Q1 2022 Kinsale Capital Group Inc Earnings Call
Okay.
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 2021 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 first.
Quarter results Kinsale management May also reference certain non-GAAP financial measures in the call today, a reconciliation of GAAP to these measures can be found in the press release, which is available at the company's website at Www Dot Kinsale capital group Dot Com I would now.
Turn the conference over to Kim sales, President and CEO , Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone welcome to our first quarter conference call.
As usual, both Bryan Petrucelli, Kinsale, CFO and Brian Haney, Kim sales CLO are joining me.
Will each make a few comments on the quarter and then proceed to any questions you may have.
Can sales operating earnings for the first quarter 2022 increased by 47% over the same quarter in 2021.
And gross written premium was up 45%.
The company posted a 79% combined ratio for the quarter.
And annualized operating return on equity of 22, 1%.
Yeah.
The performance of the business in the first quarter of 2022 is really a continuation of what we had been seeing for the last couple of years.
Favorable and growing E&S market is creating a tailwind for concern at all in particular by allowing us to raise rates and grow our premium and an unusually high level.
Adding to this tailwind is our own unique business strategy.
Underwriting and claim handling together with a technology driven low cost operation the combination of which creates a powerful opportunity to.
To deliver best in class profit and growth in the years ahead.
We remain confident that the E&S market environment will remain favorable and allow for further rate increases and strong premium growth over the course of the next year.
We had a little less visibility on the broader market.
Well, we do have visibility on our competitive advantages, which we believe have real durability to them.
Physically controlling our own underwriting.
Contracting that out to third parties, and secondly building core competency around technology, just like we do underwriting and claim handling.
Owning our own core system and not relying on external parties for that function.
<unk> needs to our highly automated business process.
And all the various benefits that flow from that productivity gains and superior customer service.
Our robust and accurate data and of course, it's driving our low expense ratio and boosting our returns.
I'll now turn the call over to Bryan Petrucelli.
Thanks, Mike.
The business continues to perform at a very high level with gross written premiums growing by 45% due to the continual favorable market conditions. Mike just mentioned, we reported net income of $31 $8 million for the first quarter of 2022 down slightly.
From $32 $1 million last year, due primarily to unrealized losses on our equity portfolio.
Net operating earnings, which excludes the impact from fluctuations in equity values increased by approximately 48% up to $38 million from $26 million last year.
Company generated underwriting income of $38 million.
And a combined ratio of 79% for the for the quarter compared to $25 million and 80% last year.
The combined ratio for the first quarter of 2022 included four seven points from net favorable prior year loss Reserve development.
Impaired to five seven points last year.
With cat losses being negligible in both periods at 21, 6% expense ratio for the quarter continues to benefit from some economies of scale with earned premiums that are growing faster than our operating expenses operating return on equity was approximately 22% for the year and again ahead of our mid teens guidance.
Book value decreased by four 8% for the quarter, primarily due to unrealized losses on our fixed income securities, resulting from the higher interest rate environment.
Company continues to generate strong positive operating cash flows which gives us the ability to hold these securities to maturity and higher interest rate environment allows us to invest new money at better yields.
Ultimately benefits to the company.
And long term.
Yes.
Net investment income increased by 31% over the first quarter last year up to $9 million from $7 million last year as a result of continued growth and investment.
Investment portfolio.
Annual gross investment returns, excluding cash and cash equivalents was two 5% for the quarter compared to two 6% last year.
And lastly, diluted operating earnings per share was $1 63 per share for the quarter compared to $1 $11 11 per share last year.
With that I'll pass it over to Brian Haney.
Thanks, Brian .
As mentioned earlier premium grew 45% in the first quarter up from 36% in the fourth quarter.
We saw further hardening in the property market, particularly in hurricane exposed areas in the Gulf and Atlantic States.
Beyond that we are seeing gradual acceleration submission growth in the first quarter. It was in the high teens.
Broker basis are growing driven by economic activity and by inflation.
Growth was particularly strong in our commercial property and inland Marine divisions also our general casualty book occur significantly helped by the reopening of the economy.
We saw rates up in the low double digits in the aggregate during the first quarter generally consistent with the past several quarters. The reason that the overall rate change was not moderating as has been reported by some other carriers that we are growing faster. So in the areas where rates are increasing the fastest which tends to raise the weighted average.
We are carefully monitoring inflection and loss cost trend being cautious in our approach.
The early earlier prognostications and depress that inflation would be transitory did not pan out.
