Attached files
| file | filename |
|---|---|
| 8-K - 8-K - Kinsale Capital Group, Inc. | knslform8-k2q2018.htm |
Exhibit 99.1
Kinsale Capital Group, Inc. Reports 2018 Second Quarter Results
Richmond, Va, August 6, 2018-Kinsale Capital Group, Inc. (NASDAQ:KNSL) reported net income of $10.1 million, $0.47 per diluted share, for the second quarter of 2018 compared to $8.5 million, $0.40 per diluted share, for the second quarter of 2017. Net income was $17.4 million, $0.80 per diluted share, for the first half of 2018 compared to $14.8 million, $0.69 per diluted share, for the first half of 2017.
Net operating earnings(1) were $9.9 million, $0.46 per diluted share, for the second quarter of 2018 compared to $8.5 million, $0.40 per diluted share, for the second quarter of 2017. Net operating earnings(1) were $18.1 million, $0.83 per diluted share, for the first half of 2018 compared to $14.8 million, $0.69 per diluted share, for the first half of 2017.
Highlights for the second quarter and first half of 2018 included:
• | Net income increased by 19.0% compared to the second quarter of 2017 |
• | Net operating earnings(1) increased by 16.8% compared to the second quarter of 2017 |
• | 21.2% growth in gross written premiums to $70.0 million compared to the second quarter of 2017 |
• | 55.5% increase in net investment income to $3.8 million compared to the second quarter of 2017 |
• | Underwriting income(1) of $8.4 million in the second quarter of 2018, resulting in a combined ratio of 83.5% |
• | 14.9% annualized operating return on equity(1) for the six months ended June 30, 2018 |
(1) See discussion of "Non-GAAP Financial Measures" below.
"We are encouraged by the 21.2% growth in premiums in the second quarter and are cautiously optimistic that top-line growth will remain strong during the latter half of the year. We achieved an annualized operating return on equity of 14.9% for the first half of 2018, and a combined ratio of 83.5% and underwriting income of $8.4 million for the quarter. We believe these results are a testament to our disciplined underwriting and claims handling, our technology and our low cost model,” said President and Chief Executive Officer, Michael P. Kehoe.
Results of Operations
Underwriting Results
Gross written premiums were $70.0 million for the three months ended June 30, 2018 compared to $57.8 million for the three months ended June 30, 2017, an increase of 21.2%. Gross written premiums were $133.8 million for the six months ended June 30, 2018 compared to $110.6 million for the six months ended June 30, 2017, an increase of 21.0%. The increase in gross written premiums during the second quarter and the first half of 2018 over the same periods last year was due to growth across most lines of business.
Underwriting income(2) was $8.4 million resulting in a combined ratio of 83.5% for the three months ended June 30, 2018, compared to $10.7 million resulting in a combined ratio of 75.2% for same period last year. The decrease in underwriting income (2) in the second quarter of 2018 compared to the second quarter of 2017 was principally due to both lower net favorable prior accident year loss reserve development and a
1
higher current accident year loss ratio, offset in part by higher net earned premiums. Net favorable development of loss reserves on prior accident years was $2.2 million in the second quarter of 2018, compared to $3.8 million in the second quarter of 2017. Loss and expense ratios were 58.9% and 24.6%, respectively, for the three months ended June 30, 2018 compared to 50.8% and 24.4% for the three months ended June 30, 2017.
Underwriting income(2) was $15.2 million for the six months ended June 30, 2018, resulting in a combined ratio of 84.7% compared to $17.7 million resulting in a combined ratio of 78.8% for same period last year. Loss and expense ratios were 59.5% and 25.2%, respectively, for the six months ended June 30, 2018 compared to 52.7% and 26.1%, respectively, for the six months ended June 30, 2017. The decrease in underwriting income(2) was principally the result of lower net favorable prior accident year loss reserve development during the first half of 2018 compared to the first half of 2017, offset in part by higher net earned premiums.
