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Kinsale Capital Group Reports Third Quarter 2022 Results

10/27/2022

Kinsale Capital Group, Inc. (NYSE: KNSL) reported net income of $33.0 million, $1.43 per diluted share, for the third quarter of 2022 compared to $36.6 million, $1.59 per diluted share, for the third quarter of 2021. Net income included after-tax catastrophe losses of $20.6 million in the third quarter of 2022 and $4.6 million in the third quarter of 2021. Net income was $91.9 million, $3.98 per diluted share, for the first nine months of 2022 compared to $104.3 million, $4.53 per diluted share, for the first nine months of 2021. After-tax catastrophe losses were $20.7 million for the first nine months of 2022 and $6.9 million for the first nine months of 2021.

Net operating earnings(1) were $37.9 million, $1.64 per diluted share, for the third quarter of 2022 compared to $36.7 million, $1.59 per diluted share, for the third quarter of 2021. Net operating earnings(1) were $120.0 million, $5.20 per diluted share, for the first nine months of 2022 compared to $91.7 million, $3.98 per diluted share, for the first nine months of 2021.

Highlights for the quarter included:

  • Net income decreased by 9.9% due principally to higher catastrophe activity and a decline in the fair value of equity investments during the quarter
  • Net operating earnings(1) of $37.9 million increased by 3.3% compared to the third quarter of 2021
  • Gross written premiums increased by 43.8% to $284.1 million compared to the third quarter of 2021
  • Net investment income increased by 71.2% to $13.9 million compared to the third quarter of 2021
  • Underwriting income(2) was $34.3 million in the third quarter of 2022, resulting in a combined ratio of 83.6%, compared to $38.1 million and a combined ratio of 75.7% in the third quarter of 2021
  • Annualized operating return on equity(4) was 24.3% for the nine months ended September 30, 2022

"Our third quarter results again reflected strong premium growth of 44% as E&S market conditions remain favorable. Our underlying business continues to generate positive results for the quarter over last year and we achieved a combined ratio of just under 84%, which included 12.5 points of incurred losses from Hurricane Ian. These results reflect the combination of a superior business model and favorable E&S market conditions. Looking ahead, we remain confident in our ability to create shareholder value through best-in-class underwriting and technology-driven low costs,” said President and Chief Executive Officer, Michael P. Kehoe.

Results of Operations

Underwriting Results

Gross written premiums were $284.1 million for the third quarter of 2022 compared to $197.6 million for the third quarter of 2021, an increase of 43.8%. Gross written premiums were $806.6 million for the first nine months of 2022 compared to $560.6 million for the first nine months of 2021, an increase of 43.9%. The increase in gross written premiums during the third quarter and first nine months of 2022 over the same periods last year reflected strong submission flow from brokers and a favorable pricing environment.

Underwriting income(2) was $34.3 million, resulting in a combined ratio of 83.6%, for the third quarter of 2022, compared to $38.1 million and a combined ratio of 75.7% for the same period last year. The decrease in underwriting income(2) quarter over quarter was largely due to higher catastrophe losses incurred, offset in part by premium growth and favorable rate increases from a strong underwriting environment and lower levels of relative operating expenses. Loss and expense ratios were 64.4% and 19.2%, respectively, for the third quarter of 2022 compared to 55.7% and 20.0% for the third quarter of 2021. The loss ratio for the third quarter of 2022 included 12.5 points of net incurred catastrophe losses, primarily related to Hurricane Ian. The loss ratio for the third quarter of 2021 included 3.8 points of net incurred catastrophe losses, primarily from Hurricane Ida. Results for the third quarters of 2022 and 2021 included net favorable development of loss reserves from prior accident years of $11.0 million, or 5.3 points, and $9.2 million, or 5.9 points, respectively.

Underwriting income(2) was $116.0 million, resulting in a combined ratio of 79.9%, for the first nine months of 2022, compared to $91.4 million and a combined ratio of 78.1% for the first nine months of 2021. The increase in underwriting income(2) period over period was due to a combination of premium growth and favorable rate increases from a strong underwriting environment and lower levels of relative reported losses and operating expenses, offset in part by higher catastrophe losses incurred. Loss and expense ratios were 59.6% and 20.3%, respectively, for the first nine months of 2022 compared to 56.7% and 21.4% for the first nine months of 2021. Results for the first nine months of 2022 and 2021 included net favorable development of loss reserves from prior accident years of $28.9 million, or 5.0 points, and $25.4 million, or 6.1 points, respectively. The loss ratio for the nine months ended September 30, 2022 included 4.5 points of net incurred catastrophe losses compared to 2.1 points for the same period last year. The catastrophe activity in first nine months of 2022 primarily related to Hurricane Ian, and in first nine months of 2021 resulted from Hurricane Ida and the winter storms in Texas.

