Kinsale Capital Group, Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, principally property and casualty coverage distributed through independent brokers. In the first nine months of 2019, gross written premiums were 89.2% casualty and 10.8% property; personal lines accounted for 4.6%.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Gross written premiums | $98.0 million | $69.5 million | $277.6 million | $203.4 million |
| Net written premiums | $86.8 million | $57.9 million | $242.5 million | $173.9 million |
| Net earned premiums | $72.6 million | $54.3 million | $200.2 million | $153.3 million |
| Total revenues | $78.3 million | $60.1 million | $223.1 million | $165.2 million |
| Net income | $13.0 million | $11.9 million | $45.5 million | $29.3 million |
| Diluted EPS | $0.58 | $0.55 | $2.07 | $1.35 |
| Net investment income | $5.3 million | $4.1 million | $14.6 million | $11.1 million |
| Underwriting income | $9.5 million | $8.4 million | $31.7 million | $23.5 million |
| Combined ratio | 86.9% | 84.6% | 84.2% | 84.6% |
Q3 loss and expense ratios were 61.7% and 25.2%, respectively, versus 59.1% and 25.5% a year earlier. For the first nine months, the respective ratios were 59.0% and 25.2%, versus 59.3% and 25.3%. A combined ratio below 100% indicates an underwriting profit. Nine-month net income growth was 55.0%; it included $8.1 million in unrealized gains on equity securities, compared with $0.6 million in the prior-year period. Net realized investment gains were $0.2 million for the period.
Financial position and liquidity
- At September 30, 2019, total assets were $1.036 billion, total liabilities $646.4 million, and stockholders’ equity $390.0 million. Year-end 2018 balances were $773.1 million, $509.1 million, and $264.0 million, respectively.
- Cash and cash equivalents were $86.3 million, compared with $75.1 million at December 31, 2018. Investments totaled $782.6 million, including $716.6 million in available-for-sale fixed maturities.
- Operating cash flow for the first nine months was $119.1 million, versus $78.4 million in 2018. Investing cash flow was negative $181.1 million and financing cash flow was positive $73.3 million; cash increased by $11.2 million.
- The company had $11.2 million outstanding, net of issuance costs, under a $50 million senior unsecured revolving facility due May 2024; the weighted-average interest rate was 3.89%. It reported compliance with financial covenants.
- In August, Kinsale issued 741,750 shares at $93 per share, receiving approximately $65.9 million net proceeds to fund organic growth. Dividends declared were $0.24 per share in the first nine months.
Material changes and management commentary
- Management attributed premium growth to higher broker submissions and improving E&S market conditions, including higher rates on bound accounts. Net retention increased to 88.5% for Q3 from 83.3%, and to 87.4% for the nine-month period from 85.5%, primarily following higher retention under reinsurance treaties renewed June 1, 2019.
- Q3 underwriting income increased 13.5%, but the combined ratio worsened by 2.3 percentage points, mainly because favorable prior-year reserve development was lower ($0.5 million versus $2.2 million) and current-year catastrophe losses were higher.
- Nine-month prior-year reserves developed favorably by $8.4 million, compared with $5.7 million in 2018. Favorable development in 2016–2018 accident years was partly offset by $6.4 million of adverse development in 2011–2015, attributed largely to lengthened loss development factors and added conservatism in IBNR reserves.
- The company is developing a new headquarters, targeting completion in Q3 2020. The project is estimated at $50–$55 million; $13.1 million of construction in progress was recorded at quarter-end. Management expects to fund it with operating cash flows and debt financing.
- Management said liquidity was sufficient for operating needs, obligations, and committed capital expenditures over the next 12 months. No earnings or premium guidance was provided. Interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Key disclosed risks include reserve estimation uncertainty, catastrophe and claims severity, reinsurance availability and collectability, investment-market performance, E&S market cycles, competition, regulation, broker concentration, and managing growth. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
- At September 30, fixed maturities had $1.5 million of gross unrealized losses; management attributed these to interest-rate or other market factors rather than credit issues and reported no other-than-temporary impairments. 87.9% of fixed maturities were rated A- or better.
- Reinsurance recoverables on unpaid losses were $63.7 million. Kinsale stated that its reinsurers were rated A (Excellent) or better by A.M. Best and that it had never had a loss for uncollectible reinsurance.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material off-balance-sheet arrangements and no material market-risk changes from the 2018 Form 10-K.
Important facts for investors to verify
- Whether premium growth and improved market conditions persist, and how pricing, submissions, and net retention evolve.
- Whether favorable reserve development continues; review accident-year trends, particularly the older-year adverse development and changes to IBNR assumptions.
- How catastrophe losses, claims inflation, and the higher retained share under reinsurance affect future loss ratios and capital exposure.
- Investment portfolio credit quality, duration and sensitivity to interest rates and equity prices; distinguish recurring earnings from equity-security fair-value gains.
- Headquarters project cost and timing, future revolver borrowings, and liquidity after construction spending and continued growth.
- Capital and dilution effects of the 2019 equity offering, alongside dividend payments and returns on the newly raised capital.