Kinsale Capital Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020 unless otherwise noted. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, distributed primarily through independent brokers. Amounts below are in millions except per-share data and ratios.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Gross written premiums | $168.9 | $124.0 | +36.2% |
| Net written premiums | $144.3 | $108.1 | +33.5% |
| Net earned premiums | $123.0 | $89.8 | +37.1% |
| Total revenues | $138.3 | $80.3 | +$57.9 |
| Net income | $32.1 | $5.1 | +530.7% |
| Diluted EPS | $1.39 | $0.22 | — |
| Underwriting income (non-GAAP) | $24.6 | $14.4 | +70.6% |
| Net operating earnings (non-GAAP) | $25.5 | $17.2 | +48.1% |
| Net investment income | $6.9 | $6.0 | +16.5% |
| Operating cash flow | $91.3 | $59.7 | +$31.6 |
The loss ratio improved to 57.1% from 59.9%; the expense ratio improved to 22.9% from 24.0%; and the combined ratio improved to 80.0% from 83.9%. A combined ratio below 100% indicates an underwriting profit. The annualized operating return on equity was 17.6%, versus 17.1%.
Net income also reflected a $7.1 million gain from changes in equity-security fair value, compared with a $16.2 million loss in Q1 2020, and $1.2 million of realized investment gains. Other comprehensive loss was $19.6 million, largely from unrealized losses on available-for-sale fixed-maturity investments.
At March 31, 2021, total assets were $1.645 billion, including $1.240 billion of investments and $132.5 million of cash. Stockholders’ equity was $587.6 million, versus $576.2 million at year-end 2020. Unpaid-loss and loss-adjustment reserves were $688.8 million, up from $636.0 million at year-end. The company had $42.6 million outstanding on its $50 million revolving credit facility, at a 1.95% weighted-average rate; it reported compliance with covenants. Cash and cash equivalents increased $55.4 million during the quarter.
Material changes and management commentary
- Premium growth reflected higher broker submissions and rate increases across substantially all lines amid favorable E&S market conditions. Average premium per policy rose to approximately $9,800 from $9,200.
- Prior-year reserves developed favorably by $7.1 million, principally from the 2020 accident year as reported losses emerged below expectations; Q1 2020 favorable development was $3.0 million.
- Management attributed higher earnings to business growth, improved equity-market returns, and greater favorable reserve development. The prior-year comparison was also affected by pandemic-related market declines in equity values in Q1 2020.
- Management expected premium growth to continue through the remainder of 2021 and stated it believed liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months. This is not quantified earnings or EPS guidance.
Outlook, risks, and contingencies
- Management reported no material adverse effect on loss ratios from COVID-19 claims to date, but noted uncertainty about the pandemic and economic effects. It said policy terms would generally be expected to preclude virus-related claims in potentially exposed lines.
- Key disclosed risks include reserve-estimation uncertainty, catastrophe and severe-weather losses, reinsurance cost and availability or reinsurer nonpayment, changing E&S market conditions, competition, broker concentration, investment-market and interest-rate exposure, regulation, and the possibility of being forced to sell investments for liquidity.
- Management reported no credit losses on fixed-maturity securities with unrealized losses in Q1; it attributed those losses to interest rates or other market factors. The portfolio’s fixed maturities had an average rating of AA- and 4.3-year weighted-average duration.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to the risk factors in the 2020 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much future underwriting performance depends on continued rate increases, premium growth, and favorable E&S market conditions.
- Whether favorable prior-year reserve development persists, and how actual claims compare with estimates, particularly as the 2020 accident year matures.
- The sustainability of earnings excluding equity-security fair-value movements and realized investment gains; assess GAAP net income alongside the company’s non-GAAP underwriting and operating measures.
- Investment portfolio sensitivity to interest rates and equity markets, including the impact of unrealized fixed-income losses on accumulated other comprehensive income.
- Reinsurance recoverability and renewal terms, catastrophe exposure, and the remaining capacity and covenant terms of the revolving facility.