UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ~~for the quarterly period ended June 30, 2018~~

For the quarterly period ended June 30, 2019



☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ~~for the transition period from _______ to _______~~

For the transition period from _______ to _______

Commission File Number: 001-37848




	KINSALE CAPITAL GROUP, INC.
	(Exact name of registrant as specified in its charter)
Delaware		98-0664337
~~Delaware~~ (State or other jurisdiction of incorporation or organization)		~~98-0664337~~ (I.R.S. Employer Identification Number)



			2221 Edward Holland Drive
Suite 600 ~~Richmond, VA 23230~~
	Richmond,	Virginia		23230
(Address of principal executive offices)
	~~(804) 289-1300~~
	(~~Registrant's telephone number, including area code)~~	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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer ☐	~~Accelerated filer~~ ☐	Non-accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company☐	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section ~~7(a)(2)(B)~~13(a) of the ~~Securities~~Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of the registrant's common ~~shares~~stock outstanding at July ~~31, 2018: 21,181,127~~30, 2019: 21,370,825

KINSALE CAPITAL GROUP, INC.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	24
	Consolidated Balance Sheets (Unaudited) at June 30, ~~2018~~2019 and December 31, ~~2017~~2018	24
	Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	35
	Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	46
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	57
	Notes to Condensed Consolidated Financial Statements (Unaudited)	68
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2223
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3840
Item 4.	Controls and Procedures	3840

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3941
Item 1A.	Risk Factors	3941
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3941
Item 6.	Exhibits	3941
	Signatures	4042

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to historical or current fact. These statements may discuss, among others, our future financial performance, our business prospects and strategy, our anticipated financial position, liquidity and capital, dividends and general market and industry conditions. You can identify forward-looking statements by words such as "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," "believes," "seeks," "outlook," "future," "will," "would," "should," "could," "may," "can have" and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements are only predictions and are not guarantees of future performance. Actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include, without limitation:

the possibility that our loss reserves may be inadequate to cover our actual losses, which could have a material adverse effect on our financial condition, results of operations and cash flows;

the inherent uncertainty of models resulting in actual losses that are materially different than our estimates;

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;

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 the Annual Report on Form 10-K for the year ended December 31, 2018.

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)


	June 30, 2018			December 31, 2017		June 30, 2019		December 31, 2018
	(in thousands, except share and per share data)					(in thousands, except share and per share data)
Assets
Investments:
Fixed-maturity securities available for sale, at fair value (amortized cost: $472,418 in 2018; $422,255 in 2017)	$	467,922		$	425,191
Equity securities, at fair value (cost: $51,190 in 2018; $45,916 in 2017)	58,219			54,132
Fixed-maturity securities available for sale, at fair value (amortized cost: $577,183 in 2019; $514,237 in 2018)						$	590,077	$	510,251
Equity securities, at fair value (cost: $56,447 in 2019 $56,051 in 2018)						65,910		57,711
Total investments	526,141			479,323		655,987		567,962
Cash and cash equivalents	79,670			81,747		78,131		75,089
Investment income due and accrued	3,343			3,077		3,972		3,783
Premiums receivable, net	24,023			19,787		34,150		24,253
Reinsurance recoverables	54,436			49,593		65,937		56,788
Ceded unearned premiums	14,463			13,858		17,397		16,072
Deferred policy acquisition costs, net of ceding commissions	14,123			11,775		18,652		14,801
Intangible assets	3,538			3,538		3,538		3,538
Deferred income tax asset, net	5,073			2,492		6,068		7,176
Other assets	4,093			2,659		10,974		3,601
Total assets	$	728,903		$	667,849	$	894,806	$	773,063

Liabilities and Stockholders' Equity
Liabilities:
Reserves for unpaid losses and loss adjustment expenses	$	344,565		$	315,717	$	407,433	$	369,152
Unearned premiums	120,742			103,110		157,752		128,250
Payable to reinsurers	3,711			3,226		6,769		4,565
Accounts payable and accrued expenses	4,230			6,519		7,655		7,090
Other liabilities	7,710			1,088		7,290		20
Total liabilities	480,958			429,660		586,899		509,077

Stockholders’ equity:
Common stock, $0.01 par value, 400,000,000 shares authorized, 21,169,384 and 21,036,087 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	211			210
Common stock, $0.01 par value, 400,000,000 shares authorized, 21,356,399 and 21,241,504 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively						214		212
Additional paid-in capital	156,264			155,082		159,986		158,485
Retained earnings	93,129			73,502		135,628		106,545
Accumulated other comprehensive (loss) income	(1,659		)	9,395
Accumulated other comprehensive income (loss)						12,079		(1,256		)
Total stockholders’ equity	247,945			238,189		307,907		263,986
Total liabilities and stockholders’ equity	$	728,903		$	667,849	$	894,806	$	773,063

See accompanying notes to condensed consolidated financial statements.

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in thousands, except per share data)												(in thousands, except per share data)
Revenues:
Gross written premiums	$	69,981		$	57,753		$	133,828		$	110,615		$	94,947		$	69,981		$	179,573		$	133,828
Ceded written premiums	(9,090		)	(7,980		)	(17,846		)	(16,680		)	(12,260		)	(9,090		)	(23,819		)	(17,846		)
Net written premiums	60,891			49,773			115,982			93,935			82,687			60,891			155,754			115,982
Change in unearned premiums	(9,998		)	(6,721		)	(17,028		)	(10,450		)	(16,600		)	(9,998		)	(28,176		)	(17,028		)
Net earned premiums	50,893			43,052			98,954			83,485			66,087			50,893			127,578			98,954
Net investment income	3,782			2,432			7,011			4,718			4,806			3,782			9,321			7,011
Net unrealized gains (losses) on equity securities	94			—			(1,185		)	—			1,909			94			7,804			(1,185		)
Net realized gains (losses) on investments	174			24			286			(8		)
Net realized (losses) gains on investments													(235		)	174			45			286
Other income	4			—			7			—			5			4			9			7
Total revenues	54,947			45,508			105,073			88,195			72,572			54,947			144,757			105,073

Expenses:
Losses and loss adjustment expenses	29,967			21,859			58,866			43,966			39,579			29,967			73,311			58,866
Underwriting, acquisition and insurance expenses	12,519			10,492			24,917			21,786			16,437			12,519			32,053			24,917
Other expenses	—			402			14			402			21			—			57			14
Total expenses	42,486			32,753			83,797			66,154			56,037			42,486			105,421			83,797
Income before income taxes	12,461			12,755			21,276			22,041			16,535			12,461			39,336			21,276
Total income tax expense	2,349			4,260			3,877			7,265			2,768			2,349			6,849			3,877
Net income	10,112			8,495			17,399			14,776			13,767			10,112			32,487			17,399
Other comprehensive income (loss):
Change in unrealized (losses) gains on available-for-sale investments, net of taxes of ($270) and ($1,561) in 2018 and $1,171 and $1,748 in 2017	(1,016		)	2,174			(5,872		)	3,247
Change in unrealized gains (losses) on available-for-sale investments, net of taxes of $1,743 and $3,544 in 2019 and $(270) and $(1,561) in 2018													6,555			(1,016		)	13,335			(5,872		)
Total comprehensive income	$	9,096		$	10,669		$	11,527		$	18,023		$	20,322		$	9,096		$	45,822		$	11,527


Earnings per share:
Basic	$	0.48	$	0.41	$	0.83	$	0.70	$	0.65	$	0.48	$	1.53	$	0.83
Diluted	$	0.47	$	0.40	$	0.80	$	0.69	$	0.63	$	0.47	$	1.49	$	0.80

Weighted-average shares outstanding:
Basic	21,070		20,969		21,058		20,969		21,210		21,070		21,190		21,058
Diluted	21,666		21,457		21,648		21,425		21,832		21,666		21,803		21,648

Cash dividends declared per share	$	0.07	$	0.06	$	0.14	$	0.12

See accompanying notes to condensed consolidated financial statements.

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

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

Total
Stock-
holders' Equity
(in thousands)
Balance at December 31, 2016 20,969
$ 210
$ 153,353
$ 53,640
$ 3,011
$ 210,214
Stock-based compensation —
—
324
—
—
324
Dividends declared —
—
—
(2,516 ) —
(2,516 )
Other comprehensive income, net of tax —
—
—
—
3,247
3,247
Net income —
—
—
14,776
—
14,776
Balance at June 30, 2017 20,969
$ 210
$ 153,677
$ 65,900
$ 6,258
$ 226,045

Balance at December 31, 2017 21,036
$ 210
$ 155,082
$ 73,502
$ 9,395
$ 238,189
Cumulative effect adjustment - net unrealized gains on equity securities, net of tax —
—
—
6,490
(6,490 ) —
Balance at January 1, 2018, as adjusted 21,036
210
155,082
79,992
2,905
238,189
Reclassification of tax effects resulting from the TCJA —
—
—
(1,308 ) 1,308
—
Issuance of common stock under stock-based compensation plan 133
1
623
—
—
624
Stock-based compensation —
—
559
—
—
559
Dividends declared —
—
—
(2,954 ) —
(2,954 )
Other comprehensive loss, net of tax —
—
—
—
(5,872 ) (5,872 )
Net income —
—
—
17,399
—
17,399
Balance at June 30, 2018 21,169
$ 211
$ 156,264
$ 93,129
$ (1,659 ) $ 247,945



	Shares of Common Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumu- lated Other Compre- hensive Income (Loss)			Total Stock- holders' Equity
	(in thousands)
Balance at December 31, 2018	21,242		$	212	$	158,485		$	106,545		$	(1,256	)	263,986
Issuance of common stock under stock-based compensation plan	43		1		597			—			—			598
Stock-based compensation expense	—		—		507			—			—			507
Dividends declared ($0.08 per share)	—		—		—			(1,702		)	—			(1,702		)
Other comprehensive income, net of tax	—		—		—			—			6,780			6,780
Net income	—		—		—			18,720			—			18,720
Balance at March 31, 2019	21,285		213		159,589			123,563			5,524			288,889
Issuance of common stock under stock-based compensation plan	78		1		393			—			—			394
Stock-based compensation expense	—		—		621			—			—			621
Restricted shares withheld for taxes	(7	)	—		(617		)	—			—			(617		)
Dividends declared ($0.08 per share)	—		—		—			(1,702		)	—			(1,702		)
Other comprehensive income, net of tax	—		—		—			—			6,555			6,555
Net income	—		—		—			13,767			—			13,767
Balance at June 30, 2019	21,356		$	214	$	159,986		$	135,628		$	12,079		$	307,907

Balance at December 31, 2017	21,036		$	210	$	155,082		$	73,502		$	9,395		$	238,189
Cumulative effect adjustment - unrealized gains on equity securities, net of tax	—		—		—			6,490			(6,490		)	—
Balance at December 31, 2017, as adjusted	21,036		210		155,082			79,992			2,905			238,189
Reclassification of tax effect of TCJA	—		—		—			(1,308		)	1,308			—
Issuance of common stock under stock-based compensation plan	36		—		545			—			—			545
Stock-based compensation expense	—		—		158			—			—			158
Dividends declared ($0.07 per share)	—		—		—			(1,473		)	—			(1,473		)
Other comprehensive loss, net of tax	—		—		—			—			(4,856		)	(4,856		)
Net income	—		—		—			7,287			—			7,287
Balance at March 31, 2018	21,072		210		155,785			84,498			(643		)	239,850
Issuance of common stock under stock-based compensation plan	97		1		78			—			—			79
Stock-based compensation expense	—		—		401			—			—			401
Dividends declared ($0.07 per share)	—		—		—			(1,481		)	—			(1,481		)
Other comprehensive loss, net of tax	—		—		—			—			(1,016		)	(1,016		)
Net income	—		—		—			10,112			—			10,112
Balance at June 30, 2018	21,169		$	211	$	156,264		$	93,129		$	(1,659	)	$	247,945

See accompanying notes to condensed consolidated financial statements.

