Mike Kehoe - CEO Bryan Petrucelli - CFO Brian Haney - COO.

Mark Hughes - SunTrust Jeff Smith - William Blair Mark Dwelle - RBC Capital Markets.

Good day ladies and gentlemen and welcome to the Kinsale Capital Group Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded.

Before we get started let me remind everyone that due the course of the teleconference Kinsale’s management may make comments that reflect their intentions, beliefs and expectation 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 2016 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 third quarter results.

Kinsale’s management may make reference during the call to underwriting income which is a non-GAAP financial measure or financial result. Kinsale's underwriting income represents pre-tax profitability of the company's insurance operations. The Form 8-K and press release are 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. Kinsale reported net income of $4.2 million for the third quarter of 2017, compared to $8 million in the third quarter of 2016. The drop in income for the quarter is due to a net after tax catastrophe loss of $5.3 million. These losses arose principally from hurricanes Harvey and Irma.

Losses from Maria and Lee [Ph] California Wildfires etcetera, you know other recent catastrophes in the news, they are all immaterial to Kinsale. As a reminder, Kinsale rides catastrophe exposed property through its personal insurance and commercial properties divisions.

Both teams focussed on careful and disciplined underwriting to make sure that we get paid properly for the risk we take. Being mindful of the volatility of the cat business, we combined the solid underwriting with a careful risk management strategy to reduce our exposure to extreme events.

This approach allowed the company to achieve a process for the quarter notwithstanding the storm related losses.

The other financial highlights of the quarter include a 7.3% annualized return on equity for the quarter and 11.5% for nine months, a combined ratio of 94.5% for the quarter and 84.3% year-to-date, 16.3% in premium for the quarter and a growth in our net investment income of 46% for the quarter.

Regarding the market outlook, we’re optimistic given both the cat activity of late combined with a deterioration of weaker competitors casualty results, a more favourable trading environment will be nice to have, but its’ a good reminder that it’s not necessary for Kinsale to achieve its goal of competing and winning in the market place.

The Kinsale strategy of disciplined underwriting, advanced use of technology and low costs provide the competitive advantage that allows Kinsale to achieve it’s goals regardless of market conditions. And with that, I’m going to turn it over to Bryan Petrucelli, Chief Financial Officer for Kinsale..

Thanks Mike. As Mike noted, in the third quarter we incurred losses from both hurricanes Harvey and Irma and given the strength of those two storms and the fact that they impacted some concentrated areas of exposure for the company; we are pleased with the performance of our property book.

From a financial statement perspective, we incurred $5.3 million in losses net of reinsurance and taxes from those two events which approximates 2.2% of the company’s September 30 consolidated GAAP equity. We reported net income of $4.2 million for the third quarter of 2017, down from $7.9 million for the third quarter of 2016.

The company generated underwriting income of $2.5 million and a combined ratio of 94.5%, compared to $10.9 million and 71.8% for the third quarter of 2016 excluding quota share. The combined ratio for the third quarter of 2017 included 17.9 points from cat losses and benefitted from 6.

4 points of net favourable loss reserve development compared to zero points of cat losses and 12.9 points from net favourable loss development last year.

On a year-to-date basis, the company generated underwriting income of $20.2 million and a combined ratio of 84.3% compared to $25.4 million and 77.3% for the same period last year excluding the quota share.

The year-to-date combined ratio included 6.4 points from cat losses and benefited from 9.2 points of net favourable loss reserve development compared to a negligible percent from cat losses and 11.2 point from net loss development from last year. Gross written premiums were $55.6 million representing a 16.3% increase over the third quarter of 2016.

Year-to-date written premiums have increased 17.9% over last year with growth continuing to be generated from overall increase and underwriting activity across most lines of business. On the investment side, investment income increased by 46% over third quarter of 2016 as a result of continued growth in the investment portfolio.

Annualized gross investment returns increased slightly to 2.4% from 2.1% last year and although we continue to maintain a conservative approach to our investments and our strategy, we’ve modestly increased our allocation to preferred stocks and structured securities over the course of this year.

