Q1 2023 Kinsale Capital Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the Kinsale Capital Group first quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again.
Star one thank you 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.
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 2020 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.
Ken 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 the press release, which is available at the Companys website at <unk>.
W. W. W Dot Kinsale capital group Dotcom.
I will now turn the conference over to Kim.
<unk> President and CEO , Mr. Michael Kehoe. Please go ahead Sir.
Thank you operator, and good morning, everyone. We will follow our familiar format for todays call wherein Bryan Petrucelli, <unk>, CFO and Brian Haney can say, how C O O and I will each make a few comments and then we'll move on to any questions you may have.
In the first quarter 2023 can sales operating earnings per share increased by 50%.
Gross written premium grew by 46% over the first quarter of 2022.
The company posted a 78% combined ratio for the quarter and.
And an operating return on equity of 29%.
These favorable results are being driven by the <unk> sale business strategy of disciplined E&S underwriting and technology enabled low costs.
Which allow us to generate attractive returns and to take market share from competitors at the same time.
Adding to the <unk> sale results. So the overall favorable P&C market conditions with a strong and steady flow of business into the E&S market from the standard market, which allows us to expand margins and accelerate growth at the same time as we have been doing for several years now the <unk>.
<unk> property market continues to be an area of opportunity and rapid growth for kinsale.
As we discussed last quarter, we balanced the expected strong returns on the property business, we write with a variety of controls to limit the increase in volatility.
Specifically, we restrict the concentration of business geographically.
We model our portfolio regularly we manage our individual policy limits.
Very carefully and we purchased a substantial reinsurance program.
Our commercial and personal lines property premium amounted to 26% of our net written premium volume in the first quarter.
The property premiums subject to any material hurricane exposure is just over 10% of <unk> sales total premium.
Further our expected losses relative to operating income in the event of a major storm have not materially changed even with the considerable growth in <unk>.
Premium.
Part of achieving long term success in the P&C business is to consistently established conservative estimates for future losses can sale has done just that over the years and we continue to do so.
Setting up reserves for future claims that we believe are more than adequate.
Creating the likelihood that those reserves developed favorably over time.
In a period of time with heightened inflation.
Such an approach is even more important.
And as a consequence investors should continue to maintain a high level of confidence and can sales reserve position and overall balance sheet.
Finally, our overall view of the E&S market continues to be positive the.
The property market in particular is in a state of distress.
While the casualty market is more orderly and subject to more competition, but still allows for positive rate increases and strong premium growth.
We are optimistic for the balance of 2023, and we have a rising sense of optimism about next year.
That being said, we also believe our business model disciplined underwriting and technology driven low cost will allow can sale to deliver best in class returns and to take market share even when the competition increases at some point in the future in a more competitive market can sale.
Continued to deliver strong returns, but our current growth rate.
Will give way to something more modest perhaps in the low to mid teens.
With that I'll turn the call over to Bryan Petrucelli.
Mike.
Just a really strong quarter for all the reasons that Mike just mentioned with 46% growth in written premium and net and operating income increasing by 76% and 51% respectively.
The 78, 2% combined ratio for the quarter included three eight points from net favorable prior year loss reserve development compared to 4.7 points last year with less than a point from cat losses in either period.
Most of the improvement in the quarterly expense ratio of 19, 6% compared to 21, 6% in the first quarter of last year related to ceding commissions for the Companys casualty and commercial property proportional reinsurance agreements and is also in line with our 1919, 9% expense ratio.
In the fourth quarter of last year.
On the investment side.
Net investment income increased by 128% over the first quarter of last year as a result of continued growth and investment portfolio and higher interest rates, but a gross return of three 7% for the quarter compared to two 5% last year, we continue to monitor monitor fed actions and any related.
Impact on inflation and interest rates and given the current inverted yield curve, we're continuing to invest new money in a shorter duration securities with new money yields averaging close to 5% during the quarter and our duration decreasing slightly to three four years down from three and a half years at the end of last year we.
We did have a preferred stock position in.
SPV bank and recognized a $4 million of realized loss on the sale of that security during the quarter.
Book value was positively impacted in the first quarter from a combination of net income and an increase in the fair value of our fixed income securities during the quarter notwithstanding the positive Q1 movements. Our fixed income portfolio continues to be an overall unrealized loss position, resulting from the higher interest rates or services.
