Q2 2020 Kinsale Capital Group Inc Earnings Call
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Before we get started let me remind everyone that through the course up the telecom Friends' Caf Health management may make comments that looks like dairy intentions beliefs and expectations for the future as always this forward looking statements are subject to certain risk factors, which could cause actual results to differ materially.
These risk factors our leases in the company's various if you see fighting, including the second quarter Twentytwenty quarterly report on form 10-Q.
2019, L. report on form 10-K should be used carefully the company has furnish export.
Okay with the Securities and Exchange Commission that contains the press release announcing its second quarter. We sold keen self 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.
He's website at Www Dot Kings Hill capital Group Dot Com I will now turn the conference all but two cancels president and CEO Mr. Michael Gill. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining us on the call today.
With me are Brian Petruzzelli can sell CFO and Brian Hany can sell COO.
I will begin or presentation, and then Brian patch for Sally will cover the financial performance for the quarter.
And then Brian Hany will provide some color on the market and our underwriting operation.
Last night can sell reported operating earnings of 84 cents per diluted share for the second quarter of 2020.
47% from the second quarter of 2019.
Gross written premium was up 41% for the quarter notwithstanding the disruption of the covert virus.
The company posted an 83.8% combined ratio.
In a 16.9% annualized operating return on equity for the six months ending June 32020.
The can sales strategy of disciplined and highly controlled underwriting combined with technology driven low cost.
And a focus on the E N S market is propelling our profitability and growth and we believe we'll continue to do so over the long term.
In addition to our own business strategy, our growth is being enhanced by a growing level of dislocation within the PNC market.
After many years of intense competition, some competitors are experiencing adverse results and our withdrawing capacity canceling some programs raising prices et cetera.
We expect this dislocation to continue, thereby allowing can sell to grow at an elevated rate perhaps through 2021.
At some point thereafter, we expect the level of dislocation to abate.
And our growth rate to normalize perhaps in the low double digit range.
Beyond the accelerated growth.
Industry dislocation is also allowing can sell to raise rates and in some cases restrict coverage to further expand our profit margins.
To take full advantage of this market opportunity there was a possibility can sell could raise a modest amount of equity capital before yearend.
At the end of the first quarter 2020.
We noted that we did not expect to covert 19 bars to have a material impact on can sales profitability or gross.
Three months later, we have the exact same position.
The temporary drop off in March in the growth of new business submissions reversed within a couple of weeks.
And we have experienced a V shaped recovery and submission activity and premium.
On the claim side three months ago. We noted a small number of claims were in all policies involved had coverage Ics.
Coverage exclusions that we anticipated would preclude any payout.
We are essentially in a similar place today, it's small number of claims against policies with coverage defenses in place, we don't see any material impact to either growth or profitability arising from the cobot 19 bars and now I'll turn the call over to Brian Petra seller.
Thanks, Mike.
The premium growth in the profitability that Mike just mentioned as it is encouraging given the less than ideal economic conditions generated by covert 19 in the second quarter.
Just as a reminder, our primary goals as a company or to consistently produce mid eightys combined ratios and mid teens operating returns on equity.
And our second quarter, 83.9% combined ratio and 16.9% and realize operating or are we are right in line with that guidance.
We reported net income of $30.3 million for the second quarter of 2020.
Representing an increase of 120% when compared to $13.8 million last year.
Net income this quarter included $13 million or so and pretax unrealized gains on our equity investments as the financial markets came back our way and recovered nicely from the significant client declines in the first quarter ever driven by the equity markets reaction to cover 19.
Net operating earnings, which excludes the volatility from investment gains and losses increased by 54% up to $19 million compared to 13, and a half million and the second quarter 2019.
The company generated underwriting income a $15.7 million and a combined ratio of 83.8% compared to $10 million and 84.8% last year.
The combined ratio for the second quarter of 2020 included 3.7 points from net favorable prior year loss Reserve development.
Compared to 2.2 points last year.
Our effective income tax rate for the first six months of 2020 was 14.8% and again includes discrete tax benefits recognized from the exercise of stock options during the period.
