Kinsale Capital Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unless otherwise stated, dollar amounts are in millions. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, distributing primarily through independent brokers. Its sole reportable segment is property and casualty insurance.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross written premiums | $57.8 | $50.1 | $110.6 | $93.2 |
| Net written premiums | $49.8 | $35.7 | $93.9 | $83.5 |
| Net earned premiums | $43.1 | $31.8 | $83.5 | $62.4 |
| Total revenues | $45.5 | $33.7 | $88.2 | $66.4 |
| Underwriting income (non-GAAP) | $10.7 | $7.8 | $17.7 | $14.1 |
| Net income | $8.5 | $6.1 | $14.8 | $11.3 |
| Diluted EPS | $0.40 | Class A $0.42; Class B $0.18 | $0.69 | Class A $0.79; Class B $0.25 |
| Combined ratio | 75.2% | 75.3% | 78.8% | 77.4% |
The Q2 loss ratio improved to 50.8% from 54.9%; the expense ratio increased to 24.4% from 20.4%. For the first half, the loss ratio improved to 52.7% from 57.0%, while the expense ratio rose to 26.1% from 20.4%. Kinsale reported favorable prior-year reserve development of $8.9 million in the first half, versus $5.4 million in the prior-year period. Net investment income was $2.4 million for Q2 and $4.7 million for the half, up 33.7% and 35.0%, respectively. Six-month annualized return on equity was 13.5%, compared with 18.6%.
Cash flow and balance sheet: Six-month operating cash flow was $40.8 million, versus $36.5 million; investing activities provided $4.4 million, versus using $38.7 million; financing activities used $2.5 million, principally for dividends. Cash and cash equivalents were $93.4 million at June 30, up from $50.8 million at year-end. Total assets were $623.0 million, liabilities $396.9 million, and stockholders’ equity $226.0 million. Investments totaled $431.3 million. Unpaid loss and loss-adjustment reserves were $284.4 million, and unearned premiums were $100.2 million. The filing does not show a debt balance; management noted the former credit facility was repaid in Q4 2016.
Material changes versus prior periods
- Gross written premiums grew 15.3% in Q2 and 18.7% in the first half, reflecting growth across most business lines, particularly small business, construction, energy, product liability and personal insurance.
- Net written and earned premiums benefited from the non-renewal of the multi-line quota share (MLQS) treaty for 2017. The MLQS had reduced reported 2016 premiums and affected commissions and loss ratios, so reported period comparisons are not fully like-for-like. Excluding the MLQS, first-half net earned premium growth was 13.6%.
- First-half underwriting income increased 26.0% and net income increased 30.6%; the combined ratio nevertheless rose year over year. Favorable prior-year reserve development supported results.
- Underwriting, acquisition and insurance expenses rose 61.9% in Q2 and 71.2% in the first half, partly because 2016 included MLQS ceding commissions. The company also cited higher employee compensation and public-company costs.
- The 2015 MLQS was commuted effective January 1, 2017; the company reported no remaining MLQS balances and said the commutation did not affect results or cash flows. The 2016 treaty had previously been terminated and commuted in October 2016.
Outlook, commentary and risks
No specific earnings or premium guidance was provided. Management stated that its long-term financial goal is mid-teens return on equity and believed available liquidity, operating receipts and investment resources were sufficient for operating needs and obligations over the next 12 months. Results for the interim period are not necessarily indicative of full-year results.
Key exposures include insurance claims and the accuracy of reserve estimates, catastrophe losses, reinsurance collectability, and market risk—principally interest-rate risk in fixed maturities and equity-price risk in equity investments. Reinsurance does not release Kinsale from obligations to policyholders; the company said its reinsurers were rated A or better by A.M. Best and it had never recorded an allowance for uncollectible reinsurance. It reported no material change in risk factors or market risk from its 2016 Form 10-K, no material off-balance-sheet arrangements, and ordinary-course legal proceedings not expected to have a material adverse effect.
Unusual items include $0.4 million of Q2 and first-half expenses related to a May 2017 secondary stock offering. The company paid dividends of $0.12 per share, or $2.5 million in aggregate, during the first half. Management found disclosure controls effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of premium and earnings growth reflects underlying business expansion versus the change in MLQS cession and retention.
- Whether favorable reserve development continues, and how current-accident-year loss trends develop across casualty lines.
- Whether expense growth, including employee and public-company costs, remains controlled as the business expands.
- Capital and liquidity implications of higher net retention, catastrophe exposures, and the adequacy and collectability of reinsurance protection.
- Investment portfolio credit quality, duration and sensitivity to interest rates and equity-market changes; confirm any material effects from the accounting standards the company was evaluating.
- Interpret the 13.5% first-half ROE in light of the enlarged equity base following the 2016 IPO and management’s long-term mid-teens goal.