Year or so.
The company continues to generate strong positive operating cash flows which gives us the ability to hold these securities to maturity and the higher it's a higher interest rate environment allows us to invest new money better yields that are just touched on as.
As it relates to capital, we continuously monitor our needs as market as market conditions change.
Given the continued favorable market conditions and related premium growth Theres always the possibility that we will need additional supporting capital.
The support could come in the form of debt or equity with a bias towards debt given our current modest debt to capital position and with any decisions to be made in the second half of the year consistent with our historical approach.
And lastly, diluted operating earnings per share continues to improve and was 2.2 dollars 44 per share for the quarter compared to $1 63.
<unk> per share last year.
With that I'll pass it over to Brian Haney, Thanks, Brian .
Mentioned earlier premium grew 46% in the first quarter consistent with the last several quarters and representing a continuation of the previous four years, where we averaged just over 40% growth annually.
Overall, the E&S market remains favorable with strong growth across most of our product line. The property market continues to be hard and in the wake up hurricane and the contraction in industry capacity has continued.
In addition to our commercial property Division, we are seeing continued strong growth in our inland Marine book as well as across most of our casualty divisions, our energy General casualty and entertainment divisions in particular continued to grow at a significant pace.
There are some pockets of business that are more competitive and flat or slower growing such as management liability and product liability.
I want to speak for a moment about the property market in particular.
Last few years the industry has experienced some significant losses.
Five of the top 10 costliest natural catastrophes in U S history have happened in the last six years and two of the top three have occurred in the last two years. This has resulted in carriers dramatically pulling back cutting capacity and raising rates.
It has presented a historic opportunity for Kinsale, because we came through that same period with record profitability. So now we have the ability to write business at extraordinary rates and terms.
The current property the current market and property is as hard as we've ever seen in the rates and terms are as good as we've ever seen.
As Mike said, we are mindful of volatility and so we carefully manage and limit our accumulation of aggregate and share value in order to keep our volatility with an acceptable balance.
Submission growth continues to be strong in the low 20% range, which represents a modest acceleration from the previous quarter, but generally consistent with most of 2022.
As a reminder, we view submissions as a leading indicator of growth out of that submission growth rate is a positive signal for our market opportunity.
We sell a wide array of products and the rates on those products do not move in lockstep, but if we boil that all down to one number we see real rates being up a little over 7% in the aggregate during the first quarter, a very slight improvement over the fourth quarter.
The property market is certainly boosting that number rate changes for property would be well higher than the average.
The rate changes for casualty divisions with vary greatly but overall it would be less than the average, but still positive which indicates that the combination of rate changes in premium trends are exceeding loss cost trend.
It is important to stress the rate change in rate adequacy are two different things as our results demonstrate our rates are more than adequate we're continually reviewing these rates and adjusting that based on a number of considerations such as our target combined ratio our target return on equity the market opportunity and shifts in the competition.
It's also important to note that we've been getting rate increases in excess of trend for several years now we feel the business, we're putting on the books today as the best rate adequacy, we've seen in our history.
We do continue to keep an eye on inflation, we feel we're in a good position, but we monitor the situation continuously and make adjustments as necessary.
The market conditions are those that are generally favorable across the board for the most part we see competitors either retrenching or behaving in a stable rational manner. There are a few new market entrants, particularly among MGA and fronting deals that are offering wide open coverage and prices too cheap for the carriers to help to make any return, but this phenomenon isn't impacting our MAU.
Market opportunity at the moment and we believe economic reality will eventually catch up with those competitors. When it does there will be further market dislocation and opportunity for the rational actors and that ultimately will be good news for cantel.
Overall, clearly a good quarter and we are happy with the results.
That I'll hand, it back over to Mike.
Thanks, Brian .
Operator, we're now ready for any questions in the queue.
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.
Your first question is from the line of Mark Hughes with Truest. Your line is open.
Yeah. Thank you good morning.
Good morning, Mark.
Mike do you have in the past referred to.
And commentary about the inflation.
Impact on loss development, among our competitors I think you can.
Year to date kind of reinsurers speculating about.
About loss development being more severe than expected.