Gross written premiums were $134 million, representing a 41% increase over last year for all the reasons that Mike previously mentioned, including the continued market discipline dislocation and sustain service levels.
The investment side net investment income increased by 38% over the second quarter last year up to $6.6 million from $4.8 million last year as a result of continued growth in investment portfolio.
Annualized gross investment returns.
Excluding cash and cash equivalents did increase did decrease however to 3% from 3.2% last year, just given lower interest rate environment.
Diluted operating EPS was 84 cents per share for the quarter compared to 57 cents per share last year and with that I'll pass it over to Brian Hany. Thanks, Brian as mentioned earlier premium grew 41% and the second quarter that is lower than a 47% growth rate in the first quarter.
There are two big competing factors that have been affecting our growth rate the hardening in us market and the covered related lockdown.
The bulk of the effect of covered was felt in the second quarter that peak or bottomed out depending on your perspective in April.
Since then we've seen significant recovery and the growth rate.
Anecdotally I can say that the growth rate in June was essentially the same rate as the growth rate in January.
So while Kobe it is undoubtedly still weighing on economic growth and our opportunity somewhat that effect is being overwhelmed by the impact of the hardening of the Ines market.
I would say at this point all the markets. We compete in are trending in the direction of heart.
Other than others.
The excess casualty commercial property in Allied health spaces are probably in the vanguard if market hardening.
Years about underwriting an overly aggressive behavior in the market have led to seriously poor results enforce the more on disappointed among the competition to significantly pullback.
Some competitors have been compelled to dramatically increase the rates, which had been inadequate for many long years of this off market.
They have also had to tighten terms and conditions re underwrite some books of business reduce limits exit some classes of business entirely and terminate some programs. All of this has led to more opportunity for us.
We have maintained underwriting discipline throughout the soft market. So we are not now being forced to pull back in the hardening market.
Submission growth was 24% in the second quarter down slightly from 25 present in the first quarter.
But as I mentioned earlier, the covet effects were worse in April.
So what we saw in June we believe growth rates and submission have essentially returned to pre Kevin levels, even though there is undoubtedly still some ongoing effect from the lockdowns.
As for rates, we are still pushing them up in response to market conditions.
As a reminder, we have a very had Rogers book of business, which complicates, reducing all the rate movements to one single number.
But that all being said, we see rates being up in the 10% to 12% range in the aggregate during the second quarter.
What is not reflected in the 10% to 12% right increase however, our terms and conditions.
The market has hardened we have also been pushing more favorable terms and conditions.
Even though that may not be reflected and rate changes. It does affect profit margins. So we expect that 10% to 12% might understate the change in profitability in the book and with that I'll turn it back to Mike.
Thanks, Brian Operator, we're ready to open up the line for questions now.
Thank you enough I remind our ladies and gentlemen, if you have a question just press star one.
To getting the Q.
And our first question is from Matt Carletti JMP Securities. Please go ahead.
Hey, good morning.
Good morning, Matt.
Mike I was hoping I appreciate your end Brian's comments on.
That submissions in premium growth are kinda back to pre cobot levels could you just give us a little picture kind of during the quarter. What you saw kind of where it was maybe in April May June and then if you have an early look at July if you could offer that just curious at the progression.
Yeah, we touched on this to last conference call that.
Got it at its most severe moment.
Our growth rate in new submissions, one from a high twentys to low thirtys down to about a 2% to 5%.
Right. So we saw this dramatic drop off in the growth rate, but that was.
For a couple of week period, and then there was a.
You know a kind of the V shaped recovery if you will.
Print premium was never that dramatic coming premium.
We don't we don't we don't track a premium by day, and we don't have that detail to provide but.
On a monthly basis, you didnt see nearly that kind of drop it in premium.
Okay, Great and then just one other one I had a question on the expense ratio with.
Took a nice step down in the quarter and just curious are there any kind of one time or we've seen that some other companies kind of co bid related benefit there or is that just that leverage in the model as the earned premium you know catches up with the gross written you're getting expense ratio leverage on the bottom line.
