The following tables present our selected consolidated financial and other data, at the dates and for the periods indicated. The selected consolidated financial and other data set forth below as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 have been derived from our audited consolidated financial statements for those years.
(3) During the fourth quarter of 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted, which lowered the federal corporate tax rate from 35% to 21% starting January 1, 2018. As a result of the TCJA enactment, deferred tax balances were remeasured to reflect the lower rate, which resulted in charge to tax expense of $1.9 million for the year ended December 31, 2017.
(4) Underwriting income is a non-GAAP financial measure. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income to underwriting income.
(5) In connection with the IPO, the Company amended and restated its certificate of incorporation, which reclassified the Company’s former Class A Common Stock and Class B Common Stock into a single class of common stock.
(11) The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(14) Operating return on equity is net operating earnings expressed as a percentage of average beginning and ending stockholders’ equity during the period and is a non-GAAP financial measure. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income to net operating earnings.
Year ended December 31, 2019 compared to year ended December 31, 2018
We have one reportable segment, our Excess and Surplus Lines Insurance segment, which offers P&C insurance products through the E&S market. In 2020, the percentage breakdown of our gross written premiums was 85.6% casualty and 14.4% property. Our commercial lines offerings include construction, small business, excess casualty, commercial property, product liability, allied health, life sciences, general casualty, professional liability, management liability, energy, environmental, health care, inland marine, public entity and commercial insurance. We also write a small amount of homeowners insurance in the personal lines market, which in aggregate represented 3.9% of our gross written premiums in 2020.
We are closely monitoring the impact of the COVID-19 pandemic and related economic effects on all aspects of our business, including how it will impact premium volume, losses and the fair value of our investment portfolio.
preceding COVID-19, the E&S segment of the P&C market has been experiencing rapid growth due to dislocation in the overall property and casualty market.
•Trends in the average size of losses incurred on a particular type of business;
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 but not limited to employment costs, telecommunication and technology costs, and legal and auditing fees.
Net investment income is an important component of our results of operations. We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed-maturity securities, and may also include cash and cash equivalents, equity securities and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims.
Change in fair value of equity securities represents the increase or decrease in the market value of equity securities held during the period.
Net operating earnings is a non-GAAP financial measure. We define net operating earnings as net income excluding the net change in the fair value of equity securities, after taxes, and net realized gains and losses on investments, after taxes. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to net operating earnings.
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 stockholders’ equity during the period. See "-Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net income in accordance with GAAP to net operating earnings.
The following table summarizes our results of operations for the years ended December 31, 2020 and 2019:
Gross written premiums were $552.8 million for the year ended December 31, 2020 compared to $389.7 million for the year ended December 31, 2019, an increase of $163.1 million, or 41.9%. The increase in gross written premiums for the for the year ended December 31, 2020 over the prior year was due to higher submission activity from brokers across most lines of business and higher rates on bound accounts, resulting from continued favorable market conditions. The average premium per policy written by us was $9,100 in 2020 compared to $8,200 in 2019. Excluding our personal lines insurance, which has relatively low premiums per policy written, the average premium per policy written was approximately $11,800 in 2020 compared to $10,800 in 2019. The increase in the average premium per policy written was due to changes in the mix of business and higher rates on bound accounts during 2020 compared to the prior year. The changes in gross written premiums were most notable in the following lines of business:
•Excess casualty, which represented approximately 13.9% of our gross written premiums in 2020, increased by $25.5 million, or 49.8%, for the year ended December 31, 2020 over the prior year;
On an inception-to-date basis as of December 31, 2020, all accident years have developed favorably, with the exception of the 2011 accident year.
The following tables summarize the effect of the factors indicated above on the loss ratios for the years ended December 31, 2020 and 2019:
The expense ratio was 22.8% for the year ended December 31, 2020 compared to 24.8% for the year ended December 31, 2019. The decrease in the expense ratio was primarily due to higher net earned premiums, without a proportional increase in the amount of other underwriting expenses as a result of management's focus on controlling costs. Direct commissions paid as a percent of gross written premiums was 14.6% for the years ended December 31, 2020 and 2019.
The following table summarizes the components of net investment income and net investment gains for the years ended December 31, 2020 and 2019:
The weighted average duration of our fixed-maturity portfolio, including cash equivalents, was 4.3 years at December 31, 2020 and 2019. Our investment portfolio had a gross return of 2.9% as of December 31, 2020, compared to 3.1% as of December 31, 2019.
