Q2 2022 Kinsale Capital Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome Ken sales second quarter 2022 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 materially.
These risk factors are listed in the Companys, various SEC filings, including their 'twenty 'twenty. One 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 second quarter results.
And sales management May also reference certain non-GAAP financial measures in the call today.
A reconciliation of GAAP to these measures can be found in our press release, which is available at the Companys website at Www Dot Kinsale capital group Dotcom.
I will now turn the conference over to Ken Karels, President and CEO , Mr. Michael Kehoe. Please go ahead Sir.
Okay.
Thank you operator, and good morning, everyone welcome to our second quarter Conference call.
Brian Petra Sally can sales Chief financial Officer.
Brian Haney, Kim sales Chief operating officer are with me on the call. This morning.
As usual, we will each make a few comments and then move on to any questions you may have.
Can sales operating earnings for the second quarter 2022 increased by 51% over the second quarter 2021.
Gross written premium was up 43% for the quarter.
The company posted a 77% combined ratio for the quarter.
On an annualized operating return on equity of 24, 6% for the first six months of the year.
This quarter's performance is similar to our experience.
Over the last couple of years, where we have been able to raise rates to our customers above loss cost trend.
And at the same time.
Grow our premium volume at a remarkable level.
This multi year combination of profit margin expansion with outsized premium growth is extraordinary.
It's allowing us to deliver better returns, while continuing to build a strong balance sheet, especially with regard to loss reserves.
Although there is much uncertainty in the economy today, especially with inflation can sales stockholders should be confident that our reserves are conservatively positioned.
And more likely to develop favorably than unfavorably in the years ahead.
We attribute this combination of higher insurance rates and rapid growth to two powerful drivers.
First a dislocated P&C market place.
And weaker competitors continue to struggle with.
With sufficient loss reserves inadequate margins high costs.
Legacy software work from home business models general inflation et cetera.
And secondly, our own unique business model, wherein we target the small account E&S market.
Maintain absolute control over our underwriting and claim handling and operate with a technology enabled expense advantage over high cost competitors.
We continue to have an optimistic outlook towards growth in 2022 and 2023.
But we also continue to expect the broad P&C marketplace to gradually return to a normal level of competition beyond that.
A consequence of which would be unexpected can sale growth rate in the low double digit range and lower the 43% we saw this past quarter.
Given the competitive advantages of Kinsale model, especially at our expense advantage, we do expect to continue to grow and take market share from competitors for this foreseeable future.
In both hard and soft markets.
And to deliver best in class margins at the same time.
As we have said many times over the years.
Fund underwriting and low cost is an endgame winner every time.
I'll now turn the call over to Bryan Petrucelli.
Thanks, Mike again, just another really strong quarter from an operating income perspective, with a 43% increase in gross written premiums.
And a 51% increase in operating earnings for all the reasons that Mike just mentioned, including higher rates and our superior business model.
We reported net income of $27 $1 million for the second quarter of 2022.
Down from $35 $6 million last year as a result of unrealized losses on equity securities.
Given by the drawdown in the equity markets during the quarter.
As mentioned net operating earnings, which excludes the impact from fluctuations in equity values did increase by approximately 51% up to $44 4 million from $29 $4 million in the second quarter of last year.
The company generated underwriting income of $44 million and a combined ratio of slightly less than 77% for the quarter compared to $29 million and 79% last year.
The combined ratio for the second quarter of 2022 included five points from net favorable prior year loss reserve development compared.
Compared to six six points last year.
Cat losses were negligible this quarter compared to two one points last year.
And our operating return on equity was approximately 25% for the year and again ahead of our mid teens guidance.
Book value did decrease by four 7% in the quarter, primarily as a result of unrealized losses on our fixed income securities, resulting from higher interest rates. The company continues to generate strong positive operating cash flows which gives us the ability to hold these securities to maturity.
In a higher interest rate environment allows us to invest new money at better yields.
Just as a point of.
Clarity there the new money yields averaged about $3, 84% during the quarter.
