Q4 2019 Earnings Call
Hi, and welcome to the Q4 2019 can sell group capital Group Inc. earnings Conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
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Before we get started let me remind everyone that through the course of the teleconference and sales management may make comments that reflect their intentions beliefs and expectations about 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 FCC filings, including a 2018 annual report on form 10-K, but should be review carefully.
The company's furnished on form 8-K, but the Securities Exchange Commission that can contains the press release announcing its fourth quarter results.
Sales management May also reference certain non-GAAP financial measures in the call today, a reconciliation of GAAP. So 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 Kids Jones, President and CEO Mr. Michael Quito. Please go ahead Sir.
Thank you operator, and good morning, everyone and thank you for joining us Brian Petra Sally can sales Chief Financial Officer, and Brian Hany, Chief operating officer or with me on the call today.
As a reminder, although can sell has many competitors our business strategy is unique in several important ways.
That allow us to drive attractive returns and superior growth rates across all parts of the insurance cycle.
Can sale is the only company to focus exclusively on the excess and surplus lines or the non standard market.
With an emphasis on small to medium sized accounts.
Where are the only company to control our own underwriting and claims management and not outsource those functions to external parties.
And we use proprietary technology and automation to operate with a significant expense advantage over many larger competitors.
One measure of the significance of our commitment to technology is that over 20% of can sales employees work in the information technology area.
It is our second largest department behind underwriting.
And keep in mind, none of these employees is engaged in maintaining legacy software from the 19 eighties at a 19 nineties since can sell doesn't have any.
Instead, among many things they are working on process improvement and automation to lower costs and allow us to handle ever larger volumes a business without a commensurate increase in staffing.
Today's market conditions are characterized by a rising level of dislocation as some competitors experienced poor results.
Reacted by reducing capacity withdrawing from some markets and lines of business and by canceling some programs.
As a company that maintained disciplined underwriting standards during the comparative period of the insurance cycle.
Sales in the attractive position of taking advantage of this favorable market opportunity to accelerate growth in the business and to expand its profit margins at the same time.
We expect these favorable trends to continue for a year or two before reverting to a normal level of competition any more modest growth rate.
Can sales operating earnings increased by 42.1%.
Gross written premiums increased by 55.4%.
In the fourth quarter compared to the same quarter in 2018.
The combined ratio for the fourth quarter was 86.1%.
And the operating return on equity was 15.9% for the year.
With confidence in our strategy and a favorable market opportunity before us we.
We are optimistic about our business prospects.
Now over to Brian Petra Sally for the financial report Ah. Thanks, Mike as Mike mentioned, we had its another real good quarter the strong growth in both written premiums and operating earnings.
We reported net income of $17.9 million for the fourth quarter of 2019, an increase of 301% when compared to 4.4 million for the fourth quarter of 2018.
And driven primarily by increases in our unrealized gains on our equity portfolio and written premiums and from lower cat losses.
Net operating earnings increased by 42% to $14.3 million compared to 10.1 million in the fourth quarter of 2018.
The company generated underwriting income of $11.5 million and the combined ratio of 86.1 per cent compared to $7.7 million and 87.1% last year.
Cat activity contributed 1.8 points to the fourth quarter two to 2019 is combined ratio compared to 8.7 points last year.
The combined ratio for the fourth quarter of 2019 included 1.3 points from net favorable prior year loss reserve development compared to 2.2 points last year.
Our effective income tax rate for the full year was 16.7 per cent compared to 16.5% last year.
Operating return on equity was 15.9% for 2019 and inline with our mid teens guidance.
Gross written premiums were $112 million for the quarter, representing a 55% increase over last year.
Growth continues to be generated from increased a mission flows from our brokers and from a pricing driven by continued market dislocation.
On the investment side net investment income increased by 21% or so over the fourth quarter of 2018.
To $5.5 million up from four to half million last year.
Gross investment returns for the year exclude excluding cash and cash equivalents increased to 3.1% from 3% last year.
