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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. 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 first 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 the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.
Thank you, operator, and good morning, everyone. We will follow our familiar format for today's call, wherein, Bryan Petrucelli, Kinsale's CFO, and Brian Haney, Kinsale's COO, 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, Kinsale's operating earnings per share increased by 50% and gross written premium grew by 46% over the first quarter of 2022. The company posted a 78% combined ratio for the quarter and an operating return on equity of 29%. These favorable results are being driven by the Kinsale 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 Kinsale results are 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 commercial 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 purchase a substantial reinsurance program.
Although our commercial and personal lines property premium amounted to 26% of our net written premium volume in the first quarter, the property premium subject to any material hurricane exposure is just over 10% of Kinsale's 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 premium. Part of achieving long-term success in the P&C business is to consistently establish conservative estimates for future losses. Kinsale 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 develop favorably over time. In a period of time with heightened inflation, such an approach is even more important.
As a consequence, investors should continue to maintain a high level of confidence in Kinsale's reserve position and overall balance sheet. Finally, our overall view of the E&S market continues to be positive. 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 of disciplined underwriting and technology-driven low costs will allow Kinsale 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, Kinsale will continue 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.
Thanks, Mike. Again, 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 3.8 points from net favorable prior year loss reserve development compared to 4.7 points last year, with less than one 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 from the company's casualty and commercial property proportional reinsurance agreements, is also in line with our 19.9% 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 in the investment portfolio and higher interest rates, with a gross return of 3.7% for the quarter compared to 2.5% last year. We continue to monitor Fed actions and any related impact on inflation and interest rates. Given the current inverted yield curve, we're continuing to invest new money in the shorter duration securities, with new money yields averaging close to 5% during the quarter. Our duration decreasing slightly to 3.4 years, down from three and a half years at the end of last year.
We did have a preferred stock position in SVB Bank and recognized a $4 million or so 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 so over the past 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 interest rate environment allows us to invest new money at better yields that I just touched on.
As it relates to capital, we continuously monitor our needs as market conditions change. Given the continued favorable market conditions and related premium growth, there's always the possibility that we'll 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. Lastly, diluted operating earnings per share continues to improve and was $2.44 per share for the quarter, compared to $1.63 per share last year. With that, I'll pass it over to Brian Haney. Thanks, Brian.
As 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 U.S. market remains favorable with strong growth across most of our product line. The property market continues to be hard, and in the wake of Hurricane Ian, the contraction in industry capacity is continuing. 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 continue 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.
The 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. Now we have the ability to write business at extraordinary rates and terms. The current market in property is as hard as we've ever seen, and 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 insured value in order to keep our volatility within acceptable bounds.
Submission growth continues to be strong in the low 20% range, which represents a modest acceleration from the previous quarter, generally consistent with most of 2022. As a reminder, we view submissions as a leading indicator of growth, that submission growth rate is a positive signal for our market opportunity. We sell a wide array of products, the rates in those products do not move in lockstep. If we boil that all down to one number, we see real rates being up a little over 7% in the first quarter, a very slight improvement over the fourth quarter. The property market is certainly boosting that number. The rate changes for property would be well higher than the average.
The rate changes for casualty divisions would vary greatly, but overall it'd be less than the average, but still positive, which indicates that the combination of rate changes and premium trend are exceeding loss cost trend. It's important to stress that rate change and rate adequacy are two different things. As our results demonstrate, our rates are more than adequate. We are continually reviewing these rates and adjusting them based on a number of considerations, such as our target combined ratio, our target operating 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 are putting on the books today has 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, as I said, 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 MGAs and fronting deals, that are offering wide open coverage and prices too cheap for their carriers to hope to make any return. This phenomenon isn't impacting our market opportunity at the moment, and we believe economic reality will eventually catch up with those competitors. When it does, there'll be further market dislocation and opportunity for the rational actors, and that ultimately will be good news for Kinsale. Overall, clearly a good quarter and we are happy with the results. With 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 Truist. Your line is open.
Yeah, thank you. Good morning.
Good morning, Mark.
Mike, you have in the past referred to some commentary about the inflation and the impact on loss development among competitors. I think you have alluded to kind of reinsurers speculating about loss development being more severe than expected. Any update on that? How do you see the impact of inflation on your competitors, and what does that mean for growth in the E&S market?
Well, I think on your longer tail lines, they're the most exposed to the increase in inflation. I think we've seen it in our own book of business where, you know, building supplies have gone up in price, labor costs have gone up in price. You know, a claim that may have been settled two-three years ago for $100,000 is probably being settled for, you know, a considerably higher number today. You know, 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. I think that conservatism gives us some insulation. Clearly, if you go back to for Kinsale, the 2015-2019 years, inflation has impacted those years.