Any update on that how do you see the impact of inflation on your competitors.
What does that mean for growth in E&S market.
Okay.
Well I think on your longer tail lines.
They are the most exposed to the increase in inflation I think we've seen it in our own.
The book of business, where.
Building supplies have gone up in price labor costs have gone up in price and so.
Our claim that May have been settled two to three years ago for 100000 is probably being settled for.
Considerably higher number today.
We always like to belabor. The fact that it's a very fundamental part of our business strategy to set conservative reserves for future claims.
And I think that conservatism gives us some insulation.
But clearly if you go back to the four <unk> sales of 15 through 19 years.
Yes inflation has impacted those years I think all of those years have developed favorably on an inception to date basis.
But it is probably a road is the conservatism a little bit.
Given the rate increases that Brian mentioned from 2000, and 2021 'twenty two and now 23.
We think we're in a great position in terms of conservatism overall, but it does have an impact and.
It's going to impact all of our competitors. The same way not every company takes the same conservative approach to reserving so the more optimistic the company is at the beginning of that process.
The more painful the inflation can be but I think the net takeaway is it should extend the favorable.
The pricing environment.
For the E&S market.
No no no construction refresh me how much of your book May be exposed to construction, what do you think about.
Potential slowdown related to the banking crisis are you seeing any thing like that any early signs.
Okay.
No I think we're seeing good growth in construction, it's about 25% of our business. If you include everything under that broad umbrella. So I mean that could include commercial and residential contractors who could.
Include a home repair businesses.
Janitorial landscaping, all sorts of things fit under that umbrella.
Yes, thats, our bread and butter E&S class for the industry and as for can sale as well.
But I think.
We're seeing good growth across all our casualty lines at the moment with the two exceptions that Brian talked about.
Management liability in particular.
Okay, and then one other question Brian .
Bryan Petrucelli the ceded premium ratio with.
Property.
Creasing.
Actually I think was down a little bit sequentially this quarter.
What do you think a good run rate for 'twenty one.
Three would be on ceded premium ratio.
I think mark looking at what we have for the first quarters are probably a good indicator of what we have going forward that is going to change.
Pending around the mix of business, we talk about that.
In the past, but I think if you are trying to put something in our model I think looking at what we did for the first quarters as good indicators I can give you.
Thank you.
Thanks Mark.
Your next question is from the line of Tableau things on with Jpmorgan. Your line is open.
Good morning, Brian .
Good morning.
Mike you mentioned that expected losses as a percentage of operating income have not changed even amid property writings going up can you help quantify that a bit.
And then B how to do it.
Whether it's essentially premiums or earnings or any numbers around that expectation.
Well I think the best way to look at that because it gets into a very tactical.
Array of numbers when you look at our probable maximum loss curve across.
A variety of different return periods, but if you look at <unk> sales experience now over.
579 years every major storm.
When theres a major storm, we have losses, but they're very manageable.
Yeah.
In terms of.
Maybe look at the third quarter of last year as an example.
Our run rate on combined ratios I think it was in the high seven days in the third quarter. When we had some losses related to hurricane and pay that combined ratio ticked up into the low eighty's.
Alright, so thats.
That's generally how we're trying to manage.
The volatility we see a tremendous opportunity in the property business at the moment is.
As Brian said.
We've never seen a more favorable market for.
The risk there and so we want to take advantage of that but we're also mindful of the volatility and so all the things we've done over the years to balance the return prospects against the volatility we continue to do that.
It's kind of the message we wanted to convey but we don't have a specific number to give you.
If you could boil everything down to one statistic.
Understood that was helpful context, Mike and then.
The second question I just wanted to follow up on your comment that this isn't something new that you've said right. You said this before but you know longer term you think growth for <unk> in Duluth to mid teens.
I guess the question around that is based on your experience with past cycles in the market how do you see that.
Normalization playing out right do you think there's going to be a steep decline does that more run rate level or do you think that process will be more gradual maybe even over a couple of years.
I think it could be gradual over a couple of years.
As I said in my comments, we are very optimistic today I mean, we just we've been growing at an extraordinary rate now for four years.
The distress in the property market I don't think we will go away.
Anytime soon.
Inflation has an impact on the industry's reserve position so that has yet to.
Manifest itself.