Summary of Operating Results

The Company’s operating results for the three and nine months ended September 30, 2022 and 2021 are summarized as follows:

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2022

 

2021

 

2022

 

2021

 

($ in thousands)

Gross written premiums

$

284,111

 

 

$

197,616

 

 

$

806,625

 

 

$

560,553

 

Ceded written premiums

 

(48,212

)

 

 

(26,939

)

 

 

(111,885

)

 

 

(77,825

)

Net written premiums

$

235,899

 

 

$

170,677

 

 

$

694,740

 

 

$

482,728

 

 

 

 

 

 

 

 

 

Net earned premiums

$

209,259

 

 

$

156,871

 

 

$

577,979

 

 

$

417,612

 

Losses and loss adjustment expenses

 

134,788

 

 

 

87,352

 

 

 

344,333

 

 

 

236,727

 

Underwriting, acquisition and insurance expenses

 

40,145

 

 

 

31,465

 

 

 

117,662

 

 

 

89,490

 

Underwriting income(2)

$

34,326

 

 

$

38,054

 

 

$

115,984

 

 

$

91,395

 

 

 

 

 

 

 

 

 

Loss ratio

 

64.4

%

 

 

55.7

%

 

 

59.6

%

 

 

56.7

%

Expense ratio

 

19.2

%

 

 

20.0

%

 

 

20.3

%

 

 

21.4

%

Combined ratio

 

83.6

%

 

 

75.7

%

 

 

79.9

%

 

 

78.1

%

 

 

 

 

 

 

 

 

Annualized return on equity(3)

 

21.1

%

 

 

22.7

%

 

 

18.6

%

 

 

22.5

%

Annualized operating return on equity(4)

 

24.2

%

 

 

22.8

%

 

 

24.3

%

 

 

19.8

%

(1)   

Net operating earnings is a non-GAAP financial measure. See discussion of "Non-GAAP Financial Measures" below.

(2)   

Underwriting income is a non-GAAP financial measure. See discussion of "Non-GAAP Financial Measures" below.

(3)   

Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

(4)   

Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

The following tables summarize losses incurred for the current accident year and the development of prior accident years for the three and nine months ended September 30, 2022 and 2021:

 

Three Months Ended
September 30, 2022

 

Three Months Ended
September 30, 2021

 

Losses and
Loss
Adjustment
Expenses

 

% of Earned
Premiums

 

Losses and
Loss
Adjustment
Expenses

 

% of Earned
Premiums

Loss ratio:

($ in thousands)

Current accident year

$

119,650

 

 

57.2

%

 

$

90,675

 

 

57.8

%

Current accident year - catastrophe losses

 

26,130

 

 

12.5

%

 

 

5,882

 

 

3.8

%

Effect of prior accident year development

 

(10,992

)

 

(5.3

) %

 

 

(9,205

)

 

(5.9

) %

Total

$

134,788

 

 

64.4

%

 

$

87,352

 

 

55.7

%

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30, 2022

 

Nine Months Ended
September 30, 2021

 

Losses and
Loss
Adjustment
Expenses

 

% of Earned
Premiums

 

Losses and
Loss
Adjustment
Expenses

 

% of Earned
Premiums

Loss ratio:

($ in thousands)

Current accident year

$

346,970

 

 

60.1

%

 

$

253,348

 

 

60.7

%

Current accident year - catastrophe losses

 

26,213

 

 

4.5

%

 

 

8,792

 

 

2.1

%

Effect of prior accident year development

 

(28,850

)

 

(5.0

) %

 

 

(25,413

)

 

(6.1

) %

Total

$

344,333

 

 

59.6

%

 

$

236,727

 

 

56.7

%

Investment Results

Net investment income was $13.9 million in the third quarter of 2022 compared to $8.1 million in the third quarter of 2021, an increase of 71.2%. Net investment income was $33.5 million in the first nine months of 2022 compared to $22.5 million in the first nine months of 2021, an increase of 49.3%. These increases were driven by growth in the Company's investment portfolio generated largely from the investment of strong operating cash flows since September 30, 2021 and to a lesser degree, higher interest rates relative to the prior year periods. Net operating cash flows were $456.7 million in the first nine months of 2022 compared to $301.9 million in the first nine months of 2021, an increase of 51.3%. The Company’s investment portfolio had an annualized gross investment return(5) of 2.7% for the first nine months of 2022 compared to 2.5% for the same period last year. The Company expects the current rising interest rate environment to contribute to higher reinvestment yields on fixed-maturity securities prospectively. Funds are generally invested conservatively in high quality securities with an average credit quality of "AA-" and the weighted average duration of the fixed-maturity investment portfolio, including cash equivalents, was 3.9 years and 4.3 years at September 30, 2022 and December 31, 2021, respectively. Cash and invested assets totaled $1.9 billion at September 30, 2022 and $1.7 billion at December 31, 2021.

