Q1 2020 Earnings Call
[music], ladies and gentlemen, thank you for standing by welcome to the first quarter 2020, Kingsdale 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.
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Now before we get started let me remind everyone that through the course of the teleconference Kids sales 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 could differ materially.
These risk factors are listed in the Companys various SBC filings, including the first quarter 2020 quarterly reports on form 10-Q, and the 2019th annual report on form 10-K, which should be reviewed carefully.
The company has furnished on form 8-K, with the Securities and Exchange Commission that contains a press release announcing his first quarter results.
Good sales management, they 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 Dot Kinsale capital group Dot com.
I'll now turn the conference over to kids meals, President and CEO Mr. Michael Keyhole. Please go ahead Sir.
Thank you very much operator, and good morning, and welcome to our call. We hope everyone participating on the call is staying well and we want to especially commend all the can sell employees for their hard work and flexibility. During this crisis in adapting so quickly to our remote work arrangement.
And in continuing to deliver best in class service to our brokers around the country.
Their efforts in particular have helped to distinguish can sale and to drive the superior performance, we reported last night.
Joining me on today's call, our Brian Petrocelli can sell CFO and Brian Haiti can sell C O M.
Last night, we reported a 19% increase in operating earnings per share compared to the first quarter 2019.
47% increase in written premium and a combined ratio of about 84%.
Our annualized operating ROE he was 17% for the first quarter.
Brian Petra Sally will provide some additional detail in color on our financial performance here in a moment.
Can sales strategy of focusing on the N.S. market.
Controlling our underwriting and claim handling operations absolutely.
And using technology to improve customer service and reduce costs served us well this quarter.
When the virus hit and we needed to shift to a work from home model.
We were able to do so quickly and with no loss in productivity or drop off in service levels.
As of now 90% of our employees are working remotely.
And our business is firing on all cylinders.
There's been a considerable amount of commentary about the krona virus and its impact on the PNC industry.
This is an evolving topic and subject to some element of uncertainty.
However, given what we know at this point, we do not believe the Corona virus will have a material impact on can sales profitability or growth.
Specifically can sell does not right any of the following lines of business that may have a heightened exposure to virus related losses event cancellation work comp surety trade credit mortgage insurance or reinsurance.
Areas, where we could be exposed to losses.
Include commercial property premises liability management liability and Allied health care liability.
I'll start with the commercial property.
Conceals property book focuses on industrial type exposures in general.
Processing facilities, recyclers warehouses vacant properties et cetera.
We generally avoid occupancy is like restaurants, Jim's theaters et cetera that may be more exposed to government shutdown orders.
We believe the overwhelming majority of our policyholders are still operating during this crisis.
All of our policies required direct physical damage to trigger coverage.
Oh include virus exclusions.
And all include an authorities exclusion, which specifically precludes coverage for claims arising from government shutdown orders.
To date, we have received 17 commercial property claims.
Eight of these involve policies that either do not have been business income coverage at all or policies where.
The B. I limit is below the attachment point of can sales access policy.
So in effect.
Those policies, there's zero exposure to our to our coverage.
The remaining nine policies could possibly present exposure to loss subject to a complete investigation subject to the terms and conditions of the policy and subject to a b calculation that exceeds can sales. It attachment point as these are mostly excess policies.
We have not received any claims today in the management liability premises liability or the Allied health care liability areas related to Corona bars.
Again, we anticipate policy terms and conditions would preclude coverage for most claims.
Specifically, the allied healthcare coverage excludes communicable disease on every policy.
Our promises liability accounts.
Both primary and excess exclude viruses.
And our DNA notebook excludes bodily injury on every policy.
Of course upon receipt of any claim we will conduct a thorough investigation and proceed appropriately given the coverage in place the allegations and the circumstances.
Regarding the impact on growth a few thoughts can sell grew 41% last year and 47% in the first quarter, principally due to dislocation within the broader PNC industry.
After a long period of intense industry competition, many companies standard and non standard our restructuring their books of business running off underperforming lines.
Reducing capacity raising prices and canceling programs.
As a disciplined underwriting company that didn't lose its way during the soft period of the insurance cycle can sale is not canceling are running off anything.
We're working very hard to grow the business and expand our margins.
Any slowdown in the PNC industry, and specifically the DNS market.
Due to an economic contraction, we expect to be offset by the continuing market dislocation.
We expect this dislocation to continue for the remainder of 2020 and perhaps even into 2021.
It's possible to Corona virus, even adds to this level of dislocation time will tell.
Ill now turn the call over to Brian pets reseller.
