other- than-temporary declines in the fair value of the investments. See Note 2 for further discussion of other-than-temporary impairments ("OTTI"). Interest on fixed-maturity securities is credited to earnings as it accrues. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities, or to the earliest call date. Dividends on equity securities are included in earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the trade date. Reinsurance Reinsurance premiums, commissions, and ceded unearned premiums on reinsured business are accounted for on a basis consistent with that used in accounting for the original policies issued and the terms of the reinsurance contracts. The Company receives ceding commissions in accordance with certain reinsurance treaties. The ceding commissions are capitalized and amortized as a reduction of underwriting, acquisition and insurance expenses. Reinsurance recoverables represent paid losses and loss adjustment expenses and reserves for unpaid losses and loss adjustment expenses ceded to reinsurers that are subject to reimbursement under reinsurance treaties. The method for determining reinsurance recoverables for unpaid losses and loss adjustment expenses involves reviewing actuarial estimates of gross unpaid losses and loss adjustment expenses to determine the Company's ability to cede unpaid losses and loss adjustment expenses under the Company's existing reinsurance contracts. This method is continually reviewed and updated and any resulting adjustments are reflected in earnings in the period identified. See Note 8 for a further discussion of the Company's reinsurance program. Premiums receivable, net Premiums receivable balances are carried at face value, net of any allowance for doubtful accounts. The allowance for doubtful accounts represents an estimate of amounts considered uncollectible based on the Company’s assessment of the collectability of receivables that are past due. The Company recorded an allowance for doubtful accounts of $2.7 million and $2.6 million at December 31, 2019 and 2018, respectively, and believes that all other amounts due are collectible. Deferred policy acquisition costs, net of ceding commissions The Company defers commissions, net of ceding commissions, and certain other costs that are directly related to the successful acquisition of insurance contracts. All eligible costs are capitalized and charged to expense in proportion to premium earned over the estimated policy life. To the extent that unearned premiums on existing policies are not adequate to cover the related costs and expenses, referred to as a premium deficiency, deferred policy acquisition costs are charged to earnings. The Company considers anticipated investment income in determining whether a premium deficiency exists. Property and equipment, net Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from 7 to 10 years for furniture and equipment, 3 to 7 years for electronic data processing hardware and software, and from 2 to 6 years for leasehold improvements, which is the shorter of the estimated useful life or the lease term. 73 Table of Contents Property and equipment are included in "other assets" in the accompanying consolidated balance sheets and consists of the following: Equipment Software Furniture and fixtures Leasehold improvements Construction in progress - corporate headquarters Accumulated depreciation Total property and equipment, net December 31, 2019 2018 $ (in thousands) 2,353 $ 2,356 1,025 984 19,789 26,507 (3,873) $ 22,634 $ 1,950 1,031 1,019 983 318 5,301 (3,191) 2,110 In January 2019, the Company purchased land for $2.5 million in Henrico County, Virginia for the development of its new corporate headquarters and is currently targeting a third quarter 2020 completion date. The project is estimated to cost approximately $50 million to $55 million, which will be funded through a combination of existing cash flows from operations and draw down on the credit facility. See Note 11 for further discussion. Intangible assets Intangible assets are recorded at fair value at the date of acquisition. The Company's intangible assets are comprised solely of indefinite-lived intangible assets, which arose from regulatory approvals granted by the various state insurance departments to write insurance business in the respective states on a non- admitted basis. In accordance with U.S. GAAP, amortization of indefinite-lived intangible assets is not permitted. Indefinite-lived intangible assets are tested for impairment during the fourth quarter on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. There were no impairments recognized in 2019, 2018, or 2017. In addition, as of December 31, 2019, no triggering events occurred that suggested an updated review was necessary. Reserves for unpaid losses and loss adjustment expenses Reserves for unpaid losses and loss adjustment expenses represent management's best estimate of ultimate unpaid cost of all reported and unreported losses and loss adjustment expenses incurred prior to the financial statement date. The estimates are based on an actuarial method that uses management’s initial expected loss ratios, expected reporting patterns for losses based on industry data and the Company’s actual reported losses and loss adjustment expenses. All estimates are regularly reviewed and, as experience develops and new information becomes known, the reserves for unpaid losses and loss adjustment expenses are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are determined. Although management believes that the reserves for losses and loss adjustment expenses are reasonable, due to the inherent uncertainty in estimating reserves for unpaid losses and loss adjustment expenses, it is possible that the Company’s actual incurred losses and loss adjustment expenses will not develop in a manner consistent with the assumptions inherent in the determination of these reserves. If actual liabilities exceed recorded amounts, there will be an increase to the Company’s reserves resulting in a reduction in net income and stockholders’ equity in the period in which the deficiency is identified. Furthermore, management may determine that recorded reserves are more than adequate to cover expected losses which will result in a reduction to the reserves. The Company believes that the reserves for unpaid losses and loss adjustment expenses at December 31, 2019 and 2018 are adequate and represent a reasonable estimate of the Company's future obligations. See Note 7 for a further discussion of reserves for unpaid losses and loss adjustment expenses. Revenue recognition Premiums are recognized as revenue ratably over the term of the insurance contracts, net of ceded reinsurance. Unearned premiums are calculated on a daily pro rata basis. 74 Table of Contents Income taxes Deferred income tax assets and liabilities are determined based on the difference between the recorded amounts and the tax bases of assets and liabilities, using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded when it is more likely than not that some portion, or all, of the deferred tax assets will not be realizable. Management evaluates the realizability of the deferred tax assets and assesses the need for any valuation allowance adjustment. Valuation allowances on deferred tax assets are estimated based on the Company's assessment of the realizability of such amounts. The Company provides for uncertain tax positions, and the related interest and penalties, based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the anticipated tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense. The Company uses the portfolio approach to release stranded tax effects in accumulated other comprehensive income ("AOCI") related to its available-for- sale fixed-maturity securities. Under this approach, stranded tax effects remaining in AOCI are released only when the entire portfolio of the available-for- sale fixed-maturity securities are liquidated, sold or extinguished. Commitments and contingencies Liabilities for loss contingencies, arising from noninsurance policy claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Fair value of financial instruments The fair values of certain financial instruments are determined based on the fair value hierarchy. U.S. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value. The following was considered in the estimation of fair value for each class of financial instruments for which it was practicable to estimate that value. The Company’s investment manager uses independent pricing vendors to estimate the fair value of fixed-maturity securities and the Company’s management reviews these prices for reasonableness. U.S. Treasury Securities that have quoted prices in active markets are included in the amounts disclosed as Level 1. For other fixed-maturity securities, 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 fixed-maturity investments are included in the amounts disclosed as Level 2. For those bonds where significant inputs are unobservable, Level 3 inputs, the Company's investment manager obtains valuations from pricing vendors using the market approach and income approach valuation techniques. For equity securities, the Company’s investment manager uses prices from independent pricing vendors to estimate fair value. The fair value estimates of exchange traded funds are based on quoted prices in an active market and are disclosed as Level 1. The fair value estimates of preferred stock are based on observable market data and, as a result, are disclosed as Level 2. Fair value disclosures for investments are included in Notes 2 and 3. Stock-based compensation Stock-based compensation is expensed based upon the estimated fair value of employee stock awards. Compensation cost for awards of equity instruments to employees is measured based on the grant-date fair value of those awards and compensation expense is recognized over the service period that the awards vest. Forfeitures of stock-based compensation 75 Table of Contents awards are recognized as they occur. See Note 9 for further discussion and related disclosures regarding stock-based compensation. Recently adopted accounting pronouncements ASU 2016-02, Leases (Topic 842) In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" to improve the financial reporting of leasing transactions. Under this ASU, lessees will recognize a right-of-use ("ROU") asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of 12 months or less. The lessee’s income statement treatment for leases will vary depending on the nature and classification of the lease. Effective January 1, 2019, the Company adopted this ASU and recorded a ROU asset and corresponding lease liability of approximately $0.9 million. The ROU and operating lease liability are included in "other assets" and "other liabilities," respectively, in the accompanying consolidated balance sheet. The Company elected the package of practical expedients permitted under the adoption of the new standard, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new standard. This election kept the existing agreements as operating leases. The Company also elected the practical expedient allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease components as a single lease component. In addition, the Company has implemented the necessary internal controls relating to the adoption of the standard. ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities In March 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. Effective January 1, 2019, the Company adopted ASU 2017-08 using a modified retrospective approach. The adoption of ASU 2017-08 did not have a material impact on the Company's financial statements. Prospective accounting pronouncements ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) On June 16, 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" to provide more useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. The FASB has issued an additional ASUs on Topic 326 that do not change the core principle of the guidance in ASU 2016-13 but clarify or certain aspects of it. This ASU and the additional ASUs on Topic 326 are effective for annual and interim reporting periods beginning after December 15, 2019. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The adoption of this ASU is not expected to have a material impact on the Company's financial statements. ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract On August 29, 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up and other up-front costs incurred in a cloud computing arrangement hosted by the vendor. The new guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The new guidance also requires the entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. This guidance is 76 Table of Contents effective for reporting periods beginning after December 15, 2019. The adoption of the guidance is not expected to have a material effect on the Company’s financial statements. There are no other prospective accounting standards which, upon their effective date, would have a material impact on the Company's consolidated financial statements. 2. Investments Available-for-sale investments The following tables summarize the Company’s available-for-sale investments: Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value December 31, 2019 (in thousands) Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ 110 $ 2 $ — $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total available-for-sale investments 166,312 180,287 195,750 172,358 7,542 4,736 2,930 1,819 (961) (255) (710) (388) $ 714,817 $ 17,029 $ (2,314) $ 112 172,893 184,768 197,970 173,789 729,532 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value December 31, 2018 (in thousands) Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ 610 $ 2 $ (1) $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total available-for-sale investments 153,884 97,889 151,137 110,717 2,010 264 252 354 (1,294) (1,401) (1,522) (2,650) $ 514,237 $ 2,882 $ (6,868) $ 611 154,600 96,752 149,867 108,421 510,251 Available-for-sale investments in a loss position The Company regularly reviews all its available-for-sale investments with unrealized losses to assess whether the declines in the securities’ fair value are deemed to be an other-than-temporary impairment ("OTTI"). The Company considers a number of factors in completing its OTTI review, including the length of time and the extent to which a security's fair value has been below cost and the financial condition of an issuer. In addition to specific issuer information, the Company also evaluates the current market and interest rate environment. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an OTTI, but rather a temporary decline in fair value. 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 the ability to recover all amounts outstanding 77 Table of Contents when contractually due. When assessing whether it intends to sell a fixed-maturity security or if it is likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. For fixed-maturity securities where a decline in fair value is considered to be other-than-temporary and the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, an impairment is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed-maturity security below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the OTTI, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the noncredit portion of the OTTI, which is recognized in other comprehensive income The following tables summarize gross unrealized losses and fair value for available-for-sale securities by length of time that the securities have continuously been in an unrealized loss position: Less than 12 Months December 31, 2019 12 Months or Longer Total Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses (in thousands) Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ — $ — $ — $ — $ — $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities 28,997 22,409 37,723 36,986 (961) (251) (303) (148) 254 1,509 46,623 24,815 — (4) (407) (240) 29,251 23,918 84,346 61,801 Total available-for-sale investments $ 126,115 $ (1,663) $ 73,201 $ (651) $ 199,316 $ — (961) (255) (710) (388) (2,314) At December 31, 2019, the Company held 137 fixed-maturity securities with a total estimated fair value of $199.3 million and gross unrealized losses of $2.3 million. Of those securities, 51 were in a continuous unrealized loss position for greater than one year. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. At December 31, 2019, 89% of the Company’s fixed-maturity securities were rated "A-" or better and all of Company's fixed-maturity securities made expected coupon payments under the contractual terms of the securities. Based on its review, the Company concluded that there were no other-than-temporary impairments from fixed-maturity securities with unrealized losses for the year ended December 31, 2019. 78 Table of Contents Less than 12 Months December 31, 2018 12 Months or Longer Total Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses (in thousands) Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ — $ — $ 499 $ (1) $ 499 $ (1) Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities 42,718 62,045 93,247 24,571 (440) (890) (1,017) (155) 34,326 12,092 25,746 55,638 (854) (511) (505) (2,495) 77,044 74,137 118,993 80,209 Total available-for-sale investments $ 222,581 $ (2,502) $ 128,301 $ (4,366) $ 350,882 $ (1,294) (1,401) (1,522) (2,650) (6,868) At December 31, 2018, the Company held 317 fixed-maturity securities with a total estimated fair value of $350.9 million and gross unrealized losses of $6.9 million. Of these securities, 158 were in a continuous unrealized loss position for greater than one year. Unrealized losses were caused by interest rate changes or other market factors and were not credit specific issues. At December 31, 2018, 86.4% of the Company’s fixed-maturity securities were rated "A-" or better and all of Company's fixed-maturity securities made expected coupon payments under the contractual terms of the securities. Based on its review, the Company concluded that there were no other-than-temporary impairments from the fixed-maturity or equity securities with unrealized losses at December 31, 2018. Contractual maturities of available-for-sale fixed-maturity securities The amortized cost and estimated fair value of available-for-sale fixed-maturity securities at December 31, 2019 are summarized, by contractual maturity, as follows: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities Amortized Cost Estimated Fair Value $ (in thousands) 9,940 $ 115,480 79,235 142,054 195,750 172,358 $ 714,817 $ 9,990 118,611 82,314 146,858 197,970 173,789 729,532 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. 79 Table of Contents Net investment income The following table presents the components of net investment income: Interest: Taxable bonds Municipal bonds (tax exempt) Cash equivalents and short-term investments Dividends on equity securities Gross investment income Investment expenses Net investment income Realized investment gains and losses The following table presents realized investment gains and losses: Fixed-maturity securities: Realized gains Realized losses Net realized gains from fixed-maturity securities Equity securities: Realized gains Realized losses Net realized gains (losses) from equity securities Short-term securities - realized gain Net realized investment gains Change in net unrealized gains (losses) on investments Year Ended December 31, 2019 2018 (in thousands) 2017 $ 14,853 $ 9,474 $ 3,692 842 2,136 21,523 (1,390) 4,298 1,017 2,014 16,803 (1,115) $ 20,133 $ 15,688 $ 6,233 3,619 678 1,041 11,571 (1,002) 10,569 Year Ended December 31, 2019 2018 (in thousands) 2017 $ $ 567 $ (79) 488 556 (688) (132) 3 359 $ 263 $ (17) 246 57 (22) 35 — 281 $ 220 (69) 151 — — — — 151 The change in net unrealized gains for fixed-maturity securities was $18.7 million for the year ended December 31, 2019. The change in net unrealized losses for fixed-maturity securities was $6.9 million for the year ended December 31, 2018. The change in net unrealized gains for fixed-maturity securities was $5.2 million for the year ended December 31, 2017. For the year ended December 31, 2017, the change in net unrealized gains for equity securities was $4.2 million. Insurance – statutory deposits The Company had invested assets with a carrying value of $6.9 million and $6.9 million on deposit with state regulatory authorities at December 31, 2019 and 2018, respectively. 80 Table of Contents 3. Fair value measurements Fair value is estimated for each class of financial instrument for which it was practical to estimate fair value. Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. The three levels of the fair value hierarchy are defined as follows: Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment manager from nationally recognized third- party pricing services, where available. For securities where the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company's investment manager. Management performs several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2019 and 2018, including 1) obtaining and reviewing internal control reports from the Company's investment manager that assess fair values from third party pricing services, 2) discussing with the Company's investment manager 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 manager 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. 81 Table of Contents The following tables present the balances of assets measured at fair value on a recurring basis as of December 31, 2019 and 2018, by level within the fair value hierarchy. Level 1 Level 2 Level 3 Total December 31, 2019 (in thousands) Assets Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ 112 $ — $ — $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities — — — — 112 172,893 184,768 197,970 173,789 729,420 — — — — — — — — — $ 112 172,893 184,768 197,970 173,789 729,532 54,463 23,831 78,294 807,826 54,463 — 54,463 54,575 $ — 23,831 23,831 753,251 $ $ Level 1 Level 2 Level 3 Total December 31, 2018 (in thousands) Equity securities: Exchange traded funds Nonredeemable preferred stock Total equity securities Total Assets Fixed maturities: U.S. Treasury securities and obligations of U.S. government agencies $ 611 $ — $ — $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities — — — — 611 154,600 96,752 149,867 108,421 509,640 Equity securities: Exchange traded funds Nonredeemable preferred stock Total equity securities Total 38,987 — 38,987 39,598 $ — 18,724 18,724 528,364 $ $ — — — — — — — — — $ 611 154,600 96,752 149,867 108,421 510,251 38,987 18,724 57,711 567,962 There were no transfers into or out of Level 1 and Level 2 during the years ended December 31, 2019 or 2018. There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018. The carrying value of cash equivalents approximates its fair value at December 31, 2019, due to the short-term maturities of these assets. In addition, the estimated fair value of the Credit Facility approximated its carrying value as of December 31, 2019. See Note 11 for further information regarding the Credit Facility. 82 Table of Contents 4. Deferred policy acquisition costs The following table presents the amounts of policy acquisition costs deferred and amortized for the years ended: Balance, beginning of year Policy acquisition costs deferred: Direct commissions Ceding commissions Other underwriting and policy acquisition costs Policy acquisition costs deferred Amortization of net policy acquisition costs Balance, end of year Year Ended December 31, 2019 2018 (in thousands) 2017 $ 14,801 $ 11,775 $ 10,150 56,841 (12,373) 3,727 48,195 (39,432) 40,546 (11,239) 3,141 32,448 (29,422) $ 23,564 $ 14,801 $ 32,927 (9,984) 2,827 25,770 (24,145) 11,775 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. Underwriting, acquisition and insurance expenses Underwriting, acquisition and insurance expenses consist of the following: Underwriting, acquisition and insurance expenses incurred: Direct commissions Ceding commissions Other operating expenses Total Year Ended December 31, 2019 2018 2017 (in thousands) $ $ 48,382 $ 36,885 $ (12,347) 34,182 (10,448) 26,988 70,217 $ 53,425 $ 31,001 (9,799) 22,944 44,146 Other operating expenses within underwriting, acquisition and insurance expenses included salaries, employee benefits and bonus expense of $27.8 million, $19.7 million and $17.7 million, for the years ended December 31, 2019, 2018 and 2017, respectively. 6. Income taxes The Company’s subsidiaries file a consolidated U.S. federal income tax return. Under a tax sharing agreement, KCGI collects from or refunds to its subsidiaries the amount of taxes determined as if KCGI and the subsidiaries filed separate returns. The Company is no longer subject to income tax examination by tax authorities for the years ended before January 1, 2016. 83 Table of Contents Income tax expense includes the following components for the years ending December 31, 2019, 2018 and 2017: Current federal income tax expense Deferred federal income tax (benefit) expense Income tax expense Year Ended December 31, 2019 2018 (in thousands) 2017 $ $ 12,860 $ (125) 12,735 $ 9,923 $ (3,230) 6,693 $ 12,555 1,065 13,620 The Company paid $11.6 million, $9.9 million and $13.5 million in federal income taxes during the years ended December 31, 2019, 2018 and 2017, respectively. Current income taxes payable was $0.4 million at December 31, 2019, and included in "other liabilities" in the accompanying consolidated balance sheets. Current income taxes receivable was $0.8 million at December 31, 2018, and included in "other assets" in the accompanying consolidated balance sheets. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the "TCJA"). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates from 35% to 21%, effective January 1, 2018. U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. Accordingly, the Company remeasured its deferred tax assets and liabilities using enacted tax rates applicable in the years in which the temporary differences were expected to be recovered or paid, which resulted in a $1.9 million increase in income tax expense and a corresponding decrease in net deferred tax assets as of the enactment date. In addition, the TCJA modified the manner in which property and casualty insurance loss reserves were computed for federal income tax purposes. In computing its taxable income, the Company records a deduction for unpaid losses and loss adjustment expenses, which is discounted using interest rates and loss payment patterns prescribed by the U.S. Treasury. The TCJA changed the prescribed interest rates, which are now based on corporate bond yield curves, and extended the applicable time periods for the loss payment pattern period for long-tailed lines of business. The changes were effective for tax years beginning after 2017 with a transition rule that spread the adjustments related to pre-effective-date losses and loss adjustment expenses over the next eight years beginning in 2018. The prevailing federal income tax rate was 21% in 2019 and 2018 and 35% in 2017. The Company’s effective income tax rate on income before income taxes differs from the prevailing federal income tax rate and is summarized as follows: Income tax expense at federal income tax rate $ Stock options exercised Tax-exempt investment income Effect of tax rate change Other Total Year ended December 31, 2019 2018 (in thousands) 2017 15,971 $ (2,411) (577) — (248) 8,501 $ (918) (672) — (218) 13,482 (471) (1,064) 1,915 (242) 13,620 $ 12,735 $ 6,693 $ 84 Table of Contents The significant components of the net deferred tax asset are summarized as follows: Deferred tax assets: Unpaid losses and loss adjustment expenses $ Unearned premiums Organizational costs Stock compensation State operating loss carryforwards Allowance for doubtful accounts Unrealized losses on fixed-maturity securities Other Deferred tax assets before allowance Less: valuation allowance Total deferred tax assets Deferred tax liabilities: Unrealized gains on fixed-maturity securities Unrealized gains on equity securities Deferred policy acquisition costs, net of ceding commissions Intangible assets Transition adjustment for loss reserve discount Other Total deferred tax liabilities Net deferred tax asset $ December 31, 2019 2018 (in thousands) 8,199 $ 7,193 162 765 1,497 570 — 256 18,642 (1,592) 17,050 3,090 2,995 4,949 743 1,537 362 13,676 3,374 $ 6,854 4,711 196 557 708 551 837 196 14,610 (780) 13,830 — 374 3,108 743 2,060 369 6,654 7,176 At December 31, 2019 and 2018, the Company had state net operating loss carryforwards ("NOLS") of $31.6 million and $19.5 million, respectively. The state NOLs are available to offset future taxable income or reduce taxes payable and begin expiring in 2029. Management evaluates the need for a valuation allowance related to its deferred tax assets. At December 31, 2019 and 2018, the Company recorded a tax valuation allowance equal to the state NOLs and the deferred tax assets, net of existing deferred tax liabilities that were expected to reverse in future periods, related to certain state jurisdictions. No other valuation allowances were established against the Company’s deferred tax assets at December 31, 2019 and 2018, as the Company believes that it is more likely than not that the remaining deferred tax assets will be realized given the carry back availability, reversal of existing temporary differences and future taxable income. The Company did not have any uncertain tax positions in 2019 or 2018. Management is not aware of any events that would give rise to any uncertain tax positions. The Company recognized its entire uncertain tax position of $1.0 million in 2017 due to lapse of the statute of limitations. The recognition of the uncertain tax position had no impact on the effective tax rate as it resulted in a decrease of current taxes and an offsetting increase to deferred taxes. 