Q3 2021 Kinsale Capital Group Inc Earnings Call
Before we get started let me remind everyone that through the course of the 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 certain risk factors, which could cause actual results to differ.
Particularly beef.
These risk factors are listed in the company's various SEC filings, including the 20th any annual report on Form 10-K, which should be reviewed carefully. The company has furnished a form 8-K with the securities and Exchange Commission that contains the press release announcing its third quarter results.
Kinsale management May also refer on that May also reference certain non-GAAP financial measures in the call today.
A reconciliation of GAAP to these measures can be found in the press release, which is available at the company's website odd triple double your dock Kinsale capital Group Dotcom.
I will now turn the call over to you.
Chicken sales President and CEO Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your joining us on the call today.
We will follow our usual format.
With a brief introduction from me then Bryan Petrucelli can sales Chief Financial Officer, and Brian Haney, Chief operating officer will each provide some additional commentary and then we'll move on to any questions from any idea.
Can sales operating earnings for the third quarter 2021 were $1 59 per diluted share a significant increase from the third quarter of 2020.
Gross written premiums.
Gross written premium rather was up 36, 5% for the quarter.
The company posted a 75.7% combined ratio for the quarter.
And 78, 1% combined ratio for the nine months.
Our operating return on equity for nine months was 19, 8%.
Multiple years of significant rate increases combined with our disciplined underwriting and low cost model is allowing for meaningful margin expansion.
Our long term guidance of 15% operating return on equity.
And we expect to continue to run well ahead of that 15% goal.
Our catastrophe loss from hurricane either was $4 $6 million net of tax.
This relatively modest loss in light of the severity of the storm is consistent with our cat experience over the last 10 years, we do write cat exposed property business through our personal lines and our commercial property books, and we think the margins in that business are compelling.
Well, we also seek to limit the volatility of the business through a combination of good underwriting strict limits on the concentration of business and our comprehensive reinsurance program the relatively higher cat loss figure from the third quarter of 2020 compared to the third quarter of 2021 was mostly due to the.
[noise] occurrence of multiple events.
Last year.
We continue to be optimistic about market trends and prospects for our business.
Our own numbers have remained strong and our reserves are conservatively stated.
In contrast, there was lots of commentary in a recent industry conference.
About casualty reserve issues amongst some weaker competitors and the lack of returns on property business.
Really for the whole P&C industry over the last three to five years.
Both of these examples were cited as reasons among other things for the robust pricing cycle to continue.
Hany will provide some additional commentary on our own experience here in a moment.
As we mentioned last quarter, we expect to consider borrowing some additional money next year in 2022 should we need any capital to fund our growth.
Our debt to total capital ratio was about 6% today and our longer term goal is for that to approach 20% additional.
Financial leverage should be helpful to our returns.
I'll now turn the call over to Bryan Petrucelli.
Thanks, Mike just another nice quarter with strong operating results continuing to be driven by solid premium growth favorable loss experience and disciplined expense management we.
We reported net income of $36 $6 million for the third quarter of 2021, representing an increase of 146% when.
Compared to $14 $9 million last year, due primarily to higher earned premium lower cat losses, and net favorable loss reserve development.
Net operating earnings increased by 282% up to $36 $7 million from $9 $6 million in the third quarter of last year.
The company generated underwriting income of $38 1 million and a combined ratio of 75, 7% for the quarter.
Compared to $2 9 million and 97, 3% last year with improvements to both velocity and expense ratios. The combined ratio for the third quarter of 2021 included five nine points from net favorable prior year loss Reserve Reserve development and three eight points from cat losses, primarily from.
Hurricane Ida compared to two eight points of favorable loss reserve development and $15 four.
Points of Cat losses last year.
Our current accident year loss ratio exclusive of cat losses decreased in recognition of ongoing price favorable pricing trends that Mike previously touched on.
The 20% 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 in the business shifted the mix of business.
Lines that are subject to reinsurance, where we receive ceding commissions.
Although it is possible that we'll continue to achieve a modest level of additional economies of scale with some variability from quarter to quarter.
We believe in an expense ratio in the low to mid twenty's to be sustainable over time.
