Q1 2021 Kinsale Capital Group Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the first quarter 2021, Kinsale Capital Group, Inc Earnings Conference call at.
At this time all the participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder of this conference call is being recorded.
Before we get started let me remind everyone that through the course of the teleconference. Kinsale capital Kinsale 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.
The risk factors are listed in the company's various SEC filings, including the 2020 annual report on form 10-K, which should be reviewed of carefully.
A copy of the has furnished a form 8-K with the Securities and Exchange Commission that contains the press release announcing its first quarter results.
Ken sales management May also reference certain non-GAAP financial measure at the end 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 Kinsale capital group Dot com.
I will now turn the conference over to consult the President and CEO Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone and thank you for joining us on the call today.
Bryan Petrucelli can sales Chief financial Officer, and Brian Haney can sales Chief operating officer are on the call with me.
Each of US will make a few comments and turn after which we will.
Any questions.
Last night Kinsale reported operating earnings of $1 11 per diluted share for the first quarter of 2021 on increase of over 48% from the first quarter of 2020.
Gross written premium was up over 36% for the quarter.
The company posted an 80% combined ratio and.
And of 17, 6% annualized operating return on equity for the quarter.
Well ahead of our guidance of a mid <unk> combined ratio kind of mid teens operating return on equity.
A quick recap of the <unk> sales strategy is appropriate given that it is our print. It is the principal driver of our results.
We focus on small to medium size accounts in the E&S market, we control our own underwriting unlike almost all of our competitors, which at least in part contract out underwriting to outside parties.
And we operate at a significant technology driven expense advantage over most competitors.
The disciplined underwriting and low costs is a powerful combination.
Kinsale results are also benefiting from continued dislocation in the market.
We are still seeing some carriers working through the process of correcting problems within their books of business. Some programs are being canceled capacity withdrawn.
The standard business being pushed into the non standard market et cetera.
This process has been going on for the last two years or so and we expect it to continue for the duration of 2021 and possibly longer for.
For can sale of the dislocation as of.
Allowing us to grow rapidly and expand margins at the same time.
Brian Haney will provide some additional color on this topic here in a moment.
As we have said in the past when this period of dislocation abates, possibly in 2022 of 2023, Kinsale will continue to grow and take market share given the power of our business model, but will do so more slowly likely in the low double digit range.
From an operation standpoint, we moved our employees back to the office early in the fourth quarter and we continue to benefit from that staff, especially in terms of providing our brokers superior customer service.
And better training new.
The new employees that we've been hiring to accommodate the strong premium growth roles.
Rolling out new technology innovations et cetera.
Speaking of technology, we continue to invest in improving our core enterprise system.
By Rolling out new features and functions that improved productivity customer service accuracy and data collection.
Owning our core enterprise system, not having legacy systems to maintain as a competitive advantage that we are working hard to exploit.
One measure of our commitment to this initiative is that we now have eight agile development teams that work up from 7% last year and five two years ago.
A little over 20% of our employees work in it related positions.
And none of them work on maintaining legacy systems from the 19 nineties.
We're 90% <unk> in Pryor, because we don't have any now.
Now I'll turn the call over to Bryan Petrucelli.
Thanks, Mike the results for the first quarter continue to be strong and driven by solid premium growth favorable loss experience and disciplined expense management.
We reported net income of $32 1 million for the first quarter of 2021, representing an increase of 531% when compared to $5 $1 million last year.
Due primarily to of $10 million increase in underwriting income in the $35 million increase investment returns driven by favorable equity market value movements in 2021 compared to 2020, where we saw significant unfavorable equity market movements, resulting from a reaction to the pandemic.
Net operating earnings, which excludes the volatility from equity investment gains and losses increased by 48% up to $26 million from $17 million in the first quarter of last year.
The company generated underwriting income of $24 $6 million and the combined ratio of 80% for the quarter.
Compared to $14 4 million and 83, 9% last year with improvements to both the loss and expense ratios the.
The combined ratio for the first quarter of 2021 included five seven points from net favorable prior year loss Reserve development.
Compared to three three points last year, and with negligible cat losses in either period.
We continue to see a slower pace of reported losses from limited limited operating capacity in the courts and other judicial inefficiencies related to COVID-19.
As a result, we continue to take a conservative approach on our reserving in this area. We believe there is likely some permanent benefit. There. However, we believe it's prudent to take a wait and see approach of the course of open and normalize operations before recognizing any related redundancy.
Additionally, our current accident year loss ratio decreased slightly and recognition of ongoing favorable pricing trends.
<unk> from the market dislocation that might previously previously touched on.
The expense ratio benefited from economies of scales related to our premium growth and from a slightly lower relative net commissions as a result of shifting the mix of business in lines that are subject to reinsurance, where we receive ceding commissions.
Annualized operating return on equity was 17, 6% for the quarter and again ahead of our mid teens guidance.