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
	(in thousands)						(in thousands)
Operating activities:
Net cash provided by operating activities	$	50,423		$	40,782		$	71,292		$	50,423

Investing activities:
Purchase of property and equipment	(458		)	(62		)	(5,999		)	(458		)
Change in short-term investments, net	—			(14,481		)
Purchases – fixed-maturity securities	(110,023		)	(21,161		)	(115,356		)	(110,023		)
Purchases – equity securities	(7,199		)	(6,301		)	(3,593		)	(7,199		)
Sales – fixed-maturity securities	3,913			719			31,441			3,913
Sales – equity securities	1,910			—			2,869			1,910
Maturities and calls – fixed-maturity securities	61,681			45,707			25,699			61,681
Net cash (used in) provided by investing activities	(50,176		)	4,421
Net cash used in investing activities							(64,939		)	(50,176		)

Financing activities:
Debt issuance costs							(284		)	—
Payroll taxes withheld and remitted on share-based payments							(617		)	—
Proceeds from stock options exercised	624			—			991			624
Dividends paid	(2,948		)	(2,516		)	(3,401		)	(2,948		)
Payments on capital lease	—			(9		)
Net cash used in financing activities	(2,324		)	(2,525		)	(3,311		)	(2,324		)
Net change in cash and cash equivalents	(2,077		)	42,678			3,042			(2,077		)
Cash and cash equivalents at beginning of year	81,747			50,752			75,089			81,747
Cash and cash equivalents at end of period	$	79,670		$	93,430		$	78,131		$	79,670

See accompanying notes to condensed consolidated financial statements.

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Summary of significant accounting policies

Basis of presentation

The accompanying condensed consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of Kinsale Capital Group, Inc. and its wholly owned subsidiaries (the "Company") included in the Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All significant intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management periodically reviews its estimates and assumptions.

Recently adopted accounting pronouncements

ASU ~~2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities~~

In January 2016, the Financial Accounting Standards Board ("FASB") issued 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 investments, required changes in unrealized gains and losses in fair value of equity investments to be recognized in net income, required public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, required separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that was required to be disclosed for financial instruments measured at amortized cost. Effective January 1, 2018, the Company adopted this ASU and recorded a cumulative-effect adjustment, which reclassified unrealized gains of $6.5 million, net of taxes, on equity investments from accumulated other comprehensive income ("AOCI") to retained earnings. Prior periods have not been restated to conform to the current presentation.

~~ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~

In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which permitted companies to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the "TCJA") on items within AOCI to retained earnings. The FASB refers to these amounts as "stranded tax effects." The guidance is effective for all companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Effective January 1,

2018, the Company elected to early adopt this ASU and to reclassify the stranded income tax effects for available-for-sale securities of $1.3 million from AOCI to retained earnings. Other than those effects related to the TCJA, the Company uses the portfolio approach to release stranded tax effects in AOCI related to its available-for-sale fixed-maturity securities and its available-for-sale equity securities (prior to the adoption of ASU 2016-01). Under this approach, stranded tax effects remaining in AOCI are released only when the entire portfolio of the available-for-sale fixed-maturity securities and available-for-sale equity securities are liquidated, sold or extinguished.

~~Prospective 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 ~~fewer than~~ 12 months. The liability is to be initially measured at the present value of the future minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the leasemonths or ~~if not known, the lessee’s incremental borrowing rate at the inception of the lease.~~less. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The paymentand classification of the lease. Effective January 1, 2019, the Company adopted this ASU and recorded a ROU asset and corresponding lease liability ~~set up~~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 ~~such~~existing leases ~~will be apportioned between interest~~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 ~~principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify~~nonlease components as a ~~financing type~~single lease ~~it will be accounted~~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

modified retrospective approach. The adoption of ASU 2017-08 did not have a material impact on the income statement as rent on a straight-line basis. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidatedCompany's financial statements.

Prospective accounting pronouncements

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" to provide more useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.

~~ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities~~

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. This ASU is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period. Upon adoption, the update will be applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period presented. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its 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 available-for-sale investments at June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	June 30, 2018									June 30, 2019
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
	(in thousands)									(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	608	$	2	$	(3	)	$	607	$	110	$	3	$	—		$	113
Obligations of states, municipalities and political subdivisions	155,799		1,672		(1,870		)	155,601		125,619		6,344		(2		)	131,961
Corporate and other securities	85,672		221		(885		)	85,008		125,873		3,572		(229		)	129,216
Asset-backed securities	125,030		119		(1,101		)	124,048
Commercial mortgage and asset-backed securities										175,355		2,995		(485		)	177,865
Residential mortgage-backed securities	105,309		384		(3,035		)	102,658		150,226		1,626		(930		)	150,922
Total available-for-sale investments	$	472,418	$	2,398	$	(6,894	)	$	467,922	$	577,183	$	14,540	$	(1,646	)	$	590,077



	December 31, 2018
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
	(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	610	$	2	$	(1	)	$	611
Obligations of states, municipalities and political subdivisions	153,884		2,010		(1,294		)	154,600
Corporate and other securities	97,889		264		(1,401		)	96,752
Commercial mortgage and asset-backed securities	151,137		252		(1,522		)	149,867
Residential mortgage-backed securities	110,717		354		(2,650		)	108,421
Total available-for-sale investments	$	514,237	$	2,882	$	(6,868	)	$	510,251

December 31, 2017
Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies $ 9,108
$ 4
$ (14 ) $ 9,098
Obligations of states, municipalities and political subdivisions 161,012
3,726
(412 ) 164,326
Corporate and other securities 71,224
579
(172 ) 71,631
Asset-backed securities 95,223
405
(268 ) 95,360
Residential mortgage-backed securities 85,688
466
(1,378 ) 84,776
Total fixed-maturity securities 422,255
5,180
(2,244 ) 425,191

Equity securities:
Exchange traded funds 26,041
8,339
—
34,380
Nonredeemable preferred stock 19,875
108
(231 ) 19,752
Total equity securities 45,916
8,447
(231 ) 54,132
Total available-for-sale investments $ 468,171
$ 13,627
$ (2,475 ) $ 479,323

Available-for-sale securities in a loss position

The Company regularly reviews all its available-for-sale ~~securities~~investments with unrealized losses to assess whether the decline in the securities’ fair value is deemed to be an other-than-temporary impairment ("OTTI"). The Company considers a number of 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 maturities,~~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 ~~the credit quality of the issuer~~ and the ability to recover all amounts outstanding when contractually due. When assessing whether it intends to sell a fixed-maturity 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 equity securities prior to the adoption of ASU 2016-01, the Company considered the near-term prospects of an issuer and its ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery.

For ~~fixed maturities~~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. For equity securities prior to the adoption of ASU 2016-01, a decline in fair value that was considered to be other-than-temporary was 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.

The following tables summarize gross unrealized losses and fair value for available-for-sale ~~securities~~investments by length of time that the securities have continuously been in an unrealized loss position:



	June 30, 2019
	Less than 12 Months					12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Losses
	(in thousands)
Fixed maturities:
Obligations of states, municipalities and political subdivisions	$	—	$	—		$	1,425	$	(2	)	$	1,425	$	(2	)
Corporate and other securities	9,716		(29		)	5,359		(200		)	15,075		(229		)
Commercial mortgage and asset-backed securities	41,047		(195		)	32,809		(290		)	73,856		(485		)
Residential mortgage-backed securities	5,059		(8		)	53,187		(922		)	58,246		(930		)
Total available-for-sale investments	$	55,822	$	(232	)	$	92,780	$	(1,414	)	$	148,602	$	(1,646	)

June 30, 2018
Less than 12 Months 12 Months or Longer Total
Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies $ —
$ —
$ 495
$ (3 ) $ 495
$ (3 )
Obligations of states, municipalities and political subdivisions 57,877
(742 ) 34,451
(1,128 ) 92,328
(1,870 )
Corporate and other securities 64,209
(763 ) 7,382
(122 ) 71,591
(885 )
Asset-backed securities 73,520
(823 ) 9,511
(278 ) 83,031
(1,101 )
Residential mortgage-backed securities 22,523
(362 ) 52,224
(2,673 ) 74,747
(3,035 )
Total fixed-maturity securities $ 218,129
$ (2,690 ) $ 104,063
$ (4,204 ) $ 322,192
$ (6,894 )

At June 30, ~~2018,~~2019, the Company held ~~324~~101 fixed-maturity securities in an unrealized loss position with a total estimated fair value of ~~$322.2~~$148.6 million and gross unrealized losses of ~~$6.9~~$1.6 million. Of these securities, ~~122~~79 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all fixed-maturity securities within its investment portfolio to determine whether any other-than-temporary impairment has occurred. ~~Unrealized~~Based on the Company's review as of June 30, 2019, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At June 30, ~~2018, 89.5%~~2019, 85.9% of the Company’s fixed-maturity securities were rated "A-" or better and all of the Company’s fixed-maturity securities made expected coupon payments under the contractual terms of the securities. ~~Management~~For the six months ended June 30, 2019, the Company concluded that there were no other-than-temporary impairments from fixed-maturity securities with unrealized ~~losses for the six months ended June 30, 2018.~~losses.



	December 31, 2018
	Less than 12 Months					12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Losses
	(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	—		$	499	$	(1	)	$	499	$	(1	)
Obligations of states, municipalities and political subdivisions	42,718		(440		)	34,326		(854		)	77,044		(1,294		)
Corporate and other securities	62,045		(890		)	12,092		(511		)	74,137		(1,401		)
Commercial mortgage and asset-backed securities	93,247		(1,017		)	25,746		(505		)	118,993		(1,522		)
Residential mortgage-backed securities	24,571		(155		)	55,638		(2,495		)	80,209		(2,650		)
Total available-for-sale investments	$	222,581	$	(2,502	)	$	128,301	$	(4,366	)	$	350,882	$	(6,868	)

December 31, 2017
Less than 12 Months 12 Months or Longer Total
Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses Estimated Fair Value Gross Unrealized Holding Losses
(in thousands)
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies $ 3,497
$ (2 ) $ 5,488
$ (12 ) $ 8,985
$ (14 )
Obligations of states, municipalities and political subdivisions 7,258
(36 ) 38,143
(376 ) 45,401
(412 )
Corporate and other securities 30,944
(98 ) 13,444
(74 ) 44,388
(172 )
Asset-backed securities 27,609
(108 ) 10,706
(160 ) 38,315
(268 )
Residential mortgage-backed securities 9,081
(83 ) 57,262
(1,295 ) 66,343
(1,378 )
Total fixed-maturity securities 78,389
(327 ) 125,043
(1,917 ) 203,432
(2,244 )

Equity securities:
Exchange traded funds 130
—
—
—
130
—
Nonredeemable preferred stocks 10,649
(231 ) —
—
10,649
(231 )
Total equity securities 10,779
(231 ) —
—
10,779
(231 )
Total investments available for sale $ 89,168
$ (558 ) $ 125,043
$ (1,917 ) $ 214,211
$ (2,475 )

At December 31, ~~2017,~~2018, the Company held ~~195~~317 fixed-maturity securities in an unrealized loss position with a total estimated fair value of ~~$203.4~~$350.9 million and gross unrealized losses of ~~$2.2~~$6.9 million. Of those securities, ~~126~~158 were in a continuous unrealized loss position for greater than one year. ~~Unrealized~~Based on the Company's review as of December 31, 2018, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At December 31, ~~2017, 91.1%~~2018, 86.4% of the Company’s fixed-maturity securities were rated "A-" or better and all of the Company’s fixed-maturity securities made expected coupon payments under the contractual terms of the securities. AtFor the year ended December 31, 2017, the Company held 13 securities in its equity portfolio with a total estimated fair value of $10.8 million and gross unrealized losses of $0.2 million. None of these securities were in a continuous unrealized loss position for greater than one year. Based on its review,2018, the Company concluded that there were no other-than-temporary impairments from fixed-maturity ~~or equity~~ securities with unrealized ~~losses for the year ended December 31, 2017.~~

losses.

Contractual maturities of available-for-sale fixed-maturity securities

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities at June 30, ~~2018~~2019 are summarized, by contractual maturity, as follows:



	June 30, 2019
	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Due in one year or less	$	3,914	$	3,922
Due after one year through five years	95,702		98,079
Due after five years through ten years	50,116		52,709
Due after ten years	101,870		106,580
Commercial mortgage and asset-backed securities	175,355		177,865
Residential mortgage-backed securities	150,226		150,922
Total fixed maturities	$	577,183	$	590,077

June 30, 2018
Amortized Estimated
Cost Fair Value
(in thousands)
Due in one year or less $ 24,944
$ 24,857
Due after one year through five years 49,867
49,735
Due after five years through ten years 39,180
39,529
Due after ten years 128,088
127,095
Asset-backed securities 125,030
124,048
Residential mortgage-backed securities 105,309
102,658
Total fixed maturities $ 472,418
$ 467,922

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower.

