Kinsale Capital Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, distributing primarily through independent brokers. Its single reportable segment writes property and casualty coverage; first-nine-month gross premiums were 79% casualty and 21% property.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Gross written premiums | $284.1m | $197.6m | $806.6m | $560.6m |
| Net earned premiums | $209.3m | $156.9m | $578.0m | $417.6m |
| Total revenues | $217.0m | $164.9m | $576.2m | $456.2m |
| Net income | $33.0m | $36.6m | $91.9m | $104.3m |
| Diluted EPS | $1.43 | $1.59 | $3.98 | $4.53 |
| Underwriting income | $34.3m | $38.1m | $116.0m | $91.4m |
| Combined ratio | 83.6% | 75.7% | 79.9% | 78.1% |
Gross written premiums grew 43.8% in Q3 and 43.9% for the nine-month period, reflecting increased broker submissions and higher rates across most lines amid favorable E&S conditions. Net income fell 9.9% in Q3 and 12.0% year to date. Underwriting income increased 26.9% year to date, while nine-month net operating earnings, a non-GAAP measure, rose 31.0% to $120.0m.
The Q3 loss ratio rose to 64.4% from 55.7%; the expense ratio improved to 19.2% from 20.0%. For nine months, the loss ratio was 59.6% versus 56.7%, while the expense ratio improved to 20.3% from 21.4%. Net catastrophe losses were $26.1m in Q3 and $26.2m for the first nine months, primarily from Hurricane Ian. Prior-year reserves developed favorably by $28.9m year to date, including $32.0m favorable development from accident years 2020 and 2021, partly offset by adverse development largely related to 2018.
Cash, investments, debt and capital
- Nine-month operating cash flow was $456.7m, versus $301.9m in 2021. Investing activities used $519.9m, and financing activities provided $68.3m. Cash and cash equivalents ended the period at $126.2m.
- Total investments were $1.821bn, including $1.606bn of available-for-sale fixed maturities, $133.7m of equity securities and $81.4m of short-term investments. Net investment income increased 49.3% year to date to $33.5m.
- Rising rates and market movements drove $165.5m of after-tax unrealized fixed-maturity losses in other comprehensive income for the first nine months. Accumulated other comprehensive loss reached $147.3m. The company reported no credit-related impairment of fixed maturities; 79.8% were rated A- or better.
- At September 30, total assets were $2.464bn, total liabilities $1.845bn, and stockholders’ equity $619.5m, down from $699.3m at year-end 2021, mainly due to investment-related unrealized losses and dividends. Gross unpaid loss reserves were $1.197bn; net reserves were $1.010bn.
- In July, the company issued $125m of 5.15% senior notes due 2034 and repaid $43m drawn under its revolving facility. The notes’ balance-sheet carrying amount was $123.2m, net of issuance costs. The amended revolver provides $100m of commitments, with no borrowings outstanding at quarter-end and an option to increase commitments by $30m. The company reported compliance with debt covenants.
Outlook, commentary and risks
The filing provides no numerical earnings or premium guidance. Management said it believed liquidity at the parent and subsidiaries was sufficient for operating needs, obligations and committed capital expenditures over the next 12 months, and that premiums, investment proceeds and income should cover foreseeable cash needs. Management attributed growth to favorable E&S conditions, higher rates and submissions, and described cost control as supporting expense-ratio improvement.
Key risks include reserve estimation uncertainty, catastrophe and severe-weather losses, reinsurance availability and counterparty performance, inflation and economic conditions, competition and changing E&S market cycles, and investment-market and interest-rate volatility. Reinsurance does not discharge obligations to policyholders; reinsurance recoverables were $188.8m, and the company recorded a $0.4m allowance for reinsurance credit losses. The company also disclosed ordinary-course legal proceedings, which it did not expect to have a material adverse effect.
Important facts for investors to verify
- Whether favorable prior-year reserve development persists and how catastrophe claims, particularly Hurricane Ian, ultimately develop.
- The extent to which premium growth reflects sustainable submissions and pricing, and the effect of the new commercial-property quota-share treaty on retention and margins.
- Portfolio sensitivity to interest rates and equity markets, including the impact of unrealized losses on equity and potential liquidity needs.
- Reinsurer recoverability and coverage terms, and compliance with covenants and the availability and cost of committed credit.
- How reported GAAP earnings compare with non-GAAP underwriting income and net operating earnings; the latter exclude specified investment-market effects and are not substitutes for GAAP results.