Net investment income increased by 43% over the second quarter last year up to $10 6 million from $7 $4 million last year as a result of continued growth in the investment portfolio.
Annualized gross investment returns, excluding cash and cash equivalents were two 6% for both this year and last.
Diluted operating earnings per share was $1 92 per share for the quarter compared to $1, 28% or $1 28.
Per share last year, and lastly, just wanted to comment briefly on the debt transaction that closed.
Last week, we entered into a 12 year $125 million, 515% fixed rate note, which we used to primarily fund surplus at the insurance company level and pay down the balance on our revolving credit agreement.
Currently we amended our existing revolving credit agreement to extend the maturity date and to increase the limit from $50 million to a $100 million with that I'll pass it over to Brian Haney. Thanks, Brian as mentioned earlier premium grew 43% in the second quarter down slightly from 45% in the first quarter.
Overall, the E&S market remains favorable and strong growth across our product lines.
In particular, the property market continues to be hard, especially property accounts with material catastrophe exposure. We are also seeing significant growth in our health care general casualty and energy divisions.
Submission growth continues to be strong right around 20% up from the high teens growth rate in the first quarter and mid teens in 2021.
Bowser basis are going up driven by economic activity and by inflation.
We saw rates up.
Low double digits in the aggregate during the second quarter consistent with the first quarter and consistent with 2021.
We are continuing to keep an eye on inflation, we feel we're in a good position because we've been achieving rate increases ahead of loss cost.
Several years now.
These increases combined with our strategy of conservative reserving further protect the company from the threat of inflation than some of our peers may be more exposed to.
The market conditions are generally favorable across the board, we see some limited pockets of everybody aggressive behavior here and there usually on the part of startup mga's, especially ones focus on big ticket items, but by and large the market is functioning rationally.
Our I T Department continues to make steady incremental improvements in our systems, which enable us to process business faster and at a lower cost our technology as a key differentiator for us and that gives us a significant competitive advantage.
And across the company, we continue to focus on continuous improvement in all areas. So that we sustain our advantage in the market, providing best in class customer service and generating best in class returns for our investors.
Overall, a good quarter and we are happy with the results and with that I'll hand, it back over to Mike.
Thanks, Brian Operator, we're now ready for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
Pause for just a moment to compile the Q&A roster.
Your first question is from the line of Mark Hughes with Truest. Your line is open.
Yes. Thank you very much good morning.
Good morning, Mark.
Brian are you talking about 20% admission growth in the second quarter did you notice any.
Changing the trajectory throughout the quarter month to month so.
Yeah.
Other than that in slightly accelerated.
From the previous quarter.
Yes.
This insurance for us now.
And I'm sorry, what was your last comment there.
The short answer is not really it was just a slight acceleration from the previous quarter and so there is no interesting trends in the month by month numbers keep in mind, Mark there's always a little bit.
Variability in those numbers quarter to quarter.
Yes sure.
You see from an exposure standpoint that would make you say the economy is.
Slowing down anything in your small account market.
Catching your attention.
Nothing.
Nothing we've noticed yet.
And they will see the headlines.
The numbers for our quarter.
Where we are.
Pretty strong and pretty consistent with what we've seen in the last couple of years.
Yeah.
Okay.
Bryan on the expense ratio.
Pretty good I don't know whether this is the high watermark.
Well I guess, the <unk> last year was slightly lower but.
How do you feel are the expense ratio trend.
On a go forward basis is this a good.
Starting point.
I think it is mark.
Again, it does bounce around quarter to quarter, a little bit however.
We're continuing to see some modest economies of scale with the earned premium increasing but.
I think what Youre seeing here and I think if you look at it on an annual basis.
It's probably the best way to look at it.
Okay.
Okay.
And then.
Mike.
I'd be interested in just a few more thoughts on what do you think about the cycle here obviously since then.
Go on for quite some time it sounds like you're optimistic through this year and into 2023.
You gave some.
Points about weaker competitors continuing to struggle, but any more thoughts on the cycle the durability of it.