Net investment income

The following table presents the components of net investment income for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Interest:
Taxable bonds	$	3,476		$	2,239		$	6,543		$	4,000
Tax exempt municipal bonds	888			1,083			1,896			2,168
Cash equivalents and short-term investments	156			217			401			477
Dividends on equity securities	566			512			1,087			924
Gross investment income	5,086			4,051			9,927			7,569
Investment expenses	(280		)	(269		)	(606		)	(558		)
Net investment income	$	4,806		$	3,782		$	9,321		$	7,011

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Interest:
Taxable bonds $ 2,239
$ 1,508
$ 4,000
$ 3,045
Tax exempt municipal bonds 1,083
818
2,168
1,612
Cash equivalents and short-term investments 217
167
477
254
Dividends on equity securities 512
185
924
295
Gross investment income 4,051
2,678
7,569
5,206
Investment expenses (269 ) (246 ) (558 ) (488 )
Net investment income $ 3,782
$ 2,432
$ 7,011
$ 4,718

Realized investment gains and losses

The following table presents realized investment gains and losses for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Fixed-maturity securities:
Realized gains	$	25		$	189		$	396		$	244
Realized losses	—			(4		)	(79		)	(4		)
Net realized gains from fixed-maturity securities	25			185			317			240

Equity securities:
Realized gains	30			—			34			57
Realized losses	(290		)	(11		)	(306		)	(11		)
Net realized (losses) gains from equity securities	(260		)	(11		)	(272		)	46
Net realized investment (losses) gains	$	(235	)	$	174		$	45		$	286

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Fixed-maturity securities:
Realized gains $ 189
$ 24
$ 244
$ 24
Realized losses (4 ) —
(4 ) (32 )
Net realized gains (losses) fixed-maturity securities 185
24
240
(8 )

Equity securities:
Realized gains —
—
57
—
Realized losses (11 ) —
(11 ) —
Net realized gains (losses) equity securities (11 ) —
46
—
Net realized investment gains (losses) $ 174
$ 24
$ 286
$ (8 )

Change in net unrealized gains (losses) on ~~investments~~fixed-maturity securities

For the three and six months ended June 30, 2019, the changes in net unrealized gains for fixed-maturity securities were $8.3 million and $16.9 million, respectively. For the three and six months ended June 30, 2018, the changes in net unrealized losses for fixed-maturity securities were $1.3 million and $7.4 million, respectively. For the three and six months ended June 30, 2017, the changes in net unrealized gains for fixed-maturity securities were $2.8 million and $3.5 million and the change in net unrealized gains for equity securities was $0.6 million and $1.5 million, respectively.

Insurance – statutory deposits

The Company had invested assets with a carrying value of $6.9 million ~~and $7.1 million~~ on deposit with state regulatory authorities at June 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018.

Payable for investments purchased

The Company recorded a payable for investments purchased, not yet settled, of ~~$7.7~~$5.5 million at June 30, ~~2018 and $1.0 million at December 31, 2017.~~2019. The payable ~~balances were~~balance was included in the "other liabilities" line item of the balance sheet and treated as a non-cash ~~transactions~~transaction for purposes of cash flow presentation.

3. Fair value measurements

Fair value ~~was~~is estimated for each class of financial instrument for which it ~~was~~is practical to estimate fair value. Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and

the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.

The three levels of the fair value hierarchy are defined as follows:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment manager from third party pricing services, where available. For securities where the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company's investment manager. Management performs several procedures to ascertain the reasonableness of investment values included in the condensed consolidated financial statements including 1) obtaining and reviewing internal control reports from the Company's investment manager that ~~obtain~~obtains fair values from third party pricing services, 2) discussing with the Company's investment manager its process for reviewing and validating pricing obtained from outside pricing services and 3) reviewing the security pricing received from the Company's investment manager and monitoring changes in unrealized gains and losses. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.

The following tables present the balances of assets measured at fair value on a recurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, by level within the fair value hierarchy.



	June 30, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	113	$	—	$	—	$	113
Obligations of states, municipalities and political subdivisions	—		131,961		—		131,961
Corporate and other securities	—		129,216		—		129,216
Commercial mortgage and asset-backed securities	—		177,865		—		177,865
Residential mortgage-backed securities	—		150,922		—		150,922
Total fixed maturities	113		589,964		—		590,077

Equity securities:
Exchange traded funds	46,396		—		—		46,396
Nonredeemable preferred stock	—		19,514		—		19,514
Total equity securities	46,396		19,514		—		65,910
Total	$	46,509	$	609,478	$	—	$	655,987


	June 30, 2018								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Assets
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	607	$	—	$	—	$	607	$	611	$	—	$	—	$	611
Obligations of states, municipalities and political subdivisions	—		155,601		—		155,601		—		154,600		—		154,600
Corporate and other securities	—		85,008		—		85,008		—		96,752		—		96,752
Asset-backed securities	—		124,048		—		124,048
Commercial mortgage and asset-backed securities									—		149,867		—		149,867
Residential mortgage-backed securities	—		102,658		—		102,658		—		108,421		—		108,421
Total fixed maturities	607		467,315		—		467,922		611		509,640		—		510,251

Equity securities:
Exchange traded funds	39,434		—		—		39,434		38,987		—		—		38,987
Nonredeemable preferred stock	—		18,785		—		18,785		—		18,724		—		18,724
Total equity securities	39,434		18,785		—		58,219		38,987		18,724		—		57,711
Total	$	40,041	$	486,100	$	—	$	526,141	$	39,598	$	528,364	$	—	$	567,962

December 31, 2017
Level 1 Level 2 Level 3 Total
(in thousands)
Assets
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies $ 9,098
$ —
$ —
$ 9,098
Obligations of states, municipalities and political subdivisions —
164,326
—
164,326
Corporate and other securities —
71,631
—
71,631
Asset-backed securities —
95,360
—
95,360
Residential mortgage-backed securities —
84,776
—
84,776
Total fixed maturities 9,098
416,093
—
425,191

Equity securities:
Exchange traded funds 34,380
—
—
34,380
Nonredeemable preferred stock —
19,752
—
19,752
Total equity securities 34,380
19,752
—
54,132
Total $ 43,478
$ 435,845
$ —
$ 479,323

There were no transfers into or out of Level 1 and Level 2 during the ~~three~~six months ended June 30, ~~2018.~~2019. There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

Due to the relatively short-term nature of cash and cash equivalents, ~~short-term investments,~~ receivables and payables, their carrying amounts are reasonable estimates of fair value.

4. Deferred policy acquisition costs

The following table presents the amounts of policy acquisition costs deferred and amortized for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Balance, beginning of period	$	16,314		$	12,768		$	14,801		$	11,775
Policy acquisition costs deferred:
Direct commissions	13,880			10,298			26,243			19,675
Ceding commissions	(3,258		)	(2,609		)	(6,514		)	(5,150		)
Other underwriting and policy acquisition costs	849			694			1,814			1,503
Policy acquisition costs deferred	11,471			8,383			21,543			16,028
Amortization of net policy acquisition costs	(9,133		)	(7,028		)	(17,692		)	(13,680		)
Balance, end of period	$	18,652		$	14,123		$	18,652		$	14,123

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Balance, beginning of period $ 12,768
$ 10,501
$ 11,775
$ 10,150
Policy acquisition costs deferred:
Direct commissions 10,298
8,625
19,675
16,505
Ceding commissions (2,609 ) (2,392 ) (5,150 ) (4,983 )
Other underwriting and policy acquisition costs 694
756
1,503
1,517
Policy acquisition costs deferred 8,383
6,989
16,028
13,039
Amortization of net policy acquisition costs (7,028 ) (5,912 ) (13,680 ) (11,611 )
Balance, end of period $ 14,123
$ 11,578
$ 14,123
$ 11,578

5. Underwriting, acquisition and insurance expenses

Underwriting, acquisition and insurance expenses for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 consist of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Underwriting, acquisition and insurance expenses incurred:
Direct commissions	$	11,387		$	8,756		$	22,061		$	17,135
Ceding commissions	(3,114		)	(2,464		)	(6,052		)	(4,908		)
Other operating expenses	8,164			6,227			16,044			12,690
Total	$	16,437		$	12,519		$	32,053		$	24,917

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Underwriting, acquisition and insurance expenses incurred:
Direct commissions $ 8,756
$ 7,544
$ 17,135
$ 14,693
Ceding commissions (2,464 ) (2,466 ) (4,908 ) (4,812 )
Other operating expenses 6,227
5,414
12,690
11,905
Total $ 12,519
$ 10,492
$ 24,917
$ 21,786

Other operating expenses within underwriting, acquisition and insurance expenses include salaries, bonus and employee benefits expenses of ~~$5.3~~$7.1 million and ~~$4.5~~$5.3 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Salaries, ~~bonus~~bonuses, and employee ~~benefits~~benefit expenses were ~~$10.3~~$13.9 million and ~~$9.5~~$10.3 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

6. Stock-based compensation

On July 27, 2016, the Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (the "2016 Incentive Plan") became effective. The 2016 Incentive Plan, which is administered by the Compensation, Nominating and Corporate Governance Committee of the Company's Board of Directors, provides for grants of stock options, ~~stock appreciation rights,~~ restricted stock, restricted stock units and other stock-based awards ~~and other cash-based awards~~ to ~~directors,~~ officers, ~~and other~~ employees, ~~as well as~~directors, independent contractors ~~or consultants providing consulting or advisory services to the Company.~~and consultants. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832.

The total compensation cost that has been charged against income for share-based compensation arrangements was ~~$0.6~~$1.1 million and ~~$0.3~~$0.6 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Restricted Stock Awards

During the six months ended June 30, ~~2018, the Board of Directors approved, and~~2019, 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~~1 year to ~~four~~4 years, corresponding to the anniversary date of the grants. The fair value of restricted stock awards was determined based on the closing trading price of the Company’s shares on the grant date or, if no shares were traded on the grant date, the last preceding date for which there was a sale of shares. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive ~~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 six months ended June 30, ~~2018~~2019 is as follows:



	For the Six Months Ended June 30, 2019
	Number of Shares		Weighted Average Grant Date Fair Value per Share
Non-vested outstanding at the beginning of the period	92,465		$	52.98
Granted	62,015		$	80.59
Vested	(27,628	)	$	51.53
Forfeited	(1,677	)	$	53.60
Non-vested outstanding at the end of the period	125,175		$	66.97

For the Six Months Ended June 30, 2018
Number of Shares Weighted Average Grant Date Fair Value per Share
Nonvested outstanding at the beginning of the period —
$ —
Granted 94,270
$ 52.99
Vested —
$ —
Forfeited —
$ —
Nonvested outstanding at the end of the period 94,270
$ 52.99
Employees and directors have the option to surrender shares to pay for withholding tax obligations resulting from any vesting of restricted shares. During the six months ended June 30, 2019, restricted shares withheld for taxes in connection with the vesting of restricted shares totaled 7,365.

The fair value of restricted shares vested was $2.1 million during the six months ended June 30, 2019. As of June 30, ~~2018,~~2019, the Company had ~~$4.7~~$8.0 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of ~~3.8~~3.4 years.

Stock Options

On July 27, 2016, the Board of Directors approved, and the Company granted, 1,036,916 stock options with an exercise price equal to the Initial Public Offering price of $16.00 per share and a weighted-average grant-date fair value of $2.71 per share. The options have a maximum contractual term of 10 years and vest in 4 equal annual installments following the date of the grant.

The value of the options granted was estimated at the date of grant using the Black-Scholes pricing model using the following assumptions:



Risk-free rate of return	1.26	%
Dividend yield	1.25	%
Expected share price volatility⁽¹⁾	18.50	%
Expected life in years⁽²⁾	6.3 years


⁽¹⁾	Expected volatility was based on the Company’s competitors within the industry.


⁽²⁾	Expected life was calculated using the simplified method, which was an average of the contractual term of the option and its ordinary vesting period, as the Company did not have sufficient historical data for determining the expected term of our stock option awards.