Our effective income tax rate for the first nine months of 2021 was 18, 9%.
Third to 12, 8% last year.
And higher primarily a result of lower tax benefits from stock compensation activity. This year.
Annualized operating return on equity was 19, 8% for the first nine months of the year and again as Mike mentioned, but our book ahead of our mid teens guidance.
Gross written premiums were approximately $198 million for the quarter, representing a 36, 5% increase over last year.
Due to the continuing favorable market conditions, and our superior service standards.
On the investment side net investment income increased by 15, 5% over the third quarter last year up to $8 $1 million from $7 million last year.
Annualized gross investment returns, excluding cash and cash equivalents was two 5% for the year, so far compared to 3% last year.
<unk> operating earnings per share was $1 59 per share for the quarter.
Compared to 42 cents per share last year and with that I'll pass it over to Brian Haney.
Thanks, Brian.
And earlier premium grew 36, 5% in the third quarter down from 45% in the second quarter, but roughly consistent with the growth rates in the first quarter and the fourth quarter of last year.
Increase is generally driven by increasing submissions rate increases as well as economic growth, which drives up exposure basis.
One of our divisions was up for the quarter led by our General Casualty Division, which had been particularly hard hit by the Lockdowns in 2020.
The reopening of the economy and the robust economic growth is still providing us a significant boost.
Submission growth was in the low teens in the third quarter.
As the rates, we continue to push them up in response to market conditions. As a reminder, we are a very heterogenous book of business, which complicates, reducing all the rate would've been one single number but that all being said, we see rates being up in the low teens in the aggregate during the third quarter generally consistent with the past several quarters the conditions that have driven the market hardening still exists. So we do not expect.
Change the market in the near term.
We are paying close attention to inflation at this point, we feel that the rate increases we are achieving on excess of loss cost trends and therefore, we shouldn't be building additional margin.
At our recent Investor Conference I touched on several advantages kimco has over its competitors our sole focus on E&S, our superior technology and our meaningful expense ratio about another advantage has emerged during COVID-19. We are one of the few maybe the only surplus lines insurer that has been fully in the office in person.
Five days a week, we came back to the office again person last October.
We have to hire and train a lot of people to keep up with the growth and find the teaching and learning is just pattern person also we feel like you can only absorb the company culture. If you actually see your co-workers face to face.
Our competitors are now calling on their second year of attempting to recruit and train people buy them. It's just not a good way to train people period people don't work learn as well remotely and they don't pick up the company culture.
Being in person we've avoided the learning loss that you are seeing in academics and business that goes hand in hand with remote learning. This is a significant advantage for us in terms of our ability to train new staff and execute our plan.
In summary, we continue to be optimistic.
We're producing truly extraordinary results and the market conditions continue to favor our business model works well in any market in hardware software and between the current market conditions are really excellent and we are working hard to make the most of them and with that I'll turn it back over to Mike.
Thanks, Brian.
Operator, we're now ready for any questions indicated.
Thank you.
A reminder, if you wish to ask a question you may do so by pressing star followed by the number one on your telephone keypad again, then if I want to ask a question well pause for just a moment to compile the Q&A roster.
Yeah.
First we have a question for Jeff Schmitt with William Blair. Your line is open.
Hi, yes, good morning.
I'm wondering who's obviously.
Growth was obviously really strong in the quarter.
I was just curious what youre seeing you know how much that is exposure growth across the book just with inflation of supply.
Constraints worsening kind of how much does that I guess offset by tightening terms and conditions.
Exactly answer for that but if I had to break it I would say that the effects of increased promotions increased rates that increased exposure are all roughly equal.
So let's call. It a third of the growth is increasing exposure, but that's a guess.
Okay, and what level is that at this stage I presume, it's been moving up.
Sam.
36%.
Okay I got you right, Okay and then.
Underlying loss ratio, obviously moved down quite a bit to 258% and can you maybe speak to that I mean with that large of a drop from what what drove that.
Yeah, Jeff This is Mike.
Well number one we had an extraordinary cooling are right. So.
Very good loss activity for them for the month, but the bigger driver is we've been getting.