<unk> of the abrupt massive increase in money supply may take a longer time to work through the economy than many people had thought and will likely cause disruption in pain in the insurance industry.
Which will serve to prolong the hard market.
Can sale with our low expense ratio on higher margins and more nimble efficient processes is in a better position to navigate the current economic situation in many of our competitors.
Also it is worth noting that we have been achieving rate increases ahead of loss cost trend for several years now.
These increases combined with our strategy of conservative reserving further protect the company from the threat of inflation that some of our peers are more expensive.
The fact that we write 100% of our business in the E&S market means that we are positioned to react much more quickly to events than our peers that have significant admitted business.
With our control over the underwriting as well as our superior technology, we have the necessary data to understand what is going on in our book much more so than our competitors, who are delegated underwriting authority or who rely on antiquated technology again. It was a good quarter and again, we are happy with the results and with that I'll hand, it back over to Mike. Thanks, Brian .
Operator, we're ready for any questions in the queue.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one our first question comes from the line of Mark Hughes from Truest. Your question. Please.
Yes, Thank you and good morning.
Good morning, Mark.
Anything on the average policy size have you seen much change there.
Thank you.
<unk>.
I think our average premium size is.
Like around 11600 or something like that it may be up very modestly.
In general our strategy is still to target small to medium sized accounts.
Depending on the mix of business in any quarter that could shift a little bit, but clearly rate is helping as well.
Yeah.
Ceded premiums.
The ratio down a few points year over year.
You mentioned how.
Our property is a focus for you I don't know whether that impacts the ceded premium or is there a <unk>.
Issue of excess versus primary that are influencing that.
Yes.
The business, we see it off more on the excess.
The primary casualty policies, we just keep net seven.
So the mix is going to impact that.
Comparing year over year, our Retentions have incrementally increased so yeah, and I think there were some retention reinstatement premiums last year in the first quarter that book to Mark.
Okay, and so you say your returns.
<unk> increased just keeping more of the business yourself is that the way to think about if you look back a number of years, yes, there's been incremental adjustments in our retention.
The change in retention in the mix of business.
Reinstatement premium last year, all of those things could kind of.
I guess obfuscate your year over year comparisons.
Yeah.
And then Brian .
Brian you talked about I think did you say gradual acceleration in submission.
Okay.
Okay, and so that.
Kind of through the first quarter, you continued to see acceleration.
Yes.
The growth.
Growth rate in the first quarter internationally was.
Marginally higher than the growth rate in the fourth quarter.
Yeah.
Any other.
And markets are lines, you mentioned commercial property Marine General casualty.
Any other observations you might make your point about you were going after the business that youre getting more rate is.
It seems very relevant.
Any more detail on that front.
No I would just say that.
Growth was widespread.
Most.
As has been the case.
For a while now most of our divisions for most quarters.
And.
Yes, there are maybe like little pockets here, and there that grow faster or slower but.
Okay.
Core of what we do grow at a very steady right.
And then thats been consistent really mark the last couple of years now.
Yeah.
Yeah, Yeah, and then one more if anything about the.
Claims frequency severity, you talked about inflation, how that prolongs the hard market, but are you seeing any I know you've got the tools to deal with it but any signs of inflation.
In your book.
Yes, yes.
Trends I'd comment on it yes, we do see inflation, alright, especially one more adjusting.
Property claims.
Cost of building materials and whatnot I mean, that's all been factored in settlement. So yes inflation is real I would say.
The more interesting trend at the moment, which again has continued now throughout Covid is that reported losses have come in slower than we would've expected.
We continue to offset those.
Lower reported losses with IRI DNR, because there's a there's a real question around.
Ah.
What are the trends in the reported losses are being driven principally by a disruption in the court system.
And if that's the case in the courts.
Actually reopened.
And they are trying to.
We play a little catch up I think there's a question as to whether.
Those loss trends kind of revert to the mean.
And so we're prepared for them to do that if they don't in the future.
Some of the extra redundancy will kind of waterfall out year after year.
But I think I think we always like to reiterate.
With our investors and we take a very conservative approach to reserving and they should have a lot of confidence in our balance sheet.
Thank you very much.
Thanks Mark.
Thank you. Our next question comes from the line of Pablo season from Jpmorgan. Your question. Please.
Hello, Hi, so.
Hello.
Your gross premium growth rate was one of the highest in recent history.
It's close to $80 million on an absolute basis versus last year was there anything unusual about the business you booked this quarter or do you see that type of growth continuing at a similar pace through the remainder of the year, whether measured in absolute terms or in terms of percentage.
