Kinsale Capital Group Q1 2023 Earnings Call Transcript

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April 28, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinsale Capital Group First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

Before we get started, let me remind everyone that through the course of the teleconference, Kinsale's management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward looking statements are subject to certain risk factors, which could cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including the 2022 Annual Report on Form 10 ks, which should be reviewed carefully, the company has furnished a Form 8 ks with the Securities and Exchange Commission that contains the press release announcing its Q1 results. Kinsale's management may also reference certain non GAAP financial measures in the call today. A reconciliation of GAAP to these measures can be found in the press release, which is available at the company's website at www dotkinsalecapitalgroup.com.

Operator

I will now turn the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We will follow our familiar format for today's call, we're in Brian Petrucelli, Kinsale's CFO and Brian Haney, Kinsale's COO and I will each make a few comments, and then we'll move on to any questions you may have. In the Q1 2023, Kinsale's operating earnings per share increased by 50% and gross written premium grew by 46% over the Q1 of 2022. The company posted a 78% combined ratio for the quarter and an operating return on equity of 29%. These favorable results are being driven by the Kinsale business strategy of disciplined E and S underwriting and technology enabled low costs, which allow us to generate attractive returns and to take market share from competitors at the same time.

Speaker 1

Adding to the Kinsale results of the overall favorable P and C market conditions with a strong and steady flow of business into the E and S market from the standard market, which allows us to expand margins and accelerate growth at the same time as we have been doing for several years now. The commercial property market continues to be an area of opportunity and rapid growth for Kinsale. As we discussed last quarter, we balanced the expected strong returns on the property business we write with a variety of controls we will limit the increase in volatility. Specifically, we restrict the concentration of business geographically. We model our portfolio regularly.

Speaker 1

We manage our individual policy limits very carefully, and we we will now begin the call to provide a brief update on our financial and personal lines property premium amounted to 26% of our net written premium volume in the Q1, the property premium subject to any material hurricane exposure it's just over 10% of Kinsale's total premium. Further, our expected losses relative to operating income in the event of a major storm have not materially changed even with the considerable growth in premium. Part of achieving long term In the P and C business is to consistently establish conservative estimates for future losses. Kinsale has done just that over the years and we continue to do so, setting up reserves for future claims that we believe are more than adequate, creating the likelihood that those reserves develop favorably over time. In a period of time with heightened inflation, such an approach is even more important.

Speaker 1

And as a consequence, investors should continue to maintain a high level of confidence in Kinsale's reserve position and overall balance sheet. Finally, our overall view of the E and S market continues to be positive. The property market in particular is in a state of distress, while the casualty market is more orderly and subject to more competition, it still allows for positive rate increases and strong premium growth. We are optimistic for the balance of 2023, we have a rising sense of optimism about next year. That being said, we also believe our business model of disciplined underwriting in technology driven low costs, we'll allow Kinsale to deliver best in class returns and to take market share even when the competition increases at some point in the future.

Speaker 1

In a more competitive market, Kinsale we'll continue to deliver strong returns, but our current growth rate will give way to something more modest, perhaps in the low to mid teens. With that, I'll turn the call over to Brian Petrucelli.

Speaker 2

Thanks, Mike. Again, just a really strong quarter for all the reasons that Mike just mentioned. With 46% growth in written premium and net and operating income increasing by 76% 51%, respectively, the 78.2% combined ratio for the quarter included 3.8 points from net favorable prior year loss reserve development compared to 4.7 points last year with less than a point from cat losses in either period. Most of the improvement in the quarterly expense ratio of 19.6% compared to 21.6% in the Q1 of last year related to ceding commissions for the company's casualty and commercial property proportional reinsurance agreements and is also in line with our 19.9% expense ratio in the Q4 of last year. On the investment side, net investment income increased by 128 we are pleased to report that we are making progress in the investment portfolio and higher interest rates with a gross return of 3.7% for the quarter compared to 2.5% last year.

Speaker 2

We continue to monitor Fed actions and any related impact on inflation and interest rates and given the current inverted yield curve, we're continuing to invest new money in the shorter duration securities with new money yields averaging close to 5% during the quarter and our duration decreasing slightly to 3.4 years, down from 3.5 years at the end of last year. We did have a preferred stock position in SPB Bank I recognize the $4,000,000 unrealized loss on the sale of that security during the quarter. Book value was positively impacted in the Q1 from a combination of net income and an increase in the fair value of our fixed income securities during the quarter. Notwithstanding the positive Q1 movements, our fixed income portfolio continues to be an overall unrealized loss position resulting from the higher interest rates or so over the past year or so. The company continues to generate strong positive operating cash flows, which gives us the ability to hold these securities to maturity the higher interest rate environment allows us to invest new money at better yields that I just touched on.