During the year ended December 31, 2020, we recognized unrealized gains related to our equity portfolio of $16.9 million, of which $16.4 million was related to our ETFs. Our ETF portfolio is generally reflective of the performance in the broader domestic stock markets. During the first quarter of 2020, the fair values our ETFs declined by $13.1 million, driven by the disruption in the financial markets associated with the COVID-19 pandemic. The fair value of these funds rebounded sharply during the second quarter of 2020, gaining back a substantial portion of the decline in value, and fair values continued to increase during the latter half of 2020 on an improving outlook. For the year ended December 31, 2019, we recognized unrealized gains related to our equity portfolio of $12.4 million and was reflective of gains in the broader stock markets during this period.
Net capital gains were $3.5 million for the year ended December 31, 2020, primarily due to the sale of corporate bonds to realize favorable investment valuations.
We perform quarterly reviews of all available-for-sale securities within our investment portfolio to determine whether the decline in a security's fair value is deemed to be a credit loss. Management concluded that there were no credit losses (previously known as other-than-temporary impairments) from available-for-sale investments for the year ended December 31, 2020 or 2019.
Our return on equity was 18.0% for the year ended December 31, 2020 compared to 18.9% for the year ended December 31, 2019. Operating return on equity was 14.7% for the full year of 2020, a decrease from 15.9% for the full year of 2019. The decrease in the operating return on equity was due largely to the proceeds received from our equity offering in the third quarter of 2020 and catastrophe losses incurred during the year, offset in part by higher net income.
As of December 31, 2020, our holding company had $8.4 million in cash and investments, compared to $14.7 million as of December 31, 2019.
Loans under the Credit Facility may be subject to varying rates of interest depending on whether the loan is a Eurodollar loan or an alternate base rate (ABR) loan, at the Company's election. Eurodollar loans bear an interest rate per annum equal to adjusted LIBOR for the applicable interest period plus a margin of 1.75%. ABR loans bear an interest rate per annum equal to the higher of the prime rate, the New York Federal Reserve Board Rate or the one-month adjusted LIBOR, plus the applicable margin of 0.75% or 1.75%, depending on which interest option was applicable for the particular ABR loan.
On August 7, 2020, we completed an underwritten public offering and sold and issued 310,500 shares of our common stock at a price of $190 per share. After deducting underwriting discounts and commissions, we received net proceeds of $56.7 million, which was used for general corporate purposes, including to fund organic growth.
The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future.
Our cash flows for the years ended December 31, 2020 and 2019 were:
$60.4 million and municipal bonds of $42.8 million. During 2019, we received proceeds of $35.5 million from sales of fixed-maturity securities, largely municipal bonds in order to take advantage of favorable valuations. In addition, we received proceeds of $67.9 million from redemptions of asset- and mortgage-backed securities and corporate bonds.
During 2019, the Company reallocated its ETFs from foreign and small-cap funds to domestic equity funds to more closely mirror the broader U.S. stock market. For the year ended December 31, 2019, purchases and sales of ETFs were $19.3 million and $13.7 million, respectively. For the year ended December 31, 2019, purchases and sales of non-redeemable preferred stocks were $10.6 million and $7.8 million, respectively. Net cash used in investing activities during 2019 included purchases of property and equipment of $19.6 million and was principally comprised of expenditures related to the construction of our new corporate headquarters, discussed previously.
For the year ended December 31, 2020, net cash provided by financing activities was $76.1 million and reflected the proceeds from our equity offering of $56.7 million, previously discussed, and the drawdown of $25.7 million on our Credit Facility, which was used to fund construction of our new headquarter facilities. During the year ended December 31, 2020, we paid dividends of $0.36 per common share, or $8.1 million in the aggregate. Proceeds received from our equity compensation plans were $3.6 million, offset by payroll taxes withheld and remitted on restricted stock awards of $1.8 million for the year ended December 31, 2020.