Gross written premiums were approximately $170 million for the quarter, representing a 36% increase over last year due to the market dislocation that Mike mentioned and our superb tiers of service standards on.
On the investment side net investment income increased by 16, 5% of the first quarter last year.
Up to $6 9 million from $5 $9 million last year Andrew.
The annualized gross investment returns, excluding cash and cash equivalents was two 6% compared to two 9% of 2020.
The diluted operating earnings per share was $1 11 per share for the quarter compared to 76 per share last year.
With that I'll pass it over to Brian Thanks, Brian.
As mentioned earlier premium grew 36% in the first quarter up slightly from the fourth quarter of 2020.
While there is still plenty of competition in the market is still very favorable on the rates and terms. We are getting are still very attractive.
Growth was particularly strong in our commercial property environmental on product liability areas, although most areas were up significantly.
Commercial property space continues to harden as a result of major industry events.
Last quarter, the uptick in COVID-19 cases led.
Many states to reimpose restrictions, particularly in California, and New York, which are two of our bigger states.
With the widespread vaccine distribution and dropping cases in the first quarter, we're seeing restrictions loosening, which has provided us some tailwind, particularly in areas like construction and general casualty.
Submission growth was in the mid teens on the first quarter down from the high teens in the fourth quarter, but we saw a resurgence late in the in the quarter as some COVID-19 restrictions are loosened and that resurgence has continued into the early second quarter, giving us a good sense of optimism for the full year as respect submission and premium growth and general market opportunity.
As for rates, we continue to push them up in response to market conditions.
As a reminder, we have a very heterogenous book of business, which complicates, reducing all of the rate movement to one single number but that all being said, we see rates up rates being up in the low teens range on the aggregate during the first quarter generally consistent with the fourth quarter.
Even beyond getting pure rate, we are tightening terms and conditions, which should contribute even more to the bottom line.
Keep in mind. Unlike many of our competitors, we are raising rates to further improve margins not to correct former poor decisions or to rectify money, losing books of business.
With all of that said, we feel like the rate increases, we're getting our well on excess of trend. So we expect some margin improvement gradually over time.
Lastly, as Mike mentioned, our employees have been back in the office since October of last year and Thats been of great help to us in terms of training new employees, providing superior customer service and stealing our corporate culture.
Starting in January we resumed making marketing trips to see our brokers in person where the lockdowns would permit.
We're seeing an advantage and that many of our competitors have not returned to the office yet and are not doing any in person marketing, we're very much on the vanguard on this front.
But we find the really is no substitute for in person face to face interaction whether it be in marketing training the associates or and just work in the in general.
Our competitors will ultimately I suspect returned to the office and eventually resume their marketing trips, but until then we will enjoy the temporary advantage they have ceded to us and with that I'll hand, it back over to Michael.
Thanks, Brian operator, we're ready to take any questions.
Are in the queue.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question is from the line of Jeff Schmitt with William Blair.
Okay.
Hi, good morning.
Good morning, yes.
Yes growth, obviously continues to be really good.
You had mentioned you continue to see dislocation in some areas.
And rate increases were obviously, a couple of years and they've been high for a few years kind of has a compounding effect.
Where are you still seeing that dislocation and is it getting close to adequacy, there or what is your view on that.
Yes, I think we were adequate back in 2018.
So of course.
We monitor our profitability very closely and we're always <unk>.
Adjusted technical pricing.
To stay abreast of trend, but we generally manage our book of business to that.
Mid teens operating return on equity or greater.
And so the rate increases in 2019 2020.
Partly into 2021.
That's the point I think Brian was trying to make is these are opportunistic rate increases that we're getting that are expanding our margins not filling in.
On a black hole from under price business in the past so it's a pretty interesting opportunity for us.
Right right.
Okay, and then a question on.
Favorable development and it looks like if all came from 2029.
$9 million in 2020, and there was some.
I guess, the adverse and some from prior accident years is that right.
What years from that from an what lines of that from.
Yes, I don't think were ready on the call to get into that level of granularity, but what I would say is.
We saw an increase in favorable development from the prior year's right on a year over year comparison, so first quarter of 2020 versus first quarter 2021.
We went from three point something percent up to I think five 7%.
The favorable development.
Our goal that we've talked about.
Frequently as to post very conservative reserves that are highly likely to develop favorably over time.
I think we've achieved that goal.
Every single accident year, except one which was our first full year on business back in 2011.
Other than 2011 on every single accident year has developed favorably on an inception to date basis, occasionally youll see a little bit of volatility in those reserves.
As they develop over the years, but in general they.
They are all developed favorably and.
Given the rate increases the margin expansion, we've been talking about the <unk>.
Fact that we've been able to sell of slightly more restrictive coverage terms from time to time.
On the growth in the business is giving us a little bit of of that economy of scale effect on our expense ratio.
Clearly, we're seeing some very interesting margin expansion.