(5)   

Gross investment return is investment income from fixed-maturity and equity securities, excluding cash equivalents, before any deductions for fees and expenses, expressed as a percentage of the average beginning and ending book values of those investments during the period.

Other

On July 22, 2022, the Company entered into a Note Purchase and Private Shelf Agreement and issued $125.0 million aggregate principal amount of 5.15% senior notes, the proceeds of which were used to fund surplus at Kinsale Insurance Company, refinance indebtedness and for general corporate purposes.

On July 22, 2022, the Company entered into an Amended and Restated Credit Agreement, which primarily extended the maturity date to July 22, 2027 and increased the unsecured revolving credit facility to $100.0 million.

The effective tax rates for the nine months ended September 30, 2022 and 2021 were 17.5% and 18.9%, respectively. In the first nine months of 2022 and 2021, the effective tax rates were lower than the federal statutory rate of 21% primarily due to the tax benefits from stock-based compensation and tax-exempt investment income.

Stockholders' equity was $619.5 million at September 30, 2022 compared to $699.3 million at December 31, 2021. The decrease in stockholders' equity was largely due to the decline in the fair value of the Company's fixed-maturity investments, resulting from a higher interest rate environment, offset in part by net income. Annualized operating return on equity(4) was 24.3% for the first nine months of 2022, an increase from 19.8% for the first nine months of 2021, which was primarily due to growth in the business from favorable E&S market conditions and rate increases and a decrease in average stockholders' equity driven by the decline in the fair value of investments, offset in part by higher catastrophe losses incurred during the period.

Non-GAAP Financial Measures

Net Operating Earnings

Net operating earnings is defined as net income excluding the effects of the change in the fair value of equity securities, after taxes, and net realized investment gains and losses, after taxes. Management believes the exclusion of these items provides a useful comparison of the Company's underlying business performance from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.

For the three and nine months ended September 30, 2022 and 2021, net income and diluted earnings per share reconcile to net operating earnings and diluted operating earnings per share as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2022

 

2021

 

2022

 

2021

 

 

($ in thousands, except per share data)

Net operating earnings:

 

 

 

 

 

 

 

 

Net income

 

$

32,984

 

 

$

36,625

 

 

$

91,865

 

 

$

104,339

 

Adjustments:

 

 

 

 

 

 

 

 

Change in the fair value of equity securities, before taxes

 

 

6,095

 

 

 

1,012

 

 

 

37,199

 

 

 

(13,644

)

Income tax (benefit) expense (1)

 

 

(1,280

)

 

 

(213

)

 

 

(7,812

)

 

 

2,865

 

Change in fair value of equity securities, after taxes

 

 

4,815

 

 

 

799

 

 

 

29,387

 

 

 

(10,779

)

 

 

 

 

 

 

 

 

 

Net realized investment losses (gains), before taxes

 

 

173

 

 

 

(895

)

 

 

(1,535

)

 

 

(2,397

)

Income tax (benefit) expense (1)

 

 

(36

)

 

 

188

 

 

 

322

 

 

 

503

 

Net realized investment losses (gains), after taxes

 

 

137

 

 

 

(707

)

 

 

(1,213

)

 

 

(1,894

)

Net operating earnings

 

$

37,936

 

 

$

36,717

 

 

$

120,039

 

 

$

91,666

 

 

 

 

 

 

 

 

 

 

Diluted operating earnings per share:

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.43

 

 

$

1.59

 

 

$

3.98

 

 

$

4.53

 

Change in the fair value of equity securities, after taxes, per share

 

 

0.21

 

 

 

0.03

 

 

 

1.27

 

 

 

(0.47

)

Net realized investment losses (gains), after taxes, per share

 

 

0.01

 

 

 

(0.03

)

 

 

(0.05

)

 

 

(0.08

)

Diluted operating earnings per share(2)

 

$

1.64

 

 

$

1.59

 

 

$

5.20

 

 

$

3.98

 

 

 

 

 

 

 

 

 

 

Operating return on equity:

 

 

 

 

 

 

 

 

Average equity(3)

 

$

626,761

 

 

$

644,401

 

 

$

659,395

 

 

$

617,702

 

Annualized return on equity(4)

 

 

21.1

%

 

 

22.7

%

 

 

18.6

%

 

 

22.5

%

Annualized operating return on equity(5)

 

 

24.2

%

 

 

22.8

%

 

 

24.3

%

 

 

19.8

%

(1)   

Income taxes on adjustments to reconcile net income to net operating earnings use a 21% effective tax rate.