Fairly significant rate increases for almost three years now well above loss cost trend.
We have over the years added to the conservatism in our loss reserves, but clearly that some of that.
Pricing improvement is now showing up in terms of margin expansion. So.
That's it in a nutshell.
Got it okay. Thanks for the answers.
Thanks, Jeff.
Thank you next to me time, Marquis went through it.
Okay.
Yeah. Thank you good morning.
The earned was quite strong in the quarter relative to what I might have expected given the written was there any audit premium or other adjustments or timing issues that helped earned in the quarter.
Good morning, Mark This is Mike.
I can't I can't speak to that off the top of my head clearly the big driver is we're writing more premium and that's showing through in the earned.
We do audit most of our policies.
So you know.
There's always going to be a little bit of variability on that there's also different retentions based on.
The mix of business that can have a little bit of impact quarter to quarter.
But the big driver is you know you're just seeing the growth in the business.
Again, we attribute to our model and to the general market conditions being as favorable as they are.
Yeah.
And then Brian.
Brian the expense ratio essentially 20%, you say low to mid twenties.
I'm assuming.
You're opt.
Optimism around the market conditions hold then youre going to be growing the top line or one might assume so.
Is there some reason why.
The expense ratio should go back up from here or is this more.
The pro forma guidance, but is that just.
More of a long term guide you're giving them.
Yeah, I would just say it does it does sort of.
Very from quarter to quarter.
Each of the nine months our ratio of the 'twenty. One four is probably the best guide at this point.
Okay very good and then the AR reserve gains in the quarter.
The accident years that are that you do from there was that largely a 2020.
Yeah, we kind of write that up a little bit into Q.
I think it's.
Yes, I think it's largely from 2020.
Again, the point I would make for investors with respect to reserves as they should have a lot of confidence in the integrity of our balance sheet.
We purposefully set up reserves that we think are.
Conservatively stated, where theyre more likely to develop favorably than unfavorably.
And we see that as a real strength for our company and.
Long term I think in a nurse to everybody's benefit.
And then just one more question.
You talked about potentially raising capital next year with that.
The underwriting leverage refresh me on where you see your underwriting leverage now and whats your.
Kind of operational ceiling would be.
I think our net premium to GAAP equity is about one to one.
Our a M best rating is predicated on.
Net premiums to statutory surplus, which lags GAAP equity by.
A significant amount.
The general point is that we don't expect to raise any additional equity capital that we want to.
Inject a little bit more financial leverage into the business and we think that'll be pretty helpful. In terms of driving superior returns going forward.
Thank you very much.
Thanks, Mike.
Thank you next we have mark dwelle with RBC capital markets.
Yes, good morning.
A couple of questions.
You you've commented on the growth in submissions are there any particular lines of business that are seeing higher rates of submissions and kind of in parallel with that are you continuing to see good rip migration of business from the standard lines towards the E&S lines.
Yeah, Margaret Brian Haney.
So general casualty, saying increase in submissions because.
They write a lot of premises related business and last year during the Lockdowns that business had been severely affected.
That's one area where I'm not.
Actually our theory works, it's down because.
For our environmental business and our life Sciences business actually had a huge increase especially as last year because of Covid.
And then yes, we are still seeing.
Not necessarily we are seeing movement from the standard lines to the.
To our space, but we're also seeing movement from program Star space.
I think progress on.
Struggle.
The second question I wanted to ask about was.
You've commented about getting more of the business getting higher ceding commissions basically there's more of a business that you're writing. These are subject to reinsurance is that primarily in excess I know you're not writing significantly more property, which is well reinsured is it mainly casually excess.
Yes, it's in two areas it would be the casualty excess mark and also on our personal lines.
Homeowners product, we have a quota share.
Agreement there that have some ceding commissions involvement.
Okay.
And then just in general in terms of maybe a pricing comment overall.
Obviously, you guys have been seeing quite good rate increases are there any still areas of the market that you are.
Are generally viewed as not well priced or not adequately priced at this point I would think after the better part of three years. So those are becoming pretty scarce.
Hey, Mark this is Mike.