85 Table of Contents 7. Reserves for unpaid losses and loss adjustment expenses The reserves for unpaid losses and loss adjustment expenses represent the Company's estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date. Reserves are estimated using individual case-basis valuations of reported claims and statistical analyses. Case reserves are established for individual claims that have been reported to the Company, typically by the Company's insureds or their brokers. Based on the information provided, case reserves are established by estimating the ultimate losses from the claim, including defense costs associated with the ultimate settlement of the claim. Incurred-but-not-reported ("IBNR") reserves are determined using actuarial methods to estimate losses that have occurred but have not yet been reported to the Company. The incurred Bornhuetter-Ferguson actuarial method ("BF method") is used to arrive at the Company's loss reserve estimates for each line of business. This method estimates the reserves based on the initial expected loss ratio and expected reporting patterns for losses. Because the Company has a limited number of years of loss experience compared to the period over which losses are expected to be reported, the Company uses industry and peer-group data, in addition to its own data, as a basis for selecting its expected reporting patterns. As part of the reserving process, the Company reviews historical data and considers the effect of various factors on claims development patterns including polices written on a "claims made" versus "occurrence" basis. Policies written on a claims made basis provide coverage to the insured only for losses incurred during the coverage period, and only if the claim was reported during a specified reporting period. Policies written on an occurrence basis provide coverage to the insured for liabilities arising from events occurring during the term of the policy, regardless of when a claim is actually made. Accordingly, claims related to policies written on an occurrence basis may arise many years after a policy has lapsed. Property losses, while written on an occurrence basis, are generally reported within a short time from the date of loss, and in most instances, property claims are settled and paid within a relatively short period of time. The following table presents a reconciliation of consolidated beginning and ending reserves for unpaid losses and loss adjustment expenses: Net reserves for unpaid losses and loss adjustment expenses, beginning of year $ Commutation of MLQS Adjusted net reserves for losses and loss adjustment expenses Incurred losses and loss adjustment expenses: Current year Prior year Total net losses and loss adjustment expenses incurred Payments: Current year Prior year Total payments Net reserves for unpaid losses and loss adjustment expenses, end of year Reinsurance recoverable on unpaid losses 2019 December 31, 2018 (in thousands) 2017 313,763 $ — 313,763 267,493 $ — 267,493 178,986 (9,423) 169,563 19,054 74,006 93,060 390,266 69,792 135,078 (7,037) 128,041 14,118 67,653 81,771 313,763 55,389 Gross reserves for unpaid losses and loss adjustment expenses, end of year $ 460,058 $ 369,152 $ 194,602 27,929 222,531 114,960 (11,280) 103,680 13,792 44,926 58,718 267,493 48,224 315,717 During the year ended December 31, 2019, our net incurred losses for accident years 2018 and prior developed favorably by $9.4 million. This favorable development included $13.0 million for the 2018 accident year and $1.6 million for accident year 2017. This favorable development was primarily due to reported losses emerging at a lower level than expected on the other liability and products liability lines of business. The favorable development was offset by adverse development of $5.2 million for the 2011 through 2015 accident years. The unfavorable development was primarily attributable to the other liability occurrence line of 86 Table of Contents business. This adverse development largely resulted from management’s decision to lengthen the actuarial loss development factors to provide for emergence of reported losses over a longer period of time based on trends observed in loss experience, which added a modest amount of conservatism to the Company’s IBNR reserves. During the year ended December 31, 2018, our net incurred losses for accident years 2017 and prior developed favorably by $7.0 million. This favorable development included $6.8 million for the 2017 accident year, $3.8 million for the 2016 accident year. This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $3.6 million for the 2011 through 2015 accident years. The unfavorable development was primarily attributable to the other liability occurrence line of business. During the year ended December 31, 2017, our net incurred losses for accident years 2016 and prior developed favorably by $11.3 million. This favorable development included $9.4 million for the 2016 accident year and $6.0 million of favorable development for accident years 2015 and 2014. The favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $4.1 million for the 2011 through 2013 accident years. The unfavorable development was primarily attributable to the other liability occurrence line of business. Prior to 2017, the Company participated in a multi-line quota share treaty ("MLQS") that transferred a portion of its risk related to certain lines of business to reinsurers that received a portion of the direct written premiums on that business. Effective January 1, 2017, the Company commuted the remaining outstanding MLQS covering the period January 1, 2015 to December 31, 2015, which reduced reinsurance recoverables on unpaid losses by approximately $27.9 million. The commutation did not have any effect on the Company's results of operations or cash flows for the applicable period. Incurred and Paid Claims Development The following is information about incurred and paid claims development as of December 31, 2019, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. The development and claims duration tables below exclude commuted MLQS contracts, which would distort development patterns related to those transactions. Cumulative number of reported claims is reported on a per claim basis. The information about incurred and paid claims development for the years ended December 31, 2010 to December 31, 2018, is presented as unaudited supplementary information. Property Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, As of December 31, 2019 Accident Year 2015 Unaudited 2016 Unaudited 2017 Unaudited 2018 Unaudited 2019 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims $ 1,394 $ 880 $ 4,177 2015 2016 2017 2018 2019 ($ in thousands) 857 $ 3,392 12,473 87 872 $ 3,301 11,705 11,559 Total $ 869 $ 3,278 11,676 12,004 14,914 42,741 — 14 65 236 2,384 63 286 1,038 643 598 Table of Contents Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2015 Unaudited 2016 Unaudited $ 584 $ 2015 2016 2017 2018 2019 For the Years Ended December 31, 2017 Unaudited ($ in thousands) 706 $ 1,867 832 $ 3,257 9,938 2018 Unaudited 2019 865 $ 3,265 11,233 9,132 Total All outstanding liabilities before 2015, net of reinsurance Liabilities for claims and claim adjustment expenses, net of reinsurance $ 869 3,265 11,602 11,646 9,852 37,234 — 5,507 Historical Claims Duration The following is supplementary information about average historical claims duration as of December 31, 2019: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance 1 2 (Unaudited) 3 4 5 70.3% 22.1% 5.9% 1.9% 0.4% Years Property Casualty - Claims Made Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Accident Year 2010 Unaudited 2011 Unaudited 2012 Unaudited 2013 Unaudited 2014 Unaudited 2015 Unaudited 2016 Unaudited 2017 Unaudited 2018 Unaudited 2019 As of December 31, 2019 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims $ 778 $ 805 $ 679 $ 737 $ 946 $ 4,246 3,844 7,913 3,646 5,749 15,238 3,609 4,205 11,639 18,847 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 894 $ 883 $ 876 $ 872 $ 3,374 2,845 7,917 11,748 16,777 19,170 3,261 2,477 7,002 11,217 14,896 14,694 18,116 3,225 2,314 6,463 10,948 13,583 14,675 17,096 22,429 3,206 2,207 6,128 10,988 13,942 14,322 16,121 20,235 34,693 Total $ 122,714 13 102 261 629 1,239 2,024 3,248 5,024 10,949 27,450 14 76 138 228 273 257 309 366 448 504 ($ in thousands) 916 $ 3,560 3,102 9,113 14,289 18,883 88 Table of Contents Accident Year 2010 Unaudited 2011 Unaudited 2012 Unaudited 2013 Unaudited 2014 Unaudited 2015 Unaudited 2016 Unaudited 2017 Unaudited 2018 Unaudited 2019 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, $ — $ 79 $ 139 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 368 $ 393 $ ($ in thousands) 862 $ 859 $ 859 $ 859 $ 859 $ 1,037 153 1,392 475 499 2,116 877 1,915 435 3,044 1,024 4,436 1,865 217 3,042 1,090 5,070 5,039 4,496 1,158 3,042 1,882 5,320 6,384 7,562 3,015 340 3,065 1,946 5,439 8,290 9,238 6,907 4,897 507 Total Liabilities for claims and claim adjustment expenses, net of reinsurance $ 859 3,104 1,946 5,482 9,415 11,371 9,839 8,252 5,030 2,487 57,785 64,929 Casualty - Occurrence Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Accident Year 2010 Unaudited 2011 Unaudited 2012 Unaudited 2013 Unaudited 2014 Unaudited 2015 Unaudited 2016 Unaudited 2017 Unaudited 2018 Unaudited 2019 As of December 31, 2019 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims $ 843 $ 771 $ 531 $ 460 $ 458 $ 404 $ 406 $ ($ in thousands) 5,839 5,940 16,977 5,757 17,436 30,616 7,340 18,803 28,771 47,805 7,613 20,401 28,037 40,668 59,717 8,142 20,579 29,039 38,049 51,739 61,440 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 429 8,375 22,001 31,731 36,678 49,122 55,680 71,126 402 $ 406 $ 9,023 22,401 33,248 39,313 52,100 53,549 67,151 86,157 9,379 23,223 33,973 41,859 54,697 55,534 68,985 78,331 112,266 $ 478,653 Total 59 471 1,716 4,016 7,980 13,117 19,588 33,798 56,169 99,970 49 226 581 840 1,158 1,322 1,318 1,373 1,297 951 89 Table of Contents Accident Year 2010 Unaudited 2011 Unaudited 2012 Unaudited 2013 Unaudited 2014 Unaudited 2015 Unaudited 2016 Unaudited 2017 Unaudited 2018 Unaudited 2019 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, $ 4 $ 37 $ 207 59 $ 1,596 757 ($ in thousands) 113 $ 2,519 4,441 1,099 263 $ 261 $ 273 $ 3,788 7,850 4,469 698 4,575 11,238 7,957 3,081 941 6,363 14,382 14,890 8,489 3,161 1,099 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 313 6,868 16,474 21,348 17,576 12,685 6,015 1,581 346 8,510 19,383 26,715 23,771 28,385 17,225 9,352 2,638 Total Liabilities for claims and claim adjustment expenses, net of reinsurance $ 347 8,693 20,707 28,248 31,026 37,690 28,924 22,407 10,995 3,944 192,981 285,672 Historical Claims Duration The following is supplementary information about average historical claims duration as of December 31, 2019: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years Casualty - claims made Casualty - occurrence 1 4.5% 2.4% 2 20.2% 9.9% 3 25.3% 13.7% (Unaudited) 4 12.5% 19.0% 5 20.4% 18.3% 6 9.5% 12.1% 7 0.9% 6.3% 8 0.2% 11.1% 9 10 0.6% 5.1% —% —% Reconciliation of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows: (in thousands) Net outstanding liabilities Property Casualty - claims made Casualty - occurrence Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance Reinsurance recoverable on unpaid claims Property Casualty - claims made Casualty - occurrence Total reinsurance recoverable on unpaid claims Unallocated claims adjustment expenses Gross liability for unpaid claims and claim adjustment expense 8. Reinsurance December 31, 2019 5,507 64,929 285,672 356,108 3,119 9,852 56,821 69,792 34,158 460,058 $ $ The Company purchases reinsurance from other insurance companies ("reinsurers") in order to limit its exposure to large losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. In a reinsurance transaction, an insurance 90 Table of Contents company transfers, or cedes, part or all of its exposure to the reinsurer that receives a portion of the premium. The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. The following table summarizes the effect of reinsurance on premiums written and earned: Written: Direct Assumed Ceded Net written Earned: Direct Assumed Ceded Net earned 2019 Year Ended December 31, 2018 (in thousands) 2017 $ $ $ $ 389,569 $ 125 (47,633) 342,061 $ 330,464 $ 104 (47,587) 282,981 $ 275,538 $ — (39,924) 235,614 $ 250,397 $ — (37,709) 212,688 $ 223,191 — (33,719) 189,472 209,426 — (33,373) 176,053 Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $27.2 million, $25.5 million and $12.