Kinsale Capital Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone quarterly filing; quarterly figures below are unaudited. Kinsale is a U.S. property and casualty insurer focused exclusively on excess and surplus lines, distributing primarily through independent brokers.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Gross written premiums | $552.8 million | $389.7 million | +41.9% |
| Net written premiums | $478.2 million | $342.1 million | +39.8% |
| Net earned premiums | $412.8 million | $283.0 million | +45.9% |
| Total revenues | $459.9 million | $315.9 million | +45.6% |
| Net income | $88.4 million | $63.3 million | +39.6% |
| Diluted EPS | $3.87 | $2.86 | +35.3% |
| Underwriting income (non-GAAP) | $54.7 million | $43.2 million | +26.5% |
| Net cash from operations | $280.0 million | $178.4 million | +$101.6 million |
The combined ratio was 86.7%, versus 84.7% in 2019, indicating underwriting profitability in both years. The loss ratio increased to 63.9% from 59.9%, while the expense ratio improved to 22.8% from 24.8%. Return on equity was 18.0% versus 18.9%; operating return on equity, a non-GAAP measure, was 14.7% versus 15.9%.
Investment income was $26.1 million, up 29.7%. Net investment gains were $20.4 million, including $16.9 million of equity-security fair-value gains and $3.5 million of realized gains. These investment gains contributed to reported net income; net operating earnings, which excludes specified investment effects, were $72.3 million, up 35.8%.
Balance sheet, cash flow and liquidity
- Cash and invested assets totaled $1.289 billion at year-end, up from $908.2 million; total assets were $1.547 billion, versus $1.091 billion.
- Stockholders’ equity rose to $576.2 million from $405.9 million. Statutory capital and surplus at the insurance subsidiary increased to $476.1 million from $348.8 million.
- Debt was $42.6 million at year-end, compared with $16.7 million in 2019. The debt-to-total-capitalization ratio was 6.9%, versus 4.1%. The $50 million revolving facility matures in May 2024; the company reported compliance with its financial covenants.
- Operating cash flow was $280.0 million; investing cash outflow was $379.4 million and financing cash inflow was $76.1 million. Cash and cash equivalents ended the year at $77.1 million.
- Gross unpaid-loss reserves were $636.0 million, including $552.3 million net of reinsurance. Reinsurance recoverables were $93.2 million. The company stated that its holding company and operating subsidiaries had sufficient liquidity for operating needs and committed capital expenditures over the next 12 months.
Material changes and notable items
- Premium growth reflected increased broker submissions and higher rates across most lines amid favorable E&S market conditions. Average premium per policy rose to approximately $9,100 from $8,200.
- Prior-year loss reserves developed favorably by $13.3 million, compared with $9.4 million of favorable development in 2019. This helped results, but catastrophe losses increased to $23.2 million from $3.0 million, primarily from Hurricanes Laura, Sally and Zeta and California wildfires.
- The company raised $56.7 million in net proceeds from a common-stock offering in August 2020 and paid $8.1 million in dividends during the year. The quarterly dividend was $0.09 per share in 2020; a $0.11 dividend was declared in February 2021.
- The new Richmond headquarters was substantially completed and placed into service during 2020. The company reported $27.8 million of net property-and-equipment purchases during the year.
- Unaudited fourth-quarter 2020 gross written premiums were $149.9 million and net income was $38.2 million, compared with $112.1 million and $17.9 million, respectively, in fourth-quarter 2019.
Outlook, risks and contingencies
The filing provides no specific earnings or premium guidance. Management described continued opportunities to grow in the E&S market while emphasizing underwriting profitability, expense discipline, technology investment and conservative capital management. Kinsale reported that it had not seen a significant slowdown in premium growth from COVID-19 and did not then expect a material adverse effect on loss ratios from pandemic claims, but said the ultimate effects remained uncertain. Investment values fell sharply in the first quarter and subsequently recovered.
Key risks include reserve estimation uncertainty, catastrophe and pandemic losses, dependence on reinsurance and reinsurer credit, broker concentration, E&S market cycles and competition, investment-market and interest-rate volatility, and regulatory restrictions on insurance-subsidiary dividends. About 84.9% of net loss reserves were IBNR; management estimated that a 5% change in net IBNR would change reserves by approximately $23.4 million. The five largest reinsurers represented 78.4% of paid and unpaid loss recoverables. The insurance subsidiary’s A.M. Best rating was A (Excellent). The filing reports no material litigation or material off-balance-sheet arrangements. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Assess whether premium growth and favorable market conditions can persist without weakening pricing or underwriting standards.
- Review reserve development and IBNR assumptions, especially given the material reserve sensitivity and the auditor’s critical audit matter on reserves.
- Separate recurring underwriting and investment-income performance from equity fair-value gains and realized investment gains.
- Monitor catastrophe exposure, reinsurance renewal terms, counterparty concentration and recoverability of ceded losses.
- Confirm holding-company liquidity and dividend capacity, including statutory limits on distributions from the insurance subsidiary and the debt facility’s terms.