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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