Hello. Before we get started, let me remind everyone that through the course of the teleconference, Kinsale's management may make comments that reflect 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 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 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 at the company's website at www.kinsalecapitalgroup.com. I will now turn this over to Kinsale's President and CEO, Mr. Michael Kehoe.
Please go ahead, sir.
Thank you, operator, and good morning, everyone. Thank you for joining us on the call. With me today are Bryan Petrucelli, Kinsale's CFO, and Brian Haney, Kinsale's COO. After comments from each of us, we'll turn to your questions. Kinsale's operating earnings for the fourth quarter of 2021 were $1.76 per diluted share, a 54% increase from $1.14 in the fourth quarter of 2020. Gross written premium was up 36% for the quarter. The company posted a 74.5% combined ratio for the quarter, and 77.1% combined ratio for the year. Our operating ROE was, for 2021, was 20.8%.
As we've discussed in prior calls, Kinsale's results are being driven principally by our unique business model of focusing on smaller accounts within the E&S market, controlling the underwriting and the claim handling process instead of outsourcing it, and using our advanced technology to operate at a much lower cost structure than our competitors. An additional tailwind has been the state of the overall E&S market, which grew by double digits in 2021 for the fourth year in a row. Strong growth combined with opportunistic rate increases is having a favorable impact on our margins, with our operating ROE of almost 21% in 2021, well above our mid-teens guidance. Surplus lines stamping office tax data that was just released for January of 2022 shows the overall E&S market off to a strong start in the new year, with double-digit premium growth.
Likewise, there seem to be a number of competitors struggling with adverse development from prior year loss reserves. The combination of these two data points and the confidence we have in our own business model give us a sense of optimism about 2022, both from a growth and a profitability standpoint. Like everyone, we're seeing the impact of inflation in the economy. Most of our policies are priced using an inflation-sensitive measure, like revenue or payroll. As an underlying business adjusts its pricing because of inflation, our insurance premiums adjust as well. In addition, we manage profitability of our underwriting operation carefully and make regular adjustments to our technical pricing to stay ahead of loss trend. Finally, our rate increases have been running well ahead of inflation for several years now, putting Kinsale in a strong position regarding both profitability and the strength of our loss reserves.
Investors should have confidence in Kinsale's reserve position and our overall balance sheet. Now I'll turn the call over to Bryan Petrucelli.
Thanks, Mike. Just another solid quarter, driven by strong premium growth, favorable loss experience, and disciplined expense management. As Mike said, we reported net income of $48.4 million for the fourth quarter of 2021, representing an increase of 27% when compared to $38.2 million last year, and due primarily to higher earned premium, lower cat losses, and lower relative expenses. Net operating earnings increased by approximately 55%, up to $41 million from $26 million in the fourth quarter of last year. The company generated underwriting income of $42 million and a combined ratio of 74.5% for the quarter, compared to $22 million and 81.6% last year, with improvements to both the loss and expense ratios.
The combined ratio for the fourth quarter of 2021 included 4 points from net favorable prior year loss reserve development and no cat losses, compared to 3.1 points of favorable loss reserve development and 5.1 points from cat losses last year. The 21.4% expense ratio for this quarter continues to benefit from some economies of scale, with earned premiums that are growing faster than our operating expenses and from slightly lower relative net commissions as a result of a shift in the mix of business to lines that are subject to reinsurance and where we receive ceding commissions. Although it's possible that we'll continue to achieve a modest level of additional economies of scale with some variability from quarter to quarter, we believe an expense ratio in the low to mid-20s to be sustainable over time.
Our effective income tax rate for the year was 19.1% compared to 11.9% last year, and higher primarily as a result of lower tax benefits from stock compensation activity this year. Operating return on equity was approximately 21% for the year, and again, as Mike mentioned, ahead of our mid-teens guidance. Gross written premiums were approximately $204 million for the quarter, representing a 36% increase over last year. On the investment side, net investment income increased by 32% over the fourth quarter last year, up to $8.6 million from $6.5 million last year as a result of continued growth in the investment portfolio.
Annualized gross investment returns, excluding cash and cash equivalents, was 2.5% for the year compared to 2.9% last year. Lastly, diluted operating earnings per share was $1.76 per share for the quarter compared to $1.14 per share last year. With that, I'll pass it over to Brian Haney.
Thanks, Bryan. As mentioned earlier, premium grew 36% in the fourth quarter, more or less the same as the third quarter. The increase is generally driven by increasing submissions, rate increases, as well as economic growth, which drives up exposure bases. Every one of our divisions was up for the quarter, led by our Allied Health, Inland Marine, and Public Entity teams. Reopening of the economy and the robust economic growth is still providing us a significant boost, and the rapid surge of COVID that began in December countrywide did not appear to have a material effect on growth. Submission growth was in the mid-teens in the fourth quarter. As for rates, we continue to push them up in response to market conditions. As a reminder, we have a very heterogeneous book of business, which complicates reducing all the rate movement to a single number.
