KINSALE CAPITAL GROUP, INC. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in "Risk Factors" in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months endedSeptember 30, 2021 are not necessarily indicative of the results that may be expected for the full year endedDecember 31, 2021 , or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . References to the "Company," "Kinsale," "we," "us," and "our" are toKinsale Capital Group, Inc. and its subsidiaries, unless the context otherwise requires.
Overview
Founded in 2009, Kinsale is a specialty insurance company. Kinsale focuses
exclusively on the excess and surplus lines ("E&S") market in the U.S. , where we
use our underwriting expertise to write coverages for hard-to-place small
business risks and personal lines risks. We market these insurance products in
all 50 states, the District of Columbia , the Commonwealth of Puerto Rico and the
U.S. Virgin Islands , primarily through a network of independent insurance
brokers.
We have one reportable segment, our Excess and Surplus Lines Insurance segment,
which offers property and casualty ("P&C") insurance products through the E&S
market. For the first nine months of 2021, the percentage breakdown of our gross
written premiums was 86% casualty and 14% property. Our underwriting divisions
include small business, excess casualty, construction, commercial property,
allied health, product liability, general casualty, life sciences, professional
liability, management liability, energy, environmental, health care, public
entity, inland marine and commercial insurance. We also write a small amount of
homeowners insurance in the personal lines market, which in aggregate
represented 4% of our gross written premiums in the first nine months of 2021,
and is included within our personal insurance division.
COVID-19
We have been closely monitoring the impact of the COVID-19 pandemic and related
economic effects on all aspects of our business, including how it will impact
premium volume, losses and the fair value of our investment portfolio.
To date, management has not seen a significant decrease in the growth rate of
its gross written premiums since the beginning of the COVID-19 pandemic and the
related pressure in certain sectors of the U.S. economy. Over the past few
years, including the time period preceding COVID-19, the E&S segment of the P&C
market has been experiencing rapid growth due to dislocation in the overall
property and casualty market and management expects premium growth to continue
throughout the remainder of 2021.
With respect to reported claims, Kinsale does not write lines of business with
heightened exposure to COVID-19 related claims. Specifically, Kinsale does not
write event cancellation, mortgage insurance, trade credit or surety, workers'
compensation or reinsurance business. Lines of business written by Kinsale that
could be subject to COVID-19 related claims include general liability,
management liability, healthcare-related professional liability and commercial
property. In each case, policy terms and conditions would be expected to
preclude coverage for
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virus-related claims. Although management cannot definitively determine the
ultimate impact of COVID-19 and related economic conditions at this time,
management has not experienced any material adverse effect on Kinsale's loss
ratios due to COVID-19 related claims.
With respect to our investment portfolio, we seek to hold a high-quality,
diversified portfolio of investments. During the first quarter of 2020, we
experienced a significant decline in the fair value of our investment portfolio
due to disruption in the global financial markets associated with COVID-19.
Subsequent to the first quarter of 2020, the fair value of our investment
portfolio rebounded sharply, gaining back all of the decline in fair value.
However, during economic downturns, certain investments may default or become
impaired due to deterioration in the financial condition or due to deterioration
in the financial condition of an insurer that guarantees an issuer's payments on
such investments. Given the conservative nature of our investment portfolio, we
do not expect a material adverse impact on the value of our investment portfolio
or a long-term negative impact on our financial condition, results of operations
or cash flows as it relates to COVID-19.
Components of our results of operations
Gross written premiums
Gross written premiums are the amounts received or to be received for insurance
policies written or assumed by us during a specific period of time without
reduction for policy acquisition costs, reinsurance costs or other deductions.
The volume of our gross written premiums in any given period is generally
influenced by:
•New business submissions;
•Conversion of new business submissions into policies;
•Renewals of existing policies; and
•Average size and premium rate of bound policies.
We earn insurance premiums on a pro rata basis over the term of the policy. Our
insurance policies generally have a term of one year. Net earned premiums
represent the earned portion of our gross written premiums, less that portion of
our gross written premiums that is ceded to third-party reinsurers under our
reinsurance agreements.
Ceded written premiums
Ceded written premiums are the amount of gross written premiums ceded to
reinsurers. We enter into reinsurance contracts to limit our exposure to
potential large losses. Ceded written premiums are earned over the reinsurance
contract period in proportion to the period of risk covered. The volume of our
ceded written premiums is impacted by the level of our gross written premiums
and any decision we make to increase or decrease retention levels.
Losses and loss adjustment expenses
Losses and loss adjustment expenses are a function of the amount and type of
insurance contracts we write and the loss experience associated with the
underlying coverage. In general, our losses and loss adjustment expenses are
affected by:
•Frequency of claims associated with the particular types of insurance contracts
that we write;
•Trends in the average size of losses incurred on a particular type of business;
•Mix of business written by us;
•Changes in the legal or regulatory environment related to the business we
write;
•Trends in legal defense costs;
•Wage inflation; and
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•Inflation in medical costs.
Losses and loss adjustment expenses are based on an actuarial analysis of the
estimated losses, including losses incurred during the period and changes in
estimates from prior periods. Losses and loss adjustment expenses may be paid
out over a period of years.
Underwriting, acquisition and insurance expenses
Underwriting, acquisition and insurance expenses include policy acquisition
costs and other underwriting expenses. Policy acquisition costs are principally
comprised of the commissions we pay our brokers, net of ceding commissions we
receive on business ceded under certain reinsurance contracts. Policy
acquisition costs also include underwriting expenses that are directly related
to the successful acquisition of those policies which are deferred. The
amortization of policy acquisition costs is charged to expense in proportion to
premium earned over the policy life.
Other underwriting expenses represent the general and administrative expenses of
our insurance business such as employment costs, telecommunication and
technology costs, and legal and auditing fees.
Net investment income
Net investment income is an important component of our results of operations. We
earn investment income on our portfolio of cash and invested assets. Our cash
and invested assets are primarily comprised of fixed-maturity securities, and
may also include cash equivalents, equity securities and short-term investments.
The principal factors that influence net investment income are the size of our
investment portfolio and the yield on that portfolio. As measured by amortized
cost (which excludes changes in fair value), the size of our investment
portfolio is mainly a function of our invested equity capital combined with
premiums we receive from our insureds less payments on policyholder claims.
Change in fair value of equity securities
Change in fair value of equity securities represents the increase or decrease in
the fair value of equity securities held during the period.