I think it's.
For the industry, yes pricing is better today than it was a couple of years ago, but I think it's a reminder to the E&S market takes a very different view.
The risk and pricing in the standard market. So if a risk is moving from standard and nonstandard there will be a significant rate increase.
And I think just as a follow on to Brian's answer a minute ago.
The fact that a lot of delegated underwriting authorities are being adjusted in the last couple of years that continues and likewise there.
Sometimes a very different pricing approach to that business. So.
I think in Brian's comments, he said were getting low double digit rate increases low teens rate increases across our portfolio.
That's very significant increases, especially in light of the fact that we got similar increase as the prior year and similar to the prior year to that so it really I think speaks to the margin improvement that is starting to show up on the bottom line.
So I guess to the extent that a customer is moving from say a standard policy do in E&S policy, you might be getting a 10% increase but the customer might be getting 30%, 40% increase.
That's correct yes.
Okay. That's helpful. Thank you that's all my questions.
Excellent. Thank you.
Thank you next we have bubble of Ping Pong.
P Morgan.
Hi, good morning.
Just a quick follow up on the accident year loss ratio, obviously discourse pretty good if you look year to date I think you're running at about 61 little below 61, which is better than last year.
That a good level to think off when considering what might happen in the next couple of years sort of like 61 ish.
Okay.
I think that's as good as any problem.
I think I think that's a good.
It's a good starting point I mean, clearly the pricing trends are quite favorable.
Clearly, we're trying to set reserves that we think are likely to develop favorably over time alright.
Alright, so theres always some conservatism in how we.
Set those loss picks.
I think that's a good starting point.
Okay.
And then Mike just in New York.
To follow up on the reserve conservatism comment so I think if you back out the reserve releases from accident year 2020 year to date right.
And assuming my math is correct. It seems like you overbook that 2020 loss ratio by about five to six points.
Was there anything unique about 2020, maybe you were more conservative because of Covid or is that five to six point gap surf emblematic of.
In a normal conservatism you have in your loss picks on an ongoing basis.
Just wanted to get a perspective on that.
Yeah, I don't have the specifics in front of me to speak to the five or 6%, but I can tell you that.
The overarching trend for 2020 was.
Hey.
Material reduction in reported losses.
Relative to what we would've expected.
Clearly that had a lot to do with the pandemic.
Businesses being closed down.
This operations shifting.
And all sorts of different ways to accommodate.
Government regulation and the like.
So yes, we did set up additional.
Loss reserves to offset that reduction in reported losses.
Just to make sure that hey, if there is a catch up in <unk>.
Loss activity in the future as the economy reopens in the court systems.
Reopened and alike.
Well positioned to cover that.
So.
That was kind of the big driver for 2020.
Yeah.
Got it.
Reported losses coming in law.
Got it.
And then just a follow up on that.
Would it be safe to assume that you probably wont unwind all of the conservatism from 2020, just in one year in other words like would it be reasonable to assume that if things go as they've been going there should be further tailwind in 2022.
Yes, I think Thats, yes, absolutely we would not unwind all of our conservatism in one year.
Tourist down little by little over the years ahead.
Okay, and then last for me you had.
Some comments about inflation, so I'm not sure to what extent can actual numbers, but I presume you've increased your loss trend assumption.
Because of inflation, if you can speak about it.
I guess what.
You didn't away at the gap between pricing and loss trend assumptions.
Well, there's the loss trend assumptions are ticking up ticking up right with all the headlines we're seeing but I think the important point for investors is Brian's comment, which is hey, we're getting.
Rate increases across our portfolio in the low teens.
So whether the I think historically, we've used the loss cost trend, maybe like three or 4%.
I think it's a few points higher than that currently but you know what.
We're well north of <unk>.
And that.
Thank you.
Thanks Pablo.
Thank you we have no further questions. Please continue presenters.
Okay.
Want to thank everybody for listening in and.
Yeah.
Want to congratulate all the kinsale employees that helped make this happen.
We look forward to speaking with you again here in a few months and have a great day.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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Before we get started let me remind everyone that through the course of the 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 certain risk factors, which could cause actual results to differ materially.
