Kinsale Capital Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, primarily distributing through independent brokers. Its single reportable segment is property and casualty insurance.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Gross written premiums | $124.0 million | $84.6 million; up 46.6% |
| Net written premiums | $108.1 million | $73.1 million; up 47.9% |
| Net earned premiums | $89.8 million | $61.5 million; up 46.0% |
| Total revenues | $80.3 million | $72.2 million |
| Net income | $5.1 million | $18.7 million; down 72.8% |
| Diluted EPS | $0.22 | $0.86 |
| Net operating earnings (non-GAAP) | $17.2 million | $13.8 million; up 24.5% |
| Net investment income | $6.0 million | $4.5 million; up 32.0% |
| Cash from operating activities | $59.7 million | $33.8 million |
Underwriting income, a non-GAAP measure, was $14.4 million, up 19.0%. The loss ratio was 59.9% versus 54.9%; the expense ratio was 24.0% versus 25.4%; and the combined ratio was 83.9% versus 80.3%. The combined ratio remained below 100%, indicating an underwriting profit. Prior-year reserve development was favorable by $3.0 million, compared with $6.4 million in Q1 2019.
Net income fell chiefly because equity securities recorded a $16.2 million fair-value loss, compared with a $5.9 million gain in Q1 2019. The decline reflected financial-market disruption associated with COVID-19. Other comprehensive loss was $9.2 million, primarily reflecting lower unrealized values on available-for-sale fixed maturities. Total comprehensive loss was $4.1 million.
Financial position, cash flow and liquidity
- At March 31, total assets were $1.165 billion and stockholders’ equity was $401.3 million, compared with $1.091 billion and $405.9 million, respectively, at December 31, 2019.
- Cash and cash equivalents were $52.6 million, down from $100.4 million at year-end. Investing activities used $113.5 million, including substantial fixed-maturity purchases and headquarters construction spending; financing activities provided $6.0 million.
- Investments totaled $902.5 million: $818.9 million in available-for-sale fixed maturities and $83.6 million in equity securities. Management reported that 85.2% of fixed maturities were rated A- or better and found no credit losses on securities in unrealized-loss positions during the quarter.
- Gross unpaid-loss and loss-adjustment reserves were $491.3 million. Reinsurance recoverables on unpaid losses were $69.1 million.
- Credit-facility debt was $24.1 million, net of issuance costs, at a 3.01% weighted-average rate. The facility provides $50 million of capacity, matures in May 2024, and the company reported compliance with its financial covenants.
- The company declared dividends of $0.09 per share. Management said available liquidity was sufficient for operating needs, obligations and committed capital expenditures over the next 12 months.
Changes, outlook and risks
- Premium growth reflected higher broker submissions, higher rates in a favorable E&S market, and increased retention under reinsurance treaties. Management said it had not seen a significant slowdown in premium growth since the pandemic began.
- Management expected premium growth to continue through the remainder of 2020, but gave no quantified earnings or premium guidance. It said the ultimate effects of COVID-19 and the economic downturn could not yet be determined.
- Kinsale said its policy terms would generally be expected to preclude virus-related claims and did not expect a material adverse effect on loss ratios from such claims at that time. It cautioned that court, legislative, regulatory or government actions could challenge exclusions, require premium refunds or otherwise alter policy obligations; claims reporting and settlement could also be delayed.
- Management attributed the investment-market declines largely to market disruption and expected COVID-related adverse effects on investment values to be temporary, while acknowledging that defaults or impairments could occur in a downturn.
- Key risks include reserve estimation, catastrophe and pandemic losses, reinsurance availability and collectability, investment and interest-rate risk, economic contraction, regulation, competition, broker concentration and the cyclical E&S market. The company’s insurer held an A- (Excellent) A.M. Best rating with a positive outlook.
- The new headquarters remained under construction, with completion expected in the third quarter of 2020. The filing reported no material off-balance-sheet arrangements, and ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether premium growth and pricing persist as economic conditions and the E&S market change.
- Whether the $3.0 million of favorable prior-year reserve development, current accident-year losses and reserve assumptions remain appropriate.
- How COVID-19 affects claims, policy interpretation, premium collection, business activity and investment values, including any regulatory or judicial action.
- Investment portfolio credit quality, equity-market exposure, unrealized losses and liquidity needs; assess these alongside the decline in cash and the substantial securities purchases.
- Reinsurance protection, counterparty creditworthiness, facility capacity and covenant compliance, and headquarters construction costs and timing.