A summary of option activity as of June 30, ~~2018,~~2019, and changes during the period then ended is presented below:



	Number of Shares		Weighted-average exercise price		Weighted-average remaining years of contractual term	Aggregate intrinsic value (in thousands)
Outstanding at January 1, 2019	804,303		$	16.00
Granted	—		—
Forfeited	(13,200	)	16.00
Exercised	(61,922	)	16.00
Outstanding at June 30, 2019	729,181		$	16.00	7.1	$	55,039
Exercisable at June 30, 2019	278,015		$	16.00	7.1	$	20,985

Number of Shares Weighted-average exercise price Weighted-average remaining years of contractual term Aggregate intrinsic value (in thousands)
Outstanding at January 1, 2018 930,440
$ 16.00

Granted —
—

Forfeited (8,985 ) 16.00

Exercised (39,027 ) 16.00

Outstanding at June 30, 2018 882,428
$ 16.00
8.1 $ 34,291
Exercisable at June 30, 2018 179,803
$ 16.00
8.1 $ 6,987

The total intrinsic value of options exercised was $3.4 million and $1.4 million during the six months ended June 30, 2019 and 2018, ~~was $1.4 million. There were no options exercised during the six months ended June 30, 2017.~~respectively. As of June 30, ~~2018,~~2019, the Company had ~~$1.3~~$0.7 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of ~~2.1~~1.1 years.

7. Earnings per share

The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the consolidated financial statements:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands, except per share data)
Net income	$	13,767	$	10,112	$	32,487	$	17,399

Weighted average common shares outstanding - basic	21,210		21,070		21,190		21,058
Effect of potential dilutive securities:
Conversion of stock options	583		593		579		588
Conversion of restricted stock	39		3		34		2
Weighted average common shares outstanding - diluted	21,832		21,666		21,803		21,648

Earnings per common share:
Basic	$	0.65	$	0.48	$	1.53	$	0.83
Diluted	$	0.63	$	0.47	$	1.49	$	0.80

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands, except per share data)
Net income $ 10,112
$ 8,495
$ 17,399
$ 14,776
Weighted average common shares outstanding - basic

21,070
20,969
21,058
20,969
Effect of potential dilutive securities:
Conversion of stock options 593
488
588
456
Conversion of restricted stock 3
—
2
—
Weighted average common shares outstanding - diluted

21,666
21,457
21,648
21,425

Earnings per common share:
Basic $ 0.48
$ 0.41
$ 0.83
$ 0.70
Diluted $ 0.47
$ 0.40
$ 0.80
$ 0.69

There were approximately 55 thousand anti-dilutive stock awards for the three and six months ended June 30, 2019 and approximately 88 thousand anti-dilutive stock awards for the three and six months ended June 30, 2018. ~~There were no anti-dilutive stock awards for the three and six months ended June 30, 2017.~~

8. Income taxes

On December 22, 2017, the President of the United States signed into law 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, and modifying the manner in which property and casualty insurance loss reserves are computed for federal income tax purposes. The Company records a deduction for unpaid losses and loss adjustment expenses when computing its taxable income. Prior to the new legislation, the deduction was 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. Beginning in 2018, a transition rule will spread the adjustments related to pre-effective-date losses and loss adjustment expenses over the next eight years.

U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The TCJA did not specify the application of certain elements of the legislation and the U.S. Treasury has yet to issue interpretive guidance to specify the loss payment patterns and the corporate bond yield curve under the new law for 2018. The Company recognized provisional tax amounts of $3.5 million related to the transition adjustment for loss discounting, which was included in its components of deferred tax assets and liabilities as part of its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. During the six months ended June 30, 2018, there were no changes to these amounts and no measurement period adjustments were recorded. The accounting is expected to be complete when the U.S. Treasury issues further guidance and the Company has completed its calculations.

The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company's best estimate of the effective tax rate expected for the full year. The estimated annual effective tax rate typically differs from the U.S. statutory tax rate primarily as a result of tax-exempt investment income and any discrete items recognized during the period. The Company's effective tax ~~rate was~~rates were 16.7% and 17.4% for the three and six months ended June 30, 2019, respectively. The Company's effective tax rates were 18.9% and 18.2% for the three and six months ended June 30, 2018, respectively. The ~~Company's effective tax rate was 33.4% and 33.0% for the three and six months ended June 30, 2017, respectively. The~~ decrease in the effective tax rates in the second ~~quarter~~quarters of 2019 and 2018 and first half of 2019 and 2018 compared to ~~the same periods in the prior year was primarily due to the impact of the TCJA, which lowered~~ the U.S. statutory tax rate ~~from 35% to 21% starting January 1, 2018, and the recognition of tax benefits related~~was primarily due to stock options exercised ~~during the second quarter~~ and ~~first six months of 2018.~~

tax-exempt interest income on certain tax-advantaged investments.

9. Reserves for unpaid losses and loss adjustment expenses

The following table presents a reconciliation of consolidated beginning and ending reserves for unpaid losses and loss adjustment expenses:



	June 30,
	2019			2018
	(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year	$	313,763		$	267,493
Incurred losses and loss adjustment expenses:
Current year	81,127			62,389
Prior years	(7,816		)	(3,523		)
Total net losses and loss adjustment expenses incurred	73,311			58,866

Payments:
Current year	5,530			1,858
Prior years	36,100			33,309
Total payments	41,630			35,167
Net reserves for unpaid losses and loss adjustment expenses, end of period	345,444			291,192
Reinsurance recoverable on unpaid losses	61,989			53,373
Gross reserves for unpaid losses and loss adjustment expenses, end of period	$	407,433		$	344,565

June 30,
2018 2017
(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year $ 267,493
$ 194,602
Commutation of MLQS —
27,929
Adjusted net reserves for losses and loss adjustment expenses, beginning of year 267,493
222,531
Incurred losses and loss adjustment expenses:
Current year 62,389
52,902
Prior years (3,523 ) (8,936 )
Total net losses and loss adjustment expenses incurred 58,866
43,966

Payments:
Current year 1,858
2,185
Prior years 33,309
19,508
Total payments 35,167
21,693
Net reserves for unpaid losses and loss adjustment expenses, end of period 291,192
244,804
Reinsurance recoverable on unpaid losses 53,373
39,624
Gross reserves for unpaid losses and loss adjustment expenses, end of period $ 344,565
$ 284,428
During the six months ended June 30, 2019, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2018 developed favorably by $7.8 million. The favorable development was primarily attributable to the 2017 through 2018 accident years by $14.1 million, which mostly resulted from reported losses emerging at a lower level than expected across most statutory lines of business. This favorable development was offset in part by adverse development from the 2011 through 2016 accident years of $6.2 million primarily related to a modest amount of conservatism added to our reserves for incurred but not yet reported ("IBNR") losses to provide for emergence of reported losses over a longer period of time.

During the six months ended June 30, 2018, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2017 developed favorably by $3.5 million. The favorable development was primarily attributable to the 2015 through 2017 accident ~~year~~years of ~~$2.5 million, the 2016 accident year of $3.0 million and the 2015 accident year of $0.8~~$6.3 million, which resulted from reported losses emerging at a lower level than expected. This favorable development was offset in part by adverse development from the 2011 through 2014 accident years of $2.8 million.

During the six months ended June 30, 2017, the reserves for unpaid losses and loss adjustment expenses held at December 31, 2016 developed favorably by $8.9 million. The favorable development was attributable primarily to the 2016 accident year of $5.8 million and the 2015 accident year of $3.7 million, which was due to reported losses emerging at a lower level than expected. The favorable development was offset in part by adverse development of $1.1 million for the 2013 accident year.

~~Multi-line quota share reinsurance~~

Effective January 1, 2017, the Company commuted its multi-line quota share treaty ("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.

10. Reinsurance

The following table summarizes the effect of reinsurance on premiums written and earned for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Written:
Direct	$	94,885		$	69,981		$	179,448		$	133,828
Assumed	62			—			125			—
Ceded	(12,260		)	(9,090		)	(23,819		)	(17,846		)
Net written	$	82,687		$	60,891		$	155,754		$	115,982

Earned:
Direct	$	77,920		$	59,603		$	149,998		$	116,196
Assumed	16			—			73			—
Ceded	(11,849		)	(8,710		)	(22,493		)	(17,242		)
Net earned	$	66,087		$	50,893		$	127,578		$	98,954

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Written:
Direct $ 69,981
$ 57,753
$ 133,828
$ 110,615
Assumed —
—
—
—
Ceded (9,090 ) (7,980 ) (17,846 ) (16,680 )
Net written $ 60,891
$ 49,773
$ 115,982
$ 93,935

Earned:
Direct $ 59,603
$ 51,304
$ 116,196
$ 99,766
Assumed —
—
—
—
Ceded (8,710 ) (8,252 ) (17,242 ) (16,281 )
Net earned $ 50,893
$ 43,052
$ 98,954
$ 83,485

Incurred losses and loss adjustment expenses were net of reinsurance (ceded incurred losses and loss adjustment expenses) of ~~$5.0~~$9.4 million and ~~$(0.6)~~$5.0 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Ceded incurred losses and loss adjustment expenses were ~~$7.9~~$13.7 million and ~~$1.8~~$7.9 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. At June 30, ~~2018,~~2019, reinsurance recoverables on paid and unpaid losses were ~~$1.0~~$3.9 million and ~~$53.4~~$62.0 million, respectively. At December 31, ~~2017,~~2018, reinsurance recoverables on paid and unpaid losses were $1.4 million and ~~$48.2~~$55.4 million, respectively.

11. Credit Agreement

On May 28, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”) that provided the Company with a $50 million senior unsecured revolving credit facility (the “Credit Facility”). 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. Interest rates on borrowings are based on prevailing interest rates and the applicable margin, as described in the Credit Agreement. As of June 30, 2019, there were no outstanding balances under the Credit Facility.

~~11.~~12. Other comprehensive income (loss) ~~income~~

The following table summarizes the components of other comprehensive (loss) income for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Unrealized gains (losses) on fixed-maturity securities arising during the period, before income taxes:	$	8,323		$	(1,101	)	$	17,196		$	(7,193	)
Income taxes	(1,748		)	232			(3,611		)	1,511
Unrealized gains (losses) arising during the period, net of income taxes	6,575			(869		)	13,585			(5,682		)
Less reclassification adjustment:
Net realized gains on fixed-maturity securities, before income taxes	25			185			317			240
Income taxes	(5		)	(38		)	(67		)	(50		)
Reclassification adjustment included in net income, net of income taxes	20			147			250			190
Other comprehensive income (loss)	$	6,555		$	(1,016	)	$	13,335		$	(5,872	)

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands)
Unrealized (losses) gains arising during the period, before income taxes:
Fixed-maturity securities $ (1,101 ) $ 2,792
$ (7,193 ) $ 3,489
Equity securities ⁽¹⁾
—
577
—
1,498
Total unrealized (losses) gains arising during the period, before income taxes (1,101 ) 3,369
(7,193 ) 4,987
Income taxes 232
(1,179 ) 1,511
(1,745 )
Unrealized (losses) gains arising during the period, net of income taxes (869 ) 2,190
(5,682 ) 3,242
Less reclassification adjustment:
Net realized gains (losses) on fixed-maturity securities, before income taxes 185
24
240
(8 )
Income taxes (38 ) (8 ) (50 ) 3
Reclassification adjustment included in net income 147
16
190
(5 )
Other comprehensive (loss) income $ (1,016 ) $ 2,174
$ (5,872 ) $ 3,247

⁽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 unrealized gains and losses in the fair value of equity securities to be recognized in net income.

The sale of an available-for-sale fixed-maturity 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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in the Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors.

The results of operations for the three and six months ended June 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the full year ended December 31, ~~2018,~~2019, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

References to the "Company," "Kinsale," "we," "us," and "our" are to Kinsale Capital Group, Inc. and its subsidiaries, unless the context otherwise requires.

Overview

Founded in 2009, Kinsale is a specialty insurance company. Kinsale focuses exclusively on the excess and surplus lines ("E&S") market in the U.S., where we use our underwriting expertise to write coverages for hard-to-place small business risks and personal lines risks. We market these insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, primarily through a network of independent insurance brokers.

We have one reportable segment, our Excess and Surplus Lines Insurance segment, which offers property and casualty ("P&C") insurance products through the E&S market. For the first six months of ~~2018,~~2019, the percentage breakdown of our gross written premiums was ~~91.4%~~90.4% casualty and ~~8.6%~~9.6% property. Our underwriting divisions include construction, small business, ~~general~~excess casualty, energy, ~~excess casualty,~~product liability, professional ~~liability, life sciences, product~~ liability, allied health, general casualty, life sciences, management liability, commercial property, health care, ~~commercial property,~~ environmental, ~~management liability,~~ inland marine, commercial insurance and public ~~entity and commercial insurance.~~entity. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented ~~4.7%~~4.8% of our gross written premiums in the first six months of ~~2018.~~2019.