All that being said, we see rates being up in the low teens% range in the aggregate, during the fourth quarter, generally consistent with the past several quarters. Our expense ratio continues to be a huge advantage for us. With many of our competitors in the 30s% and even some in the 40s%, we often find ourselves able to be competitive on price while still delivering superior returns to our investors. We've also been busy in expanding our product offering. Over the course of 2021, we created underwriting divisions focused on Commercial Auto, Aviation, Entertainment, and Product Recall. We've also added a small Property division that focuses on accounts with smaller insured values. Beyond this, we have also incrementally expanded our offerings in existing divisions, and we plan to continue the product expansions in 2022 and beyond.
In summary, we feel good about the quarter. We are producing positive results, and the market conditions continue to favor us. Our business model works well in any market, soft or hard or anything in between, but the current market conditions are truly excellent, and we are working hard to make the most of it. With that, I'll turn it back over to Mike.
Thanks, Brian. Operator, we're now ready to take any questions that come in.
Thank you, sir. To ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A roster. Again, to ask a question, please press star one on your telephone. Our first question comes from Mark Hughes of Truist. Your line is open.
Yeah, thank you very much. Good morning.
Good morning, Mark.
Brian, the expenses in the quarter were up a little bit sequentially. The ratio was up. You had mentioned mix, but I'm not sure whether you were applying that or saying that was impacting the quarter. Was there anything unusual, any expense accruals or compensation accruals, anything like that?
Yeah, I would just say, you know, there was a modest increase in variable comp during the quarter. Other than that, nothing meaningful.
When you look at the 2020 accident year, I'm curious whether there's anything you can say about the loss development. You had good reserve gains in the quarter. A little bit less though than what you might have seen in the first half. How was 2020 developing? Anything about the submission or the, you know, claims activity that's unusual or any change from, I think, what was pretty benign at the time?
Mark, this is Mike. You know, one thing we've talked about on prior calls has been the fact that reported losses in 2020 and 2021 have come in below our expectations. We think a lot of that has to do with the COVID pandemic, the closure of the court systems and, you know, the like. Obviously, we've spoken in the past about the fact that we've largely offset the lower reported losses with higher IBNR. I think we're well reserved if there's kind of a mean reversion or a bounce back in those loss trends. If there's not a bounce back at some point and you know, they're just gonna be permanently lower, then hey, that's good news.
It'll drift out over the years ahead, you know, very gradually. But, you know, I would just reiterate the fact that reserving conservatively is really a fundamental part of our business strategy. I think it's just a good reminder, especially in a period of time where there's a lot of distress across the P&C market. I just reiterate, investors should have a lot of confidence in our reserves and our balance sheet.
Thinking about a broader cycle, I'll ask maybe the inning question or that, you know, throw that out there. It's interesting that you talk about sustained rate increases, still strong submission growth. You know, others have talked about maybe a little bit of tapering. I'm just sort of curious, you know, to hear how you see it at this point.
This is Mike again. You know, when we were at a conference a number of months ago, we had you know, a variety of conversations with reinsurers. It seemed they were all noting the fact that they anticipated continued weakness on the part of some companies in terms of adverse development of their casualty books. Of course, they also noted the fact that with the heightened cat activity, nobody's really made any money on property for the last five years. I would say uniformly, they attributed these two data points to their own optimism around the fact that the favorable trading environment would continue for some time. You know, that makes sense to us.
You know, I think there's also some data out there around, you know, rate trends, maybe rates in some lines of business aren't rising as rapidly as they were in the past. You know, some of those rate increases have come in a little bit. I'll just say, you know, if you go back to Brian Haney's comments a few seconds ago, we're seeing, you know, good growth in our own business. You know, the January stamping office tax data indicates that 2022 is opening pretty strongly for the E&S market overall, you know. You combine that, I think, with, again, the confidence we have in our own unique business strategy, and obviously, we feel pretty positive about things.
Thank you.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Our next question comes from Pablo Singzon of JPMorgan. Your line is open.
Hi, thanks. On the fourth quarter loss ratio, once again, pretty good. I'd be curious to hear if there's anything one-off about this quarter, whether from the mix of new business versus other quarters, the new business you put on or perhaps, you know, short tail losses like property being unusually low. Just sort of any color you can provide there would be helpful in, you know, how to think about how that AY loss ratio might trend going forward.
Yeah. I don't think there was anything unique in the fourth quarter. Keep in mind, Pablo, there's always gonna be a little bit of variability. That's just inherent in the business. You know, we work hard to manage that volatility with the conservative reserving, with the reinsurance program we have, and the like. But there's always gonna be a little bit of variability, but nothing unique beyond just normal trading conditions.
Understood. Just sort of a question on growth, but I guess from the perspective of distribution. I was just curious to hear more color on distribution expansion as a component to your growth. Meaning, you know, are you seeing higher volumes in the same number of wholesalers today, or are you working centrally with more distributors today than at the start of the pandemic, for example? If so, is there any way to size that?