I'll, let Brian Petruzzelli, why don't you had alone yeah, Matt that's that's exactly what you're seeing.
We are hiring you know.
Folks in our underwriting and claims and hearing just kind of keep up with our growth, but it's set up at a much lower rate than what we're seeing from a premium growth perspective. So.
I think you're just seeing some some economies of scale there.
Great. Thank you well done and that's what going forward.
Thanks, Matt.
Our next question comes from Mark Hughes with Suntrust. Please go ahead.
Yes. Thank you good morning.
Going to buying the Hany you had suggested June was back to January levels or it's comparable January we do assume that sort of the.
47% premium growth you had in Q1 is that.
What you. So we don't have those details to provide I was just giving that just had to put in context, what Mike was saying about how Rick.
Growth rates had recovered.
Right.
So june being better than the quarterly the whole and similar to January is your point. Yes June was June was much higher than on April and May but.
Yeah.
In that same momentum presumably continues into July.
I mean.
Well, we're not going to I don't think we're going to comment on the third quarter here.
But you know I think if you go back to the remarks I made in the intro marked at 'em, we do have a certain sense of optimism as to where the hardening of the DNS market is going and we feel like we've done a pretty pretty strong opportunities certainly through 2020 and and perhaps through 2021.
But.
I'm not sure we want to get into specifics of the third quarter just yet.
Understood.
But in terms of claims activity both the.
New Kwame going.
The current year.
Then the what you see in the on the older claims develop foods period with the courts shut down et cetera.
Yeah, we don't have anything to report in terms of any kind of material changes there have been.
I think the courts in general this varies tremendously by state and even sometimes.
Within each state.
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You know exactly what the interruption is but in general yes, the courts have been closed down.
We don't try a very large percentage of cases, but.
You know the slowdown in the court system, probably has had some modest impact on the progression of claims being resolved.
Certainly we try to account for those type of adjustments in in our in our reserving.
Keep in mind, we we frequently talked about or.
Focus on trying to post reserves that are conservative more likely to develop favorably than not and.
We certainly think we're very much on track to do that.
Yes, there probably is.
A slowdown at some level although.
We're still opening new claims and closing all claims that at a pretty good at a pretty good clip. So.
So the my thoughts.
Understood.
Q1, you talked about putting some extra amount into IDN or I think related to the current accident year any dynamic like that this quarter.
In the first quarter you know we got into the we it's a little bit just because of the dramatic nature of the virus and its impact on the economy.
I think there's a lot of investor concern about its impact on the PNC industry.
I'm not sure we're going to go into that level of detail every quarter, but what I would say is that the I think it was 5.4 million that we put up in Q1 that wasn't specifically cove. It exactly it was more or less a reaction to.
You know the uncertainty created by coded.
You know the impact on the industry shutdown and its impact on the economy et cetera.
But.
In general I would say.
You know can sale in general has avoided the lines of business that are most exposed to.
Litigation or claims coming out of the virus.
I'm thinking of things like mortgage insurance trade credit.
Event cancellation things like that were not exposed at all.
We do write property business of course commercial property, but it's heavily skewed toward more of an industrial exposure. So theres a.
Most of our insurance were not shut down during the virus the way it may be restaurants and hotels were.
And then we have very strict coverage.
Defenses in place that if you look at the combination of.
All of those factors I think.
You know that's how we concluded that we really don't expect.
Any kind of material impact on the business.
In terms of our loss ratio or growth to but.
So.
You know that's probably the best way to address it we do always strive to be conservative in the reserving at that goes for the second quarter, just like every other quarter.
No one final question if I might.
The excess casualty so that was the.
One of the lines, where you're seeing.
A lot of opportunity.
We do anticipate outsized growth there and does that have an impact on the ceded premium.
Ratio.
I'm going to turn that went over to Brian Hany.
I mean.
To the extent that the growth there outstrips the growth and the rest of the book, yes, but.
I mean.
