KINSALE CAPITAL GROUP, INC. The discussion and analysis below include 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, 2021 . 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 months endedMarch 31, 2022 are not necessarily indicative of the results that may be expected for the full year endedDecember 31, 2022 , 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, 2021 .
References to the "Company," "Kinsale," "we," "us," and "our" are to
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 three months of 2022, the percentage breakdown of our
gross written premiums was 82% casualty and 18% property. Our commercial
underwriting divisions include small business, commercial property, excess
casualty, construction, allied health, products liability, general casualty,
life sciences, professional liability, management liability, energy, health
care, environmental, entertainment, inland marine and public entity. We also
write a small amount of homeowners insurance in the personal lines market, which
in aggregate represented 3% of our gross written premiums in the first three
months of 2022 and is included within our personal insurance division.
COVID-19
Consistent with 2021, the Company's results of operations, financial position and cash flows were not materially impacted by COVID-19 and the related economic effects during the first three months of 2022. For further discussion, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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;
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•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
•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.
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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
Net realized investment gains are a function of the difference between the amount received by us on the sale of a security and the security's amortized cost.
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. 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.
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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.
Results of Operations
Three months ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended March 31,
($ in thousands) 2022 2021 Change % Change
Gross written premiums $ 245,513 $ 168,876 $ 76,637 45.4 %
Ceded written premiums (29,015) (24,578) (4,437) 18.1 %
Net written premiums $ 216,498 $ 144,298 $ 72,200 50.0 %
Net earned premiums $ 178,562 $ 123,041 $ 55,521 45.1 %
Losses and loss adjustment expenses 102,505 70,260 32,245 45.9 %
Underwriting, acquisition and insurance
expenses 38,545 28,136 10,409 37.0 %
Underwriting income (1) 37,512 24,645 12,867 52.2 %
Net investment income 9,088 6,942 2,146 30.9 %
Change in fair value of equity securities (7,751) 7,091 (14,842) (209.3) %
Net realized investment gains 295 1,198 (903) (75.4) %
Other expense, net (272) (437) 165 (37.8) %
Income before taxes 38,872 39,439 (567) (1.4) %
Income tax expense 7,081 7,360 (279) (3.8) %
Net income $ 31,791 $ 32,079 $ (288) (0.9) %
Net operating earnings (2) $ 37,681 $ 25,531 $ 12,150 47.6 %
Loss ratio 57.4 % 57.1 %
Expense ratio 21.6 % 22.9 %
Combined ratio 79.0 % 80.0 %
Annualized return on equity 18.6 % 22.1 %
Annualized operating return on equity(2) 22.1 % 17.6 %
(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.
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(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.
Overview
Net income was$31.8 million for the three months endedMarch 31, 2022 compared to$32.1 million for the three months endedMarch 31, 2021 , a decrease of 0.9%. The decrease in net income for the first three months of 2022 over the same period last year was primarily due to a decline in the fair value of our equity investment portfolio driven by adverse movements in the capital markets during the quarter. This decrease was mostly offset by strong growth in the business from favorable E&S market conditions and continued rate increases and an increase in investment income quarter over quarter driven by higher investment balances. Underwriting income was$37.5 million for the three months endedMarch 31, 2022 compared to$24.6 million for the three months endedMarch 31, 2021 , an increase of 52.2%. The corresponding combined ratios were 79.0% for the three months endedMarch 31, 2022 compared to 80.0% for the three months endedMarch 31, 2021 . The increase in underwriting income for the first three months of 2022 compared to the same period last year was due to higher premium growth and continued rate increases from a favorable E&S market environment.
