Kinsale Capital Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, principally distributing through independent brokers.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Gross written premiums | $84.6 million | $63.8 million | +32.5% |
| Net written premiums | $73.1 million | $55.1 million | +32.6% |
| Net earned premiums | $61.5 million | $48.1 million | +27.9% |
| Total revenues | $72.2 million | $50.1 million | +44.0% |
| Net income | $18.7 million | $7.3 million | +156.9% |
| Diluted EPS | $0.86 | $0.34 | — |
| Operating cash flow | $33.8 million | $21.4 million | — |
- Underwriting income, a non-GAAP measure, rose 79.5% to $12.1 million. The combined ratio improved to 80.3% from 85.9% (loss ratio 54.9% versus 60.1%; expense ratio 25.4% versus 25.8%).
- Net investment income increased 39.8% to $4.5 million. Net unrealized gains on equity securities were $5.9 million, compared with a $1.3 million loss in Q1 2018; net realized investment gains were $0.3 million.
- Cash and cash equivalents were $102.9 million at March 31, 2019, up from $75.1 million at year-end 2018. Investing activities used $4.9 million and financing activities used $1.1 million, including $1.7 million of dividends paid.
- Total assets were $852.9 million and stockholders’ equity was $288.9 million, versus $773.1 million and $264.0 million, respectively, at December 31, 2018. Total investments were $605.3 million.
- The balance sheet reports no debt line item or debt balance. Management said the planned headquarters project is expected to use a combination of operating cash flows and debt financing.
Material changes and management commentary
- Management attributed premium growth to increased broker submissions across substantially all business lines and a favorable, improving E&S market. Net retention was unchanged at 86.3%.
- Prior-year loss reserves developed favorably by $6.4 million in Q1 2019, compared with $1.3 million in Q1 2018. Management said reported losses for 2015–2018 accident years were below expectations; the favorable development materially supported the loss ratio and underwriting results.
- Annualized gross investment return increased to 3.2% from 2.7%. Annualized return on equity was 27.1%, compared with 12.2%; annualized operating return on equity, a non-GAAP measure, was 20.0% versus 13.7%.
- Other comprehensive income was $6.8 million, principally reflecting unrealized gains on available-for-sale fixed maturities. Accumulated other comprehensive income was $5.5 million at quarter-end, versus a $1.3 million loss at year-end.
Liquidity, outlook, risks, and unusual items
- Management said liquidity was sufficient to meet operating needs and obligations and committed capital expenditures for the next 12 months. Operating cash flow can vary with the timing of premiums, claims, and reinsurance receipts.
- Kinsale purchased land for $2.5 million in January 2019 for a new headquarters. The project is estimated at $50–$55 million, substantially all expected to be capitalized, with completion targeted for Q3 2020.
- No earnings or premium guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key exposures include interest-rate risk in fixed-maturity investments, equity-price risk, underwriting and reserve-estimation risk, and the possibility that reinsurers do not meet obligations. All reinsurance counterparties were rated A or better by A.M. Best; the company reported no historical loss from uncollectible reinsurance.
- At quarter-end, 85.4% of fixed-maturity securities were rated A- or better, and management reported no other-than-temporary impairments. The filing identifies $22.1 million payable for investments purchased but not yet settled, included in other liabilities.
- The company adopted lease accounting effective January 1, 2019, recording an approximately $0.9 million right-of-use asset and lease liability. The adoption of the callable-debt premium amortization standard had no material impact. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- How much of earnings growth reflects repeatable underwriting performance versus $6.4 million of favorable reserve development and equity-security gains.
- Whether submission growth and favorable E&S market conditions continue, and how pricing and business mix affect premium growth and combined ratios.
- Reserve adequacy and subsequent development by accident year, given the significance of prior-period reserve releases.
- The final headquarters cost, construction schedule, and amount and terms of any debt financing.
- Investment portfolio valuation, interest-rate and equity exposure, reinsurance recoverability, and the timing of claims and cash flows.