Net realized investment gains (losses)
Net realized investment gains (losses) are a function of the difference between
the amount received by us on the sale of a security and the security's amortized
cost, as well as any credit impairments recognized in earnings.
Income tax expense
Currently, substantially all of our income tax expense relates to federal income
taxes. Our insurance subsidiary, Kinsale Insurance Company , is not subject to
income taxes in the states in which it operates; however, our non-insurance
subsidiaries are subject to state income taxes, but have not generated any
material taxable income to date. The amount of income tax expense or benefit
recorded in future periods will depend on the jurisdictions in which we operate
and the tax laws and regulations in effect.
Key metrics
We discuss certain key metrics, described below, which we believe provide useful
information about our business and the operational factors underlying our
financial performance.
Underwriting income is a non-GAAP financial measure. We define underwriting
income as net income, excluding net investment income, net change in the fair
value of equity securities, net realized gains and losses on investments, other
income, other expenses and income tax expense. See "-Reconciliation of non-GAAP
financial measures" for a reconciliation of net income in accordance with GAAP
to underwriting income.
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Net operating earnings is a non-GAAP financial measure. We define net operating
earnings as net income excluding the net change in the fair value of equity
securities, after taxes, and net realized gains and losses on investments, after
taxes. See "-Reconciliation of non-GAAP financial measures" for a reconciliation
of net income in accordance with GAAP to net operating earnings.
Loss ratio, expressed as a percentage, is the ratio of losses and loss
adjustment expenses to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of underwriting,
acquisition and insurance expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined
ratio under 100% indicates an underwriting profit. A combined ratio over 100%
indicates an underwriting loss.
Return on equity is net income expressed on an annualized basis as a percentage
of average beginning and ending total stockholders' equity during the period.
Operating return on equity is a non-GAAP financial measure. We define operating
return on equity as net operating earnings expressed on an annualized basis as a
percentage of average beginning and ending total stockholders' equity during the
period. See "-Reconciliation of non-GAAP financial measures" for a
reconciliation of net income in accordance with GAAP to net operating earnings.
Net retention ratio is the ratio of net written premiums to gross written
premiums.
Gross investment return is investment income from fixed-maturity and equity
securities, before any deductions for fees and expenses, expressed as a
percentage of the average beginning and ending book value of those investments
during the period.
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Three months ended September 30, 2021 compared to three months ended
September 30, 2020
The following table summarizes our results of operations for the three months
ended September 30, 2021 and 2020:
Three Months Ended September 30,
($ in thousands) 2021 2020 Change % Change
Gross written premiums $ 197,616 $ 144,777 $ 52,839 36.5 %
Ceded written premiums (26,939) (22,529) (4,410) 19.6 %
Net written premiums $ 170,677 $ 122,248 $ 48,429 39.6 %
Net earned premiums $ 156,871 $ 108,244 $ 48,627 44.9 %
Losses and loss adjustment expenses 87,352 82,431 4,921 6.0 %
Underwriting, acquisition and insurance
expenses 31,465 22,927 8,538 37.2 %
Underwriting income (1) 38,054 2,886 35,168 1,218.6 %
Net investment income 8,095 7,008 1,087 15.5 %
Change in the fair value of equity
securities (1,012) 6,031 (7,043) (116.8) %
Net realized gains on investments 895 647 248 38.3 %
Other expense, net (353) (451) 98 (21.7) %
Income before taxes 45,679 16,121 29,558 183.4 %
Income tax expense 9,054 1,231 7,823 635.5 %
Net income $ 36,625 $ 14,890 $ 21,735 146.0 %
Net operating earnings (2) $ 36,717 $ 9,615 $ 27,102 281.9 %
Loss ratio 55.7 % 76.1 %
Expense ratio 20.0 % 21.2 %
Combined ratio 75.7 % 97.3 %
Annualized return on equity 22.7 % 12.0 %
Annualized operating return on equity (2) 22.8 % 7.8 %
(1) Underwriting income is a non-GAAP financial measure. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to underwriting income. (2) Net operating earnings and annualized operating return on equity are non-GAAP financial measures. Net operating earnings is defined as net income excluding the net change in the fair value of equity securities, after taxes, and net realized investment gains and losses, after taxes. Annualized operating return on equity is defined as net operating earnings expressed on an annualized basis as a percentage of average beginning and ending total stockholders' equity during the period. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to net operating earnings. Net income was$36.6 million for the three months endedSeptember 30, 2021 compared to$14.9 million for the three months endedSeptember 30, 2020 , an increase of 146.0%. The increase in net income for the third quarter of 2021 over the third quarter of 2020 was primarily due to higher underwriting income reflecting favorable E&S market conditions, which resulted in higher rates on bound accounts and strong growth in broker submissions. In addition, net income for the third quarter of 2021 over the third quarter of 2020 reflected lower catastrophe activity and higher net favorable development of loss reserves from prior accident years. These increases were offset in part 28 -------------------------------------------------------------------------------- Table of Contents by a decline in the fair value of equity securities during the third quarter of 2021 relative to the same period last year. Underwriting income was$38.1 million for the three months endedSeptember 30, 2021 compared to$2.9 million for the three months endedSeptember 30, 2020 , an increase of 1,218.6%. The corresponding combined ratios were 75.7% for the three months endedSeptember 30, 2021 compared to 97.3% for the three months endedSeptember 30, 2020 . The increase in our underwriting income in the third quarter of 2021 compared to the third quarter of 2020, was largely due to premium growth and continued rate increases from a strong underwriting environment, lower catastrophe activity and higher net favorable development of loss reserves from prior accident years. Net catastrophe losses incurred during the third quarter of 2021 were$5.9 million compared to$16.7 million during the third quarter of 2020. Premiums Our gross written premiums were$197.6 million for the three months endedSeptember 30, 2021 compared to$144.8 million for the three months endedSeptember 30, 2020 , an increase of$52.8 million , or 36.5%. The increase in gross written premiums for the third quarter of 2021 over the same period last year was due to higher submission activity from brokers and higher rates on bound accounts, resulting from favorable market conditions. The average premium on a policy written was approximately$10,700 in the third quarter of 2021 compared to approximately$9,100 in the third quarter of 2020. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was approximately$13,000 in the third quarter of 2021 compared to$11,700 in the third quarter of 2020. Net written premiums increased by$48.4 million , or 39.6%, to$170.7 million for the three months endedSeptember 30, 2021 from$122.2 million for the three months endedSeptember 30, 2020 . The increase in net written premiums for the third quarter of 2021 compared to the same period last year was primarily due to higher gross written premiums. The net retention ratio was 86.4% for the three months endedSeptember 30, 2021 compared to 84.4% for the three months endedSeptember 30, 2020 . The increase in the net retention ratio was largely due to the change in the mix of business quarter over quarter and higher reinstatement premiums in the third quarter of 2020. Net earned premiums increased by$48.6 million , or 44.9%, to$156.9 million for the three months endedSeptember 30, 2021 from$108.2 million for the three months endedSeptember 30, 2020 and was directly related to growth in gross written premiums. Loss ratio The loss ratio was 55.7% for the three months endedSeptember 30, 2021 compared to 76.1% for the three months endedSeptember 30, 2020 . The decrease in the loss ratio in the third quarter of 2021 compared to the third quarter of 2020 was due primarily to lower catastrophe activity, lower loss selections for the current accident year and higher favorable development on loss reserves from prior accident years. The loss selections in the current accident year were lower relative to the prior year due to favorable market conditions and continued rate increases. During the three months endedSeptember 30, 2021 , net catastrophe losses incurred in the current accident year were primarily attributable to Hurricane Ida. During the three months endedSeptember 30, 2020 , net catastrophe losses incurred were primarily due to Hurricanes Laura and Sally and theCalifornia wildfires. Loss reserves for prior accident years developed favorably by$9.2 million for the three months endedSeptember 30, 2021 , of which$7.1 million was attributable to the 2020 accident year. Actuarial assumptions for the 2020 accident year reflected additional uncertainty to account for potential COVID-19 related claims. However, our current outlook is more favorable than in the prior year as no significant claims have been reported to date and, as a result, we have adjusted certain assumptions in the 2021 period. In addition, reported losses have been emerging at lower levels than expected across most lines of business. Loss reserves for prior accident years developed favorably by 29 -------------------------------------------------------------------------------- Table of Contents$3.0 million , for the three months endedSeptember 30, 2020 , which was primarily attributable to the 2019 accident year. The following table summarizes the loss ratios for the three months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, 2021 2020 Losses and Loss Losses and Loss Adjustment Adjustment ($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums Loss ratio: Current accident year before catastrophe losses$ 90,675 57.8 %$ 68,764 63.5 % Current year catastrophe losses 5,882 3.8 % 16,670 15.4 % Effect of prior year development (9,205) (5.9) % (3,003) (2.8) % Total$ 87,352 55.7 %$ 82,431 76.1 % Expense ratio The following table summarizes the components of the expense ratio for the three months endedSeptember 30, 2021 and 2020:
Three Months Ended
2021 2020
Underwriting Underwriting
($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums
Commissions incurred:
Direct $ 26,317 16.8 % $ 18,585 17.2 %
Ceding (6,902) (4.5) % (4,588) (4.2) %
Net commissions incurred 19,415 12.3 % 13,997 13.0 %
Other underwriting expenses 12,050 7.7 % 8,930 8.2 %
Underwriting, acquisition and
insurance expenses $ 31,465 20.0 % $ 22,927 21.2 %
The expense ratio was 20.0% for the three months ended September 30, 2021
compared to 21.2% for the three months ended September 30, 2020 . The decrease in
the expense ratio was due to lower other underwriting expenses and lower net
commissions incurred as a percentage of earned premiums. The decrease in the
other underwriting expense ratio was primarily due to higher net earned
premiums, without a proportional increase in the amount of other underwriting
expenses, as a result of management's focus on controlling costs. The decrease
in the net commissions incurred ratio was mostly due to higher ceding
commissions resulting from growth in the excess casualty and personal insurance
lines of business and a change in the mix of business. Direct commissions paid
as a percent of gross written premiums was 14.6% for both the three months ended
September 30, 2021 and 2020.
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Investing results
The following table summarizes net investment income, change in the fair value
of equity securities and net realized investment gains for the three months
ended September 30, 2021 and 2020:
Three Months Ended September 30,
($ in thousands) 2021 2020 Change % Change
Interest from fixed-maturity securities
16.6 %
Dividends from equity securities 979 1,100 (121) (11.0) %
Other 1 - 1 NM
Gross investment income 8,325 7,401 924 12.5 %
Investment expenses (230) (393) 163 (41.5) %
Net investment income 8,095 7,008 1,087 15.5 %
Change in the fair value of equity
securities (1,012) 6,031 (7,043) (116.8) %
Net realized investment gains 895 647 248 38.3 %
Total $ 7,978 $ 13,686 $ (5,708) (41.7) %
NM - Percentage change not meaningful.
Our net investment income increased by 15.5% to $8.1 million for the three
months ended September 30, 2021 from $7.0 million for the three months ended
September 30, 2020 . This increase was primarily due to growth in our investment
portfolio generated from the investment of positive cash flow since
September 30, 2020 . Our investment portfolio, excluding cash equivalents and
unrealized gains and losses, had an annualized gross investment return of 2.5%
for the three months ended September 30, 2021 , compared to 2.9% for the three
months ended September 30, 2020 .
The fair value of our equity investment portfolio decreased $1.0 million for the
three months ended September 30, 2021 compared to an increase of $6.0 million
for the three months ended September 30, 2020 . During the third quarter of 2021,
the change in fair value was mostly attributable to our exchange-traded fund
("ETF") securities, whose valuations are largely reflective of the broader U.S.
stock markets. During the third quarter of 2020, the fair value of our ETF
securities continued to rebound from a significant decline in fair value driven
by the disruption in the financial markets in March 2020 associated with the
COVID-19 pandemic.
Income tax expense
Our effective tax rate was 19.8% for the three months ended September 30, 2021
compared to 7.6% for the three months ended September 30, 2020 . The effective
tax rates were lower than the federal statutory rate of 21% due to the tax
benefits from stock-based compensation and tax-exempt investment income. During
the three months ended September 30, 2021 , the level of stock options exercised
was significantly lower than the comparable prior year period, which resulted in
a higher effective tax rate quarter over quarter.