Well, I'd say we're I mean, we're seeing more inflow of submissions from the existing brokers. We're continuing to appoint occasionally additional brokers. We're adding new products, so that's driving some of the new growth. We are still working on sort of efficiency and process to sort of get to more quotes and get to them faster. That's driving some of that as well. Nothing that we haven't been doing, you know, for the last decade.
You know, Pablo, this is Mike. I'll just add to Bryan's comments. You know, a lot of times we talk about our technological advantage with regard to efficiency and operating our company at a low expense ratio and how much of an advantage that is in a commodity industry like P&C. There's an equally important benefit when it comes to the service levels that we can provide to our brokers. You know, the more efficient our business process, the better the service to our brokers. There's a very direct correlation between the quality of your service and the propensity for you to bind a given quote.
I mean, we don't talk about it a ton, but it's a really important part of our strategy, and it's another powerful benefit from having a more advanced approach to technology.
Got it. That makes sense, Mike. The last one for me, I just wanted to pick up on your comment about dislocation in the E&S market. I guess it's more of a qualitative question. You know, how would you describe or qualify a dislocation today versus maybe three, four years ago, you know, where some of the larger competitors in the market, like AIG and Lloyd's, really clean portfolios. Today it seems like they're trying to grow, probably not the same way they did before. But then again, you made comments about, you know, I guess smaller E&S companies undergoing reserve issues, right. I guess if you take a step back overall, is there more dislocation today than there was like three or four years ago, or the same or less. Just your thoughts on that. Thank you.
I'll start and then I'll turn it over to Brian for his comments. I would just say, I think it might be more or less steady. You know, some very large E&S writers that have run off multiple $ billions of premium over the last several years. I can think of one big one that has kind of reverted to growth. But I can think of other very large E&S writers that are still triaging their books of business. There's a ton of anecdotes about, you know, companies, you know, smaller, more boutique-sized, E&S companies shutting down underperforming lines of business and canceling programs and the like. You know, offsetting the dislocation is the fact that there's been an explosion in the number of delegated underwriting authorities.
Somebody told me the other day we're up to 21 fronting companies, you know, that more or less facilitate those kind of, you know, delegated arrangements. The delegated underwriting market is red-hot as well, right? That would offset a lot of the dislocation. To me, it's kind of a mixed market, and it has been for a number of years. On the whole, I think it's still pretty favorable.
Yeah. This is Brian Haney. I agree with Mike. Right now it's stable, but just the time period you happen to pick, the three to four years, it's definitely like that would extend back to 2018. It's definitely, you know, much more favorable market now than it was in 2018. But I'd say we're not seeing, you know, dramatic shifts either way at the moment in January 2022.
Got it. Thanks for your answers.
Okay. Thanks, Pablo.
We have a question from Rowland Mayor of RBC Capital Markets. Your line is open.
Hi. Good morning. When you look at the long-term growth rate, I think you guys have talked about a mid-teens% rate longer term. When you look at 2022, it seems like there's a lot of stuff going favorably. Is there a way to sort of ballpark how much higher you think that growth rate could be in 2022 versus sort of your long-term goals?
You know, Rowland, this is Mike. We don't offer guidance on growth because it's hard to nail that down with precision, right? What I would say is I think certainly over the long haul, right? When the market kind of mean reverts at some point in the future, you know, low double-digit growth is something we think we can maintain for the long haul, given our expense advantage, the uniqueness of our business model and the like. If you look back over the last four or five years, we've been growing at a 30% or 40% rate. You know, the two data points I mentioned at the beginning of the call. One, you know, looks like the E&S market is off to a double-digit growth rate at the beginning of 2022.
That's certainly quite positive for our growth. The dislocation in the market, not that there's not a ton of competition, there is, but as Brian said, hey, this market is much more attractive to us as a risk-bearing entity than what we experienced a few years back. You know, the combination of our strategy being quite unique and competitive combined with attractive overall market opportunity, I think you can read our body English. We're pretty optimistic.
No, I figured that was what the response was gonna be, but it was worth trying. On the balance sheet, I was wondering, you've raised capital a few times in the past to support growth. Is the business now able to support itself on a growth front from organic capital generation, or would there be a need at some point to raise further capital?
I think we've talked about in the past you know we have you know somewhere around a 6% debt to cap ratio right now. I think over time wanna get up to somewhere in the 20% range. Yeah there may be some need to raise additional capital but we would look to the debt markets for that here I'd say in the near to medium term.
Great. Thank you so much. Those were my questions.
Thanks, Rowland.
Thank you. I'm seeing no further questions in the queue. I will turn the call back over to Mr. Michael Kehoe for closing remarks.
Okay. Well, thank you everybody for joining us, and I just want to extend thanks and congratulations to all the Kinsale employees. We just finished the best year in our company's history, and it's obviously the result of an enormous amount of hard work and dedication on their part. Thank you for all the listeners, and we look forward to speaking with you again here in two months. Have a good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day, and have a good weekend.