Pablo This is Mike I would say that.
Brian highlighted a couple of the divisions, where we're seeing a.
A little bit stronger growth property inland marine our general casualty.
The area, where we ran a lot of hospitality.
Apartment site business premises liability, but.
We're seeing good growth across the portfolio.
If you look back the last several quarters youre going to see that the growth rate does have a little bit of volatility to it.
And we don't really forecast growth specifically.
But obviously, we've made some very optimistic comments about the market overall.
<unk>.
We feel very positive about.
The next several quarters.
I'm trying to remember our growth rate in the fourth quarter I think it was in our <unk>, yes. So we grew 36% in the fourth quarter 45 in the first.
You have to allow for a little bit of volatility like that but in general.
These are really extraordinary times in the E&S market and we're working really hard to take advantage of them.
Yes understood.
Then if I turn to your margins there was a distinct quarterly.
Pattern in the accident year loss ratio in 2021, where the ratio or the loss ratio was lower in the second half versus the first half. It was also present in 2020, but little less prominent.
Do you expect a similar pattern. This year, maybe it's a function of a business that is renewing in any specific quarter.
Yes, I would say.
A number of things that can impact the loss ratio over the course of a given year, including.
Reported losses cash that type of thing, but in general we don't.
You don't have any.
Maybe the best way to say it is were most conservative at the beginning of the year right and it's a brand new accident year.
Theres policies just went out the door.
We really have no real indication that.
We're just relying on.
Actuarial assumptions at this stage of the year as you get towards the later part of the year.
You can react to the reported loss activity, obviously that becomes more pronounced in the second year in the third year in the fourth year et cetera.
Yep Yep standards, Mike, there's more flexibility to maybe adjust your loss picks accident. Your loss pick later in the year right, especially what you are saying is that a fair yeah. We said, we said conservative loss picks.
Sure.
Assuming the losses develop as expected, which I think they are highly likely to do that or even better than expected.
I think you would see.
Hey.
A little more cautious at the early part of the year than that at the end of the year.
Okay understood.
And then I have two more here I think I'd mentioned pricing increasing low double digits.
Given the environment today any change in whether it's heat loss trends moving.
I guess versus a quarter or two quarters ago.
Okay.
I mean, obviously.
Yeah.
Underlying inflation is going to take a while to sort of roll through.
Right now I'd say, we're probably at 4% to 6% trend net.
Exposure based trends net prices.
And the underlying products recovery going up.
So I still think were excess hubs.
We're achieving rate increases in excess of loss cost trends.
And again, we have been now for several years so excellent.
I think I think we're in a very comfortable position with respect to inflation, but it's something we're concerned about and we pay a lot of attention to it.
Got it and then last from me I cant comment on submissions interesting because.
I was looking at your disclosure in the K. It seems like submissions have been growing over.
Over the past three years, but actually growing at a slower rate. So I think in 19 of 30% year over year.
'twenty one is 13.
Based on your comments it seems like Theyre growing high teens in the first quarter.
So do you think that there'll be an inflection off of that level in this year end.
Whats driving that is it music growth and maybe lines that you weren't growing as much and before.
We really don't like prognosticate semester read going forward, if I were to speculate what happened I think that <unk>.
Covered in the Lockdown.
Creating this ripple effect, where we actually got in some areas a lot more submissions inside of it.
When that kind of settled out I think our submission growth kind of bottomed out in the low teens, but now youre starting to see the economy and the industries return a little bit more than normal and so you are saying kind of all that science by or more.
Expected run rate.
Well, we're getting past the effects of Covid on the lockdown and all of that so that that would be my guess, but it wasn't it wouldn't be unprecedented to see some volatility in that number either it does bounce around.
That's right.
Got it okay. Thanks for answers.
Thanks, Tom.
Thank you as a reminder, if you have a question. Please press Star then one our next question comes from the line of Casey Alexander from Compass point. Your question. Please.
Yes, hi, good morning.
<unk>.
This may seem like a kind of an arcane question and you may not even have it with you. If you don't you can come back to me with it but I was just wondering of the fixed income the fixed maturity portion of the portfolio what percentage of that portfolio is characterized as available for sale.
And on the available for sale portion of the portfolio do you know what the average price is relative to par.
The answer to the first part is 100% of its available for sale.
I have to get back to you on the second question I do not have that in front of me.
Okay, great. Thank you that's my only question thanks very much.
Jason.
Thank you. Our next question is a follow up from the line of Mark Hughes from <unk>. Your question. Please.