Components of our results of operations

Gross written premiums

Gross written premiums are the ~~amount~~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;

Conversion of new business submissions into policies;

Renewals of existing policies; and

Average size and premium rate of bound policies.

We earn insurance premiums on a pro rata basis over the term of athe policy. Our insurance policies generally have a term of one year. Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is ceded to third-party reinsurers under our reinsurance agreements.

Ceded written premiums

Ceded written premiums are the amount of gross written premiums ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential large losses. Ceded written premiums are earned over the reinsurance contract

period in proportion to the period of risk covered. The volume of our ceded written premiums is impacted by the level of our gross written premiums and any decision we make to increase or decrease retention levels.

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 from 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.

Net investment gains (losses)

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

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, the costs of our lease, and legal and auditing fees.

Income tax expense

Currently all of our income tax expense relates to federal income taxes. Our insurance subsidiary, Kinsale Insurance Company, 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 we believe 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~~net income, excluding net investment income, net ~~investment~~unrealized gains and losses on equity securities, net realized gains and losses on investments, other income, other expenses and ~~expenses.~~income tax expense. See "—Reconciliation of non-GAAP financial measures" for a reconciliation of net income ~~to underwriting income~~ in accordance with ~~GAAP.~~GAAP to underwriting income.

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 expressed on an annualized basis as a percentage of average beginning and ending total stockholders’ equity during the period.

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.

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. ~~Our overall financial goal is~~See "—Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to ~~produce a return on equity in the mid-teens or higher over the long-term.~~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.

Three months ended June 30, ~~2018~~2019 compared to three months ended June 30, ~~2017~~2018

The following table summarizes our results of operations for the three months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended June 30,											Three Months Ended June 30,
($ in thousands)	2018			2017			Change			% Change		2019			2018			Change			% Change

Gross written premiums	$	69,981		$	57,753		$	12,228		21.2	%	$	94,947		$	69,981		$	24,966		35.7	%
Ceded written premiums	(9,090		)	(7,980		)	(1,110		)	13.9	%	(12,260		)	(9,090		)	(3,170		)	34.9	%
Net written premiums	$	60,891		$	49,773		$	11,118		22.3	%	$	82,687		$	60,891		$	21,796		35.8	%

Net earned premiums	$	50,893		$	43,052		$	7,841		18.2	%	$	66,087		$	50,893		$	15,194		29.9	%
Losses and loss adjustment expenses	29,967			21,859			8,108			37.1	%	39,579			29,967			9,612			32.1	%
Underwriting, acquisition and insurance expenses	12,519			10,492			2,027			19.3	%	16,437			12,519			3,918			31.3	%
Underwriting income ⁽¹⁾	8,407			10,701			(2,294		)	(21.4	)%	10,071			8,407			1,664			19.8	%
Other income (expenses), net	4			(402		)	406			(101.0	)%
Net investment income	3,782			2,432			1,350			55.5	%	4,806			3,782			1,024			27.1	%
Net unrealized gains on equity securities	94			—			94			NM		1,909			94			1,815			1,930.9	%
Net realized gains on investments	174			24			150			625.0	%
Net realized (losses) gains on investments												(235		)	174			(409		)	(235.1	)%
Other (expense) income, net												(16		)	4			(20		)	(500.0	)%
Income before taxes	12,461			12,755			(294		)	(2.3	)%	16,535			12,461			4,074			32.7	%
Income tax expense	2,349			4,260			(1,911		)	(44.9	)%	2,768			2,349			419			17.8	%
Net income	$	10,112		$	8,495		$	1,617		19.0	%	$	13,767		$	10,112		$	3,655		36.1	%

Annualized return on equity	16.6		%	15.4		%						18.5		%	16.6		%
Annualized operating return on equity⁽²⁾												16.7		%	16.2		%

Loss ratio	58.9		%	50.8		%						59.9		%	58.9		%
Expense ratio	24.6		%	24.4		%						24.9		%	24.6		%
Combined ratio	83.5		%	75.2		%						84.8		%	83.5		%

~~NM - Percentage change not meaningful~~

⁽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.~~GAAP to operating income.

Net income was $13.8 million for the three months ended June 30, 2019 compared to $10.1 million for the three months ended June 30, 2018, an increase of 36.1%. The increase in net income for the second quarter of 2019 over the second quarter of 2018 was due to higher earned premiums, resulting from strong growth in broker submissions and higher returns on our investment portfolio. These increases were offset in part by lower favorable development on loss reserves related to prior accident years.

Underwriting income was $10.1 million for the three months ended June 30, ~~2018~~2019 compared to $8.5 million for the three months ended June 30, 2017, an increase of 19.0%. The increase in net income for the second quarter of 2018 over the second quarter of 2017 was due to a lower effective tax rate of 18.9%, resulting from the TCJA and the recognition of tax benefits related to stock options exercised during the second quarter of 2018, and higher net investment income.

~~Underwriting income was~~ $8.4 million for the three months ended June 30, 2018, an increase of 19.8%. The corresponding combined ratios were 84.8% for the three months ended June 30, 2019 compared to ~~$10.7~~83.5% for the three months ended June 30, 2018. The increase in our underwriting income in the second quarter of 2019 compared to the second quarter of 2018, was largely due to

premium growth quarter over quarter, offset in part by lower favorable development on loss reserves from prior accident years.

Premiums

Our gross written premiums were $94.9 million for the three months ended June 30, ~~2017, a decrease of 21.4%. The corresponding combined ratios were 83.5% for the three months ended June 30, 2018~~2019 compared to 75.2% for the three months ended June 30, 2017. The decrease in our underwriting income was due to both lower net favorable prior accident year loss reserve development and a higher current accident year loss ratio, offset in part by higher net earned premiums.

~~Premiums~~

~~Our gross written premiums were~~ $70.0 million for the three months ended June 30, 2018, ~~compared to $57.8 million for the three months ended June 30, 2017,~~ an increase of ~~$12.2~~$25.0 million, or ~~21.2%~~35.7%. The increase in gross written premiums for the second quarter of ~~2018~~2019 over the same period last year was due to a combination of factors including higher ~~submissions~~submission activity ~~across most lines of business.~~from brokers, a favorable E&S market and rate increases on new and renewal policies. The average premium on a policy written was approximately $7,600 in the second quarter of 2019 compared to approximately $7,200 in the second quarter of ~~2018 compared to~~2018. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was approximately ~~$7,800~~$10,500 in the second quarter of ~~2017. The decrease~~2019 compared to $10,000 in ~~the average premium per policy written was due to changes in the mix of business during~~ the second quarter of ~~2018 compared to the same period last year.~~2018.

Net written premiums increased by ~~$11.1~~$21.8 million, or ~~22.3%~~35.8%, to $82.7 million for the three months ended June 30, 2019 from $60.9 million for the three months ended June 30, ~~2018 from $49.8 million for the three months ended June 30, 2017.~~2018. The increase in net written premiums for the second quarter of ~~2018~~2019 compared to the same period last year was primarily due to higher gross written premiums. The net retention ratio was 87.1% for the three months ended June 30, 2019 compared to 87.0% for the three months ended June 30, ~~2018 compared~~2018.

Net earned premiums increased by $15.2 million, or 29.9%, to ~~86.2%~~$66.1 million for the three months ended June 30, ~~2017.~~

~~Net earned premiums increased by $7.8 million, or 18.2%, to~~2019 from $50.9 million for the three months ended June 30, 2018 ~~from $43.1 million for the three months ended June 30, 2017 due~~and was directly related to growth in gross written premiums.

Loss ratio

The loss ratio was 59.9% for the three months ended June 30, 2019 compared to 58.9% for the three months ended June 30, ~~2018 compared to 50.8% for the three months ended June 30, 2017.~~2018. The increase in the loss ratio ~~for~~in the second quarter of ~~2018~~2019 compared to the second quarter of ~~2017~~2018 was due primarily to lower ~~net~~ favorable development ofon loss reserves ~~for~~from prior accident ~~years and an increase in the loss ratio for the current accident year.~~years.

During the second quarter of 2019 and 2018, ~~and 2017,~~ the overall favorable development ofon loss reserves ~~for~~from prior accident years was primarily due to reported losses emerging at lower levels than expected. During the ~~second quarter of 2018,~~three months ended June 30, 2019, prior accident years developed favorably by ~~$2.2 million, of which $3.1 million was attributable to accident years 2015 and 2016. This favorable development was offset in part by adverse development from accident years 2011 through 2014 of $0.9~~$1.4 million. During the ~~second quarter of 2017,~~three months ended June 30, 2018, loss reserves for prior accident years developed favorably by ~~$3.8 million, which was attributable to accident years 2014 to 2016 of $4.3~~$2.2 million. ~~This favorable development was offset in part by adverse development in the 2012 and 2013 accident year of $0.5 million.~~

The following table summarizes the loss ratios for the three months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended June 30,										Three Months Ended June 30,
	2018					2017					2019					2018
($ in thousands)	Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums
Loss ratio:
Current accident year before catastrophe losses	$	32,050		63.0	%	$	25,651		59.6	%	$	40,360		61.1	%	$	32,050		63.0	%
Current year catastrophe losses	156			0.3	%	40			0.1	%	639			1.0	%	156			0.3	%
Effect of prior year development	(2,239		)	(4.4	)%	(3,832		)	(8.9	)%	(1,420		)	(2.2	)%	(2,239		)	(4.4	)%
Total	$	29,967		58.9	%	$	21,859		50.8	%	$	39,579		59.9	%	$	29,967		58.9	%

Expense ratio

~~The expense ratio for the three months ended June 30, 2018 was relatively flat compared to the three months ended June 30, 2017.~~ The following table summarizes the components of the expense ratio for the three months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended June 30,										Three Months Ended June 30,
	2018					2017					2019					2018
($ in thousands)	Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums

Commissions incurred:
Direct	$	8,756		17.2	%	$	7,544		17.5	%	$	11,387		17.2	%	$	8,756		17.2	%
Ceding	(2,464		)	(4.8	)%	(2,466		)	(5.7	)%	(3,114		)	(4.7	)%	(2,464		)	(4.8	)%
Net commissions incurred	6,292			12.4	%	5,078			11.8	%	8,273			12.5	%	6,292			12.4	%
Other underwriting expenses	6,227			12.2	%	5,414			12.6	%	8,164			12.4	%	6,227			12.2	%
Underwriting, acquisition and insurance expenses	$	12,519		24.6	%	$	10,492		24.4	%	$	16,437		24.9	%	$	12,519		24.6	%

The ~~decrease~~expense ratio was 24.9% for the three months ended June 30, 2019 compared to 24.6% for the three months ended June 30, 2018. The slight increase in the other underwriting expense ratio for the three months ended June 30, ~~2018~~2019 compared to the same period last year reflected ~~the benefit of~~ higher ~~net earned premiums without a proportional increase in total other~~variable compensation from improved underwriting ~~expenses from management's focus on controlling costs.~~performance and higher stock-based compensation. Direct commissions paid as a percent of gross written premiums was 14.6% for the three months ended June 30, 2019 and 14.7% for the three months ended June 30, ~~2018 and 14.8% for the three months ended June 30, 2017.~~

~~Combined ratio~~

~~Our combined ratio was 83.5% for the three months ended June 30, 2018 compared to 75.2% for the three months ended June 30, 2017.~~

~~Other expenses, net~~

~~Other expenses of $0.4 million for the three months ended June 30, 2017 were comprised of expenses related to the secondary offering of our common stock in May 2017.~~

2018.

Investing results

Our net investment income increased by ~~55.5%~~27.1% to $4.8 million for the three months ended June 30, 2019 from $3.8 million for the three months ended June 30, ~~2018 from $2.4 million for the three months ended June 30, 2017.~~2018. This increase was primarily due to growth in our investment portfolio balance generated from the investment of excess operating funds ~~generated~~ since ~~the second quarter of 2017~~June 30, 2018 and from higher gross investment ~~returns in the second quarter of 2018 compared to the same period last year as a result of a more favorable interest rate environment and higher dividends.~~returns.