Thanks, Mike as Mike mentioned, we had another strong quarter and are encouraged by the premium growth in the profitability that we've been able to achieve particularly given the impact of Coca 19 on overall economic conditions.
Our goal is to consistently produce mid eightys combined ratios and mid teens operating returns on equity on our first quarter, 84% combined ratio and 17% and realize operating or we are right in line with that guidance.
The volatility in the financial markets towards the ended the quarter.
Did have a negative impact on net income and comprehensive income.
However, the markets have rebounded in April and we've recovered approximately three quarters of the unrealized investment losses that were incurred during the first quarter.
We reported net income of $5.1 million for the first quarter of 2020.
A decrease of 72.8% when compared to.
Last year, and again 2020 included 16 million or so and pretax unrealized losses on our equity investments.
Net operating earnings increased by 24.5% up to 17 point.
2 million compared to 13.8 million in the first quarter of last year.
The company generated underwriting income of $14.4 million and a combined ratio of 83.9% compared to $12 million on 80.3% last year.
Combined ratio for the first quarter of 2020 included 3.4 points from net favorable prior year loss reserve development compared to 10.4 points last year as Mike mentioned, we've not received many claims directly related to covert 19.
However, we have experienced a slowdown in reported losses, which appears to be related to courts operating at limited capacity and other legal system inefficiencies related to covert 19.
We added some conservative at some conservatism into our reserves and recorded approximately $5.4 million and additional IB NR in Q1 to account for any uncertainties related to covert 19.
Our effective income tax rate was a negative 1.1% for the quarter compared to 17.9% last year.
The negative rate being driven by the discrete tax benefits for net recognized from the exercise of stock options during the quarter and the impact of unrealized losses related to our equity investments on a quarterly taxable income.
Gross written premiums were $124 million, representing a 47% increase over last year for all the reasons that Mike previously mentioned, including continued market dislocation.
And sustain service levels.
On the net investment side.
Net investment income increased by 32% or so over last year up to $6 million from four and a half million last year.
As a result continued growth in investment portfolio.
Annual gross investment returns, excluding fashion cash equivalents did decrease however to 2.9% from 3.2% last year, just given the lower interest rate environment.
During the first quarter.
Diluted earnings per share was 70 676 per.
Cents per share for the quarter compared to 64 cents per share last year.
If you normalized.
Our effective tax rate that would been 76 cents would have been lower by about three cents or so.
With that I'll pass it over to Brian Hany.
Thanks, Brian.
As mentioned earlier premium grew 47% in the first quarter the highest growth rates were in our commercial property Allied health care excess casualty inland marine and management liability divisions, but in general we saw strong growth across the portfolio.
Our spare business was up 29% for the quarter, we took significant rate actions in our personal insurance book, which as you will recall is focused on manufactured housing in the coastal states.
This has led to a more modest growth an item count, but at a more attractive margin.
Pre Corona virus admission growth was on track to be around 30% for the quarter.
The first couple of weeks of the locked out and the growth rate slowed to a single digit right, but has recovered significantly to the low to mid 20 range in the last two weeks.
Weekly numbers can be volatile, but we are encouraged by the bounce back.
During that reach submission slowdown we made the best of the situation by improving our customer service and court ratios.
As you know, we frequently how our technology as a competitive advantage.
Sometimes it's hard to put that in perspective for the investor, but this situation provides an excellent example, how we really are different.
In a matter of about a week, we went from having a small percentage of our staff working from home to having more than 90% working from out we have not missed a beat.
Among our underwriting staff, we had one person working from home before Calvin and more than 90% after.
With one months worth of data to look at it is clear we are getting out more quotes per underwriter than we did previously so not only have we've been able to smoothly transition to a work from home model, we've actually gotten better and more efficient.
It's a testimony to the strength of our systems the effectiveness of our IP team and how hard working intelligent our employees are.
So while submission growth has moderated in response to the cabin situation quote growth has stayed high and combined with the rate increases we've been able to continue to grow the premium at a healthy pace.
The market dislocation, we have discussed over the last year hasn't abated due to the virus. Accordingly, we continue to increase rates in response to market conditions.
As a reminder, we have a very heterogenous book of business, which complicates, reducing all the rate movement to a single number but that being said, we see rates being up and the plus 10% plus 12% range in the aggregate during the first quarter.
And with that I'll turn it back over to Mike.
Thanks, Brian.
Operator, we're now ready for any questions.
That come in.
Certainly as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question that's the pelkey.
Please standby, while we compile the culinary roster.
And our first question comes from the line of Matt Carletti with JMP Securities.