On the only caveat there would be hey, our conservative reserving sometimes creates a lag between when we write the business.
Those reserves will come down and we will recognize that profitability, but.
In general its pretty solid news.
Right absolutely.
Thank you for the answers.
Thanks, Jeff.
Your next question from the line of Mark Hughes with the truest.
Yes. Thank you good morning.
Could you talk about frequency in the quarter.
You talked about the courts are.
Opening slowly, but I just wonder.
The frequency seemed like it was down last year, how does the progressed here into the Q1.
Yes, Mark it's Mike again.
We kind of characterize it as reported losses reported losses were lower than we expected last year and that's continued in Q1 clearly some of that we think is related to the disruption in the court system.
But the creates a little bit of uncertainty as to whether theres going to be a bounce back.
In those claims or whether its a permanent advantage for us and.
That was.
Those of the comments, Brian was trying to make just that hey, we're taking a very cautious approach. There we're fully reserved as those claims are going to revert to normal if they don't thats great news it will recognize that redundancy overtime.
When we think about cat losses.
Why did you do so well relative to the winter storm here in Texas.
You did have some hits in the <unk> around the hurricanes.
But the magnitude of the dollar losses were pretty substantial industry wide for both what about your book of business.
Put you in better position now versus <unk>.
So this is Brian Haney.
On the personal insurance side, we do write a fair amount in Texas, but its concentrated towards the coast, where the freezing would've been.
Not as bad and then on the commercial property side, we do write a fair amount in the areas of our affected by freezing the lot of it would be shared and layered excess deals with very restrictive terms and conditions. So.
We ended up from.
Whatever reason of not having a lot of.
The commercial property losses.
Yes, okay.
And then the.
Submission.
The activity I think you said the.
Slowed from high teens, the mid teens within re accelerated late in the quarter and the.
That's continued into Q1 go ahead of that.
Correct, and then any way to breakout how much is the.
Kind of the reopening or resurging small business versus mix shift into.
Yes.
So the first part yes, you are correct that you've correctly described what I said earlier and then there is right in the way to break it out sort of beyond that we don't know how much of it is related to your like what particular facts, although im pretty sure the Kevin restrictions on something to do with it.
So presumably youre seeing more in California, and New York, where there were restrictions in place, but opening up.
I don't have the.
With me, but it would not surprise me of that was true.
Yes.
Like it seems like Theres, a lot of signs of inflation.
In the economy, how do we think about your business in the context of if inflation does kick up.
Mark I would think of it this way.
Most of our business is priced off of inflation sensitive metrics.
Alright, so if if theres a general inflation in the economy, we're going to get the benefit of that in the form of higher premiums.
On the other hand, hey, Theres a lag between when we collect premiums and pay claims. So there is some exposure there and of course to the extent that the fed recognizes the inflation in our results in higher rates.
There is an exposure of therefore, our fixed income portfolio I think we're very conservatively positioned.
From a fixed income standpoint.
I think the fact that we've been aggressively raising prices well ahead of loss cost trend going back to <unk>.
January of 2019.
Puts us in a great position to handle.
Things like.
Inflation right I mean, the fed saying that their debt the CPI is pretty steady around 2%.
Tons of anecdotes that indicate that that's not accurate.
Time will tell.
What the real answer is there, but I think there is.
Given the conservative conservatism in how we priced our business.
Think we're well positioned to handle any uncertainty that comes our way from inflation in general or there is a lot of commentators talking about social inflation impacting loss cost trends I think we're very well positioned to handle that.
And the like.
And then one final question since you mentioned that you say eight agile development teams what do they do it.
We have divided those teams into the into different verticals to focus on improving our system.
Okay.
We've achieved a lot in terms of the technology over the 11 or 12 year in business.
But we've got a long way to go to.
I'd point to our expense ratio is.
And of high volume business and just to put some numbers on that can sell had about 460000, new business submissions in 2020, I think that translated into.
Directionally somewhere around 300000, new business quotes.
Multiple tens of thousands of new business binders tens of thousands of renewable binders.
Tens of thousands of various endorsements of transactions like cancellations reinstatement.
Sections audits et cetera, and.
And we finished the year I think with 305 full time employees. So.
I think kind of indirectly that speaks to the level of automation that we've been able to achieve over the years, but we've got a long way to go to and so.
We're looking to drive more and more repetitive tasks into the software.
To make our employees jobs, a little bit more automated we want.
To have more support for our claims examiners our underwriters.
Et cetera, So it's a big initiative.
It's an advantage I think clearly and it's one that we think have some real durability to it given the fact that.
I think we're one of the few companies that has taken this.
The approach in terms of owning our core system.
And.
Building on staff with the skills and capabilities not just to build it but to improve it over time.
Thank you.
Your next question is from the line of Roland Mayer with RBC capital markets.
Hi, Good morning, guys first a quick one of the premium retention ratio was down a bit year over year is that still the shift to more of a commercial property business or is there anything else on that.