These risk factors are listed in the company's various SEC filings, including the 20th annual report on Form 10-K, which should be reviewed carefully. The company has furnished a form 8-K with the securities and Exchange Commission that contains the press release announcing its third quarter results.
Kinsale management May also refer them may also reference certain non-GAAP financial measures in the call today are Rick cancellation of GAAP to these measures can be found in the press release, which is available at the company's website odd Triple W. Dot Kinsale capital group Dotcom.
I will now turn the call over to you.
Chicken sales President and CEO Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your joining us on the call today.
We will follow our usual format.
With a brief introduction from me then Bryan Petrucelli can.
<unk> sales Chief Financial Officer, and Brian Haney, Chief operating officer will each provide some additional commentary.
And then we'll move on to any questions from any of you.
Can sales operating earnings for the third quarter 2021 were $1 59 per diluted share.
A significant increase from the third quarter of 2020.
Gross written premiums.
Gross written premium rather was up 36, 5% for the quarter.
The company posted a 75, 7% combined ratio for the quarter.
And 78, 1% combined ratio for the nine months.
Our operating return on equity for nine months was 19, 8%.
Multiple years of significant rate increases combined with our disciplined underwriting and low cost model is allowing for meaningful margin expansion.
For our long term guidance of 15% operating return on equity.
And we expect to continue to run well ahead of that 15% goal.
Our catastrophe loss from Hurricane Ida was $4 $6 million net of tax.
Yes.
This relatively modest loss in light of the severity of the storm is consistent with our cat experience over the last 10 years, we do write cat exposed property business to our personal lines and our commercial property books, and we think the margins in that business are compelling.
Well, we also seek to limit the volatility of the business through a combination of good underwriting strict limits on the concentration of business and our comprehensive reinsurance program the relatively higher cat loss figure from the third quarter of 2020 compared to the third quarter of 2021 was mostly due to the.
Occurrence of multiple events.
Last year.
We continue to be optimistic about market trends and prospects for our business.
Our own numbers have remained strong and our reserves are conservatively stated.
In contrast, there was lots of commentary in a recent industry conference.
About casualty reserve issues amongst some weaker competitors and the lack of returns on property business.
For the whole P&C industry over the last three to five years.
Both of these examples were cited as reasons among other things for the robust pricing cycle to continue.
Brian Haney will provide some additional commentary on our own experience here in a moment.
As we mentioned last quarter, we expect to consider borrowing some additional money next year in 2022 should we need any capital to fund our growth.
Our debt to total capital ratio was about 6% today and our longer term goal is for that to approach, 20% additional financial leverage should be helpful to our returns.
Now I'll turn the call over to Bryan Petrucelli.
Thanks, Mike just another nice quarter with strong operating results continuing to be driven by solid premium growth favorable loss experienced and disciplined expense management.
We reported net income of $36 6 million for the third quarter of 2021, representing an increase of 146% compared to $14 $9 million last year due primarily to higher earned premium lower cat losses, and net favorable loss reserve development.
Net operating earnings increased by 282% up to $36 $7 million from $9 $6 million in the third quarter of last year.
Company generated underwriting income of $38 $1 million and a combined ratio of 75, 7% for the quarter.
Compared to $2 9 million and 97, 3% last year with improvements to both the loss and expense ratios. The combined ratio for the third quarter of 2021 included five nine points from net favorable prior year loss reserve development and three eight points from cat losses, primarily from.
Ida compared to two eight points of favorable loss reserve development and $15 four.
Points of Cat losses last year.
Our current accident year loss ratio exclusive of cat losses decreased in recognition of ongoing price favorable pricing trends that Mike previously touched on.
The 20% expense ratio for this quarter continues to benefit from 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 in the business shifted the mix of business.
Lines that are subject to reinsurance, where we receive ceding commissions.
Although it is possible that we will continue to achieve a modest level of additional economies of scale with some variability from quarter to quarter.
We believe in an expense ratio in the low to mid 'twenty to be sustainable over time.
Our effective income tax rate for the first nine months of 2021 was 18, 9% compared to 12, 8% last year.
