Kinsale Capital Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, primarily distributed through independent brokers. Its sole reportable segment is E&S insurance.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Gross written premiums | $357.6 million | $245.5 million | Up 45.6% |
| Net written premiums | $299.0 million | $216.5 million | Up 38.1%; net retention was 83.6%, versus 88.2% |
| Net earned premiums | $237.2 million | $178.6 million | Up 32.8% |
| Total revenues | $256.9 million | $180.3 million | Included investment income and investment gains/losses |
| Net income | $55.8 million | $31.8 million | Up 75.5%; diluted EPS was $2.40 versus $1.38 |
| Underwriting income (non-GAAP) | $51.6 million | $37.5 million | Up 37.5% |
| Net investment income | $20.7 million | $9.1 million | Up 127.7% |
| Operating cash flow | $197.6 million | $121.9 million | Investing cash outflow was $190.2 million; cash increased $2.4 million |
Underwriting and returns: The loss ratio was 58.6% (57.4%); the expense ratio was 19.6% (21.6%); and the combined ratio was 78.2% (79.0%), indicating an underwriting profit. Annualized return on equity was 28.6%, versus 18.6%; annualized operating return on equity, a non-GAAP measure, was 29.1%, versus 22.1%.
Financial position and liquidity
- At March 31, 2023, total assets were $3.00 billion, stockholders’ equity was $815.7 million, and cash and cash equivalents were $158.6 million. Total investments were $2.25 billion.
- Gross unpaid-loss and loss-adjustment-expense reserves were $1.35 billion, up from $1.24 billion at December 31, 2022; unearned premiums were $563.7 million.
- Debt was $195.8 million: $123.2 million outstanding on 5.15% senior notes, net of issuance costs, and $72.6 million on the revolving credit facility, at a 6.4% weighted-average rate. The notes mature in 2034; the $100 million revolver matures in 2027. The company reported compliance with debt covenants.
- Management said liquidity at the holding company and subsidiaries was sufficient for operating needs and obligations for the next 12 months. The company paid a quarterly dividend of $0.14 per share.
Material changes and management commentary
- Premium growth reflected higher broker submissions and rates across most lines amid favorable E&S market conditions. The average premium per policy rose to $14,900 from $11,800.
- Net retention declined primarily because of increased ceded premiums under a commercial-property quota-share treaty effective June 1, 2022, and a change in business mix.
- Investment income increased with a larger investment portfolio and higher interest rates. Equity securities produced a $3.5 million fair-value gain, compared with a $7.8 million loss in Q1 2022; net realized investment losses were $4.7 million, primarily from sales of securities issued by certain banking and financial institutions.
- Prior-year reserves developed favorably by $9.0 million, including $12.6 million of favorable development from 2021 and 2022 accident years. This was partly offset by adverse development, principally in 2017 and 2019 construction-related casualty claims exposed to inflation. Catastrophe losses were $1.6 million, versus $0.1 million.
- Fixed-maturity securities had $154.0 million of gross unrealized losses at quarter-end; management attributed losses generally to interest-rate and other market factors rather than issuer-specific credit issues. The filing said 80.3% were rated A− or better and all made expected coupon payments.
- In the second quarter of 2023, the company initiated plans to sell certain parcels and one building of its real estate investment property. After quarter-end, the assets met held-for-sale criteria; their carrying value will be subject to the lower-of-carrying-value-or-fair-value-less-cost-to-sell measurement.
Outlook, risks, and contingencies
The filing provides no specific earnings or premium guidance. Management cited favorable E&S conditions, continued rate increases, and profitable growth, but cautioned that interim results are not necessarily indicative of full-year results. Principal risks include reserve-estimation uncertainty, inflation and social inflation affecting claims, catastrophe and severe-weather losses, reinsurance availability and counterparty performance, competition and E&S market cyclicality, investment-market and interest-rate risk, and regulatory and liquidity risks. Ordinary-course legal proceedings were not expected to have a material adverse effect; the filing reported no material change in risk factors.
Important facts for investors to verify
- Whether premium growth and underwriting profitability persist as market conditions and pricing evolve.
- Reserve development and inflation exposure in long-tail construction-related casualty claims.
- Reinsurance costs, reduced net retention, coverage limits, and collectability of reinsurance recoverables.
- Investment portfolio sensitivity to interest rates and equity markets, including unrealized fixed-income losses and realized financial-sector security losses.
- Debt costs, covenant compliance, and the valuation and proceeds implications of the planned real-estate sale.