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Nine months ended September 30, 2021 compared to nine months ended September 30,
2020
The following table summarizes our results of operations for the nine months
ended September 30, 2021 and 2020:
Nine Months Ended September 30,
($ in thousands) 2021 2020 Change % Change
Gross written premiums $ 560,553 $ 402,904 $ 157,649 39.1 %
Ceded written premiums (77,825) (54,996) (22,829) 41.5 %
Net written premiums $ 482,728 $ 347,908 $ 134,820 38.8 %
Net earned premiums $ 417,612 $ 294,962 $ 122,650 41.6 %
Losses and loss adjustment expenses 236,727 194,468 42,259 21.7 %
Underwriting, acquisition and insurance
expenses 89,490 67,471 22,019 32.6 %
Underwriting income (1) 91,395 33,023 58,372 176.8 %
Net investment income 22,466 19,613 2,853 14.5 %
Change in fair value of equity securities 13,644 3,709 9,935 267.9 %
Net realized investment gains 2,397 1,676 721 43.0 %
Other expense, net (1,176) (428) (748) 174.8 %
Income before taxes 128,726 57,593 71,133 123.5 %
Income tax expense 24,387 7,355 17,032 231.6 %
Net income $ 104,339 $ 50,238 $ 54,101 107.7 %
Net operating earnings (2) $ 91,666 $ 45,984 $ 45,682 99.3 %
Loss ratio 56.7 % 65.9 %
Expense ratio 21.4 % 22.9 %
Combined ratio 78.1 % 88.8 %
Annualized return on equity 22.5 % 14.3 %
Annualized operating return on equity(2) 19.8 % 13.0 %
(1) Underwriting income is a non-GAAP financial measure. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to underwriting income. (2) Net operating earnings and annualized operating return on equity are non-GAAP financial measures. Net operating earnings is defined as net income excluding the net change in the fair value of equity securities, after taxes, and net realized investment gains and losses, after taxes. Annualized operating return on equity is defined as net operating earnings expressed on an annualized basis as a percentage of average beginning and ending total stockholders' equity during the period. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of net income in accordance with GAAP to net operating earnings. Net income was$104.3 million for the nine months endedSeptember 30, 2021 compared to$50.2 million for the nine months endedSeptember 30, 2020 , an increase of 107.7%. The increase in net income for the first nine months of 2021 over the same period last year was due to a number of factors including growth in the business from favorable market conditions and continued rate increases, higher net favorable development of loss reserves from prior accident years and higher returns on equity investments as a result of a rebound in the financial markets. In addition, net income for the nine months endedSeptember 30, 2021 reflected lower catastrophe activity compared to the same period last year. 32 -------------------------------------------------------------------------------- Table of Contents Underwriting income was$91.4 million for the nine months endedSeptember 30, 2021 compared to$33.0 million for the nine months endedSeptember 30, 2020 , an increase of 176.8%. The corresponding combined ratios were 78.1% for the nine months endedSeptember 30, 2021 compared to 88.8% for the nine months endedSeptember 30, 2020 . The increase in underwriting income for the first nine months of 2021 compared to the same period last year was due to higher premium growth and continued rate increases from a favorable market environment, higher net favorable development of loss reserves from prior accident years and lower catastrophe activity. Premiums Our gross written premiums were$560.6 million for the nine months endedSeptember 30, 2021 compared to$402.9 million for the nine months endedSeptember 30, 2020 , an increase of$157.6 million , or 39.1%. The increase in gross written premiums for the first nine months of 2021 over the same period last year was due to higher submission activity from brokers and higher rates across most lines of business, resulting from continued favorable conditions in the E&S market. The average premium on a policy written was approximately$10,100 in the first nine months of 2021 compared to approximately$8,900 in the first nine months of 2020. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was approximately$12,700 for the first nine months of 2021 and approximately$11,600 for the first nine months of 2020. Net written premiums increased by$134.8 million , or 38.8%, to$482.7 million for the nine months endedSeptember 30, 2021 from$347.9 million for the nine months endedSeptember 30, 2020 . The increase in net written premiums for the first nine months of 2021 compared to the same period last year was primarily due to higher gross written premiums. The net retention ratio was 86.1% for the nine months endedSeptember 30, 2021 compared to 86.4% for the same period last year. The decrease in the net retention ratio was primarily due to a change in the mix of business. Net earned premiums increased by$122.7 million , or 41.6%, to$417.6 million for the nine months endedSeptember 30, 2021 from$295.0 million for the nine months endedSeptember 30, 2020 due to growth in gross written premiums. Loss ratio The loss ratio was 56.7% for the nine months endedSeptember 30, 2021 compared to 65.9% for the nine months endedSeptember 30, 2020 . The decrease in the loss ratio in the first nine months of 2021 compared to the first nine months of 2020 was due primarily to lower catastrophe activity, higher favorable net development of reserves from prior accident years and lower loss selections for the current accident year. The loss selections in the current accident year were lower relative to the prior year due to favorable market conditions and continued rate increases. During the nine months endedSeptember 30, 2021 , net catastrophe losses incurred in the current accident year were primarily attributable to Hurricane Ida and the winter storms Uri and Viola inTexas . During the nine months endedSeptember 30, 2020 , net catastrophe losses incurred were primarily due to Hurricanes Laura and Sally and theCalifornia wildfires. During the nine months endedSeptember 30, 2021 , prior accident years developed favorably by$25.4 million , of which$28.9 million was attributable to the 2020 accident year. Actuarial assumptions for the 2020 accident year reflected additional uncertainty to account for potential COVID-19 related claims. However, our current outlook is more favorable than in the prior year as no significant claims have been reported to date and, as a result, we have adjusted certain assumptions in the 2021 period. In addition, reported losses have been emerging at lower levels than expected across most lines of business. This favorable development was offset in part by adverse development, mostly attributable to the 2015-2018 accident years as a result of modest adjustments in actuarial assumptions based on observable trends. 33 -------------------------------------------------------------------------------- Table of Contents During the nine months endedSeptember 30, 2020 , loss reserves from prior accident years developed favorably by$9.6 million , of which$7.8 million was attributable to the 2019 accident year. The favorable development resulted from reported losses emerging at lower levels than expected across most lines of business.