Diluted operating earnings per share was 63 cents per share for the quarter.
Fourth quarter 2019, compared to 46 cents per share last year and $2.41 for the full year 2019 compared to $1.79 cents last year.
With that I'll pass it over to Brian.
Thanks, Brian.
As mentioned earlier premium grew 55% in the fourth quarter.
Our commercial property business again grew driven by a surge in submissions significant rate increases and a concerted effort to service the business more quickly and put more accounts.
It's also worth noting that while we are doing that's where becoming much more restrictive and the terms and conditions, we offer which should amplified the margin expansion in this line, although it's difficult to quantify the fact.
The growth is not limited to just one division at this point the growth is basically everywhere.
Since we are exclusively E.N.S., we are seeing increased activity in virtually every area, including some areas like general casualty there has been slower to harden, it's not the other areas.
For the best part all the markets Marianne are moving in a direction favorable from a risk there.
Our spare business was up 44% for the quarter, which while his strong growth rate actually like the rest of the company southern proportion. The total group that that's fair comprises shrank slightly to just under 4%.
Semester growth was 35% in the fourth quarter.
Spiked up from the third quarter I would expect us to be slightly lower in the first quarter 2020.
There's a limit to how much we can grow transaction count without service standards, starting to become a challenge and we are here in Atlanta.
I expect at some point that growth will level off because these growth rates, we've seen are pretty extraordinary.
We continue to push more and more on right in part to regulate right and parked reactor changing market conditions.
As a reminder, we have a very had Raj this book of business, which complicates produce all the rate movement to a single number but that all being said we are seeing rates up any plus eight plus 10 range in the aggregate.
We are seeing higher rate increases for property business and lower increases for professional lines.
With that I'll turn it back over to Mike.
Thanks, Brian.
Operator, we're now ready to take a phone calls if there are questions. If there are any.
Thank you as a reminder to ask a question you'll need to press Star then one on your touched on telephone to withdraw your question press the pound key please standby well, we compile the culinary roster.
Our first question comes from Matt Carletti with JMP. Your line is now open.
Thanks, Good morning.
Good morning, Matt.
But a few questions one just start with a favorable development for the year I was hoping you might be able to.
Break it out into <unk>.
Accident years, it resulted from for full year nineties.
Yeah, we don't have that available on the call I think.
Like that gets published an okay.
So that'll be out will follow the K next week.
Okay, I can wait I can wait for that.
And then.
Two other quick ones you know on you I think Brian mentioned in his comments like commercial properties, you're growing nicely.
Obviously with the dramatic growth, there's there's always mix shift taking place can you maybe talk a little bit about where some of that mix shift might be how the book at year end 2019 might look different than it was at 28 team by larger classes of business and in particular I've always thought if you guys that you're having a few percent property kind of 96 ish.
Hi, casualty, a little bit of property I forgot change nothing material way or is that still pretty status quo.
Hi, Matt This is Mike.
Property did increase relative to the overall book.
I think from a very high single digits to very low double digits.
Okay. You know I think that's really just a function of market opportunity more than anything else.
You know.
We when we opened the company a you know over a decade ago now.
We anticipated I think property might be 20% or so of our book of business. It lags significantly mostly because the level of competition was so intense that.
We just had trouble you know growing the top line. So I think that's normal in DNS business to that you know we have 17 different underwriting divisions, the relative opportunity does ebb and flow from time to time and you know, we're seeing a little bit of that in the last several quarters with property, but I don't think theres any kind of significant.
Often ours our strategy certainly.
Okay and then in the last one just one of the App you for your your updated thoughts on.
On how you feel about your your capital I mean, just two quarters in particular have been extremely strong growth than it was pretty strong even before that I'm, just kind of an updated viewpoint of it.
These sorts of growth rates or even even even a little bit of a dial back.
Work to persist kind of how you feel about capital.
Right. So obviously you know capital something we managed very carefully you know where especially sensitive around maintaining our and best rating. We think that's a very important to us to be able to execute our business plan. We did raised.
