KNSL Kinsale Capital Group Inc

Kinsale Capital Group, Inc. (Nasdaq: KNSL) reported net income of $38.2 million, $1.65 per diluted share, for the fourth quarter of 2020 compared to $17.9 million, $0.79 per diluted share, for the fourth quarter of 2019. Net income was $88.4 million, $3.87 per diluted share, for the year ended December 31, 2020 compared to $63.3 million, $2.86 per diluted share, for the year ended December 31, 2019. For the fourth quarter and year ended December 31, 2020, net income included after-tax catastrophe losses of $4.8 million and $18.3 million, respectively. For the fourth quarter and year ended December 31, 2019, net income included after-tax catastrophe losses of $1.2 million and $2.4 million, respectively.

Net operating earnings(1) were $26.3 million, $1.14 per diluted share, for the fourth quarter of 2020 compared to $14.3 million, $0.63 per diluted share, for the fourth quarter of 2019. Net operating earnings(1) were $72.3 million, $3.16 per diluted share, for the year ended December 31, 2020 compared to $53.2 million, $2.41 per diluted share, for the year ended December 31, 2019.

Highlights for the fourth quarter of 2020 included:

• Net income increased by 113.9% compared to the fourth quarter of 2019
• Net operating earnings(1) increased by 83.8% compared to the fourth quarter of 2019
• 33.7% growth in gross written premiums to $149.9 million compared to the fourth quarter of 2019
• 17.1% increase in net investment income to $6.5 million compared to the fourth quarter of 2019
• 88.1% increase in underwriting income(2) to $21.6 million compared to the fourth quarter of 2019, resulting in a combined ratio of 81.6%
• 19.0% annualized operating return on equity(4) for the fourth quarter of 2020

Highlights for the full year of 2020 included:

• Net income increased by 39.6% compared to the full year of 2019
• Net operating earnings(1) increased by 35.8% compared to the full year of 2019
• 41.9% growth in gross written premiums to $552.8 million compared to the full year of 2019
• 29.7% increase in net investment income to $26.1 million compared to the full year of 2019
• 26.5% increase in underwriting income(2) to $54.7 million compared to the full year of 2019, resulting in a combined ratio of 86.7%
• 14.7% operating return on equity(4) for the year ended December 31, 2020

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

"We concluded the year with another strong quarter with growth in gross written premiums of 34% and a combined ratio of just under 82%. This past year provided remarkable opportunities as well as challenges. We again capitalized on favorable market conditions where we generated record premium growth during the year of 42%, while successfully navigating through heightened catastrophe levels and the impact of the pandemic. Our results highlight the strength and durability of our business model and we are optimistic about delivering another successful year in 2021," said President and Chief Executive Officer, Michael P. Kehoe.

Results of Operations

Underwriting Results

Gross written premiums were $149.9 million for the fourth quarter of 2020 compared to $112.1 million for the fourth quarter of 2019, an increase of 33.7%. Gross written premiums were $552.8 million for the year ended December 31, 2020 compared to $389.7 million for the year ended December 31, 2019, an increase of 41.9%. Growth in gross written premiums during the fourth quarter and year ended December 31, 2020 over the same periods last year was driven by higher submission activity and premium rates on bound accounts.

Underwriting income(2) was $21.6 million, resulting in a combined ratio of 81.6%, for the fourth quarter of 2020, compared to $11.5 million, and a combined ratio of 86.1% for the same period last year. The increase in underwriting income(2) for the fourth quarter of 2020 was due primarily to premium growth quarter over quarter and higher favorable development on loss reserves from prior accident years. These increases were offset in part by higher catastrophe losses in the fourth quarter of 2020 compared to the prior year period. Loss and expense ratios were 58.8% and 22.8%, respectively, for the fourth quarter of 2020 compared to 62.1% and 24.0% for the fourth quarter of 2019. The loss ratios included current accident year catastrophe losses of $6.1 million, or 5.1 points, for the fourth quarter of 2020, and $1.5 million, or 1.8 points, for the fourth quarter of 2019. Favorable development on reserves from prior accident years was $3.7 million, or 3.1 points, for the fourth quarter of 2020, and $1.1 million, or 1.3 points, for the fourth quarter of 2019.

