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Kinsale Capital Group, Inc. Reports 2018 Fourth Quarter and Year-End Results

RICHMOND, Va., Feb. 21, 2019 (GLOBE NEWSWIRE) -- Kinsale Capital Group, Inc. (NASDAQ:KNSL) reported net income of $4.4 million, $0.20 per diluted share, for the fourth quarter of 2018 compared to $5.9 million, $0.27 per diluted share, for the fourth quarter of 2017. Net income was $33.8 million, $1.56 per diluted share, for the year ended December 31, 2018 compared to $24.9 million, $1.16 per diluted share, for the year ended December 31, 2017. In the fourth quarter and year ended 2018, net income included after-tax catastrophe losses of $4.1 million and $4.5 million, respectively, and after-tax unrealized losses on equity securities of $5.6 million and $5.2 million, respectively. In the fourth quarter and year ended 2017, net income included after-tax catastrophe losses of $0.5 million and $5.9 million, respectively. In addition, net income for the fourth quarter and full year of 2017 reflected a charge of $1.9 million for the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA).

Net operating earnings(1) were $10.1 million, $0.46 per diluted share, for the fourth quarter of 2018 compared to $7.8 million, $0.36 per diluted share, for the fourth quarter of 2017. Net operating earnings(1) were $38.7 million, $1.79 per diluted share, for the year ended 2018 compared to $26.7 million, $1.24 per diluted share, for the year ended 2017.

Highlights for the fourth quarter of 2018 included:

  • Net income decreased by 24.9% compared to the fourth quarter of 2017
  • Net operating earnings(1) of $10.1 million increased by 29.8% compared to the fourth quarter of 2017
  • 26.7% growth in gross written premiums to $72.2 million compared to the fourth quarter of 2017
  • 48.8% increase in net investment income to $4.6 million compared to the fourth quarter of 2017
  • Underwriting income(1) of $7.7 million in the fourth quarter of 2018, resulting in a combined ratio of 87.1%

Highlights for the full year of 2018 included:

  • Net income increased by 35.7% compared to the full year of 2017
  • Net operating earnings(1) of $38.7 million increased by 45.0% compared to the full year of 2017
  • 23.5% growth in gross written premiums to $275.5 million compared to the full year of 2017
  • 48.4% increase in net investment income to $15.7 million compared to the full year of 2017
  • Underwriting income(1) of $31.2 million for the full year of 2018, resulting in a combined ratio of 85.3%
  • 15.4% operating return on equity(1) for the year ended December 31, 2018

(1) See discussion of "Non-GAAP Financial Measures" below.

"The Kinsale strategy of combining disciplined underwriting with low costs delivered another quarter and year, respectively, of favorable results. Premiums increased by 27% in the fourth quarter, and for the full year, the company posted an 85.3% combined ratio and a 15.4% operating return on equity. Given these results and the current market opportunities, we are optimistic heading into 2019,” said President and Chief Executive Officer, Michael P. Kehoe.

Results of Operations

Underwriting Results

Gross written premiums were $72.2 million for the three months ended December 31, 2018 compared to $56.9 million for the three months ended December 31, 2017, an increase of 26.7%. Gross written premiums were $275.5 million for the year ended December 31, 2018 compared to $223.2 million for the year ended December 31, 2017, an increase of 23.5%. The increase in gross written premiums for the fourth quarter and the full year of 2018 over the same periods last year was due to strong growth across most lines of business.

Underwriting income(2) was $7.7 million, resulting in a combined ratio of 87.1%, for the fourth quarter of 2018, compared to $8.0 million, and a combined ratio of 83.1% for the same period last year. Loss and expense ratios were 62.4% and 24.7%, respectively, for the three months ended December 31, 2018 compared to 59.2% and 23.9% for the three months ended December 31, 2017. Results for the fourth quarter of 2018 included catastrophe losses, net of reinsurance, of $5.2 million, or 8.7 points, offset in part by favorable development on reserves from prior accident years of $1.3 million, or 2.2 points. Results for the fourth quarter of 2017 included catastrophe losses, net of reinsurance, of $0.8 million, or 1.8 points, and upward development on reserves from prior accident years of $0.6 million, or 1.1 points.