The following table summarizes the loss ratios for the nine months ended
Nine Months Ended September 30,
2021 2020
Losses and Loss Losses and Loss
Adjustment Adjustment
($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums
Loss ratio:
Current accident year before
catastrophe losses $ 253,348 60.7 % $ 186,965 63.4 %
Current year catastrophe losses 8,792 2.1 % 17,131 5.8 %
Effect of prior year development (25,413) (6.1) % (9,628) (3.3) %
Total $ 236,727 56.7 % $ 194,468 65.9 %
Expense ratio
The following table summarizes the components of the expense ratio for the nine
months ended September 30, 2021 and 2020:
Nine Months Ended
2021 2020
Underwriting Underwriting
($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums
Commissions incurred:
Direct $ 71,036 17.0 % $ 50,068 17.0 %
Ceding (18,344) (4.4) % (11,234) (3.8) %
Net commissions incurred 52,692 12.6 % 38,834 13.2 %
Other underwriting expenses 36,798 8.8 % 28,637 9.7 %
Underwriting, acquisition and
insurance expenses $ 89,490 21.4 % $ 67,471 22.9 %
The expense ratio was 21.4% for the nine months ended September 30, 2021
compared to 22.9% for the nine months ended September 30, 2020 . The decrease in
the expense ratio was due to lower other underwriting expenses and lower net
commissions incurred as a percentage of earned premiums. The decrease in the
other underwriting expense ratio was primarily due to higher net earned
premiums, without a proportional increase in the amount of other underwriting
expenses, as a result of management's focus on controlling costs. The decrease
in the net commissions incurred ratio was due to higher ceding commissions
resulting from growth in the excess casualty and personal insurance lines of
business and a change in the mix of business. Direct commissions paid as a
percent of gross written premiums was 14.6% for both the nine months ended
September 30, 2021 and 2020.
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Investing results
The following table summarizes net investment income, change in the fair value
of equity securities and net realized investment gains for the nine months ended
September 30, 2021 and 2020:
Nine Months Ended September 30,
($ in thousands) 2021 2020 Change % Change
Interest from fixed-maturity securities $ 20,992 $ 17,994 $ 2,998 16.7 %
Dividends from equity securities 2,801 2,554 247 9.7 %
Other 11 261 (250) (95.8) %
Gross investment income 23,804 20,809 2,995 14.4 %
Investment expenses (1,338) (1,196) (142) 11.9 %
Net investment income 22,466 19,613 2,853 14.5 %
Change in fair value of equity securities 13,644 3,709 9,935 267.9 %
Net realized investment gains 2,397 1,676 721 43.0 %
Total $ 38,507 $ 24,998 $ 13,509 54.0 %
Our net investment income increased by 14.5% to $22.5 million for the nine
months ended September 30, 2021 from $19.6 million for the nine months ended
September 30, 2020 . This increase in the first nine months of 2021 compared to
the same period last year was primarily due to growth in our investment
portfolio generated from the investment of positive cash flow since
September 30, 2020 and proceeds from our equity offering in the third quarter of
2020. Our fixed-maturity investment portfolio, excluding cash equivalents and
unrealized gains and losses, had an annualized gross investment return of 2.5%
for the nine months and ended September 30, 2021 and 3.0% for the nine months
ended September 30, 2020 .
During the first nine months of 2021, the change in fair value of equity
securities was comprised of unrealized gains related to ETF securities of $13.4
million and unrealized gains related to non-redeemable preferred stock of $0.2
million . The change in unrealized gains during the first nine months of 2021
attributable to ETF securities was largely reflective of the gains in the
broader U.S. stock market.
During the first nine months of 2020, the change in fair value of equity
securities was comprised of unrealized gains related to ETF securities of $4.5
million and unrealized losses related to preferred stock of $0.8 million . Fair
values of ETF's declined by $13.1 million during the first quarter of 2020,
driven by the disruption in the financial markets associated with the COVID-19
pandemic and, subsequently, the fair value of those securities rebounded sharply
during the second quarter of 2020. Consistent with the trend experienced in the
second quarter of 2020, the fair values of these securities continued to
increase during the third quarter of 2020, although to a lesser degree.
We perform quarterly reviews of all available-for-sale securities within our
investment portfolio to determine whether the decline in a security's fair value
is deemed to be a credit loss. Management concluded that there were no credit
losses from available-for-sale investments for the nine months ended
September 30, 2021 or 2020.
Income tax expense
Our effective tax rate was 18.9% for the nine months ended September 30, 2021
compared to 12.8% for the nine months ended September 30, 2020 . The effective
tax rate was lower than the federal statutory rate of 21% primarily due to the
tax benefits from stock-based compensation and tax-exempt investment income.
During the nine months ended September 30, 2021 , the level of stock options
exercised was lower than the comparable prior year period, which resulted in a
higher effective tax rate.
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Return on equity
Our annualized return on equity was 22.5% for the nine months ended
September 30, 2021 compared to 14.3% for the nine months ended September 30,
2020 . Our annualized operating return on equity was 19.8% for the nine months
ended September 30, 2021 compared to 13.0% for the nine months ended
September 30, 2020 . The increase in annualized operating return on equity for
the nine months ended September 30, 2021 compared to the prior period was
attributable primarily to growth in the business from continuing favorable
market conditions and rate increases, lower catastrophe activity and higher net
favorable development of loss reserves from prior accident years.
Liquidity and capital resources
Sources and uses of funds
We are organized as a Delaware holding company with our operations primarily
conducted by our wholly-owned insurance subsidiary, Kinsale Insurance Company ,
which is domiciled in Arkansas . Accordingly, we may receive cash through (1)
loans from banks and other third parties, (2) issuance of equity and debt
securities, (3) corporate service fees from our insurance subsidiary, (4)
payments from our subsidiaries pursuant to our consolidated tax allocation
agreement and other transactions, and (5) dividends from our insurance
subsidiary. We may use the proceeds from these sources to contribute funds to
Kinsale Insurance Company in order to support premium growth, reduce our
reliance on reinsurance, pay dividends and taxes and for other business
purposes.
We receive corporate service fees from Kinsale Insurance Company to reimburse us
for most of the operating expenses that we incur. Reimbursement of expenses
through corporate service fees is based on the actual costs that we expect to
incur with no mark-up above our expected costs.
In August 2019 , we filed a universal shelf registration statement with the SEC
that expires in 2022. We can use this shelf registration to issue an unspecified
amount of debt securities, common stock, preferred stock, depositary shares and
warrants. The specific terms of any securities we issue under this registration
statement will be provided in the applicable prospectus supplements.
Management believes that the Company has sufficient liquidity available both in
Kinsale and in its insurance subsidiary, Kinsale Insurance Company , as well as
in its other operating subsidiaries, to meet its operating cash needs and
obligations and committed capital expenditures for the next 12 months.
Cash flows
Our most significant source of cash is from premiums received from our insureds,
which, for most policies, we receive at the beginning of the coverage period.