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Reinsurance balances Credit risk exists with reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. Reinsurance recoverables for unpaid losses were $69.8 million and $55.4 million, at December 31, 2019 and 2018, respectively. Reinsurance recoverables for paid losses were $2.8 million and $1.4 million at December 31, 2019 and 2018, respectively. Ceded unearned premiums related to reinsurance were $16.1 million and $16.1 million, at December 31, 2019 and 2018, respectively. Allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. All reinsurance receivables are from companies with A.M. Best ratings of "A" (Excellent) or better. To further reduce credit exposure to reinsurance recoverable balances, the Company has received letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. The Company has not recorded an allowance for doubtful accounts related to its reinsurance balances at December 31, 2019 and 2018 and believes this to be appropriate after consideration of all currently available information; however, the deterioration in the credit quality of existing reinsurers or disputes over reinsurance agreements could result in future charges. At December 31, 2019, the net reinsurance receivable, defined as the sum of paid and unpaid reinsurance recoverables and ceded unearned premiums less reinsurance payables, from five reinsurers represented 88.8% of the total balance. 9. Stockholders’ equity Capital Stock The Company’s authorized capital stock consists of 400,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. There were no shares of preferred stock issued or outstanding at December 31, 2019 or December 31, 2018. 91 Table of Contents Public Offering On August 12, 2019, the Company completed an underwritten public offering of 741,750 shares of its common stock at a price of $93.00 per share, which included 96,750 shares sold to the underwriters pursuant to the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and offering expenses, the Company received net proceeds from the offering of approximately $65.9 million. Dividend Declaration On February 14, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on March 14, 2019 to all stockholders of record on February 28, 2019. On May 23, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on June 13, 2019 to all stockholders of record on June 3, 2019. On August 15, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on September 12, 2019 to all stockholders of record on August 29, 2019. On November 13, 2019, the Company’s Board of Directors declared a cash dividend of $0.08 per share of common stock. This dividend was paid on December 12, 2019 to all stockholders of record on November 29, 2019. On February 13, 2020, the Company’s Board of Directors declared a cash dividend of $0.09 per share of common stock. This dividend is payable on March 12, 2020 to all stockholders of record on February 28, 2020. Equity-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 Company recognized total equity-based compensation expense of $2.7 million, $1.6 million and $0.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. 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. The options have a maximum contractual term of 10 years and vest in 4 equal annual installments following the date of the grant. The weighted average grant date fair value of options granted during 2016 was $2.71 per share. 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 Dividend yield Expected share price volatility(1) Expected life in years(2) 1.26% 1.25% 18.50% 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. 92 Table of Contents A summary of option activity under the employee share option plan as of December 31, 2019, and changes during the year then ended is presented below: Number of Shares Weighted-average exercise price Weighted-average remaining years of contractual life Aggregate intrinsic value (in thousands) Outstanding at December 31, 2018 Granted Forfeited Exercised Outstanding at December 31, 2019 Exercisable at December 31, 2019 804,303 $ — (18,068) (171,890) 614,345 $ 393,614 $ 16.00 — 16.00 16.00 16.00 16.00 6.6 $ 6.6 $ 52,625 33,717 The total intrinsic value of options exercised was $11.9 million during the year ended December 31, 2019 and $4.7 million during the year ended December 31, 2018. As of December 31, 2019, the Company had $0.3 million of unrecognized share-based compensation expense expected to be charged to earnings over a weighted-average period of 0.6 years. Restricted Stock Awards During 2019, the Board of Directors approved, and 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 one year to four 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 cash dividends. Unvested shares of restricted stock awards and accrued dividends, if any, are forfeited upon the termination of service to or employment with the Company. A summary of all restricted stock activity under the equity compensation plans for the year ended is as follows: Nonvested outstanding at the beginning of the period Granted Vested Forfeited Nonvested outstanding at the end of the period December 31, 2019 Number of Shares Weighted Average Grant Date Fair Value per Share 92,465 $ 62,015 $ (27,628) $ (4,129) $ 122,723 $ 52.98 80.59 51.53 60.58 67.01 Employees have the option to surrender shares to pay for withholding tax obligations resulting from any vesting of restricted stock awards. During the year ended December 31, 2019, restricted shares withheld for taxes in connection with the vesting of restricted stock awards totaled 7,365. The weighted average grant-date fair value of the Company's restricted stock awards granted during the years ended December 31, 2019 and 2018 was $80.59 and $52.99, respectively. There were no restricted stock awards granted during the year ended December 31, 2017. The fair value of restricted stock awards that vested during the year ended December 31, 2019 was $2.1 million.There were no restricted stock awards that vested during the years ended December 31, 2018 or 2017. As of December 31, 2019, the Company had $6.5 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 3.0 years. 93 Table of Contents Subsequent Event The Board of Directors granted 4,428 shares of restricted stock on January 1, 2020 under the 2016 Incentive Plan to the Company’s non-employee directors. The restricted stock had a fair value on the date of grant of $101.66 per share and will vest on a straight-line basis over a one year period. 10. Earnings per share The following table represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the consolidated financial statements: Net income Year ended December 31, 2019 2018 2017 $ (in thousands, except per share data) 33,787 $ 63,316 $ 24,901 Weighted average common shares outstanding - basic 21,528 21,090 20,992 Dilutive effect of shares issued under stock compensation arrangements: Stock options Restricted stock awards Total dilutive effect of shares issued under stock compensation arrangements Weighted average common shares outstanding - diluted 570 38 608 22,136 591 4 595 21,685 Earnings per common share: Basic Diluted $ $ 2.94 $ 2.86 $ 1.60 $ 1.56 $ 506 — 506 21,498 1.19 1.16 There were approximately 54 thousand and approximately 86 thousand anti-dilutive stock awards for the years ended December 31, 2019 and 2018, respectively. There were no anti-dilutive stock awards for the year ended December 31, 2017. Basic earnings per share was computed by dividing the earnings attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share was computed by dividing earnings attributable to common stockholders by the weighted average shares outstanding of common stock outstanding during the period, including potentially dilutive shares of common stock for the period determined using the treasury stock method. 11. 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 will be used to fund construction of the Company’s new headquarters and 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 an interest rate per annum equal to the higher of the prime rate, the New York Federal Reserve Board Rate or the one-month adjusted LIBOR, plus the applicable margin of 0.75% to 1.75%, depending on which interest option was applicable for the particular ABR loan. As of December 31, 2019, there was $17.3 million outstanding under the Credit Facility, net of debt issuance cost of $0.6 million, with a weighted average interest rate of 3.75%. Total 94 Table of Contents interest expense under the Credit Facility was $0.2 million for the year ended December 31, 2019 and was capitalized as part of the real estate project under construction. See Note 1 for further details. Interest paid was $0.1 million for the year ending December 31, 2019. There were no credit agreements outstanding at December 31, 2018 or December 31, 2017. The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default. As of December 31, 2019, the Company was in compliance with all of its financial covenants under the Credit Facility. 