Kinsale Capital Group, Inc. — Q2 2020 Form 10-Q
Business and period: Specialty insurer focused on U.S. excess and surplus lines, primarily placing hard-to-insure commercial and personal risks through independent brokers. This unaudited filing covers the three and six months ended June 30, 2020; comparisons are with the same 2019 periods unless otherwise noted. Amounts below are in millions except per-share data and ratios.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Gross written premiums | $134.1 | $94.9 | $258.1 | $179.6 |
| Net earned premiums | $97.0 | $66.1 | $186.7 | $127.6 |
| Net investment income | $6.6 | $4.8 | $12.6 | $9.3 |
| Net income | $30.3 | $13.8 | $35.3 | $32.5 |
| Diluted EPS | $1.33 | $0.63 | $1.56 | $1.49 |
| Loss ratio | 60.1% | 59.9% | 60.0% | 57.5% |
| Expense ratio | 23.7% | 24.9% | 23.9% | 25.1% |
| Combined ratio | 83.8% | 84.8% | 83.9% | 82.6% |
Combined ratios below 100% indicate underwriting profit. Non-GAAP underwriting income was $15.7 million in Q2 and $30.1 million for the first half, versus $10.1 million and $22.2 million, respectively. Non-GAAP net operating earnings were $19.1 million in Q2 and $36.4 million for the first half.
- Cash flow: First-half operating cash flow was $132.6 million, compared with $71.3 million in 2019. Investing used $181.6 million, including substantial securities purchases and headquarters spending; financing provided $11.6 million. Cash and equivalents ended June at $63.0 million, down from $100.4 million at year-end.
- Balance sheet and liquidity: Total assets were $1.289 billion and stockholders’ equity $456.1 million at June 30, versus $1.091 billion and $405.9 million at December 31, 2019. Investments totaled $1.001 billion. Unpaid loss reserves were $525.8 million and unearned premiums $229.6 million.
- Debt and capital: Credit-facility borrowings were $33.1 million, net of issuance costs, under a $50 million revolving facility maturing in 2024; weighted-average interest rate was 2.33%. The company reported compliance with all financial covenants. It declared dividends of $0.18 per share during the first half and paid $4.0 million in dividends.
Changes and management commentary
- Q2 gross written premiums rose 41.2%; first-half premiums rose 43.7%. Management attributed growth to more broker submissions, higher rates and favorable E&S market conditions. First-half business mix was 87% casualty and 13% property.
- First-half net income increased 8.8%, while underwriting income grew 35.7%. The first-half combined ratio worsened to 83.9% from 82.6%, mainly because the loss ratio rose as favorable prior-year reserve development was lower; the expense ratio improved with scale and cost control.
- Prior-year reserves developed favorably by $6.6 million in the first half of 2020, including $5.0 million from the 2019 accident year. Management said it moderated favorable development partly to account for uncertainty related to economic conditions and COVID-19.
- Equity-security fair-value changes were volatile: a $2.3 million loss for the first half included a sharp first-quarter decline and a strong Q2 rebound, producing a $13.8 million Q2 gain. Q2 net income therefore benefited from market recovery; first-half net income was affected by the earlier decline. Available-for-sale fixed-maturity securities recorded $17.8 million of after-tax unrealized gains in other comprehensive income during the first half. Management reported no credit losses on those securities.
- Management expected premium growth to continue through the remainder of 2020, but gave no quantified full-year earnings or premium guidance. It did not then expect a material adverse effect on loss ratios from COVID-19 claims, citing policy terms, but said ultimate impacts remained uncertain.
Risks, contingencies and unusual items
- COVID-19 and related economic disruption could affect premium volume, claims, investments, claim reporting and collections. Coverage exclusions could be challenged through litigation or government action, including possible premium refunds or restrictions on cancellations and collections. The investment portfolio fell significantly in Q1 and recovered sharply in Q2.
- Catastrophes and severe weather can produce volatile losses; adequacy and cost of reinsurance, reserve estimates, reinsurer performance, competition, broker concentration, regulation and investment-market movements are also significant risks. Reinsurance does not discharge obligations to policyholders, though all reinsurers were rated A (Excellent) or better and Kinsale reported no historical uncollectible reinsurance.
- The company adopted the expected-credit-loss accounting standard in January 2020; the reinsurance-recoverable allowance and retained-earnings adjustment were not material. Construction of the new headquarters was expected to be completed in Q3 2020; related capital spending and credit-facility draws were notable cash uses.
- Management stated that it had sufficient liquidity for operating needs and committed capital expenditures over the next 12 months. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and pricing remain strong after the favorable market conditions cited by management.
- Subsequent reserve development, especially the assumptions and uncertainty affecting current accident years and COVID-19-related claims.
- Investment portfolio performance and credit quality, including equity-security volatility, fixed-income exposure and portfolio duration.
- Cash needs for claims, investment purchases and headquarters completion; remaining facility capacity, borrowing costs and covenant headroom.
- Any legal, regulatory or judicial decisions that alter coverage interpretations, premium collection or policyholder obligations during the pandemic.
- Changes in reinsurance pricing, terms, retention levels and catastrophe protection at future renewals.