Kinsale Capital Group, Inc. (NYSE: KNSL) reported net income of $72.8 million, $3.12 per diluted share, for the second quarter of 2023 compared to $27.1 million, $1.17 per diluted share, for the second quarter of 2022. Net income was $128.6 million, $5.52 per diluted share, for the first half of 2023 compared to $58.9 million, $2.55 per diluted share, for the first half of 2022.
Net operating earnings(1) were $67.2 million, $2.88 per diluted share, for the second quarter of 2023 compared to $44.4 million, $1.92 per diluted share, for the second quarter of 2022. Net operating earnings(1) were $123.9 million, $5.32 per diluted share, for the first half of 2023 compared to $82.1 million, $3.56 per diluted share, for the first half of 2022.
Highlights for the quarter included:
- Net income increased by 168.7% compared to the second quarter of 2022
- Net operating earnings(1) of $67.2 million increased by 51.2% compared to the second quarter of 2022
- Gross written premiums increased by 58.2% to $438.2 million compared to the second quarter of 2022
- Net investment income increased by 128.2% to $24.2 million compared to the second quarter of 2022
- Underwriting income(2) was $61.5 million in the second quarter of 2023, resulting in a combined ratio of 76.7%
- Annualized operating return on equity(7) was 30.6% for the six months ended June 30, 2023
“Our second quarter performance reflects the continued focus on disciplined underwriting, technology-enabled expense management and operational excellence which allows us to capitalize on favorable market conditions. The combination of gross written premium growth of 58.2%, a combined ratio of 76.7% and annualized operating return on equity of 30.6% demonstrates our ability to take market share and generate attractive returns over the long term,” said President and Chief Executive Officer, Michael P. Kehoe.
Results of Operations
Underwriting Results
Gross written premiums were $438.2 million for the second quarter of 2023 compared to $277.0 million for the second quarter of 2022, an increase of 58.2%. Gross written premiums were $795.8 million for the first half of 2023 compared to $522.5 million for the first half of 2022, an increase of 52.3%. The increase in gross written premiums during the second quarter and first half of 2023 over the same periods last year reflected strong submission flow from brokers and a favorable pricing environment.
Underwriting income(2) was $61.5 million, resulting in a combined ratio of 76.7%, for the second quarter of 2023, compared to $44.1 million and a combined ratio of 77.4% for the same period last year. The increase in underwriting income(2) quarter over quarter was due to a combination of premium growth, favorable loss experience and lower net commissions. Loss(3) and expense(4) ratios were 55.7% and 21.0%, respectively, for the second quarter of 2023 compared to 54.9% and 22.5% for the second quarter of 2022. Results for the second quarters of 2023 and 2022 included net favorable development of loss reserves from prior accident years of $10.4 million, or 3.9 points, and $9.5 million, or 4.9 points, respectively.
Underwriting income(2) was $113.1 million, resulting in a combined ratio of 77.7%, for the first half of 2023, compared to $81.7 million and a combined ratio of 78.4% for the first half of 2022. The increase in underwriting income(2) was due to a combination of premium growth, favorable loss experience, lower net commissions and scale. Loss(3) and expense(4) ratios were 56.4% and 21.3%, respectively, for the first half of 2023 compared to 55.4% and 23.0% for the first half of 2022. Results for the first half of 2023 and 2022 included net favorable development of loss reserves from prior accident years of $19.5 million, or 3.8 points, and $17.9 million, or 4.7 points, respectively.
Summary of Operating Results
The Company’s operating results for the three and six months ended June 30, 2023 and 2022 are summarized as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||
($ in thousands) | |||||||||||||||
Gross written premiums | $ | 438,222 | $ | 277,001 | $ | 795,810 | $ | 522,514 | |||||||
Ceded written premiums | (73,181 | ) | (34,658 | ) | (131,739 | ) | (63,673 | ) | |||||||
Net written premiums | $ | 365,041 | $ | 242,343 | $ | 664,071 | $ | 458,841 | |||||||
Net earned premiums | $ | 257,046 | $ | 190,158 | $ | 494,204 | $ | 368,720 | |||||||
Fee income | 6,986 | 4,919 | 13,187 | 9,264 | |||||||||||
Losses and loss adjustment expenses | 147,042 | 107,040 | 286,076 | 209,545 | |||||||||||
Underwriting, acquisition and insurance expenses | 55,473 | 43,891 | 108,219 | 86,781 | |||||||||||
Underwriting income(2) | $ | 61,517 | $ | 44,146 | $ | 113,096 | $ | 81,658 | |||||||
Loss ratio(3) | 55.7 | % | 54.9 | % | 56.4 | % | 55.4 | % | |||||||
Expense ratio(4) | 21.0 | % | 22.5 | % | 21.3 | % | 23.0 | % | |||||||
Combined ratio(5) | 76.7 | % | 77.4 | % | 77.7 | % | 78.4 | % | |||||||
Annualized return on equity(6) | 34.5 | % | 16.7 | % | 31.8 | % | 17.7 | % | |||||||
Annualized operating return on equity(7) | 31.8 | % | 27.3 | % | 30.6 | % | 24.6 | % | |||||||
(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) | Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to the sum of net earned premiums and fee income. Prior periods have been revised to conform to the current period's presentation. | |