(2)   

Diluted operating earnings per share may not add due to rounding.

(3)   

Computed by adding the total stockholders' equity as of the date indicated to the prior quarter-end or year-end total, as applicable, and dividing by two.

(4)   

Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

(5)   

Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Underwriting Income

Underwriting income is defined as net income excluding net investment income, the change in the fair value of equity securities, net realized investment gains and losses, interest expense, other expenses, other income and income tax expense. The Company uses underwriting income as an internal performance measure in the management of its operations because the Company believes it gives management and users of the Company's financial information useful insight into the Company's results of operations and underlying business performance. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.

For the three and nine months ended September 30, 2022 and 2021, net income reconciles to underwriting income as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2022

 

2021

 

2022

 

2021

 

 

(in thousands)

Net income

 

$

32,984

 

 

$

36,625

 

 

$

91,865

 

 

$

104,339

 

Income tax expense

 

 

7,116

 

 

 

9,054

 

 

 

19,549

 

 

 

24,387

 

Income before income taxes

 

 

40,100

 

 

 

45,679

 

 

 

111,414

 

 

 

128,726

 

Net investment income

 

 

(13,858

)

 

 

(8,095

)

 

 

(33,540

)

 

 

(22,466

)

Change in the fair value of equity securities

 

 

6,095

 

 

 

1,012

 

 

 

37,199

 

 

 

(13,644

)

Net realized investment losses (gains)

 

 

173

 

 

 

(895

)

 

 

(1,535

)

 

 

(2,397

)

Interest expense

 

 

1,716

 

 

 

243

 

 

 

2,306

 

 

 

752

 

Other expenses (6)

 

 

212

 

 

 

145

 

 

 

521

 

 

 

482

 

Other income

 

 

(112

)

 

 

(35

)

 

 

(381

)

 

 

(58

)

Underwriting income

 

$

34,326

 

 

$

38,054

 

 

$

115,984

 

 

$

91,395

 

(6)   

Other expenses are comprised of corporate expenses not allocated to the Company's insurance operations.

Conference Call

Kinsale Capital Group will hold a conference call to discuss this press release on Friday, October 28, 2022 at 9:00 a.m. (Eastern Time). Members of the public may access the conference call by dialing (888) 660-6493, conference ID# 3573726, or via the Internet by going to www.kinsalecapitalgroup.com and clicking on the "Investor Relations" link. A replay of the call will be available on the website until the close of business on November 25, 2022.

Forward-Looking Statements

This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. In some cases, such forward-looking statements may be identified by terms such as "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," "believes," "seeks," "outlook," "future," "will," "would," "should," "could," "may," "can have," "prospects" or similar words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Although it is not possible to identify all of these risks and factors, they include, among others, the following: inadequate loss reserves to cover the Company's actual losses; inherent uncertainty of models resulting in actual losses that are materially different than the Company's estimates; adverse economic factors; a decline in the Company's financial strength rating; loss of one or more key executives; loss of a group of brokers that generate significant portions of the Company's business; failure of any of the loss limitations or exclusions the Company employs, or change in other claims or coverage issues; adverse performance of the Company's investment portfolio; adverse market conditions that affect its excess and surplus lines insurance operations; and other risks described in the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this release and the Company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

About Kinsale Capital Group, Inc.

Kinsale Capital Group, Inc. is a specialty insurance group headquartered in Richmond, Virginia, focusing on the excess and surplus lines market.

