Kinsale Capital Group, Inc. — Q3 2021 Form 10-Q
Business and period: Specialty insurer focused on U.S. excess and surplus lines, reported for the quarter and nine months ended September 30, 2021. Its portfolio is primarily casualty (86% of nine-month gross written premiums) and property (14%), distributed mainly through independent brokers.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Gross written premiums | $197.6m | $144.8m | $560.6m | $402.9m |
| Net earned premiums | $156.9m | $108.2m | $417.6m | $295.0m |
| Total revenues | $164.9m | $122.5m | $456.2m | $320.6m |
| Net income | $36.6m | $14.9m | $104.3m | $50.2m |
| Diluted EPS | $1.59 | $0.65 | $4.53 | $2.21 |
| Combined ratio | 75.7% | 97.3% | 78.1% | 88.8% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $301.9m | $206.5m |
Underwriting: Q3 loss and expense ratios were 55.7% and 20.0%; nine-month ratios were 56.7% and 21.4%. Underwriting income, a non-GAAP measure, was $38.1m for Q3 and $91.4m year to date. Nine-month net investment income was $22.5m; the equity securities fair-value change added $13.6m year to date, but reduced Q3 results by $1.0m.
Balance sheet and liquidity at September 30, 2021: Total assets were $1.899bn, including $1.495bn of investments and $90.0m of cash. Stockholders’ equity was $659.2m. Unpaid loss and loss-adjustment reserves were $814.9m; unearned premiums were $334.6m. Credit facility debt was $42.7m, net of issuance costs, at a weighted-average rate of 1.88%; the $50m facility matures in May 2024. The company reported compliance with its financial covenants. Management said liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months.
Material changes and management commentary
- Premium growth reflected stronger broker submissions and higher rates in favorable E&S market conditions. Gross written premiums rose 36.5% in Q3 and 39.1% year to date; net retention was 86.4% and 86.1%, respectively.
- Net income increased 146.0% in Q3 and 107.7% year to date. Management attributed the improvement mainly to premium growth, rate increases, lower catastrophe losses, and more favorable prior-year reserve development.
- Prior accident-year reserves developed favorably by $9.2m in Q3 and $25.4m year to date. Year-to-date favorable development included $28.9m from the 2020 accident year, partly offset by adverse development, mostly from 2015–2018 years. Management cited fewer COVID-related claims than previously allowed for and lower-than-expected reported losses across most lines.
- Year-to-date catastrophe losses were $8.8m, primarily from Hurricane Ida and Texas winter storms Uri and Viola, versus $17.1m in the prior-year period. Q3 catastrophe losses were $5.9m versus $16.7m.
- Cash from operations increased year over year. Investing activity used $280.1m, principally reflecting purchases of fixed-maturity securities; financing activity used $8.9m, including $7.5m of dividends paid. Cash and cash equivalents rose $12.9m from year-end 2020.
- Fixed-maturity securities had an average rating of AA- and weighted-average duration of 4.4 years; 80.3% were rated A- or better. The company recorded no credit losses on available-for-sale securities in the nine-month period. Unrealized investment losses reduced nine-month other comprehensive income by $16.1m.
Outlook, risks, and other items
Management expected premium growth to continue through the remainder of 2021, citing favorable E&S market conditions; the filing provides no quantified earnings or premium guidance. Management reported no material adverse effect on loss ratios from COVID-19 claims to date, but said ultimate pandemic and economic effects remained uncertain. It expects policy terms generally to preclude virus-related claims in potentially exposed lines.
Key risks include reserve-estimation uncertainty, catastrophe severity, reinsurance availability and counterparty performance, economic conditions and claims inflation, changing E&S market cycles, broker concentration, competition, regulation, and investment-market risks. Reinsurance does not discharge the company’s obligations to policyholders. Legal proceedings in the ordinary course were not expected to have a material adverse effect; the company reported no material changes to its previously disclosed risk factors and no material off-balance-sheet arrangements.
Investor verification priorities
- Assess whether favorable reserve development, particularly for the 2020 accident year, is sustainable and how future claims emergence may change reserve estimates.
- Verify whether premium growth and rate increases continue, and whether underwriting margins remain strong as the business mix and market cycle evolve.
- Review catastrophe exposure, reinsurance limits and retentions, reinsurer credit quality, and potential recoverables after major events.
- Monitor investment portfolio valuation and interest-rate/equity-market sensitivity, including unrealized losses and the effect on equity.
- Track operating cash flows, claims payments, debt utilization, and dividend capacity; management’s liquidity assessment is not a guarantee of future cash availability.
- When comparing results, distinguish GAAP net income from management’s non-GAAP underwriting income and net operating earnings.