RICHMOND, Va., April 30, 2020 (GLOBE NEWSWIRE) -- Kinsale Capital Group, Inc. (NASDAQ:KNSL) reported net income of $5.1 million, $0.22 per diluted share, for the first quarter of 2020 compared to $18.7 million, $0.86 per diluted share, for the first quarter of 2019. Net operating earnings(1) were $17.2 million, $0.76 per diluted share, for the first quarter of 2020 compared to $13.8 million, $0.64 per diluted share, for the first quarter of 2019.
Highlights for the first quarter of 2020 included:
- Net income decreased by 72.8% compared to the first quarter of 2019, due to a decline in the fair value of equity securities resulting from the severe disruption in financial markets related to the COVID-19 pandemic
- Net operating earnings(1) of $17.2 million increased by 24.5% compared to the first quarter of 2019
- 46.6% growth in gross written premiums to $124.0 million compared to the first quarter of 2019
- 32.0% increase in net investment income to $6.0 million compared to the first quarter of 2019
- Underwriting income(2) of $14.4 million in the first quarter of 2020, resulting in a combined ratio of 83.9%
- 17.1% annualized operating return on equity(1) for the three months ended March 31, 2020
(1) Net operating earnings and annualized operating return on equity are non-GAAP financial measures. See discussion of "Non-GAAP Financial Measures" below.
“Kinsale achieved high levels of profit and growth in the first quarter of 2020 and proved again the strength and resiliency of the company's business model. Due to COVID-19 related restrictions, over 90% of Kinsale employees were working remotely by the end of the quarter with no loss in productivity or service levels. Premium was up 47% for the quarter and the combined ratio was just under 84%,” said President and Chief Executive Officer, Michael P. Kehoe.
Results of Operations
Underwriting Results
Gross written premiums were $124.0 million for the first quarter of 2020 compared to $84.6 million for the first quarter of 2019, an increase of 46.6%. The increase in gross written premiums during the first quarter of 2020 over the same period last year was due to higher submission activity from brokers and higher rates, resulting from continued favorable market conditions in the excess and surplus lines market.
Underwriting income(2) was $14.4 million, resulting in a combined ratio of 83.9%, for the first quarter of 2020, compared to $12.1 million and a combined ratio of 80.3% for the same period last year. The increase in underwriting income(2) for the first quarter of 2020 was due primarily to premium growth period over period, offset in part by lower favorable development on loss reserves from prior accident years. Loss and expense ratios were 59.9% and 24.0%, respectively, for the first quarter of 2020 compared to 54.9% and 25.4% for the first quarter of 2019. Results for the first quarter of 2020 and 2019 included favorable development on loss reserves from prior accident years of $3.0 million, or 3.3 points, and $6.4 million, or 10.4 points, respectively.
Summary of Operating Results
The Company’s operating results for the three months ended March 31, 2020 and 2019 are summarized as follows:
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| ($ in thousands) | |||||||
| Gross written premiums | $ | 124,036 | $ | 84,626 | |||
| Ceded written premiums | (15,983 | ) | (11,559 | ) | |||
| Net written premiums | $ | 108,053 | $ | 73,067 | |||
| Net earned premiums | $ | 89,761 | $ | 61,491 | |||
| Losses and loss adjustment expenses | 53,733 | 33,732 | |||||
| Underwriting, acquisition and insurance expenses | 21,583 | 15,616 | |||||
| Underwriting income(2) | $ | 14,445 | $ | 12,143 | |||
| Loss ratio | 59.9 | % | 54.9 | % | |||
| Expense ratio | 24.0 | % | 25.4 | % | |||
| Combined ratio | 83.9 | % | 80.3 | % | |||
| Annualized return on equity(3) | 5.0 | % | 27.1 | % | |||
| Annualized operating return on equity(4) | 17.1 | % | 20.0 | % | |||
| (2) Underwriting income is a non-GAAP financial measure. See discussion of "Non-GAAP Financial Measures" below. | |||||||
| (3) Annualized return on equity is net income expressed on an annualized basis as a percentage of average stockholders’ equity during the period. | |||||||
| (4) Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of stockholders’ equity during the period. See discussion of "Non-GAAP Financial Measures" below. | |||||||
The following table summarizes losses incurred for the current accident year and the development of prior accident years for the three months ended March 31, 2020 and 2019:
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||||||||
| Losses and Loss Adjustment Expenses | % of Earned Premiums | Losses and Loss Adjustment Expenses | % of Earned Premiums | ||||||||||
| Loss ratio: | ($ in thousands) | ||||||||||||
| Current accident year | $ | 56,671 | 63.1 | % | $ | 40,098 | 65.2 | % | |||||
| Current accident year - catastrophe losses | 71 | 0.1 | % | 30 | 0.1 | % | |||||||
| Effect of prior accident year development | (3,009 | ) | (3.3 | )% | (6,396 | ) | (10.4 | )% | |||||
| Total | $ | 53,733 | 59.9 | % | $ | 33,732 | 54.9 | % | |||||
Investment Results
The Company’s net investment income was $6.0 million in the first quarter of 2020 compared to $4.5 million in the first quarter of 2019, an increase of 32.0%. The Company’s investment portfolio, excluding cash and cash equivalents, had an annualized gross investment return(5) of 2.9% for the first quarter of 2020 compared to 3.2% for the first quarter of 2019. Funds are generally invested conservatively in high quality securities, including government agency, asset- and mortgage-backed securities, and municipal and corporate bonds with an average credit quality of "AA-." The weighted average duration of the fixed-maturity investment portfolio, including cash equivalents, was 4.7 years at March 31, 2020 and 4.3 years at December 31, 2019. Cash and invested assets totaled $955.0 million at March 31, 2020 compared to $908.2 million at December 31, 2019.