For the year ended December 31, 2018, underwriting income(2) was $31.2 million, resulting in a combined ratio of 85.3%, compared to $28.2 million, and a combined ratio of 84.0% for the prior year. Loss and expense ratios were 60.2% and 25.1%, respectively, for the year ended December 31, 2018 compared to 58.9% and 25.1%, respectively, for the year ended December 31, 2017. The loss ratios included 2.7 points and 5.1 points related to catastrophe losses, net of reinsurance, for the years ended December 31, 2018 and 2017, respectively. Favorable development on reserves from prior accident years was $7.0 million, or 3.3 points, for the year ended December 31, 2018 and $11.3 million, or 6.4 points, for the year ended December 31, 2017.

Summary of Operating Results

The Company’s operating results for the three months and year ended December 31, 2018 and 2017 are summarized as follows:

       
  Three Months Ended
December 31,
  Year Ended
 December 31,
  2018   2017   2018   2017
               
  ($ in thousands)
Gross written premiums $ 72,164     $ 56,943     $ 275,538     $ 223,191  
Ceded written premiums (10,476 )   (8,477 )   (39,924 )   (33,719 )
Net written premiums $ 61,688     $ 48,466     $ 235,614     $ 189,472  
               
Net earned premiums $ 59,438     $ 47,538     $ 212,688     $ 176,053  
Losses and loss adjustment expenses 37,090     28,146     128,041     103,680  
                       
Underwriting, acquisition and insurance expenses 14,658     11,371     53,425     44,146  
Underwriting income(2) $ 7,690     $ 8,021     $ 31,222     $ 28,227  
               
Loss ratio 62.4 %   59.2 %   60.2 %   58.9 %
Expense ratio 24.7 %   23.9 %   25.1 %   25.1 %
Combined ratio 87.1 %   83.1 %   85.3 %   84.0 %
               
Annualized return on equity(3) 6.8 %   10.1 %   13.5 %   11.1 %
Annualized operating return on equity(4) 15.5 %   13.2 %   15.4 %   11.9 %
                       

(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.

The following tables summarize losses incurred for the current accident year and the development of prior accident years for the three months and year ended December 31, 2018 and 2017:

       
  Three Months Ended
December 31, 2018
  Three Months Ended
December 31, 2017
  Losses and
Loss
Adjustment
Expenses
  % of Earned
Premiums
  Losses and
Loss
Adjustment
Expenses
  % of Earned
Premiums
               
Loss ratio: ($ in thousands)
Current accident year $ 33,231     55.9 %   $ 26,750     56.3 %
Current accident year - catastrophe losses 5,174     8.7 %   845     1.8 %
Effect of prior accident year development (1,315 )   (2.2 )%   551     1.1 %
Total $ 37,090     62.4 %   $ 28,146     59.2 %
                           


       
  Year Ended
 December 31, 2018
  Year Ended
 December 31, 2017
  Losses and
Loss
Adjustment
Expenses
  % of Earned
Premiums
  Losses and
Loss
Adjustment
Expenses
  % of Earned
Premiums
               
Loss ratio: ($ in thousands)
Current accident year $ 129,346     60.8 %   $ 105,958     60.2 %
Current accident year - catastrophe losses 5,732     2.7 %   9,002     5.1 %
Effect of prior accident year development (7,037 )   (3.3 )%   (11,280 )   (6.4 )%
Total $ 128,041     60.2 %   $ 103,680     58.9 %
                           

Investment Results

The Company’s net investment income was $4.6 million in the fourth quarter of 2018 compared to $3.1 million in the fourth quarter of 2017, an increase of 48.8%. Net investment income was $15.7 million for the full year of 2018 compared to $10.6 million for the full year of 2017. The Company’s investment portfolio, excluding cash and cash equivalents, had a gross investment return(5) of 3.0% for the year ended December 31, 2018 compared to 2.4% for the year ended December 31, 2017. Funds are generally invested conservatively in high quality securities, including government agency, mortgage-backed, 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 3.9 years at December 31, 2018 and December 31, 2017. Cash and invested assets totaled $643.1 million at December 31, 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 three months and year ended December 31, 2018, the Company recognized unrealized losses, net of taxes, related to its equity portfolio of $5.6 million and $5.2 million, respectively.