It's driving it would be interesting.
Mark we don't really have any special insight into where the market will go over the next year, we're kind of extrapolating from what we're seeing today in terms of submission growth rate increases.
Hit ratios on business in Hawaii.
You put it all together and it just it gives us a good sense of optimism here in the near term.
That being said.
It's almost certainly the market will kind of mean regard at some point.
And.
We're ready for that too I think that's the one message I was trying to kind of communicate is.
Given our business model.
Focused on not just E&S, but smaller accounts within the E&S market.
Hey, it's still it still can be quite competitive, but I think theres a little bit.
A break from the intensity of the competition in a soft market environment and then when you add in the expense advantage.
We're confident we are well positioned to compete and hard or soft markets.
But that being said, we're kind of near term positive longer term, we would expect the market to kind of normalize.
Thank you very much.
Okay.
Your next question is from the line of Scott <unk> with RBC capital markets. Your line is open.
Yes, good morning.
Just wondering if good morning wondering if you could first touch on.
Your rate increases are significant still obviously.
Buffalo digits double digits and.
Outpacing loss cost trends.
I'm just wondering if you could comment a little bit more on <unk>.
Loss cost trends, you know, where they are now where they've been.
And how youre kind of thinking about that youre still getting core margin expansion, but if anything you can comment there right.
Our rate versus loss trend anywhere any more detail would be great.
I would say that.
<unk>.
The the loss cost trends that we use prospectively today average about 8%.
They vary pretty widely by statutory line of business, alright, So thats kind of a weighted average across our portfolio.
There is a significant premium trend.
That we get because most of our business is priced on things like revenue or payroll that in and of itself is being inflated.
Right I think the way, we generally view it as that.
Retrospectively premium trend.
Largely offset loss cost trend maybe.
Clint or two shy, but in general if we're getting a low double digit.
Nominal rate increase across our portfolio.
The real rate increase might lag by.
A couple of points below that.
In general, we're getting very significant rail rate increases.
But not just now we've been getting them over the last several years. So it's a rate on rate on rate on rate effect.
And I think that goes a long way to explaining why.
Our margins are as compelling as they are.
Okay.
Definitely helpful, but it sounds like pricing is still holding up as well across the book.
The next question I wanted to ask was just on the.
Terms.
Terms and conditions is something that you've talked about before you know kind of working in your favor over the past year I'm wondering if you can give an update on kind of what youre seeing in terms of.
Yes limits and deductibles, whether youre seeing any shifts in that over the past year or so anything that kind of sticks out.
And then any change in customer behavior as well.
Due to the economy.
Definitely.
Definitely seeing a trend towards carriers shrinking their limits that they offer inside of that.
And we've done that to just sort of follow on with the market.
It's definitely open up opportunities for us because when you shrink limits if customers don't want to buy the same total amount of one other thing I got a more carriers.
We're not really seeing yet a big trend towards.
Insurance buying larger limits.
I think in some cases.
Especially in the harder parts of the market.
Stability starts to become an issue.
At a certain point, they can't afford to limit to that Mike.
Bought in the past.
So it's affecting.
Affecting behavior in that regard, but generally I would say limits.
Have shrank deductibles on things like property exposures in particular are up and terms and conditions are tending to get tighter.
Tom.
Okay.
Good.
And then you mentioned again dislocation, which I know is something we saw a lot. In 2021 is is that is that typically the in the same areas pockets and competitors or has that changed really much in the past year is or is there I think you mentioned some new new startups, but is there anything more you can talk about that the.
Because it seems like it seems like that dislocation would be.
Kind of lessening.
Out there, but I don't know what you are maybe youre seeing something something different.
Yes, I would just remind you that the.
P&C market is quite large.
And it doesn't really move Monolithically theres, all sorts of sub markets in pockets I would say right now.
On a property in particular.
Property within acute.
Catastrophe exposure is.
In a hard market capacity is hard to come by.
In our reinsurance for carriers is harder to come by and prices are higher.
Whereas there's probably other other areas of the market that maybe are a little bit more.