Our most significant cash outflow is for claims that arise when a policyholder
incurs an insured loss. Because the payment of claims occurs after the receipt
of the premium, often years later, we invest the cash in various investment
securities that earn interest and dividends. We also use cash to pay commissions
to insurance brokers, as well as to pay for ongoing operating expenses such as
salaries, consulting services and taxes. As described under "-Reinsurance"
below, we use reinsurance to manage the risk that we take related to the
issuance of our policies. We cede, or pay out, part of the premiums we receive
to our reinsurers and collect cash back when losses subject to our reinsurance
coverage are paid.
The timing of our cash flows from operating activities can vary among periods
due to the timing by which payments are made or received. Some of our payments
and receipts, including loss settlements and subsequent reinsurance receipts,
can be significant, so their timing can influence cash flows from operating
activities in any given period. Management believes that cash receipts from
premiums, proceeds from investment sales and redemptions and investment income
are sufficient to cover cash outflows in the foreseeable future.
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On August 7, 2020 , we completed an underwritten public offering and sold and
issued 310,500 shares of our common stock at a price of $190 per share. After
deducting underwriting discounts and commissions, we received net proceeds of
$56.7 million , which were used for general corporate purposes, including to fund
organic growth.
Our cash flows for the nine months ended September 30, 2021 and 2020 were:
Nine Months Ended September 30,
2021 2020
(in thousands)
Cash and cash equivalents provided by (used in):
Operating activities $ 301,881 $ 206,461
Investing activities (280,081) (302,386)
Financing activities (8,881) 74,213
Change in cash and cash equivalents $
12,919
Net cash provided by operating activities was approximately$301.9 million for the nine months endedSeptember 30, 2021 , compared to$206.5 million for the same period in 2020. This increase was largely driven by higher premium volume, the timing of claim payments and reinsurance recoveries, offset in part by changes in operating assets and liabilities. Net cash used in investing activities was$280.1 million for the nine months endedSeptember 30, 2021 , compared to$302.4 million for the nine months endedSeptember 30, 2020 . Net cash used in investing activities during the first nine months of 2021 included purchases of fixed-maturity securities of$509.0 million , and were comprised primarily of corporate bonds, mortgage- and asset-backed securities, municipal securities and, to a lesser extent,U.S. Treasuries. During the first nine months of 2021, we received proceeds of$102.6 million from sales of fixed-maturity securities, largely corporate bonds, and$139.7 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the nine months endedSeptember 30, 2021 , purchases of ETF securities and non-redeemable preferred stock were$1.5 million and$10.2 million , respectively. Net cash used in investing activities of$302.4 million during the first nine months of 2020 included purchases of fixed-maturity securities of$389.7 million , which in part reflected the investment of proceeds from the equity offering during the third quarter of 2020 and the deployment of cash equivalents held atDecember 31, 2019 . Purchases of fixed-maturity securities were comprised primarily of corporate bonds, asset- and mortgage-backed securities, and municipal securities. During the first nine months of 2020, we received proceeds of$79.0 million from sales of fixed-maturity securities, largely corporate bonds, and$66.2 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the nine months endedSeptember 30, 2020 , purchases of ETF securities and non-redeemable preferred stock were$26.6 million and$7.2 million , respectively. Net cash used in investing activities included net purchases of property and equipment of$24.1 million , primarily related to the development of our new corporate headquarters. During the first nine months of 2021, cash used in financing activities reflected dividends paid of$0.33 per common share, or$7.5 million in aggregate. In addition, payroll taxes withheld and remitted on restricted stock awards was$2.1 million , offset in part by proceeds received from our equity compensation plans of$0.7 million , for the nine months endedSeptember 30, 2021 . During the first nine months ofSeptember 30, 2020 , cash provided by financing activities reflected net proceeds from the equity offering of$56.7 million , which was used for general corporate purposes, including to fund organic growth. In addition, we drew down$23.3 million on our Credit Facility, which was used to fund construction of our new headquarter facilities. During the first nine months of 2020, cash used in financing activities reflected dividends 37 -------------------------------------------------------------------------------- Table of Contents paid of$0.27 per common share, or$6.0 million in aggregate. Proceeds received from our equity compensation plans were$2.1 million , offset by payroll taxes withheld and remitted on restricted stock awards of$1.8 million for the nine months endedSeptember 30, 2020 . Credit agreement InMay 2019 , we entered into a Credit Agreement that provided us with a$50 million Credit Facility and an uncommitted accordion feature that permits us to increase the commitments by an additional$30 million . The Credit Facility has a maturity ofMay 28, 2024 . Borrowings under the Credit Facility was used to fund construction of our new headquarters but may also be used for working capital and general corporate purposes. Interest rates on borrowings are based on prevailing interest rates and the applicable margin, as described in the Credit Agreement. As ofSeptember 30, 2021 , there was$42.7 million outstanding under the Credit Facility, net of debt issuance costs. Reinsurance We enter into reinsurance contracts primarily to limit our exposure to potential large losses. Reinsurance involves an insurance company transferring ("ceding") a portion of its exposure on a risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. Our reinsurance is primarily contracted under quota-share reinsurance contracts and excess of loss contracts. In quota-share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses, in excess of a specified amount. Under excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company's losses. We renew our reinsurance treaties annually. During each renewal cycle, there are a number of factors we consider when determining our reinsurance coverage, including (1) plans to change the underlying insurance coverage we offer, (2) trends in loss activity, (3) the level of our capital and surplus, (4) changes in our risk appetite and (5) the cost and availability of reinsurance coverage. To manage our natural catastrophe exposure, we use computer models to analyze the risk of severe losses. We measure exposure to these losses in terms of probable maximum loss ("PML"), which is an estimate of the amount of loss we would expect to meet or exceed once in a given number of years (referred to as the return period). When managing our catastrophe exposure, we focus on the 100 year and the 250 year return periods. 