I think our net proceeds from the August 2019 capital raise were about $66 million. So we're we're obviously putting that capital to work quickly and with the strong return on equity we're we're generating.
Retained earnings, which helps as well, but you know the 55% growth in Q4, you know as that if that were to continue.
So you know obviously at some point, we would probably be looking at.
Additional capital.
And could likely be some form of it could be data could be equity or could be both.
Got you so it's it certainly sounds great more monitoring.
Great. Thank you for the the answers in a bad luck and frankly.
Thanks, Matt.
Thank you. Our next question comes from Mark Hughes with Suntrust. Your line is now open.
Yeah. Thanks, good morning.
Good morning, Mark.
The.
<unk> expense ratio was so I think typically have been a little lower in the fourth quarter was up a little lower this quarter is 25% still a bogey or can you get some leverage on that with this kind of growth.
You know, 25% is as a general bogey I mean, there is some variability from time to time.
You know clearly the topline growth does does help somewhat so.
I think I think 25% is it's something we feel confident we can generally hit.
On a go forward basis, but as the company grows.
You know it wouldn't surprise me, if we outperformed in that area slightly.
I Wonder if you might oh, giving people more thoughts on the a favorable development last couple of quarters. It's averaged about a point that's clearly below your historical norm you've talked about.
Phenomenon Love a little.
More coming out in the tail wind and clearly a lot of conversation last quarter about social inflation, how do we think.
Think about that kinda point should a with this business that you're right now.
With this surge should that improve as we go forward.
Yeah, I think anytime we talk about reserve development I think it's worth restating, our goal, which is to build a very conservative balance sheet.
You know the loss reserves are a huge component of that and our goal is to set those reserves in a conservative fashion, so that they're more likely to develop favorably then on favorably.
And I think generally we've been very successful at that over the 10 year period, we've been in business all of our accident years.
Except a one of the very early ones have developed favorably on an inception to date basis.
And that kind of conservatism I think gives our investors confidence.
And in our financial results and our ability as managers of the business.
We have talked about the fact that you know some of our accident years developed a little bit later and so the last couple of years, we've been injecting additional conservatism into the reserves and that has had the effect of slowing down the release abide DNR, which is I think is what you're alluding to here.
I think I think a lot of that conservatism is his you know that's in the numbers now I think when you look at our market opportunity, where we're getting some very significant rate increases.
That adds even more I think to our to our confidence in.
Our balance sheet and in our reserves I would say we've never been more confident.
In those numbers than we are today.
And then when we think about the submission growth he said light to taper a little bit in one cues that more of a capacity issue or.
Got a timing on renewals what the informed that view that one could you maybe.
Little bit slower on submission <unk>.
I mean, I would say harvest reaction to how significant spike in the fourth quarter was if you look at it it was kind of out of line would be acceleration, we saw which makes for.
More incremental so I think as part of it. It's just that one number that one growth numbers. So far out of the norm I think we should be natural for it to come back to the long term trend.
The other one is just mathematically you know growing at 35% or is it is a very very strong right. That's almost doubling every two years I.
I just get it's tough for me picture, a scenario where sufficient keep doubling every two years.
And then.
One final one.
Mike.
Thank you.
You have done suggested that they expect favorable trend to continue for a year or two what are they kind of the updated signaled that you've seen in recent months or weeks that kind of a inform your view of the potential longevity on the cycle.
Yeah. So you know obviously, a you know the numbers. We just presented is a big part of that right our own growth.
And the expansion of our profit margin.
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You know gives us a lot of confidence, but then the you know the headlines that I think we're all reading in the trade press corroborate set as well right. There's a lot of companies.
That were.
You know much too aggressive in growing and in how they underwrote and private price business during the soft period of the insurance cycle.
And you know the consequence of that lack a disciplined can be it's painful.
Right so.
I think we're all the reading the same headlines and it it's really that's what.
I think gives us the view that hey, it's it's likely to be another year or two of this kind of very favorable trading environment that eventually will give away you know to a normal.