Underwriting income(2) was $54.7 million, resulting in a combined ratio of 86.7%, for the year ended December 31, 2020, compared to $43.2 million, and a combined ratio of 84.7% for the prior year. The increase in underwriting income(2) for the year ended December 31, 2020 was due primarily to premium growth year over year and the improvement in the development of loss reserves from prior accident years, offset in part by higher catastrophe losses. Loss and expense ratios were 63.9% and 22.8%, respectively, for the year ended December 31, 2020 compared to 59.9% and 24.8%, respectively, for the year ended December 31, 2019. The loss ratios included current accident year catastrophe losses of $23.2 million, or 5.6 points, for the year ended December 31, 2020 and $3.0 million, or 1.1 points, for the year ended December 31, 2019. Favorable development on reserves from prior accident years was $13.3 million, or 3.2 points, for the year ended December 31, 2020 and $9.4 million, or 3.3 points, for the year ended December 31, 2019.

Summary of Operating Results

The Company’s operating results for the three months and year ended December 31, 2020 and 2019 are summarized as follows:

	Three Months Ended December 31,										Year Ended December 31,
	2020					2019					2020					2019
	($ in thousands)
Gross written premiums	$	149,910				$	112,137				$	552,814				$	389,694
Ceded written premiums	(19,599		)			(12,582		)			(74,595		)			(47,633		)
Net written premiums	$	130,311				$	99,555				$	478,219				$	342,061
Net earned premiums	$	117,792				$	82,782				$	412,754				$	282,981
Losses and loss adjustment expenses	69,334					51,442					263,802					169,563
Underwriting, acquisition and insurance expenses	26,825					19,840					94,296					70,217
Underwriting income(2)	$	21,633				$	11,500				$	54,656				$	43,201
Loss ratio	58.8			%		62.1			%		63.9			%		59.9			%
Expense ratio	22.8			%		24.0			%		22.8			%		24.8			%
Combined ratio	81.6			%		86.1			%		86.7			%		84.7			%
Annualized return on equity(3)	27.5			%		17.9			%		18.0			%		18.9			%
Annualized operating return on equity(4)	19.0			%		14.4			%		14.7			%		15.9			%

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

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

(4)   Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See discussion of "Non-GAAP Financial Measures" below.

The following tables summarize losses incurred for the current accident year and the development of prior accident years for the three months and year ended December 31, 2020 and 2019:

	Three Months Ended December 31, 2020								Three Months Ended December 31, 2019
	Losses and Loss Adjustment Expenses				% of Earned Premiums				Losses and Loss Adjustment Expenses				% of Earned Premiums
Loss ratio:	($ in thousands)
Current accident year	$	66,983			56.8		%		$	51,022			61.6		%
Current accident year - catastrophe losses	6,061				5.1		%		1,493				1.8		%
Effect of prior accident year development	(3,710		)		(3.1	)	%		(1,073		)		(1.3	)	%
Total	$	69,334			58.8		%		$	51,442			62.1		%

	Year Ended December 31, 2020								Year Ended December 31, 2019
	Losses and Loss Adjustment Expenses				% of Earned Premiums				Losses and Loss Adjustment Expenses				% of Earned Premiums
Loss ratio:	($ in thousands)
Current accident year	$	253,948			61.5		%		$	175,939			62.1		%
Current accident year - catastrophe losses	23,192				5.6		%		3,047				1.1		%
Effect of prior accident year development	(13,338		)		(3.2	)	%		(9,423		)		(3.3	)	%
Total	$	263,802			63.9		%		$	169,563			59.9		%