12. Contingencies Contingencies arise in the normal conduct of the Company’s operations and are not expected to have a material effect on the Company’s financial condition or results of operations. However, adverse outcomes are possible and could negatively affect the Company’s financial condition and results of operations. 13. Employee benefit plan The Company has established a defined contribution employee retirement plan ("Plan") in accordance with Section 401(k) of the Internal Revenue Code. Expenses related to the Plan were $1.3 million, $1.0 million and $1.0 million in 2019, 2018 and 2017, respectively. 14. Other comprehensive income (loss) The following table summarizes the components of other comprehensive income (loss): Unrealized gains (losses) arising during the period, before income taxes: Fixed-maturity securities Equity securities (1) Total unrealized gains (losses) arising during the period, before income taxes Income taxes Unrealized gains (losses) arising during the period, net of income taxes Less reclassification adjustment: Net realized investment gains on available-for-sale investments Income taxes Reclassification adjustment included in net income Other comprehensive income (loss) 95 Year Ending December 31, 2019 2018 (in thousands) 2017 $ 19,190 $ (6,664) $ — 19,190 (4,029) 15,161 489 (102) 387 — (6,664) 1,399 (5,265) 258 (54) 204 $ 14,774 $ (5,469) $ 5,371 4,192 9,563 (3,094) 6,469 132 (47) 85 6,384 Table of Contents (1) Adoption of ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which was effective January 1, 2018, eliminated the available-for-sale classification for equity investments and required changes in the fair value of equity securities to be recognized in net income. The sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to realized gains or losses in current period earnings. The related tax effect of the reclassification adjustment is recorded in income tax expense in current period earnings. See Note 2 for additional information. 15. Underwriting information The Company has one reportable segment, the Excess and Surplus Lines Insurance segment, which primarily offers commercial excess and surplus lines liability and property insurance products through its underwriting divisions. Gross written premiums by underwriting division are presented below: Commercial: Construction Small business Excess casualty Commercial property Product liability Allied health General casualty Professional liability Life sciences Energy Management liability Health care Environmental Inland marine Commercial insurance Public entity Total commercial Personal: Personal insurance Total personal Total 2019 Year Ended December 31, 2018 (in thousands) 2017 $ 71,035 $ 50,879 $ 63,181 51,225 29,115 26,333 23,962 23,279 20,029 17,821 15,371 14,820 5,963 5,179 3,467 1,674 580 44,368 37,398 9,166 20,049 16,815 17,625 16,717 14,505 15,586 8,161 5,725 2,205 2,046 1,096 1,193 373,034 263,534 16,660 16,660 12,004 12,004 $ 389,694 $ 275,538 $ 48,587 34,896 30,260 5,609 14,288 10,645 15,865 12,956 12,408 13,544 4,123 6,235 2,046 967 816 1,265 214,510 8,681 8,681 223,191 Construction underwrites commercial general liability coverage on contractors focusing on new residential construction, residential remodeling and renovation and commercial construction. Small business underwrites commercial general liability on smaller risks with an emphasis on artisan contractors and premises related exposures. 96 Table of Contents Excess casualty underwrites excess liability over risks that would fit within the general casualty, construction, products liability and small business divisions above. Coverage is written over our primary liability policies as well as those of other insurers. This division also writes excess liability over primary commercial auto liability policies written by other carriers. During 2019, certain business previously underwritten by the Energy and Environmental divisions is now underwritten by this division and prior year amounts have been reclassified to conform to the current year's presentation. Commercial property underwrites catastrophe-exposed risks including manufacturing facilities, government and municipal buildings, professional buildings, offices and general commercial properties, vacant properties, as well as entertainment and retail facilities. Products liability underwrites commercial general liability on manufacturers, distributors and importers of a wide array of consumer, commercial and industrial products. Allied health underwrites commercial general liability, professional liability and excess liability on allied health and social service risks including assisted living facilities, home health care agencies and outpatient medical facilities. General casualty underwrites general liability and liquor liability on hospitality, habitational and retail risks, among others, with similar premises liability loss exposures. Professional liability underwrites small-to-medium sized non-medical professional liability risks. The classes of risks we cover include accountants, architects and engineers, financial planners, insurance agents, lawyers, realtors, and certain other professions. Life sciences underwrites general liability, products liability and professional liability coverage for manufacturers, distributors and developers of dietary supplements, medical devices, pharmaceuticals, biologics, health and beauty products, durable medical equipment and clinical trials. Energy underwrites commercial general liability, pollution liability, professional liability and excess liability on enterprises engaged in the business of energy production or distribution or mining including drillers, lease operators, contractors and product manufacturers. As previously discussed, during 2019, certain business previously underwritten by this division is now underwritten by the Excess Casualty division and prior year amounts have been reclassified to conform to the current year's presentation. Management liability underwrites directors and officers liability, employment practices liability and fiduciary liability coverage on a variety of commercial and government risks. Health care underwrites medical professional liability for physicians, surgeons, dentists, chiropractors and podiatrists. Policies cover both individuals and small practice groups. Environmental underwrites commercial general liability, pollution liability and professional liability on a wide range of commercial risks where environmental exposures exist that are operational in nature or related to the premises. As previously discussed, during 2019, certain business previously underwritten by this division is now underwritten by the Excess Casualty division and prior year amounts have been reclassified to conform to the current year's presentation. Inland marine underwrites a variety of inland marine coverages including builders risk, contractors' equipment, transportation risks and mobile equipment. Commercial insurance underwrites commercial general liability on small accounts, through our wholly-owned broker, Aspera. Public entity underwrites law enforcement professional liability and school board liability. 97 Table of Contents Personal insurance writes homeowners coverage on manufactured homes with a catastrophe exposure due to coastal location. The Company does business with two unaffiliated insurance brokers that generated $47.2 million and $41.1 million of gross written premiums for the year ended December 31, 2019, representing 12.1% and 10.5% of gross written premiums, respectively. No other broker generated 10.0% or more of the gross written premiums for the year ended December 31, 2019. 16. Statutory financial information Kinsale Insurance maintains its accounts in conformity with accounting practices prescribed or permitted by state regulatory authorities that vary in certain respects from GAAP. In converting from statutory accounting principles to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory nonadmitted assets and the inclusion of net unrealized gains or losses relating to fixed maturities in stockholders’ equity. The Company does not use any permitted practices that are different from prescribed statutory accounting practices. Statutory net income and statutory capital and surplus for Kinsale Insurance as of December 31, 2019, 2018, and 2017 and for the years then ended are summarized as follows: Statutory net income Statutory capital and surplus Year ended December 31, 2019 2018 (in thousands) 2017 $ 40,917 $ 348,811 34,206 $ 233,500 23,841 213,833 Kinsale Insurance is subject to risk-based capital ("RBC") requirements. RBC is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of RBC is calculated using various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the RBC results, as determined by the formula. Companies that do not maintain statutory capital and surplus at a level in excess of the company action level RBC are required to take specified actions. At December 31, 2019 and 2018, actual statutory capital and surplus for Kinsale Insurance substantially exceeded the regulatory requirements. Dividend payments to Kinsale from Kinsale Insurance are restricted by state insurance laws as to the amount that may be paid without prior approval of the regulatory authorities of Arkansas. The maximum dividend distribution is limited by Arkansas law to the greater of 10% of policyholder surplus as of December 31 of the previous year or statutory net income, not including realized capital gains, for the previous calendar year. Dividend payments are further limited to that part of available policyholder surplus which is derived from net profits on its business. The maximum dividend distribution that can be paid by Kinsale Insurance during 2020 without prior approval is $40.7 million. 