Premiums
Our gross written premiums were$245.5 million for the three months endedMarch 31, 2022 compared to$168.9 million for the three months endedMarch 31, 2021 , an increase of$76.6 million , or 45.4%. The increase in gross written premiums for the first three months of 2022 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$11,800 in the first three months of 2022 compared to$9,800 in the first three months of 2021. Excluding our personal lines insurance, which has a relatively low premium per policy written, the average premium on a policy written was$14,200 for the first three months of 2022 and$12,300 for the first three months of 2021. Net written premiums increased by$72.2 million , or 50.0%, to$216.5 million for the three months endedMarch 31, 2022 from$144.3 million for the three months endedMarch 31, 2021 . The increase in net written premiums for the first three months of 2022 compared to the same period last year was primarily due to higher gross written premiums. The net retention ratio was 88.2% for the three months endedMarch 31, 2022 compared to 85.4% for the same period last year. The increase in the net retention ratio was primarily due to lower reinstatement premiums on certain property reinsurance treaties and a change in the mix of business quarter over quarter. Net earned premiums increased by$55.5 million , or 45.1%, to$178.6 million for the three months endedMarch 31, 2022 from$123.0 million for the three months endedMarch 31, 2021 due to growth in gross written premiums.
Loss ratio
The loss ratio was 57.4% for the three months endedMarch 31, 2022 compared to 57.1% for the three months endedMarch 31, 2021 . The increase in the loss ratio in the first three months of 2022 compared to the first three months of 2021 was due primarily to lower favorable net development of reserves from prior accident years as a percentage of earned premiums, offset in part by lower reported losses in the current accident year as a percentage of earned premiums compared to the same period last year. 26
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During the three months endedMarch 31, 2022 , prior accident years developed favorably by$8.3 million , of which$10.1 million was attributable to the 2021 and 2020 accident years due to lower than expected reported losses across most lines of business. This was offset by$2.0 million of unfavorable development from accident years 2016 and 2018 due to a few large claims. During the three months endedMarch 31, 2021 , loss reserves from prior accident years developed favorably by$7.1 million . The favorable development was primarily attributable to the 2020 accident year of$9.5 million , which resulted from reported losses emerging at a lower level than expected across most lines of business. The following table summarizes the loss ratios for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Losses and Loss Losses and Loss Adjustment Adjustment ($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums Loss ratio: Current accident year before catastrophe losses$ 110,789 62.1 %$ 77,257 62.8 % Current year catastrophe losses 62 - % 76 - % Effect of prior year development (8,346) (4.7) % (7,073) (5.7) % Total$ 102,505 57.4 %$ 70,260 57.1 % Expense ratio
The following table summarizes the components of the expense ratio for the three
months ended
Three Months Ended March 31,
2022 2021
Underwriting Underwriting
($ in thousands) Expenses % of Earned Premiums Expenses % of Earned Premiums
Commissions incurred:
Direct $ 29,951 16.8 % $ 21,165 17.2 %
Ceding (7,829) (4.4) % (5,355) (4.3) %
Net commissions incurred 22,122 12.4 % 15,810 12.9 %
Other underwriting expenses 16,423 9.2 % 12,326 10.0 %
Underwriting, acquisition and
insurance expenses $ 38,545 21.6 % $ 28,136 22.9 %
The expense ratio was 21.6% for the three months ended March 31, 2022 compared
to 22.9% for the three months ended March 31, 2021 . 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 largely due to lower reinstatement premiums on
certain property reinsurance treaties that do not have ceding commissions, and a
change in the mix of business. Direct commissions paid as a percentage of gross
written premiums was 14.6% for both the three months ended March 31, 2022 and
2021.
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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
Three Months Ended March 31,
($ in thousands) 2022 2021 Change
Interest from fixed-maturity securities
Dividends from equity securities 1,030 869 161
Other 19 1 18
Gross investment income 9,701 7,484 2,217
Investment expenses (613) (542) (71)
Net investment income 9,088 6,942 2,146
Change in fair value of equity securities (7,751) 7,091 (14,842)
Net realized investment gains 295 1,198 (903)
Total $ 1,632 $ 15,231 $ (13,599)
Our net investment income increased by 30.9% to $9.1 million for the three
months ended March 31, 2022 from $6.9 million for the three months ended
March 31, 2021 . This increase in the first three months of 2022 compared to the
same period last year was primarily due to growth in our investment portfolio
largely generated from the investment of positive cash flow since March 31,
2021 . Our fixed-maturity investment portfolio, excluding cash equivalents and
unrealized gains and losses, had an annualized gross investment return of 2.5%
for the three months and ended March 31, 2022 and 2.6% for the three months
ended March 31, 2021 .
