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spk00: Ladies and gentlemen, thank you for standing by, and welcome to Kinsale's second quarter 2022 earnings call. Before we get started, let me remind everyone that through the course of the teleconference, Kinsale's 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 their 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 a press release announcing its second quarter results. Kin 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 company's website at www.kinsalecapitalgroup.com. I will now turn the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.
spk06: Thank you, Operator, and good morning, everyone. Welcome to our second quarter conference call. Brian Petrucelli, Kinsale's Chief Financial Officer, and Brian Heaney, Kinsale's 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. Kinsale's operating earnings for the second quarter 2022 increased by 51% over the second quarter 2021. and gross rate and premium was up 43% for the quarter. The company posted a 77% combined ratio for the quarter and 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 lost cost trends 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 lost reserves. Although there is much uncertainty in the economy today, especially with inflation, Consale 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 PNC marketplace wherein weaker competitors continue to struggle with deficient 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 toward 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 an expected Kinsale growth rate in the low double digit range in lieu of the 43% we saw this past quarter. Given the competitive advantages of the Kinsale model, especially our expense advantage, we do expect to continue to grow and take market share from competitors for the 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, disciplined underwriting and low cost is an endgame winner every time. I'll now turn the call over to Brian Petruccelli.
spk07: 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, driven 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 in 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 to 6.6 points last year. CAT losses were negligible this quarter compared to 2.1 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 4.7% 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, and a higher interest rate environment allows us to invest new money at better yields. Just as a point of reference, 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 2.6% for both this year and last, Diluted operating earnings per share was $1.92 per share for the quarter compared to $1.28 per share last year. And lastly, I just wanted to comment briefly on the debt transaction that closed last week. We entered into a 12-year, $125 million, 5.15% 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. Concurrently, we amended our existing revolving credit agreement to extend the maturity date and to increase the limit from $50 million to $100 million. With that, I'll pass it over to Brian Haney.
spk05: 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 to 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 healthcare, 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. Exposure bases are going up, driven by economic activity and by inflation. We saw rates up in the 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 costs 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 may be more exposed to. The market conditions are generally favorable across the board. We see some limited pockets of overly aggressive behavior here and there, usually on the part of startup MGAs, especially ones focused on big ticket items, but by and large, the market is functioning rationally. Our IT department continues to make steady, incremental improvements in our systems, which enable us to process business faster and at a lower cost. Our technology is 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.
spk06: Thanks, Brian. Operator, we're now ready for questions.
spk00: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, Again, press star 1. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Mark Hughes with Truist.
spk04: Your line is open. Yeah, thank you very much. Good morning. Good morning, Mark.
spk01: Brian, you talked about 20% submission growth in the second quarter. Did you notice anything? changing the trajectory throughout the quarter, month to month, say?
spk04: Other than that it slightly accelerated from the previous quarter. The short answer is no. I'm sorry, what was your last comment there? The short answer is not really.
spk05: It was just a slight acceleration from the previous quarter. So there's no interesting trends in the month-by-month numbers.
spk06: Keep in mind, Mark, there's always a little bit of variability in those numbers quarter to quarter.
spk01: Yeah, sure. Anything you see from an exposure standpoint that would make you say the economy is slowing down? Anything in your small account markets that's catching your attention?
spk04: Nothing we've noticed yet. I mean, we see the headlines, but You know, I mean, the numbers for our quarter were, you know, pretty strong and pretty consistent with what we've seen the last couple of years.
spk01: Yeah. Okay. And then, Brian, on the expense ratio, this is pretty good. I don't know whether this is the high-water mark. Well, I guess the 3Q last year was slightly lower, but how do you feel the expense ratio trimmed? On a go-forward basis, is this a good kind of starting point?
spk07: I think it is, Mark. You know, again, it does bounce around quarter to quarter a little bit. However, you know, we're continuing to see, you know, some modest economies of scale with, you know, the earned premium increasing. But, you know, I think what you're seeing here, and I think if you look at it on an annual basis, that's probably the best way to look at it.
spk01: And then, Mike, I'd be interested in just a few more thoughts on what you think about the cycle here. Obviously, this has been going 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, what's driving it would be interesting.
spk06: 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 and the like. you know, you put it all together and it just, it gives us a good sense of optimism here in the near term. You know, that being said, you know, it's almost certainly the market will kind of mean revert at some point. And, you know, we're ready for that too. I think that's the one message I was trying to kind of communicate is, you know, given our business model, you know, focused on not just ENS but smaller accounts within the ENS market, hey, it still can be quite competitive, but I think there's a little bit of 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're well positioned to compete in 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.
spk04: Thank you very much. Okay.
spk00: Your next question is from the line of Scott Heleniak with RBC Capital Markets. Your line is open.