Mark you might have modeled on mute.
Yes, I'm sorry, it was I was on mute.
Any observations about the.
Lloyds competitive behaviors or also in the past, Mike you've talked about some of your program competitors.
Being a little too aggressive and maybe there is going to be a reckoning on that front any update on either.
Topic that would be helpful.
Alright.
Yes, no updates other than.
It's a.
We're at a period in a market where there is a lot of delegated underwriting.
The <unk> business.
Being transacted there is a huge growth in the number of front end companies.
Then to assist with that.
And.
I think I've said in the past there are a lot of those delegated underwriting programs.
Our quite successful and have been around for a long period of time, but.
There are many that are not and so there is a certain.
You know on that or volatility if you will in that space, where programs can come and gone rather quickly.
But no real change in the last year.
We compete with a lot of <unk>.
But we always have standalone kind of.
In some ways business as usual.
You had mentioned the reported losses coming in slower than expected I Wonder if you could kind of.
Walk us through.
The Covid 2020, certainly saw decline.
<unk> C and then when we think about how that developed in 2021 and 2022 here to start with.
Are we still at.
A depressed level I wonder if you could just give us some perspective on that.
Trajectory.
Yes.
The best way to look at that Mark is if you pull our statutory statement and look at our schedule P. Information I think you will see that at least for most lines of business are IV NR is at a higher percentage of the total incurred loss.
In the more recent accident years, I think youre seeing.
That's a way to kind of quantify Brian as we've reported loss component has come down the DNR has gone up.
This is the point I was trying to make before then.
We're not realizing the benefit of.
This slowdown in reported losses, perhaps.
It's temporary perhaps it's not we don't really know right now, but I think we're well positioned.
If the loss activity were to bounce back.
For those accident years and if it doesn't then he does some of the redundancy will come out year by year.
In the future.
2022, starting out it could be similar to what you saw in 2021 on that front.
Yes, I think I think 2022 is similar to what we've seen in the last 21 in 'twenty.
Okay.
Thank you very much.
Thanks Mark.
Thank you. Our next question is a follow up from the line of publishing zone from Jpmorgan. Your question. Please.
Hi, Thanks for taking my follow up so are you able to offer some estimate of how much your net investment income to benefit from higher interest rates I guess over the next several years. It seems like your new money yield is already higher than where your portfolio yield is.
Yes.
What I would say I think in the Internet.
Fourth quarter, Pablo I think are.
Our current new money yield was somewhere in the 3% range and Thats, probably closer to four and a half now.
Got it okay.
I guess the benefit will just sort of trickle in I think education is about four to five years right. So assuming no change.
Okay.
And then.
Last one for me.
From a capital perspective is the plan still to issue debt later this year to fund growth I suppose interest rates will be a little higher now, but I don't think it will be material to you, but if you can just sort of confirm youre.
Thinking on capital Thanks.
Pablo.
Got that.
Okay.
Sorry.
Issuing debt this year, Okay, I am sorry, we got distracted with your.
Yes sure.
Yes.
Just in your favor and repeat the question Oh.
Oh, yes, sorry about that yes.
I am not sure what happened there. So just from a capital perspective is the plan still to issue debt later this year to fund growth.
And I said, that's one I suppose okay.
Okay, yes, and trees are higher but I don't think there'll be material to you, but just wanted to confirm.
Okay.
<unk>.
Thank you.
Next question comes from the line of Roland Mayer from RBC capital markets. Your question. Please.
Hi, Good morning, I saw the duration of the portfolio was extended to four six years from four three years at year end I just wanted to ask if there was anything to read into that or is that just.
So of course, the investments took in the quarter.
Yes, I think I wouldn't read a lot into it.
If anything I would expect it to come in a little bit just with the uncertain interest rate environment right now.
And then within that portfolio.
Can you break out the percentage that has a maturity of less than one year I'm just trying to get an understanding of how much the portfolio can turn over in the next year at higher rates.
It's probably I would guess around 10%.
But I think the one thing to kind of.
Positively impacts that is we've got a very strong flow.
Cash.
I think last year or.
Cash flow was a little bit over $400 million.
Which is a big number relative to the size of the portfolio and I think given the premium growth. This year, we would expect that number to grow on a pretty good clip.
So the new money plus the maturities and Paydowns in the line.
Okay. Those are my two questions. Thank you.
Thanks, a lot.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Michael Kehoe for any further remarks.
Okay. Thanks, operator, thank you everybody for joining us and we look forward to speaking with you again here in a few months.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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