38 -------------------------------------------------------------------------------- Table of Contents The following is a summary of our significant reinsurance programs as ofSeptember 30, 2021 : Line of Business Covered Company Policy Limit Reinsurance Coverage Company Retention Property - per risk (1) Up to$10.0 million per$5.75 million excess of$3.0 million per risk$3.0 million occurrence Property - personal N/A 50% up to$30.4 million 50% of all personal insurance (2) per catastrophe property losses Property - catastrophe (3) N/A$60.0 million excess of$15.0 million per$15.0 million catastrophe Primary casualty (4) Up to$10.0 million per$8.0 million excess of$2.0 million per occurrence$2.0 million occurrence Excess casualty (5) Up to$10.0 million per Variable quota share$2.0 million per occurrence occurrence except as described in note (5) below (1) Our property per-risk reinsurance reduces the financial impact of a large loss on a single commercial property or inland marine policy. In addition to the Company's retention, this treaty includes a deductible of the first$4.0 million of losses covered under this reinsurance treaty. This treaty also includes a reinstatement provision which requires us to pay reinstatement premiums after a loss in excess of$5 million has occurred in order to preserve coverage. (2) Our personal insurance quota share reinsurance reduces the financial impact of property losses on our personal insurance policies. (3) Our property catastrophe reinsurance reduces the financial impact of a catastrophe event involving multiple claims and policyholders. Our property catastrophe reinsurance includes a reinstatement provision which requires us to pay reinstatement premiums after a loss has occurred in order to preserve coverage. Including the reinstatement provision, the maximum aggregate loss recovery limit is$120 million and is in addition to the per-occurrence coverage provided by our treaty coverages. (4) Reinsurance is not applicable to any individual policy with a per-occurrence limit of$2.0 million or less. (5) For casualty policies with a per-occurrence limit higher than$2.0 million , the ceding percentage varies such that the retention is always$2.0 million or less. For example, for a$4.0 million limit excess policy, our retention would be 50%, whereas for a$10.0 million limit excess policy, our retention would be 20%. For policies for which we also write an underlying primary limit, the retention on the primary and excess policy combined would not exceed$2.0 million . Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligation could result in losses to us, and therefore, we established an allowance for credit risk based on historical analysis of credit losses for highly rated companies in the insurance industry. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers. AtSeptember 30, 2021 , all reinsurance contracts that our insurance subsidiary was a party to were with companies withA.M. Best ratings of "A" (Excellent) or better. As ofSeptember 30, 2021 , we recorded an allowance for doubtful accounts of$0.3 million related to our reinsurance balances. 39 -------------------------------------------------------------------------------- Table of Contents RatingsKinsale Insurance Company has a financial strength rating of "A" (Excellent) with a stable outlook fromA.M. Best .A.M. Best assigns ratings to insurance companies, which currently range from "A++" (Superior) to "F" (In Liquidation). "A" (Excellent) is the third highest rating issued byA.M. Best . The "A" (Excellent) rating is assigned to insurers that have, inA.M. Best's opinion, an excellent ability to meet their ongoing obligations to policyholders. This rating is intended to provide an independent opinion of an insurer's ability to meet its obligation to policyholders and is not an evaluation directed at investors. The financial strength ratings assigned byA.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The "A" (Excellent) rating obtained byKinsale Insurance Company is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan. Financial condition Stockholders' equity AtSeptember 30, 2021 , total stockholders' equity was$659.2 million and tangible stockholders' equity was$656.4 million , compared to total stockholders' equity of$576.2 million and tangible stockholders' equity$573.4 million atDecember 31, 2020 . The increases in both total and tangible stockholders' equity over the prior year-end balances were due to profits generated during the period and activity related to stock-based compensation plans, offset in part by an increase in unrealized losses on available-for-sale investments, net of taxes, and payment of dividends. Tangible stockholders' equity is a non-GAAP financial measure. See "-Reconciliation of non-GAAP financial measures" for a reconciliation of stockholders' equity in accordance with GAAP to tangible stockholders' equity. Investment portfolio AtSeptember 30, 2021 , our cash and invested assets of$1.6 billion consisted of fixed-maturity securities, equity securities and cash and cash equivalents. AtSeptember 30, 2021 , the majority of the investment portfolio was comprised of fixed-maturity securities of$1.3 billion that were classified as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. AtSeptember 30, 2021 , we also held$151.8 million of equity securities, which were comprised of ETF securities and non-redeemable preferred stock, and$90.0 million of cash and cash equivalents. Our fixed-maturity securities, including cash equivalents, had a weighted average duration of 4.4 years and 4.3 years atSeptember 30, 2021 andDecember 31, 2020 , respectively, and an average rating of "AA-" atSeptember 30, 2021 andDecember 31, 2020 . 40 -------------------------------------------------------------------------------- Table of Contents AtSeptember 30, 2021 andDecember 31, 2020 , the amortized cost and estimated fair value on fixed-maturity securities were as follows: September 30, 2021 December 31, 2020 Estimated Fair % of Total Fair Estimated Fair % of Total Fair Amortized Cost Value Value Amortized Cost Value Value ($ in thousands) Fixed-maturity securities:U.S. Treasury securities and obligations ofU.S. government agencies $ 6,932$ 6,922 0.5 % $ - $ - - % Obligations of states, municipalities and political subdivisions 214,776 226,061 16.8 % 216,181 230,906 21.3 % Corporate and other securities 434,489 446,490 33.2 % 294,854 316,608 29.3 % Asset-backed securities 298,492 301,668 22.5 % 236,813 240,661 22.2 % Commercial mortgage-backed securities 58,579 61,440 4.6 % 66,110 70,969 6.6 % Residential mortgage-backed securities 300,016 300,292 22.4 % 217,859 222,656 20.6 % Total fixed-maturity securities$ 1,313,284 $ 1,342,873 100.0 %$ 1,031,817 $ 1,081,800 100.0 %
The table below summarizes the credit quality of our fixed-maturity securities
at
September 30, 2021 December 31, 2020
Standard & Poor's or Equivalent Estimated Fair Estimated Fair
Designation Value % of Total Value % of Total
($ in thousands)
AAA $ 365,705 27.2 % $ 312,721 28.9 %
AA 483,381 36.0 % 382,174 35.3 %
A 229,741 17.1 % 187,970 17.4 %
BBB 183,545 13.7 % 157,777 14.6 %
Below BBB and unrated 80,501 6.0 % 41,158 3.8 %
Total $ 1,342,873 100.0 % $ 1,081,800 100.0 %
The amortized cost and estimated fair value of our fixed-maturity securities
summarized by contractual maturity as of September 30, 2021 and December 31,
2020 , were as follows:
September 30, 2021 December 31, 2020
Amortized Estimated Fair % of Total Fair Amortized Estimated Fair % of Total Fair
Cost Value Value Cost Value Value
($ in thousands)
Due in one year or less $ 8,471 $ 8,601 0.6 % $ 15,545 $ 15,782 1.5 %
Due after one year through five years 172,248 178,438 13.3 % 107,150 115,390 10.7 %
Due after five years through ten
years 211,736 219,098 16.3 % 156,958 169,711 15.7 %
Due after ten years 263,742 273,336 20.3 % 231,382 246,631 22.8 %
Asset-backed securities 298,492 301,668 22.5 % 236,813 240,661 22.2 %
Commercial mortgage-backed securities 58,579 61,440 4.6 % 66,110 70,969 6.5 %
Residential mortgage-backed
securities 300,016 300,292 22.4 % 217,859 222,656 20.6 %
Total fixed-maturity securities $ 1,313,284 $ 1,342,873 100.0 % $ 1,031,817 $ 1,081,800 100.0 %
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Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. As ofSeptember 30, 2021 , 7.1% of our total cash and investments was invested in ETF securities. AtSeptember 30, 2021 andDecember 31, 2020 , our ETF balances were comprised of the following funds: September 30, 2021 December 31, 2020 Fund Fair Value % of Total
Fair Value % of Total
($ in thousands)
Domestic stock market fund $ 74,588 66.0 % $ 64,760 66.0 %
Dividend yield equity fund 38,396 34.0 % 33,290 34.0 %
Total $ 112,984 100.0 % $ 98,050 100.0 %
As of
September 30, 2021 December 31, 2020
Industry Fair Value % of Total Fair Value % of Total
($ in thousands)
Financial $ 34,845 89.8 % $ 27,744 87.8 %
Utilities 3,053 7.9 % 3,034 9.6 %
Industrials and other 910 2.3 % 834 2.6 %
Total $ 38,808 100.0 % $ 31,612 100.0 %
Restricted investments
In order to conduct business in certain states, we are required to maintain
letters of credit or assets on deposit to support state-mandated insurance
regulatory requirements and to comply with certain third-party agreements.
