Kinsale Capital Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the same 2017 periods unless noted. Amounts are in U.S. dollars. Kinsale is a specialty insurer focused on the U.S. excess and surplus lines market, primarily distributing through independent brokers.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross written premiums | $69.5m | $55.6m | $203.4m | $166.2m |
| Net written premiums | $57.9m | $47.1m | $173.9m | $141.0m |
| Net earned premiums | $54.3m | $45.0m | $153.3m | $128.5m |
| Total revenue | $60.1m | $47.8m | $165.2m | $136.0m |
| Net investment income | $4.1m | $2.8m | $11.1m | $7.5m |
| Net income | $11.9m | $4.2m | $29.3m | $19.0m |
| Diluted EPS | $0.55 | $0.20 | $1.35 | $0.88 |
| Combined ratio | 84.6% | 94.5% | 84.6% | 84.3% |
Balance sheet, cash flow and capital
- At September 30, 2018, total assets were $770.5m, including $508.0m of fixed-maturity securities, $61.4m of equity securities and $64.7m of cash and cash equivalents. Total liabilities were $512.6m and stockholders’ equity was $257.9m.
- Cash from operating activities for the nine months was $78.4m, versus $64.5m in 2017. Investing activities used $92.5m, and financing activities used $2.9m. Cash declined $17.0m from year-end 2017 to $64.7m.
- Cash and invested assets totaled $634.2m. The filing reports no material off-balance-sheet arrangements. It does not provide a clear standalone debt balance or conventional liquidity ratio.
- Cash dividends paid during the nine months totaled $4.4m, or $0.21 per common share. Total stockholders’ equity increased from $238.2m at December 31, 2017.
Changes versus the prior comparable period
- Growth: Q3 gross written premiums rose 25.0%; nine-month premiums rose 22.3%. Management attributed growth mainly to higher broker submission activity across most business lines. Nine-month net retention increased to 85.5% from 84.8%.
- Quarterly underwriting: Q3 net income increased 184.2%, primarily as catastrophe losses fell. Q3 catastrophe losses were $0.4m before tax, compared with $8.0m; management reported after-tax catastrophe losses of $0.3m versus $5.2m. The Q3 loss ratio improved to 59.1% from 70.1%.
- Nine-month underwriting: The combined ratio was broadly stable at 84.6% versus 84.3%. The loss ratio rose to 59.3% from 58.8%, as lower catastrophe losses were more than offset by less favorable prior-year reserve development. Nine-month catastrophe losses were $0.6m versus $8.2m.
- Investments and taxes: Nine-month net investment income increased 48.3%, reflecting a larger portfolio, higher gross returns and dividends. The effective tax rate fell to 17.1% from 30.5%, mainly following the federal rate reduction under the Tax Cuts and Jobs Act (TCJA).
- Investment valuation: Fixed-maturity unrealized losses contributed to accumulated other comprehensive loss of $3.6m at September 30, versus accumulated other comprehensive income of $9.4m at year-end 2017. The filing attributed unrealized fixed-maturity losses to interest rates or other market factors, not issuer-specific credit issues.
Management commentary, outlook and risks
- Management said it believes available liquidity is sufficient for operating needs and committed capital expenditures for the next 12 months, and that premium receipts, investment income and investment proceeds can cover foreseeable cash outflows. This is management’s assessment, not formal earnings guidance; no specific financial forecast was provided.
- Prior-year reserves developed favorably by $5.7m in the first nine months of 2018, primarily from accident years 2016 and 2017, partly offset by $2.4m of adverse development from accident years 2011–2015. The comparable 2017 period had $11.8m of favorable development.
- Reinsurance recoverables on unpaid losses were $63.5m. Management reported all reinsurers were rated A (Excellent) or better by A.M. Best and no historical reinsurance uncollectibility losses. Reinsurance does not discharge Kinsale’s obligations to policyholders.
- Investment portfolio risks include interest-rate and equity-price exposure. Fixed maturities had a 4.0-year weighted-average duration; 86.3% were rated A- or better. The company reported no material changes in market risk from its 2017 Form 10-K.
- Accounting changes effective in 2018 require unrealized changes in equity securities to be recorded in net income; Q3 included $1.8m of such gains. The company also adopted the TCJA tax-effects reclassification standard. Its provisional accounting for certain TCJA loss-reserve tax effects remained subject to further guidance, with completion expected by the end of Q4 2018.
- A new general-ledger system was implemented during Q3, a material change in internal control over financial reporting. Management reported that disclosure controls were effective and described implementation testing and review procedures. Ordinary-course legal proceedings were not expected to have a material adverse effect; no material changes to risk factors were reported.
Important facts for investors to verify
- Whether premium growth and broker submission trends continue, and how changes in business mix affect average policy premiums and retention.
- Whether low catastrophe losses and favorable reserve development persist; review current-accident-year claims and reserve development by accident year.
- How much reported earnings depend on investment returns, equity-security fair-value gains and the accounting change recognizing those gains in net income.
- The quality and collectability of the $63.5m reinsurance recoverable, as well as reinsurer credit strength and the scope of catastrophe protection.
- Effects of interest rates and equity markets on investment income, portfolio fair values, accumulated other comprehensive income and capital.
- Final TCJA-related tax accounting and whether the new general-ledger system continues to operate effectively under financial-reporting controls.