Kinsale Capital Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The company is a U.S. excess and surplus lines property and casualty insurer operating through independent brokers. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Gross written premiums | $50.1 | $45.1 | $93.2 | $86.0 |
| Net written premiums | $35.7 | $18.8 | $83.5 | $35.8 |
| Net earned premiums | $31.8 | $17.0 | $62.4 | $33.5 |
| Total revenue | $33.7 | $18.6 | $66.4 | $36.4 |
| Underwriting income (non-GAAP) | $7.8 | $8.9 | $14.1 | $15.8 |
| Net income | $6.1 | $6.6 | $11.3 | $11.7 |
| Combined ratio | 75.3% | 47.6% | 77.4% | 52.7% |
| Adjusted combined ratio, excluding quota share treaty effects (non-GAAP) | 78.4% | 72.0% | 80.2% | 74.6% |
| Net investment income | $1.8 | $1.4 | $3.5 | $2.6 |
| Diluted EPS, Class A / Class B | $0.42 / $0.18 | $0.44 / $0.42 | $0.79 / $0.25 | $0.80 / $0.56 |
At June 30, 2016, total assets were $563.6 million, including $402.2 million of investments and $22.2 million of cash and cash equivalents. Total liabilities were $433.8 million; stockholders’ equity was $129.8 million. The balance sheet included $245.2 million of gross unpaid loss and loss adjustment expense reserves, with $75.5 million of reinsurance recoverables. Note payable was $29.7 million. Management said liquidity was sufficient for operating needs and obligations over the next 12 months.
For the first six months, operating cash flow was $36.5 million, investing cash flow was negative $38.7 million, and financing cash flow was negative $0.1 million; cash declined $2.3 million. The fixed-income portfolio had a 3.1-year weighted-average duration and an average rating of AA-. Unrealized investment gains increased equity by $5.0 million after tax during the first half.
Material changes and drivers
- Gross written premiums grew 11.1% in Q2 and 8.3% in the first half. Management attributed growth principally to more policies, partly offset by lower average premium per policy; construction and small business were notable growth lines.
- Net written and earned premiums increased much faster than gross premiums largely because the multi-line quota share (MLQS) ceding percentage fell from 40% to 15% effective January 1, 2016. Net retention was 71.2% in Q2 and 89.6% in the first half, versus 41.8% and 41.6% in the corresponding 2015 periods. Comparisons of reported underwriting ratios are materially affected by this change.
- Net income decreased 8.4% in Q2 and 3.5% in the first half. Underwriting income fell 12.1% and 11.0%, respectively. Excluding MLQS effects, adjusted combined ratios worsened to 78.4% in Q2 and 80.2% in the first half, compared with 72.0% and 74.6% a year earlier.
- Management cited lower favorable prior-year reserve development as a principal cause of weaker underwriting results. Favorable development was $5.4 million in the first half of 2016 versus $6.8 million in the 2015 comparison period; 2016 development was primarily in casualty accident years 2014 and 2015.
- Underwriting, acquisition and insurance expense was $12.7 million in the first half versus $0.4 million a year earlier, principally reflecting substantially lower ceding commissions following the treaty change. Other underwriting expenses rose 11.6%, mainly from increased employee compensation.
Outlook, risks and unusual items
- No quantified earnings or premium guidance is provided. Management’s long-term financial goal is return on equity of at least 15%; annualized ROE was 19.3% for Q2 and 18.6% for the first half, down from 26.2% and 24.0% in the prior-year periods.
- Management expected ceded premiums to decline relative to gross premiums and underwriting expenses to rise significantly in 2016 because of the lower MLQS ceding percentage. It said the 2016 treaty could be terminated and commuted following the IPO and intended to commute it on October 1, 2016.
- The company reported an August 2, 2016 IPO, after the reporting date: it issued 5.0 million shares and received approximately $72.4 million in net proceeds. Selling stockholders sold another 2.59 million shares; the company received no proceeds from those sales. A $0.05-per-share dividend was declared August 30, payable September 30 to holders of record September 15.
- Other post-quarter changes included conversion of the two prior common-stock classes into one class and grants of 1,036,916 stock options at the $16 IPO price, vesting in four annual installments.
- Key exposures include reserve estimation uncertainty, catastrophe and weather losses, reinsurance availability and counterparty collectability, investment interest-rate and equity-price risk, competition and insurance-market cycles, dependence on brokers and qualified personnel, and extensive insurance regulation. The insurer’s A.M. Best financial strength rating was A- (Excellent). The company reported no material off-balance-sheet arrangements and no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- How the reduced MLQS cession and planned treaty commutation affect retention, capital needs, reinsurance protection, ceding commissions and future reported ratios.
- Whether current and prior-year loss-reserve estimates develop as expected, particularly given the importance of favorable casualty reserve development.
- Premium growth and pricing trends: policy count rose while average premium per policy declined.
- Post-IPO share count, dilution from equity awards, use of the $72.4 million net proceeds, and the sustainability of dividends.
- Reinsurance recoverables and counterparty exposures, and the insurer’s ability to maintain its A- rating and regulatory capital position.