As of December 31, 2020, Kinsale Insurance has only contracted with reinsurers with A.M. Best financial strength ratings of "A" (Excellent) or better. At December 31, 2020, the net reinsurance receivable, defined as the sum of paid and unpaid reinsurance recoverables, ceded unearned premiums less reinsurance payables, from five reinsurers represented 78.1% of the total balance. During 2020, we adopted new accounting guidance ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and, as a result, we recorded an allowance for doubtful accounts of $0.3 million related to our reinsurance balances at December 31, 2020.
Reserves for losses and loss adjustment expenses represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our consolidated financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by period are based on Company experience as well as on industry and peer-group claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for losses and loss adjustment expenses are reported
separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and loss adjustment expenses totaled $93.2 million at December 31, 2020.
At December 31, 2020, total stockholders' equity was $576.2 million and tangible stockholders' equity was $573.4 million, compared to total stockholders' equity of $405.9 million and tangible stockholders' equity of $403.1 million at December 31, 2019. The increase in both total stockholders' equity and tangible stockholders' equity in 2020 compared to 2019 was primarily due to profits generated during the period, proceeds received from the public equity offering in August of 2020, an increase in unrealized gains on available-for-sale investments, net of taxes, and net activity related to stock-based compensation plans. These increases were offset in part by the dividends declared during 2020. Tangible stockholders’ equity is a non-GAAP financial measure. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of stockholders' equity in accordance with GAAP to tangible stockholders' equity.
On July 27, 2016, the Kinsale Capital Group, Inc. 2016 Omnibus Incentive Plan (the "2016 Incentive Plan"), became effective. The 2016 Incentive Plan provides for grants of stock options, restricted stock, restricted stock units and other stock-based awards to directors, officers and other employees, as well as independent contractors or consultants providing consulting or advisory services to the Company. The number of shares of common stock available for issuance under the 2016 Incentive Plan may not exceed 2,073,832.
On January 1, 2021, the Board of Directors granted 3,200 shares of restricted stock awards under the 2016 Incentive Plan to the Company’s non-employee directors. The restricted stock had a fair value on the date of grant of $200.13 per share and will vest on the first anniversary date of the grant.
On May 21, 2020, the Company’s Board of Directors declared a cash dividend of $0.09 per share of common stock. This dividend was paid on June 12, 2020 to all stockholders of record on June 2, 2020.
On August 18, 2020, the Company’s Board of Directors declared a cash dividend of $0.09 per share of common stock. This dividend was paid on September 14, 2020 to all stockholders of record on August 31, 2020.
At December 31, 2020, the amortized cost and estimated fair value of our investments were as follows:
The amortized cost and estimated fair value of our available-for-sale investments in fixed-maturity securities summarized by contractual maturity as of December 31, 2020, were as follows:
Net income for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 reconciles to underwriting income as follows:
Reconciliation of adjusted loss ratio, adjusted expense ratio and adjusted combined ratio
Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio as each of our loss ratio, expense ratio and combined ratio, respectively, excluding the effects of the MLQS. We use these adjusted ratios as an internal performance measure in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss ratio, expense ratio and combined ratio, respectively, which are presented in accordance with GAAP.
The effect of the MLQS on our results of operations is primarily reflected in our ceded written premiums, losses and loss adjustment expenses, as well as our underwriting, acquisition and insurance expenses. The following table summarize the effect of the MLQS on our underwriting income for the year ended December 31, 2016:
Net income for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 reconcile to net operating earnings as follows:
We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities, if any. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies, see the "Notes to Consolidated Financial Statements" included in this Annual Report on Form 10-K.
The reserves for unpaid losses and loss adjustment expenses are the largest and most complex estimate in our consolidated balance sheet. The reserves for unpaid losses and loss adjustment expenses represent our estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the consolidated balance sheet date. As a relatively new company, our historical loss experience is limited. We estimate the reserves using individual case-basis valuations of reported claims and statistical analyses. Those estimates are based on our historical information, industry information and our estimates of future trends in variable factors such as loss severity, loss frequency and other factors such as inflation. We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes
known to us. Such adjustments are included in current operations. Additionally, during the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimate included in our consolidated financial statements.