The following table summarizes net investment income and net realized and unrealized investment gains and losses for the three months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended June 30,											Three Months Ended June 30,
($ in thousands)	2018			2017			Change			% Change		2019			2018			Change			% Change

Interest from fixed-maturity securities	$	3,322		$	2,326		$	996		42.8	%	$	4,364		$	3,322		$	1,042		31.4	%
Dividends from equity securities	512			185			327			176.8	%	566			512			54			10.5	%
Other	217			167			50			29.9	%	156			217			(61		)	(28.1	)%
Gross investment income	4,051			2,678			1,373			51.3	%	5,086			4,051			1,035			25.5	%
Investment expenses	(269		)	(246		)	(23		)	9.3	%	(280		)	(269		)	(11		)	4.1	%
Net investment income	3,782			2,432			1,350			55.5	%	4,806			3,782			1,024			27.1	%
Net unrealized gains on equity securities	94			—			94			NM		1,909			94			1,815			1,930.9	%
Net realized gains on investments	174			24			150			625.0	%
Net realized and unrealized investment gains	268			24			244			1,016.7	%
Net realized (losses) gains on investments												(235		)	174			(409		)	(235.1	)%
Total	$	4,050		$	2,456		$	1,594		64.9	%	$	6,480		$	4,050		$	2,430		60.0	%

~~NM - Percentage change not meaningful~~

Our investment portfolio, excluding cash equivalents and unrealized gains and losses, had an annualized gross investment return of 3.2% for the three months ended June 30, 2019, compared to 2.9% for the three months ended June 30, 2018, compared to 2.4% for the three months ended June 30, 2017. As discussed previously, effective January 1, 2018, we adopted a new accounting standard which required changes in the fair value of equity investments to be recognized in net income. During the second quarter of 2018, we recognized unrealized gains of $0.1 million related to our equity portfolio.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 investments for the three months ended June 30, ~~2018~~2019 or ~~2017.~~2018.

Income tax expense

Our income tax expense was $2.8 million for the three months ended June 30, 2019 compared to $2.3 million for the three months ended June 30, ~~2018 compared to $4.3 million~~2018. Our effective tax rate was approximately 16.7% for the three months ended June 30, ~~2017. Our effective tax rate was approximately~~2019 compared to 18.9% for the three months ended June 30, ~~2018 compared to 33.4% for the three months ended June 30, 2017. For the second quarter of 2018, our~~2018. The effective tax ~~rate reflected the Tax Cuts and Jobs Act of 2017, which among other provisions, lowered~~rates were lower than the federal ~~corporate tax~~statutory rate ~~from 35% to~~of 21% ~~starting January 1, 2018. The decrease in the effective tax rate for the three months ended June 30, 2018 compared to the prior-year period was also~~ due to the ~~recognition of~~ tax benefits ~~related to~~from the exercise of stock options ~~exercised during the second quarter of 2018.~~and from income generated by certain tax-advantaged investments.

Six months ended June 30, ~~2018~~2019 compared to six months ended June 30, ~~2017~~2018

The following table summarizes our results of operations for the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,											Six Months Ended June 30,
($ in thousands)	2018			2017			Change			% Change		2019			2018			Change			% Change

Gross written premiums	$	133,828		$	110,615		$	23,213		21.0	%	$	179,573		$	133,828		$	45,745		34.2	%
Ceded written premiums	(17,846		)	(16,680		)	(1,166		)	7.0	%	(23,819		)	(17,846		)	(5,973		)	33.5	%
Net written premiums	$	115,982		$	93,935		$	22,047		23.5	%	$	155,754		$	115,982		$	39,772		34.3	%

Net earned premiums	$	98,954		$	83,485		$	15,469		18.5	%	$	127,578		$	98,954		$	28,624		28.9	%
Losses and loss adjustment expenses	58,866			43,966			14,900			33.9	%	73,311			58,866			14,445			24.5	%
Underwriting, acquisition and insurance expenses	24,917			21,786			3,131			14.4	%	32,053			24,917			7,136			28.6	%
Underwriting income ⁽¹⁾	15,171			17,733			(2,562		)	(14.4	)%	22,214			15,171			7,043			46.4	%
Other expenses, net	(7		)	(402		)	395			(98.3	)%
Net investment income	7,011			4,718			2,293			48.6	%	9,321			7,011			2,310			32.9	%
Net unrealized losses on equity securities	(1,185		)	—			(1,185		)	NM
Net realized gains (losses) on investments	286			(8		)	294			NM
Net unrealized gains (losses) on equity securities												7,804			(1,185		)	8,989			(758.6	)%
Net realized gains on investments												45			286			(241		)	(84.3	)%
Other expense, net												(48		)	(7		)	(41		)	585.7	%
Income before taxes	21,276			22,041			(765		)	(3.5	)%	39,336			21,276			18,060			84.9	%
Income tax expense	3,877			7,265			(3,388		)	(46.6	)%	6,849			3,877			2,972			76.7	%
Net income	$	17,399		$	14,776		$	2,623		17.8	%	$	32,487		$	17,399		$	15,088		86.7	%

Annualized return on equity	14.3		%	13.5		%						22.7		%	14.3		%
Annualized operating return on equity⁽²⁾												18.4		%	14.9		%

Loss ratio	59.5		%	52.7		%						57.5		%	59.5		%
Expense ratio	25.2		%	26.1		%						25.1		%	25.2		%
Combined ratio	84.7		%	78.8		%						82.6		%	84.7		%

~~NM - Percentage change not meaningful~~

⁽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.

Net income was $32.5 million for the six months ended June 30, 2019 compared to $17.4 million for the six months ended June 30, 2018, ~~compared to $14.8 million for the six months ended June 30, 2017,~~ an increase of ~~17.8%~~86.7%. The increase in net income for the first ~~half~~six months of ~~2018~~2019 over the ~~first half of 2017~~same period last year was due to ~~a lower effective tax rate of 18.2%,~~higher earned premiums, resulting from ~~the TCJA~~a combination of strong growth in broker submissions, a favorable E&S market, higher returns on our investment portfolio and ~~the recognition of tax benefits~~higher favorable development on loss reserves related to stock options exercised during the first half of 2018, and higher net investment income. These factors were offset in part by unrealized losses of $1.2 million related to changes in the fair value of equity investments, which were required to be recognized in net income upon the adoption of a new accounting standard.prior accident years.

Underwriting income was $22.2 million for the six months ended June 30, 2019 compared to $15.2 million for the six months ended June 30, 2018, an increase of 46.4%. The corresponding combined ratios were 82.6% for the six months ended June 30, 2019 compared to ~~$17.7~~84.7% for the six months ended June 30, 2018. The increase in our underwriting income in the first six months of 2019 compared to the same period last year was due to premium growth year over year and higher favorable development on loss reserves from prior accident years.

Premiums

Our gross written premiums were $179.6 million for the six months ended June 30, ~~2017, a decrease of 14.4%. The corresponding combined ratios were 84.7% for the six months ended June 30, 2018~~2019 compared to 78.8% for the six months ended June 30, 2017. The decrease in our underwriting income in the first half of 2018 compared to the first half of 2017, was due to lower net favorable development of loss reserves for prior accident years, offset in part by higher net earned premiums.

~~Premiums~~

~~Our gross written premiums were~~ $133.8 million for the six months ended June 30, 2018, ~~compared to $110.6 million for the six months ended June 30, 2017,~~ an increase of ~~$23.2~~$45.7 million, or ~~21.0%~~34.2%. The increase in gross written premiums for the first six months of ~~2018~~2019 over the same period last year was due to a combination of factors including higher submission activity ~~across most lines of business.~~from brokers, a favorable E&S market and rate increases on new and renewal policies. The average premium on a policy written was approximately $7,800 in the first six months of 2019 compared to approximately $7,500 in the first six months of ~~2018 compared to~~2018. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was approximately ~~$8,200 in~~$10,500 for the first six months of ~~2017. The decrease in the average premium per policy written was due to changes in the mix of business during~~2019 and $10,200 for the first ~~half~~six months of ~~2018 compared to the same period last year.~~2018.

Net written premiums increased by ~~$22.0~~$39.8 million, or ~~23.5%~~34.3%, to $155.8 million for the six months ended June 30, 2019 from $116.0 million for the six months ended June 30, ~~2018 from $93.9 million for the six months ended June 30, 2017.~~2018. The increase in net written premiums for the first six months of ~~2018~~2019 compared to the same period last year was primarily due to higher gross written ~~premiums while ceded premiums remained relatively flat.~~premiums. The net retention ratio was 86.7% for both the six months ended June 30, ~~2018 compared~~2019 and 2018.

Net earned premiums increased by $28.6 million, or 28.9%, to ~~84.9%~~$127.6 million for the six months ended June 30, 2017. The increase in the net retention ratio was due to an increase in our retention on the excess casualty reinsurance treaty effective with the renewal on June 1, 2017 and a change in the mix of business.

~~Net earned premiums increased by $15.5 million, or 18.5%, to~~2019 from $99.0 million for the six months ended June 30, 2018 ~~from $83.5 million for the six months ended June 30, 2017~~ due to growth in gross written premiums.

Loss ratio

The loss ratio was 57.5% for the six months ended June 30, 2019 compared to 59.5% for the six months ended June 30, ~~2018 compared to 52.7% for the six months ended June 30, 2017.~~2018. The ~~increase~~decrease in the loss ratio ~~for~~in the first six months of 2019 compared to the first six months of 2018 was due primarily to ~~lower net~~higher favorable development ofon loss reserves ~~for~~from prior accident ~~years in the first half of 2018 compared to the first half of 2017.~~years.

During the first half of 2019 and 2018, ~~and 2017,~~ the overall favorable development ofon loss reserves ~~for~~from prior accident years was primarily due to reported losses emerging at lower levels than expected. During the six months ended June 30, ~~2018,~~2019, prior accident years developed favorably by ~~$3.5~~$7.8 million, of which ~~$6.3~~$14.0 million was attributable to accident years ~~2015 through 2017.~~2017 and 2018. This favorable development in 2019 was offset in part by adverse development ~~from~~in the accident years 2011 through ~~2014~~2016 of ~~$2.8 million.~~$6.2 million primarily related to a modest amount of conservatism added to our IBNR reserve to provide for emergence of reported losses over a longer period of time. During the six months ended June 30, ~~2017,~~2018, loss reserves for prior accident years developed favorably by ~~$8.9~~$3.5 million, which was largely attributable to accident years 2015 ~~and 2016~~through 2017 of ~~$9.5~~$6.3 million. This favorable development in 2018 was offset in part by adverse development in the ~~2013~~ accident ~~year~~years 2011 through 2014 of ~~$1.1~~$2.8 million.

The following table summarizes the loss ratios for the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,										Six Months Ended June 30,
	2018					2017					2019					2018
($ in thousands)	Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums		Losses and Loss Adjustment Expenses			% of Earned Premiums
Loss ratio:
Current accident year before catastrophe losses	$	62,233		62.9	%	$	52,788		63.3	%	$	80,458		63.1	%	$	62,233		62.9	%
Current year catastrophe losses	156			0.2	%	114			0.1	%	669			0.5	%	156			0.2	%
Effect of prior year development	(3,523		)	(3.6	)%	(8,936		)	(10.7	)%	(7,816		)	(6.1	)%	(3,523		)	(3.6	)%
Total	$	58,866		59.5	%	$	43,966		52.7	%	$	73,311		57.5	%	$	58,866		59.5	%

Expense ratio

The following table summarizes the components of the expense ratio for the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,										Six Months Ended June 30,
	2018					2017					2019					2018
($ in thousands)	Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums		Underwriting Expenses			% of Earned Premiums

Commissions incurred:
Direct	$	17,135		17.3	%	$	14,693		17.6	%	$	22,061		17.3	%	$	17,135		17.3	%
Ceding	(4,908		)	(4.9	)%	(4,812		)	(5.8	)%	(6,052		)	(4.7	)%	(4,908		)	(4.9	)%
Net commissions incurred	12,227			12.4	%	9,881			11.8	%	16,009			12.6	%	12,227			12.4	%
Other underwriting expenses	12,690			12.8	%	11,905			14.3	%	16,044			12.5	%	12,690			12.8	%
Underwriting, acquisition and insurance expenses	$	24,917		25.2	%	$	21,786		26.1	%	$	32,053		25.1	%	$	24,917		25.2	%

The expense ratio was 25.1% for the six months ended June 30, 2019 compared to 25.2% for the six months ended June 30, ~~2018 compared to 26.1% for the six months ended June 30, 2017.~~2018. The decrease in the other underwriting expense ratio for the six months ended June 30, ~~2018~~2019 compared to ~~the expense ratio for~~ the same period last year reflected the benefit of higher net earned premiums without a proportional increase in total other underwriting expenses resulting from management's focus on controlling costs. Direct commissions paid as a percent of gross written premiums was 14.6% for the six months ended June 30, 2019 and 14.7% for the six months ended June 30, ~~2018 and 14.8% for the six months ended June 30, 2017.~~

~~Combined ratio~~

~~Our combined ratio was 84.7% for the six months ended June 30, 2018 compared to 78.8% for the six months ended June 30, 2017.~~

~~Other expenses, net~~

~~Other expenses of $0.4 million for the six months ended June 30, 2017 were comprised of expenses related to the secondary offering of our common stock in May 2017.~~2018.

