Q2 2021 Kinsale Capital Group Inc Earnings Call
[music].
Okay.
And you probably get started let me remind everyone that through the course after teleconference. Kinsale management may make comments that reflect their intentions beliefs and expectations for the future.
As always these forward looking statements are subject to sit there and the rest of the factories.
And which could cause actual results to differ materially these risk factors at least that and the company's value is S. E T filings.
Including the 10 to 20, and we'll report on form 10-K, which should be reviewed carefully.
The company has furnished a form 8-K with the.
And exchange Commission that contains the press release announcing its second quarter results Kinsale management May also reference certain non-GAAP financial measures in the call today, a reconciliation of GAAP for these measures can be found in the breath for list, which is available at the company's website at.
For the Ww that Kinsale capital group Dotcom.
I will now turn the conference over to T cells, President and CEO, Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your joining us on the call today.
Bryan Petrucelli <unk>.
Securities Financial Officer, and Brian Haney.
<unk> operating officer are with me as well.
After each of us to make a few comments. We will then take any questions you may have.
And sales operating earnings for the second quarter 2021 were $1.28 per.
Looted share and increase.
So 52% from the second quarter of 2020.
Gross written premium was up over 45 per cent for the quarter.
And the company posted a 79.5% combined ratio and an 18.2% annualized operating return on equity.
For the first 6 months of 2020.
Sales from <unk>.
These numbers are well ahead of our guidance of a mid <unk> combined ratio and mid teens and operating return on equity.
And sales results were driven by our unique business strategy that combined focus on the small account E&S market.
Control over our underwriting operation.
And technology enabled low costs.
But they are also driven especially their 45% growth rate and the second quarter from the continued favorable market conditions within the E&S segment, we continue to see steady growth and new business submissions, which we see as a bit of a leading indicator and we.
<unk> to say low double digit rate increases across the book of business.
Which are positively impacting our margins Brian.
Brian Haney will offer some additional commentary on this topic here and a moment.
And we are optimistic about market conditions for the balance of the year and perhaps next year as well.
Regarding.
Capital levels for the company is well situated currently and we don't expect to need any additional capital this year, even with the strong growth rate to the extent that we do need additional capital next year, we would expect to use debt in lieu of equity capital.
I'll now turn the call over to Bryan Petrucelli.
Thanks, Mike.
The results for the second quarter continued to be strong and driven by solid premium growth favorable loss experience and disciplined expense management. We reported net income of $35.6 million for the second quarter of 2021, representing an increase of 17, 8% from compared to.
$32 million last year, and due primarily to higher earned premiums.
And net favorable loss reserve development net.
And net operating earnings increased by 54% to $29.4 million up from $19 million and the second quarter of 2020.
The company generated underwriting.
I'm, a $28.7 million and a combined ratio of 79, 2% for the quarter compared to $15.7 million and 83, 8% last year with improvements to both the loss and expense ratios.
The combined ratio for the second quarter of 2021 included 6.6 points from net.
Favorable prior year loss reserve development.
And 2.1 points from cat losses, compared to 3.7 points of favorable loss reserve development and negligible cat losses last year.
The cat losses, this quarter were primarily related to development on losses from a couple of the Texas winter storms.
Our current accident.
And at year loss ratio.
Exclusive of cat losses decreased slightly and recognition of the ongoing favorable pricing trends that Mike previously touched on.
We expect there will always be some variability and our quarterly expense ratio and our 21, 7% expense ratio for this quarter continues to benefit from some economies.
<unk> of scale given that our earned premiums are growing faster than our operating expenses and from slightly lower relative net commissions as a result of a shift and the mix of business to lines that are subject to reinsurance and where we receive ceding commissions.
Our effective income tax rate for the quarter was 18, 5% compared to.
And 8% last year and higher due to lower tax benefits from stock compensation activity this quarter.
Annualized operating return on equity was 18, 2% for the first 6 months of this year and again as Mike stated ahead of our mid teens guidance.
Written premiums were approximately $194 million for.
The quarter, representing a 45% increase over last year due to the favorable market conditions that Mike mentioned and also superior our superior service standards.
On the investment side net investment income increased by 11, 8% over the second quarter last year.
Up to $7.4 million from 6.
$6.6 million last year as a result of continued growth and our investment portfolio annualized gross investment returns, excluding cash and cash equivalents was 2.6% for the year, so far compared to 3% last year.
Diluted operating earnings per share was $1.28 per share for the quarter.
Compared to 84 per share last year.
And with that I'll pass it over to Brian Haney, Thanks, Brian as mentioned earlier premium grew 45% and the second quarter up 36%.
36% and the first quarter, and 34% and the fourth quarter of 2020.
The growth is generally driven by higher.
For submission volume and rate increases as well as robust economic growth, which is driving up premiums.
Every 1 of our divisions was up for the quarter led by Allied health excess casualty and commercial property.
And the reopening of the economy and the strong economic growth is providing us a significant boost.
Submission growth was in the upper teens.
Quarter, which represented a rebound from the first quarter.
As for rates, we continue to push them up and response to market conditions. As a reminder, we have a very heterogenous book of business, which complicates, reducing all the rate movement to 1 single number but that all being said, we see rates being up and the low teens range and the aggregate during the second quarter.
And the second generally consistent with the past 2 quarters.
Some data suggest that the industry has passed peak rate increases at this point, but for whatever reason, perhaps mix of business, we feel that our rate increases have stayed high and not starting to app.