To a normal a environment, where the competition increases and the growth rate.
Slows down to something more a enough maybe 510, 15% range.
Thank you.
Okay. Thanks Mark.
Thank you and as a reminder to ask a question you will need to press Star then one on your Touchtone telephone to withdraw your question press the pound key.
Our next question comes from Scott Heleniak with RBC capital markets. Your line is now open.
Oh, yes morning.
Yeah.
Notice the the growth is obviously significant I'm here has been significant past couple of quarters and did pick up versus Q3. So.
Yeah, I imagine there's a lot more opportunity as you mentioned, a the submission count the higher quote activity.
But wondering if you could talk about some of the more specific areas. I know you kind of mentioned across the board did mentioned general casually, but is there any other particular areas, where you're seeing kind of an uptick in a dislocation you know versus versus Q3 in Q2, I'm kind of any areas, where where there's a lot more opportunity for for Ken sill.
And there has been that maybe didnt exist a couple of course ago.
And that's going to sound like a little bit of a cop out, but I mean really the growth is remarkable and house for out. It is so it would be at all.
And there hasn't been like a significant extended the submission spiked.
In the fourth quarter, they seem to spike pretty much for most divisions sounds like there's not one particular I mentioned I mean, we've already covered property.
Some of the Allied Health Space is then you know challenge for a few years for some of our competitors excess cash in excess casualty.
Right I mean, it really is in most of the lines of business, we right yeah.
And so it's fair to say some of the same the same areas, where you've seen strength here, just just kind of more of a true up optic and optic and that connectivity as well yeah. That's right on that yep. Okay. And then the rate increases you mentioned, 8% to 10% I think that was pretty similar to what you saw the.
Third third quarter, so I would imagine that's outpacing loss loss cost inflation in mostly areas. So I wonder if you could touch on that and just aren't kind of where your thoughts Oh, yeah, our for accident year loss ratios, where those might trend.
In 2020.
I'll just address kind of trend in the right is this is brought hany you, 8% to 10% I think is a bubble we would consider trend for our book of business.
I would say how to put a number for trying it's probably on a 3% to 4%.
Our French.
But then what that means that turns back to your loss ratios in reserves I'll leave that.
Yeah, Yeah, I mean, I'd like we were talking about a little while ago you know were.
We're very confident in our reserve position the goal is to be conservative. So obviously over the years ahead as those claims are reported an adjusted and settled.
We would expect those.
You know reserves to develop favorably but.
You know at this stage you know, it's probably not appropriate to.
No go much beyond that.
Yeah, that's fair enough and then just a last question on the the net premium retention ratio, that's been kind of tracking a little bit higher in the into high Eightys last couple of quarters and just wondering if that's a a sort of a fair run rate to assume and also on a related note has there been any each any changes and.
Our reinsurance treaties anything new at one one at all that stuff that you can comment on.
Well, we are reinsurance treaties renew on June 1st So we did a increase our retention slightly.
And as upon renewal last year in June So I think that's what you're seeing.
And here in the fourth quarter in terms of of the higher retention, So I think that.
At least here for the foreseeable future is a good is a good guide yep okay.
Thanks, a lot.
Okay. Thanks, Scott.
Thank you and your next question comes from Mark Hughes with Suntrust. Your line is now open.
It was just curious the on the property is that more coastal focused or the more geographically diversified.
Markets, Mike the or personal lines book is coastal and our commercial lines business is a mix, but predominantly non coastal.
And what's the mix of personal versus commercial with them property.
I guess this is just I guess, but I think it's about two thirds commercial.
Okay and personal yeah.
And is that the personal lines is that Oh.
Their mobile or in that are largely mobile homes, yeah. Its exclusively manufactured homes on the South East coast.
Yeah manufacturing them.
Okay. Thank you.
Okay Mark.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to Mike Oaky <unk> for any closing remarks.
Okay. Thank you operator, and thanks, everybody for joining us on the call and we look forward to speaking to you again here in a few months have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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