98 Table of Contents 17. Unaudited selected quarterly financial data The following is a summary of the unaudited quarterly results of operations: (in thousands, except per share data) First Second Third Fourth 2019 Quarter Gross written premiums Total revenues Net income Comprehensive income Earnings per share - basic Earnings per share - diluted $ 84,626 $ 94,947 $ 97,984 $ 72,185 18,720 25,500 0.88 $ 0.86 $ $ $ 78,327 12,976 16,218 0.60 $ 0.58 $ 72,572 13,767 20,322 0.65 $ 0.63 $ 2018 Quarter 112,137 92,804 17,853 16,050 0.81 0.79 (in thousands, except per share data) First Second Third Fourth Gross written premiums Total revenues Net income Comprehensive income Earnings per share - basic Earnings per share - diluted $ 63,847 $ 69,981 $ 69,546 $ 50,126 7,287 2,431 0.35 $ 0.34 $ 54,947 10,112 9,096 0.48 $ 0.47 $ 60,137 11,940 9,987 0.57 $ 0.55 $ $ $ 72,164 56,904 4,448 6,804 0.21 0.20 Due to differences in weighted average common shares outstanding, quarterly earnings per share may not add up to the totals reported for the full year. 99 Table of Contents Type of Investment Fixed maturities: KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Summary of Investments—Other than Investments in Related Parties Schedule I Amortized Cost Fair Value (in thousands) Amount at which shown on Balance Sheet U.S. Treasury securities and obligations of U.S. government agencies $ 110 $ 112 $ Obligations of states, municipalities and political subdivisions Corporate and other securities Commercial mortgage and asset-backed securities Residential mortgage-backed securities Total fixed maturities Equity securities: Common stock-exchange traded funds Nonredeemable preferred stock Total equity securities Total investments 166,312 180,287 195,750 172,358 714,817 40,842 23,403 64,245 172,893 184,768 197,970 173,789 729,532 54,463 23,831 78,294 $ 779,062 $ 807,826 $ 112 172,893 184,768 197,970 173,789 729,532 54,463 23,831 78,294 807,826 See accompanying Report of Independent Registered Public Accounting Firm. 100 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Condensed Financial Information of Registrant Balance Sheets December 31, 2019 2018 (in thousands) $ $ $ 14,726 $ 16,836 391,071 519 — 208 423,360 $ 260 $ 434 16,744 42 17,480 222 229,229 162,911 13,518 405,880 $ 423,360 $ Assets Cash and cash equivalents Due from subsidiaries Investment in subsidiaries Deferred tax assets Income taxes recoverable Other assets Total assets Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses Income taxes payable Credit facility Other liabilities Total liabilities Stockholders’ equity: Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes. See accompanying Report of Independent Registered Public Accounting Firm. 101 Schedule II 10,016 1,001 251,591 369 787 549 264,313 308 — — 19 327 212 158,485 106,545 (1,256) 263,986 264,313 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Condensed Financial Information of Registrant Statements of Income and Comprehensive Income Schedule II Revenues: Management fees from subsidiaries $ Total revenues Expenses: Other operating expenses Other expenses Total expenses Loss before income taxes Income tax benefit Income (loss) before equity in net income of subsidiaries Equity in net income of subsidiaries Net income Years Ended December 31, 2019 2018 (in thousands) 2017 4,502 $ 4,502 3,215 $ 3,215 2,473 2,742 5,215 (713) (2,714) 2,001 61,315 63,316 2,457 1,598 4,055 (840) (1,158) 318 33,469 33,787 Other comprehensive income (loss): Equity in other comprehensive earnings (losses) of subsidiaries Total comprehensive income $ 14,774 78,090 $ (5,469) 28,318 $ 2,037 2,037 2,526 652 3,178 (1,141) (739) (402) 25,303 24,901 6,384 31,285 See accompanying notes. See accompanying Report of Independent Registered Public Accounting Firm. 102 Table of Contents KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Condensed Financial Information of Registrant Statements of Cash Flows Schedule II Operating activities Net income Adjustments to reconcile net income to net cash used in operating activities: Deferred tax (benefit) expense Stock compensation expense Equity in undistributed earnings of subsidiaries Changes in operating assets and liabilities Dividends received from subsidiary Net cash (used in) provided by operating activities Investing activities Contributions to subsidiary Net cash used in investing activities Financing activities Common stock issued, net of transaction costs Common stock issued, stock options exercised Payroll taxes withheld and remitted on share-based payments Dividends paid Proceeds from credit facility Debt issuance costs Net cash provided by (used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year 2019 Years Ended December 31, 2018 (in thousands) 2017 $ 63,316 $ 33,787 $ 24,901 (150) 2,742 (61,315) (14,247) 5,000 (4,654) (68,391) (68,391) 65,879 2,750 (617) (6,929) 17,300 (628) 77,755 4,710 10,016 (170) 1,597 (33,469) (633) 11,500 12,612 — — — 1,808 — (5,906) — — (4,098) 8,514 1,502 429 652 (25,303) (1,583) 4,500 3,596 — — — 1,077 — (5,039) — — (3,962) (366) 1,868 1,502 Cash and cash equivalents at end of year $ 14,726 $ 10,016 $ See accompanying notes. See accompanying Report of Independent Registered Public Accounting Firm. 103 Table of Contents 1. Accounting policies Organization KINSALE CAPITAL GROUP, INC. Condensed Financial Information of Registrant Notes to Condensed Financial Information Kinsale Capital Group, Inc., a Delaware domiciled insurance holding company, was formed on June 3, 2009 for the purpose of acquiring and managing insurance entities. Basis of presentation The accompanying condensed financial statements have been prepared using the equity method. Under the equity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries since the date of acquisition. These condensed financial statements should be read in conjunction with the Company’s consolidated financial statements. Certain prior year amounts have been reclassified to conform to the current year's presentation. Estimates and assumptions Preparation of the condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates. 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 will be used to fund construction of the Company’s new headquarters and 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 an interest rate per annum equal to the higher of the prime rate, the New York Federal Reserve Board Rate or the one-month adjusted LIBOR, plus the applicable margin of 0.75% to 1.75%, depending on which interest option was applicable for the particular ABR loan. As of December 31, 2019, there was $17.3 million outstanding under the Credit Facility, net of debt issuance cost of $0.6 million, with a weighted average interest rate of 3.75%. Total interest expense under the Credit Facility was $0.2 million for the year ended December 31, 2019 and was capitalized as part of the real estate project under construction. See Note 1 for further details. Interest paid was $0.1 million for the year ending December 31, 2019. There were no credit agreements outstanding at December 31, 2018 or December 31, 2017. 104 Table of Contents The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default. As of December 31, 2019, the Company was in compliance with all of its financial covenants under the Credit Facility. Dividends from subsidiary Cash dividends paid to Kinsale Capital Group, Inc. by its wholly-owned subsidiary, Kinsale Insurance Company, were $5.0 million for the year ended December 31, 2019, $11.5 million for the year ended December 31, 2018, and $4.5 million for the year ended December 31, 2017. 105 Table of Contents (in thousands) Year Ended December 31, 2019: Allowance for premiums receivable Valuation allowance for deferred tax assets Year Ended December 31, 2018: Allowance for premiums receivable Valuation allowance for deferred tax assets Year Ended December 31, 2017: Allowance for premiums receivable Valuation allowance for deferred tax assets KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Schedule V Balance at Beginning of Period Additions Amounts Charged to Expense Deductions Amounts Written Off or Disposals Balance at End of Period $ 2,615 $ 780 835 $ 812 745 $ — 2,112 690 1,977 623 663 90 488 67 160 — 353 — 2,705 1,592 2,615 780 2,112 690 See accompanying Report of Independent Registered Public Accounting Firm. 106 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. 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 Company’s reports under 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 the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Senior Vice President, Chief Financial Officer and Treasurer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company's President and Chief Executive Officer and the Company’s Senior Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Company’s Senior Vice President, Chief Financial Officer and Treasurer concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019. Management’s Report on Internal Control Over Financial Reporting and the report of the Company’s independent registered public accounting firm on the effectiveness of internal control over financial reporting as of December 31, 2019 are included in Part II, Item 8 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information Not applicable. 107 Item 10. Directors, Executive Officers and Corporate Governance PART III The information required by Item 10 is incorporated by reference to the definitive Kinsale Capital Group, Inc. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 11. Executive Compensation The information required by Item 11 is incorporated by reference to the definitive Kinsale Capital Group, Inc. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 12 is incorporated by reference to the definitive Kinsale Capital Group, Inc. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by Item 13 is incorporated by reference to the definitive Kinsale Capital Group, Inc. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 14. Principal Accounting Fees and Services The information required by Item 14 is incorporated by reference to the definitive Kinsale Capital Group, Inc. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 108 Table of Contents Item 15. Exhibits and Financial Statement Schedules PART IV The following consolidated financial statements of Kinsale Capital Group, Inc. and subsidiaries are filed as part of this report under Item 8 — Financial Statements and Supplementary Data: 1. Audited Consolidated Financial Statements Management's Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant - Parent Company Only Schedule V - Valuation and Qualifying Accounts All other financial schedules are not required under the related instructions, or are inapplicable and therefore have been omitted. Page 64 64 68 69 70 71 72 100 101 106 Item 16. Form 10-K Summary None. Table of Contents Exhibit Number 3.1 3.2 4.1 10.1+ 10.1a+ 10.2a+ 10.2b+ 10.3+ 10.4+ 10.5 10.6 21.1 23.1 31.1 31.2 32.1* 32.2* Exhibit Index Description Second Amended and Restated Certificate of Incorporation of Kinsale Capital Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2018) Amended and Restated By-Laws of Kinsale Capital Group, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2018) Description of Securities Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on July 18, 2016) Amendment to Outstanding Awards under the Kinsale Capital Group Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1a to the Company's Annual Report on Form 10-K, filed with the SEC on February 28, 2018) Form of Stock Option Grant Notice and Award Agreement (Employee) (incorporated by reference to Exhibit 10.5a to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on July 18, 2016) Form of Stock Option Grant Notice and Award Agreement (Director) (incorporated by reference to Exhibit 10.5b to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on July 18, 2016) Form of Restricted Share Award Agreement (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K, filed with the SEC on February 28, 2018) Employment and Arbitration Agreement, dated as of June 4, 2009 between Kinsale Management, Inc. and Michael P. Kehoe (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1, filed with the SEC on July 1, 2016) Form of Indemnification Agreement between Kinsale Capital Group, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on July 18, 2016) Credit Agreement, dated as of May 28, 2019, among Kinsale Capital Group, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on May 29, 2019) List of subsidiaries of Kinsale Capital Group, Inc. Consent of KPMG LLP, Independent Registered Public Accounting Firm Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS** XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 or the Exchange Act. ** Furnished with this Annual Report. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933 and are deemed not filed for purposes of section 18 of the Exchange Act. + Compensatory plan or arrangement 110 Table of Contents Pursuant to the requirements of Section 13 or 15(d) 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 on March 2, 2020. Signatures KINSALE CAPITAL GROUP, INC. By: /s/ Michael P. Kehoe Michael P. Kehoe President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Michael P. Kehoe Michael P. Kehoe /s/ Bryan P. Petrucelli Bryan P. Petrucelli /s/ Steven J. Bensinger Steven J. Bensinger /s/ Anne C. Kronenberg Anne C. Kronenberg /s/ Robert Lippincott III Robert Lippincott III /s/ James J. Ritchie James J. Ritchie /s/ Frederick L. Russell, Jr. Frederick L. Russell, Jr. /s/ Gregory M. Share Gregory M. Share President, Chief Executive Officer and Director (Principal Executive Officer) March 2, 2020 Senior Vice President, Chief Financial Officer and Treasurer March 2, 2020 (Principal Financial and Accounting Officer) Director Director Director Director Director Director 111 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 Exhibit 4.1 DESCRIPTION OF SECURITIES The following description sets forth certain material terms of Kinsale Capital Group, Inc.’s (the “Company,” “we,” “us” and “our”) common stock, which is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended. The following description is intended as a summary, and is qualified in its entirety by reference to our second amended and restated certificate of incorporation (our “Charter”) and our amended and restated by-laws (“By-Laws”), which are filed with the Securities and Exchange Commission and are exhibits to this Annual Report on Form 10-K, and the Delaware General Corporation Law (the “DGCL”). Description Common Stock All holders of our common stock are entitled to the same rights and privileges, as described below: Authorized Capital Stock We are authorized to issue up to 400,000,000 shares of common stock, par value $0.01 per share. Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “KNSL.” Voting Rights Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of stockholders, including the election of directors. Holders of our common stock do not have cumulative voting rights in the election of directors. Our By-Laws provide that each director will be elected by a majority of the votes cast with respect to such person, either in person or represented by properly authorized proxy, at each annual meeting at which a quorum is present; provided, that, each director will be elected by a plurality of the votes cast in the case of a contested election. Dividend Rights Subject to the prior rights of holders of any then-outstanding shares of our preferred stock, holders of our common stock are entitled to receive ratably any dividends that may be declared from time to time by our Board of Directors out of funds legally available therefor. Liquidation Rights Subject to the prior rights of our creditors and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of our preferred stock, in the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets legally available for distribution to stockholders. Preemptive Rights Holders of our common stock are not entitled to preemptive or subscription rights. Anti-takeover Effects of Certain Provisions of Delaware Law, our Charter and our By-Laws Our Charter and By-Laws contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors and that could make it more difficult to acquire control of our company by means of a tender offer, an open market purchase, a proxy contest or otherwise. These provisions may discourage coercive takeover practices or inadequate takeover bids and are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board of Directors, which we believe may result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they also give our Board of Directors the power to discourage acquisitions that some stockholders may favor or may consider in their best interests. A summary of these provisions is set forth below. Election of Directors Our Charter provides that each director will be elected at each annual meeting of stockholders for a term expiring at the next succeeding annual meeting of stockholders and that each director will remain in office until his or her successor is duly elected or qualified, or until his or her earlier death, resignation, retirement, disqualification or removal. If the number of directors is increased, any additional director elected to fill a newly elected directorship will hold office for a term expiring at the next annual meeting of stockholders. In no case will a decrease in the number of directors shorten the term of any incumbent director. Vacancies Filled by the Board Our Charter provides that, subject to the terms of any one or more classes or series of preferred stock then outstanding, any vacancy in our Board of Directors whether from an increase in the size of the board or otherwise will be filled only by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Calling of Special Meetings of Stockholders Our Charter and By-Laws provide that special meetings of our stockholders for any purpose or purposes may be called at any time only (1) by the chairman of our Board of Directors, (2) by our chief executive officer (or, in the absence of a chief executive officer, our president) or (3) pursuant to a resolution adopted by a majority of our Board of Directors. Stockholders do not have the authority to call a special meeting of stockholders. Advance Notice of Stockholder Nominations and Proposals Our By-Laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to our Board of Directors. Stockholders at an annual meeting are only able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our Board of Directors, or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying stockholder actions until the next stockholder meeting (i.e., by precluding the conduct of certain business at the current annual meeting if the proper procedures are not followed) that are favored by the holders of a majority of our outstanding voting securities or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us. SUBSIDIARIES OF KINSALE CAPITAL GROUP, INC. Jurisdiction of Incorporation or Formation Exhibit 21.1 Arkansas Delaware Virginia Delaware Delaware Subsidiary Kinsale Insurance Company Kinsale Management, Inc. Aspera Insurance Services, Inc. Kinsale Real Estate, Inc. 2001 Maywill, LLC Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Kinsale Capital Group, Inc.: We consent to the incorporation by reference in the registration statements (No. 333‑212815) on Form S-8 and (No. 333-233041) on Form S-3ASR of Kinsale Capital Group, Inc. of our reports dated March 2, 2020, with respect to the consolidated balance sheets of Kinsale Capital Group, Inc. as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedules I, II, and V, and the effectiveness of internal control over financial reporting as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form 10‑K of Kinsale Capital Group, Inc. Richmond, Virginia March 2, 2020 /s/ KPMG LLP CERTIFICATION Exhibit 31.1 I, Michael P. Kehoe, certify that: 1. I have reviewed this annual report on Form 10-K of Kinsale Capital Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 2, 2020 /s/ Michael P. Kehoe Michael P. Kehoe President and Chief Executive Officer (Principal Executive Officer) CERTIFICATION Exhibit 31.2 I, Bryan P. Petrucelli, certify that: 1. I have reviewed this annual report on Form 10-K of Kinsale Capital Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 2, 2020 /s/ Bryan P. Petrucelli Bryan P. Petrucelli Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 In connection with the Annual Report on Form 10-K of Kinsale Capital Group, Inc. (the "Company") for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael P. Kehoe, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 2, 2020 /s/ Michael P. Kehoe Michael P. Kehoe President and Chief Executive Officer (Principal Executive Officer) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.2 In connection with the Annual Report on Form 10-K of Kinsale Capital Group, Inc. (the "Company") for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bryan P. Petrucelli, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 2, 2020 /s/ Bryan P. Petrucelli Bryan P. Petrucelli Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 

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