Additionally, investment and common stocks has increased to approximately 5.5% at the end of the third quarter compare to approximately 4% at the end of 2016. The company’s effective tax rates for the third quarter and year-to-date were 20.1% and 30.5% respectively compared to 34% for the same period last year.

The reduction in 2017 was due to higher levels of tax exempt investment income from muni bonds and a discreet item in the third quarter related to the recognition of tax benefits from employees exercising stock options. Excluding discreet items, we estimate that our effective tax rate should approximate 32%.

For the third quarter, basic and diluted EPS was $0.20 per share. Year-to-date basic and diluted EPS was $0.90 and $0.88 per share respectively. With that I'll pass it over to Brian Haney..

Thanks Bryan. As much as we don’t like having a 94% combined ratio in any quarter, it does show the power of our low expense model. If we had the same expense ratio with some of our competitors we’d be closer to our one ten combined.

As it is, we can still show some underwriting profit even in what will turn out to be the worst quarter for natural catastrophes in history. With regards to our growth, premium grew 16% in the third quarter which is just ahead of the pace in the second quarter. The growth is widely spread with most of our 17 divisions showing positive change.

Aspera business was up 46% for the quarter. Missions were up slightly better than 20%. We have noticed a gradual acceleration in this growth rate. This could be a sign that more business is flowing into the E&S market or it could just be increased market recognition per Kinsale. In any event we see it as a good omen.

Technical rates for the quarter were up slightly, although given market conditions we expect somewhat larger rate increases going forward. The market conditions for property have shifted in our favour since the hurricanes. In the overall market, price decreases of any kind seem to be much rare even for non-catastrophe exposed business.

Insurers are pushing 5% to 10% increases for loss free catastrophe exposed accounts and accounts with losses are facing 25% to as high as 200% rate increases depending on how badly underpriced they were to begin with and how bad their loss was. To be clear, I’m talking about the market here not Kinsale.

We passed on a lot of opportunities because the market prices are inadequate and some of the rate increase is being pushed still odd [Ph] enough to bring prices to adequate, but we look at the market shift as a positive development for us.

Also keep in mind that the storms are still very recent and the effects that they will have on the market are still developing. The full impact of the catastrophes will become more clear over the next few quarters as more accounts and more reinsurance programs were known.

The market conditions for casualty seem to be improving if less roughly and less obviously. There is a steady and seemingly growing drumbeat of program business experiencing distress and competitors having to re-underwrite certain segments of their book.

Some actors have been covering up their poor casualty results with overly optimistic reserving, but that is always a short term effects. Eventually overly growth of insurers will have to true [ph] up their reserves, so I fully expect there is more bad news coming for the market for casualty lines.

Again to be clear, I’m talking about the market not Kinsale. One reason we write so much less than most of our competitors and have grown more slowly than we might have liked is our conservative underwriting approach. A final word about the hurricanes.

Based on the catastrophe modelling we would have expected a larger loss than we appear to be headed towards. We are materially outperforming the model results. We attribute this to sound conservative underwriting and we feel our performance in this quarter vindicates that approach. And with that, I’ll turn it back over to Mike..

Thanks, Brian. Operator, we are now ready for questions..

Thank you.[Operator Instructions] Our first question comes from the line of Mark Hughes of SunTrust. Your line is now open..

Yes, thank you very much, good morning. How much interest would you have in more property even on you know very good pricing, what do you think your appetite is, I assume you want to – you have a model that’s not quite vulnerable to these kind of cat losses, but there are good returns out there and you would like to grow that book.

How are you thinking about it? Is there a upper bond that we should think about for property?.

You know, I would say number one we are ambitions and we are looking for ways to grow our business by writing good profitable accounts.

And obviously with the catastrophe exposed property, there is a risk management piece that comes in [Indiscernible] well but I would say we’ve got a bit runway in front of us given our size, given how small the property book is relative to the overall book. I think it’s running around 7% or so.

So you know more favourable pricing environment would allow us to accelerate the growth..

Is – are we in that environment and how high should that, could that 7% go?.

I would say, you know in the right market conditions it could be 20% to 25% of the book. It’s going to take some movements, additional movement in the market to get there, but.....