And higher primarily a result of lower tax benefits from stock compensation activity. This year.
Annualized operating return on equity was 19, 8% for the first nine months of the year and again as Mike mentioned, but ahead of our mid teens guidance.
Gross written premiums were approximately $198 million for the quarter, representing a 36, 5% increase over last year.
Due to the continuing favorable market conditions, and our superior service standards.
On the investment side net investment income increased by 15, 5% over the third quarter of last year up to $8 $1 million from $7 million last year.
Annualized gross investment returns, excluding cash and cash equivalents was two 5% for the year, so far compared to 3% last year diluted.
Diluted operating earnings per share was $1 59 per share for the quarter.
Compared to <unk> 42.
For sure last year and with that I'll pass it over to Brian Haney.
Brian mentioned earlier premium grew 36, 5% in the third quarter down from 45% in the second quarter, but roughly consistent with the growth rates in the first quarter and the fourth quarter of last year.
The increase is generally driven by increasing submissions rate increases as well as economic growth, which drives up exposure basis. Every one of our divisions was up for the quarter led by our general Casualty Division, which had been particularly hard hit by the Lockdown in 2020.
The reopening of the economy and the robust economic growth is still providing us a significant base.
Submission growth was in the low teens in the third quarter.
As the rates, we continue to push them up in response to market conditions. As a reminder, we are a very heterogenous book of business, which complicates, reducing all the rate movement to one single number but that all being said, we see rates being up in the low teens in the aggregate during the third quarter generally consistent with the past several quarters the conditions that have driven the market hardening still exists. So we do not expect to churn.
And the market in the near term.
We are paying close attention to inflation at this point, we feel that the rate increases we are achieving on excess of loss cost trends and therefore, we shouldn't be building additional margin.
At our recent Investor Conference I touched on several advantages kimco has over.
Over its competitors, our sole focus on E&S, our superior technology, and our meaningful expense ratio advantage.
Another advantage have emerged during COVID-19. We are one of the few maybe the only surplus lines insurer that has been fully in the office in person five days a week, we came back to the office and in person last October.
We have to hire and train a lot of people to keep up with the growth and find the teaching and learning is just better in person also we feel like you can only absorb the company culture. If you actually see your co-workers face to face.
Our competitors are now calling on their second year of attempting to recruit and train people wise it's.
It's just not a good way to train people period people don't work learn as well remotely and they don't pick up the company and culture.
By being in person we've avoided the learning loss that you are seeing in academics and business that goes hand in hand with sort of outlining. This is a significant advantage for us in terms of our ability to train new staff and execute our plan.
In summary, we continue to be optimistic.
We're producing truly extraordinary results in our market conditions continue to favor us our business model works well in any market hardware software in between with the current market conditions are really excellent and we are working hard to make the most of them and with that I'll turn it back over to Mike.
Thanks, Brian.
Operator, we're now ready for any questions in the queue.
Thank you.
A reminder, if you wish to ask a question you may do so by pressing star followed by the number one on your telephone keypad again, then if I wanted to ask a question.
For just a moment to compile the Q&A roster.
Yeah.
Okay.
Okay.
First we have a question to Jeff Schmidt with William Blair. Your line is open.
Hi, yes, good morning.
Or else Who's obviously.
Growth was obviously really strong in the quarter.
I was just curious what youre seeing you know how much that is exposure growth across the book, just with inflation and supply constraints worsening.
How much does that I guess offset by tightening terms and conditions.
Exactly answer for that but if I had to break it I would say that the effects of increased submissions increased rates and increased exposure are all roughly equal.
Let's call. It a third of the growth is increasing et cetera, but that's a guess.
Okay.
What level is that at this stage I presume, it's been moving up.
I would just say a third of that 36%.
Okay I got you right, Okay and then.
Underlying loss ratio, obviously moved down quite a bit to 258% and can you maybe speak to that I mean with that large of a drop from what what drove that.
Yes, Jeff this is Mike.
Yeah.
Well number one we had an extraordinary qunar right. So just very good loss activity for the months, but the bigger driver is we've been getting.