Yes.
The shift in business and we did have a couple of million dollars in reinstatement premium.
During the first quarter.
That drove that down a little bit as well.
Got it and then this <unk>.
Be parsing your words of it but it sounded like.
The competition might be of it.
Tighter than it was a year ago, and that's not saying a lot, but sort of as you reached the point, where it competition does begin to catch up on rate adequacy is.
The should we expect the pace of margin improvement this low before gross flows or sort of how do you balance the margin improvement that is opportunistic versus sort of the rapid growth you're seeing now.
Yes, I think we are.
We're pretty excited about the market opportunity candidly for the last couple of years, but really.
Kind of for the near term foreseeable future because we're getting both margin expansion and extraordinary growth.
As competition heats up we've got a lot of leeway and our pricing to be more aggressive.
And so we will continue to balance both obviously profitability is are our principal goal of growth as secondary but given the expense advantage in our business model. We think we're going to be able to achieve both over the long term.
Great and are there any sort of metrics you might be able to give on.
If competition has changed recently of your renewal Retentions.
The sort of flat to where they were a year ago or.
Is the hit rate on when Youre quoting still.
Similar to where it was last year.
Yes.
I think you might've missed parsed, what we said we would.
And implying the competition has heated up recently.
Was trying to say it was pretty steady and if you look at the we don't really share metrics of Aflac group.
On the competitive marketing stats rehab, but generally that's been pretty steady sales. So we're not seeing any deterioration in those metrics because of competition and we're not seeing anecdotally anecdotally any increase in competition its just steady.
Great. Thanks for the clarification of those were all my questions.
Thanks, Ron.
Again to ask a question. Please press star one on your <unk>.
The phone keypad your.
Your next question is from the line of Pablo things on with J P. Morgan.
Hi, Good morning, I, just wanted to follow up on the topic of favorable development, which was mostly from accident year 2020.
What drove the decision through the these fairly early in the action have any impact on how you are thinking about loss picks for 2021.
Yeah Pablo this is Mike.
Have.
Part of our actuarial.
Assumptions you have reporting patterns.
And the.
The you anticipate and they vary by the statutory line of business.
And it's those patterns that govern how reserves are released over.
<unk>.
A couple of years for short tail lines like property.
579 years for some of the casualty lines and it gets into the upper teens I think for our excess casualty, which is considered a longer tail lines of business.
So it's.
It's a formulaic release and.
Those.
We do adjust those patterns annually based on actual claims activity that we compare to the assumptions but in general.
They are pretty steady and.
I think thats, what youre seeing.
There's also an effect because 2020 was dramatically larger than every accident year that came before it.
So theres just more dollars in play each each progressive year that we've gone along.
Especially given the robust growth rates, but.
Yes that helps.
Yes, it does.
Especially the point about 2020 being large dollar of yours that makes sense.
And then the second question you had referenced margin improvement given the pricing exceeding loss cost in your remarks I was wondering if you could provide some detail on debt, whether where you see loss cost trends or maybe even the margin expansion you expect.
Yes, we've talked about that before the where we see.
Loss cost trend below 4%.
And.
If you go back to 2019, I think we were raising rates around double that around 8%.
For 2020, we move that up to low teens kind of of 10% to 13% range.
And as Brian said <unk>.
Steady in Q1.
Got it and then I just have a couple of more.
The question, So I think the or net commission expenses held steady at about 13% of earned but clearly the other underwriting expense ratio has come down considerably over time. So just given your growth how should we think about that part of your the non commission part of your expense base. So I presume some part of it with value added premiums, but other costs back anymore.
That's the nature, perhaps over the long term.
Yes, I would say, we would expect it to be relatively steady I think Brian commented earlier that we're getting some economies of scale there.
But it's not going to be a dramatic improvement.
From quarter to quarter.
The reason, we talk a lot about technology and our expense ratio overall is because it's dramatically lower than most of our competitors and we're working to be even more efficient in the future.
But I see it more of the incremental steady improvement as opposed to any kind of.
<unk> drop.
Got it and the last from me.
You guys have a decent sized construction book any thoughts on the what.
Infrastructure Bill might mean for your business.
I haven't thought about it but I assume that would mean some positive for us.
It's already the European construction pick up from that just kind of further in the Houston.
Okay. Thanks for your assets.
Thanks Pablo.
Yes.
At this time there are no further question.
Okay operator.
I just want to thank everybody for joining us on the call on just a quick acknowledgment, we just posted the best results in our company's history.
I think of lot of it goes back to the employees to come to work every day.
And.
And Thats the foundation of our business and they are working very hard and I think youre seeing the results of that so.
Kudos to them and we look forward to speaking with everybody again here in a few months.
Okay, Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
Hum.
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Good morning, ladies and gentlemen, and welcome to the first quarter 2021, the Kinsale Capital Group, Inc Earnings Conference call.