I think all those years have developed favorably on an inception to date basis, but it has clearly eroded the conservatism a little bit. You know, given the rate increases that Brian mentioned from 2020, 2021, 2022, and now 2023, we think we're in a great position in terms of conservatism overall, but it does have an impact. It's gonna impact all of our competitors the same way. Not every company takes the same conservative approach to reserving. So the more optimistic a company is at the beginning of that process, I think the more painful the inflation can be. I think the net takeaway is it should extend the favorable pricing environment for the E&S market.
On construction, refresh me how much of your book may be exposed to construction? What do you think about the potential slowdown related to the banking crisis? Are you seeing anything like that? Any early signs?
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. I mean, that could include commercial and residential contractors. It can include, home repair businesses, janitorial, landscaping. You know, all sorts of things fit under that umbrella. that's a bread and butter E&S class for the industry, and it is for Kinsale as well. 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. One other question. Bryan Petrucelli. The ceded premium ratio with property increasing, actually, I think was down a little bit sequentially this quarter. What do you think a good run rate for 2023 would be on ceded premium ratio?
You know, I think, Mark, looking at what we have for the first quarter is a probably a good indicator of what we have going forward. That is gonna change, depending on the mix of business. We talked about that in the past. I think if you're trying to put something on a model, I think looking at what we did for the first quarter is as good of an indicator as I can give you.
Very good. Thank you.
Thanks, Mark.
Your next question is from the line of Pablo Singzon with JP Morgan. Your line is open.
Good morning, Pablo.
Hi. Good morning. Mike, you mentioned that expected catastrophe losses as a percentage of operating income have not changed even with property writings going up. Can you help quantify that a bit, you know, and ideally how to do it, whether it's percentage of premiums or earnings or just if any numbers around that expectation?
I think the best way to look at that, because, I mean, it gets into a very technical array of numbers when you look at a probable maximum loss curve across a variety of different return periods. If you look at Kinsale's experience now over, you know, five, seven, nine years, every major storm, when there's a major storm, we have losses, but they're very manageable, you know, in terms of... Maybe look at the third quarter of last year as an example. You know, our run rate on combined ratios, I think was in the high 70s. In the third quarter when we had some losses related to Hurricane Ian, okay, the combined ratio ticked up into the low 80s, right? That's generally how we're trying to manage, you know, the volatility.
We see a tremendous opportunity in the property business at the moment. As Brian said, you know, we've never seen a more favorable market for the risk bearer, we want to take advantage of that, but we're also mindful of volatility. You know, all the things we've done over the years to balance the return prospects against the volatility, we continue to do that. That's kind of the message we wanted to convey. We don't have a specific number to give you know, that you could boil everything down to one statistic.
Understood. That was helpful context, Mike. The second question, I just wanted to follow up on your comment, and this is something new that you've said, right? You've said this before, but, you know, longer term, you think growth for Kinsale is in the low to mid-teens. I guess the question around that is based on your experience of past cycles in the market, how do you see that normalization playing out, right? Do you think there's gonna be a steep decline to that more run rate level, or do you think the process will be more gradual, maybe even over a couple of years?
I think it could be gradual over a couple of years. You know, as I said in my comments, we're very optimistic today. I mean, we've been growing at an extraordinary rate now for four years. The distress in the property market, I don't think will go away anytime soon. Inflation has an impact on the industry's reserve position, that has yet to, you know, manifest itself. You know, we continue to have a very dynamic tort system in the United States, which of course is a challenge for the industry. 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 a 46% top line growth in a mature industry like insurance is extraordinary.
You know, at some point in the future, it will abate somewhat. 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 MGAs and fronting companies. I'm not sure if you referenced a specific line of business, but could you talk to, I guess, where, you know, these entities are over-represented and, you know, maybe those entities having a negative impact on pricing and market dynamics. Apologies if I, if I missed it, but I didn't hear specific lines associated with those.
No, no, I didn't mention it, but I would say, in management liability, is probably one area you're going to see them. In professional liability, they're gonna be more common. They definitely tend to focus on large deals, which is why it's not having that big of an impact on us. If you've heard market commentary from some of our competitors about what's going on in, let's say, D&O, right? That's gonna be going on in the large public company D&O space, which we're not in. That would be the line, the lines we would tend to see them in.
Got it. Thank you.
The other seems cyber, but we don't really write cyber.
Then property? Sorry, are they less common in property? Sort of like these syndicate deals or?
I would say, with the market the way it is now in property, it. They're less common. Like right now, you wouldn't have to use MGAs to write a lot of business in property. They certainly are in that space.
All right. Thank you.
Your next question is from the line of Andrew Andersen 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? 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's got a pronounced CAT exposure will run at a much lower attritional loss ratio. 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. I don't know that you'll see any kind of immediate benefit. you know, that being said, even with our conservatism, I think we're in the high 50s for a loss ratio. When you match that up with a, you know, attractive expense ratio, hey, we're delivering, you know, really, really compelling returns, even with the conservatism.