It is worth discussing inflation for a moment it's.
It's important to note that a majority of our policies.
Our written on inflation sensitive exposure basis, such as revenue or payroll. So as inflation goes up premiums go up commensurately for the bulk of our policies and.
Inflation also FX losses of course, and while our loss trends have been pain, we are noticing a general price inflation for the businesses, we insure and in the economy on the whole.
And as a matter of time before and that shows up and loss trends for us and the rest of the industry.
The biggest components of our losses, our medical cost loss wages construction costs and legal costs, all of which are going to be affected by general price inflation. We are aware of this and staying on top of it.
Whatever the true inflation rate is and whether or not it.
And as transitory we are getting rate increases that are in excess of it. So we are implicitly building on what were already strong margins.
We feel that elevated inflation will prolong the hard market because it will erode the margin improvement that insurers were aiming for with the increased rates.
We are and a good spot because we are raising rates not to correct.
And all of them, but to further improve our already strong returns, but in any event for longer and inflation remains elevated for longer we expect the hard market will stay with us.
In summary, we are optimistic we have a great team great results as well as our strong balance sheet with conservative reserves, our business model works, well and any market.
Correct and for hard were softer and between the current market conditions are really again and with that I'll turn it back over to Mike.
Thanks, Brian Operator, we're now and we're now ready to take any questions come in.
Thank you ladies.
Ladies and gentlemen, if you.
And at this time, please press star and then the number 1 key on your thoughts shown powerful and just a question has been answered or you wish day and will be yourself from the queue basketball and Keith.
We have our first question from the line of Jeff Schmidt from William.
William Blair Your line is open.
Good morning, Jeff.
Hi, good morning.
Just curious how you handle inflation from a reserving perspective, I think you'd have to have a view on whether it's sort of transitory or not.
You tend to be pretty conservative just wondering how you.
You have on Inc for that.
Hi, yes.
And I think we've spoken about this many times that and it's a fundamental part of our business strategy and opposed to reserves that are much more likely to develop favorably than unfavorably and we're constantly reviewing actual experience against all of the and various.
Your career assumptions, including.
Net loss cost trends.
And so.
And.
As data comes in we adjust our estimates accordingly.
And as Brian said most of our policies are priced off of inflation sensitive metric so to the extent.
Inflation picks up.
That flows through the revenue that our insureds experience and our insurance premiums are priced off that inflated base.
But.
Does that kind of get at your question.
Yes, no I was just curious if you have to make a call.
Actual and whether that's transitory or just how are you.
<unk> handle that.
And then you had you had pointed out I think some of the areas of highest growth was allied health excess casualty I think those areas a bit and that's been.
Are they sort of the farthest from rate adequacy.
And with Sears, there just greater dislocation and those lines could you maybe touch on on this.
I would say.
And the rates were charging and those are adequate and were earning like a really high margin I would just say the industry has had some challenges and those areas commercial property and seen a lot of cat activity and the industry.
Paul Allied health, there's just been a number of competitors that have.
And sort of blown up right and that type of business and excess casualty is.
Fairly.
Common thing you would see and a market turn where people kind of get burned with soft market practices and then have to course correct.
And Thats, what we see going on so.
But I would say, we feel pretty good about our rates and our experienced and this.
Right, Yeah, and that was for more of the market.
Those areas, where the market is farther off I mean, you've been rate adequate obviously for for some time, but.
Okay.
Okay. Thanks for the answers.
Thank you Sir we have another question from the line of from Mark Hughes from Tavis. Your line is open.
Yes.
Yes. Thank you good morning.
Good morning, Mark.
The 210 point of development on the <unk>.
Q1 storms was that.
Inflation and material costs higher than expected or what drove that.
I think it was.
A couple of claims where we were and an excess position.
And on a larger commercial schedule and there can be some ambiguity in the early days Hey, we think this this losses.
$30 million and over the course of the adjustment process it turns out to be a higher.
Higher number and it.
And for attaching excess of.
And a substantial retention or and underlying schedule.
And I think it was that type of thing where I wouldn't attribute it to inflation per se I think it was just ambiguity and the adjustment process and we were and an excess position.
Understood how about.
When we think about social inflation I think you've spoken to this and number of times, but do you see any movement and the court system anything in your book that's been.
Impacted by that.
And I think you kind of stay away from most of that but could you give us a sense of.
What's going on in terms of activity or court.
Movement, let's say.
I think in general I would say loss cost trend is real.
Endeavor to stay well ahead.
Yeah.
I think given our focus on smaller commercial accounts. The fact that we put up smaller limits.
And <unk> to us a little bit from some of these nuclear verdicts and the like.
I would say in terms of inflation.
And as Brian indicated to the extent that there is a general price.
Price inflation, we're going to see that along with everybody else and.
Certainly when property claims come in.
Material costs are up labor costs are up.
I'm sure, we're seeing that and current estimates but.
Is it impacting our kind.
Head of it and macro trends across our whole book of business No I think things are going quite well for us.
And then the reserve development and the quarter the 6.6 points how much of that was the.
2000, 22020 was obviously an unusual year in terms of frequency and severity.
And of.
A little more depth.
And some of your older accident years, you've had.
From.
Less favorable development through time, how are you seeing that dynamic now.
Yes.
We are.
We are conservatively.
And across all of our accident years.
A huge priority for us as.
As a management team and and as a business.
We've gotten some dramatic rate increases the last couple of years and I would say some of those more current accident years or even.
