Q3 2022 Kinsale Capital Group Inc Earnings Call
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 third quarter results.
Kim Zelles 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 on the company's website at Www Dot Kinsale capital group Dot Com I will now turn the conference over to <unk>, President and CEO .
Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone.
Bryan Petrucelli can sales CFO and Brian Haney <unk> sales.
Sales.
Joining me this morning are <unk>.
<unk> third quarter conference call will follow our usual format.
This will make a few comments and then we'll move on to any questions you may have.
Can sales operating earnings for the third quarter 2022 increased by three 3%.
Over the same quarter in 2021.
Gross written premium was up 44% for the quarter.
The company posted an 83, 6% combined ratio for the quarter and an 80% combined ratio for the nine months.
The annualized operating ROE for the first nine months of the year was 24, 3%.
The previously mentioned three 3% growth in operating earnings was more muted than recent history because of losses from Hurricane Dorian.
In southwest Florida.
So a few comments on chip sales property insurance strategy and Hurricane Dorian.
Through nine months of 2022 can sales premium was split about 21% property and 79% casualty.
For comparison purposes. The overall E&S market is about a third property <unk> casualty.
Slightly less than half of that 21% property premium has some sort of exposure to hurricane losses, our balance does not.
Kinsale writes catastrophe exposed property business because of the profit margins are compelling.
We are mindful, however of the volatility associated with this type of business.
And use a variety of strategies to control specifically a disciplined underwriting approach.
Irregular modeling individual risks and the property portfolio.
Limits on the concentration of business.
And a robust reinsurance program.
Regarding hurricane Ian in particular, our gross loss is estimated at $67 $5 million and our net after tax loss is $20 6 million.
About 80% of these gross losses arose from our modestly sized book of personal lines business.
And is this amount exceeded some of our underwriting and pricing assumptions, we're making a variety of adjustments to reduce volatility in this area.
With about 20% of our gross loss.
For me in coming from our commercial lines book.
This book significantly outperformed our underwriting and pricing expectations, which of course is encouraging.
Beyond hurricane in the quarter was a continuation of the trends we have experienced over the last several years are relatively hard market.
With a strong growth in submissions strong topline growth in premium and favorable profit margins on our underwriting.
This strong business performance combined with can sales low cost operating model allowed us to absorb the storm losses and still produce a quarterly sub 84% combined ratio and a nine month operating Roe above 20%.
We continue to raise rates above loss cost trend in the quarter and we continue to establish reserves for future losses in a conservative fashion.
This combined with the unique nature of our business model should provide our investors with confidence in our balance sheet and our prospects for future growth and profitability.
We continue to have an optimistic outlook for the E&S market for the balance of 2022 and for 2023.
Beyond next year, our view of the market becomes a little bit less certain but with our model of disciplined underwriting and technology driven low costs, we expect to grow our business take market share from less efficient competitors.
And produce best in class returns for the foreseeable future.
Are there any market conditions.
And now I'll turn the call over to Brian first yourselves.
Thanks, Mike.
Just another really strong quarter from an operating income perspective, even in light of cat losses from Ian.
Although net income was down around nine 9% compared to Q3 2021 as a result of the higher cat activity and a decline in the fair value of our equity investments during the quarter operating earnings which excludes the impact from fluctuations in equity values did increase by approximately three 3% over the same period last year.
The 83, 6% combined ratio for the quarter included five three points from net favorable prior year loss reserve development compared to five nine points last year and cat losses contributed 12 five points this quarter compared to three eight points last year.
With respect to expenses, we continue to achieve some economies of scale as our earned premium continues to grow at a faster clip than our operating expect expenses as reflected in the 19, 2% expense.
<unk> ratio that we reported for Q3 of this year compared to 20% last year.
A portion of this decrease related to slightly lower relative variable compensation, given the higher cat activity. This year. Additionally, we entered into a quota share reinsurance agreement on our commercial property business at June one of this year that includes some ceding commission.
That did not exist last year and shows up as a reduction to our commission expense.
Book value decreased by two 3% in the quarter, primarily due to unrealized losses on our investment portfolio as a result of higher interest rates and volatility in the equity markets. The.
The company continues to generate strong positive positive operating cash flows which gives us the ability to hold these securities to maturity.
And the higher interest rate environment allows us to invest new money at better yields.
We're investing new money in shorter duration securities with new money yields <unk>, averaging close to 5% during the quarter and duration has decreased to three nine years down from four three years at the end of 2021.
