Kinsale Capital Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the same 2020 periods unless noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, writing hard-to-place commercial and personal property and casualty risks primarily through independent brokers. In the first half of 2021, 86% of gross written premiums were casualty and 14% property.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Gross written premiums | $194.1m | $134.1m | $362.9m | $258.1m |
| Net earned premiums | $137.7m | $97.0m | $260.7m | $186.7m |
| Total revenues | $153.0m | $117.7m | $291.3m | $198.1m |
| Net income | $35.6m | $30.3m | $67.7m | $35.3m |
| Diluted EPS | $1.55 | $1.33 | $2.94 | $1.56 |
| Underwriting income (non-GAAP) | $28.7m | $15.7m | $53.3m | $30.1m |
| Loss / expense / combined ratio | 57.5% / 21.7% / 79.2% | 60.1% / 23.7% / 83.8% | 57.3% / 22.2% / 79.5% | 60.0% / 23.9% / 83.9% |
| Net investment income | $7.4m | $6.6m | $14.4m | $12.6m |
| Equity-security fair-value change | +$7.6m | +$13.8m | +$14.7m | −$2.3m |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $194.9m | $132.6m |
Balance sheet, liquidity and capital
- At June 30, 2021, cash and cash equivalents were $128.0m; investments totaled $1.376bn, including $1.225bn of fixed maturities and $150.9m of equity securities.
- Total assets were $1.806bn, total liabilities $1.177bn, and stockholders’ equity $629.6m. Equity increased from $576.2m at December 31, 2020, primarily from earnings, partly offset by unrealized investment losses in accumulated other comprehensive income and dividends.
- Gross unpaid loss and loss-adjustment reserves were $753.3m, with $104.3m of reinsurance recoverables on unpaid losses. Unearned premiums were $317.5m.
- Credit-facility borrowings were $42.6m, net of issuance costs, under a $50m revolving facility maturing May 2024; the weighted-average interest rate was 1.91%. The company reported compliance with financial covenants.
- First-half investing cash outflow was $137.4m and financing cash outflow was $6.6m. Cash increased by $50.9m to $128.0m. Dividends paid were $5.0m, or $0.11 per share for the half-year.
Changes, drivers and management outlook
- Premium growth was strong: Q2 gross written premiums rose 44.7% and first-half premiums rose 40.6%. Management attributed growth to increased broker submissions, favorable E&S conditions and higher rates across most lines. First-half average premium per policy was about $9,900, versus $8,800 a year earlier.
- Net income increased 17.8% in Q2 and 91.6% in the first half. Underwriting income and combined ratios improved in both comparisons. Management cited premium growth, rate increases, cost control and greater favorable prior-year reserve development.
- Prior-year reserves developed favorably by $9.1m in Q2 and $16.2m in the first half; first-half favorable development included $21.8m from the 2020 accident year, partly offset by adverse development, mostly from the 2018 accident year. Catastrophe losses increased, largely from development related to Texas winter storms Uri and Viola.
- Investment results affected period comparisons: Q2 equity-security gains were smaller than the sharp rebound in Q2 2020, while first-half equity results improved from losses in the 2020 comparison period. Fixed-maturity securities had an average rating of AA− and weighted-average duration of 4.3 years; 80% were rated A− or better. Management reported no credit losses on available-for-sale securities in the first half.
- Management expected premium growth to continue through the remainder of 2021 but gave no quantified earnings or premium guidance. It said available liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months. Management had not seen a material adverse effect on loss ratios from COVID-19 claims, while noting uncertainty around its ultimate effects.
- Other notable balance-sheet item: $28.6m payable for investments purchased but not yet settled was included in other liabilities at June 30. The filing reported no material off-balance-sheet arrangements; ordinary-course legal proceedings were not expected to have a material adverse effect.
Risks and items to monitor
- Reserve estimates depend on actuarial judgments and may prove inadequate; favorable development can reverse, and actual losses may differ from modeled estimates.
- Catastrophes, claims inflation, economic conditions and changing E&S market conditions can affect claim severity, premium growth and profitability.
- Reinsurance may be unavailable or costly, and reinsurers may fail to honor obligations. Reinsurance does not release Kinsale from its policyholder obligations; reported reinsurance recoverables were $105.5m in total.
- Investment results are exposed to equity-price and interest-rate risk. Management also identified potential risks from forced investment sales to meet liquidity needs, competition, broker concentration, regulation and changes in financial-strength ratings.
Important facts for investors to verify
- Whether premium growth and pricing remain strong, and how business mix and the 86.0% first-half net retention ratio evolve.
- Whether favorable reserve development persists, particularly the 2020 accident-year contribution, and how catastrophe losses develop.
- Reinsurance renewal pricing, coverage and counterparty quality, together with the recoverability of reinsurance balances.
- Investment portfolio performance, including equity-market sensitivity, fixed-income credit quality and interest-rate effects on fair value and accumulated other comprehensive income.
- Cash-flow conversion and liquidity needs, the outstanding credit-facility balance, and the settlement of the $28.6m investment payable.
- Management’s unquantified expectation for continued premium growth through the rest of 2021; the filing provides no numerical full-year guidance.