Q3 2019 Earnings Call

Oh wait before it within state.

Our subject to certain risk factors, which could cause actual results to differ materially.

These risk factors are listed in the company Barry If S E C filings, including the 2018 annual report.

On Form 10-K , which should be refute carefully.

The company has tarnished form 8-K, with the Securities and Exchange Commission that contains the press release announcing its third quarter results.

Can't fails Smack me also reference certain non G.H.P. financial measures and the call today.

A reconciliation of GE a P to these measures can be found in the press release, which is available at the company's website at Www Dot Kinsale capital group Dot com.

I'll now turn the conference over to Canfield, President and CEO Mr., Michael Key held please go ahead Sir.

Thank you operator, and good morning, everyone.

Joining me today or Brian Petra, Sally can sell CFO and Brian Haiti can sales chief operating officer.

We're going to follow a similar format today that we've.

We've had on our prior conference calls I'll begin with some.

Quick introductory comments and then Brian Petra Sally will review our financial results.

Well, followed by Brian Hany, who will discuss can sales underwriting results and provide some market commentary and then we're going to follow up with any questions.

As a reminder, Kim can sell combines discipline, the underwriting and claim handling with technology enabled low cost to deliver attractive returns and growth, we focus on smaller and sometimes hard to place accounts within the excess and surplus lines market.

And unlike competitors.

Excuse me, we maintain absolute control over the underwriting and claim management process.

We do not outsource those functions to external parties.

We use proprietary technology and automation to operate at a significant expense advantage over many larger competitors.

And this combination of discipline underwriting and low costs as a winter every time.

The third quarter, so a continuation of can sales profitability and growth.

From the first half of the year.

The combined ratio for the quarter was 86.9%.

Through nine months the annualized operating return on equity was 15.9%.

These numbers are consistent with our forward guidance, how the mid teens return on equity and a mid eightys combined ratio.

Premium growth for the quarter, 40.9% was up from 36% in the second quarter and 32% in the first.

The growth we experienced in the third quarter was driven by can sales business strategy combined with a trading environment that is not only favorable but improving.

As we've discussed on prior calls this improving trading environment is driven by dislocation within the broad PNC market.

And that includes both standard lines any ines companies.

Wherein companies are reducing capacity.

Withdrawing from certain lines of business canceling some delegated programs and generally becoming more discriminating about risk in their underwriting process.

And now going to turn the call over to Brian Petra seller for the financial report. Thanks, Mike can feel had another strong quarter and we are encouraged by the premium growth and improved market conditions. We reported net income was $13 million for the third quarter of 2019.

An increase of 9% when compared to 11.9 million for the third quarter of 2018.

And due primarily to growth in the business that operating earnings increased by 20% to $12.6 million compared to $10.6 million and the third quarter last year.

Company generating underwriting income of 9.5 million.

And a combined ratio of 86.9% compared to 8.4 million and 84.6% last year.

Cat activity contributed 1.2 points to the third quarter 2019 is combined ratio.

And I was less than one point last year.

The combined ratio for the third quarter of 2019 included.

0.7 points from net favorable prior year loss reserve development compared to four point from net favorable prior year loss Reserve Reserve development last year.

And was lower largely as a result of lengthening.

Of actuarial loss development factors in an effort to add a modest amount of conservatism to our IP in our reserves for certain prior accident years.

Our effective income tax rate was 16.6% for the first nine months of 2019 compared to 17.1% last year.

And lower due to the tax benefits from the exercise of a larger amount of stock options. This year.

Annualized operating return on equity was 15.9% for the first nine months of this year and in line with our mid teens guidance.

Gross written premiums of $97.9 million, a represented a 41% increase over last year.

And as Mike mentioned growth continues to be generated from an increase submission flow from our brokers and farmer pricing driven by market dislocation.

Hey, I will get into this a little more detail here shortly.

On the investment side net investment income increased by 29% or so.

Order a 2000.

18 to 5.3 million from $4 million last year.

As a result continued growth in investment portfolio.

Annualized gross investment returns increased to 3.1% from 2.9% for the first half of the year.

Diluted operating EPS.

Was 58 cents per share for the third quarter of 2019 compared to 55 cents per share last year and a $1.77 cents for the first nine months of 2019 compared to $1.32 cents last year.

With that I'll pass it over to Brian .

Thanks, Brian .

As mentioned earlier premium grew 41% in the third quarter, our commercial property business grew significantly driven by a surgeon submissions significant rate increases and a focus on improving internal processes to get to more of the submissions as quickly as humanly possible.