(5) Gross investment return is investment income from fixed-maturity and equity securities, before any deductions for fees and expenses, expressed as a percentage of average beginning and ending balances of those investments during the period.
Other
Total comprehensive (loss) income, which includes the change in after-tax unrealized gains and losses from the Company’s available-for-sale investments, was a loss of $4.1 million for the first quarter of 2020 compared to income of $25.5 million for the first quarter of 2019. The decline in total comprehensive income was due to lower fair values of the Company's investments resulting from the impact of the disruption in global financial markets beginning in March 2020 associated with the COVID-19 pandemic.
The effective tax rates for the first quarter of 2020 and 2019 were (1.1)% and 17.9%, respectively. In the first quarter of 2020, the effective tax rate was lower than the federal statutory rate of 21% primarily due to the tax benefits from stock options exercised and tax-exempt investment income in relation to pretax income. Pretax income in the first quarter of 2020 reflected a decline in the fair value of the Company's equity investment portfolio.
Stockholders' equity was $401.3 million at March 31, 2020, compared to $405.9 million at December 31, 2019. Annualized operating return on equity(4) was 17.1% for the first quarter of 2020, a decrease from 20.0% for the first quarter of 2019, which was attributable to the proceeds received from the Company's equity offering in the third quarter of 2019.
Non-GAAP Financial Measures
Net Operating Earnings
Net operating earnings is defined as net income excluding the effects of the net change in the fair value of equity securities, after taxes, and net realized gains and losses on investments, after taxes. Management believes the exclusion of these items provides a more useful comparison of the Company's underlying business performance from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.
For the three months ended March 31, 2020 and 2019, net income and diluted earnings per share reconcile to net operating earnings and diluted operating earnings per share as follows:
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| ($ in thousands, except per share data) | |||||||
| Net operating earnings: | |||||||
| Net income | $ | 5,086 | $ | 18,720 | |||
| Change in the fair value of equity securities, after taxes | 12,767 | (4,657 | ) | ||||
| Net realized gains on investments, after taxes | (613 | ) | (221 | ) | |||
| Net operating earnings | $ | 17,240 | $ | 13,842 | |||
| Diluted operating earnings per share: | |||||||
| Diluted earnings per share | $ | 0.22 | $ | 0.86 | |||
| Change in the fair value of equity securities, after taxes, per share | 0.56 | (0.21 | ) | ||||
| Net realized gains on investments, after taxes, per share | (0.03 | ) | (0.01 | ) | |||
| Diluted operating earnings per share(1) | $ | 0.76 | $ | 0.64 | |||
| Operating return on equity: | |||||||
| Average stockholders' equity(2) | $ | 403,607 | $ | 276,438 | |||
| Annualized return on equity(3) | 5.0 | % | 27.1 | % | |||
| Annualized operating return on equity(4) | 17.1 | % | 20.0 | % | |||
| (1) Diluted operating earnings per share may not add due to rounding. | |||||||
| (2) Computed by adding the total stockholders' equity as of the date indicated to the prior quarter-end or year-end total, as applicable, and dividing by two. | |||||||
| (3) Annualized return on equity is net income expressed on an annualized basis as a percentage of average stockholders’ equity during the period. | |||||||
| (4) Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of stockholders’ equity during the period. | |||||||
Underwriting Income
Underwriting income is defined as net income excluding net investment income, the net change in the fair value of equity securities, net realized gains and losses on investments, other income, other expenses and income tax expense. The Company uses underwriting income as an internal performance measure in the management of its operations because the Company believes it gives management and users of the Company's financial information useful insight into the Company's results of operations and underlying business performance. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.
For the three months ended March 31, 2020 and 2019, net income reconciles to underwriting income as follows:
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| (in thousands) | |||||||
| Net income | $ | 5,086 | $ | 18,720 | |||
| Income tax expense | (56 | ) | 4,081 | ||||
| Income before income taxes | 5,030 | 22,801 | |||||
| Other expenses | — | 36 | |||||
| Net investment income | (5,960 | ) | (4,515 | ) | |||
| Change in the fair value of equity securities | 16,161 | (5,895 | ) | ||||
| Net realized investment gains | (776 | ) | (280 | ) | |||
| Other income | (10 | ) | (4 | ) | |||
| Underwriting income | $ | 14,445 | $ | 12,143 | |||
Conference Call
Kinsale Capital Group will hold a conference call to discuss this press release on Friday, May 1, 2020, at 9:00 a.m. (Eastern Time). Members of the public may access the conference call by dialing (844) 239-5282, conference ID# 4841629, or via the Internet by going to www.kinsalecapitalgroup.com and clicking on the "Investor Relations" link. A replay of the call will be available on the website until the close of business on June 29, 2020.