Summary of Underwriting Results
The Company’s underwriting results for the three and six months ended June 30, 2018 and 2017 are summarized as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
($ in thousands) | |||||||||||||||
Gross written premiums | $ | 69,981 | $ | 57,753 | $ | 133,828 | $ | 110,615 | |||||||
Ceded written premiums | (9,090 | ) | (7,980 | ) | (17,846 | ) | (16,680 | ) | |||||||
Net written premiums | $ | 60,891 | $ | 49,773 | $ | 115,982 | $ | 93,935 | |||||||
Net earned premiums | $ | 50,893 | $ | 43,052 | $ | 98,954 | $ | 83,485 | |||||||
Losses and loss adjustment expenses | 29,967 | 21,859 | 58,866 | 43,966 | |||||||||||
Underwriting, acquisition and insurance expenses | 12,519 | 10,492 | 24,917 | 21,786 | |||||||||||
Underwriting income (2) | $ | 8,407 | $ | 10,701 | $ | 15,171 | $ | 17,733 | |||||||
Loss ratio | 58.9 | % | 50.8 | % | 59.5 | % | 52.7 | % | |||||||
Expense ratio | 24.6 | % | 24.4 | % | 25.2 | % | 26.1 | % | |||||||
Combined ratio | 83.5 | % | 75.2 | % | 84.7 | % | 78.8 | % | |||||||
Annualized return on equity (3) | 16.6 | % | 15.4 | % | 14.3 | % | 13.5 | % | |||||||
Annualized operating return on equity (4) | 16.2 | % | 15.3 | % | 14.9 | % | 13.5 | % | |||||||
(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 beginning and ending stockholders’ equity during the period. |
(4) | Annualized operating return on equity is net operating earnings, a non-GAAP financial measure, expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See discussion of "Non-GAAP Financial Measures" below. |
2
The following tables summarize losses incurred for the current accident year and the development of prior accident years for the three and six months ended June 30, 2018 and 2017:
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | ||||||||||||
Losses and Loss Adjustment Expenses | % of Earned Premiums | Losses and Loss Adjustment Expenses | % of Earned Premiums | ||||||||||
Loss ratio: | ($ in thousands) | ||||||||||||
Current accident year | $ | 32,050 | 63.0 | % | $ | 25,651 | 59.6 | % | |||||
Current accident year - catastrophe losses | 156 | 0.3 | % | 40 | 0.1 | % | |||||||
Effect of prior accident year development | (2,239 | ) | (4.4 | )% | (3,832 | ) | (8.9 | )% | |||||
Total | $ | 29,967 | 58.9 | % | $ | 21,859 | 50.8 | % | |||||
Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | ||||||||||||
Losses and Loss Adjustment Expenses | % of Earned Premiums | Losses and Loss Adjustment Expenses | % of Earned Premiums | ||||||||||
Loss ratio: | ($ in thousands) | ||||||||||||
Current accident year | $ | 62,233 | 62.9 | % | $ | 52,788 | 63.3 | % | |||||
Current accident year - catastrophe losses | 156 | 0.2 | % | 114 | 0.1 | % | |||||||
Effect of prior accident year development | (3,523 | ) | (3.6 | )% | (8,936 | ) | (10.7 | )% | |||||
Total | $ | 58,866 | 59.5 | % | $ | 43,966 | 52.7 | % | |||||
Investment Results
The Company’s net investment income was $3.8 million in the second quarter of 2018 compared to $2.4 million in the second quarter of 2017, an increase of 55.5%. Net investment income was $7.0 million in the first half of 2018 compared to $4.7 million in the first half of 2017. The Company’s investment portfolio, excluding cash and cash equivalents, had an annualized gross investment return of 2.9% for the six months ended June 30, 2018 compared to 2.3% for the six months ended June 30, 2017. Funds are generally invested conservatively in high quality securities, including government agency, asset and mortgage-backed securities, 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 4.0 years at June 30, 2018 and 3.9 years at December 31, 2017. Cash and invested assets totaled $605.8 million at June 30, 2018 compared to $561.1 million at December 31, 2017.
Effective January 1, 2018, the Company adopted a new accounting standard, which prescribed several changes, including eliminating the available-for-sale classification of equity investments and requiring changes in unrealized gains and losses in the fair value of equity investments to be recognized in net income. For the first half of 2018, the Company recognized $0.9 million of unrealized losses, net of taxes, related to its equity portfolio in the consolidated statement of income.
Other
The effective tax rates for the six months ended June 30, 2018 and 2017 were 18.2% and 33.0%, respectively. The decrease in the effective tax rate for the six months ended June 30, 2018 compared to the prior-year period was attributable to the effect of the Tax Cuts and Jobs Act of 2017, which lowered the federal corporate tax rate from 35% to 21%, and the recognition of tax benefits from stock options exercised during the first half of 2018.
Total comprehensive income, which includes the change in after-tax unrealized gains and losses from the Company’s available-for-sale securities, was $9.1 million for the second quarter of 2018 compared to $10.7
3
million for the same period in 2017. Total comprehensive income was $11.5 million for the first half of 2018 compared to $18.0 million for the first half of 2017. The decline in total comprehensive income was principally due to an increase in unrealized losses during the second quarter and first half of 2018 related to lower fair values of Company's fixed-maturity investments, which was mostly attributable to a higher interest rate environment.
