Kinsale Capital Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report; the filing also provides unaudited fourth-quarter results. Kinsale is a U.S. excess and surplus lines property-and-casualty insurer focused on hard-to-place commercial and personal risks, primarily distributed through independent brokers.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Gross written premiums | $389.7 million | $275.5 million |
| Net earned premiums | $283.0 million | $212.7 million |
| Total revenues | $315.9 million | $222.1 million |
| Net income | $63.3 million | $33.8 million |
| Diluted earnings per share | $2.86 | $1.56 |
| Underwriting income (non-GAAP) | $43.2 million | $31.2 million |
| Loss / expense / combined ratio | 59.9% / 24.8% / 84.7% | 60.2% / 25.1% / 85.3% |
| Operating return on equity (non-GAAP) | 15.9% | 15.4% |
| Net investment income | $20.1 million | $15.7 million |
| Operating cash flow | $178.4 million | $104.0 million |
Gross written premiums rose 41.4%; net earned premiums increased 33.0%. Management attributed premium growth to higher broker submissions and better pricing, and growth was especially strong in commercial property. The combined ratio below 100% indicates an underwriting profit. Prior-year reserve development was favorable by $9.4 million in 2019, compared with $7.0 million in 2018.
Net income increased 87.4%. In addition to stronger underwriting and investment income, the change reflected a $12.4 million gain in the fair value of equity securities, versus a $6.6 million loss in 2018. Thus, GAAP earnings growth included market-driven investment effects; operating return on equity increased more modestly.
Fourth quarter, unaudited: Gross written premiums were $112.1 million, total revenues $92.8 million, net income $17.9 million and diluted EPS $0.79. In fourth-quarter 2018, the corresponding figures were $72.2 million, $56.9 million, $4.4 million and $0.20.
Balance sheet and liquidity: At year-end, cash and invested assets were $908.2 million, total assets $1.091 billion, total liabilities $684.7 million and stockholders’ equity $405.9 million. Gross loss and loss-adjustment-expense reserves were $460.1 million; net reserves were $390.3 million. Cash and cash equivalents were $100.4 million. Reported debt, net of issuance costs, was $16.7 million; gross facility borrowings were $17.3 million. The company reported $178.4 million of operating cash flow, $230.8 million of cash used in investing and $77.8 million of cash provided by financing. The $50 million revolving facility matures in 2024; Kinsale reported compliance with its covenants.
Material changes and notable items
- Net retention rose to 87.8% from 85.5%, primarily following higher retentions on reinsurance treaties renewed in June 2019.
- Cash and invested assets grew to $908.2 million from $643.1 million. The investment portfolio included $729.5 million of fixed maturities and $78.3 million of equity securities; equity fair-value changes flow through net income under the accounting standard adopted in 2018.
- Kinsale issued 741,750 shares in August 2019, receiving approximately $65.9 million net proceeds, and paid $6.9 million in dividends during the year.
- The company began construction of a new headquarters, estimated to cost $50–$55 million, with completion targeted for the third quarter of 2020. It expected to use operating cash flow and debt financing.
- Gross reserves were 82.2% IBNR; net reserves were 83.2% IBNR. A 5% change in net IBNR reserves would change reserves by approximately $16.2 million and net income by approximately $12.8 million, according to the filing.
Outlook, risks and contingencies
The filing gives no specific numerical earnings or premium guidance. Management said it intended to pursue profitable growth in the E&S market, maintain underwriting discipline and manage capital prudently. It cited favorable market conditions, increased submissions and pricing as contributors to 2019 growth, but cautioned that E&S markets are cyclical and competitive.
- Reserves and underwriting: Ultimate claims may differ materially from estimates, particularly for long-tail casualty and occurrence business. The auditor identified reserve estimation as a critical audit matter; Kinsale’s own disclosure highlights limited historical loss experience and substantial IBNR.
- Catastrophe and reinsurance: Severe weather, model uncertainty, reinsurance availability and counterparty performance could affect results. Reinsurance recoverables totaled $72.6 million, and five reinsurers represented 88.8% of the net reinsurance receivable balance; no reinsurance allowance was recorded.
- Distribution and concentration: The two largest brokers generated 22.6% of 2019 gross written premiums; the six largest generated 49.6%. Broker relationships and premium remittance are important exposures.
- Investments and liquidity: Interest-rate, credit, equity-market and mortgage prepayment risks can affect investment income and portfolio values. A 200-basis-point rate increase was estimated to reduce fixed-maturity fair value by 7.7% at year-end. Insurance regulations restrict subsidiary dividends; up to $40.7 million could be paid to the parent in 2020 without regulatory approval, subject to statutory conditions.
- Other risks: Competition, economic downturns, regulatory changes, cyber or technology disruption, and the ability to manage rapid growth may adversely affect results. The company reported no material litigation, no material off-balance-sheet arrangements, and no material contingencies expected to affect its financial condition or results.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that controls were effective as of December 31, 2019.
Important facts for investors to verify
- Whether favorable reserve development persists, and how long-tail casualty reserves develop against the company’s assumptions and independent actuarial estimates.
- Whether strong premium growth and pricing translate into sustainable underwriting profit as market conditions change; monitor loss, expense and combined ratios.
- The effect of higher net retention on catastrophe and large-loss exposure, and the collectability and concentration of reinsurance recoverables.
- How much 2019 earnings growth came from core underwriting and investment income versus equity-market fair-value gains.
- Final headquarters project cost, funding needs and debt outstanding, alongside statutory capital, dividend capacity and growth-related capital requirements.
- Broker concentration and the company’s ability to maintain its A.M. Best “A-” financial strength rating.