More conservatively positioned.
And.
And then 2020 also has the added.
Issue of Covid, where.
Our reported losses were lower than we expected and.
And we offset that with higher <unk> just to make sure that.
We were well positioned and the case there were some sort of bounce back and reported loss.
Loss activity.
Each quarter that goes by.
We will make modest adjustments to those assumptions to kind of normalize the.
For 2020 accident year with the prior year's but in general.
We're always every quarter, we're looking at actual loss activity and comparing it against all the various <unk>.
<unk> and assumptions that we make.
And and we adjust but.
I think in general I think from an Investor standpoint, 1 thing I would notice.
We are seeing a modest uptick in the amount of redundancy thats coming out every quarter and I think that's largely a function of.
And a pretty dramatic increases in price that we've been able to charge for the last couple of years. So again, we feel very good about the reserves for the company.
And we feel very good about the modest margin expansion and we're starting to see on the bottom line.
Have you seen any.
The back off the 2020 accident year.
In terms of claim.
No.
Okay, and then 1 final question I'm sorry to drill.
Thrown on but.
Rai and specialties the IPO.
I think part of their discussion was that there is.
Consolidation among the wholesale brokers.
And any thoughts on whether that.
Whether that is the case that there is consolidation that that has any meaning in terms of your ability to.
To get to the market.
Well, there's definitely been consolidation.
<unk> Ryan has acquired a number of <unk>.
Firm, but.
Others have as well and.
It hasn't had any impact on us, we do quite a bit of business with with all the large wholesale brokers and.
But we've worked with a lot of smaller.
We kind of characterize them as national brokers. Some are more regional some are very local.
There are some startups that have opened and the last couple of years, we worked with them as well, but certainly theres been a lot of acquisition activity and.
As of today has it hasnt really impacted our business.
We do quite a bit of work with all of those firms and they're very good and what they do.
Thank you.
Thank you Sir we have another question from the line of Casey Alexander from Compass Point. Your line is open.
Hi.
Hi, Good morning, guys I have a couple of questions for you.
First of all Scott kind of from a high level given the.
The extraordinary growth rate that you are producing.
To what extent does this eventually stress your manpower your real estate footprint and.
And.
And your need to add some expenses to support this growth.
And also and particularly in relation to the real estate footprint, how does work at home habits and work at home changes impact that dynamic.
Casey and good morning, and this is Mike.
Yes.
We've been growing at a strong double digit rate for a number of years now and of course, it puts a lot of <unk>.
Stress on your management team.
For recruiting and hiring a lot of people that's.
Theres, a big training component.
And the like but that's.
And that's what we get paid to do and we've been working.
Nevada for a number of years and house. So that's that's kind of business as usual.
In terms of the real estate footprint.
There's no stress there we've got plenty of capacity and the building that we occupy.
What was the third part of your question well just.
<unk> heart of this work at home habits impact that yes.
<unk> worked from the office team and.
We did move 90% of our employees home when the virus first hit back and I guess it was March or April of 2020, but.
Bye Bye October we're basically back in the office.
And.
Given the number of new hires.
The training component, we want those new employees to learn our culture.
Working together and in office facilitates communication.
A big part of our business strategy is delivering best in class service to our brokers.
And.
All of that all those goals are furthered by having everybody work together and an office and so.
And that's how we're operating.
Okay, great. Thanks, and secondly, let's say.
Year ago, the discussion during the quarter disc.
Discuss.
A decrease in the competitive environment and in the set of competitors was offered you kind of a clear vision towards accelerated growth over the course of the next year, how would you characterize the competitive environment now compared to what it was a.
And that.
I'd say it's free.
So we've seen some new competitors, but they tend to be small and we're still seeing some pullback from larger competitors sale and balances.
More or less and the way it was.
Alright, great. Thank you I appreciate you taking my questions.
A year ago. Thanks Casey.
Thank you Sir we have another question from the line of Roland Mayer from RBC capital. Your line is open.
Hi, Good morning, when you guys talked about low teens rate increases is that pure rate or the effects of change in terms and conditions.
And that number.
Pure rate.
Not including the fact that not including the effect of inflation on the exposure base.
Got it and is there any way and I would quantify sorted.
The impact of tightening terms and conditions and.
So is that worth another 1 or 2 points of theirs.
In conclusion of 1 or 2 points of pricing or and.
And it would be every accounts it'll be tough to quantify it's worth something.
Okay got it 1 or 2 is probably as good a guess as any.
Got it yes it does.
Really my.
And I guess just to double enough cases kind of what we've seen a lot of company.
Equivalents that dialing up growth.
And the next coming quarters is that really Hasnt worked down and you guys at all.
Not really entered your marquee at higher competition.
I mean, there's look there's plenty of competition I think Brian said it was steady from the prior year.
Our hit ratio on new business submissions continues.
Companies be somewhere between 10 and 15%.
At the same last year is the same the year before that.
So there is plenty of competition, it's just it's diminished from where it was.
5 years ago or for years ago, when we were in.
A very but I.
To be for us as a more.
Intensely competitive market, it's a little bit less today.
But.
That doesn't mean, there's no competition.
No that makes sense. Thank you for your those were my only 2 questions congrats on the quarter.
Thanks Roland.
Okay. Thank you again, everyone. If you have a question. Please press Star then the number 1 on your Touchtone telephone and we have another question from the line of Pablo <unk> from Jpmorgan. Your line is open.