At this time all the participants are in a listen only mode.
We will conduct a question and answer session and instructions will follow at that time.
In the one should require assistance during the conference. Please press Star then zero on the touch tone telephone as a reminder of this conference call is being recorded.
Before we get started let me remind everyone that through the course of the teleconference. Kinsale capital kept 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 to differ materially vs.
The risk factors are listed on the company's the various SEC filings, including the 2020 annual report on form 10-K, which should be reviewed of carefully.
The company has furnished a form 8-K with the Securities and Exchange Commission that can tell you the press release announcing its first quarter of results.
Can't sales management May also reference certain non-GAAP financial measure stay on 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 Kinsale capital group Dot com.
I will now turn the conference over to consult the President and CEO Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone and thank you for joining us on the call today.
Bryan Petrucelli can sales Chief financial Officer, and Brian Haney Kim.
Can sales Chief operating officer are on the call with me.
Each of US will make a few comments and turn after which we will take.
Take any questions.
Last night Kinsale reported operating earnings of $1 11 per diluted share for the first quarter of 2021.
An increase of over 48% from the first quarter of 2020.
Gross written premium was up over 36% for the quarter.
The company posted an 80% combined ratio.
And of 17, 6% annualized operating return on equity for the quarter.
Well ahead of our guidance of a mid <unk> combined ratio kind of mid teens operating return on equity.
A quick recap of the <unk> sales strategy is appropriate given that it is our print. It is the principal driver of our results.
We focus on small to medium sized accounts in the E&S market, we control our own underwriting unlike almost all of our competitors, which at least in part contract out underwriting to outside parties.
And we operate at a significant and technology driven expense advantage over most competitors.
The disciplined underwriting and low costs because of.
The powerful combination.
Kinsale results are also benefiting from continued dislocation in the market.
We are still seeing some carriers working through the process of correcting problems within their books of business. Some programs are being canceled capacity withdrawn on.
The standard business being pushed into the non standard market et cetera.
This process has been going on for the last two years or so and we expect it to continue for the duration of 2021 and possibly longer.
For can sales of this.
Location is allowing us to grow rapidly and expand margins at the same time.
The Brian Haney will provide some additional color on this topic here on a moment.
As we have said in the past when this period of dislocation abates, possibly in 2022 of our 2023 Kinsale will continue to grow and take market share given the power of our business model, but will do so more slowly likely in the low double digit range.
From an operation standpoint, we moved to our employees back to the office early in the fourth quarter and we continue to benefit from that staff of specialty in terms of providing our brokers superior customer service.
And better training new.
The new employees that we've been hiring to accommodate the strong premium growth rolling.
The rolling out new technology innovations et cetera.
Speaking of technology, we continue to invest in improving our core enterprise system.
By Rolling out new features and functions that improved productivity customer service accuracy and data collection.
Owning our core enterprise system, not having legacy systems to maintain as a competitive advantage that we are working hard to exploit.
One measure of our commitment to this initiative is that we now have eight agile development teams that work up from seven last year and five two years ago.
A little over 20% of our employees work in it related positions.
And none of them work on maintaining legacy systems from the 1990 days.
Were $19 $80 on Pryor, because we don't have any now.
Now I'll turn the call over to Bryan Petrucelli.
Thanks, Mike the results for the first quarter continue to be strong and driven by solid premium growth favorable loss experience and disciplined expense management.
We reported net income of $32 $1 million per the first quarter of 2021, representing an increase of 531% when compared to $5 $1 million last year due primarily to of $10 million increase in underwriting income and of $35 million increase investment returns driven by favorable equity.
Market value movements in 2021, compared to 2020, where we saw significant unfavorable equity market movements, resulting from a reaction to the pandemic.
Net operating earnings, which excludes the volatility from equity investment gains and losses increased by 48% up to $26 million from $17 million on the first quarter of last year the <unk>.
Company generated underwriting income of $24 $6 million and of combined ratio of 80% for the quarter compared to $14 4 million and 83, 9% last year with improvements to both the loss and expense ratios.
The combined ratio for the first quarter of 2021 included five seven points from net favorable prior year loss reserve development compared.
Compared to three three points of last year, and with negligible cat losses in either period.
We continue to see a slower pace of reported losses from limited limited operating capacity in the courts and other judicial inefficiencies related to COVID-19.
As a result, we continue to take a conservative approach on our reserving in this area. We believe there is likely some permanent benefit. There. However, we believe it's prudent to take a wait and see approach of the course open and normalize operations before recognizing any related redundancy.
Additionally, our current accident year loss ratio decreased slightly and recognition of ongoing favorable pricing trends.
The resulting from the market dislocation that might previously previously touched on.
The expense ratio benefited from economies of scales.
Weighted to our premium growth and from a slightly lower relative net commissions as a result of shifting the mix of business in lines that are subject to reinsurance, where we receive ceding commissions.