spk02: Yes, good morning. Good morning. Good morning. I wonder if you could first touch on your rate increases are significant still, obviously, up low digits, double digits, and outpacing loss-cost trends. Just wondering if you could comment a little bit more on your lost cost trends, where they are now, where they've been, and how you're kind of thinking about that. You're still getting core margin expansion, but if anything you can comment there, rate versus lost trend, any more detail would be great.
spk06: I would say that the lost cost trends that we use prospectively today average about 8%. They vary pretty widely by statutory line of business. So that's kind of a weighted average across our portfolio. There's 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. I think that the way we generally view it is that you know, retrospectively, premium trend largely offsets lost cost trend. Maybe it's a point 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, you know, a couple points below that. So in general, we're getting very significant real 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 the margins are as compelling as they are.
spk02: Okay. Yeah, that's definitely helpful. It sounds like pricing is still holding up as well across the book. The next question I wanted to ask was just on the you know, terms and conditions is something that you've talked about before, you know, kind of working in your favor over the past year. I wonder if you can give an update on kind of what you're seeing in terms of, you know, limits and deductibles, whether you've seen, you know, any shifts in that, you know, over the past year or so, anything that kind of sticks out and any change in customer behavior as well, you know, due to the economy.
spk05: I've definitely seen a trend towards carriers shrinking their limits that they offer. And we've done that too, just to sort of follow along with the market. It's definitely opened up opportunities for us because when you shrink limits, if the customer still wants to buy the same total amount of limit, they've got to go to more carriers. We're not really seeing yet a big trend towards... insurance buying larger limits. I think in some cases, you know, especially in the harder parts of the market, you know, affordability starts to become an issue and there's, you know, at a certain point they can't afford the limit that they might have bought in the past. So it's affecting behavior in that regard. But so generally I would say limits have shrank deductibles on things like property expenditures in particular. are up and terms and conditions are tending to get tighter.
spk02: Okay, that's good. And then you mentioned again dislocation, which I know is something we saw a lot in 2021. Is that typically in the same areas, pockets and competitors, or has that changed really much in the past year? I think you mentioned some new... new startups, but is there anything more you can talk about that, the dislocation? Because it seems like the dislocation would be kind of lessening out there, but I don't know, maybe you're seeing something different.
spk06: Yeah, I'll just remind you that the PNC market is quite large, and it doesn't really move monolithically. You know, there's all sorts of sub-markets and pockets, I would say, right now, Property in particular, you know, property with an acute catastrophe exposure is, you know, a hard market. Capacity is hard to come by. You know, reinsurance for carriers is harder to come by. Prices are higher. You know, whereas there's probably other areas of the market that maybe are a little bit more steady. But in general, if you just look at all the earnings reports and whatnot, I mean, there's plenty of examples of carriers that are still working through challenges in their business models and their financial results. And some of that bleeds into the E&S market and I think helps explain the market opportunity that we see. Now, candidly, the other half of our market opportunity is driven by our own business model. you know, we're operating at a cost advantage that's just very material, and we operate in an industry where the customers care intensely about the price of the policy. It's a traumatic advantage that we have, and we're working hard to exploit it.
spk02: Okay, perfect. Just one last one, just on your property business. I'm just wondering, you know, the Rates there have obviously farmed a lot. Everyone knows that over the past year. And wondering what your appetite is for growth there, what you've seen year to date on that line. Are the rates good enough to really expand there? And anything you can talk about on that part of the book?
spk06: Yeah, I would say that there's 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've 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 just 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. We model the portfolio regularly. We buy a lot of reinsurance. So yeah, we're always going to balance, if you will, the volatility with the profit opportunity in that business, but we are running more than we have in the past.
spk02: Okay, that's helpful. It makes sense. That's all I had. Thanks a lot. Thanks so much.
spk00: Your next question is from the line of Casey Alexander with Compass Point. Your line is open.
spk03: Yeah, you just answered 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 quarters have shrunk to where it's 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?
spk06: Yeah, this is Mike. I would say that... Longer term, we think equities will play a bigger role in our investment strategy. In the next couple months, we're digesting some pretty dramatic changes in Fed policy around short-term rates, quantitative tightening, how transitory inflation is, are we going into a recession, et cetera. Near term, I think we're... We're not going to make any dramatic changes longer term. I think equities could play an incrementally larger role in our investment strategy.
spk03: All right, thank you. That was my only question that was left over. Thanks. Okay, thank you.
spk00: Your next question is from the line of Pablo Singzon with J.P. Morgan. Your line is open.
spk08: Hi, thank you. So I think the top line benefit from higher pricing is pretty evident in your results, but I was hoping if you could shed more light on the new business versus renewal dynamic behind your premium growth. So I guess how much of your written premium base is new versus renewal, or maybe you want to frame it another way. How does your enforced policy account compare against bond policies, right? I think in 2021, you bond about 35,000.