Fairly significant rate increases for almost three years now well above loss cost trend.
We have over the years added to the conservatism in our loss reserves, but clearly that some of that.
Pricing improvement is now showing up in terms of margin expansion. So.
That's it in a nutshell.
Got it okay. Thanks for the answers.
Thanks, Jeff.
Thank you next to me time, Marquis, which Lewis your.
Your line is open.
Yes. Thank you good morning.
The earned was quite strong in the quarter relative to what I might have expected given the written was there any audit premium or other adjustments or timing issues that helped earned in the quarter.
Good morning, Mark This is Mike.
I can't I can't speak to that off the top of my head clearly the big driver is we're writing more premium and that's showing through in the earned.
We do audit most of our policies.
So.
Theres always going to be a little bit of variability on that there's also different retentions based on.
The mix of business that can have a little bit of impact quarter to quarter.
But the big driver is you're just seeing the growth in the business.
Again, we attribute to our model and to the general market conditions being as favorable as they are.
Yeah.
And then.
Ryan the expense ratio essentially 20%, you say low to mid twenties.
Assuming.
You're opt.
Optimism around the market conditions hold then youre going to be growing the top line or one might assume so.
Is there some reason why.
The expense ratio should go back up from here or is this more.
So, let's say pro forma guidance, but is that just.
More of a long term guide you're giving us.
Yeah, I would just say Mark you know it does it does.
Sort of.
Very from quarter to quarter.
I would point you to the nine months.
The ratio of the 'twenty one four is probably the best guide at this point.
Okay very good and then the reserve gains in the quarter.
Yeah.
The accident years that you do from there was that largely a 2020.
Yes, we kind of write that up a little bit into Q.
Yes, I think it's largely from 2020.
Again, the point I would make for investors with respect to reserves as they should have a lot of confidence in the integrity of our balance sheet.
We purposefully set up reserves that we think are.
Conservatively stated, where theyre more likely to develop favorably than unfavorably.
And we see that as a real strength for our company and.
Long term I think in a nurse to everybody's benefit.
And then just one more question.
You talked about potentially raising capital next year with that.
The underwriting leverage refresh me on where you see your underwriting leverage now and whats your.
Kind of operational ceiling would be.
I think our net premium to GAAP equity is about one to one.
Our a M best rating is predicated on.
Net premiums to statutory surplus, which lags GAAP equity by.
A significant amount.
The general point is that we don't expect to raise any additional equity capital that we want to.
Inject a little bit more financial leverage into the business and we think that'll be pretty helpful. In terms of driving superior returns going forward.
Thank you very much.
Thanks Mark.
Thank you next we have Mark Dwelle RBC capital markets.
Yes, good morning.
Just a couple of questions.
You commented on the growth in submissions are there any particular lines of business that are seeing higher rates of submissions and kind of in parallel with that are you continuing to see good written migration of business from the standard lines towards the E&S lines.
Yes margins, Brian Haney.
So the general casualty, saying increase in submissions because.
You're right a lot of premises related business and last year during the Lockdowns.
As it had been severely impacted so that's one area, where it's actually our theory works it's down because.
For our environmental business and our life Sciences business actually had a huge increase in sessions last year because of Covid.
And then yes, we are still seeing or.
Not necessarily we are seeing movement from the standard lines to the.
To our space, but we're also seeing movement from programs to our space.
Okay.
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The second question I wanted to ask about was.
You'd commented about getting more of their business getting higher ceding commissions based on it was more of the business that youre writing.
Yes subject to reinsurance is that primarily in excess I know youre not writing significantly more property, which is well reinsured is it mainly casually excess.
Yes in two areas that would be the casualty excess mark and.
Also in our personal lines.
Yeah.
Homeowners product, we have a quota share.
The agreement there that has some ceding commissions involvement.
Okay.
And then.
Just in general in terms of maybe a pricing comment overall.
Obviously, you guys have been seeing quite good rate increases are there any still areas of the market that you.
We are generally viewed as not well priced or not adequately priced at this point I would think after the better part of three years those are becoming pretty scarce.
Hey, Mark this is Mike.
I think it's.
