Kinsale Capital Group, Inc. (NYSE:KNSL) Q4 2023 Earnings Call Transcript

Kinsale Capital Group, Inc. (NYSE:KNSL) Q4 2023 Earnings Call Transcript February 16, 2024

Kinsale Capital Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning. My name is Abbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2023 Kinsale Capital Group, Inc. Earnings Conference 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 the 2022 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 fourth quarter results.

Kinsale’s 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.kinsalecapitalgroup.com. I will now turn the conference over to Kinsale’s President and CEO, Mr. Michael Kehoe. Please go ahead, sir.

Michael Kehoe: Thank you, operator. And good morning everyone. Bryan Petrucelli, our CFO, and Brian Haney, our President and COO, and I will each offer a few remarks. And then we’ll move on to any questions you may have. In the fourth quarter of 2023, Kinsale’s operating earnings per share increased by 49% and gross written premium grew by 33.8% over the fourth quarter 2022. For the quarter, the company posted a combined ratio of 72.1% and posted an operating ROE of 31.8% for the full year of 2023. Company strategy of disciplined E&S underwriting and technology enabled low costs drive these results and allows us to have returns and to take market share from competitors at the same time. Specifically for those newer to the company, Kinsale focuses exclusively on the E&S market [Technical Difficulty] on writing smaller accounts.

We provide our brokers with the broadest risk appetite and the best customer service in the business. And we use our low expense ratio to offer our customers competitively priced insurance, while also delivering best-in-class margins to our stockholders. Since much of this expense advantage is predicated on our advanced systems and our team of world class technology professionals, we believe the competitive advantage of our technology model not only has durability to it, but has the potential to become even more powerful in the years ahead. As we have noted over the last several years, the E&S market continues to benefit from the inflow of business from standard companies and from rate increases driven by inflation and relatively tight underwriting conditions.

Our growth in the fourth quarter was similar to the third and was largely consistent with the industry commentary about the property market becoming more orderly. We continue to be optimistic about growth in 2024. Finally, a reminder about our reserving process and approach. We collect premiums upfront and pay claims out over the subsequent several years. Accordingly, we post reserves now for claims we will have to pay in the future. We deliberately set those reserves in a conservative fashion. We set aside more than we think we will need to allow for some uncertainty in the process, the possibility of a changing towards system and the uptick of inflation we have experienced more recently in the last couple of years. Our 2016 through 2019 accident years have developed favorably on an inception to date basis, but the level of conservatism in those years has been partially eroded by inflation.

Subsequent to 2019, we have benefited from very significant rate increases above the loss cost trend, and we have used some of that additional rate to add to the level of conservatism in our reserves. Investors should have a high level of confidence in the Kinsale sell balance sheet, as we expect overall reserves to continue to develop favorably in the years ahead. And with that, I’m going to turn the call over to Bryan Petrucelli.

Bryan Petrucelli : Thanks, Mike. Another solid quarter with 33.8% growth in written premium, very low cat activity and net income and net operating earnings increasing by 53.7% and 49.6%, respectively. The 72.1% combined ratio for the quarter included 2.3 points from net favorable prior year loss reserve development compared to 3.2 points last year and negligible cat losses in either period. The expense ratio continues to benefit from higher ceding commissions from the company’s casualty and commercial property proportional reinsurance agreements as a result of growth in both of those lines of business. The expense ratio can bounce around a bit from quarter to quarter. So we believe it’s best to evaluate the components of the expense ratio over a 12-month period.

For the year, we noted that the expense ratio decreased by 1.4 points from 22.2% in 2022 to 20.8% this year. Breaking this decrease down a little further, 1.2 points came from net commissions, with the remaining 0.2 point from other underwriting expenses. On the investment side, net investment income increased by 71.2% over the fourth quarter last year, as a result of continued growth in investment portfolio, generated from strong operating cash flows and higher interest rates, with a gross return of 4% for the year compared to 3% last year. We’re continuing to invest new money in shorter duration securities, with new money yields averaging in the low to mid 5% range and duration decreased to 2.8 years, down from three-and-a-half years at the end of last year.

And lastly, diluted operating earnings per share continues to improve and was $3.87 per share for the quarter compared to $2.60 per share last year. With that, I’ll pass it over to Brian Haney.

Brian Haney : Thanks, Bryan. As mentioned earlier, premium grew 34% in the fourth quarter and 42% for the year. We continue to see growth across our book of business with particularly strong growth in our property divisions along with entertainment, general casualty, excess casualty and commercial auto divisions. Submission growth continues to be strong and actually experienced a bit of an acceleration to the mid-20s for the quarter. This number is subject to some variability, but in general, we view submissions as a leading indicator of growth, and so we see the submission the growth rate as a positive signal. We sell a wide array of products and rates in those products don’t move up in lockstep, but if we boil it down to one number, we see real rates being up around 5%.