We continue to have is a very dynamic towards system in the United States, which of course is a challenge for the industry. So there's a lot of reasons I think for the market to continue to be favorable.
It's just a recognition that a 40% or 46% topline growth in.
In a mature industry like insurance is extraordinary and.
At some point in the future it will.
Update somewhat but beyond that we think our business model is a little bit unique and it should allow us to continue to grow at a very healthy rate and take market share even in a more competitive environment.
Understood and then the last one for me is for Brian Haney.
Apologies if I missed this but you had mentioned something about Mga's funding companies I'm not sure. If you referenced this specific line of business, but could you talk to I guess.
These entities are over represented in.
Maybe those entities, having a negative impact on pricing and market dynamics and apologies if I missed it but I didn't see your specific lines associated with us.
No no I didn't mention it but I would say.
Yeah.
In management liability.
It's probably one way or you're going to save them on professional liability they are going to be more common.
They are definitely Dan to focus on large deals, which is why not having that big of an impact on us or if you've heard market commentary from some of our competitors about what's going on in let's say D&S now right.
That's going to be going on in the large public company D&O space, which we're not add so so that would be along the lines, we intend to stay that way.
Got it. Thank you, however, but we don't really right cyber.
And then property sorry, yes.
Are they less common than property, that's sort of like these are syndicated deals or.
Yes, I would say.
With the market the way it is now in property.
Yes, there are less common like right now you wouldn't have to.
Use MGA is to write a lot of business.
Property, but they certainly they certainly are in that space.
Alright, thank you.
Your next question is from the line of Andrew Henderson with Jefferies. Your line is open.
Hey, good morning, just considering the growth in property over the last couple of quarters any impact on the underlying loss ratio from what I would think would be a lower attritional loss ratio business.
And if not would it be fair to think of some coming in the second half of the year.
It's true that.
The property business, we write that Scott a pronounced cat exposure will run at a much lower attritional loss ratio.
But I would say in general given the uptick in inflation the persistence of inflation.
A lot of commentary around social inflation on certain claims.
We continue to take a very cautious approach to reserving.
And so I don't know that Youll see any kind of immediate.
But that being said even with our conservatism.
I think we are in.
High fifties for our loss ratio and when you match that up with you.
Attractive expense ratio.
We are delivering.
We're really really compelling returns even with the conservatism.
Got it and do the recent Florida market reforms change appetite in the state relative to maybe where it was a few months ago and could you also just remind us of appetite in the state of whether residential commercial and maybe geographic.
We were kind of exempt from a lot of the.
Issues that were plaguing the standard homeowners' writers in Florida, We do have a small homeowners book in the southeast United States.
We're actually kind of.
Reducing concentration there we had a loss that was a little bit larger than we hoped.
But Florida is a big state for us on both the property and casualty side.
Obviously, we again, we have strict limits on concentration so.
Yes, we're going to write in Miami Dade County, but hey, we have we have limits as to how much will right there, but most of our most of our exposure I think is on the commercial side.
Got it thank you.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from the line of Scott <unk> with RBC capital markets. Your line is open.
Yes, good morning.
Just wondering if the.
If theres anything you can point to.
In particular on the uptick and improvement in our submission count.
Yeah, which which has obviously been strong for a while it looked like it that up ticked a little bit but is there is there any area or where youre seeing more dislocation or pullback from some of your peers I would think obviously property, but is there anything else that you can point to where.
Youre, just getting a lot more looks at business.
Competitors retrench.
Yes.
Obviously property is one area, we're seeing a lot more submissions I would say, it's pretty across the board like there's very few areas, where we're not.
Saying good growth in session and to the extent that we are those are the areas that are not growing.
As much like.
Product liability and management liability side of the kind of it kind of ties with the growth rate in premium.
Okay pretty broad based alright.
And just moving on to the you guys have if im not mistaking you have a commercial property quota share reinsurance treaty that renews at June one any thoughts on renewing that the current form whether you expect any any changes on that and pricing and whether you expect to keep it.
That is a quota share versus Texas loss or anything you can add on that.
Yes, Scott this is Mike.
We're going through the reinsurance renewal for our whole program at the moment.
The intent is to renew the commercial.
Commercial property quota share.