For the industry, yes pricing is better today than it was a couple of years ago, but I think it is a reminder to the E&S market takes a very different view.
The risk and pricing in the standard market. So if a risk is moving from standard to non standard there will be a significant rate increase.
And I think just as a follow on to Brian's answer a minute ago.
The fact that a lot of delegated underwriting authorities are being adjusted in the last couple of years that continues.
And likewise, there is sometimes a very different pricing approach to that business. So.
I think in Brian's comments, he said were getting low double digit rate increases low teens rate increases across our portfolio.
That's very significant increases, especially in light of the fact that we got similar increase as the prior year and similar to the prior year to that.
So it really I think speaks to the margin improvement that you saw.
We're going to show up on the bottom line.
So I guess to the extent that a customer is moving from say a standard policy do in E&S policy, you might be getting a 10% increase but the customer might be getting a 30% to 40% increase.
Correct Yeah.
Okay. That's helpful. Thank you that's all my questions.
Thanks, Mark Thank you.
Thank you next we have bubble of things on the J P. Morgan.
Hi, good morning.
So just a quick follow up on the accident year loss ratio. Obviously this quarter is pretty good.
Look year to date, I think youre running at about 61, although below 61, which is better than last year.
Is that a good level to think off when considering what might happen in the next couple of years.
61 ish.
I think thats as good as any Pablo.
I think thats a good.
It's a good starting point I mean, clearly the pricing trends are quite favorable clear.
Clearly, we're trying to set reserves that we think are likely to develop favorably over time.
Alright, so theres always some conservatism in how we.
Set those loss picks.
I think that's a good starting point.
Okay.
And then Mike just in New York.
To follow up on the reserve conservatism comment so I think if you back out the reserve releases from accident year 2020 year to date right.
Assuming my math is correct. It seems like you overbook that 2020 loss ratio by about five to six points.
Was there anything unique about 2020, maybe even more conservative because of COVID-19 or is that five to six point gap surf emblematic of.
And a normal conservatism you have in your loss picks in an ongoing basis.
That is it.
Just wanted to get a perspective on that.
I don't have the specifics in front of me to speak to the five or 6%, but I can tell you that.
The overarching trend for 2020 was.
Material reduction in reported losses.
Relative to what we would've expected.
Clearly that had a lot to do with the pandemic.
Businesses being closed down.
The operations shifting.
And all sorts of different ways to accommodate.
Government regulation and the like.
And so yes, we did set up additional.
Loss reserves to offset that reduction in reported losses.
Just to make sure that hey, if there is a catch up.
Loss activity in the future as the economy reopens in the court systems.
Reopen and allow.
Hey, we are well positioned to cover that.
So.
That was kind of the big driver for 2020.
Sure.
Got it.
Our reported loss was covenant law.
Got it.
And then just to follow up on that.
Would it be safe to assume that you probably want to unwind all of the conservatism from 2020, just in one year in other words like would it be reasonable to assume that if things go as they've been going there should be further tailwind in 2022.
Yes, I think that's yeah, absolutely we would not unwind all of our conservatism in one year.
Tourist down little by little over the years ahead.
Okay.
And then last for me you had.
Some comments about inflation, so I am not sure to what extent the actual numbers, but I presume you've increased your loss trend assumption.
Because of inflation, if you sort of speak to that.
I guess to what extent has that.
You didn't away at the gap between pricing and loss trend assumptions.
Well, there's the loss trend assumptions are ticking up ticking up right with all the headlines we're seeing but I think the important point for investors as Brian's comment, which is hey, we're getting.
Rate increases across our portfolio in the low teens.
So weather, though I think historically, we've used the loss cost trend, maybe like three or 4%.
I think it's a few points higher than that currently but.
We're well north of <unk>.
Even that.
Thank you.
Thanks Pablo.
Thank you we have no further questions. Please continue presenters.
Okay well.
Want to thank everybody for listening in.
Yeah.
Want to congratulate all the kinsale employees that helped make this happen.
We look forward to speaking with you again here in a few months and have a great day.
This concludes today's conference call. Thank you all for participating you may now disconnect.