(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 income, which includes the change in after-tax unrealized gains and losses from the Company’s available-for-sale investments, was $28.3 million for the full year of 2018 compared to $31.3 million for the full year of 2017. The decline in total comprehensive income was principally due to an increase in unrealized losses during 2018 related to lower fair values of Company's fixed-maturity investments, which was mostly attributable to a higher interest rate environment, and the impact of the new accounting guidance.

Stockholders' equity was $264.0 million at December 31, 2018, compared to $238.2 million at December 31, 2017. Operating return on equity was 15.4% for the full year of 2018, an increase from 11.9% for the full year of 2017, which was attributable to growth in the business during the year and the benefits from a lower tax rate.

Effect of the Tax Cuts and Jobs Act of 2017

The TCJA was signed into law on December 22, 2017, which among other provisions, lowered the federal corporate tax rate from 35% to 21% and modified the manner in which property and casualty insurance loss reserves are computed for federal income tax purposes. U.S. GAAP required companies to recognize the effect of tax law changes in the period of enactment. As a result, the Company remeasured its deferred tax balances in the fourth quarter of 2017 to reflect the provisions under the TCJA. The re-measurement decreased the Company's net deferred tax asset and increased tax expense by $1.9 million, or $0.09 per diluted share, for the fourth quarter and full year of 2017.

The effective tax rate for the year ended December 31, 2018 was 16.5%. The effective tax rate was lower than the federal statutory rate due to the tax benefits from the exercise of stock options and from interest income generated by certain tax-advantaged investments.

Non-GAAP Financial Measures

Net Operating Earnings

Net operating earnings exclude the impact of realized investment gains and losses and unrealized gains and losses on equity securities, as well as the earnings impact of the deferred tax revaluation recognized resulting from the enactment of the TCJA in December 2017. 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 and year ended December 31, 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
December 31,
  Year Ended
 December 31,
  2018   2017   2018   2017
               
  ($ in thousands, except per share data)
Net operating earnings:              
Net income $ 4,448     $ 5,924     $ 33,787     $ 24,901  
Net unrealized losses on equity securities, after taxes 5,633         5,178      
Net realized gains on investments, after taxes (1 )   (75 )   (222 )   (98 )
TCJA charge     1,915         1,915  
Net operating earnings $ 10,080     $ 7,764     $ 38,743     $ 26,718  
               
Diluted operating earnings per share:              
Diluted earnings per share $ 0.20     $ 0.27     $ 1.56     $ 1.16  
Net unrealized losses on equity securities, after taxes, per share 0.26         0.24      
Net realized gains on investments, after taxes, per share         (0.01 )   (0.01 )
TCJA charge, per share     0.09         0.09  
Diluted operating earnings per share $ 0.46     $ 0.36     $ 1.79     $ 1.24  
               
Operating return on equity:              
Average equity(1) $ 260,946     $ 234,974     $ 251,088     $ 224,202  
Annualized return on equity(2) 6.8 %   10.1 %   13.5 %   11.1 %
Annualized operating return on equity(3) 15.5 %   13.2 %   15.4 %   11.9 %
                       

(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.