I think E&S, the E&S market roughly divides kind of two third casualty, one third property. So clearly we could get quite a bit more than the 7%..

Did you indicate how much pricing was up this quarter, I’m sorry if you didn’t know....

It was what I said up slightly....

Okay. But your anticipation is that, that will get better somewhat larger rate increases going forward..

Yes, you know the combination of the storm activity but I think even more importantly is the deterioration in the casualty business for a lot of companies. You are starting to see more adverse development. I think that gives us a sense of optimism.

You said, submission is up 20%, which I think you have suggested is -- of the -- in an uncertain world, at least the best indicator you’ve got or that you’re able to share regarding potential growth in written premium, that 28% you said either maybe more in E&S or you getting more visibility.

Is there some reason to think you’re getting more visibility at this point, have you done something differently that help, open up the flow or is this a broader phenomenon?.

That was just speculation. There was nothing specific we did in the quarter to increase our visibility. I just think, as we grow and by virtue of being a public company we are more well known than we were let’s say 18 or 24 months ago..

Mark, I do think its very possible that the uptake in the submission growth and we've seen just recently, it could be indicative of a more business moving into the E&S market from the standard market..

Great.

And so that standard programs are doing poorly and you’re beneficiary of that, is that possible?.

It certainly possibly, obviously as Bryan said, we’re speculating. We don’t know definitively, but it would certainly be expected that a company that’s running into some financial distress because the under performance of their book of business is going to be a little bit more discriminating going forward about how they price and accept risk.

And that uptake and caution on the part of a big standard lines company certainly would force more accounts in to the non-standard market..

Is that – will that potentially bring larger accounts more into your focus? I think you have made the point that you tend to be a small account underwriter because that’s where you get better returns, but you would certainly be eager to move up market a bit if you got adequate returns.

Could that be a near term dynamic?.

Yes. We are actually seeing more larger, particularly distressed accounts. So we’re not binding as much of it as we’re seeing more of it. So we’re seeing a lot of stuff that’s -- it has bad loss history. It is having a tough time finding a home..

Right..

So, I think we will see more of that going forward. Certainly the trends are pretty remarkable..

I would just follow that up with. In past hard markets you definitely see an uptick in your average premium, because larger accounts that were underpriced now you're able to get an adequate return on them. So that would not be unusual if we were in fact kind of go into some sort of turn in the cycle..

All right. Sounds good. Thank you..

Thanks, Mark..

Thank you. Our next question comes from the line of Jeff Smith with William Blair. Your line is now open..

Hi. Good morning everyone. It looks like the accident year loss ratio like cat was up about 100 basis points.

Is that normal volatility? Are you seeing any uptick in trends there similar to some of your competitors?.

I think we’ve – Jeff, good morning. This is Mike here. I think we would attribute that to just a normal variability. In a 90-day period I think if you look on the – I think the year to-date numbers are little bit more stable than the quarterly numbers. That’s how we say..

Okay. And then favorable development was down a fair amount from what we’ve seen over last year or two.

Is there any more color you can provide there and is there maybe any change in levels going forward?.

You know, I think it’s a same dynamic, right. Whether it’s a current accident year or whether just the prior accident years, there’s a little bit of volatility and variability in terms of how the loss is coming in and are adjusted and closed out.

And I think if you look at the quarterly numbers the prior year development drop compared to the prior year. If you look at the nine-month numbers, I think its pretty close to – I think they are fairly comparable. So really it’s kind of the normal variability in the business. I wouldn’t see it as a trend of any sort..

Okay. And then I think you said that Aspera was growing at 46%.

What’s driving that? Are you just adding more brokers as a geographic expansion or what are the components there?.

Yes. Just to remind, Aspera is our affiliate company-owned broker that we distribute some of our product lines through the retail channel. So for instance our personal lines business goes exclusively through Aspera to retail brokers. And the 46% growth is partly adding new brokers. It's partly geographic expansion.

It’s partly broadening the product line. And candidly a lot it is say it’s a small premium base so that it's moving from I think 3.5% of our business to 4% or something. We’re encouraged by the growth, but it’s still a modest part of our overall book of business today..

Right. Okay. Thank you..