Investment Results

The Company’s net investment income was $6.5 million in the fourth quarter of 2020 compared to $5.5 million in the fourth quarter of 2019, an increase of 17.1%. Net investment income was $26.1 million for the full year of 2020 compared to $20.1 million for the full year of 2019. This increase was primarily due to growth in our investment portfolio balance generated from the investment of operating funds since December 31, 2019 and from proceeds from our equity offerings. The Company’s investment portfolio, excluding cash and cash equivalents, had a gross investment return(5) of 2.9% for the year ended December 31, 2020 compared to 3.1% for the year ended December 31, 2019. Funds are generally invested conservatively in high quality securities, including government agency, mortgage-backed, municipal and corporate bonds with an average credit quality of "AA-." The weighted average duration of the fixed-maturity investment portfolio, including cash equivalents, was 4.3 years at both December 31, 2020 and 2019. Cash and invested assets totaled $1.3 billion at December 31, 2020 compared to $908.2 million at December 31, 2019.

(5)   Gross investment return is investment income from fixed-maturity and equity securities, before any deductions for fees and expenses, expressed as a percentage of average beginning and ending balances of those investments during the period.

Other

Total comprehensive income, which includes net income and the change in after-tax unrealized gains and losses from the Company’s available-for-sale investments, was $116.3 million for the full year of 2020 compared to $78.1 million for the full year of 2019. The increase in total comprehensive income for the year ended 2020 over the prior year was due to higher net income as well as an increase in the fair value of the Company's fixed-maturity investments.

The effective tax rate for the year ended December 31, 2020 was 11.9%. The effective tax rate was lower than the federal statutory rate primarily due to the tax benefits from stock-based compensation and tax-exempt investment income.

Stockholders' equity was $576.2 million at December 31, 2020, compared to $405.9 million at December 31, 2019. Operating return on equity was 14.7% for the full year of 2020, a decrease from 15.9% for the full year of 2019, which was attributable primarily to the proceeds received from the Company's equity offering in the third quarter of 2020 and catastrophe losses incurred during the year, offset in part by higher net income.

Non-GAAP Financial Measures

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.

For the three months and year ended December 31, 2020 and 2019, net income and diluted earnings per share reconcile to net operating earnings and diluted operating earnings per share as follows:

		Three Months Ended December 31,										Year Ended December 31,
		2020					2019					2020					2019
		($ in thousands, except per share data)
Net operating earnings:
Net income		$	38,181				$	17,853				$	88,419				$	63,316
Change in fair value of equity securities, after taxes		(10,385		)			(3,428		)			(13,315		)			(9,787		)
Net realized gains on investments, after taxes		(1,467		)			(102		)			(2,791		)			(284		)
Net operating earnings		$	26,329				$	14,323				$	72,313				$	53,245
Diluted operating earnings per share:
Diluted earnings per share		$	1.65				$	0.79				$	3.87				$	2.86
Change in fair value of equity securities, after taxes, per share		(0.45		)			(0.15		)			(0.58		)			(0.44		)
Net realized gains on investments, after taxes, per share		(0.06		)			—					(0.12		)			(0.01		)
Diluted operating earnings per share(1)		$	1.14				$	0.63				$	3.16				$	2.41
Operating return on equity:
Average equity(2)		$	555,185				$	397,958				$	491,059				$	334,933
Annualized return on equity(3)		27.5			%		17.9			%		18.0			%		18.9			%
Annualized operating return on equity(4)		19.0			%		14.4			%		14.7			%		15.9			%

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

(2)   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.

(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.

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 gains and losses on investments, 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.

For the three months and year ended December 31, 2020 and 2019, net income reconciles to underwriting income as follows:

		Three Months Ended December 31,								Year Ended December 31,
		2020				2019				2020				2019
		(in thousands)
Net income		$	38,181			$	17,853			$	88,419			$	63,316
Income tax expense		4,639				3,669				11,994				12,735
Income before income taxes		42,820				21,522				100,413				76,051
Other expenses		353				—				1,375				57
Net investment income		(6,497		)		(5,547		)		(26,110		)		(20,133		)
Change in fair value of equity securities		(13,146		)		(4,339		)		(16,855		)		(12,389		)
Net realized investment gains		(1,857		)		(129		)		(3,533		)		(359		)
Other income		(40		)		(7		)		(634		)		(26		)
Underwriting income		$	21,633			$	11,500			$	54,656			$	43,201