Annualized operating return on equity was 17, 6% per the quarter and again ahead of our mid teens guidance.
Gross written premiums were approximately $170 million per the quarter, representing a 36% increase over last year due to the market dislocation that Mike mentioned and our superb tiers of service standards.
On the investment side net investment income increased by 16, 5% of the first quarter last year of.
The $6 9 million from $5 $9 million last year.
Annualized gross investment returns, excluding cash and cash equivalents was two 6% compared to two 9% of 2020.
And diluted operating earnings per share was $1 11 per share for the quarter compared to <unk> 76 per share last year.
With that I'll pass it over to Brian Thanks, Brian as of.
Mentioned earlier premium grew 36% in the first quarter up slightly from the fourth quarter of 2020.
While there is still plenty of competition in the market is still very favorable on the rates and terms. We are getting are still very attractive.
Growth was particularly strong in our commercial property environmental on product liability areas, although most areas were up significantly.
Commercial property space continues to harden as a result of major industry events.
Last quarter, the uptick in COVID-19 cases led.
Many states to reimpose restrictions, particularly in California, and New York, which are two of our bigger states.
With the widespread vaccine distribution and dropping cases in the first quarter, we're seeing restrictions loosening, which has provided of some tailwind, particularly in areas like construction and general casualty.
Submission growth within the mid teens on the first quarter down from the high teens in the fourth quarter, but we saw a resurgence late in the in the quarter as some COVID-19 restrictions are loosened and that resurgence has continued into the early second quarter, giving us a good sense of optimism for the full year as respect submission and premium growth and general market opportunity.
As for rates, we continue to push them up in response to market conditions.
As a reminder, we have a very heterogenous book of business, which complicates, reducing all of the rate movement to one single number but that all being said, we see rates up.
<unk> being up in the low teens range on the aggregate during the first quarter generally consistent with the fourth quarter.
Even beyond getting pure rate, we are tightening terms and conditions, which should contribute even more to the bottom line.
Keep in mind. Unlike many of our competitors, we are raising rates to further improve margins not to correct former poor decisions or to rectify money, losing books of business.
With all of that said, we feel like the rate increases, we're getting our well on excess of trend. So we expect some margin improvement gradually over time.
Lastly, as Mike mentioned, our employees have been back in the office since October of last year and Thats been of great help to us in terms of training new employees, providing superior customer service and scaling our corporate culture.
Starting in January we resumed making marketing trips to see our brokers in person where the lockdowns would permit.
We're seeing an advantage and that many of our competitors have not returned to the office yet and are not doing any in person marketing, we're very much on the vanguard on this front.
But we find there really is no substitute for in person face to face interaction whether it be in marketing training, the recessions or and just work in the in general.
Our competitors will ultimately I suspect returned to the office and eventually resume their marketing trips, but until then we will enjoy the temporary advantage. They have the ceded to us and with that I'll hand, it back over to Michael Thanks, Brian Operator, we're ready to take any questions.
Are in the queue.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
The first question is from the line of Jeff Schmitt with William Blair.
Okay.
Hi, good morning.
Good morning.
The growth obviously continues to be really good.
You had mentioned you continue to see dislocation in some areas.
And rate increases were obviously, a couple of years and they've been high for a few years kind of has a compounding effect.
Where are you still seeing that dislocation is it getting close to adequacy, there or what is your view on that.
Yes, I think we were adequate back in 2018.
So of course, we monitor our profitability very closely and we're always adjusting technical pricing.
The stay abreast of trend, but we generally manage our book of business to that.
The mid teens operating return on equity or greater.
And so the rate increases in 2019 2020.
Partly into 2021.
That's the point I think Brian was trying to make is these are opportunistic rate increases that we're getting that are expanding our margins not filling in.
On a black hole from under price business in the past so it's a pretty interesting opportunity for us.
Right right.
Okay, and then a question on.
Our favorable development and it looks like it all came from 2029.
$9 million in 2020, and there was from.
I guess, the adverse and some from prior accident years is that right.
What years was that from an what lines of that from.
Yes, I don't think were ready on the call to get into that level of granularity, but what I would say is.
We saw an increase in favorable development from the prior year's right on a year over year comparison, so first quarter of 2020 versus first quarter 2021.
We went from three point something percent up to I think five 7%.
The favorable development.
Our goal that we've talked about.
Frequently as opposed to very conservative reserves that are highly likely to develop favorably over time.
I think we've achieved that goal.
Every single accident year, except one which was our first full year on business back in 2011.
Other than 2011 on every single accident year has developed favorably on an inception to date basis, occasionally youll see a little bit of volatility in those reserves.
As they develop over the years, but in general they.
<unk> all developed favorably and.
Given the rate increases the margin expansion, we've been talking about the <unk>.
Fact that we've been able to sell of slightly more restrictive coverage terms from time to time.
On the growth in the business is giving us a little bit of of that economy of scale effect on our expense ratio.