spk05: I guess one way to answer that would be... Generally speaking, we renew about two-thirds of the dollars of premium from one year to the next. If that ratio holds steady in the long term, about one-third of our business should be new and about two-thirds of our business should be renewal. I don't have the exact figures, but since we've been growing, more of our business is new than one-third. Over the long term, that's what you should expect in terms of new versus renewal split. Got it. Thank you.
spk08: And then on investment income, I was curious, are you selling out of current securities that you have, or is it operating cash flows that you're mainly investing at the higher new money yield? And I guess going forward, you expect to get, obviously, the investing base is growing fast, but you expect to get a yield pickup as well in the investment.
spk06: Yeah, we're essentially holding to maturity all the fixed income, even if it's, you know, dropped in price. So it's new money coming in. It's, you know, paydowns from, you know, existing fixed income investments that we're talking about achieving the higher yields.
spk08: Got it. Thank you. And then switching to capital, so appreciate the discussion of the finance you put in place. Could you remind us again how much incremental net premiums current financing will be able to support? And I guess, you know, you can sort of frame it whichever way you think is appropriate. But, you know, at least from where I'm sitting, like I tend to think about like a debt to capital ratio or target premium surplus ratio. But just broadly speaking, how much net premiums can the current financing support? Thank you.
spk06: The debt to capital will be somewhere in the high teens.
spk09: Okay.
spk06: Well, pro forma, you know, we closed the loan after the end of the quarter, but, you know, 16, I think 17%, give or take. And what was the rest of the question, Pablo?
spk08: Yeah, it was more sort of the magnitude of 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? Maybe one to two. So if he did raise $125,000 and you have the revolver that's an extra $100,000, then I think you can upside both, right? Altogether, like how much, sure. Yep.
spk06: Yeah, I would have to, we'd have to get back to you on that. But the way we would look at it is, hey, we model our business all the time as part of our capital management process. And so... You know, we're kind of looking at this note and this debt as putting us in a comfortable position to finish up 2022 in good standing with, you know, AMBEST is our principal rating agency. So, you know, to maintain our A rating, that's very important to us. But to itemize how much premium would be associated with that, I think we'd have to get back to you.
spk08: Got it. And then last one for me. So just on the topic of loss trends. So I think, you know, this quarter, other companies have talked about updating their loss trend assumptions, you know, I guess given higher inflation and their evolving view of how port 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 prospectively the 8%, but has that number changed much over the past couple of years? Thank you.
spk06: Yeah, absolutely. I mean, you know, every quarter, you know, we look at actual loss activity and actual, you know, economic statistics, especially around things like inflation, and adjust all of our actuarial assumptions to make sure that, you know, they're as accurate as they can be. So, yes, as we've seen inflation, you know, trend up the last year or so, we're certainly
spk04: you know, updating our actuarial assumptions accordingly. All right. Thanks, Mike. Okay, Pablo.
spk00: 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 Truist. Your line is open.
spk01: Yeah, I'll follow up on that one. You talked about 8% lost cost trends. You're setting, I think you said prospectively, you're setting that based on those statistics that you see. I think historically you've talked more mid-single digit loss cost trend. Have you seen it pick up a little bit or you're just looking around and anticipating that or being conservative to make sure it doesn't sneak up on you?
spk06: Mark, this is Mike. Where we've seen inflation in the claims process At this stage, it's mostly in first-party claims, where labor costs, construction costs are inflating the value of a property damage claim. We've seen it a little bit in the construction defect area. That's property damage-driven, and so it's not unusual if someone's made an estimate of X amount of damages over the course of the litigation, the estimate gets updated and it increases because of, you know, supply chain issues, labor costs and the like. But I would say that 8% and, you know, our actuarial assumptions are really driven more by, you know, different statistics that we use to forecast and plan our business.
spk01: Yeah, is there a, if we think about your premium mix, Is there a ceiling of how much property you wouldn't go above just to manage volatility?
spk06: Well, property is about a third of the E&S market. And I think there's some classes of property. I'm thinking of like primary habitational business where we're not targeting. So I think we would tend to lag well below the one-third mark. I think we're probably in the low 20s today, and we're very comfortable with that. There's no specific target. I think what I talked about a few minutes ago of just balancing the property we write 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, and I think that's largely because of good underwriting, but also a good measure of conservatism in our risk management approach.
spk04: Very good. Thank you. Okay. Thanks, Mark.
spk00: There are no further questions at this time. I will now turn the call back over to Mr. Michael Kehoe.
spk06: Okay. Well, thank you, everybody, for joining us. We're happy with the quarterly results and look forward to speaking with you again here in 90 days. Have a great day.
spk00: Ladies and gentlemen, thank you for participating. This concludes today's conference call.
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