Steady.
But in general if you just look at all of the earnings reports and whatnot.
Plenty of examples of carriers that are still working through challenges in their in their business models and their financial results.
And some of that bleeds into the E&S market and I think helps explained.
The market opportunity that we see net candidly the other half of our market opportunities driven by our own business model.
We're operating at a cost advantage thats just.
Very material and we operate in an industry, where the customers care intensely about the price of the policy.
Okay.
So dramatic advantage that we have and we're working hard to exploit them.
Okay, perfect and just one last one just on the.
Your property business.
Just wondering if the rates tariff, obviously firmed a lot everyone knows that over the past year and wondering what your appetite is for growth there or what you've seen year to date on that on that line are the rates good enough to really expand their end to end.
Anything you can talk about on that part of the book.
Yes, I would say that.
There is a there is a very attractive market opportunity in property and we're working hard to take advantage of that.
Given the state of the market, we are growing our property divisions rapidly. We've got a number of different areas. We've got a commercial property division. We've got a small business property Division, we got inland Marine Division, we have a personal lines.
Division, that's principally property driven so we're working very hard to grow and take advantage of the opportunity.
I would caveat.
One important way is we've always been very mindful of the volatility associated with cat business and we've got very strict controls on the concentration of business in any one geographic area.
Model portfolio.
Regularly we buy a lot of reinsurance.
So yes, we're always going to balance if you will in the volatility.
The profit opportunity in that business, but we are we are writing more than we have in the past.
Okay.
Helpful makes sense.
That's all I had thanks a lot.
Thanks, Thanks, so much.
Your next question is from the line of Casey Alexander with Compass point. Your line is open.
Yeah, you just answered my my.
Biggest question in that last one but.
I'll ask one other the.
Equity Securities as a percentage of your total investment portfolio, obviously due to mark to market changes in the portfolio over the last couple of quarters have shrunk to where it is now.
Somewhere below 10%.
Would you guys consider increasing the allocation to equities to bring it back up to a more normalized level and take advantage of lower prices in the marketplace.
Hi, Yes. This is Mike I would say that.
Longer term, we think equities will.
Play a bigger role in our investment strategy.
And the next couple of months, where we're digesting some pretty dramatic changes in fed policy around short term rates.
Monetary tightening.
Alan how transitory inflation is how are we going into a recession et cetera, So near term I think.
We're not going to make any dramatic changes longer term.
I think.
Equities could play an incrementally larger role in the in.
In our investment.
Strategy.
Alright. Thank you that was my only question that was leftover thanks, Doug.
Okay. Thank you.
Your next question is from the line of tableau since.
Things on with Jpmorgan. Your line is open.
Hi, Thank you.
I think the top line benefit from higher pricing its pretty evident your results, but I was hoping if you can shed more light on new business versus the new business versus renewal dynamic behind your premium growth. So.
I guess, how much of your written premium basis universe to renewal or maybe you want to frame. It another way how does your in force policy count compare against buying policies right I think of 2021 you're bound to about $35.
I guess, one way to answer that would be.
Generally speaking we buy.
We renew about two thirds of the.
$1 of premium from one year to the next.
So if that ratio holding steady and can long term parr.
About one third of our business should be there in about two thirds of our registry renewal I don't have the exact figures, but since we have been growing.
More of our business is new that one third.
Over the long term, that's what you should expect in terms of new versus renewals, but.
Got it thank you.
And then on the <unk>.
Investment income I was curious are you selling out of current securities that you have or is it operating cash flows that youre, meaning investing at the higher new money yield.
And I guess going forward do you expect to get.
Obviously.
The investigation is growing fast that you expect to get a yield pickup as well as it investments.
Yes.
Actually holding to maturity on our fixed income even if it's dropped in price. So it's new money coming in.
Paydowns from from.
Existing fixed income investments that we're talking about.
Achieving the higher the higher yields.
Got it thank you.
And then switching to capital so I appreciate the discussion of the.
Financing put in place.