IBNR reserves are determined using actuarial methods to estimate losses that have occurred but have not yet been reported to us. We principally use the incurred Bornhuetter-Ferguson actuarial method ("BF method") to arrive at our loss reserve estimates for each line of business. This method estimates the reserves based on our initial expected loss ratio and expected reporting patterns for losses. Because we have a limited number of years of loss experience compared to the period over which we expect losses to be reported, we use industry and peer-group data, in addition to our own data, as a basis for selecting our expected reporting patterns. Since the incurred BF method does not directly use reported losses in the estimation of IBNR, it is less sensitive to our level of reported losses than other actuarial methods. This method avoids some of the distortions that could result from a large loss development factor
During the year ended December 31, 2020, our net incurred losses for accident years 2019 and prior developed favorably by $13.3 million. This favorable development included $10.5 million for the 2019 accident year and $1.8 million for the 2018 accident year, which was primarily due to reported losses emerging at a lower level than expected, largely across the other liability and excess lines of business.
Like other accounting estimates, fair value measurements may be based on subjective information and generally involve uncertainty and judgment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. The three levels of the fair value hierarchy are described below:
Fair values of our investment portfolio are estimated using unadjusted prices obtained by our investment accounting vendor from nationally recognized third-party pricing services, where available. For securities where we are unable
to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from our investment accounting vendor. We perform several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2020, including (1) obtaining and reviewing the internal control report from our investment accounting vendor that obtain fair values from third party pricing services, (2) discussing with our investment accounting vendor their process for reviewing and validating pricing obtained from outside pricing services and (3) reviewing the security pricing received from our investment accounting vendor and monitoring changes in unrealized gains and losses at the individual security level.
We have audited Kinsale Capital Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedules I, II, and V (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We have audited the accompanying consolidated balance sheets of Kinsale Capital Group, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedules I, II, and V (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
•performing independent estimates of reserves for each line of business, using a combination of the Company’s underlying historical claims data and industry data
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from 39 years for the parking deck and building, 15 to 20 years for land improvements, 7 to 10 years for furniture and equipment, 3 to 7 years for electronic data processing hardware and software, and from 2 to 5 years for leasehold improvements, which is the shorter of the estimated useful life or the lease term.
Deferred income tax assets and liabilities are determined based on the difference between the recorded amounts and the tax bases of assets and liabilities, using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded when it is more likely than not that some portion, or all, of the deferred tax assets will not be realizable. Management evaluates the realizability of the deferred tax assets and assesses the need for any valuation allowance adjustment. Valuation allowances on deferred tax assets are estimated based on the Company's assessment of the realizability of such amounts.
The following was considered in the estimation of fair value for each class of financial instruments for which it was practicable to estimate that value. The Company’s investment accounting vendor uses independent pricing vendors to estimate the fair value of fixed-maturity securities and the Company’s management reviews these prices for reasonableness. U.S. Treasury securities that have quoted prices in active markets are included in the amounts disclosed as Level 1. For other fixed-maturity securities, the pricing vendors use a pricing methodology involving the market approach, including pricing models which use prices and relevant market information regarding a particular security or securities with similar characteristics to establish a valuation. The estimates of fair value of these fixed-maturity securities are included in the amounts disclosed as Level 2. For those fixed-maturity securities where significant inputs are unobservable, Level 3 inputs, the Company's investment accounting vendor obtains valuations from pricing vendors using the market approach and income approach valuation techniques.
are disclosed as Level 1. The fair value estimates of preferred stock are based on observable market data and, as a result, are disclosed as Level 2.
Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326)
Effective January 1, 2020, the Company adopted this ASU using the modified-retrospective approach and recorded a cumulative effect adjustment to beginning retained earnings. The adoption of this ASU resulted in the recognition of an allowance for credit loss related to the Company’s reinsurance recoverables. However, since the Company enters into contracts with reinsurers that have A.M. Best ratings of “A” (Excellent) or better, the allowance was not material to the Company’s consolidated financial statements.
ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted. The adoption of the guidance will not have a material effect on the Company’s consolidated financial statements.
The following tables summarize the Company’s available-for-sale investments at December 31, 2020 and 2019:
The Company regularly reviews all its available-for-sale investments with unrealized losses to assess whether the decline in the fair value is deemed to be a credit loss. The Company considers a number of factors in completing its review of credit losses, including the extent to which a security's fair value has been below cost and the financial condition of an issuer. In addition to specific issuer information, the Company also evaluates the current market and interest rate environment. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute a credit loss.