Please note, we’ve been increasing rates above loss cost trend for several years now. And it’s also important to stress that our rate change and rate adequacy are two different things. As our results demonstrate, our rates are more than adequate. We’re continually reviewing our rates, adjusting them based on a number of considerations, such as our target return on equity and market opportunity and shifts in the competition. But in any event, we feel that business we’re putting on the books today is the most adequately priced business we’ve seen in our history. Another thing I’d like to note, we’ve seen in industry commentary a trend that some companies are seeing generally favorable development on workers’ comp that’s offsetting, to some extent, adverse development in general liability.

Just as a reminder, Kinsale doesn’t write any workers’ comp and general liability represents the largest share of our reserves. So when you see Kinsale having favorable development, you should know that this is a result of diligently staying ahead of the trends in the general liability market, and it does differentiate as someone in the industry. That being said, the notable industry trend of weakness in general liability reserves bodes well for us and may serve to prolong the favorable market conditions. Finally, inflation has moderated somewhat from its highs, but getting the inflation rate to the Fed’s target has proven to be a much longer effort than many prognosticators had forecast. The longer the elevated inflation persists, the more pressure the industry will see on reserves, particularly on longer tail lines.

We are dedicated to staying vigilant about this, so that we may continue to have reserves that are more likely to develop favorably than adversely. Overall, once again, a good quarter. And we’re really happy with the results. And with that, I’ll hand it back over to Mike.

Michael Kehoe : Thanks, Brian. Operator, we’re ready for any questions in the queue.

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Q&A Session

Operator: [Operator Instructions]. And we will take our first question from Bill Carcache with Wolfe Research.

Bill Carcache: I wanted to follow-up on your comments about the conservatism implicit in your reserving. I was hoping you could offer a little bit more color on the loss emergence trends that you’re seeing from those that sort of 2019 and prior accident year period, particularly in this environment, whereas, as you described, some carriers are experiencing adverse development. And along those lines are latency effects associated with court closures during COVID resulting in tail elongation, just curious how much that remains in focus.

Michael Kehoe: This is Mike In general, I would say that there was some disruption with regard to the pandemic. It varies dramatically by accident year and by line of business. There’s a level of complexity there that I think would preclude us from getting into too much detail on a conference call. But in general, I would say that Kinsale has done a good job over our – this is our 15th accident year in business. And I think we’ve done a really good job in setting aside conservative reserves, not every single year, but effectively I think 13 of the 14 prior years have developed favorably on inception to date basis. So, hopefully, investors look at that track record of conservatism. As we just talked about, we’ve been adding – raising our rates ahead of loss cost trend for a number of years in a row now.

And that’s given us the opportunity to add even more conservatism. I think the conservatism is warranted with the uptick in inflation in general, but changes in tort law and social inflation, etc. There’s all sorts of reasons for caution. And I just think it’s important for our investors to understand that Kinsale is very proactive and very conservative in setting aside reserves today to pay claims in the future.

Bill Carcache: I understand you’re probably limited in what you can say about that court judgment described in the 8-K that you filed at the end of last year, but following the thought process that you just described at a high level as we sort of think about social inflation pressures and the risk that those could prove more pervasive in coming years than might have been contemplated at the time that the business was written, you feel like the conservatism that you’ve contemplated from the outset sort of protects you from that dynamic?

Michael Kehoe: Yeah. In a nutshell, yes. I would say we can’t get into talking about that specific claim because it’s active litigation. But we said in the 8-K, we didn’t think it would have a material adverse effect. Adequate provision has been made in the consolidated financial statements and existing reserves to account for any liability that comes in related to claims such as this legal proceeding. I would say, in general, there’s been a lot of commentary over the last couple of years about social inflation. Some of that probably picks up this concept of nuclear verdicts. And there has been a dramatic uptick. Kinsale is an E&S company. We make frequent use of coverage limitations to help us control our exposure to loss.

We also tend to focus on smaller accounts, which probably insulates us a little bit. And I think we run a very disciplined underwriting operation. We’ve got really good systems, which translates into robust data to manage profitability. So it’s something that creates, I think, a challenge for the industry. But I think Kinsale is very good at staying ahead of changes in the torque system. When you add to that the conservatism and how we approach reserving, again, I think investors should have a lot of confidence in the Kinsale balance sheet.

Bill Carcache: If I could squeeze in one last one. Are you considering – for Brian, are you considering extending duration as the debate around the timing of Fed cuts continues? And maybe you could just frame how investors should be thinking about potential downside risk to earnings from a lower rate environment?

Bryan Petrucelli: We certainly keep up with what’s going on from an interest rate perspective and an inflation perspective. I think in the near term, we’re probably going to continue to invest in that three year timeframe. But, hey, it’s something we look at every month and every quarter, and working with our investment teams to ensure that we’re being opportunistic, but being aware of rollover risk and what have you.

Operator: And we will take our next question from Mike Zaremski with BMO.

Michael Zaremski: Maybe we can just start on – you mentioned that submissions increased a bit into the mid-20s. I know there’s some variability you cited on that. But any color there? I feel like insurance investors have been grappling with a potential uptick in flow on the casualty side, given social inflationary pressures impacting everyone, kind of maybe more than offset or offset by less property flow, to the extent property has gotten a lot of price and the wind doesn’t blow to tough in 2024, but any color would be helpful.