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income and Comprehensive Income

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2022

 

2021

 

2022

 

2021

Revenues

 

(in thousands, except per share data)

Gross written premiums

 

$

284,111

 

 

$

197,616

 

 

$

806,625

 

 

$

560,553

 

Ceded written premiums

 

 

(48,212

)

 

 

(26,939

)

 

 

(111,885

)

 

 

(77,825

)

Net written premiums

 

 

235,899

 

 

 

170,677

 

 

 

694,740

 

 

 

482,728

 

Change in unearned premiums

 

 

(26,640

)

 

 

(13,806

)

 

 

(116,761

)

 

 

(65,116

)

Net earned premiums

 

 

209,259

 

 

 

156,871

 

 

 

577,979

 

 

 

417,612

 

 

 

 

 

 

 

 

 

 

Net investment income

 

 

13,858

 

 

 

8,095

 

 

 

33,540

 

 

 

22,466

 

Change in the fair value of equity securities

 

 

(6,095

)

 

 

(1,012

)

 

 

(37,199

)

 

 

13,644

 

Net realized investment (losses) gains

 

 

(173

)

 

 

895

 

 

 

1,535

 

 

 

2,397

 

Other income

 

 

112

 

 

 

35

 

 

 

381

 

 

 

58

 

Total revenues

 

 

216,961

 

 

 

164,884

 

 

 

576,236

 

 

 

456,177

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

134,788

 

 

 

87,352

 

 

 

344,333

 

 

 

236,727

 

Underwriting, acquisition and insurance expenses

 

 

40,145

 

 

 

31,465

 

 

 

117,662

 

 

 

89,490

 

Interest expense

 

 

1,716

 

 

 

243

 

 

 

2,306

 

 

 

752

 

Other expenses

 

 

212

 

 

 

145

 

 

 

521

 

 

 

482

 

Total expenses

 

 

176,861

 

 

 

119,205

 

 

 

464,822

 

 

 

327,451

 

Income before income taxes

 

 

40,100

 

 

 

45,679

 

 

 

111,414

 

 

 

128,726

 

Total income tax expense

 

 

7,116

 

 

 

9,054

 

 

 

19,549

 

 

 

24,387

 

Net income

 

 

32,984

 

 

 

36,625

 

 

 

91,865

 

 

 

104,339

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

Change in net unrealized losses on available-for-sale investments, net of taxes

 

 

(46,652

)

 

 

(6,072

)

 

 

(165,464

)

 

 

(16,111

)

Total comprehensive (loss) income

 

$

(13,668

)

 

$

30,553

 

 

$

(73,599

)

 

$

88,228

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.45

 

 

$

1.61

 

 

$

4.03

 

 

$

4.60

 

Diluted

 

$

1.43

 

 

$

1.59

 

 

$

3.98

 

 

$

4.53

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

22,813

 

 

 

22,714

 

 

 

22,783

 

 

 

22,681

 

Diluted

 

 

23,114

 

 

 

23,064

 

 

 

23,099

 

 

 

23,057

 

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

 

 

 

September 30, 2022

 

December 31, 2021

Assets

 

(in thousands)

Investments:

 

 

 

 

Fixed-maturity securities at fair value

 

$

1,605,847

 

$

1,392,066

Equity securities at fair value

 

 

133,735

 

 

172,611

Short-term investments

 

 

81,408

 

 

Total investments

 

 

1,820,990

 

 

1,564,677

 

 

 

 

 

Cash and cash equivalents

 

 

126,213

 

 

121,040

Investment income due and accrued

 

 

11,663

 

 

7,658

Premiums receivable, net

 

 

96,102

 

 

71,004

Reinsurance recoverables, net

 

 

188,803

 

 

122,970

Ceded unearned premiums

 

 

40,924

 

 

33,679

Deferred policy acquisition costs, net of ceding commissions

 

 

58,445

 

 

41,968

Intangible assets

 

 

3,538

 

 

3,538

Deferred income tax asset, net

 

 

59,136

 

 

2,109

Other assets

 

 

58,418

 

 

57,012

Total assets

 

$

2,464,232

 

$

2,025,655

 

 

 

 

 

Liabilities & Stockholders' Equity

 

 

 

 

Liabilities:

 

 

 

 

Reserves for unpaid losses and loss adjustment expenses

 

$

1,197,317

 

$

881,344

Unearned premiums

 

 

471,736

 

 

347,730

Payable to reinsurers

 

 

26,323

 

 

16,112

Accounts payable and accrued expenses

 

 

22,218

 

 

23,250

Debt

 

 

123,159

 

 

42,696

Other liabilities

 

 

4,024

 

 

15,188

Total liabilities

 

 

1,844,777

 

 

1,326,320

 

 

 

 

 

Stockholders' equity

 

 

619,455

 

 

699,335

Total liabilities and stockholders' equity

 

$

2,464,232

 

$

2,025,655

 

Kinsale Capital Group, Inc.
Bryan Petrucelli
Executive Vice President, Chief Financial Officer and Treasurer
804-289-1272
ir@kinsalecapitalgroup.com

Source: Kinsale Capital Group, Inc.

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