During the first three months of 2022, the change in fair value of equity
securities was comprised of unrealized losses related to exchange traded funds
("ETFs") of $4.5 million and unrealized losses related to non-redeemable
preferred stock of $3.2 million . The change in unrealized losses during the
first three months of 2022 attributable to ETFs was largely reflective of the
broader U.S. stock market. The change in unrealized losses during the first
three months of 2022 attributable to non-redeemable preferred stock was
reflective of a higher interest rate environment.
During the first three months of 2021, the change in fair value of equity
securities was comprised of unrealized gains related to ETFs of $7.5 million and
unrealized losses related to preferred stock of $0.4 million . Unrealized gains
during the first quarter of 2021 were largely reflective of the gains in the
broader U.S. stock market.
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 three months ended March 31,
2022 or 2021.
Income tax expense
Our effective tax rate was 18.2% for the three months ended March 31, 2022
compared to 18.7% for the three months ended March 31, 2021 . 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.
Return on equity
Our annualized return on equity was 18.6% for the three months endedMarch 31, 2022 compared to 22.1% for the three months endedMarch 31, 2021 . Our annualized operating return on equity was 22.1% for the three months endedMarch 31, 2022 compared to 17.6% for the three months endedMarch 31, 2021 . The increase in annualized 28
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operating return on equity for the three months ended
Liquidity and Capital Resources
Sources and uses of funds
We are organized as aDelaware holding company with our operations primarily conducted by our wholly-owned insurance subsidiary,Kinsale Insurance Company , which is domiciled inArkansas . 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 toKinsale 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 fromKinsale 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. InAugust 2019 , we filed a universal shelf registration statement with theSEC that expires in 2022. We can use this shelf registration to issue an unspecified amount of 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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Our cash flows for the three months ended
Three Months Ended March 31,
2022 2021
(in thousands)
Cash and cash equivalents provided by (used in):
Operating activities $ 121,929 $ 91,322
Investing activities (135,710) (33,724)
Financing activities (3,101) (2,156)
Change in cash and cash equivalents $
(16,882)
Net cash provided by operating activities was approximately$121.9 million for the three months endedMarch 31, 2022 , compared to$91.3 million for the same period in 2021. 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$135.7 million for the three months endedMarch 31, 2022 , compared to$33.7 million for the three months endedMarch 31, 2021 . Net cash used in investing activities during the first three months of 2022 included purchases of fixed-maturity securities of$226.5 million , which were comprised largely of corporate bonds, mortgage-backed securities, and to a lesser extent, asset-backed securities, sovereign and municipal securities. During the first three months of 2022, we received proceeds of$54.2 million from sales of fixed-maturity securities, largely corporate bonds and mortgage- and asset-backed securities, and$37.0 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the three months endedMarch 31, 2022 , purchases of ETFs were$0.5 million . Net cash used in investing activities of$33.7 million for the three months endedMarch 31, 2021 included purchases of fixed-maturity securities of$105.0 million , and were comprised primarily of corporate bonds and asset- and mortgage-backed securities. During the first three months of 2021, we received proceeds of$30.8 million from sales of fixed-maturity securities, largely corporate bonds, and$45.1 million from redemptions of asset- and mortgage-backed securities and corporate bonds. For the three months endedMarch 31, 2021 , purchases of ETFs and non-redeemable preferred stock were$0.5 million and$2.8 million , respectively. During the first three months of 2022, cash used in financing activities reflected dividends paid of$0.13 per common share, or$3.0 million in aggregate. In addition, payroll taxes withheld and remitted on restricted stock awards was$0.5 million , offset in part by proceeds received from our equity compensation plans of$0.4 million , for the three months endedMarch 31, 2022 . During the first three months ofMarch 31, 2021 , cash used in financing activities reflected dividends paid of$0.11 per common share, or$2.5 million in aggregate. Proceeds received from our equity compensation plans were$0.3 million for the three months endedMarch 31, 2021 .