Stockholders' equity was $247.9 million at June 30, 2018, compared to $238.2 million at December 31, 2017. Annualized return on equity was 14.3% for the first six months of 2018, an increase from 13.5% for the first six months of 2017. The increase was principally due to the lower income tax rate resulting from the Tax Cuts and Jobs Act of 2017 and higher overall returns on the investment portfolio.
Non-GAAP Financial Measures
Net Operating Earnings
Net operating earnings excludes the impact of realized investment gains and losses and unrealized gains and losses on equity securities. Management believes the exclusion of these items provides a more useful comparison of the Company's underlying business performance from period to period. Net operating earnings and percentages or calculations using net operating earnings (e.g., diluted operating earnings per share and annualized operating return on equity) are non-GAAP financial measures. Net operating earnings should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define net operating earnings differently.
For the three and six months ended June 30, 2018 and 2017, net income and diluted earnings per share reconcile to net operating earnings and diluted operating earnings per share as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
($ in thousands) | ||||||||||||||||
Net operating earnings: | ||||||||||||||||
Net income | $ | 10,112 | $ | 8,495 | $ | 17,399 | $ | 14,776 | ||||||||
Net unrealized (gains) losses on equity securities, after taxes | (74 | ) | — | 936 | — | |||||||||||
Net realized (gains) losses on investments, after taxes | (137 | ) | (16 | ) | (226 | ) | 5 | |||||||||
Net operating earnings | $ | 9,901 | $ | 8,479 | $ | 18,109 | $ | 14,781 | ||||||||
Diluted operating earnings per share: | ||||||||||||||||
Diluted earnings per share | $ | 0.47 | $ | 0.40 | $ | 0.80 | $ | 0.69 | ||||||||
Net unrealized losses on equity securities, after taxes, per share | — | — | 0.04 | — | ||||||||||||
Net realized (gains) losses on investments, after taxes, per share | (0.01 | ) | — | (0.01 | ) | — | ||||||||||
Diluted operating earnings per share | $ | 0.46 | $ | 0.40 | $ | 0.83 | $ | 0.69 | ||||||||
Operating return on equity: | ||||||||||||||||
Average equity (1) | $ | 243,898 | $ | 221,258 | $ | 243,067 | $ | 218,130 | ||||||||
Annualized return on equity (2) | 16.6 | % | 15.4 | % | 14.3 | % | 13.5 | % | ||||||||
Annualized operating return on equity (3) | 16.2 | % | 15.3 | % | 14.9 | % | 13.5 | % | ||||||||
(1) | Computed by adding the total equity as of the date indicated to the prior quarter-end or year-end total, as applicable, and dividing by two. |
4
(2) | Annualized return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. |
(3) | Annualized operating return on equity is net operating earnings expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. |
Underwriting Income
Underwriting income is a non-GAAP financial measure that is useful in evaluating the Company's underwriting performance without regard to investment income. Underwriting income represents the pre-tax profitability of the Company's insurance operations and is derived by subtracting losses and loss adjustment expenses and underwriting, acquisition and insurance expenses from net earned premiums. 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 and six months ended June 30, 2018 and 2017, net income reconciles to underwriting income as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 10,112 | $ | 8,495 | $ | 17,399 | $ | 14,776 | ||||||||
Income tax expense | 2,349 | 4,260 | 3,877 | 7,265 | ||||||||||||
Income before income taxes | 12,461 | 12,755 | 21,276 | 22,041 | ||||||||||||
Other expenses | — | 402 | 14 | 402 | ||||||||||||
Net investment income | (3,782 | ) | (2,432 | ) | (7,011 | ) | (4,718 | ) | ||||||||
Net unrealized (gains) losses on equity securities | (94 | ) | — | 1,185 | — | |||||||||||
Net realized (gains) losses on investments | (174 | ) | (24 | ) | (286 | ) | 8 | |||||||||
Other income | (4 | ) | — | (7 | ) | — | ||||||||||
Underwriting income | $ | 8,407 | $ | 10,701 | $ | 15,171 | $ | 17,733 | ||||||||
Conference Call
Kinsale Capital Group will hold a conference call to discuss this press release on Tuesday, August 7, 2018, at 9:00 a.m. (Eastern Time). Members of the public may access the conference call by dialing (844) 239-5282, conference ID# 9999625, 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 October 5, 2018.
