Kinsale Capital Group, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Kinsale is a U.S. excess and surplus lines insurer focused on hard-to-place commercial and personal risks, distributed primarily through independent brokers.
Financial results and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Gross written premiums | $275.5 million | $223.2 million |
| Net written premiums | $235.6 million | $189.5 million |
| Net earned premiums | $212.7 million | $176.1 million |
| Total revenues | $222.1 million | $186.8 million |
| Net income | $33.8 million | $24.9 million |
| Diluted EPS | $1.56 | $1.16 |
| Net investment income | $15.7 million | $10.6 million |
| Net investment gains (losses) | $(6.3) million | $0.2 million |
| Operating cash flow | $104.0 million | $77.4 million |
| Cash and invested assets, at year-end | $643.1 million | $561.1 million |
| Stockholders’ equity, at year-end | $264.0 million | $238.2 million |
| Debt | No credit agreements outstanding | No credit agreements outstanding |
The 2018 loss ratio was 60.2% (58.9% in 2017), expense ratio 25.1% (unchanged), and combined ratio 85.3% (84.0%). A combined ratio below 100% indicates an underwriting profit. Return on equity was 13.5%, and management’s non-GAAP operating return on equity was 15.4%. The company paid $0.28 per share in dividends during 2018.
Fourth quarter: Gross written premiums were $72.2 million, total revenues $56.9 million, net income $4.4 million, and diluted EPS $0.20. In Q4 2017, the corresponding figures were $56.9 million, $50.7 million, $5.9 million, and $0.27.
Material changes and management commentary
- Gross written premiums rose 23.5% year over year, attributed mainly to higher broker submission activity across most lines. Net earned premiums increased 20.8%.
- Net income grew 35.7%, supported by business growth, lower net catastrophe losses, and a lower effective tax rate. Underwriting income increased 10.6% to $31.2 million.
- The combined ratio worsened by 1.3 percentage points. Lower catastrophe losses were more than offset in part by less favorable prior-year reserve development: favorable development was $7.0 million in 2018 versus $11.3 million in 2017.
- Net investment income increased 48.4%, while investment results included $6.6 million of unrealized equity-security losses. The company adopted ASU 2016-01, which moved unrealized equity-security gains and losses into net income; prior periods were not restated.
- The effective tax rate fell to approximately 16.5% from 35.4%, principally reflecting the Tax Cuts and Jobs Act’s reduction of the federal corporate rate to 21% beginning in 2018.
- Cash provided by operations was $104.0 million; investing activities used $106.5 million, and financing activities used $4.1 million. Management said liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months.
Outlook, risks, and unusual items
- No specific premium, earnings, or growth guidance is provided. Management states a long-term goal of achieving return on equity in the mid-teens and intends to pursue profitable E&S growth while maintaining underwriting discipline and a strong balance sheet.
- Loss-reserve adequacy is a key uncertainty: net unpaid losses and loss adjustment expense reserves were $313.8 million, of which 82.3% was IBNR. Management’s sensitivity analysis estimates that a 5% change in net IBNR would change reserves by $12.9 million.
- Other principal risks include catastrophe exposure, model uncertainty, competitive and cyclical E&S market conditions, broker concentration, reinsurance availability and counterparty risk, investment and interest-rate volatility, regulation, and cyber or technology disruption.
- Five reinsurers accounted for 92.7% of the net reinsurance receivable balance. Reinsurance does not relieve Kinsale of its obligations to policyholders. The company reported no allowance for uncollectible reinsurance.
- The investment portfolio was $643.1 million, with fixed maturities averaging an “AA” rating and 3.9-year duration. A hypothetical 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by 4.2%.
- Arkansas insurance law limits subsidiary dividends; up to $34.0 million could be paid to the holding company in 2019 without regulatory approval. The subsidiary paid $11.5 million to the parent in 2018.
- The company incorporated real-estate subsidiaries in December 2018 and reported costs related to a new headquarters development project. It purchased land during 2019 in anticipation of developing a new headquarters. No material litigation or off-balance-sheet arrangements were reported.
- Kinsale Insurance held an “A-” (Excellent) A.M. Best financial strength rating. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth is being achieved at adequate rates and with sustainable underwriting margins as the mix of business changes.
- How reserves develop, particularly long-tail casualty and occurrence claims, and whether favorable reserve development continues.
- The performance and valuation of equity, asset-backed, and mortgage-backed investments, including the effect of market rates and credit conditions.
- Reinsurance protection, recoverable concentration, counterparty quality, and the company’s net catastrophe exposure.
- Cash available at the holding company and the regulatory limits on upstream dividends, alongside the stated liquidity outlook.
- The effect of the accounting change for equity securities when comparing 2018 investment results with prior periods, and the sustainability of the lower tax rate.