Investing results

Our net investment income increased by ~~48.6%~~32.9% to $9.3 million for the six months ended June 30, 2019 from $7.0 million for the six months ended June 30, ~~2018 from $4.7 million for~~2018. This increase in the first six months ~~ended June 30, 2017. This increase~~of 2019 compared to the same period last year was primarily due to growth in our investment portfolio balance generated from the investment of excess operating funds since June 30, 2018 and from higher gross investment ~~returns in the first half of 2018 compared to the same period last year as a result of a more favorable interest rate environment and higher dividends.~~returns.

The following table summarizes net investment income and net realized and unrealized investment gains and losses for the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,											Six Months Ended June 30,
($ in thousands)	2018			2017			Change			% Change		2019			2018			Change			% Change

Interest from fixed-maturity securities	$	6,168		$	4,657		$	1,511		32.4	%	$	8,439		$	6,168		$	2,271		36.8	%
Dividends from equity securities	924			295			629			213.2	%	1,087			924			163			17.6	%
Other	477			254			223			87.8	%	401			477			(76		)	(15.9	)%
Gross investment income	7,569			5,206			2,363			45.4	%	9,927			7,569			2,358			31.2	%
Investment expenses	(558		)	(488		)	(70		)	14.3	%	(606		)	(558		)	(48		)	8.6	%
Net investment income	7,011			4,718			2,293			48.6	%	9,321			7,011			2,310			32.9	%
Net unrealized losses on equity securities	(1,185		)	—			(1,185		)	NM
Net realized gains (losses) on investments	286			(8		)	294			NM
Net realized and unrealized investment losses	(899		)	(8		)	(891		)	NM
Net unrealized gains (losses) on equity securities												7,804			(1,185		)	8,989			(758.6	)%
Net realized gains on investments												45			286			(241		)	(84.3	)%
Total	$	6,112		$	4,710		$	1,402		29.8	%	$	17,170		$	6,112		$	11,058		180.9	%

~~NM - Percentage change not meaningful~~

Our investment portfolio, excluding cash equivalents and unrealized gains and losses, had an annualized gross investment return of 3.2% for the six months ended June 30, 2019, compared to 2.9% for the six months ended June 30, 2018, compared to 2.3% for the six months ended June 30, 2017. As discussed previously, effective January 1, 2018, we adopted a new accounting standard which required changes in the fair value of equity investments to be recognized in net income. During the first half of 2018, we recognized unrealized losses of $1.2 million related to our equity portfolio.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 investments for the six months ended June 30, ~~2018~~2019 or ~~2017.~~2018.

Income tax expense

Our income tax expense was $6.8 million for the six months ended June 30, 2019 compared to $3.9 million for the six months ended June 30, ~~2018 compared to $7.3 million~~2018. Our effective tax rate was approximately 17.4% for the six months ended June 30, ~~2017. Our effective tax rate was approximately~~2019 compared to 18.2% for the six months ended June 30, ~~2018 compared to 33.0% for the six months ended June 30, 2017. For the first six months of 2018, our~~2018. The effective tax ~~rate reflected the Tax Cuts and Jobs Act of 2017, which among other provisions, lowered~~rates were lower than the federal ~~corporate tax~~statutory rate ~~from 35% to~~of 21% ~~starting January 1, 2018. The decrease in the effective tax rate for the six months ended June 30, 2018 compared to the prior-year period was also~~primarily due to the ~~recognition of~~ tax benefits ~~related to~~from the exercise of stock options ~~exercised during the first half of 2018.~~and from income generated by certain tax-advantaged investments.

Return on equity

Our annualized return on equity was 22.7% for the six months ended June 30, 2019 compared to 14.3% for the six months ended June 30, ~~2018 compared to 13.5%~~2018. Our annualized operating return on equity was 18.4% for the six months ended June 30, ~~2017.~~2019 compared to 14.9% for the six months ended June 30, 2018. The increase in annualized operating return on equity for the six months ended June 30, ~~2018~~2019 compared to the prior-year period was ~~largely~~ due to ~~the lower income tax rate as~~ a ~~result~~number of ~~the Tax Cuts and Jobs Act of 2017 and~~factors, including premium growth, higher overall returns on ~~our~~the investment ~~portfolio.~~portfolio and higher favorable development on loss reserves from prior accident years.

Liquidity and capital resources

Sources and uses of funds

We are organized as a Delaware holding company with our operations primarily conducted by our wholly-owned insurance subsidiary, Kinsale Insurance Company, which is domiciled in Arkansas. Accordingly, we may receive cash

through (1) loans from banks and other third parties, (2) issuance of equity and debt securities, (3) corporate service fees from our insurance subsidiary, (4) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions, and (5) dividends from our insurance subsidiary. We may use the proceeds from these sources to contribute funds to Kinsale Insurance Company in order to support premium growth, reduce our reliance on reinsurance, pay dividends and taxes and for other business purposes.

We receive corporate service fees from Kinsale Insurance Company to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.

Management believes that the Company has sufficient liquidity available both in Kinsale and in its insurance subsidiary, Kinsale Insurance Company, as well as in its other operating subsidiaries, to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.

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. In May 2019, we entered in to a Credit Agreement (the “Credit Agreement”) which provides for a 5-year senior unsecured revolving credit facility of $50 million (the “Credit Facility”). As of June 30, 2019, there were no outstanding balances under the Credit Facility. See "—Liquidity and Capital Resources, Credit agreement" below for further details regarding this financing.

Cash flows

Our most significant source of cash is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that earn interest and dividends. We also use cash to pay commissions to insurance brokers, as well as to pay for ongoing operating expenses such as salaries, rent and taxes. As described under "—Reinsurance" below, we use reinsurance to manage the risk that we take onrelated to the issuance of our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.

The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018 were:


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
	(in thousands)						(in thousands)
Cash and cash equivalents provided by (used in):
Operating activities	$	50,423		$	40,782		$	71,292		$	50,423
Investing activities	(50,176		)	4,421			(64,939		)	(50,176		)
Financing activities	(2,324		)	(2,525		)	(3,311		)	(2,324		)
Change in cash and cash equivalents	$	(2,077	)	$	42,678		$	3,042		$	(2,077	)

Net cash provided by operating activities was approximately ~~$50.4~~$71.3 million for the six months ended June 30, ~~2018,~~2019, compared to ~~$40.8~~$50.4 million for the same period in ~~2017.~~2018. This increase was largely driven by higher premium volume, the timing of claim payments and reinsurance recoveries, and changes in operating assets and liabilities.

Net cash used in investing activities was $64.9 million for the six months ended June 30, 2019, compared to $50.2 million for the six months ended June 30, ~~2018, compared to net~~2018. Net cash ~~provided by~~used in investing activities during the first six months of ~~$4.4~~2019 reflected purchases of fixed-maturity securities of $115.4 million, ~~for~~comprised of asset and mortgage-backed securities and corporate bonds. During the first six months of 2019, we received proceeds of $31.4 million from sales of fixed-maturity securities, principally municipal bonds, and $25.7 million from redemptions of corporate bonds and asset and mortgage-backed securities. During the six months ended June 30, ~~2017. Net~~2019, purchases and sales of non-redeemable preferred stocks were $2.1 million and $2.9 million, respectively, and purchases of ETFs were $1.5 million. In addition, net cash used in investing activities included the purchase property and equipment of $6.0 million mostly related to the development of our new corporate headquarters, discussed previously.

Cash used in investing activities during the first six months of 2018 reflected purchases of ~~fixed-maturity~~fixed-income securities of $110.0 million, ~~comprised largely of~~principally corporate bonds and asset-backed ~~securities, and purchases~~securities. In addition, we purchased $7.2 million of equity securities during the first six months of ~~$7.2 million,~~2018, principally

exchange traded funds ~~("ETFs")~~(ETFs). During the first half of 2018, we received proceeds of $65.6 million from maturities and sales of fixed-maturity securities and $1.9 million from the sale of an intermediate-term bond ETF and preferred stocks. Cash provided by investing activities during the first half of 2017 reflected proceeds received from sales and maturing fixed income securities of $46.4 million, offset in part by selective purchases of fixed income securities, principally municipal bonds and asset backed securities of $21.2 million. In addition, we purchased $14.5 million of short-term investments and ~~$6.3 million~~ ~~of equity securities during~~

During the first six months of ~~2017.~~

June 30, 2019, cash used in financing activities reflected dividends paid of $0.08 per common share, or $3.4 million in aggregate. During the first six months of June 30 2018, cash used in financing activities primarily reflected dividends paid of ~~$0.14~~$0.07 per common share, or $2.9 million in aggregate. ~~During~~Net proceeds received from our equity compensation plans were $0.4 million and $0.6 million for the ~~first~~ six months ended June 30, 2019 and 2018, respectively. In addition, debt issuance costs related to the credit facility previously discussed were $0.3 million.

Credit agreement

On May 28, 2019, the Company entered into a Credit Agreement that provided the Company with a $50 million Credit Facility. The Credit Facility has a maturity of ~~2017, cash~~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. Interest rates on borrowings are based on prevailing interest rates and the applicable margin, as described in ~~financing activities primarily reflected dividends paid~~the Credit Agreement. As of ~~$0.12 per common share, or $2.5 million in aggregate.~~June 30, 2019, there were no outstanding balances under the Credit Facility.

Reinsurance

We enter into reinsurance contracts primarily to limit our exposure to potential large losses. Reinsurance involves an insurance company transferring ("ceding") a portion of its exposure on a risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. Our reinsurance is primarily contracted under quota-share reinsurance contracts and excess of loss contracts. In ~~quota share~~quota-share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses, in excess of a specified amount. Under excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company's losses.

We use facultative reinsurance coverage on a limited basis. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is 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 June 30, ~~2018:~~2019:



Line of Business Covered	Company Policy Limit	Reinsurance Coverage	Company Retention
Property - per risk	Up to $10.0 million per risk	$~~9.0~~8.0 million excess of ~~$1.0~~$2.0 million	$~~1.0~~2.0 million per occurrence
Property - catastrophe (1)	N/A	$~~45.0~~77.5 million excess of ~~$5.0~~$7.5 million	$~~5.0~~7.5 million per catastrophe
Primary casualty (2)	Up to $10.0 million per occurrence	$~~9.0~~8.0 million excess of ~~$1.0~~$2.0 million	$~~1.0~~2.0 million per occurrence
Excess casualty (3)	Up to $10.0 million per occurrence	Variable quota share	$~~1.5~~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 ~~$90~~$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 ~~$1.0~~$2.0 million or less.

(3)

For policies with a per occurrence limit higher than ~~$1.0~~$2.0 million, the ~~quota share~~quota-share ceding percentage varies such that the retention is always ~~$1.5~~$2.0 million or less. For example, for a ~~$2.0~~$4.0 million limit excess policy, our retention would be ~~75%~~50%, whereas for a $10.0 million limit excess policy, our retention would be ~~15%~~20%. For policies for which we also write an underlying primary limit, the retention on the primary and excess policy combined would not exceed ~~$1.5~~$2.0 million.

At each renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.

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 ~~therefore,~~if such an event occurred, we would establish ~~allowances~~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 June 30, ~~2018,~~2019, all reinsurance contracts that our insurance subsidiary was a party to were with companies with A.M. Best ratings of "A" (Excellent) or better. As of June 30, ~~2018,~~2019, we have never had a loss for uncollectible reinsurance.

Ratings

Kinsale Insurance Company has a financial strength rating of "A-" (Excellent) with a positive outlook 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 directed at investors.