For fixed-maturity securities, the Company also considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery and 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.
amortized cost, an impairment is recognized in net income based on the fair value of the security at the time of assessment. For fixed-maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before recovery of its amortized cost, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the impairment, which is recognized in net income through an allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment, which is recognized in other comprehensive income. Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 1 - Recently adopted accounting pronouncements - ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) for additional information.
The Company reports investment income due and accrued separately from fixed-maturity securities, available for sale, and has elected not to measure an allowance for credit losses for investment income due and accrued. Investment income due and accrued is written off through net realized gains (losses) on investments at the time the issuer of the bond defaults or is expected to default on payments.
The following tables summarize gross unrealized losses and estimated fair value for available-for-sale investments by length of time that the securities have continuously been in an unrealized loss position:
At December 31, 2020, the Company held 60 fixed-maturity securities with a total estimated fair value of $143.9 million and gross unrealized losses of $0.7 million. Of those securities, 12 were in a continuous unrealized loss position for greater than one year. As discussed above, the Company regularly reviews all fixed-maturity securities within its investment portfolio to determine whether a credit loss has occurred. Based on the Company's review as of December 31, 2020, unrealized losses were caused by interest rate changes or other market factors and were not credit-specific issues. At December 31, 2020, 81.6% of the Company’s fixed-maturity securities were rated "A-" or better and all of Company's fixed-maturity securities made expected coupon payments under the contractual terms of the securities. Based on its review, the Company concluded that there were no credit losses from fixed-maturity securities with unrealized losses for the year ended December 31, 2020.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities at December 31, 2020 are summarized, by contractual maturity, as follows:
The change in net unrealized gains for fixed-maturity securities was $35.3 million and $18.7 million for the years ended December 31, 2020 and 2019, respectively. The change in net unrealized losses for fixed-maturity securities was $6.9 million for the year ended December 31, 2018.
The Company had invested assets with a carrying value of $6.9 million on deposit with state regulatory authorities at both December 31, 2020 and 2019.
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.
Fair values of the Company's investment portfolio are estimated using unadjusted prices obtained by its investment accounting vendor from nationally recognized third-party pricing services, where available. Values for U.S. Treasury and exchange traded funds are generally based on Level 1 inputs which use quoted prices in active markets for identical assets. For other fixed-maturity securities and preferred stock, the pricing vendors use a pricing methodology involving the market approach, including pricing models which use prices and relevant market information regarding a particular security or securities with similar characteristics to establish a valuation. The estimates of fair value of these investments are included in the amounts disclosed as Level 2. For those investments where significant inputs are unobservable, the Company's investment accounting vendor obtains valuations from pricing vendors or brokers using the market approach and income approach valuation techniques and are disclosed as Level 3.
Management performs several procedures to ascertain the reasonableness of investment values included in the consolidated financial statements at December 31, 2020 and 2019, including 1) obtaining and reviewing internal control reports from the Company's investment accounting vendor that assess fair values from third party pricing services, 2) discussing with the Company's investment accounting vendor its process for reviewing and validating pricing obtained from third party pricing services and 3) reviewing the security pricing received from the Company's investment accounting vendor and monitoring changes in unrealized gains and losses at the individual security level. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.
The following tables present the balances of assets measured at fair value on a recurring basis as of December 31, 2020 and 2019, by level within the fair value hierarchy.
There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2020 or 2019.
Income tax expense includes the following components for the years ending December 31, 2020, 2019 and 2018:
Management evaluates the need for a valuation allowance related to its deferred tax assets. At December 31, 2020 and 2019, the Company recorded a tax valuation allowance equal to the state NOLs and the deferred tax assets, net of existing deferred tax liabilities that were expected to reverse in future periods, related to certain state jurisdictions. No other valuation allowances were established against the Company’s deferred tax assets at December 31, 2020 and 2019, as the Company believes that it is more likely than not that the remaining deferred tax assets will be realized given the carry back availability, reversal of existing temporary differences and future taxable income.
other liability and excess lines of business. Current year incurred losses and loss adjustment expenses for the year ended December 31, 2020 included $23.2 million of catastrophe losses primarily related to Hurricane Laura, Hurricane Sally and the California wildfires.
