Kinsale Capital Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Kinsale is a U.S. specialty insurer focused on excess and surplus lines, distributed primarily through independent brokers.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Gross written premiums | $52.9 million | $43.1 million | Up 22.7% |
| Net written premiums | $44.2 million | $47.8 million | Down 7.6%; affected by quota-share accounting |
| Net earned premiums | $40.4 million | $30.6 million | Up 32.1% |
| Total revenues | $42.7 million | $32.7 million | Includes earned premiums and investment income |
| Net investment income | $2.3 million | $1.7 million | Up 36.4% |
| Net income | $6.3 million | $5.3 million | Up 19.5% |
| Diluted EPS | $0.29 | $0.37 Class A; $0.07 Class B | Not directly comparable following 2016 share-class reclassification |
| Operating cash flow | $15.4 million | $16.2 million | Lower, mainly from timing of claims, reinsurance recoveries and working capital |
Underwriting: Loss ratio was 54.7% versus 59.2%; expense ratio was 27.9% versus 20.4%; combined ratio was 82.6% versus 79.6%. Excluding quota-share effects, the adjusted combined ratio was 82.6% versus 82.1%. Underwriting income increased 12.9% to $7.0 million. The expense-ratio increase chiefly reflected the non-renewal of the multi-line quota-share treaty and higher compensation and public-company costs.
Balance sheet and liquidity
- Total assets were $594.5 million and stockholders’ equity was $216.5 million at March 31, 2017. Equity rose from $210.2 million at year-end, reflecting earnings and unrealized investment gains, partly offset by dividends.
- Cash and cash equivalents were $75.6 million; investments were $420.2 million. Cash and invested assets totaled $495.7 million.
- Loss and loss-adjustment reserves were $273.0 million, including $40.3 million of reinsurance recoverables on unpaid losses.
- The balance sheet reports no borrowings. Management said the credit facility was repaid in Q4 2016 and stated liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months.
- Cash increased $24.8 million during the quarter. Investing activities provided $10.6 million, reflecting fixed-maturity maturities and calls exceeding purchases; the company paid $1.3 million in dividends.
Material changes and management commentary
- Gross premium growth was driven mainly by more policies from higher broker submissions; average premium per policy declined to about $8,600 from $8,900.
- Kinsale did not renew its multi-line quota-share treaty for 2017 and commuted the remaining 2015 treaty effective January 1, 2017. The commutation reduced reinsurance-related balances but had no effect on reported results or cash flows for the applicable periods. The treaty change makes year-over-year written-premium and expense comparisons less representative; excluding treaty effects, earned premiums grew 12.2% and adjusted combined ratios were 82.6% and 82.1%.
- Prior-year reserves developed favorably by $5.1 million, primarily from the 2016 and 2015 accident years, partly offset by $0.9 million of adverse development for 2013. Favorable development contributed to the lower reported loss ratio.
- Annualized return on equity was 11.8%, down from 18.0%, which management attributed in part to the larger equity base following the 2016 IPO. Management’s stated long-term financial goal is mid-teens ROE; the filing gives no specific Q2 or full-year 2017 earnings guidance.
- The fixed-income portfolio had an average rating of AA and a weighted-average duration of 3.6 years. Management reported no other-than-temporary investment impairments in Q1 2017; unrealized losses were attributed to interest-rate or other market factors rather than issuer-specific credit issues.
Risks, contingencies and unusual items
- Insurance results depend on estimates of claim frequency, severity and loss reserves; actual outcomes may differ. Reinsurance does not relieve Kinsale of its obligations to policyholders, and reinsurer failure could cause losses. Reinsurers were rated A (Excellent) or better by A.M. Best, and Kinsale reported no historical allowance for uncollectible reinsurance.
- Primary market risks are interest-rate exposure in fixed maturities and equity-price exposure in equity securities. The filing reported no material change in market risk from the 2016 Form 10-K.
- Legal proceedings arise in the ordinary course; management did not expect them, individually or in aggregate, to materially adversely affect financial position. No material risk-factor changes were reported.
- A proprietary policy-processing module was implemented February 1, 2017, materially changing internal controls over financial reporting. Management performed testing and additional validation procedures and concluded disclosure controls were effective; the filing cautions that controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Whether premium growth and underwriting profitability persist after separating organic performance from the quota-share treaty transition.
- Whether favorable reserve development continues and how loss trends affect current accident-year results.
- Whether expense growth, including compensation and public-company costs, moderates as earned premiums grow.
- Reinsurance recoverability, catastrophe exposure and the effect of reinsurance pricing and capacity on retained risk.
- Investment portfolio sensitivity to interest rates and equity markets, and progress toward the stated long-term ROE goal.