Forward-Looking Statements
This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. In some cases, such forward-looking statements may be identified by terms such as "believe," "expect," "seek," "may," "will," "intend," "project," "plan," "estimate" or similar words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Although it is not possible to identify all of these risks and factors, they include, among others, the following: inadequate loss reserves to cover the Company's actual losses; inherent uncertainty of models resulting in actual losses that are materially different than the Company's estimates; adverse economic factors; a decline in the Company's financial strength rating; loss of one or more key executives; loss of a group of brokers that generate significant portions of the Company's business; failure of any of the loss limitations or exclusions the Company employs, or change in other claims or coverage issues; adverse performance of the Company's investment portfolio; adverse market conditions that affect its excess and surplus lines insurance operations; and other risks described in the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this release and the Company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
About Kinsale Capital Group, Inc.
Kinsale Capital Group, Inc. is a specialty insurance group headquartered in Richmond, Virginia, focusing on the excess and surplus lines market.
Contact
Kinsale Capital Group, Inc.
Bryan Petrucelli
Executive Vice President, Chief Financial Officer and Treasurer
804-289-1272
ir@kinsalecapitalgroup.com
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income and Comprehensive Income
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Revenues | (in thousands, except per share data) | ||||||
| Gross written premiums | $ | 124,036 | $ | 84,626 | |||
| Ceded written premiums | (15,983 | ) | (11,559 | ) | |||
| Net written premiums | 108,053 | 73,067 | |||||
| Change in unearned premiums | (18,292 | ) | (11,576 | ) | |||
| Net earned premiums | 89,761 | 61,491 | |||||
| Net investment income | 5,960 | 4,515 | |||||
| Change in the fair value of equity securities | (16,161 | ) | 5,895 | ||||
| Net realized investment gains | 776 | 280 | |||||
| Other income | 10 | 4 | |||||
| Total revenues | 80,346 | 72,185 | |||||
| Expenses | |||||||
| Losses and loss adjustment expenses | 53,733 | 33,732 | |||||
| Underwriting, acquisition and insurance expenses | 21,583 | 15,616 | |||||
| Other expenses | — | 36 | |||||
| Total expenses | 75,316 | 49,384 | |||||
| Income before income taxes | 5,030 | 22,801 | |||||
| Total income tax (benefit) expense | (56 | ) | 4,081 | ||||
| Net income | 5,086 | 18,720 | |||||
| Other comprehensive (loss) income | |||||||
| Change in unrealized (losses) gains on available-for-sale investments, net of taxes | (9,223 | ) | 6,780 | ||||
| Total comprehensive (loss) income | $ | (4,137 | ) | $ | 25,500 | ||
| Earnings per share: | |||||||
| Basic | $ | 0.23 | $ | 0.88 | |||
| Diluted | $ | 0.22 | $ | 0.86 | |||
| Weighted-average shares outstanding: | |||||||
| Basic | 22,109 | 21,169 | |||||
| Diluted | 22,678 | 21,763 | |||||
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
| March 31, 2020 | December 31, 2019 | ||||||
| Assets | (in thousands) | ||||||
| Investments: | |||||||
| Fixed-maturity securities at fair value | $ | 818,905 | $ | 729,532 | |||
| Equity securities at fair value | 83,566 | 78,294 | |||||
| Total investments | 902,471 | 807,826 | |||||
| Cash and cash equivalents | 52,554 | 100,408 | |||||
| Investment income due and accrued | 5,499 | 4,743 | |||||
| Premiums receivable, net | 42,187 | 34,483 | |||||
| Reinsurance recoverable | 71,422 | 72,574 | |||||
| Ceded unearned premiums | 18,112 | 16,118 | |||||
| Deferred policy acquisition costs, net of ceding commissions | 26,005 | 23,564 | |||||
| Intangible assets | 3,538 | 3,538 | |||||
| Deferred income tax asset, net | 9,869 | 3,374 | |||||
| Other assets | 33,832 | 23,922 | |||||
| Total assets | $ | 1,165,489 | $ | 1,090,550 | |||
| Liabilities & Stockholders' Equity | |||||||
| Liabilities: | |||||||
| Reserves for unpaid losses and loss adjustment expenses | $ | 491,333 | $ | 460,058 | |||
| Unearned premiums | 207,662 | 187,374 | |||||
| Payable to reinsurers | 10,658 | 7,151 | |||||
| Accounts payable and accrued expenses | 7,528 | 12,366 | |||||
| Credit facility | 24,075 | 16,744 | |||||
| Other liabilities | 22,899 | 977 | |||||
| Total liabilities | 764,155 | 684,670 | |||||
| Stockholders' equity | 401,334 | 405,880 | |||||
| Total liabilities and stockholders' equity | $ | 1,165,489 | $ | 1,090,550 | |||