Clearly, we're seeing some very interesting margin expansion.
The only caveat there would be hey, our conservative reserving sometimes creates a lag between when we write the business.
Those reserves will come down and we will recognize that profitability, but.
In general its pretty solid news.
Right absolutely.
Thank you for the answers.
Thanks, Jeff.
Your next question from the line of Mark Hughes with the truest.
Yes, good morning, good morning.
Could you talk about the frequency in the quarter.
You talked about the courts are.
Opening slowly, but I just wonder.
The frequency seemed like it was down last year, how has that progressed here to the Q1.
Yes, Mark it's Mike again.
We kind of characterize it as reported losses reported losses were lower than we expected last year and that's continued in Q1 clearly some of that we think is related to the disruption in the court system.
But the creates a little bit of uncertainty as to whether theres going to be a bounce back.
In those claims or whether its a permanent advantage for us and.
That was.
Those of the comments, Brian was trying to make just said hey, we're taking a very cautious approach. There we're fully reserved as those claims are going to revert to normal if they don't thats, great news and we'll recognize that redundancy overtime.
When we think about cat losses.
Why did you do so well relative to the winter storm here in Texas.
You did have some hits in the <unk> around the hurricanes.
But the magnitude of the dollar losses were pretty substantial industry wide for both of what about your book of business.
Put you in better position now versus <unk>.
So this is Brian Haney sale on the personal insurance side, we do write a fair amount in Texas, but its concentrated towards the coast, where the freezing would've been.
Not as bad and then on the commercial property side, we do write a fair amount on the areas of our affected by freezing the lot of it would be shared and layered excess deals with very restrictive terms and conditions.
We ended up for whatever reason not having a lot of.
The commercial property losses.
Yes, okay.
And then the.
The admission.
The activity I think you said the.
Slowed from high teens, the mid teens, but then re accelerated late in the quarter of them.
That's continued into Q1 go ahead of that.
Correct, and then any way to break out how much is the.
Kind of of the reopening or resurging small business versus mix shift too.
Yeah.
So the first part yes, you are correct that you've correctly described what I said earlier and then there is right in the way to break it out sort of beyond that we don't know how much of it is related to what particular facts on that.
Im pretty sure the Kevin restrictions on something to do with it.
So presumably you are seeing more in California, and New York, where there were restrictions in place, but opening up.
I don't have the deep dive.
With me, but it would not surprise me of that was true.
Yes.
Like it seems like Theres, a lot of signs of inflation.
In the economy, how do we think about your business in the context of if inflation does kick up.
Mark I would think of it this way.
Sure.
Most of our business is priced off of inflation sensitive metrics.
So if theres a general inflation in the economy, we're going to get the benefit of that in the form of higher premiums.
On the other hand, hey, Theres a lag between when we collect premiums and pay claims. So there is some exposure there and of course to the extent that the fed recognizes the inflation in our results in higher rates of theirs.
There is an exposure of therefore, our fixed income portfolio I think we're very conservatively positioned.
From a fixed income standpoint.
I think the fact that we've been aggressively raising price as well ahead of loss cost trend going back to <unk>.
January of 2019.
Puts us in a great position to handle.
Things like <unk>.
The inflation right I mean, the fed saying that their debt. The CPI is pretty steady around 2% theres tons of anecdotes that indicate that that's not accurate.
Time will tell.
No.
What the real answer is there, but I think there is.
Given the conservative.
<unk> has it been how we priced our business.
Think we're well positioned to handle any uncertainty that comes our way from inflation in general or there is a lot of commentators talking about social inflation impacting loss cost trends I think we're very well positioned to handle that.
And the like.
And then one final question since you mentioned that you say eight agile development teams what do they do it.
We have divided those teams into the into different verticals to focus on improving our system.
Yes.
Achieved a lot in terms of the technology over the 11 or 12 year in business.
But we've got a long way to go to.
I'd point to our expense ratio is.
And of high volume business and just to put some numbers on that can sell had about 460000, new business submissions in 2020, I think that translated into.
Directionally somewhere around 300000, new business quotes.
Multiple tens of thousands of new business binders tens of thousands of renewal binders tens of thousands of various endorsements of transactions like cancellations reinstatement.
<unk> audits et cetera, and.
And we finished the year I think with 305 full time employees.
I think kind of indirectly that speaks to the level of automation that we've been able to achieve over the years, but we've got a long way to go to and so.
We're looking to drive more and more repetitive tasks into the software.
To make our employees jobs, a little bit more automated we want.
To have more support for our claims examiners our underwriters.
Et cetera, So it's a big initiative.
It's an advantage I think clearly and it's one that we think of some real durability to it given the fact that.
I think we're one of the few companies that has taken the.
The approach in terms of owning our core system.
And.
Building on staff with the skills and capabilities not just to build on it but to improve it over time.
Thank you.
Your next question is from the line of Roland Mayer with RBC capital markets.