During the year ended December 31, 2019, our net incurred losses for accident years 2018 and prior developed favorably by $9.4 million. This favorable development included $13.0 million for the 2018 accident year and $1.6 million for the 2017 accident year. This favorable development was primarily due to reported losses emerging at a lower level than expected, on the other liability and products liability lines of business. The favorable development was offset by adverse development of $5.2 million for the 2011 through 2015 accident years. The unfavorable development was primarily attributable to the other liability occurrence line of business. This adverse development largely resulted from management’s decision to lengthen the actuarial loss development factors to provide for emergence of reported losses over a longer period of time based on trends observed in loss experience, which added a modest amount of conservatism to the Company’s IBNR reserves.
Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $42.0 million, $27.2 million and $25.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table presents reinsurance recoverables on paid and unpaid losses as of December 31, 2020 and 2019:
At December 31, 2020, prepaid reinsurance premiums ceded to five reinsurers were $6.1 million, $4.0 million, $2.7 million, $2.4 million and $2.3 million, representing 71.8% of the total balance.
On August 12, 2019, the Company completed an underwritten public offering and sold and issued 741,750 shares of its common stock at a price of $93.00 per share. After deducting underwriter discounts and commissions and offering expenses, the Company received net proceeds from the offering of approximately $65.9 million.
The weighted average grant-date fair value of the Company's restricted stock awards granted during the years ended December 31, 2020, 2019, and 2018 was $147.45, $80.59 and $52.99, respectively. The fair value of restricted stock awards that vested during the year ended December 31, 2020 and 2019 was $5.8 million and $2.1 million, respectively. There were no restricted stock awards that vested during the year ended December 31, 2018. As of December 31, 2020, the Company had $8.3 million of total unrecognized stock-based compensation expense expected to be charged to earnings over a weighted-average period of 2.8 years.
On February 11, 2021, the Company’s Board of Directors declared a cash dividend of $0.11 per share of common stock. This dividend is payable on March 12, 2021 to all stockholders of record on February 26, 2021.
On May 28, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”) that provided the Company with a $50.0 million senior unsecured revolving credit facility (the “Credit Facility”) and an uncommitted accordion feature that permits the Company to increase the commitments by an additional $30.0 million. The Credit Facility has a maturity of May 28, 2024. Borrowings under the Credit Facility were used to fund construction of the Company’s new headquarters but may also be used for working capital and general corporate purposes.
The Company has established a defined contribution employee retirement plan ("Plan") in accordance with Section 401(k) of the Internal Revenue Code. Expenses related to the Plan were $1.7 million, $1.3 million and $1.0 million in 2020, 2019 and 2018, respectively.
Excess casualty underwrites excess liability over risks that would fit within the general casualty, construction, products liability and small business divisions. Coverage is written over the Company's primary liability policies as well as those of other insurers. This division also writes excess liability over primary commercial auto liability policies written by other carriers.
Allied health underwrites commercial general liability, professional liability and excess liability on allied health and social service risks including assisted living facilities, home health care agencies and outpatient medical facilities.
Professional liability underwrites small-to-medium sized non-medical professional liability risks. The classes of risks include accountants, architects and engineers, financial planners, insurance agents, lawyers, realtors, and certain other professions.
Energy underwrites commercial general liability, pollution liability, professional liability and excess liability on enterprises engaged in the business of energy production or distribution or mining including drillers, lease operators, contractors, product manufacturers and alternative energy.
Personal insurance writes homeowners coverage on manufactured homes with a catastrophe exposure due to coastal location.
Kinsale Insurance maintains its accounts in conformity with accounting practices prescribed or permitted by state regulatory authorities that vary in certain respects from U.S. GAAP. In converting from statutory accounting principles to U.S. GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory nonadmitted assets and the inclusion of net unrealized gains or losses relating to fixed maturities in stockholders’ equity. The Company does not use any permitted practices that are different from prescribed statutory accounting practices.
Statutory net income and statutory capital and surplus for Kinsale Insurance as of December 31, 2020, 2019, and 2018 and for the years then ended are summarized as follows:
The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type, as well as customary events of default. As of December 31, 2020, the Company was in compliance with all of its financial covenants under the Credit Facility.
Cash dividends paid to Kinsale Capital Group, Inc. by its wholly-owned subsidiary, Kinsale Insurance Company, were $5.0 million for the year ended December 31, 2019, and $11.5 million for the year ended December 31, 2018. There were no cash dividends paid by the insurance subsidiary for the year ended December 31, 2020.