Speaker 2

As it relates to capital, we continuously monitor our needs as market conditions change. Given the continued favorable market conditions and related premium growth, there's always the possibility that we'll need additional supporting capital. The support could come in the form of debt or equity, we're the bias towards debt given our current modest debt to capital position and with any decisions to be made in the second half of the year consistent with our historical approach. And lastly, diluted operating earnings per share continues to improve it was $2.44 per share for the quarter compared to $1.63 per share last year. And with that, I'll pass it over to Brian Haney.

Speaker 3

Thanks, Brian. As mentioned earlier, premium grew 46% in the Q1, consistent with the last several quarters and representing a continuation of the previous 4 years where we averaged just over 40% growth annually. Overall, the E and S market remains favorable with strong growth across most of our product line. The property market continues to be hard and in the wake of Hurricane Ian, the contraction in industry capacity is continuing. In addition to our commercial property division, we are seeing continued strong growth in our inland marine book as well as across most of our casualty divisions.

Speaker 3

Our Energy, General Casualty and Entertainment divisions, in particular, continue to grow at a significant pace. There are some pockets of business that are more competitive and flat or slower growing, such as management liability and products liability.

Speaker 1

I want

Speaker 3

to speak for a moment about the property market in particular. The last few years, the industry has experienced some significant losses. 5 of the top 10 costliest natural catastrophes in U. S. History have happened in the last 6 years, and 2 of the top 3 have occurred in the last 2 years.

Speaker 3

This has resulted in carriers dramatically pulling back, cutting capacity and raising rates. It has presented a historic opportunity for because we came through that same period with record profitability. So now we have the ability to write business at extraordinary rates and terms. The current property the current market and property is as hard as we've ever seen and the rates and terms are as good as we've ever seen. As Mike said, we are mindful of volatility and so we carefully manage and limit our accumulation of aggregate insured value in order to keep our volatility within acceptable bounds.

Speaker 3

Submission growth continues to be strong in the low 20% range, which represents a modest acceleration from the previous quarter, but generally consistent with most of 2022. As a reminder, we view submissions as a leading indicator of growth, so that submission growth rate is a positive signal for our market opportunity. We sell a wide array of products and the rates in those products do not move in lockstep. But if we boil that all down to one number, we see real rates being up a little over 7% in the aggregate during the 4th Q1, a very slight improvement over the 4th quarter. The property market is certainly boosting that number.

Speaker 3

The rate changes for property would be well higher than the average. The rate changes for casualty divisions would vary greatly, but overall it will be less than the average, but still positive, which indicates that the combination of rate changes and premium trend are exceeding loss cost trend. It's important to stress that rate change and rate adequacy are 2 different things. As our results demonstrate, our rates are more than adequate. We are continually reviewing these rates and adjusting them based on a number of considerations, such as our target combined ratio, our target return on equity, the market opportunity and shifts in the competition.

Speaker 3

It's also important to note that we've been getting rate increases in excess of trend for several years now. We feel the business we are putting on the books today has the best rate adequacy we've seen in our history. We do continue to keep an eye on inflation. We feel we're in a good position, but we monitor the situation continuously and make adjustments as necessary. The market conditions, as I've said, are generally favorable across the board.

Speaker 3

For the most part, we see competitors either retrenching or behaving in a stable, rational manner. There are a few new market entrants, particularly among MGAs and fronting deals that are offering wide open coverage and prices too cheap for their carriers to hope to make any return. This phenomenon isn't impacting our market opportunity at the moment, and we believe economic reality will eventually catch up with those competitors. When it does, there will be further market dislocation and opportunity for the rational actors, and that ultimately will be good news for Contrail. Overall, clearly a good quarter, and we are happy with the results.

Speaker 3

And with that, I'll hand it back over to Mike.

Speaker 1

Thanks, Brian. Operator, we're now ready for any questions in the queue.

Operator

Your first question is from the line of Mark Hughes with Truist. Your line is open.

Speaker 4

Yes. Thank you. Good morning.

Speaker 1

Good morning, Mark.