Hey, good morning.
Good morning, Matt.
Got a couple of questions first is just I just a clarification just following on Brian's comments, there that commentary about the brief slow down and then quickly responded to kind of re rebounded to the mid twentys that submission count growth, you're talking about and not not a premium levels will not take into account or.
Pricing or exposure just that submission count.
Correct.
Okay perfect.
And then my other question relates to another numbers question, just give a small amount a favorable.
Prior period development in the quarter.
Can you give any color kind of where that came from accident year, where they're larger puts and takes or was it just kind of very small movements.
Across the board.
We don't have any specific info I think it was generally across the board Matt.
Okay, Great wonderful that's all I got it. Thank you very much in the best of luck.
Thanks, Matt.
Thank you.
Our next question comes from the line of Mark Hughes with Suntrust.
Yes. Thank you good morning.
Good morning, Thank you.
Could you talk about.
Yes, just what you've seen with small accounts, obviously lot of concern about what happened small business.
What is your experience so far what do you anticipate.
Yeah, I mean, we as a company definitely focused on small accounts.
Our average premiums in the generally in that $10000 per policy range.
Clearly, there's a lot of dislocation in the economy now.
You see all the headlines, but I think our business.
We've kind of laid out what exactly what we're saying right. We saw a material drop off in submissions for a few weeks, we've seen a real nice rebound not back to the 30% but into the 20% range.
The premium growth.
Has been less impacted and I think Brian noted part of that as rate increases part of that is.
We've been able to quote.
Higher percentage of the submissions that come in.
But I thought in terms of the about cancellations or mid term a premium adjustments any any sign of that heavily.
Yes, I mean, we're doing a lot a one off accommodations if someone calls and says Hey, my business has been shut down for two months.
Okay why don't we extend your.
Expiration date by two months for no additional premium right and just kind of working those things out on a case by case basis.
And.
How material is that activity, but.
It hasn't been overwhelming but theres clearly you know a number of transactions every day I mean keep in mind, we write tens of thousands of policies, we have hundreds of thousands of submission so.
In the Grand scheme of things you know it hasn't been dramatic enough that it's impacted our topline.
What we're trying to do the right thing this is an incredible.
Crisis, that's come up very suddenly and we want to treat our policyholders fairly.
And.
That's essentially what we're doing.
Brian you'd mentioned you put a 5.4 million an additional ideas are in one in Q.
Could you expand on added that to say that your.
With this tied to the drop in claims given the claims you would have normally book.
Lower losses, but you added to the IDN or for conservatism say.
Hey, Mark as Mike again.
Yeah, we noticed a modest downtick and claim frequency.
But the real drivers just kind of the general uncertainty created by this crisis.
You can read all the commentary out there about.
It's a possible impact on the PNC industry.
We feel that we're very well positioned but.
Theres still lot of uncertainty out there and so.
We're just trying to drive a little bit of additional conservatism in our IB NR.
You are suggesting that in other things being equal with claims volume pricing.
Loss pick might have been lower.
Point $4 billion, lower but you added some additional conservatism.
Yes.
Okay.
Well above the expense ratio was quite good.
Appear to be getting operating leverage that you said in the past the G.
25 is.
Kind of they did numbers 25 26.
I think 24.
It should we expect.
A lower number to be sustainable.
Yes, Mark I think that 25%.
And take is probably a good a good number you know we obviously premium is growing we're adding.
Staff in the underwriting areas and some of the ITC areas.
You know, we're monitoring what's going on sorta.
With the premium and will.
Add add staff.
Accordingly.
But I think.
Just like we always have I think we're very conscious on managing expenses.
Now to reasonable level.
You know, it's going to ebb and flow a little bit, but I'd say, the 24 and a half 25.
It's probably a good place to.
Hello.
Then how about the any commentary on pricing trends as you've seen in April.
I think Mike you said you expect.
The dislocation did continue through 2020.
No change in that the upward trajectory in April.
Yes. This is Brian no no change it's.
We're still pushing right.
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I'm going to change the trajectory.
No not Alaska, Indeed noteworthy change in the.
Lloyd.
Just the we've been treated they seem to.
Trim similar exposure in California in the first quarter.
And they have been.
I guess at least latest data wasn't clear that they were reducing the you know.
Anything from Lloyds or maybe just more broadly about the dislocation.
Yes, Mark this is Mike again, I don't think we want to comment on competitors.
I will let them speak for themselves but.
In general I think to Bryan's point right the dislocation in the market is continuing.
There is as we went through a long period of very intense price competition I don't think it's unusual that.