We're also seeing strong growth in our management liability products liability and environmental divisions.

The growth is widespread across many different divisions and classes of business.

Our spirit units were up 40% for the quarter in line with the rest of the company.

Submission graph was 35% for the third quarter.

We continue to see substantial across the board increases in submission by on the most divisions.

We feel we're doing well to keep up our service levels, but some areas are seeing inflows of submissions of such magnitude servicing them all become challenging times.

We are becoming more and more assertive and seeking rate increases.

As a reminder, we have a very had rogen as book of business, which complicates, reducing all the rate movement to a single number but that all being said, we see rates up being on the plus eight plus 10% range in the aggregate.

We are seeing higher rate increases for property business and lower increases for professional lines.

At this point the rate increases are starting to contribute materially to the premium growth.

I did want to address the topic of social inflation, which several other insurers have commented on recently.

With a book as relatively small as ours and.

With as diverse a book of business as we have it is not always easy for us to discern certain changes and trends using only our own data we tend to rely on publicly available third party information when developing our views on loss trends. So while we havent seen anything in our own data that would suggest a significant uptick in social inflation, we have been revisiting.

For the available third party data and had been revising some of the trend assumptions used in our pricing models where appropriate.

It is worth keeping in mind that we write very little commercial auto.

We write mostly $1 million limits are lower and focus on smaller accounts.

All three of those facts, we feel will make us less exposed to any social inflation the industry of saying.

Lastly, and as a reminder, while the market is definitively moved in our favor recently in terms of pricing at market opportunity and while we are growing at a very strong rate at the moment investors should not expect that this extraordinary growth rate will continue forever. We don't know how long will last but the market moves in cycles at some point of the future we expect to see a return to more.

Normal growth rate.

Yeah. This is Brian Petrocelli, just to clarify one thing.

Diluted operating EPS was 50 cents per share for the quarter.

57 cents per share for the quarter.

Was 58 cents just on a diluted.

Earnings per share basis.

And operator, we're now ready for any questions.

At this time I will like share let everyone know in order to ask your question. Please press Star then the number one on your telephone keypad again that is star one.

Your first question comes from the line Mark Hughes Suntrust.

Good morning, Mark Yes. Thank you good morning.

Oh.

Just to clarify you say the.

Linked into your development has mentioned that you're seeing in the rain data, but rather the third party data Vincent.

Good morning motivated you to make the change.

No.

Brian was talking about some of the commentary we've seen on other.

Companies conference calls or earnings releases, where they're talking about social inflation impacting their financial results.

And so were we just we just wanted we anticipated a question and we're just trying to get ahead of that.

So is that when we looked at the.

70 basis points. He is a big development versus four point last year.

Just to clarify that.

Based on.

You are good business or are you, saying that that's just taking a more conservative grapes based on.

What you're seeing it across the industry right. So if you're talking about our quarterly results, yes, I would say.

In terms of the amount of favorable development that was impacted.

By our reserve position I think we talked about on our last conference call three months ago that we had lengthened our reporting patterns, which.

Has the effect of slowing down the release of I'd be NR.

Injecting a little bit more conservatism into our into our reserve position and then a lot of it was just you know.

Loss activity in the quarter.

No.

Friends of any concern, but just you know the normal.

Loss variability that you get an a 90 day period of time.

Yes on the investment income is there anything that was nonrecurring.

During unusual but bumped that up that wouldnt be recur next quarter.

No Mark.

It's mostly just it's the asset okay, Brian with the book of business.

Understood. Thank you.

Thanks Mark.

Your next question comes from the line up a rolling May your with RBC capital markets.

Hi, good morning, sticking on the investments the portfolio duration out a bit longer in the quarter and it looks like the new money from the capital or is when the fixed income as opposed to equity.

So I was wondering if there's a change in thinking there how we should think about that going forward.

No. There's no change I think we're on the equity side, we're just legging into the market overtime.

But I think our allocation is pretty steady here recently.

Okay got it and then you mentioned the new headquarter construction in the press release.

I was wondering if there's a timeline on that which incorporate any additional operating but at the project.

The timeline the buildings under construction today, we expect to occupy a half the building in September of 2020.

And then.

We expect to lease out the balance of that building too.

Other tenants.

So that's that's the general timeline.

Got it.

Those were going into real questions. Thank you.

Okay.

And again, if you will like to ask your question. Please press Star then that number one again that star one.

At this time, they're currently no further questions in the Q.

Okay, well just want to thank everybody for participating and we look forward to speaking with you again here and and another three months have a good day.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.