Speaker 4

Mike, you have in the past referred to some commentary about the inflation and the impact on loss development among competitors, I think you have alluded to kind of reinsurers speculating about loss development being more severe than expected. Any update on that? How do you see the impact of inflation on your competitors? And what does that mean for growth in E and S market?

Speaker 5

Well, I think

Speaker 1

on your longer tailwinds, They're the most exposed to the increase in inflation. I think we've seen it in our own a book of business where building supplies have gone up in price, labor costs have gone up in price. And a claim that may have been settled 2 or 3 years ago for 100,000 is probably being settled for considerably higher number today. We always like to belabor the fact that it's a very fundamental part of our business strategy to set conservative reserves for future claims. And I think that conservatism gives us some insulation.

Speaker 1

Clearly, if you go back to the for Kinsale, the 15 through 19 years, yes, inflation has impacted those years. I think all those years have developed favorably on an inception to date basis, it has eroded the conservatism a little bit. Given the rate increases that Brian mentioned from 20 in 2020, 2021, 2022 and now 2023, we think we're in a great position in terms of conservatism overall, But it does have an impact. And it's going to impact all of our competitors the same way. Not every company takes the same conservative approach to reserving.

Speaker 1

So the more optimistic a company is at the beginning of that process, I think the more painful the inflation can be, but I think the net takeaway is it should extend the favorable pricing environment for the E and S market.

Speaker 4

And on construction, refresh me how much of your book may be exposed to construction? What do you think about the potential slowdown related to the banking crisis, are you seeing anything like that, any early signs?

Speaker 1

No, I think we're seeing good growth in construction. It's about 25% of our business if you include everything under that broad umbrella. So I mean that could include commercial and residential contractors. It can Include home repair businesses, janitorial, landscaping, all sorts of things fit under that umbrella. But Yes, that's a bread and butter E and S class for the industry and it is for Kinsale as well.

Speaker 1

I think we're seeing good growth across all our casualty lines at the moment, with the two exceptions that Brian talked about, management liability in particular.

Speaker 4

Okay. And then one other question, Brian Petrucelli, the ceded premium ratio with property increasing, actually, I think we're down a little bit sequentially this quarter, what do you think a good run rate for 2023 would be on CD premium ratio?

Speaker 2

I think, Mark, looking at what we have for the Q1 is probably a good indicator of what we have going forward. That is going to change depending on the mix of business, we talked about that in the past. But I think if you're trying to put something in the model, think looking at what we did for the Q1 is as good of an indicator as I can give you.

Speaker 4

Very good. Thank you.

Speaker 1

Thanks Mark.

Operator

Your next question is from the line of Pablo Singzon with JPMorgan. Your line is open.

Speaker 6

Good morning. Mike, you mentioned that expected cash fee losses as a percentage of operating income have not Change even with property your writing is going up. Can you help quantify that a bit? And I'd leave it to you how to do it, whether it's percentage of premiums or earnings or is there any numbers around that expectation?

Speaker 1

Well, I think the best way to look at that, because it gets into a very technical array of numbers. When you look at a probable maximum loss curve across a variety of different return periods, but if you look at Kinsale's experience now over 5, 7, 9 years, every major storm, when there's a major storm, we have losses, but they're very manageable in terms of maybe look at the Q3 of last year as an example. Our run rate on combined ratios, I think, was in the 70s in the Q3 when we had some losses related to Hurricane Ian, the combined ratio ticked up into the low 80s, Right. So that's generally how we're trying to manage the volatility. We see a tremendous opportunity in the property business At the moment, as Brian said, we've never seen a more favorable market for the risk there.

Speaker 1

And so we want to take advantage of that. Well, we're also mindful of the volatility. And so all the things we've done over the years to balance the return prospects Against the volatility, we continue to do that. That's kind of the message we wanted to convey. But we don't have a specific number to give you could boil everything down to one statistic.

Speaker 6

Understood. That was helpful context, Mike. And then The second question, I just wanted to follow-up on your comment and this is something new that you've said, right? You said this before, but longer term you think growth for consensus in the low to mid teens. I guess the question around that is based on your experience of fat cycles in the market, how do you see that normalization playing out, right?

Speaker 6

Do you think there's going to be a steep decline to that more run rate level or do you think the process it will be more gradual maybe even over a couple of years.

Speaker 1

I think it could be gradual over a couple of years. As I said in my comments, we're very optimistic today. I mean, we just we've been growing at an extraordinary rate now for 4 years. The distress in the property market, I don't think will go away anytime soon. Inflation has an impact on the industry's reserve position, so that has yet to manifest itself.