Hi, Thank you so and the first question it seems like the improvement and accident year loss fix call. It about 1 point from the first half.
Last year for first half of this year is low in light of the GAAP, we're getting between price increases.
And your point I think you said, the low double digits and lobster and such I think and the fact, you've said it and the mid single digit range can you share your thoughts on that and maybe.
Is there an element of conservatism and loss picks are setting and.
I guess would it be reasonable to assume.
Continue to drift down and those loss picks over time.
Yes, Paolo good morning. This is Mike and I would say there is absolutely a element of conservatism and those loss picks.
And.
They are highly likely to develop down over the years as those losses come in and they are adjusted.
And settled out and.
And.
Relatively young company and Sara I think our 12 month accident year and business.
If you look back every accident year, but 1 of the very early ones have developed favorably.
On an inception to date basis, and so that's a really important.
<unk>.
Goal for us as a management team, we want people to have a lot of confidence and our balance sheet and so yes absolutely.
Conservative reserves were getting really good rate increases and you match that up with a high quality very disciplined underwriting operation and we expect the margin expansion to continue incrementally.
Got it and.
Along the same lines could you speak about where you see the expense ratio trending. So obviously you have been going down.
Even if you even if the company has been expanding rate, but just given the strong growth and premiums that will likely persist for at least and a couple of years.
How do you see that expense ratio.
Yeah.
Well.
Yes.
We obviously are making investments and human capital and <unk>.
As we grow.
There is a possibility youll see a little more drift down and that expense ratio, but I think if youre looking over the long term I think.
Seeing where it is now.
The 21% to 22% to 23% range over the long term is probably where were.
Where we would see it.
But over the short term you could see a slate.
A slight improvement and that keep in mind that it's a lot of it is mix of business as Brian said earlier on his comments.
Comments, we reinsure some lines of business, where we get a ceding commission, which could could helps push that down if we saw an uptick and.
Our excess casualty business for instance.
So that's 1 big component and I think the variable is.
Business and then head count.
Yes.
Got it and then last question for me.
Thanks for the update on capital, but can you remind us again.
What kind of are.
What level of freedom and leverage you'd be comfortable running at and I suppose next year youre surplus could potentially be funded by debt and equity.
Equity, depending on how growth plays out but.
And I guess just sort of.
Big picture, what kind of leverage can tell would be comfortable running at.
Yes, I think it's 20% debt to total capital.
And as kind of our long term target I think we're about 6% today.
So we've got a ways to go.
But.
That's why we made the comments about really as we need additional capital to grow the business, we would look to that.
Non equity at this point.
Got it and premium leverage actually that was the question I should've been clearer.
Premium leverage and I guess.
Pending how you grow right that will affect your premiums.
And leverage, but and let me attack how much debt you might have to rates, but what premium leverage would still be comfortable running and thank you.
Yes, and best per car model.
Yes, I mean, it's a complex capital model and the big drivers within that our reserves and premium.
But theres other charges for growth and invest.
And so etcetera.
And so theres no specific.
Premiums to surplus ratio that they that that would be.
Revenue from the model, but we just guesstimate somewhere and a.
A little bit higher than 1.2 to 1 net written premiums to statutory surplus.
<unk> non-GAAP equity and GAAP equity and stat surplus are correlated but there are different numbers. So.
And for what Thats worth obviously, we're an a rated.
AA rated 10 a M best.
That's our <unk> rating, that's a really important.
Number for us and we're going to maintain that <unk> rating.
Sure.
Okay.
For 2.1 and a quarter to 1 I think is a good guess.
Okay. Thank you. Thank you.
Thank you for that Sir we have another question from the line.
That's helpful. Jamie Inglis from Philo Smith your line is open.
Hi, good morning.
Amit interested and following up on your comments about inflation and how it helps you when it's your rates are.
Premiums are tied.
<unk>.
Revenue for payroll et cetera, and sort of allows you to participate and inflation on the revenue side.
And how does that work from the other side because you can pay a claim today.
James and our policy was written a little while ago and it could be quite a while ago, depending on the type of policy. So does the inflation today allow you to.
Tied to wait for put more and the bank from a reserve point of view or does or does that is it not work that way.
This is Mike I would say that.
This is going to be a very complex topic.
How installation works its way through our book of business clear.
Clearly, if we collect a premium today and settle a claim and 3 years.
That claim is going to be inflated.
As a negative.
The fact that we write a policy for $10000 and at the end of the year the contractor that we're insuring.
Charge higher rates because of inflation.
We're going to collect and audit and additional premium that's and inflation benefit.
And Theres a lot of those that work their way through for our business, but I would say and general wed like stable pricing, but given the inflation sensitive.
Pricing mechanism it provides a little bit of protection.
And I think Brian was Brian Haney commented earlier that the conservatism and our reserve position provides additional protection.
And then I would also say the fact that we tend to focus on posting lower limit policies.
Probably provides another round of protection right.
And.
But there's a lot of there's a lot of different things with inflation that would probably go either for us or against us.
Okay, great. Thanks for your help.
Net.
Thank you Sir there are no further questions at this.
Time, I will now turn the call back at you and Mr. Michael <unk> for closing remarks, Sir.
Okay. Thank you operator, and thank you everybody for joining us and we look forward to another positive call here and a few months.
Have a good day.
And.
Thank you, Sir ladies and gentlemen. This concludes today's conference call you may now.
Thank you for participating you have a good day.
