Kinsale Capital Group, Inc. — Q2 2018 Form 10-Q
Business and period: Specialty insurer focused on the U.S. excess and surplus lines market, distributing primarily through independent brokers. This unaudited filing covers the three and six months ended June 30, 2018, compared with the same periods in 2017; balance-sheet figures are compared with December 31, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Gross written premiums | $70.0m | $57.8m | $133.8m | $110.6m |
| Net written premiums | $60.9m | $49.8m | $116.0m | $93.9m |
| Net earned premiums | $50.9m | $43.1m | $99.0m | $83.5m |
| Total revenues | $54.9m | $45.5m | $105.1m | $88.2m |
| Net income | $10.1m | $8.5m | $17.4m | $14.8m |
| Diluted EPS | $0.47 | $0.40 | $0.80 | $0.69 |
| Underwriting income (non-GAAP) | $8.4m | $10.7m | $15.2m | $17.7m |
| Loss / expense / combined ratio | 58.9% / 24.6% / 83.5% | 50.8% / 24.4% / 75.2% | 59.5% / 25.2% / 84.7% | 52.7% / 26.1% / 78.8% |
Cash flow and balance sheet: First-half operating cash flow was $50.4m, versus $40.8m; investing cash flow was negative $50.2m, versus positive $4.4m; financing cash flow was negative $2.3m, versus negative $2.5m. Cash and equivalents ended June at $79.7m, down from $81.7m at year-end. Total assets were $728.9m, liabilities $481.0m and stockholders’ equity $247.9m. Investments totaled $526.1m. The filing presents no debt balance or borrowing expense line; it does not provide a separate liquidity ratio.
Gross reserves for unpaid losses and loss adjustment expenses were $344.6m, including $53.4m of reinsurance recoverables. Dividends declared were $0.07 per share for Q2 and $0.14 for the first half.
Changes and management commentary
- Premium growth remained strong: Q2 gross written premiums rose 21.2% and first-half premiums rose 21.0%, which management attributed to increased submissions across most lines. Net retention was 87.0% for Q2 and 86.7% for the first half.
- Underwriting results weakened year over year. Q2 underwriting income fell 21.4%; first-half underwriting income fell 14.4%. Combined ratios increased to 83.5% and 84.7%, respectively, mainly reflecting higher current-year loss ratios and less favorable prior-year reserve development. Favorable prior-year development was $2.2m in Q2 and $3.5m for the first half, compared with $3.8m and $8.9m in 2017.
- Net income increased despite lower underwriting income, supported by higher investment income and lower taxes. The effective tax rate was 18.9% in Q2 and 18.2% for the first half, versus 33.4% and 33.0% in 2017; management cited the Tax Cuts and Jobs Act and tax benefits from exercised stock options.
- Net investment income rose 55.5% in Q2 and 48.6% for the first half. First-half net income included $1.2m of unrealized equity investment losses, recognized in earnings following adoption of a new accounting standard. First-half other comprehensive loss was $5.9m, principally reflecting unrealized losses on fixed maturities.
Outlook, risks and unusual items
- No specific revenue, earnings or underwriting guidance is provided. Management said it believes available liquidity is sufficient for operating needs and committed capital expenditures for the next 12 months, and that premium receipts, investment proceeds and income should cover foreseeable cash outflows.
- Key exposures include claims frequency and severity, legal and medical-cost inflation, reserve-estimation uncertainty, interest-rate and equity-price movements, and reinsurer credit risk. Reinsurance does not discharge the company’s obligations to policyholders. The company reported that its reinsurers were rated A (Excellent) or better and that it had never incurred a loss for uncollectible reinsurance.
- Fixed-maturity securities had an average rating of AA and a 4.0-year weighted-average duration. Management attributed unrealized losses to interest rates or other market factors, reported no other-than-temporary impairments, and stated that 89.5% of fixed maturities were rated A- or better.
- The company adopted accounting changes affecting equity-security fair-value gains and losses and reclassified tax effects between accumulated other comprehensive income and retained earnings. The filing also notes provisional TCJA-related accounting for loss-reserve discounting; no measurement-period adjustment was recorded in the first half, and final accounting awaited further Treasury guidance and company calculations.
- Management reported no material change in risk factors or market-risk exposures from the 2017 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective; no material internal-control change was reported.
Investor verification priorities
- Assess whether premium growth can continue without deterioration in current-year loss experience and combined ratios.
- Review subsequent reserve development, particularly the adverse development in accident years 2011–2014 and the year-over-year reduction in favorable development.
- Check investment portfolio performance, interest-rate sensitivity, equity exposure and whether unrealized losses persist or affect reported earnings.
- Confirm the ultimate tax effects of the TCJA loss-reserve discounting rules and the impact of future accounting-standard adoption.
- Verify reinsurance recoverability, coverage terms and retention levels, and monitor liquidity and capital as the business grows.