Got it. Do the recent Florida market reforms change appetite in the state relative to maybe where it was, a few months ago? 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 AOB issues that were plaguing the standard homeowners writers in Florida. We do have a small homeowners book in the Southeast United States that we're actually kind of reducing concentration there. We had a Ian loss that was a little bit larger than we hoped. Florida's a big state for us on both the property and the casualty side. Obviously, again, you know, we have strict limits on concentration, so, you know, yeah, we're gonna write in Miami-Dade County, but, hey, we have limits as to how much we'll write there. 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 one on your telephone keypad. Your next question comes from the line of Scott Heleniak with RBC Capital Markets. Your line is open.
Yes. Good morning. Just wondering if, you know, if there's any point to use, in particular on the uptick and the improvement in the submission count, you know, which has obviously been strong for a while. It looked like it, that upticked a little bit. Is there any area or where you're 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 you're just getting a lot more looks at business, as competitors retrench?
Yeah. I mean, that, 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 seeing good growth and submission. To the extent that we are, those are the areas that are not growing as much, like, product liability and management liability. It kind of ties with the growth rate and premium.
Okay. Pretty broad-based. All right. Just moving on to the, you guys have a, if I'm, if I'm not mistaken, you have a commercial property quota share reinsurance treaty that renews at June 1. Any thoughts on renewing that, you know, the current form? Whether you expect any changes on that and pricing? Whether you expect to keep it, that as a quota share versus excess loss? Anything you can add on that?
Yeah, 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 property quota share. We currently cede 42.5% of that. We're gonna push that up to 50%. We don't expect any deterioration or improvement for that matter in terms. I think it'll be per expiring.
Yeah. Okay. Just had a question too. We've heard a lot of talk on the quarterly conference calls about just, you know, giving customers are seeing large rate increases, adjustments to the, you know, to the premiums to reflect the higher insured values. Are you seeing a meaningful shift in some of your terms and conditions, just the deductibles and limits, you know, pretty across the book as some customers just, you know, are struggling with the rate increases and so you have an opportunity to change deductibles and the limits there?
Yeah. The short answer is yes. I mean, we're seeing, you know, generally more favorable terms because people are looking for a way to save any money. It could be through purchasing lower limits, having higher deductibles, living with sublimits, things like that.
Is that a big change versus last six-nine months, or is that just kind of gradually headed that way?
That's been going on kind of as the hard market's been evolving. No, it's not a, it's not a significant change, although I would just say it's, in certain areas it's pretty pronounced, like again, property.
Okay. Just lastly, anything on the favorable development that you said in the Q, it's from more recent accident years, 2021, 2022. Is there any particular areas that you can call out on that you can point to, where, you know, lines of business where that's coming from?
Yeah, I don't think there's anything we can point to on the call other than, you know, I think we're seeing good experience across the portfolio. You know, we write a good mix of short, medium, and longer tail lines. There's probably a disproportionate percentage of those dollars that come from the shorter versus the longer tail. We don't have anything specific to point to. You know, the results are a combination of setting conservative loss specs, but also getting, you know, some very dramatic and persistent rate increases ahead of loss cost trend now for, you know, a number of years in a row.
Was there any favorable development from Ian that was worth calling out?
No.
No? Okay. All right. Thanks a lot.
Okay. Thank you.
Your next question is from the line of Mark Hughes with Truist. Your line is open.
Yeah. I was just gonna ask, anything on the audit premium front? Anything that would speak to the economy? Is there anything you see that suggests that maybe some slowdown even in the midst of all the other good news?
Yeah. I mean, I think you gotta keep in mind when we talk about the economy slowing down, that's in, it's in an inflationary environment. You know, are the audited premiums are gonna be based on nominal sales, not-
Real sales, not adjusted sales. We haven't really seen that big an impact on it. I guess the one thing I would say is we did use to see kind of outsized COVID-related audits a year or two ago that we aren't seeing now. No, 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?
I'll do them in reverse order. We do have a healthy allocation to mortgages through the, I guess, residential and commercial. I think they're almost all triple A rated. 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. Again, pretty highly rated bonds across a variety of regional banks.
All right. Thank you.
Okay.
Again, if you would like to ask a question, press star followed by one on your telephone keypad.
Operator, 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.
Thank you Brian, this is a voice from your past. I can't ask an intelligent question, but I want to say as a shareholder from day one, you're the example of what Warren Buffett talks about. If you're lucky in life, you invest in a couple of great companies, and you hang on. You guys have proven that to be true. This is just a stockholder saying, you have an incredible track record. Your explanation on the phone, while I can't follow it, demonstrates your knowledge of the business. I just want to express my appreciation for 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 a great ride, buddy.
All right, Tommy. Well, 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 in a couple of months. Have a great day.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.