Kinsale Capital Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise indicated.
Business context
Kinsale is a specialty insurer focused on U.S. excess and surplus lines, selling property and casualty coverage through independent brokers. For the first nine months of 2016, gross written premiums were 93.6% casualty and 6.4% property; personal lines represented 3.5% of gross written premiums. The company completed its IPO on August 2, 2016.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross written premiums | $47.8 | $45.8 | $141.0 | $131.8 |
| Net written premiums | $33.6 | $18.9 | $117.1 | $54.7 |
| Net earned premiums | $33.0 | $18.3 | $95.4 | $51.7 |
| Total revenues | $34.9 | $19.8 | $101.3 | $56.2 |
| Net income | $8.0 | $5.9 | $19.3 | $17.7 |
| Net investment income | $1.9 | $1.4 | $5.4 | $4.0 |
| GAAP combined ratio | 67.5% | 57.0% | 74.0% | 54.2% |
Q3 underwriting income, a non-GAAP measure, was $10.7 million versus $7.9 million; nine-month underwriting income was $24.8 million versus $23.7 million. Excluding the multi-line quota share treaty (MLQS), adjusted combined ratios were 71.8% and 77.3% for Q3 and nine months 2016, compared with 76.7% and 75.3% in the respective 2015 periods. The company reported Q3 common-stock EPS of $0.24; the IPO-related capital restructuring makes class-level year-over-year EPS comparisons less straightforward.
At September 30, total assets were $663.3 million, investments $416.8 million, cash and cash equivalents $103.8 million, and stockholders’ equity $209.9 million. Total liabilities were $453.4 million, including $253.5 million of gross unpaid loss and loss-adjustment reserves. The secured term loan was $27.2 million, due December 2020, with a variable rate based on three-month LIBOR plus a margin. Operating cash flow for the nine months was $56.6 million; cash increased $79.2 million to $103.8 million, largely reflecting $72.8 million of net IPO proceeds. The company paid $1.0 million in dividends and repaid $2.5 million of debt.
Material changes versus prior comparable periods
- Net written premiums rose sharply, chiefly because the MLQS ceding percentage was reduced from 40% to 15% effective January 1, 2016. The higher retention boosted net premiums but reduced ceding commissions, increasing reported underwriting expenses and making reported ratios less comparable with 2015.
- Gross written premiums increased 4.4% in Q3 and 7.0% year to date. Management attributed growth mainly to more policies, partly offset by lower average premium per policy.
- For the nine months, net income increased 9.2%, but return on equity declined to 15.9% from 23.3%, primarily reflecting the larger equity base after the IPO. Adjusted combined ratio increased to 77.3% from 75.3%.
- Prior-year reserve development was favorable by $8.9 million for the first nine months of 2016, mainly from casualty experience in accident years 2014 and 2015. The comparable 2015 period had $8.5 million of favorable development.
- The IPO issued 5.0 million primary shares at $16 per share; selling stockholders sold an additional 2.59 million shares. The company received approximately $72.8 million net. The former Class A and Class B capital structure was converted to one common-stock class.
Outlook, management commentary, and risks
- On October 1, 2016, after quarter-end, the company terminated and commuted the 2016 MLQS. Management said this should reduce ceded premiums relative to gross premiums in future periods; the commutation was expected to reduce reinsurance recoverables and funds held for reinsurers by approximately $15.5 million each.
- Management stated that available liquidity should cover operating needs, obligations, and committed capital expenditures for the next 12 months. It described a long-term goal of mid-teens return on equity; no specific near-term earnings or premium guidance was provided.
- Key exposures include underwriting and reserve-estimation uncertainty, catastrophe and other claims, reliance on reinsurers to honor recoveries, investment-market and interest-rate risk, and the ability to sustain the insurer’s A.M. Best A- financial-strength rating. Reinsurers were rated A or better, and no allowance for uncollectible reinsurance was recorded.
- The investment portfolio had a 3.0-year weighted-average duration and AA average rating. Management reported no other-than-temporary investment impairments. It reported no material change in market risk, no off-balance-sheet arrangements, and no significant change in previously disclosed risk factors. Ordinary-course legal proceedings were not expected to have a material adverse effect.
- Controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter. Interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How the October 1 MLQS termination affects retained risk, ceded premiums, ceding commissions, reported expenses, and future combined ratios.
- Whether favorable prior-year reserve development continues and how current accident-year loss experience develops, particularly in casualty lines.
- The quality and collectability of reinsurance recoverables, especially after the MLQS commutation, and the company’s exposure to large or catastrophe losses.
- How IPO proceeds are deployed, the effect of the expanded equity base on returns, and the company’s capacity to meet debt and dividend obligations.
- Whether premium growth and underwriting profitability can be sustained despite lower average premiums per policy and a low interest-rate environment.