(4) | Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses to the sum of net earned premiums and fee income. Prior periods have been revised to conform to the current period's presentation. | |
(5) | The combined ratio is the sum of the loss ratio and expense ratio as presented. Calculations of each component may not add due to rounding. Prior periods have been revised to conform to the current period's presentation. | |
(6) | 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. | |
(7) | 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 six months ended June 30, 2023 and 2022:
Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||
Losses and
| % of Sum of
| Losses and
| % of Sum of
| ||||||||||
Loss ratio: | ($ in thousands) | ||||||||||||
Current accident year | $ | 156,008 | 59.1 | % | $ | 116,531 | 59.8 | % | |||||
Current accident year - catastrophe losses | 1,451 | 0.5 | % | 21 | — | % | |||||||
Effect of prior accident year development | (10,417 | ) | (3.9 | )% | (9,512 | ) | (4.9 | )% | |||||
Total | $ | 147,042 | 55.7 | % | $ | 107,040 | 54.9 | % | |||||
Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | ||||||||||||
Losses and
| % of Sum of
| Losses and
| % of Sum of
| ||||||||||
Loss ratio: | ($ in thousands) | ||||||||||||
Current accident year | $ | 302,511 | 59.6 | % | $ | 227,320 | 60.1 | % | |||||
Current accident year - catastrophe losses | 3,025 | 0.6 | % | 83 | — | % | |||||||
Effect of prior accident year development | (19,460 | ) | (3.8 | )% | (17,858 | ) | (4.7 | )% | |||||
Total | $ | 286,076 | 56.4 | % | $ | 209,545 | 55.4 | % | |||||
Investment Results
Net investment income was $24.2 million in the second quarter of 2023 compared to $10.6 million in the second quarter of 2022, an increase of 128.2%. Net investment income was $44.9 million in the first half of 2023 compared to $19.7 million in the first half of 2022, an increase of 128.0%. These increases were driven by growth in the Company's investment portfolio generated largely from the investment of strong operating cash flows and higher interest rates relative to the prior year periods. Net operating cash flows were $423.6 million in the first half of 2023 compared to $278.7 million in the first half of 2022, an increase of 52.0%. The Company’s investment portfolio had an annualized gross investment return(8) of 3.8% for the first half of 2023 compared to 2.6% for the same period last year. 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 3.1 years and 3.5 years at June 30, 2023 and December 31, 2022, respectively. Cash and invested assets totaled $2.6 billion at June 30, 2023 and $2.2 billion at December 31, 2022.
(8) | Gross investment return is investment income from fixed-maturity and equity securities (and short-term investments, if any), before any deductions for fees and expenses, expressed as a percentage of average beginning and ending book values of those investments during the period. |
Other
The effective tax rates for the six months ended June 30, 2023 and 2022 were 18.9% and 17.4%, respectively. In the first half of 2023 and 2022, 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 $871.8 million at June 30, 2023 compared to $745.4 million at December 31, 2022. Book value per share was $37.64 at June 30, 2023 compared to $32.28 at December 31, 2022. Annualized operating return on equity(7) was 30.6% for the first half of 2023, an increase from 24.6% for the first half of 2022, which was primarily due to continued profitable growth from favorable E&S market conditions and rate increases.
In the periods ending June 30, 2023, the Company reclassified policy fees to fee income. Historically, these fees were presented as a reduction to underwriting, acquisition and insurance expenses. The Company modified the definition of the loss and expense ratios to include fee income in the denominator of each ratio. The Company has reclassified prior periods' results to conform to the current period's presentation.
Non-GAAP Financial Measures
Net Operating Earnings
Net operating earnings is defined as net income excluding the effects of the change in the fair value of equity securities, after taxes, net realized investment gains and losses, after taxes, and change in allowance for credit losses on investments, after taxes. Management believes the exclusion of these items provides a useful comparison of the Company's underlying business performance from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.
For the three and six months ended June 30, 2023 and 2022, net income and diluted earnings per share reconcile to net operating earnings and diluted operating earnings per share as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
($ in thousands, except per share data) | ||||||||||||||||
Net operating earnings: | ||||||||||||||||
Net income | $ | 72,791 | $ | 27,090 | $ | 128,591 | $ | 58,881 | ||||||||
Adjustments: | ||||||||||||||||
Change in the fair value of equity securities, before taxes | (5,811 | ) | 23,353 | (9,329 | ) | 31,104 | ||||||||||
Income tax expense (benefit) (1) | 1,220 | (4,904 | ) | 1,959 | (6,532 | ) | ||||||||||
Change in fair value of equity securities, after taxes | (4,591 | ) | 18,449 | (7,370 | ) | 24,572 | ||||||||||
Net realized investment losses (gains), before taxes | (1,291 | ) | (1,413 | ) | 3,361 | (1,708 | ) | |||||||||
Income tax (benefit) expense (1) | 271 | |||||||||||||||