Allied health is also growing and so there's other line, they're growing pretty significantly too so.
Yes.
After salmon.
It could.
No obvious mix shift.
Now, though it does.
I mean, because basically everyone's growing just a question of how fast.
Yeah Okay.
Thank you very much.
Thanks Mark.
Thank you. Our next question comes from World, One linear with RBC capital markets. Please go ahead.
Good morning, guys.
Good morning.
So a couple of quick ones on the balance sheet first you remind us within the other liabilities limelight or other liabilities line of whats gone from less than a million a 20 million this year.
Brian Yes.
Right.
It includes things like securities payable.
There are some.
Some liabilities in there with respect to buy the building.
In other that are headquarters. It's currently currently under construction and that's really the majority of that.
So it makes sense not headquarters is that still on track to be done sort of in Q3 and.
Has there been delays.
Now were largely on target I think.
And Mike you correct me if I've got this wrong I think we're looking sort of mid September ish.
Mid mid September late September.
To complete that.
Got it and then one last final one the doesn't portfolio duration is up a bit and a critical is down a bit from your end.
Anything notable going on there and so we get used to that longer term.
I think it's just a modest adjustment in our portfolio to.
Take advantage of some of the dislocation that you saw in the markets.
Related to co bid.
I wouldn't expect any dramatic change and duration going forward.
Got it is equities so that can be about 10% on portfolio are you seeing opportunities there.
Yes, I wouldn't expect too much of an increase there we did add to our position a little bit to take advantage of the.
Severe.
Decline in the market.
You know in the in the March April timeframe, but I wouldnt expect it to increase a much more than 10%.
Okay perfect. Thank you for your answers I will go ahead.
Thank you.
Thank you.
Question, Jeff Smith with William Blair. Please go ahead.
Hi, good morning.
Good apologize I could I came on a little late did did you touch on or could you touch on.
Rate increases you're seeing in some of your lines of business.
Yes, Brian how did you want to take down.
Yeah, I think we said was rates are up 10% to 12% in the aggregate. We don't generally go into detail about differences in lines, but I would say that.
I mentioned that the Allied health management liability.
Commercial property.
Excess casualty spaces were more hard than others. So you can.
For that.
As rates are going up higher than.
Average.
Okay.
And then Youve historically been kind of conservative with loss picks and in the first half I mean, it seems like that was the case here with.
Q1 in particular.
And then you would see sort of lower picks and in the second half is there anything that would change that this year or do you think that will be the case.
Yeah, I don't know that we have any kind of real seasonality to our loss reserving I think.
Our goal is of course to put forth our best estimate.
Tempered with a very strong measure of conservatism.
To account for the fact that hits it can be an uncertain business and.
You know, we really strives to to be conservative and cautious and how we set those estimates.
We want investors to have a lot of confidence in our balance sheet and.
In General I think we've been been successful you know we're not a company that's been around for decades, but.
We are in our 11th accident year, now and all of our accident years, except for 2011 have developed favorably on a.
You know inception to date basis so.
I think we've done a good track record and we're looking to build on that.
Brian Pitz recently, which would you add anything to that.
I think thats, good with private Mike.
Okay.
And then.
What was the impact of exposure on GPW growth from the in the quarter.
Brian anyone take that.
Yeah. When we don't have those exact figures I would I would I would just be speculating if I answered I would say.
It was probably.
Had probably less of an impact.
Ours, let's put it this way exposure growth probably contributed less to our growth in the second quarter than it did in previous quarters, because the effects of covet.
Right.
But it wasn't it wasn't negative it stayed positive you think.
Yeah, I think it stay positive because I think the majority of the businesses, we ensure didn't actually shut down during a long time.
Okay. Okay.
Okay. Thank you.
Thank you and this concludes kinase session for today I will like to turn the call to Michael keeled pulling his final remarks.
Okay, well, thank you operator for organizing to call and thank you for everybody who participated and we look forward to speaking with you again here in a few months have a great day.
And with that we thank you ladies and gentlemen for participating in today's conference you may now disconnect. Okay.
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