Kinsale Capital Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; fourth-quarter figures below are unaudited supplemental data. Financial statements are audited by KPMG, which issued an unqualified opinion.
Business context
Kinsale is a U.S. excess and surplus lines insurer focused on hard-to-place commercial and personal risks, distributed primarily through independent brokers. Casualty represented 93.7% of 2016 gross written premiums. The company completed its IPO in August 2016 and its shares began trading on Nasdaq in July.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Gross written premiums | $188.5 million | $177.0 million |
| Net earned premiums | $133.8 million | $74.3 million |
| Total revenues | $141.6 million | $80.6 million |
| Net income | $26.2 million | $22.3 million |
| Operating cash flow | $73.7 million | $78.7 million |
| Combined ratio | 74.3% | 60.6% |
| Adjusted combined ratio, excluding MLQS | 76.8% | 77.5% |
| Return on equity | 16.2% | 21.6% |
Net income increased 17.5%. Gross premiums grew 6.5%, while net earned premiums rose 80.0%, largely because Kinsale retained more risk as it reduced and then terminated its multi-line quota-share reinsurance agreement (MLQS). The reported combined ratio is affected by MLQS ceding commissions; the adjusted ratio provides a more comparable view of underwriting performance. Favorable prior-year loss development was $12.7 million in 2016, versus $9.2 million in 2015.
Fourth quarter: Gross written premiums were $47.5 million versus $45.2 million in fourth-quarter 2015; net income was $6.9 million versus $4.6 million.
Financial position, liquidity, and capital
- Cash and invested assets totaled $480.3 million at year-end, up from $368.7 million. Total assets were $614.4 million and stockholders’ equity was $210.2 million.
- Gross reserves for unpaid losses and loss adjustment expenses were $264.8 million; net reserves were $194.6 million. IBNR accounted for 81.6% of reserves.
- The company generated positive operating cash flow and reported $50.8 million of cash and cash equivalents at year-end. Management said liquidity was sufficient for operating needs and commitments over the next 12 months.
- The company received $72.8 million of net IPO proceeds, contributed $40 million to its insurance subsidiary, and repaid the remaining credit facility balance in December. No debt was outstanding at year-end.
- Statutory capital and surplus was $193.4 million. Up to $22.7 million could be distributed by the insurer to the holding company during 2017 without prior regulatory approval, subject to statutory limits and regulator discretion.
- Net investment income was $7.5 million, up from $5.6 million. The investment portfolio was primarily fixed maturities, with an average rating of AA and duration of 3.7 years.
Material changes and unusual items
- The MLQS ceding percentage fell to 15% at the start of 2016; the 2016 agreement was terminated and commuted effective October 1. The remaining 2015 MLQS was commuted effective January 1, 2017, leaving no MLQS contracts outstanding. Higher retention drove much of the increase in net premiums and changes in reported expense ratios.
- Net income included favorable development of prior-year reserves. Reserve estimates remain particularly consequential given the large IBNR share and the company’s relatively limited claims history.
- The IPO raised company proceeds of approximately $72.8 million. A December follow-on offering was entirely by selling stockholders, and Kinsale received no proceeds.
- The company recorded a $0.3 million impairment on a foreign-market ETF and $2.6 million of other expenses, including IPO and secondary-offering costs. It declared two 2016 dividends of $0.05 per share; a $0.06 dividend was declared in February 2017.
Outlook, commentary, and risks
No specific financial guidance was provided. Management’s stated long-term objective is a return on equity in the mid-teens, with continued profitable growth, underwriting discipline, and prudent capital management. The filing expects materially lower ceded premiums and lower MLQS ceding commissions in future periods following the commutations.
Principal risks include reserve inadequacy and the uncertainty of catastrophe and other risk models; exposure to severe weather; dependence on a concentrated broker network; reinsurance counterparty credit risk; competition and E&S market cycles; investment losses or interest-rate changes; regulatory limits on insurer dividends; and operational, cyber, and growth-management risks. Reinsurance recoverables on unpaid losses were $70.2 million at year-end; the company reported no allowance for uncollectible reinsurance.
Most important facts for investors to verify
- Whether reserve development remains favorable, and how actual claims emergence compares with assumptions; 81.6% of year-end reserves were IBNR.
- Whether underlying underwriting results remain strong after MLQS commutations, using adjusted—not only reported—combined and expense ratios.
- Whether premium growth and retention are sustainable without compromising pricing or increasing net catastrophe and casualty exposure.
- Reinsurer collectability and concentration, given substantial reinsurance balances and Kinsale’s continuing primary liability to policyholders.
- Capital deployment, insurer dividend capacity, and the effect of growth and investment-market changes on liquidity and returns.