Kinsale Capital Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023 unless otherwise noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, with one reportable segment. Its Q1 gross written premiums were 68.4% casualty and 31.6% property.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date | Change |
|---|---|---|---|
| Gross written premiums | $448.6 million | $357.6 million | +25.5% |
| Net written premiums | $351.1 million | $299.0 million | +17.4% |
| Net earned premiums | $309.5 million | $237.2 million | +30.5% |
| Total revenues | $372.8 million | $263.1 million | +41.7% |
| Net income | $98.9 million | $55.8 million | +77.3% |
| Diluted EPS | $4.24 | $2.40 | Up $1.84 |
| Underwriting income (non-GAAP) | $65.1 million | $51.6 million | +26.2% |
| Operating cash flow | $210.4 million | $197.6 million | +$12.8 million |
Underwriting margins: The loss ratio was 58.8%, versus 57.1%; the expense ratio was 20.7%, versus 21.7%; and the combined ratio was 79.5%, versus 78.8%. A combined ratio below 100% indicates an underwriting profit. The net retention ratio declined to 78.2% from 83.6% as more premiums were ceded under certain property and excess casualty reinsurance treaties.
Investment results: Net investment income rose 59.1% to $32.9 million, reflecting a larger portfolio and higher interest rates. Equity fair-value gains were $18.1 million, compared with $3.5 million; realized investment gains were $3.9 million, compared with a $4.7 million loss. These investment gains contributed to net income growth; net operating earnings, a non-GAAP measure excluding specified investment effects, rose 43.8% to $81.6 million.
Balance sheet and liquidity: At March 31, 2024, total investments were $3.16 billion, cash and cash equivalents were $136.1 million, and stockholders’ equity was $1.17 billion, up from $1.09 billion at December 31, 2023. Total debt was $183.9 million, including $11.0 million drawn on the revolving facility and $175.0 million of senior notes before debt issuance costs. The company reported covenant compliance and said it expects available liquidity to cover operating needs, obligations, and committed capital expenditures for the next 12 months.
Material changes and drivers
- Management attributed premium growth to higher broker submission activity and a favorable pricing environment. Average premium per policy was $15,300, compared with $14,900; excluding personal insurance, it was $16,000 versus $16,200.
- The loss ratio increased amid higher current-year loss selections, primarily to account for inflation, and lower net favorable prior-year reserve development; lower catastrophe losses partly offset these effects. Prior-year reserves developed favorably by $8.4 million, compared with $9.0 million. Favorable development in 2021–2023 accident years was partly offset by adverse development, principally construction defect claims in 2018–2019 and a large 2020 property claim.
- The lower expense ratio reflected reduced relative net commissions, including higher ceding commissions under the commercial property quota-share treaty.
- Operating cash flow increased, while investing activities used $192.5 million, mainly as the company purchased fixed-maturity and equity securities. Cash and cash equivalents increased by $9.4 million during the quarter.
- Available-for-sale fixed maturities had a $140.7 million gross unrealized loss at quarter-end; the company attributed losses, other than identified credit allowances, to interest rates or other market factors. It reported that 80.2% of fixed maturities were rated A- or better and that all made expected coupon payments.
Outlook, risks, and unusual items
- The filing gives no specific earnings, premium-growth, or combined-ratio guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include reserve estimation uncertainty, inflation and social inflation, severe weather and catastrophe losses, reinsurance availability and recoverability, E&S market cyclicality, broker concentration, competition, investment-market volatility, regulation, and liquidity or covenant risks. Management reported no material changes to the risk factors in the 2023 Form 10-K.
- A Georgia jury awarded $140.0 million in a wrongful-death case against a policyholder. Kinsale issued that policyholder a $1.0 million general liability policy, asserts that policy exclusions apply, and intends to defend the matter and appeal. The company does not expect resolution of its potential liability in the foreseeable future and does not believe the proceeding will have a material adverse effect; it says its reserves provide adequately for related liabilities.
- Beginning in Q2 2023, policy fees were presented as fee income rather than as a reduction of underwriting expenses. The company reclassified $6.2 million in the Q1 2023 presentation and deemed the correction immaterial to previously issued financial statements.
- The effective tax rate was 14.6%, versus 18.4%, primarily reflecting tax benefits from stock-based compensation and tax-exempt investment income. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and favorable pricing persist, and how the lower net retention ratio affects net growth and risk exposure.
- Whether current-year loss selections adequately reflect inflation and whether favorable reserve development continues; monitor construction-defect and large-property claims.
- How much reported earnings depend on equity-market gains, and the effect of interest-rate movements on the investment portfolio and accumulated other comprehensive loss.
- Reinsurance recoverability and program terms, particularly as ceded premiums and reinsurance recoverables have increased.
- Developments in the $140 million jury-verdict case, including any policy-coverage ruling, post-trial motions, or appeal.