Net investment income increased by 71% over the third quarter last year as a result of continued growth in the investment portfolio and as we start to recognize some effects from the higher interest rate environment and.
And lastly, diluted operating earnings per share was $1 92 per share for the quarter compared to $1 28 per share last year and with that I'll pass it over to Brian Haney, Thanks, Brian as.
As mentioned earlier premium grew 44% in the third quarter largely consistent with the first two quarters overall.
Overall, the E&S market remains favorable with strong gross growth across most of our product line.
Property market continues to be hard and in the wake of Hurricane can we expect contraction industry capacity, which will prolong the hard market.
In addition to our property divisions, we are seeing continued strong growth across most of our casualty divisions, our energy General casualty and entertainment divisions in particular have been growing at a significant pace.
Submission growth continues to be strong a little over 20%, which represents a slight acceleration from the first two quarters.
We sell a wide array of products on the rates on those products don't move in lockstep, but if we boil it all down to one number we see real rates being up around 8% in the aggregate during the third quarter.
Hurricane M happened late in the quarter. So we haven't seen any rate effects from it yet, but we believe it will lead to further firming in the property market and perhaps in the overall market as well as reinsurers and other capital providers tolerance for loss wins.
We are continuing to keep an eye on inflation, we feel we're in a good position because we have been achieving rate increases ahead of loss cost trend for several years now these.
These increases combined with our strategy of conservative reserving further protect the company from the threat of inflation at some of our peers may be more exposed to.
The market conditions are generally favorable across the board, we do see a proliferation of <unk> and other delegated underwriting authority arrangements.
We do not delegate underwriting authority ourselves, but virtually all our competitors do.
Although there are certainly some well managed MGA is in the market. We consider this dramatic proliferation to be a harbinger of on disciplined market behavior to comps in the long run in the form of overly aggressive pricing in lax underwriting.
But at this point it is not affecting the market much because many of the new entrants are just beginning to ramp up and because <unk> typically rely heavily on reinsurers. There is enthusiasm for aggressive expansion will be curbed by their significant losses in hurricane Ian.
As for Kinsale.
That we are able to deliver results like these even with our significant catastrophe in the quarter is a testament to the hard work of our people and the soundness of our business plan.
Our disciplined underwriting and technology enabled low costs have allowed us to deliver superior returns to our investors even in a difficult quarter for the industry and with that I'll hand, it back over to Mike.
Just one correction of the diluted operating earnings per share for the quarter was actually $1 64 per <unk>.
Okay, operator, we're ready for any questions that come in.
As a reminder to ask a question simply press star followed by the number one on your telephone keypad again that is star one for any questions. Our first question will come from the line of Mark Hughes with <unk> with <unk> Securities. Please go ahead.
Yes. Thank you good morning.
Good morning, Mark.
The ceded premium ratio was up a bit in the quarter. You had mentioned you entered into a quota share June one was with that Ed and should we assume that you'll be.
I am seeing kind of a 17% ceded premium.
Should it continue at that level go higher go back lower.
Yes, yes, Mark this is Brian .
That was the primary driver there was a little bit of reinstatement premium in there as well.
But you should see that out retained premium sort of at a lower level that we have seen historically.
Go back to kind of the low mid teens is that what youre, saying.
I think thats a good estimate yes.
Okay and then the you said the personal lines underperformed I assume that manufactured housing was.
Did you happen to have a concentration where the storm hit or do you think.
Broader issues.
Well, we certainly hey, Mark good morning, This is Mike.
Yes, we certainly right a lot of business in Florida, So we add.
Plenty of.
Accounts in that area, but.
I was just phrase it is.
<unk>.
The frequency and the severity of the storm.
We're just reconciling that with some of the underwriting and pricing assumptions.
And like we do with all of our business.
We have to react where the business didn't perform as.
As well as we anticipated.
That involves underwriting pricing concentration issues reinsurance and alike, but.
We are long term committed to the homeowner space, we do see that as a.
Long term opportunity to grow the business I would say right now it's not so material to the company, it's probably about 3% of our overall business.
But were optimistic about getting.
Getting that on track and continuing to grow.
What.
How would you characterize your appetite for.
The coastal property if you are.
10% or so of your book that's exposed to coastal.
I assume that's going up.
Because I assume the pricing will be pretty attractive, but you tell me and then ill.