Speaker 1

We continue to have a very dynamic tort system in the United States, which of course is a challenge for the industry. So there's a lot of reasons, I think, for the market to continue to be favorable. It's just a recognition that a 40% or 46% top line growth in a mature industry like insurance is extraordinary. And at some point in the future, it will abate somewhat. But beyond that, we think our business model is a little bit unique and it should allow us to continue to grow at a very healthy rate and take market share even in a more competitive environment.

Speaker 6

Understood. And then the last one for me is for Brian Haney. Apologies if I missed this, but you had mentioned something about MGAs and funding companies. I'm not sure if you referenced a specific line of business, but could you talk to, I guess, where these entities are overrepresented and maybe those entities having a negative impact on pricing and market dynamics? Apologies if I missed it, but I didn't hear specific lines associated with those.

Speaker 3

No, no, I didn't mention it. But I would say in management liability, it's probably one way you're going to see them in professional liability. They're going to be more common. They definitely tend to focus on large deals, which is why it's not having that big of an impact on us. So if you've heard market commentary from some of our competitors about what's going on in, let's say, D and O, right?

Speaker 3

That's going to be going on in the large public company D and M space, which we're not in. So that would be the line the lines we would tend to see them in. Thank you. You always see cyber, but we don't really write cyber.

Speaker 6

And then property, sorry, are they less common in property, sort of like the syndicate deals or?

Speaker 3

Yes, I would say with the market the way it is now in property, yes, they're less common. Like right now, you wouldn't have to you use MGAs to write a lot of business in property, but they certainly are in that space.

Speaker 1

All right. Thank you.

Operator

Your next question is from the line of Andrew Anderson with Jefferies. Your line is open.

Speaker 7

Hey, good morning. Just considering the growth in property over the last couple of quarters, any impact on the underlying loss ratio from what I would think would be a lower attritional loss ratio of business? And if not, would it be fair to think of some coming in the second half of the year?

Speaker 1

It's true that the property business we write that's got a pronounced cat exposure will run at a much lower attritional loss ratio. But I would say in general, given the uptick in inflation, the persistence of inflation, A lot of commentary around social inflation on certain claims. We continue to take a very cautious approach to reserving. And so I don't know that you'll see any kind of immediate benefit. But that being said, even with our conservatism, I think we're in the high 50s for a loss ratio.

Speaker 1

And when you match that up with attractive expense ratio, we're delivering really compelling returns even with the conservatism.

Speaker 7

Got it. And do the recent Florida market reforms change appetite in the state relative to maybe where it was a few months ago? Could you also just remind us of appetite in the state of whether residential, commercial and maybe geographic?

Speaker 1

We were kind of exempt from a lot of the AOB issues that were plaguing the standard homeowners writers in Florida, we do have a small homeowners book in the Southeast United States that's we're actually kind of reducing concentration there, we had a Ian loss that was a little bit larger than we hoped. But Florida is a big state for us on both the property and the casualty Obviously, we again, we have strict limits on concentration. So Yes, we're going to write in Miami Dade County, but hey, we have limits as to how much we'll write there. But most of our exposure I think is on the commercial side.

Speaker 7

Got it. Thank

Operator

Your next question comes from the line of Scott Heleniak with RBC Capital Markets. Your line is open.

Speaker 8

Yes, good morning. Just wondering if there's any point to you, in particular, on the uptick and the improvement in the submission count, which has obviously been strong for a while, it looked like that uptick a little bit. But is there any area where you're seeing more dislocation or pullback from some of your peers? I would think obviously property, but is there anything else that you can point to where you're just getting a lot more looks at business as competitors retrench?

Speaker 4

Yes, I

Speaker 3

mean, obviously property is one area we're seeing a lot more submissions. I would say it's pretty across the board. Like there's very few areas where we're not seeing good growth in submission. And to the extent that we are, those are the areas that are not growing as much like Product liability and management liability. So it kind of ties with the growth rate in premium.

Speaker 8

Okay. Pretty broad based. All right. And just moving on to the you guys have if I'm not mistaken, you have a commercial property quota share reinsurance treaty that renews at June 1, any thoughts on renewing that, the current form, whether you expect any changes on that and pricing and whether you expect to keep it that as a quota share versus excess loss, anything you can add on that?