Hi, Good morning, guys first a quick one of the premium retention ratio was down a bit year over year is that still the shift to more of a commercial property business or is there anything else on that.
And it fits the <unk>.
The shift in business and we did have a couple of million dollars in reinstatement premium.
During the first quarter.
That drove that down a little bit as well.
Got it and then this might be parsing your words of it but it sounded like.
The competition might be.
Tighter than it was a year ago, and that's not saying a lot, but sort of as you reached the point, where it competition does begin to catch up on rate adequacy is the should we expect the pace of margin improvement of slow before gross flows or sort of how do you balance of the margin improvement that is opportunistic versus sort of the rapid growth of your.
Seeing now.
Yes, I think we're.
We're pretty excited about the market opportunity candidly for the last couple of years, but really.
Kind of for the near term foreseeable future because we are getting both margin expansion and extraordinary growth.
Yeah.
The competition heats up we've got a lot of leeway and our pricing to be more aggressive.
And so we will continue to balance both obviously profitability is are our principal goal of growth as secondary but given the expense advantage in our business model. We think we're going to be able to achieve both over the long term.
Great and are there any sort of metrics you might be able to give on.
Competition has changed recently of your renewal Retentions.
The sort of flat to where they were a year ago or.
Is the hit rate on one of your clothing still.
Similar to where it was last year.
Yes.
I think you might've missed parsed, what we said we were not implying the competition has heated up recently.
Trying to value is pretty steady and if you look at the we don't really share metrics of Aflac group.
The competitive marketing stack area, but generally that's been pretty state of it. So we're not seeing any deterioration in those metrics because of competition and we're not saying anecdotally anecdotally any increase in competition its just steady.
Great. Thanks for the clarification of those were all my questions.
Thanks, Ron.
Again to ask a question. Please press star one on your telephone keypad.
Your next question is from the line of Pablo things on with J P. Morgan.
Hi, Good morning, I, just wanted to follow up on the topic of favorable development, which was mostly from accident year 2020.
I guess what drove the decision through the lease fairly early in the action have any impact on how you are thinking about loss picks for 2021.
Yes, Pablo this is Mike.
We have.
Part of our actuarial.
The assumptions you have reporting patterns.
And.
The you anticipated and they vary by the statutory line of business.
And it's those patterns that govern how reserves are released over.
A couple of years for short tail lines like property.
The $5 seven nine years for some of the casualty lines and it gets into the upper teens I think for our excess casualty, which is considered a longer tail lines of business.
So it's.
It's a formulaic relief and.
Those.
We do adjust those patterns annually based on <unk>.
The actual claims activity that we compare to the assumptions, but in general.
They are pretty steady and.
I think thats, what youre seeing.
There's also an effect because 2020 was dramatically larger than every accident year that came before it.
So theres just more dollars in play each each progressive year that we've gone along.
Especially given the robust growth rates.
Yes that helps.
Yes, it does.
Especially the point about 2020 being large dollar that makes sense.
And then the second question you had referenced margin improvement given the pricing exceeding loss cost in your remarks I was wondering if you could provide some deal on debt, whether you see loss cost trends or maybe even the margin expansion you expect.
Yes, we've talked about that before the where we see.
The loss cost trend below 4%.
And.
If you go back to 2019, I think we were raising rates around double that around 8%.
For 2020, we move that up to low teens kind of the 10% to 13% range.
And as Brian said <unk>.
<unk> in Q1.
Got it and then I just have a couple more.
The question. So I think the net commission expenses held steady at about 13% of earned the <unk>.
Clearly the other underwriting expense ratio has come down considerably over time. So just given your growth how should we think about that part of your of the non commission part of your expense base. So I presume some part of it will evaluate premiums, but other costs might be more fixed in nature, perhaps over the long term.
Yes, I would say, we would expect it to be relatively steady I think Brian commented earlier that we're getting some economies of scale there.
But it's not going to be a dramatic improvement.
From quarter to quarter.
The reason, we talk a lot about technology and our expense ratio overall is because it's dramatically lower than most of our competitors and we're working to be even more efficient in the future.
But as I see it more of the incremental steady improvement as opposed to any kind of.
<unk> drop.
Got it and the last from me.
You guys have a decent sized construction book any thoughts on the what.
Infrastructure Bill might mean for your business.
Yes.
I haven't thought of that but I assume that would mean some positive for us.
It's already of European construction of pickup from not just kind of further in Houston.
Okay. Thanks for your assets.
Thanks Pablo.
Yes.
At this time there are no further questions.
Okay.
Okay operator.
Just want to thank everybody for joining us on the call on just a quick acknowledgment. We just posted the best results in our company's history and I think of lot of it goes back to the employees to come to work every day.
<unk>.
That's the foundation of our business and they are working very hard and I think youre seeing the results of that so.
Kudos to them and we look forward to speaking with everybody again here in a few months.
Okay, Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.