Currently seed 42, 5% of that we're going to.
Push that up to 50%.
But we don't expect any deterioration or improvement for that matter in terms I think it will be per expiring.
Yes, okay.
Just had a question to a lot of what we've heard a lot of talk on the quarterly conference calls about just giving customers a shame large rate increases adjustments too.
To their premiums to reflect a higher insured values are are you are you seeing a meaningful shift in.
Some of your terms and conditions deductibles on limits.
Across their book.
Some customers just Joe or are struggling with the rate increases and so you'll have an opportunity to to change deductibles and that limits there.
Yes, the short answer is yes.
I mean, we're saying.
No.
Generally more favorable terms because.
People are looking for way to save any money so it could be through purchasing lower limits.
Higher deductibles.
The thing with sub limits things like that.
Is that does that have a big change versus last six to nine months or is that just kind of gradually headed that way that's been going on kind of as the hard market has been evolving. So now it's not a significant change I'll say in certain areas.
Pretty pronounced.
Again property.
Okay.
And then just lastly, anything on the favorable development.
You said in the Q, it's for more recent accident years.
<unk>.
2021, and 2022 is there any particular areas that you can call out on that you can point to.
Whereas lines of business, where that's coming from.
Yes, I don't think Theres anything we can point to on the call other than.
<unk>.
I think we're seeing good experience across the portfolio.
We write a good mix of short medium and longer tail lines.
And so.
Theres, probably a disproportionate.
The percent of those dollars that come from the shorter versus a longer tail.
But I don't we don't have anything specific to point to.
The results are a combination of setting conservative loss picks, but also getting some very dramatic and persistent rate increases to.
We had a loss cost trend now for a number of years in Rome.
Okay was there any favorable develop from Ian that was worth calling out.
No no okay.
Alright, Thanks, a lot.
Okay. Thank you.
Your next question is from the line of Mark Hughes with Truest. Your line is open.
Yes, I was just going to ask anything on the audit premiums from anything that would be.
Speak to the economy.
Anything you could give maybe some slowdown even in the midst of all the.
The other good news.
Yes.
<unk>.
I think we've got to keep in mind, when we talk with the economy slowing down.
It's in an inflationary environment so.
Are the auto fragrance, we revamped our nominal sales.
REO sales and not adjusted sales so.
So we haven't really seen that big of an impact on it I guess the one thing I would say is we did used to say kind of outsized co head related audits, a year or two ago that we arent, saying now, but we're not we're still seeing a good flow of audit premium.
Okay. Thank you.
Thanks, Brian .
Your next question is from the line of Casey Alexander with Compass point. Your line is open.
Hi, Good morning, just kind of a maintenance issue in the investment portfolio is there any additional regional bank exposure of note, particularly any common preferred or debt exposure to first Republic.
And also any commercial mortgage exposure.
Yeah.
Yeah.
Demand in reverse order, we do have a healthy allocation to <unk>.
Mortgages through the <unk>.
I guess residential and commercial I think are almost all AAA rated.
So we're in a pretty cautious position there in terms of the.
First Republic I don't think we have any exposure.
In terms of regional banks.
I think it was about 4% of the portfolio.
And again pretty highly rated bonds.
Across a variety of regional banks.
Alright, thank you.
Okay.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Okay.
Operator, it looks like we have one call pending.
Yes, Sir your next question comes from the line of Tommy Johnson, a private Investor Your line is open.
Mike and Brian This is a voice from your past then.
Yeah, I can't I, asking <unk> question, but I want to say is.
Shareholder from day one.
You. The example of <unk>.
Warren Buffett talks about if youre Lucky in life you invest in.
A couple of great companies.
Hang on and.
And you guys have proven that to be true and this is just a stockholder to say on it.
You have an incredible track record.
Your explanation on the phone while I can't follow it demonstrates your knowledge of the business and I just want to express my appreciation for your <unk>.
Both of your leadership throughout the time I remember when you sat in my office, Mike and laid out your business plan.
And I don't know that any of US thought you would exceed it the way you have but it's been great right Buddy.
Alright, well thanks.
Thank you for the kind words and thanks for the vote of confidence over the years.
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 participating this morning, and we look forward to speaking with you again here.
A couple of months have a great day.
Yes.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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