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; adverse economic factors; inherent uncertainty of models resulting in actual losses that are materially different than the Company's estimates; 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
5
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
Senior Vice President, Chief Financial Officer and Treasurer
804-289-1272
ir@kinsalecapitalgroup.com
6
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income and Comprehensive Income
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues | ||||||||||||||||
Gross written premiums | $ | 69,981 | $ | 57,753 | $ | 133,828 | $ | 110,615 | ||||||||
Ceded written premiums | (9,090 | ) | (7,980 | ) | (17,846 | ) | (16,680 | ) | ||||||||
Net written premiums | 60,891 | 49,773 | 115,982 | 93,935 | ||||||||||||
Change in unearned premiums | (9,998 | ) | (6,721 | ) | (17,028 | ) | (10,450 | ) | ||||||||
Net earned premiums | 50,893 | 43,052 | 98,954 | 83,485 | ||||||||||||
Net investment income | 3,782 | 2,432 | 7,011 | 4,718 | ||||||||||||
Net unrealized gains (losses) on equity securities | 94 | — | (1,185 | ) | — | |||||||||||
Net realized gains (losses) on investments | 174 | 24 | 286 | (8 | ) | |||||||||||
Other income | 4 | — | 7 | — | ||||||||||||
Total revenues | 54,947 | 45,508 | 105,073 | 88,195 | ||||||||||||
Expenses | ||||||||||||||||
Losses and loss adjustment expenses | 29,967 | 21,859 | 58,866 | 43,966 | ||||||||||||
Underwriting, acquisition and insurance expenses | 12,519 | 10,492 | 24,917 | 21,786 | ||||||||||||
Other expenses | — | 402 | 14 | 402 | ||||||||||||
Total expenses | 42,486 | 32,753 | 83,797 | 66,154 | ||||||||||||
Income before income taxes | 12,461 | 12,755 | 21,276 | 22,041 | ||||||||||||
Total income tax expense | 2,349 | 4,260 | 3,877 | 7,265 | ||||||||||||
Net income | 10,112 | 8,495 | 17,399 | 14,776 | ||||||||||||
Other comprehensive income | ||||||||||||||||
Change in unrealized (losses) gains on available-for-sale securities, net of taxes | (1,016 | ) | 2,174 | (5,872 | ) | 3,247 | ||||||||||
Total comprehensive income | $ | 9,096 | $ | 10,669 | $ | 11,527 | $ | 18,023 | ||||||||
Earnings per share - basic | $ | 0.48 | $ | 0.41 | $ | 0.83 | $ | 0.70 | ||||||||
Earnings per share - diluted | $ | 0.47 | $ | 0.40 | $ | 0.80 | $ | 0.69 | ||||||||
Weighted-average shares outstanding - basic | 21,070 | 20,969 | 21,058 | 20,969 | ||||||||||||
Weighted-average shares outstanding - diluted | 21,666 | 21,457 | 21,648 | 21,425 | ||||||||||||
7
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
June 30, 2018 | December 31, 2017 | |||||||
Assets | (in thousands) | |||||||
Investments: | ||||||||
Fixed-maturity securities at fair value | $ | 467,922 | $ | 425,191 | ||||
Equity securities at fair value | 58,219 | 54,132 | ||||||
Total investments | 526,141 | 479,323 | ||||||
Cash and cash equivalents | 79,670 | 81,747 | ||||||
Investment income due and accrued | 3,343 | 3,077 | ||||||
Premiums receivable, net | 24,023 | 19,787 | ||||||
Reinsurance recoverable | 54,436 | 49,593 | ||||||
Ceded unearned premiums | 14,463 | 13,858 | ||||||
Deferred policy acquisition costs, net of ceding commissions | 14,123 | 11,775 | ||||||
Intangible assets | 3,538 | 3,538 | ||||||
Deferred income tax asset, net | 5,073 | 2,492 | ||||||
Other assets | 4,093 | 2,659 | ||||||
Total assets | $ | 728,903 | $ | 667,849 | ||||
Liabilities & Stockholders' Equity | ||||||||
Liabilities: | ||||||||
Reserves for unpaid losses and loss adjustment expenses | $ | 344,565 | $ | 315,717 | ||||
Unearned premiums | 120,742 | 103,110 | ||||||
Payable to reinsurers | 3,711 | 3,226 | ||||||
Accounts payable and accrued expenses | 4,230 | 6,519 | ||||||
Other | 7,710 | 1,088 | ||||||
Total liabilities | 480,958 | 429,660 | ||||||
Stockholders' equity | 247,945 | 238,189 | ||||||
Total liabilities and stockholders' equity | $ | 728,903 | $ | 667,849 | ||||
8