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Yes.
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Before we get started and let me remind everyone that through the course off the teleconference. Kinsale management may make comments that reflect.
And Vincent beliefs and expectations for the future.
As always these forward looking statements are subject to sit there and the rest of the factors, which could cause actual results to differ materially. This risk factor, it's always said and the company's value is S E SEC filings.
And quoting and attended.
And while the report on form 10-K, which should be reviewed carefully.
The company has furnished a form 8-K with the securities and exchange for Medicine. That's been thanks for the press release announcing its second quarter results Kinsale management May also reference certain non-GAAP financial.
And the measures in the call today, a reconciliation of GAAP measures can be found in the breath for list, which is available at the company's website at Www Dot Kinsale capital group Dotcom.
I will now turn the conference over to <unk>, President and CEO, Mr. Michael Kehoe.
And so I would go ahead sir.
Thank you operator, and good morning, everyone.
Appreciate your joining us on the call today for.
Ryan and Petro Sally and sales Chief Financial Officer, and Brian Haney, Chief operating officer are with me as well.
And for each of us to make a few comments, we will then take any.
Any questions you may have.
And sales operating earnings for the second quarter 2021 were $1.28 per.
Per diluted share and increase of 52% from the second quarter of 2020.
Gross written premium was up over 45% for the quarter.
And the company posted a 70.
Please.
5% combined ratio and an 18.2% annualized operating return on equity.
For the first 6 months of 2021.
These numbers are well ahead of our guidance of a mid <unk> combined ratio and mid teens operating return on equity.
And sales results were driven.
And now by our unique business strategy that combined focus on the small account E&S market.
Control over our underwriting operations.
And technology enabled low costs.
But they are also driven, especially there are 45% growth rate and the second quarter from the continued favorable market.
<unk> and conditions within the E&S segment.
We continue to see steady growth and new business submissions, which we see as a bit of a leading indicator and we continue to see low double digit rate increases across the book of business.
And which are positively impacting our margins.
Brian Haney wall for some additional common.
And carry on this topic here and a moment.
We are optimistic about market conditions for the balance of the year and perhaps next year as well.
Regarding capital levels of the company is well situated currently and we don't expect to need any additional capital this year, even with the strong growth rate to the extent that.
Commentary and additional capital next year, we would expect to use debt and low of equity capital.
I'll now turn the call over to Bryan Petrucelli.
Thanks, Mike and the results for the second quarter continued to be strong and driven by solid premium growth favorable loss experience and disciplined expense management.
We did and we reported net income of $35.6 million for the second quarter of 2021.
Representing an increase of 17, 8% from compared to $32 million last year and due primarily to higher earned premiums.
And net favorable loss reserve development net.
Net operating earnings increased.
And the 4% to $29.4 million up from $19 million and the second quarter of 2020 the.
The company generated underwriting income of $28.7 million and a combined ratio of 79, 2% for the quarter compared to $15.7 million and 83, 8%.
By midyear with improvements to both the loss and expense ratios.
The combined ratio for the second quarter of 2021 included 6.6 points from net favorable prior year loss Reserve development.
And 2.1 points from cat losses, compared to 3.7 points of favorable loss reserve development and negligible.
<unk> cat losses last year.
The cat losses, this quarter were primarily related to development on losses from a couple of the Texas winter storms.
Our current accident year loss ratio.
Exclusive of cat losses decreased slightly and recognition of the ongoing favorable pricing trends that Mike previously touched on.
We expect there will always be some variability and our quarterly expense ratio and our 21, 7% expense ratio for this quarter continues to benefit from some economies of scale given that our earned premiums are growing faster than our operating expenses and from slightly lower relative net commissions as a result of a shift and the mix of business.
This to lines that are subject to reinsurance and where we receive ceding commissions.
Our effective income tax rate for the quarter was 18, 5% compared to 14, 8% last year and higher due to lower tax benefits from stock compensation activity this quarter and.
Annualized operating return on equity was $18.
2% for the first 6 months of this year and again as Mike stated ahead of our mid teens guidance.
Gross written premiums were approximately $194 million for the quarter, representing a 45% increase over last year due to the favorable market conditions that Mike mentioned and also superior our superior service standards.
And on the investment side net investment income increased by 11, 8% over the second quarter last year.
Up to $7.4 million from $6.6 million last year as a result of continued growth and our investment portfolio and.
Annualized gross investment returns, excluding cash and cash equivalents was 2.6.
Percent for the year, so far compared to 3% last year <unk>.
Diluted operating earnings per share was $1.28 per share for the quarter compared to 84 per share last year and.
And with that I'll pass it over to Brian Haney, Thanks, Brian as mentioned earlier premium grew 45% and the second quarter up 30.
36%.
Up from 36% and the first quarter and 34% and the fourth quarter of 2020.
And the growth is generally driven by higher submission volume and rate increases as well as robust economic growth, which is driving up premiums and.
1 of our divisions was up for the quarter led by Allied health excess casualty and commercial property.
<unk>.
The reopening of the economy and the strong economic growth is providing us a significant boost.
Submission growth was in the upper teens, and the second quarter, which represented a rebound from the first quarter.
As for rates, we continue to push them up and response to market conditions. As a reminder, we have a very heterogenous book of business.
Which complicates reducing all the rate movement to 1 single number but that all being said, we see rates being up and the low teens range and the aggregate during the second quarter generally consistent with the past 2 quarters.