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 were 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 ofMarch 31, 2022 , there was$42.7 million outstanding under the Credit Facility, net of debt issuance costs. 30
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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.
The following is a summary of our significant reinsurance programs as of
March 31, 2022 :
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
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reinstatement provision, the maximum aggregate loss recovery limit is
(4) Reinsurance is not applicable to any individual policy with a
per-occurrence limit of
(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. AtMarch 31, 2022 , all reinsurance contracts that our insurance subsidiary was a party to were with companies withA.M. Best ratings of "A" (Excellent) or better. As ofMarch 31, 2022 , we recorded an allowance for doubtful accounts of$0.4 million related to our reinsurance balances.
Ratings
Kinsale 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
AtMarch 31, 2022 , total stockholders' equity was$665.6 million and tangible stockholders' equity was$662.8 million , compared to total stockholders' equity of$699.3 million and tangible stockholders' equity$696.5 million atDecember 31, 2021 . The decreases in both total and tangible stockholders' equity over the prior year-end balances were due to an increase in unrealized losses on available-for-sale investments, net of taxes, and payment of dividends, offset in part by profits generated during the period and activity related to stock-based compensation plans. 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. 32
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Investment portfolio
AtMarch 31, 2022 , our cash and invested assets of$1.7 billion consisted of fixed-maturity securities, equity securities, cash and cash equivalents and short-term investments. AtMarch 31, 2022 , the majority of the investment portfolio was comprised of fixed-maturity securities of$1.5 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. AtMarch 31, 2022 , we also held$163.6 million of equity securities, which were comprised of ETF securities and non-redeemable preferred stock,$104.2 million of cash and cash equivalents and$0.8 million of short-term investments. Our fixed-maturity securities, including cash equivalents, had a weighted average duration of 4.6 years and 4.3 years atMarch 31, 2022 andDecember 31, 2021 , respectively, and an average rating of "AA-" at bothMarch 31, 2022 andDecember 31, 2021 .
At
March 31, 2022 December 31, 2021
Estimated Fair % of Total Fair Estimated Fair % of Total Fair
Amortized Cost Value Value Amortized Cost Value Value
($ in thousands)
Fixed-maturity securities:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 14,544 $ 13,984 1.0 % $ 6,936 $ 6,847 0.5 %
Obligations of states,
municipalities and political
subdivisions 222,054 217,759 14.9 % 216,375 228,045 16.4 %
Corporate and other securities 557,822 529,086 36.2 % 450,594 458,487 32.9 %
Asset-backed securities 275,052 273,658 18.7 % 299,810 301,775 21.7 %
Residential mortgage-backed
securities 381,691 358,035 24.5 % 340,804 337,685 24.3 %
Commercial mortgage-backed
securities 70,629 68,893 4.7 % 57,000 59,227 4.2 %
Total fixed-maturity securities $ 1,521,792 $ 1,461,415 100.0 % $ 1,371,519 $ 1,392,066 100.0 %
The table below summarizes the credit quality of our fixed-maturity securities
at March 31, 2022 and December 31, 2021 , as rated by Standard & Poor's Financial
Services, LLC ("Standard & Poor's"):
March 31, 2022 December 31, 2021
Standard & Poor's or Equivalent Estimated Fair Estimated Fair
Designation Value % of Total Value % of Total
($ in thousands)
AAA $ 382,784 26.2 % $ 375,579 27.0 %
AA 521,211 35.7 % 523,739 37.6 %
A 276,748 18.9 % 234,547 16.9 %
BBB 209,993 14.4 % 196,740 14.1 %
Below BBB and unrated 70,679 4.8 % 61,461 4.4 %
