Kinsale Capital Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, primarily distributing through independent brokers. All dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Gross written premiums | $55.6 | $47.8 | $166.2 | $141.0 |
| Net written premiums | $47.1 | $33.6 | $141.0 | $117.1 |
| Net earned premiums | $45.0 | $33.0 | $128.5 | $95.4 |
| Total revenue | $47.8 | $34.9 | $136.0 | $101.3 |
| Underwriting income | $2.5 | $10.7 | $20.2 | $24.8 |
| Net income | $4.2 | $8.0 | $19.0 | $19.3 |
| Basic/diluted EPS, common stock | $0.20 / $0.20 | $0.24 / $0.24 | $0.90 / $0.88 | $0.24 / $0.24 |
| Combined ratio | 94.5% | 67.5% | 84.3% | 74.0% |
Premium growth reflected expansion across most lines and higher retention after the multi-line quota-share treaty (MLQS) was not renewed for 2017. Net retention was 84.6% in Q3 and 84.8% year to date. For comparison, excluding the MLQS, 2016 net earned premiums grew 15.9% in Q3 and 14.4% year to date versus 2017.
Q3 net income fell 47.4% year over year; nine-month net income declined 1.7%. The company reported after-tax losses of $5.3 million from Hurricanes Harvey and Irma, equivalent to $8.0 million pretax and net of reinsurance. The Q3 loss ratio rose to 70.1% from 48.4%; the nine-month ratio rose to 58.8% from 54.0%. Nine-month underwriting income and combined ratio also compare against 2016 results affected by the MLQS; excluding that treaty, 2016 underwriting income was $25.5 million and adjusted combined ratio was 77.3%.
Prior-year reserves developed favorably by $11.8 million during the first nine months, mainly from accident years 2014–2016, partly offset by adverse development for 2011–2013. Investment income increased to $2.8 million in Q3 and $7.5 million year to date, supported by a larger portfolio and higher returns. Nine-month annualized return on equity was 11.5%, down from 15.9%.
Cash, balance sheet and capital
- At September 30, 2017, cash and cash equivalents were $96.7 million, investments were $458.9 million, and total assets were $663.0 million. Total stockholders’ equity was $231.8 million, up from $210.2 million at year-end 2016.
- Cash and invested assets totaled $555.6 million. Fixed maturities were $415.9 million; their average rating was AA and weighted-average duration was 3.8 years. The filing reports no material off-balance-sheet arrangements.
- Operating cash flow for the first nine months was $64.5 million, versus $56.6 million a year earlier. Investing cash outflow was $15.8 million; financing cash outflow was $2.8 million. Cash increased $45.9 million to $96.7 million.
- No note payable was reported at period-end; the prior credit facility had been repaid in 2016. Dividends paid were $3.8 million, or $0.18 per share, year to date.
- Gross reserves for unpaid losses and loss-adjustment expenses were $310.9 million, including $45.9 million recoverable from reinsurers. Reinsurance recoverables on paid and unpaid losses totaled approximately $46.5 million.
Outlook, risks and notable items
Management provided no specific earnings or premium guidance. It stated that liquidity at the holding company and subsidiaries was sufficient for operating needs, obligations and committed capital expenditures over the next 12 months, and that expected premium receipts, investment proceeds and income should cover foreseeable cash outflows.
Key exposures include catastrophe losses, claim frequency and severity, reserve-estimation uncertainty, interest-rate and equity-price movements, and reinsurer performance. Reinsurance contracts do not discharge the insurer’s obligations to policyholders. Management reported that all reinsurers were rated A or better by A.M. Best and that it had never established an allowance for uncollectible reinsurance. The insurance subsidiary’s financial-strength rating was A- from A.M. Best. Management reported no material change in risk factors, no material legal-proceeding exposure, and effective disclosure controls. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How catastrophe-loss estimates and subsequent claims experience develop for Hurricanes Harvey and Irma.
- Whether favorable reserve development persists, and the effect of older accident-year adverse development.
- Underlying underwriting trends, using comparisons that account for the 2016 MLQS and its nonrenewal in 2017.
- Premium growth, retention and business mix, including growth in small-business and personal lines.
- Reinsurance recoverability, catastrophe treaty limits and the consequences of retaining more risk after the MLQS ended.
- Investment portfolio valuation and sensitivity to interest rates and equity prices.