Conference Call

Kinsale Capital Group will hold a conference call to discuss this press release on Friday, February 19, 2021, at 9:00 a.m. (Eastern Time). Members of the public may access the conference call by dialing (844) 239-5282, conference ID# 1081715, or via the Internet by going to www.kinsalecapitalgroup.com and clicking on the "Investor Relations" link. A replay of the call will be available on the website until the close of business on April 19, 2021.

Forward-Looking Statements

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

About Kinsale Capital Group, Inc.

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

Contact

Kinsale Capital Group, Inc. Bryan Petrucelli Executive Vice President, Chief Financial Officer and Treasurer804-289-1272 ir@kinsalecapitalgroup.com

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income and Comprehensive Income
		Three Months Ended December 31,								Year Ended December 31,
		2020				2019				2020				2019
Revenues		(in thousands, except per share data)
Gross written premiums		$	149,910			$	112,137			$	552,814			$	389,694
Ceded written premiums		(19,599		)		(12,582		)		(74,595		)		(47,633		)
Net written premiums		130,311				99,555				478,219				342,061
Change in unearned premiums		(12,519		)		(16,773		)		(65,465		)		(59,080		)
Net earned premiums		117,792				82,782				412,754				282,981
Net investment income		6,497				5,547				26,110				20,133
Change in fair value of equity securities		13,146				4,339				16,855				12,389
Net realized investment gains		1,857				129				3,533				359
Other income		40				7				634				26
Total revenues		139,332				92,804				459,886				315,888
Expenses
Losses and loss adjustment expenses		69,334				51,442				263,802				169,563
Underwriting, acquisition and insurance expenses		26,825				19,840				94,296				70,217
Other expenses		353				—				1,375				57
Total expenses		96,512				71,282				359,473				239,837
Income before income taxes		42,820				21,522				100,413				76,051
Income tax expense		4,639				3,669				11,994				12,735
Net income		38,181				17,853				88,419				63,316
Other comprehensive income
Change in unrealized gains (losses) on available-for-sale
investments, net of taxes		3,523				(1,803		)		27,862				14,774
Total comprehensive income		$	41,704			$	16,050			$	116,281			$	78,090
Earnings per share:
Basic		$	1.69			$	0.81			$	3.96			$	2.94
Diluted		$	1.65			$	0.79			$	3.87			$	2.86
Weighted-average shares outstanding:
Basic		22,611				22,060				22,319				21,528
Diluted		23,073				22,645				22,852				22,136

KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
		December 31, 2020				December 31, 2019
		(in thousands)
Assets
Investments:
Fixed-maturity securities at fair value		$	1,081,800			$	729,532
Equity securities at fair value		129,662				78,294
Total investments		1,211,462				807,826
Cash and cash equivalents		77,093				100,408
Investment income due and accrued		6,637				4,743
Premiums receivable, net		48,641				34,483
Reinsurance recoverable		93,215				72,574
Ceded unearned premiums		24,265				16,118
Deferred policy acquisition costs, net of ceding commissions		31,912				23,564
Intangible assets		3,538				3,538
Deferred income tax asset, net		—				3,374
Other assets		50,133				23,922
Total assets		$	1,546,896			$	1,090,550
Liabilities & Stockholders' Equity
Liabilities:
Reserves for unpaid losses and loss adjustment expenses		$	636,013			$	460,058
Unearned premiums		260,986				187,374
Payable to reinsurers		12,672				7,151
Accounts payable and accrued expenses		13,651				12,366
Credit facility		42,570				16,744
Deferred income tax liability, net		4,648				—
Other liabilities		118				977
Total liabilities		970,658				684,670
Stockholders' equity		576,238				405,880
Total liabilities and stockholders' equity		$	1,546,896			$	1,090,550