(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 months and year ended December 31, 2018 and 2017, net income reconciles to underwriting income as follows:

       
  Three Months Ended
December 31,
  Year Ended
 December 31,
  2018   2017   2018   2017
               
  (in thousands)
Net income $ 4,448     $ 5,924     $ 33,787     $ 24,901  
Income tax expense 661     5,301     6,693     13,620  
Income before income taxes 5,109     11,225     40,480     38,521  
Other expenses 47         168     429  
Net investment income (4,592 )   (3,086 )   (15,688 )   (10,569 )
Net unrealized losses on equity securities 7,130         6,555      
Net realized investment gains (1 )   (115 )   (281 )   (151 )
Other income (3 )   (3 )   (12 )   (3 )
Underwriting income $ 7,690     $ 8,021     $ 31,222     $ 28,227  
                               

Conference Call

Kinsale Capital Group will hold a conference call to discuss this press release on Friday, February 22, 2019, at 9:00 a.m. (Eastern Time). Members of the public may access the conference call by dialing (844) 239-5282, conference ID# 7095689, 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 April 22, 2019.

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 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

 
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income and Comprehensive Income
       
  Three Months Ended
December 31,
  Year Ended
December 31,
  2018   2017   2018   2017
               
Revenues (in thousands, except per share data)
Gross written premiums $ 72,164     $ 56,943     $ 275,538     $ 223,191  
Ceded written premiums (10,476 )   (8,477 )   (39,924 )   (33,719 )
Net written premiums 61,688     48,466     235,614     189,472  
Change in unearned premiums (2,250 )   (928 )   (22,926 )   (13,419 )
Net earned premiums 59,438     47,538     212,688     176,053  
               
Net investment income 4,592     3,086     15,688     10,569  
Net unrealized losses on equity securities (7,130 )       (6,555 )    
Net realized investment gains 1     115     281     151  
Other income 3     3     12     3  
Total revenues 56,904     50,742     222,114     186,776  
               
Expenses              
Losses and loss adjustment expenses 37,090     28,146     128,041     103,680  
Underwriting, acquisition and insurance expenses 14,658     11,371     53,425     44,146  
Other expenses 47         168     429  
Total expenses 51,795     39,517     181,634     148,255  
Income before income taxes 5,109     11,225     40,480     38,521  
Total income tax expense 661     5,301     6,693     13,620  
Net income 4,448     5,924     33,787     24,901  
               
Other comprehensive income              
Change in unrealized gains (losses) on available-for-sale investments, net of taxes 2,356     1,498     (5,469 )   6,384  
Total comprehensive income $ 6,804     $ 7,422     $ 28,318     $ 31,285  
               
Earnings per share:              
Earnings per share - basic $ 0.21     $ 0.28     $ 1.60     $ 1.19  
Earnings per share - diluted $ 0.20     $ 0.27     $ 1.56     $ 1.16  
               
Weighted-average shares outstanding:              
Weighted-average shares outstanding - basic 21,141     21,033     21,090     20,992  
Weighted-average shares outstanding - diluted 21,738     21,584     21,685     21,498  
                       


 
KINSALE CAPITAL GROUP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
       
  December 31, 2018   December 31, 2017
       
Assets (in thousands)
Investments:      
Fixed-maturity securities at fair value $ 510,251     $ 425,191  
Equity securities at fair value 57,711     54,132  
Total investments 567,962     479,323  
       
Cash and cash equivalents 75,089     81,747  
Investment income due and accrued 3,783     3,077  
Premiums receivable, net 24,253     19,787  
Reinsurance recoverable 56,788     49,593  
Ceded unearned premiums 16,072     13,858  
Deferred policy acquisition costs, net of ceding commissions 14,801     11,775  
Intangible assets 3,538     3,538  
Deferred income tax asset, net 7,176     2,492  
Other assets 3,601     2,659  
Total assets $ 773,063     $ 667,849  
       
Liabilities & Stockholders' Equity      
Liabilities:      
Reserves for unpaid losses and loss adjustment expenses $ 369,152     $ 315,717  
Unearned premiums 128,250     103,110  
Payable to reinsurers 4,565     3,226  
Accounts payable and accrued expenses 7,090     6,519  
Other liabilities 20     1,088  
Total liabilities 509,077     429,660  
       
Stockholders' equity 263,986     238,189  
Total liabilities and stockholders' equity $ 773,063     $ 667,849  
               

 

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Source: Kinsale Capital Group, Inc.