How much higher would you be willing to take that.
We don't really have a macro ceiling that we manage to it is really more of a bottom up strategy depending on.
Yeah.
We have very strict limits on concentration Brian So thats.
That's always a constraint on growth.
Especially when you get into urban areas like <unk>.
South, Florida, Houston and alike.
But I would say in general.
Our commercial property book.
Formed exceptionally well in the storm.
For a number of years now it's generated very significant returns for the company.
In a way that doesn't create a lot of volatility in our results. So we are looking to incrementally grow that business.
It's 10% of our book today is some sort of hurricane exposed property.
Certainly that could go up a few points.
But I wouldn't expect it to be dramatically higher than that.
Thank you very much.
You bet.
Your next question will come from the line of Casey Alexander with Compass point. Please go ahead.
Yes, hi, good morning.
A couple of questions. One first of all my estimate for the quarter was way off the Mark and I wholly overestimated the losses that would result from Ian and so.
I apologize for that it wasn't my intention to raise the alarm bells or to distort consensus.
More trying to figure out how it could be as far off the mark as I was and I compared your losses too given the magnitude of Ian.
Two the loss ratio that you had in 2020 and is the difference between the two the fact that 2020 had multiple events that dug into year retention in multiple ways compared to Ian which was much greater magnitude storm, but only one event that the only dug into your retention one time.
Casey This is Mike.
May be best to take that question offline I don't know that we have infer.
Information in front of us to do a detailed comparison.
With 2020 in 2022, but.
We're happy to go back in and talk to you about.
The reinsurance structure, we had two years ago versus today Thats, all public health cash in that probably contributed to a lot of the difference.
Okay, well it secondly, there've been a number of reports out.
Recently that market participants can expect significantly reinsurance renewal cost increases, including increased retention, how does that contour your strategy going forward in this in the southeast markets and how might those changes in the reinsurer.
<unk> renewal and retention impact your margins.
Well I would say this.
We are in.
And always has been.
Interested in managing volatility in our business, we do that in part through our reinsurance purchases.
That's an important part of how we manage volatility, but also with our own underwriting decisions. One limits do we put out what concentration of business do we allow in a specific area how do we price the risk that we take onto our books.
And so we just renewed our reinsurance program a couple of months ago.
So we will have the better part of a year to look at the way the reinsurance market develops but.
As I mentioned, a few minutes ago, we're already proactively making some adjustments on our own I would say in general are.
Our reinsurance.
Partners have made a lot of money on can sale over the years.
Valuable client and so I think that puts us probably in a.
A little bit of a different position than some competitors, but it probably varies company by company, but.
I think the short answer is it's a little bit early to speculate but certainly we are aware of those headlines and the like as well.
Alright, great. Thank you for taking my questions I appreciate it.
You bet.
Your next question will come from the line of Pablo <unk> with Jpmorgan. Please go ahead.
Hi, Good morning, So first one I just wanted to follow up on that.
I believe I heard 8% pricing improvement you mentioned.
Is that comparable to the low double digit range. You had you have been mentioning for the past couple of years or is there an inflation adjustment to be considered is there because I believe you also mentioned the term real in your remarks I just wanted to make sure.
Apples to apples here okay.
Youre correct. This is Brian Haney.
In the past.
Stated nominal rate increases.
This quarter, we've pivoted to real rate increases, which are adjusted for the loss cost trend and premium trend.
Fine.
A clear but provides a clearer view of the movement in the rate adequacy in the margin.
Okay. So it <unk> make it apples to apples it seems like inflation mid single, you'll probably be back to low double digit rate. So no material change there the chart to the bottom line right correct.
Yes.
Okay got it and then.
The second question I had so.
I can give it to price in the personal property side, but.
I guess, Mike your comment on outperforming.
Commercial property I was wondering if you could sort of.
Talk through the elements there in your underwriting approach that enables that is it.
As most of your coverage there like in favorable diverse all risk or was there an element.
Spread just sort of your thoughts.
Why is that part of your book outperformed expectations.
Well I mean, it's.
There's a lot of things that go into it Pablo.
Suddenly.
The limits that we put up when there is a pronounced hurricane.
Exposure tend to be smaller.
Rather than larger how we price that risk.
We've achieved.
And candidly the market has allowed us to achieve over the last couple of years.
Very significant rate increases.
Partly we use coverage to drive a more accurate underwriting process, we control our own underwriting we think that gives us a little bit better result.
