Kinsale Capital Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. Kinsale is a specialty insurer focused on U.S. excess and surplus lines, distributing primarily through independent brokers. Casualty represented 92% of Q1 gross written premiums; property represented 8%.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Gross written premiums | $63.8 million | $52.9 million; up 20.8% |
| Net written premiums | $55.1 million | $44.2 million; up 24.7% |
| Net earned premiums | $48.1 million | $40.4 million; up 18.9% |
| Total revenues | $50.1 million | $42.7 million |
| Net income / diluted EPS | $7.3 million / $0.34 | $6.3 million / $0.29 |
| Underwriting income (non-GAAP) | $6.8 million | $7.0 million; down 3.8% |
| Loss / expense / combined ratio | 60.1% / 25.8% / 85.9% | 54.7% / 27.9% / 82.6% |
| Net investment income | $3.2 million | $2.3 million; up 41.3% |
| Operating cash flow | $21.4 million | $15.4 million |
Net income increased 16.0%, primarily because of a lower effective tax rate and higher investment income; this was partly offset by $1.3 million of unrealized equity investment losses recorded in earnings. The effective tax rate was 17.3%, versus 32.4%, reflecting the Tax Cuts and Jobs Act and tax benefits from exercised stock options. Annualized return on equity was 12.2%, compared with 11.8%.
Financial position and liquidity
- Total assets were $687.8 million and stockholders’ equity was $239.9 million. Cash and cash equivalents were $56.7 million; investments totaled $517.6 million, including $462.5 million of fixed maturities and $55.1 million of equity securities.
- Unpaid loss and loss adjustment expense reserves were $328.2 million; unearned premiums were $110.4 million. Reinsurance recoverables were $50.7 million.
- Cash declined $25.1 million during the quarter, to $56.7 million, primarily as investing activity used $45.6 million, including purchases of $82.6 million of fixed-maturity securities. Financing used $0.9 million, including $1.5 million of dividends paid.
- Management stated that liquidity was sufficient for operating needs and obligations over the next 12 months. No debt balance is identified in the supplied balance sheet.
- Fixed-maturity securities had an average rating of AA and weighted-average duration of 4.1 years. The insurer’s A.M. Best financial strength rating was A-.
Material changes and management commentary
- Premium growth was broad-based. Net retention rose to 86.3% from 83.5%, reflecting increased retention under the excess casualty treaty and a change in business mix. Average premium per policy declined to approximately $8,000 from $8,600 due to mix.
- The loss ratio increased mainly because prior-year favorable reserve development was lower: $1.3 million in Q1 2018 versus $5.1 million in Q1 2017. Q1 2018 development included favorable effects from the 2017 and 2016 accident years, partly offset by adverse development in 2011–2015. Current-year catastrophe losses were zero, versus $0.1 million in Q1 2017.
- The expense ratio improved as earned premiums grew faster than other underwriting expenses, which management attributed partly to cost control. The combined ratio nevertheless rose to 85.9% from 82.6%.
- Investment income increased with a larger portfolio and higher gross investment return. Adoption of ASU 2016-01 moved equity-security fair-value changes into earnings; the company recorded $1.3 million of unrealized equity losses in Q1. Fixed-maturity unrealized losses were reflected in other comprehensive income, contributing to a $4.9 million comprehensive loss component and reducing accumulated other comprehensive income.
- The company adopted ASU 2018-02 early, reclassifying $1.3 million of stranded tax effects from accumulated other comprehensive income to retained earnings. The TCJA’s loss-reserve tax transition accounting remained provisional pending further Treasury guidance; no Q1 measurement adjustment was recorded.
Outlook, risks, and contingencies
The filing provides no specific earnings or premium guidance. Management’s stated long-term goal is mid-teens or higher return on equity; it cautions that interim results are not necessarily indicative of full-year results. Principal exposures discussed include insurance claims and reserve-estimation uncertainty, reinsurance counterparty performance, interest-rate and equity-price risk, and changes in legal, regulatory, wage, and medical-cost conditions. Reinsurance does not relieve Kinsale of its obligations to policyholders; all counterparties were rated A or better by A.M. Best, and the company reported no historical loss from uncollectible reinsurance. Management reported no material off-balance-sheet arrangements, no material change in risk factors, and ordinary-course legal proceedings not expected to have a material adverse effect.
Important facts for investors to verify
- Whether premium growth and the higher net retention level persist without weakening underwriting quality.
- How loss reserves develop, particularly the older accident years with adverse development and the dependence of results on favorable prior-year development.
- Whether investment portfolio growth, interest-rate exposure, and equity-market volatility affect investment income, earnings, or book value.
- Any updates to provisional TCJA tax accounting and the effect of tax benefits on reported earnings.
- Liquidity, reinsurance recoverability, and the insurer’s capital and financial-strength position as the business grows.