Some data suggest that the industry has passed peak rate increases at this point, but for whatever reason, perhaps mix of business, we feel that our.
Our rate increases have stayed high and not starting to app.
It is worth discussing inflation for a moment.
It's important to note that a majority of our policies are written on inflation sensitive exposure basis, such as revenue or payroll. So as inflation goes up premiums go up commensurately for the bulk of our policies.
Inflation also FX losses and <unk>.
And while our loss trends have been pain, we are noticing a general price inflation for the businesses, we insure and in the economy on the whole and.
As a matter of time before and that shows up and loss trends for us and the rest of the industry.
The biggest components of our losses, our medical cost loss wages construction costs and.
Legal costs, all of which are going to be affected by general price inflation. We are aware of this and staying on top of it whatever.
Whatever the true inflation rate is and whether or not it is transitory. We are getting rate increases that are in excess of it. So we are implicitly building on what were already strong margins.
We feel that elevated inflation will pro.
Current market because it will erode the margin improvement that insurers were aiming for with the increased rates.
And we feel we're in a good spot because we are raising rates not to correct. The problem, but to further improve our already strong returns, but in any event the longer and inflation remains elevated for longer we expect the hard market will stay with us.
Along the and.
In summary, we are optimistic we have a great team great results as well as a strong balance sheet with conservative reserves, our business model works, well and any market hard were softer in between but the current market conditions are really again and with that I'll turn it back over to Mike.
Brian.
We are now and we're.
We're now ready to take any questions that come in.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star and then the number 1 key on your Touchtone telephone. Thank for your question has been answered or you wish to remove yourself from the queue for asking.
We have our first question from the line of Jeff Schmidt from William Blair. Your line is open.
Good morning, Jeff.
Hi, good morning.
Just curious how you handle inflation from a reserving perspective.
I think you'd have to have a view on whether it is sort of transitory or not.
You tend to be pretty conservative just wondering how youre accounting for that.
Yes.
And I think we've spoken about this many times and its a fundamental part of our business strategy to post reserves.
<unk> that are much more likely to develop favorably than unfavorably and we're constantly reviewing and actual experience against all of it and various actuarial assumptions, including.
Loss cost trends and.
And so.
And.
As data comes in we.
<unk> and our estimates accordingly.
And as Brian said most of our policies are priced off of inflation sensitive metric so to the.
Inflation picks up.
And that flows through the revenue that our insureds experience and our insurance premiums are priced off that inflated base.
Adjusted.
But.
Does that kind of get at your question.
Yes, no I was just curious if you have to make a call and whether that's transitory or just how are you.
And how you handle that.
And then you had you had pointed out I think some of the areas of.
This growth was allied health excess casualty I think those areas and that's been.
Are they sort of the farthest from rate adequacy or is there just greater dislocation and those lines could you maybe touch on on those.
Let's say.
And the rates were charging and those are adequate and were earning.
And like a really high margin I would just say the industry has had some challenges and those areas commercial property and seen a lot of cat activity and the industry Allied health, there's just been a number of competitors that have.
Sort of blown up right and that type of business and excess casualty is.
And a fairly.
A.
Common thing you would see and a market turn where.
People kind of get burned with soft market practices, and then have to course, correct and thats, what we see going on so.
But I would say, we feel pretty good about our rates and our experienced and this.
Right, Yeah and that was for more.
And the market.
Are those areas, where the market is farther off I mean, you've been rate adequate obviously for for some time, but.
Okay.
Thanks for the answers.
Thank you Sir we have another question from the lying off and Mark Hughes from Jefferies. Your line is open.
Yes, Thank you and good morning.
Good morning, Mark.
The 210 point of development on the Q.
Q1 storms was that.
Inflation.
Asian and material costs higher than expected or what drove that.
I think it was.
A couple of claims where we were and an excess position.
And on a larger commercial schedule and there can be some ambiguity in the early days Hey, we think this.
This losses.
$30 million and over the course of the adjustment process. It turns out to be a higher number and it.
For attaching excess of.
And a substantial retention or and underlying schedule.
And I think it was that type of thing.
I wouldn't attribute it to inflation per se I think it was just ambiguity and the adjustment process and we were and an excess position.
Understood.
Ill.
When we think about social inflation and I think you've spoken to this and number of times, but do you see.
And any movement and the court system anything in your book that's been <unk>.
Impacted by that.
And you kind of stay away from most of that but could you give us a sense of whats going on in terms of activity or court.
Movement, let's say.
I think in general I would say loss cost trend is real.
Endeavor to stay well ahead of it.
I think given our focus on smaller commercial accounts. The fact that we put up smaller limits.
Inoculates us a little bit from some of these nuclear verdicts and the link.
I would say in terms of inflation.
As Brian indicated to the extent that there is a general price inflation, we're going to see that along with everybody else and.
And certainly when property claims come in.
And material costs are up labor costs are up.
And I'm sure, we're seeing that and current estimates but.
Is it impacting our kind of macro trends across our whole book of business No I think things are going quite well for us.
And then the.
Reserve development and the quarter the 6.6 point, how much of that was.
The 2000.22020 and was obviously an unusual year in terms of frequency and severity.
A little more depth I know and some of your older accident years you've had.
From.
Less favorable development through time, how are you seeing that dynamic now.
Yes.
We are.
We are conservatively positioned across all of our accident years, that's a huge priority.
Priority for us.
As a management team and and as a business.
We've gotten some dramatic rate increases the last couple of years and I would say some of those more current.