We have strict limits on concentration we buy a lot of reinsurance in that area. So.
Lots of things go into it but.
Jim will takeaway is the bulk of our property business.
Comes through that commercial property division and it's it's an outperformer even in the face of.
Pretty significant hurricane in Florida, So again it's.
We find it very encouraging.
Got it.
I had a couple of more maybe the next one is for <unk>.
Bryan Petrucelli, so I think so.
Losses for a negative to your prices or <unk> my number but.
You put up a pretty strong accident year loss ratio of about 57% right.
Year over year, roughly consistent but even sequentially.
Pretty significant improvement I was just wondering if you could help us think about how that might evolve going Florida right weather.
Something one off this quarter was the renewal of the.
<unk> wrote last year.
Any commentary that can help us think about how that ratio could evolve going forward.
I think I think as you mentioned, it's pretty consistent with where we were last year in the third quarter and I think if you look going back in the years that loss ratio has a tendency to drift down throughout the throughout the year from quarter to quarter and I think if you look at Q2 of last year to Q3 of last year.
<unk> the movement there relative to Q2 this year to Q3. This year I think it's a fairly similar similar trend so nothing nothing.
Unusual too to comment on.
As the downward drift because thats the business that renews in the second half of the year.
Is there a change in loss fixed throughout the year.
Any color you can provide on why that's better than exist in the first place.
Pablo This is Mike again, I would just attribute it to our generally.
Conservative approach to reserving.
Right.
Sequential quarter across the calendar year.
You had a little bit more information and you have a little more confidence in where the losses are going to trend and so I think you see.
Some of that show up in the loss pick.
It's higher in the first quarter tends to be lower in the second half of the year.
Okay makes.
It makes sense and then the last one for me I was looking at staffing office data and it seems like premium growth in California was actually negative this quarter, obviously them detract from the overall growth number but I was just curious to hear any commentary on what's happening there and I guess the opportunities youre seeing in California versus other geographies.
Yes. This is Mike again, I would just attribute that to normal volatility when you get down to a state specific number like that and I think with the staffing offices as well, sometimes there can be maybe a slight lag in reporting that causes that number to vary month by month, but.
In General I think Brian Haney commented, we've seen very robust growth across.
The quarter and across our whole portfolio.
Okay.
Alright, thank you.
Okay.
Again, Brian a question. Please press star one on your next question will come from the line of Scott <unk> with RBC capital markets. Please go ahead.
Yes, good morning, just wanted to.
A quick question on we've heard this earning season, if you have the specialty insurers talk about a little more competition in a few areas typically liability lines, where some of the rates maybe.
<unk> got a little bit it sounds like you are really not seeing that much at all but just I wonder if you had any any comments on what youre seeing versus the past couple of quarters and then also the.
Submission counts, how they're sort of trended during the quarter.
Whether those strengthened towards the end of the quarter and into October .
Yes. This is Brian Haney.
So we see in our market is pretty stable now keep in mind, we focus on smaller accounts and a lot of our peers. So it wouldn't surprise me if the people that focus on larger accounts are saying a little bit more competition. We certainly don't see places where you're getting rate decreases we might be seeing some where the rate increases are less of me.
Then the market average.
Excess casualty is still pretty firm relative to casualty and property is obviously the pharmacy from.
From a professional lines are probably some of the least firm, but everything seems to be having a positive direction.
We don't really pay a lot of attention to movement month by month and submissions, but I mean it temporary.
Pretty stable.
I mean, we.
Especially <unk> has been pretty consistent all year has been on this very slight upward.
Accelerating trajectory.
Okay that sounds like it was pretty pretty close to what you saw in the second quarter, maybe a little bit better on the submissions, but definitely have to have a very strong if I could expand margins are one thing when I talked about the <unk> the <unk> category.
Those new startup Jays tend to focus on larger deals. So that's why we're not seeing a big effect from them in particular right now.
Yes, it makes sense.
And then I was just curious on.
You mentioned some of the growth areas that you saw in the quarter and the other casualty energy Entertainment and just wondering if those.
You see.
Any any new growth areas or initiatives you have kind of plan for 2023 is just continue to build out.
Existing products do.
New hires.
Spanning distribution.
How are you kind of see that over over 2023, because it sounds like you are pretty optimistic on the market itself. So imagine you're preparing for growth there.