The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The "A-" (Excellent) rating obtained by Kinsale Insurance Company is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan.

Financial condition

Stockholders' equity

At June 30, ~~2018,~~2019, total stockholders' equity was ~~$247.9~~$307.9 million and tangible stockholders' equity was ~~$245.2~~$305.1 million, compared to total stockholders' equity of ~~$238.2~~$264.0 million and tangible stockholders' equity ~~$235.4~~$261.2 million at December 31, ~~2017.~~2018. The increases in both total and tangible stockholders' equity over the prior year-end balances were primarily due to profits generated during the period, ~~offset in part by~~ an increase in unrealized ~~losses~~gains on available-for-sale investments, net of taxes, and activity related to stock-based compensation plans, offset in part by the payment of dividends.

Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as total stockholders’ equity less intangible assets, net of deferred taxes. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders' equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Stockholders' equity at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, reconciles to tangible stockholders' equity as follows:


	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(in thousands)				(in thousands)
Stockholders' equity	$	247,945	$	238,189	$	307,907	$	263,986
Less: intangible assets, net of deferred taxes	2,795		2,795		2,795		2,795
Tangible stockholders' equity	$	245,150	$	235,394	$	305,112	$	261,191

Investment portfolio

At June 30, ~~2018,~~2019, our cash and invested assets of ~~$605.8~~$734.1 million consisted of fixed-maturity securities, cash and cash equivalents and equity securities. At June 30, ~~2018,~~2019, the majority of the investment portfolio was comprised of fixed-maturity securities of ~~$467.9~~$590.1 million that were classified as available-for-sale. Available-for-sale investments are carried

at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. At June 30, ~~2018,~~2019, we also held ~~$79.7~~$78.1 million of cash and cash equivalents and ~~$58.2~~$65.9 million of equity securities, which ~~are~~were comprised of ETFs and ~~nonredeemable~~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," 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 ~~4.0~~3.9 years at June 30, ~~2018 compared to 3.9 years at~~2019 and December 31, ~~2017~~2018 and an average rating of "AA" at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the amortized cost and fair value on fixed-maturity securities were as follows:


	June 30, 2018						December 31, 2017						June 30, 2019						December 31, 2018
	Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value
	($ in thousands)												($ in thousands)
Fixed maturities:
Fixed-maturity securities:
U.S. Treasury securities and obligations of U.S. government agencies	$	608	$	607	0.1	%	$	9,108	$	9,098	2.1	%	$	110	$	113	—	%	$	610	$	611	0.1	%
Obligations of states, municipalities and political subdivisions	155,799		155,601		33.3	%	161,012		164,326		38.7	%	125,619		131,961		22.4	%	153,884		154,600		30.3	%
Corporate and other securities	85,672		85,008		18.2	%	71,224		71,631		16.9	%	125,873		129,216		21.9	%	97,889		96,752		19.0	%
Asset-backed securities	125,030		124,048		26.5	%	95,223		95,360		22.4	%	175,355		177,865		30.1	%	151,137		149,867		29.4	%
Residential mortgage-backed securities	105,309		102,658		21.9	%	85,688		84,776		19.9	%	150,226		150,922		25.6	%	110,717		108,421		21.2	%
Total fixed maturities	$	472,418	$	467,922	100.0	%	$	422,255	$	425,191	100.0	%
Total fixed-maturity securities													$	577,183	$	590,077	100.0	%	$	514,237	$	510,251	100.0	%

The table below summarizes the credit quality of our fixed-maturity securities at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, as rated by Standard & Poor’s Financial Services, LLC ("Standard & Poor's"):


	June 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
Standard & Poor’s or Equivalent Designation	Estimated Fair Value		% of Total		Estimated Fair Value		% of Total		Estimated Fair Value		% of Total		Estimated Fair Value		% of Total
	($ in thousands)								($ in thousands)
AAA	$	113,012	24.1	%	$	85,199	20.0	%	$	180,920	30.7	%	$	133,028	26.1	%
AA	192,242		41.1	%	190,044		44.7	%	205,877		34.9	%	199,026		39.0	%
A	113,627		24.3	%	112,129		26.4	%	120,307		20.3	%	108,972		21.3	%
BBB	40,668		8.7	%	28,715		6.8	%	77,738		13.2	%	61,037		12.0	%
Below BBB and unrated	8,373		1.8	%	9,104		2.1	%	5,235		0.9	%	8,188		1.6	%
Total	$	467,922	100.0	%	$	425,191	100.0	%	$	590,077	100.0	%	$	510,251	100.0	%

The amortized cost and fair value of our ~~available-for-sale investments in~~ fixed-maturity securities summarized by contractual maturity as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, were as follows:


	June 30, 2018						December 31, 2017						June 30, 2019						December 31, 2018
	Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value		Amortized Cost		Estimated Fair Value		% of Total Fair Value
	($ in thousands)												($ in thousands)
Due in one year or less	$	24,944	$	24,857	5.3	%	$	50,020	$	49,973	11.8	%	$	3,914	$	3,922	0.7	%	$	10,283	$	10,252	2.0	%
Due after one year through five years	49,867		49,735		10.6	%	28,979		29,299		6.9	%	95,702		98,079		16.6	%	67,670		67,426		13.2	%
Due after five years through ten years	39,180		39,529		8.5	%	28,733		29,800		7.0	%	50,116		52,709		8.9	%	55,725		56,235		11.0	%
Due after ten years	128,088		127,095		27.2	%	133,612		135,983		32.0	%	101,870		106,580		18.1	%	118,705		118,050		23.1	%
Asset-backed securities	125,030		124,048		26.5	%	95,223		95,360		22.4	%	175,355		177,865		30.1	%	151,137		149,867		29.4	%
Residential mortgage-backed securities	105,309		102,658		21.9	%	85,688		84,776		19.9	%	150,226		150,922		25.6	%	110,717		108,421		21.3	%
Total fixed maturities	$	472,418	$	467,922	100.0	%	$	422,255	$	425,191	100.0	%	$	577,183	$	590,077	100.0	%	$	514,237	$	510,251	100.0	%

Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of June 30, ~~2018,~~2019, approximately ~~6.5%~~6.3% of our total cash and investments were invested in ~~ETFs, which provide low-cost diversification.~~ETFs. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, our ETF ~~balance was~~balances were comprised of the following funds:


	June 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
Fund	Fair Value		% of Total		Fair Value		% of Total		Fair Value		% of Total		Fair Value		% of Total
	($ in thousands)								($ in thousands)
Domestic stock market fund	$	21,669	54.9	%	$	16,088	46.8	%	$	23,613	50.9	%	$	19,899	51.0	%
Dividend yield equity fund									10,624		22.9	%	9,344		24.0	%
Foreign stock market fund	9,879		25.1	%	9,297		27.0	%	10,011		21.6	%	8,817		22.6	%
Dividend yield equity fund	7,886		20.0	%	8,010		23.3	%
Intermediate-term corporate bond fund	—		—	%	985		2.9	%
Small-cap index									2,148		4.6	%	927		2.4	%
Total	$	39,434	100.0	%	$	34,380	100.0	%	$	46,396	100.0	%	$	38,987	100.0	%

As of June 30, ~~2018,~~2019, approximately ~~3.1%~~2.7% of our total cash and investments were invested in ~~nonredeemable~~non-redeemable preferred stock. A summary of these securities by industry segment is shown below as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	June 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
Industry	Fair Value		% of Total		Fair Value		% of Total		Fair Value		% of Total		Fair Value		% of Total
	($ in thousands)								($ in thousands)
Financial	$	14,292	76.1	%	$	15,859	80.3	%	$	15,665	80.3	%	$	14,618	78.1	%
Utilities	2,808		14.9	%	2,120		10.7	%	2,785		14.3	%	2,734		14.6	%
Industrials and other	1,685		9.0	%	1,773		9.0	%	1,064		5.4	%	1,372		7.3	%
Total	$	18,785	100.0	%	$	19,752	100.0	%	$	19,514	100.0	%	$	18,724	100.0	%

Restricted investments

In order to conduct business in certain states, we are required to maintain letters of credit or assets on deposit to support state-mandated insurance regulatory requirements and to comply with certain third-party agreements. Assets held on deposit or in trust accounts are primarily in the form of high-grade securities. The fair value of our restricted assets was$6.9 million at June 30, ~~2018~~2019 and ~~$7.1 million at~~ December 31, ~~2017.~~2018.

Off-balance sheet arrangements

We do not have any material off-balance sheet arrangements at June 30, ~~2018.~~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~~defined as net income excluding net investment ~~income. Underwriting~~ income, ~~represents the pre-tax profitability of our insurance operations~~net unrealized gains and ~~is derived by subtracting~~ losses on equity securities, net realized gains and ~~loss adjustment~~losses on investments, other income, other expenses and ~~underwriting, acquisition and insurance expenses from net earned premiums. We use~~income tax expense. The Company uses underwriting income as an internal performance measure in the management of ~~our~~its operations because ~~we believe~~the Company believes it gives usmanagement and users of ~~our~~the Company's financial information useful insight into ~~our~~the Company's 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.

Net income for the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, reconciles to underwriting income as follows:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2019			2018			2019			2018

Net income	$	10,112		$	8,495		$	17,399		$	14,776		$	13,767		$	10,112		$	32,487		$	17,399
Income tax expense	2,349			4,260			3,877			7,265			2,768			2,349			6,849			3,877
Income before income taxes	12,461			12,755			21,276			22,041			16,535			12,461			39,336			21,276
Other expenses	—			402			14			402			21			—			57			14
Net investment income	(3,782		)	(2,432		)	(7,011		)	(4,718		)	(4,806		)	(3,782		)	(9,321		)	(7,011		)
Net unrealized (gains) losses on equity securities	(94		)	—			1,185			—			(1,909		)	(94		)	(7,804		)	1,185
Net realized (gains) losses on investments	(174		)	(24		)	(286		)	8
Net realized losses (gains) on investments													235			(174		)	(45		)	(286		)
Other income	(4		)	—			(7		)	—			(5		)	(4		)	(9		)	(7		)
Underwriting income	$	8,407		$	10,701		$	15,171		$	17,733		$	10,071		$	8,407		$	22,214		$	15,171

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

from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.

Net income for the three and six months ended June 30, 2019 and 2018, reconciles to net operating earnings as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2019			2018			2019			2018

Net operating earnings:
Net income	$	13,767		$	10,112		$	32,487		$	17,399
Net unrealized (gains) losses on equity securities, after taxes	(1,508		)	(74		)	(6,165		)	936
Net realized losses (gains) on investments, after taxes	186			(137		)	(36		)	(226		)
Net operating earnings	$	12,445		$	9,901		$	26,286		$	18,109

Operating return on equity:
Average equity ⁽¹⁾	$	298,398		$	243,898		$	285,947		$	243,067
Annualized return on equity ⁽²⁾	18.5		%	16.6		%	22.7		%	14.3		%
Annualized operating return on equity ⁽³⁾	16.7		%	16.2		%	18.4		%	14.9		%

⁽¹⁾Computed by adding the total equity as of the date indicated to the prior quarter-end or year-end total, as applicable, and dividing by two.

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

⁽³⁾Annualized operating return on equity is net operating earnings expressed on an annualized basis 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. 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. Our critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. Our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We do not have any material exposure to foreign currency exchange rate risk or commodity risk.

There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective.

Changes in Internal ~~Controls~~Control over Financial Reporting

~~No changes~~There was no change in our internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred~~ during the second quarter ~~ended June 30, 2018~~of 2019 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6. Exhibits



Exhibit Number		Description
31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS **		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* This certification is deemed not filed for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

** The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		KINSALE CAPITAL GROUP, INC.
Date: August ~~6, 2018~~1, 2019	By:	/s/ Michael P. Kehoe
		Michael P. Kehoe President and Chief Executive Officer

Date: August ~~6, 2018~~1, 2019	By:	/s/ Bryan P. Petrucelli
		Bryan P. Petrucelli Senior Vice President, Chief Financial Officer and Treasurer

4042



	For the Six Months Ended June 30, 2018
	Number of Shares	Weighted Average Grant Date Fair Value per Share
Nonvested outstanding at the beginning of the period	—	$	—
Granted	94,270	$	52.99
Vested	—	$	—
Forfeited	—	$	—
Nonvested outstanding at the end of the period	94,270	$	52.99