Kinsale Capital Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Amounts below are in millions of dollars, except per-share data and ratios. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, distributed primarily through independent brokers.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gross written premiums | $144.8 | $98.0 | $402.9 | $277.6 |
| Net written premiums | $122.2 | $86.8 | $347.9 | $242.5 |
| Net earned premiums | $108.2 | $72.6 | $295.0 | $200.2 |
| Total revenue | $122.5 | $78.3 | $320.6 | $223.1 |
| Net income | $14.9 | $13.0 | $50.2 | $45.5 |
| Diluted EPS | $0.65 | $0.58 | $2.21 | $2.07 |
| Underwriting income (non-GAAP) | $2.9 | $9.5 | $33.0 | $31.7 |
| Combined ratio | 97.3% | 86.9% | 88.8% | 84.2% |
Premium growth reflected higher broker submissions and rates amid favorable E&S market conditions. Q3 net income rose 14.8%, while underwriting income fell 69.6%; nine-month net income rose 10.5% and underwriting income rose 4.2%. Investment results contributed to reported earnings: Q3 included $6.0 million of gains from changes in equity-security fair value, and the nine-month amount was $3.7 million.
Underwriting and claims: Q3 loss ratio increased to 76.1% from 61.7%, principally due to $16.7 million of catastrophe losses from Hurricane Laura, Hurricane Sally and California wildfires. Nine-month catastrophe losses were $17.1 million. Prior-year reserves developed favorably by $3.0 million in Q3 and $9.6 million year to date. Expense ratios improved to 21.2% for Q3 and 22.9% year to date, from 25.2% in both prior-year comparisons.
Cash flow and balance sheet: Operating cash flow was $206.5 million for the first nine months, versus $119.1 million. Investing activities used $302.4 million; financing activities provided $74.2 million. Cash and cash equivalents were $78.7 million at September 30, down from $100.4 million at year-end 2019. Total investments were $1.141 billion and total assets were $1.469 billion. Stockholders’ equity was $534.1 million, up from $405.9 million at year-end.
Credit-facility borrowings were $40.1 million, net of issuance costs, at a weighted-average interest rate of 2.01%; the $50 million facility matures in May 2024 and has an uncommitted $30 million accordion. Kinsale reported compliance with its financial covenants. The company issued 310,500 shares in August for $56.7 million net proceeds. Dividends paid during the first nine months totaled $6.0 million, or $0.27 per share.
Material changes, outlook and risks
- Management expected premium growth to continue through the remainder of 2020, citing favorable E&S market conditions. It stated that liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months. No specific numerical earnings or premium guidance was provided.
- Management had not observed a significant slowdown in premium growth related to COVID-19 and did not then expect a material adverse effect on loss ratios from COVID-19 claims. It cautioned that the ultimate effects remained uncertain, including possible legal or regulatory challenges to policy exclusions, premium refunds or payment extensions, delayed claims handling, and investment-market volatility.
- Management said the investment portfolio recovered the first-quarter fair-value decline by the end of Q3. At September 30, fixed-maturity securities had a 4.7-year weighted-average duration; 81.6% were rated A- or better. The company reported no credit losses on available-for-sale securities during the first nine months.
- Reinsurance limits catastrophe and individual-loss exposure, but does not relieve Kinsale of obligations to policyholders. All its reinsurers were rated A (Excellent) or better, and it reported no historical loss from uncollectible reinsurance. Catastrophe severity, reserve adequacy, reinsurance availability and pricing, and investment performance remain material risks.
- The new headquarters was substantially completed and placed in service during Q3. Kinsale sold part of the land and parking deck for approximately $6.5 million, had collected $5.0 million by quarter-end, and expected the remaining $1.5 million upon completion of the apartment development. The filing also records $1.0 million of other expenses for the quarter and year to date; the provided filing text does not clearly explain their nature.
Key facts for investors to verify
- Whether rapid premium growth can continue without deterioration in pricing, underwriting quality or retention.
- How catastrophe losses and favorable prior-year reserve development affect subsequent loss ratios and reserve estimates.
- COVID-19-related claim exposure, policy-exclusion enforceability and any effects of economic conditions on premiums or collections.
- Investment-portfolio credit quality, equity-market sensitivity, duration and liquidity, alongside the effect of investment gains on reported earnings.
- Reinsurance protection and counterparty collectibility, as well as facility utilization, covenant headroom and the use of equity-offering proceeds.