Yes, Scott This is Mike I would just say, yes to the optimism.
Both because of the market conditions and because.
We think our business model is a little bit different and.
We think that helps quite a bit as well.
In terms of the product line, we're always working on incremental expansion that's been going on for years and certainly it's gone on this year and will continue into next.
That'll be part of the growth story I think if you look at how we rollout new products they tend to be very incremental so.
It's a small part of the growth story in any given year, but over over a long period of time, it's very meaningful.
Yes, okay.
And then.
Just a question on the <unk>.
The July one reinsurance renewals.
Was there anything I mean.
You entered the quarter share, but was there anything notable any notable changes there versus what you had previously and I was also wondering if you could quantify the ceding commission benefit that you saw in the third quarter versus before you had the quota share the new quota share treaty.
I'll, let Brian handle the ceding commission question, but.
The Big shift was we moved away from excess of loss approach on our commercial property business to a quota share approach.
So.
The effect of that is it does generate a little bit of ceding commission, whereas the excess of loss approach those.
Treaties, where net they had the effect of actually.
I don't know artificially is the right word, but it had the effect of pushing up your expense ratio. The ceding commission pushes the down slightly I don't know if we can quantify it on this call.
Okay.
It had about a 0.1 point impact on our expense ratio okay.
Alright.
Perfect. Thanks, a lot.
Okay. Thank you.
Our next question is a follow up from Mark Hughes with <unk> Securities.
Yes anything.
Economy standpoint, any slowdown in business exposure unit that sort of thing payrolls youre seeing among your customer base.
Yes, Mark this is Brian Haney.
We're seeing very early signs of that in some of the construction related business, but honestly, it's a pretty broad product line and across most of it we're not seeing that yet.
But if we were sitting at anywhere we're seeing it in the construction related accounts.
Understood and then.
Hello, Michael Brian You had mentioned the possibility of that.
The hard market in reinsurance could extend the casualty lines I Wonder if you could just expand on that a little bit is that something you've seen in the past.
How likely is that in your judgment.
Look we're just speculating mark.
Go too far with that.
When theres, a big cat, sometimes that can bleed over into into other lines beyond property in terms of.
Reduced capacity I think the bigger issue in casualty historically has been reserve adequacy.
And if you talk to a lot of reinsurers some intimate that they suspect that the industry I'm not talking about can sale, but for the industry that there are some accident years, where perhaps.
The reserves aren't as robust as they need to bank.
And so that certainly can prolong.
A more favorable.
<unk> market, if you will.
I would like to reiterate a wee.
It can sale.
Really strive to establish conservative reserves and people investors in particular should have a lot of confidence in our balance sheet, but maybe for the broader industry.
Some companies, yes, some companies now.
Understood. Thank you.
Our next question is a follow up from the line of Pablo with J P. Morgan.
Hi, Thanks for taking my follow ups. So first one I have is for Mike just based on your experience with past pricing cycles, and I guess looking out further into the future do you think that all of this.
<unk> admitted to be and this remains an E&S or would be reasonable to assume some amount of if you could give it back at some point in the future when the cycle does turn.
I think.
It's good to keep in mind, Pablo how dynamic the E&S market is.
Even today when it's when it's grown I think E&S grew last year.
The whole industry grew by 25% even in a.
Boom year like that.
You have constantly got business moving back and forth from standard to non standard.
I just think of like an example would be new business would start out in the non standard market in any times a couple of years later, if they've had favorable loss history. They will probably go to the standard side, so that back and forth goes on all the time.
I would say the long term trend if you'd look back 30 years is the E&S market growing from 3% of the P&C industry I think last year was 10, 5%.
Not every year does it grow I think.
And the great recession back in seven or eight.
Four or five years in a row, where the E&S market actually shrank relative to the standard market.
Typically by like 1% or two each year so.
It can ebb and flow, but it's a long term trend. We think is likely to continue where E&S continues to grow at the expense of standard market.
Okay.
Got it.
And then just a quick follow up on the.
Question on the construction exposure I think.
Based on the notes I have it seems like your exposure to the construction as well as like less than 20% of the vote.
Premium book is that does that sound right.
On the exact numbers in front of me.
Probably relatively close.
Okay alright, thank you.
We have no further questions at this time I will turn the call back over to Michael Kehoe for any closing remarks.
Okay. Thank you operator, and thank you everyone for participating today and we look forward to speaking with you again.
Three months have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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