Kinsale Capital Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, with one reportable segment. For the first nine months, gross written premiums were 67% casualty and 33% property.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Gross written premiums | $377.8 million | $284.1 million | $1,173.6 million | $806.6 million |
| Net written premiums | $294.3 million | $235.9 million | $958.4 million | $694.7 million |
| Net earned premiums | $281.5 million | $209.3 million | $775.7 million | $578.0 million |
| Total revenues | $314.4 million | $222.1 million | $873.3 million | $590.6 million |
| Net income | $76.1 million | $33.0 million | $204.7 million | $91.9 million |
| Diluted EPS | $3.26 | $1.43 | $8.79 | $3.98 |
| Combined ratio | 74.8% | 84.0% | 76.7% | 80.4% |
| Net investment income | $27.1 million | $13.9 million | $72.0 million | $33.5 million |
Premium growth reflected increased broker submissions and higher rates across most lines amid favorable E&S market conditions. Net retention declined to 77.9% in Q3 and 81.7% year to date, from 83.0% and 86.1%, respectively, as more premium was ceded under property and excess casualty treaties.
The loss ratio improved to 53.9% in Q3 and 55.5% year to date. Lower catastrophe losses than in 2022, when Hurricane Ian drove much of the catastrophe impact, contributed to the improvement. Prior-year reserves developed favorably by $9.1 million in Q3 and $28.6 million year to date; favorable emergence in 2021–2022 accident years was partly offset by adverse development, largely on 2017–2019 construction-related casualty claims exposed to inflation. The expense ratio was 20.9% in Q3 and 21.2% year to date, helped by lower relative net commissions.
Investment income rose with a larger portfolio and higher interest rates. Q3 net realized investment gains of $4.3 million principally included a gain on the sale of real estate. Year-to-date net realized gains were $0.9 million; the $3.8 million increase in equity fair value contrasted with a $37.2 million decline in the 2022 period. Q3 net income also included a $5.5 million decline in equity fair value.
Cash, balance sheet and debt
- Operating cash flow was $648.3 million for the first nine months, versus $456.7 million in 2022. Investing activities used $616.4 million and financing activities used $25.3 million; cash increased $6.7 million to $162.9 million.
- At September 30, total investments were $2.616 billion; total assets were $3.443 billion, liabilities $2.519 billion, and stockholders’ equity $923.8 million. Equity increased from $745.4 million at year-end 2022, primarily from earnings, partly offset by lower fixed-income fair values and dividends.
- Gross unpaid-loss reserves were $1.565 billion, up from $1.238 billion at December 31, 2022. Unearned premiums were $690.4 million, up from $499.7 million.
- Total debt was $183.8 million, net of issuance costs, versus $195.7 million at year-end. Debt included $125 million of 5.15% Series A notes, $50 million of 6.21% Series B notes issued in September, and $11 million drawn on the revolving facility. Kinsale used $62 million of real-estate sale proceeds to repay revolver borrowings. The company reported covenant compliance.
- Fixed-maturity securities had $199.4 million of gross unrealized losses at quarter-end, principally attributed by management to interest-rate and other market factors rather than credit issues. The securities’ estimated fair value was $2.365 billion versus $2.564 billion amortized cost; accumulated other comprehensive loss was $155.0 million.
Outlook, risks and notable items
The filing gives no formal earnings or premium guidance. Management said it believed liquidity at the parent and subsidiaries was sufficient for operating needs and committed capital expenditures over the next 12 months, and that premium receipts, investment proceeds and income should cover foreseeable cash outflows. Management attributed growth to continued favorable E&S conditions; this is not a guarantee of future results.
Key risks include reserve-estimation uncertainty and inflation in long-tail casualty claims; severe weather and catastrophe exposure; reinsurance cost, availability and counterparty performance; market and interest-rate effects on investments; competition, broker concentration, regulation and E&S market cyclicality. Reinsurers were rated A- or better by A.M. Best, and Kinsale Insurance Company had an A (Excellent), stable outlook rating. The company reported no material change in risk factors from its 2022 Form 10-K and no legal proceedings expected to have a material adverse effect.
The company sold part of its real-estate investment for approximately $62.0 million net cash, recognized a $4.3 million gain, and reclassified the remaining building for planned office expansion. It also corrected the presentation of policy fees: fees are now reported as fee income rather than as a reduction of underwriting expenses. Prior-period amounts were reclassified, and management concluded the correction was not material. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether favorable loss experience and prior-year reserve releases persist, particularly given adverse development in older construction-related casualty claims and inflation exposure.
- How higher ceded premiums and the resulting lower retention affect net growth, underwriting returns and protection against catastrophe losses.
- Whether current premium growth and market conditions remain sustainable, and how reinsurance pricing and availability evolve.
- The sensitivity of investment income and equity to interest rates and markets, including the unrealized fixed-maturity losses and potential liquidity consequences if investments must be sold.
- The terms, interest cost and covenant requirements of the new Series B notes and revolving credit facility, as well as the basis and comparability of non-GAAP measures such as underwriting income and net operating earnings.