Could you remind us again, how much incremental net premiums skirt and financing will be able to support and I guess, you can sort of frame. It whichever we think it's appropriate but.
At least from where I'm sitting like I tend to think about it like a debt to capital ratio our target surplus ratio, but just broadly speaking how much net premiums earned.
Fantastic. Thank you.
The debt to capital B somewhere in high teens.
While pro forma we closed the loan after the end of the quarter, but.
16, I think 17% give or take.
Yes.
And then we'll look to close the rest of the question Pablo Yes, It was more.
Sure.
The magnitude of net premium incremental net premiums that the financing can support right and I think simplistically like I tend to think of it as like maybe a one to one or a little over one right.
<unk>.
So if he did raised 125 and yet the revolver. This is actually 100, then I think you can I'll take both right.
Altogether I'm not sure yet.
I would have to we'd have to get back to you on that but the way we would look at it as hey, we model.
Our business all the time as part of our capital management process and.
And so.
We're kind of looking at this.
And this debt.
<unk>, putting us in a comfortable position to.
To finish up 2022, and good standing with.
<unk> is our principal rating agency.
To maintain our a rating that's very important to us.
But to break to Idaho is how much premium would be associated with that I think we'd have to get back to you.
Got it and then last one for me so just on the topic of loss trends.
I think this quarter other companies have talked about updating the loss trend assumption.
Given the higher inflation and they're evolving.
What might develop.
Have there been any changes in your loss trend assumptions over the past couple of years and I. Appreciate the disclosure you have given perspective, either 8%, but has that number changed much over the past couple of years. Thank you.
Yes, absolutely.
Every quarter.
We look at actual loss activity and.
And actual.
Economic statistics, especially around things like inflation.
And adjust all of our App.
Actuarial assumptions to make sure that.
There is accurate as I can be so yes, as we've seen inflation.
Trend up the last year or so we certainly.
Updating our actuarial assumptions accordingly.
Alright, Thanks, Mike.
Okay.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question is from Mark Hughes with Truest. Your line is open.
Yeah, I'll follow up on that one.
It's about 8% loss cost trend.
I think prospectively, we are setting that based on those statistics that you see I think historically, you've talked more mid single digit loss cost trend.
<unk> seen it pick up a little bit or you're just looking around and anticipating that or being conservative to make sure. It didn't sneak up on you.
Mark This is Mike.
Where we've seen inflation in the claims process at this stage is mostly in first party claims.
Where.
Labor costs construction costs.
Our inflating the value prop.
Property damage claim with.
We've seen it a little bit in our construction defect area, that's property damage driven and so it's not unusual someone's made an estimate of <unk>.
Thanks, Amanda damages over the course of the litigation the estimate gets updated earnings and it increases because of.
Supply chain issues labor costs and alike, but.
But I would say that 8% and our actuarial assumptions are really driven more by different statistics that we use to forecast and plan our business.
Yes, Sir.
We have premium mix is there a ceiling of how much property.
You wouldn't go above just to manage volatility.
Well property is about a third of the E&S market.
<unk>.
And I think there are some classes of property Im thinking of like primary habitation all business, where we're not targeting.
So I think we would tend to lag well below the.
The one third Mark I think we're probably in the low <unk> today.
Very comfortable with that.
If there is no specific target I think.
When I talked about a few minutes ago, let's just ban.
Balancing.
The property we right.
And making sure that we're carefully managing the volatility associated with.
Natural catastrophes.
We've got a good track record now over the last 13 years of doing that.
Most of the Big storm activity, we've had very manageable losses.
I think.
I think thats largely because of good underwriting, but also a good measure of conservatism in our risk management approach.
Very good thank you.
Thanks Mark.
There are no further questions at this time I will now turn the call back over to Mr. Michael Kehoe.
Okay, well. Thank you everybody for joining us where we're happy with the quarterly results and I look forward to speaking with you again here in 90 days and have a great day.
Ladies and.
Gentlemen, thank you for participating this concludes today's conference call you may now disconnect.
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