Kinsale Capital Group, Inc. — Q2 2023 Form 10-Q
Business and period: Specialty insurer focused on U.S. excess and surplus lines; one reportable segment. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the same 2022 periods. First-half gross written premiums were 65% casualty and 35% property.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross written premiums | $438.2 million (+58.2%) | $277.0 million | $795.8 million (+52.3%) | $522.5 million |
| Net written premiums | $365.0 million (+50.6%) | $242.3 million | $664.1 million (+44.7%) | $458.8 million |
| Net earned premiums | $257.0 million (+35.2%) | $190.2 million | $494.2 million (+34.0%) | $368.7 million |
| Total revenues | $295.8 million | $183.9 million | $558.9 million | $368.5 million |
| Net income | $72.8 million; diluted EPS $3.12 | $27.1 million; diluted EPS $1.17 | $128.6 million; diluted EPS $5.52 | $58.9 million; diluted EPS $2.55 |
| Underwriting income (non-GAAP) | $61.5 million | $44.1 million | $113.1 million | $81.7 million |
| Combined ratio | 76.7% | 77.4% | 77.7% | 78.4% |
| Net investment income | $24.2 million | $10.6 million | $44.9 million | $19.7 million |
| Operating cash flow | Not reported by quarter in the provided filing text | $423.6 million | $278.7 million |
Balance sheet and liquidity at June 30, 2023: Total assets were $3.27 billion; cash and cash equivalents were $125.1 million; investments totaled $2.49 billion; stockholders’ equity was $871.8 million. Total debt was $195.9 million, consisting of $123.3 million of Series A notes, net of issuance costs, and $72.6 million outstanding under the revolving facility, net of issuance costs. The notes bear interest at 5.15% and mature in 2034; the revolving facility had a 6.6% weighted-average rate and matures in 2027. The company reported compliance with debt covenants. Management said available liquidity is sufficient for operating needs and obligations over the next 12 months.
Material changes and management commentary
- Premium growth reflected higher broker submission activity and higher rates across most lines amid favorable E&S market conditions. The net retention ratio declined to 83.3% for Q2 and 83.4% for the half-year, from 87.5% and 87.8%, respectively, mainly due to increased ceded premiums under the commercial property quota-share treaty and business mix.
- Q2 net income rose 168.7%; management cited profitable growth, stronger equity investment returns, and higher investment income. Equity securities recorded a $5.8 million fair-value gain in Q2 versus a $23.4 million loss a year earlier. First-half net income also benefited from higher investment income and equity valuation changes.
- Underwriting results improved, with the combined ratio falling 0.7 percentage points in Q2 and 0.7 points for the first half. The expense ratio declined, helped by higher ceding commissions and operating scale; the loss ratio increased to 55.7% in Q2 and 56.4% for the half-year, reflecting catastrophe losses and lower favorable prior-year reserve development as a share of earned premiums and fees.
- Prior-year reserves developed favorably by $10.4 million in Q2 and $19.5 million in the first half. Favorable experience in 2021–2022 accident years was partly offset by adverse development, particularly long-tail construction-related casualty claims from 2017–2019 exposed to inflation.
- Six-month investing cash outflow was $444.6 million, primarily reflecting purchases of fixed-maturity securities. Cash declined $31.2 million from year-end. The investment portfolio had $169.4 million of gross unrealized fixed-maturity losses at quarter-end; management attributed most to interest rates or other market factors, and reported that 82.3% of fixed maturities were rated A- or better.
Outlook, risks, and unusual items
- The filing provides no specific earnings, premium-growth, or combined-ratio guidance. Management cited favorable E&S market conditions but cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include reserve estimation uncertainty; claim severity and frequency, including social and economic inflation; severe weather and catastrophe exposure; reinsurance availability, pricing and counterparty performance; interest-rate and equity-market movements; competition, broker concentration, and regulation.
- In Q2 the company classified certain real estate assets as held for sale. After quarter-end, it entered into an agreement to sell an office building and parking deck for approximately $63 million net of seller costs, expected to close in Q3 2023; proceeds were expected to repay the credit facility. Closing remains subject to conditions and termination rights.
- Effective April 1, 2023, policy fees were presented as fee income rather than as a reduction of underwriting expenses. Prior-period figures were reclassified; the company deemed the correction immaterial. Ordinary-course legal proceedings were not expected to have a material adverse effect, and the filing reported no material change in risk factors.
Investor verification points
- Track whether premium growth and favorable market conditions persist, and how increased reinsurance cessions affect net retention and underwriting profitability.
- Review reserve development by accident year, especially inflation-sensitive construction casualty claims, catastrophe losses, and the assumptions underlying loss reserves.
- Assess investment-income durability and exposure to equity volatility, interest rates, and unrealized fixed-maturity losses.
- Confirm completion and net proceeds of the planned real estate sale and any resulting reduction in revolving debt.
- Monitor liquidity, debt costs and covenant compliance, reinsurance counterparties, and the implications of the policy-fee presentation change when comparing periods.