Thank you. Our next question comes from the line of Mark Dwelle of RBC Capital Markets. Your line is now open..

Yes. Good morning..

Good morning..

Couple of questions.

On the cat losses could you give us just a generalize split on what of that was personal as compared to what was the commercial business? Really just trying to understand kind of the nature of the exposures not so much for this loss, but for anything that might arise in the future?.

Yes. Harvey which is the Texas storm was probably two-thirds, one-third just roughly speaking. One-third commercial, two-third personal, I think Irma would be more heavily skewed toward the personal lines coming in on the West Coast of Florida the way it did..

Okay. That’s helpful.

On the tax rate commentary did I understand you to say continue to view 32% is the correct kind of run rate that the impact in the quarter was mainly the stock-option impact?.

That’s right, Mark. You know, obviously we’re going to have some level of stock option exercising, going forward it just difficult to predict. The 32% is just sort of backing out that discrete item, but it does include sort of anticipated level of tax-exempt income going forward..

Got it. Okay..

It does not include our prognostication on the tax reform..

Well, good luck with that if you can do it..

We’re keeping our fingers crossed..

Yes, indeed. The last question that I had – anyways in Bryan's comments, you mentioned – well, two-part questions really though. One, as you mentioned program business and distress.

You guys don't do any particular amount of program business, do you?.

No. We’re fairly dogmatic on that point. We maintain absolute control over the underwriting of our business which we mean – we mean by that is that our underwriters, company employees, underwriting price and every single account that hits our books. The program model is for some companies that can be quite effective. For some, it's been a challenge.

But it does create a little bit of a misalignment of interest when your underwriters that you -- when you outsource the underwriting to be able to get paid based on volume. That’s the misalignment of interest that has to be overcome with good management and the like.

And we’ve just seen plenty of examples of programs that get into harm's way and companies have to change course, change their guidelines and it's not unusual to see them cancelled and creates a lot of dislocation in the market..

Okay. Then the last question in that regard and this kind of follows up on Mark Hughes question. Within the property business, so it was very helpful commentary about how the market seems to be moving so far.

As kind of a general comment, mean, how much would you like to see prices increase before you kind of got to the good stuff? Is that 20%, 50%, what would it take the kind of get the competitive juices flowing and add some enthusiasm there?.

Mark, keep in mind there’s a lot of heterogeneity in the business we see. So it’s tough to really distill it down to one number. I mean, where we write decent volume of property today and we think that’s well priced business, that’s going to prospectively look to throw off a very attractive return for the company.

I think about pricing increases its more around growth opportunity, certainly if you saw in general across-the-board 20% rate increase, we’d have more opportunities than we have today, but kind of to Bryan’s point, I mean, some business is so under priced that a 20% rate increase would not increase our appetite..

Yes. I would agree with that. It’s more about – it’s kind of just the spectrum, the better prices get more we’ll be able to write at our prices. But we are writing stuff at profitable prices right now. We’re just writing the little we can at profitable prices..

It’s our guess in some ways to the commercial auto market, right? There’s been – we had one of our brokers describe that market has being in shambles, but its in shambles because the rates people were getting were so – they were below the burn cost in a lot of instances, right. The losses are exceeding the premium for some companies.

And that’s an area where rates had moved up dramatically. In our opinion and it’s just our judgment it’s not automatically correct. But in our judgment these rates are still too low. So we’re going very slowly in the commercial auto space because we don’t think the time is right.

That’s an underwriting judgment, and we’ll have to say in the future whether that’s correct..

Okay. Well, I appreciate the color on those things. Thanks..

Okay. Thanks Mark..

Thank you. I’m showing no further questions in queue at this time. I would like to turn the conference back over to Mr. Kehoe for closing remarks..

Okay. Thank you, operator. I just want to thank all our participants on the call and of course all the Kinsale employees and associates whose hard work has really allowed us to achieve the results we have so far in 2017.

And hopefully for our stockholders and related persons on the call you get a sense of our optimism for the business with our commentary this morning. We feel really good about the position of Kinsale on the market and feel very optimistic about our opportunity going forward. So thanks very much. Have good day..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..