Total $ 1,461,415 100.0 % $ 1,392,066 100.0 %
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The amortized cost and estimated fair value of our fixed-maturity securities summarized by contractual maturity as ofMarch 31, 2022 andDecember 31, 2021 , were as follows: March 31, 2022 December 31, 2021 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$ 7,749 $ 7,766 0.5 %$ 6,742 $ 6,822 0.5 % Due after one year through five years 258,045 251,927 17.2 % 185,273 189,497 13.6 % Due after five years through ten years 244,902 233,059 16.0 % 226,707 232,197 16.7 % Due after ten years 283,724 268,077 18.4 % 255,183 264,863 19.0 % Asset-backed securities 275,052 273,658 18.7 % 299,810 301,775 21.7 % Residential mortgage-backed securities 381,691 358,035 24.5 % 340,804 337,685 24.3 % Commercial mortgage-backed securities 70,629 68,893 4.7 % 57,000 59,227 4.2 % Total fixed-maturity securities$ 1,521,792 $ 1,461,415 100.0 %$ 1,371,519 $ 1,392,066 100.0 %
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 ofMarch 31, 2022 , 6.9% of our total cash and investments was invested in ETFs. AtMarch 31, 2022 andDecember 31, 2021 , our ETF balances were comprised of the following funds: March 31, 2022 December 31, 2021 Fund Fair Value % of Total
Fair Value % of Total
($ in thousands)
Domestic stock market fund$ 76,981 64.5 % $ 81,384 66.0 % Dividend yield equity fund 42,307 35.5 % 42,005 34.0 % Total$ 119,288 100.0 %$ 123,389 100.0 %
As of
March 31, 2022 December 31, 2021
Industry Fair Value % of Total Fair Value % of Total
($ in thousands)
Financial $ 40,568 91.6 % $ 45,331 92.1 %
Utilities 2,882 6.5 % 2,993 6.1 %
Industrials and other 836 1.9 % 898 1.8 %
Total $ 44,286 100.0 % $ 49,222 100.0 %
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
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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.
Net income for three months ended
Three Months Ended
March 31,
($ in thousands) 2022 2021
Net income $ 31,791 $ 32,079
Income tax expense 7,081 7,360
Income before income taxes 38,872 39,439
Other expenses (1) 396 448
Net investment income (9,088) (6,942)
Change in the fair value of equity securities 7,751 (7,091)
Net realized investment gains (295) (1,198)
Other income (124) (11)
Underwriting income $ 37,512 $ 24,645 (1) Other expenses are comprised of interest expense on the Company's Credit Facility and 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
investment gains and losses, 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.
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Net income for three months ended
Three Months Ended
March 31,
($ in thousands) 2022 2021
Net income $ 31,791 $ 32,079
Adjustments:
Change in the fair value of equity securities, before
taxes 7,751 (7,091)
Income tax expense (1) (1,628) 1,489
Change in the fair value of equity securities, after taxes
6,123 (5,602)
Net realized investment gains, before taxes (295) (1,198)
Income tax expense (1) 62 252
Net realized investment gains, after taxes (233) (946)
Net operating earnings $
37,681
Operating return on equity: Average stockholders' equity (2)$ 682,453 $ 581,902 Annualized return on equity (3) 18.6 % 22.1 % Annualized operating return on equity (4) 22.1 % 17.6 %
(1) Income taxes on adjustments to reconcile net income to net operating earnings use an effective tax rate of 21%.
(2) Computed by adding the total stockholders' equity as of the date indicated to the prior year-end total and dividing by two.
(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.
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.
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Stockholders' equity at
($ in thousands) March 31, 2022 December 31, 2021 Stockholders' equity $ 665,570 $ 699,335 Less: intangible assets, net of deferred taxes 2,795 2,795 Tangible stockholders' equity $ 662,775 $ 696,540 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 endedDecember 31, 2021 .
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