And years or even more.
More conservatively positioned.
And then 2020 also has the added issue of Covid, where.
Our reported losses were lower than we expected and.
And we offset that with higher IV and are just to make sure that.
Accident, and we were well positioned and the case there were some sort of bounce back and reported loss activity.
For each quarter that goes by we.
We will make modest adjustments to those assumptions to kind of normalize.
For 2020 accident year with the prior years, but in general.
We're always every quarter we are.
Looking at actual loss activity and comparing it against all the various actuarial assumptions that we make.
And we adjust but.
And I think in general I think from an Investor standpoint, 1 thing I would notice.
Hey, we're seeing a modest uptick and the amount of redundancy.
And Thats coming out every quarter and I think that's largely a function of the.
Pretty dramatic increases in price that we've been able to charge for the last couple of years. So again, we feel very good about the reserves for the company.
And we feel very good about the modest margin.
Cash and we're starting to see on the bottom line.
Have you seen any bounce back after 2020 accident year.
In terms of claim.
No.
Okay, and then 1 final question I'm sorry to.
Drone on but the.
Rai and specialties.
And is the IPO.
I think part of their discussion was that there is consolidation among the wholesale brokers.
And any thoughts on whether that.
Whether that is the case that there is consolidation that that has any meaning in terms of your ability to.
To get to the market.
Well, there's definitely been consolidation you know Ryan has acquired a number of.
Firms, but.
And the others have as well and.
Yeah.
It Hasnt had any impact on us, we do quite a bit of business with all the large wholesale brokers and.
Yeah.
But we've worked with a lot of smaller.
We kind of characterize them as national brokers. Some are more regional some are very local.
And there are some startups that have opened and the last couple of years, we work with them as well, but certainly theres been a lot of acquisition activity.
As of today has it hasnt really impacted our business, we do quite a bit of work with all of those firms and they're very good and what they do.
Thank you.
Thank you Sir we have another question from the line of Casey Alexander.
And from Compass point your line is open.
Hi, Good morning, I have a couple of questions for you.
<unk>.
First of all kind of from a high level given that the.
And the extraordinary growth rate that youre producing.
To what extent does this eventually stress.
Manpower your real estate footprint and.
And your need to add some expenses to support this growth.
And also and particularly in relation to the real estate footprint, how does work at home habits and work at home changes impact that dynamic.
Casey and good morning, and this is Mike.
Yes, listen we've been growing at a strong double digit range for a number of years now and of course, it puts a lot of <unk>.
Stress on your management team.
For recruiting and hiring a lot of people that's.
There was a big training component.
<unk> and the like but hey, that's that's what we get paid to do and we've been working hard at it for a number of years and house. So that's that's kind of business as usual.
In terms of the real estate footprint.
And there's no stress there we've got plenty of capacity and the building that we occupy.
What's.
For the third part of your question.
This work at home.
Habits impact that work.
Work from the office team and.
We did move 90% of our employees.
And when the virus first hit back and I guess it was March or April of 2020, but.
Bye Bye October we're basically back in the office and.
Given the number of new hires.
The training component.
Want those new employees to learn our culture.
Working together and in office facilitates communication.
A big part of our business strategy.
And is delivering best in class service to our brokers and.
And all that all those goals are further by having everybody work together and an office and so.
That's how we're operating.
Okay, great. Thanks, and secondly, let's say.
A year ago.
The discussion during the quarter.
Discuss that.
A decrease in the competitive environment and in the set of competitors.
Was offered you kind of a clear vision towards accelerated growth over the course of the next year how would you.
Characterize the competitive environment now compared to what it was a year ago.
I'd say, it's pretty flat so we've seen some new competitors, but they turn.
And to be small and we.
Still seeing some pullback from larger competitors and so on balance it's.
More or less and the way it was.
Alright, great. Thank you I appreciate you taking my questions.
Thanks Casey.
Thank you Sir we have another question from the line.
And of Roland Mayer from RBC capital Your line is open.
Hi, Good morning, when you guys talked about low teens rate increases.
Pure rate or the effects of changing terms and conditions included and that number it's pure rate.
Not including the fact that not including the effect of inflation on the exposure base.
Got it and is there any way and I would quantify sort of sort of the impact of you tightening terms and conditions and.
Is that worth another 1 or 2 points of price at.
The equivalent of 1 or 2 points of pricing or and it would be every accounts it'll be tough to quantify it's worth something.
Okay got it 1 or 2 is probably as good a guess as any.
Got it yes.
Really my.
And I guess just to double.
Double enough Casey's comment we've seen a lot of companies talk about dialing up growth.
And the next coming quarters does that really Hasnt worked down and you guys at all.
Not really entered your marquee at higher competition.
I mean, there's look there's plenty of competition I think Brian said it was steady from the prior year.
Our hit ratio on new business submissions continues to be somewhere between 10 and 15%.
Was the same last year is the same the year before that.
So there is plenty of competition, it's just.
It's diminished from where it was.
5 years ago or for years ago when we.
And a very what I would characterize as a more inter.
Intensely competitive market, it's a little bit less today.
But.
That doesn't mean there is no competition.
No that makes sense. Thank you for your those were my only 2 questions and congrats on the quarter.
And we're enrolling.
Thank you again, everyone. If you have a question. Please press star and the number 1 and your thoughts stolen and telephone and we have.
Another question from the line of Pablo <unk> from Jpmorgan. Your line is open.