Assets held on deposit or in trust accounts are primarily in the form of
high-grade securities. The fair value of our restricted assets was $6.7 million
and $6.9 million at September 30, 2021 and December 31, 2020 , respectively.
Off-balance sheet arrangements
We do not have any material off-balance sheet arrangements at September 30,
2021 .
Reconciliation of non-GAAP financial measures
Reconciliation of underwriting income
Underwriting income is defined as net income excluding net investment income,
the net change in the fair value of equity securities, net realized investment
gains, other income, other expenses 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.
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Net income for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2021 2020 2021 2020
Net income $ 36,625 $ 14,890 $ 104,339 $ 50,238
Income tax expense 9,054 1,231 24,387 7,355
Income before income taxes 45,679 16,121 128,726 57,593
Other expenses (1) 388 1,022 1,234 1,022
Net investment income (8,095) (7,008) (22,466) (19,613)
Change in the fair value of equity
securities 1,012 (6,031) (13,644) (3,709)
Net realized investment gains (895) (647) (2,397) (1,676)
Other income (35) (571) (58) (594)
Underwriting income $ 38,054 $ 2,886 $ 91,395 $ 33,023 (1) Other expenses are comprised of interest expense on the Company's Credit Facility and other corporate expenses not allocated to our insurance operations.
Reconciliation of net operating earnings Net operating earnings is defined as net income excluding the effects of the net change in the fair value of equity securities, after taxes, and net realized gains and losses on investments, after taxes. Management believes the exclusion of these items provides a more 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. Net income for the three and nine months endedSeptember 30, 2021 and 2020, reconciles to net operating earnings as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Net income$ 36,625 $ 14,890 $ 104,339 $ 50,238 Change in the fair value of equity securities, after taxes 799 (4,764) (10,779) (2,930) Net realized investment gains, after taxes (707) (511) (1,894) (1,324) Net operating earnings$ 36,717 $ 9,615 $ 91,666 $ 45,984 Operating return on equity: Average stockholders' equity (1)$ 644,401 $ 495,123 $ 617,702 $ 470,006 Annualized return on equity (2) 22.7 % 12.0 % 22.5 % 14.3 % Annualized operating return on equity (3) 22.8 % 7.8 % 19.8 % 13.0 %
(1) 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.
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(2) 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.
(3) 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.
Reconciliation of tangible stockholders' equity
Tangible stockholders' equity is defined as total stockholders' equity less
intangible assets, net of deferred taxes. Our definition of tangible
stockholders' equity may not be comparable to that of other companies, and it
should not be viewed as a substitute for stockholders' equity calculated in
accordance with GAAP. We use tangible stockholders' equity internally to
evaluate the strength of our balance sheet and to compare returns relative to
this measure.
Stockholders' equity at September 30, 2021 and December 31, 2020 , reconciles to
tangible stockholders' equity as follows:
September 30, 2021
(in thousands)
Stockholders' equity $ 659,165 $ 576,238
Less: intangible assets, net of deferred taxes 2,795 2,795
Tangible stockholders' equity $ 656,370 $ 573,443
Critical accounting estimates
We identified the accounting estimates which are critical to the understanding
of our financial position and results of operations. Critical accounting
estimates are defined as those estimates that are both important to the
portrayal of our financial condition and results of operations and require us to
exercise significant judgment. We use significant judgment concerning future
results and developments in applying these critical accounting estimates and in
preparing our condensed consolidated financial statements. These judgments and
estimates affect our reported amounts of assets, liabilities, revenues and
expenses and the disclosure of our material contingent assets and liabilities,
if any. Actual results may differ materially from the estimates and assumptions
used in preparing the condensed consolidated financial statements. We evaluate
our estimates regularly using information that we believe to be relevant. Our
critical accounting policies and estimates are described in our annual
consolidated financial statements and the related notes in our Annual Report on
Form 10-K for the year ended December 31, 2020 .
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
interest rates, equity prices, foreign currency exchange rates and commodity
prices. Our primary market risks have been equity price risk associated with
investments in equity securities and interest rate risk associated with
investments in fixed maturities. We do not have any material exposure to foreign
currency exchange rate risk or commodity risk.
There have been no material changes in market risk from the information provided
in our Annual Report on Form 10-K for the year ended December 31, 2020 .
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required financial
disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation, under the supervision and with the participation of
our management, including our CEO and CFO, of the effectiveness of the design
and operation of our disclosure controls and procedures defined under Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our
CEO and CFO concluded that our disclosure controls and procedures were effective
as of that date.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the
third quarter of 2021 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of controls and procedures is subject to certain
limitations, and, as a result, there can be no assurance that our controls and
procedures will detect all errors or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system will be attained.
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