Speaker 1

Yes, Scott, this is Mike. We're going through the reinsurance renewal for our whole program at the moment, the intent is to renew the commercial property quota share. We currently see 42.5% of that, we're going to push that up to 50%. But we don't expect any deterioration Or improvement for that matter in terms, I think it will be per expiring.

Speaker 3

Yes. Okay.

Speaker 8

Just had a question to you. We've heard a lot of talk in the quarterly conference calls about just given customers are seeing large rate increases, adjustments to the premiums that reflect the higher insured values, are you seeing a meaningful shift in some of your terms and conditions, just deductibles and limits pretty across the book as some customers just are struggling with the rate increases and so you have an opportunity to change deductibles and the limits there?

Speaker 3

The short answer is yes. So I mean we're seeing generally more favorable terms because people are looking for a way to save any money. So it could be through purchasing lower limits, having higher deductibles, living with sub limits, things like that.

Speaker 8

Is that a big change versus last 6 to 9 months? Or is that just kind of gradually headed that way.

Speaker 3

That's been going on kind of as the hard market's been evolving. So no, it's not a significant change. I would just say it's in certain areas, it's pretty pronounced, like again, property.

Speaker 8

Okay. And then just lastly, anything on the favorable development you said in the queue it's from more recent accident years, 2021, 2022. Is there any particular areas that you can call out on that that you can point to, where lines of business where that's coming from?

Speaker 1

Yes, I don't think there's anything we can point to on the call other than I think we're seeing good experience across we write a good mix of short, medium and longer tail lines. And so there's probably a disproportionate percent of those dollars that come from the shorter this is a longer tail, but I don't we don't have anything specific to point to. The results are a combination of setting conservative loss picks, But also getting some very dramatic and persistent rate increases to add a loss cost trend now for a number of years in a row.

Speaker 8

Okay. Was there any favorable development from Ian that was worth calling out?

Speaker 3

No. No. Okay. All right. Thanks a lot.

Speaker 1

Okay. Thank you.

Operator

Your next question is from the line of Mark Hughes with Truist. Your line is open.

Speaker 1

Yes. I was just going

Speaker 4

to ask anything on the audit premium front, anything that would speak to the economy? Are you is there anything you see that suggests maybe some slowdown even in the midst of all the other good news?

Speaker 3

Yes. I mean, I think you got to keep in mind when we talk about the economy slowing down, that's in an inflationary environment. So, the auto premiums will be based on nominal sales, not real sales and not adjusted sales. So we haven't really seen that big an impact on it. I guess the one thing I would say is we did used to see kind of outsized COVID related audits a year or 2 ago that we aren't seeing now, but now we're still seeing a good flow of audit premium.

Speaker 4

Okay. Thank you.

Speaker 1

Thanks, Brian.

Operator

Your next question is from the line of Casey Alexander with Compass Point. Your line is open.

Speaker 2

Hi, good morning. Just kind of a maintenance issue. In the investment portfolio, is there any additional regional bank exposure of note, particularly any common preferred or debt exposure to First Republic, And also any commercial mortgage exposure?

Speaker 1

I'll do them in reverse order. We do have a healthy allocation to mortgages through the, I guess, residential and commercial, I think they're almost all AAA rated. So we're in a pretty cautious position there. In terms of the First Republic, I don't think we have any exposure. In terms of regional banks, I think it was about 4 And again, pretty highly rated bonds across a variety of regional banks.

Speaker 6

Thank you.

Speaker 1

Okay. Operator, it looks like we have one call pending.

Operator

Yes, sir. Your next question comes from the line of Tommy Johnson, a Private Investor.

Speaker 5

Mike and Brian, this is a voice from your past. And I can't ask an intelligent question, but I want to say as a shareholder from day 1, you're the example of what Warren Buffett talks about if you're lucky in life, you invest in a couple of great companies and you hang on And you guys have proven that to be true. And this is just a stockholder saying, you have an incredible track record. Your explanation on the phone, while I can't follow it, demonstrates your knowledge of the business. And I just want to express my appreciation for your both of you are leadership throughout the time.

Speaker 5

I remember when you sat in my office, Mike, and laid out your business plan, And I don't know that any of us thought you would exceed it the way you have, but it's been great ride, buddy.

Speaker 1

All right, Tommy, well, thank you for the kind words and thanks for the vote of confidence over the years.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Michael Kehoe.

Speaker 1

Okay. Well, thank you everybody for participating this morning, and we look forward to speaking with you again here in a couple of months. Have a great

Operator

day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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