Hi, Thank you so and the first question it seems.
Thanks for improvement and accident year loss fix call. It about 1 point from the first half last year and a first half of this year is low and might have a GAAP really getting the price increases to.
And to your point I think you said, the low double digits and lobster and so should I think in the past you've said it and the mid single digit range can you share your thoughts on that and maybe.
Is there an element of conservatism.
And then the last fixture setting and.
And I guess would it be reasonable to assume.
And the continued drift down and those loss picks over time.
Yeah, Pablo good morning, and this is Mike and I would say there is absolutely a element of conservatism and those loss picks.
And I think they're highly likely to develop.
Like the down over the years as those losses come in and they are adjusted and settled out.
And.
We're a relatively young company and Sara I think our 12 month accident year and business.
But if you look back every accident year, but 1 of the very early ones have developed favorably.
On an inception to date basis.
And so that's a really important.
Goal for us as a management team, we want people to have a lot of confidence and our balance sheet and so yes absolutely.
Conservative reserves were getting really good rate increases and you match that up with a high quality very disciplined underwriting and operation and we expect.
<unk> the margin expansion to continue incrementally.
Got it and.
Along the same lines could you speak about where you see the expense ratio trending so all the capacity you have been going down.
Even if you even if the company has been expanding right, but just given the strong growth and <unk>.
It will likely persist for at least and a couple of years.
Do you see that expense ratio trending.
Well.
Yes.
We obviously are making investments and human capital and <unk>.
As we grow.
There is a possibility youll see a little more.
For drift down and that expense ratio, but I think if youre looking over the long term I think look seeing where it is now.
The 'twenty, 1 to 'twenty, 2% to 23% range over the long term is probably where we would see it.
But over the short term you could see a slight.
A slight improvement and that keep.
And as the time that it's a lot of it is mix of business as Brian said earlier on his comments, we reinsure some lines of business, where we get a ceding commission, which could could helps push that down if we saw an uptick and.
Our excess casualty business for instance.
Keith.
So that's 1 big component and I think the variable is mix of business and then head count.
<unk>.
Got it and then last question for me.
Thanks for the update on capital, but can you remind us again.
What kind of are.
What level of speed and leverage you'd be comfortable.
And I suppose next year Youre surplus group, but that should be funded by debt and equity depending on how growth plays out but.
And I guess just surf.
Big picture, what kind of leverage can tell would be comfortable running at.
Yes, I think it's 20% debt to total capital.
And as kind of our long term.
Term target I think we're about 6% today.
So we got a ways to go but.
That's why we made the comments about really as we need additional capital to grow the business, we would look to that.
Non equity at this point.
Got it and premium leverage actually that was the question I should've been clearer.
For the premium leverage and I guess.
And depending on how you grow right that will affect European leveraged.
And what's been the effect how much debt you might have to ratio, but what premium leverage with considerably comfortable running and thank you.
Yes, and best per car model.
And it's a complex capital model the big drivers within.
Observes and premium, but theres other charges for growth and investments et cetera.
And so theres no specific.
Premiums to surplus ratio that day.
And that would be.
Driven from the model, but we just guesstimate somewhere and a little bit higher than.
1.2 to 1 net written premiums to statutory surplus that's not GAAP equity and GAAP equity and stat surplus are correlated but there are different numbers. So.
And for what Thats worth obviously, we're an a rated.
AA rated 10 a.
And best.
Our a M best rating, that's a really important.
Number for us and we're going to maintain that <unk> rating.
Okay.
For 2.1 and a quarter to 1 I think is a good guess.
Okay. Thank you. Thank you.
Thank you for that here, we have another question from the line of Jamie Inglis from Philo Smith Your line is open.
Hi, good morning.
Amit.
Following up on your comments about inflation and how it helps you when it's your.
Wait for you.
Premiums are tied to <unk>.
Revenue of payroll et cetera, and sort of allows you to participate and inflation on net revenue side.
How does that works for me.
The other side because to be pay a claim today. The claims on our policy was written a little while ago and it could be quite a while ago, depending on the type of policy.
And so does the inflation today allow you to.
And for put more and the bank from a reserve point of view or does or does that is it not work that way.
This is Mike I would say that.
This is going to be a very complex topic.
Hi.
How installation works its way through our book of business clearly, if we collect a premium today and settle a claim and 3 years.
And that claim is going to be inflated.
Which is a negative.
And the fact that we write a policy for $10000 and at the end of the year the contractor that we're insuring.
Charged higher rates because of inflation, we're going to collect and audit and additional premium that's and inflation benefit.
And Theres a lot of those that work their way through for our business, but I would say and general wed like stable pricing.
But given the inflation sensitive.
Pricing.
Mechanism. It provides a little bit of protection and then I think Brian was Brian Haney commented earlier that the conservatism and our reserve position provides additional protection.
And then I would also say the fact that we tend to focus on posting lower limit policies.
Probably provides.
Another round of protection right.
<unk>.
But there's a lot of there's a lot of different things with inflation that would probably go either for us or against us.
Okay, great. Thanks for your help.
You bet.
Thank you Sir there are no further questions at this time I will now turn the call back to Mr. Michael Yao Park, losing remarks, Sir.
Okay. Thank you operator, and thank you everybody for joining us.
Look forward to another positive call here and a few months.
Have a good day.
Thank you, Sir ladies and gentlemen.
This concludes today's conference call you may now disconnect. Thank you for participating you have a good day.