It takes the industry, a little better time to kind of.
Get things on track right. So.
That's why we made that comment and obviously, we're speculating we don't know definitively how the years going to unfold, but our general gas at this point is that the.
You know the trading environment in terms of.
You know rate trends and reduction in capacity and all these restructurings that are ongoing we think thats going to continue for the balance of the year.
Thank you.
Thank you.
Next question comes from the line to broaden Bob with capital returns.
Hi, Thanks again.
Taking my questions.
I'm wondering without sort of addressing the competitive questions that were just ask I'm wondering if you could sort of come out of from a different way are you seeing any change to your buying to quote ratio.
Fleet.
No.
Okay.
And then separately there is a reasonable probability that there's going to be.
Some a lot more pain for certain lines of business by virtue of the pandemic in the weakening economy.
And I mean, it's conceivable that some some segments could actually sort of approach sort of crisis mode, where theres just not enough capacity in certain mines are there opportunities that are sort of on your radar where you may.
Entering new line if it were to approach that that are sort of on a short list. If it if rates move in terms of conditions moves to such a dramatic effect.
I would say, we're always we're always looking too.
We're always looking for new opportunities, we're always working on incremental expansion of our product line keep in mind, we write on a non admitted or excess and surplus lines paper only.
And I think some of the areas you're talking about if its.
I'll just you surety is an example, right you have to have license paper for that so.
So the answer is yes, we're always looking to expand but we're also near term.
Just looking at the Ns market.
Okay. Thanks, a lot.
Thanks, Ron.
And as a reminder, ladies and gentlemen, if you have a question. Please press star one on your telephone.
Once again, if you have a question press star one.
Im showing no further questions at this time, so with that I'll turn the call back over to CEO, Michael key hope for closing remarks.
It will take two we'd do we have one more call operator or one more question yes.
Yes, I see we just had a Sam Hoffman from Lincoln Square.
Sir Your line is now open.
Good morning.
For taking my question.
Just following up on Mark's question.
Where you said, but the cancellations and mid term premium adjustments were relatively minor.
This point the what to what extent you believe that these are lagging indicators.
And that they should increase dramatically in the second quarter there.
Because you know I guess, maybe your insurance company you might be the last part of the that you would call at the beginning of the crisis.
And so how do you think about going forward in terms of your expectations to receive additional cancellations and the term adjustment.
Well I would just say as any Ines company that focuses on small commercial buyers.
We have a very high volume of cancellations everyday the week.
In in a normal operating environment right, it's not unusual that small businesses don't pay their premium promptly.
Or somebody buys coverage because they.
There are a contractor and they get a job where the general contractor requires said the jobs over in three months they cancel the policy.
But you know were six weeks into it Brian eight weeks and Razzing, an upward trend in the request.
And if anything it's slightly downward and it is I wouldn't characterize it as material at all yeah. So it made its possible that it picks up but we feel pretty good about that thats not going to be a big problem for us.
And is this different from your experience in previous recessions like the financial crisis or are consistent.
I think it's consistent I mean, if you look back at the CNS market broadly during the 2008.
Recession.
You know them DNS market did shrank a couple percentage points, but you know, it's an industry where.
You know our customers are typically buying insurance because its compulsory.
Either their landlord or.
The general contractor requires it or if you work for the highway department they require the coverage.
If your products being sold through a retail store the retailer requires the coverage so.
You don't have wild swings in.
You know revenue volatility like you might have in other industries like say auto manufacturing.
We're kind of isolated I think from some of that.
Dynamic.
Okay I missed the very beginning of the call, but did you comment on your exposure to restaurants, and bars and ER and the retail and other types of industries that are shut down and how that affects what we're talking about.
We did as respects the property book, we write commercial property that was 8% of our premium volume last year and our property book is skewed.
Heavily in favorable more industrial type exposure, so you know warehouses and processing facilities recyclers.
We have very very limited exposure to I think the type of occupancy is you're talking about in our property book restaurants theaters Jim's things like that.
We think anecdotally that overwhelmingly.
Our insurance continue to operate during this crisis.
It's not to say universally but most of them. We think we think are.
And that combined with our coverage limitations.
You know.
We think put us in a very good spot in terms of exposure to covert related claims.
Great. Thanks for taking my questions.
Okay. Thanks.
Thank you I'll now turn the call back over to CEO Mr., Michael key hope for closing remarks. Thank.
Thank you operator, and thanks, everybody for joining us on the call today and stay well, we look forward to speaking with you again in a few months have a good day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participate and you may now disconnect.
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