Hello and thank you for standing by. My name is Regina and I will be your conference Operator today. At this time, I would like to welcome everyone to Kinsale Capital Group Incorporated’s third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star, one again.

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 risks factors that could cause actual results to differ materially.

These risk factors are listed in the company’s various SEC filings, including the 2021 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 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..

Thank you Operator and good morning everyone. Bryan Petrucelli, Kinsale’s CFO, and Brian Haney, Kinsale’s COO are joining me this morning. Our third quarter conference call will follow our usual format. Each of us will make a few comments and then we’ll move onto any questions you may have.

Kinsale’s operating earnings for the third quarter of 2022 increased by 3.3% over the same quarter in 2021. Gross written premium was up 44% for the quarter. The company posted an 83.6% combined ratio for the quarter and an 80% combined ratio for the nine months. The annualized operating ROE for the first nine months of the year was 24.3%.

The previously mentioned 3.3% growth in operating earnings was more muted than recent history because of losses from Hurricane Ian in Southwest Florida, so a few comments on Kinsale’s property insurance strategy and Hurricane Ian. Through nine months of 2022, Kinsale’s premium was split about 21% property and 79% casualty.

For comparison purposes, the overall E&S market is about a third property, two-thirds casualty. Slightly less than half of that 21% property premium has some sort of exposure to hurricane losses, the balance does not. Kinsale rates catastrophe-exposed property business because the profit margins are compelling.

We are mindful, however, of the volatility associated with this type of business and use a variety of strategies to control it, specifically a disciplined underwriting approach, regular modeling of individual risks and the property portfolio, limits on the concentration of business, and a robust reinsurance program.

Regarding Hurricane Ian in particular, our gross loss is estimated at $67.5 million and our net after-tax loss is $20.6 million.

About 80% of these gross losses arose from our modestly sized book of personal lines business, and as this amount exceeded some of our underwriting and pricing assumptions, we’re making a variety of adjustments to reduce volatility in this area.

With about 20% of our gross loss from Ian coming from our commercial lines book, this book significantly outperformed our underwriting and pricing expectations, which of course is encouraging.

Beyond Hurricane Ian, the quarter was a continuation of the trends we have experienced over the last several years, a relatively hard market with a strong growth in submissions, strong top line growth in premium, and favorable profit margins on our underwriting.

This strong business performance combined with Kinsale’s low cost operating model allowed us to absorb the storm losses and still produce a quarterly sub-84% combined ratio and a nine-month operating ROE above 20%.

We continue to raise rates above loss cost trend in the quarter and we continue to establish reserves for future losses in a conservative fashion. This combined with the unique nature of our business model should provide our investors with confidence in our balance sheet and our prospects for future growth and profitability.

We continue to have an optimistic outlook for the E&S market for the balance of 2022 and for 2023.

Beyond next year, our view of the market becomes a little bit less certain, but with our model of disciplined underwriting and technology-driven low costs, we expect to grow our business, take market share from less efficient competitors, and produce best-in-class returns for the foreseeable future under any market conditions.

Now I’ll turn the call over to Bryan Petrucelli..

Thanks Mike. Again, just another really strong quarter from an operating income perspective, even in light of cat losses from Ian.

Although net income was down around 9.9% compared to Q3 2021 as a result of the higher cat activity and a decline in the fair value of our equity investments during the quarter, operating earnings, which excludes the impact from fluctuations in equity values, did increase by approximately 3.3% over the same period last year.

The 83.6% combined ratio for the quarter included 5.3 points from net favorable prior year loss reserve development compared to 5.9 points last year, and cat losses contributed 12.5 points this quarter compared to 3.8 points last year.

With respect to expenses, we continue to achieve some economies of scale as our earned premium continues to grow at a faster clip than our operating expenses, as reflected in the 19.2% expense ratio that we reported for Q3 of this year compared to 20% last year.

A portion of this decrease related to slightly lower relative variable compensation given a higher cat activity this year.

Additionally, we entered into a quota share reinsurance agreement on a commercial property business at June 1 of this year that includes some ceding commission that did not exist last year and shows up as a reduction to our commission expense.

Book value decreased by 2.3% in the quarter primarily due to unrealized losses on our investment portfolio as a result of higher interest rates and volatility in the equity markets.

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.

We’re investing new money in shorter duration securities with new money yields averaging close to 5% during the quarter, and duration has decreased to 3.9 years, down from 4.3 years at the end of 2021.

Net investment income increased by 71% over third quarter last year as a result of continued growth in the investment portfolio and as we start to recognize some effects from the higher interest rate environment. Lastly, diluted operated earnings per share was $1.92 per share for the quarter compared to $1.28 per share last year.

With that, I’ll pass it over to Brian Haney..

Thanks Bryan. As mentioned earlier, premium grew 44% in the third quarter, largely consistent with the first two quarters. Overall, the E&S market remains favorable with strong growth across most of our product lines.

The property market continues to be hard and in the wake of Hurricane Ian, we expect a contraction in industry capacity which will prolong the hard market. In addition to our property divisions, we are seeing continued strong growth across most of our casualty divisions.

Our energy, general casualty, and entertainment divisions in particular have been growing at a significant pace. Submission growth continues to be strong, a little over 20%, which represents a slight acceleration from the first two quarters.

We sell a wide array of products and the rates on those products don’t move in lockstep, but if we boil it all down to one number, we see real rates being up around 8% in the aggregate during the third quarter.

Hurricane Ian happened late in the quarter, so we haven’t seen any rate effects from it yet, but we believe it will lead to further firming in the property market and perhaps in the overall market as well as reinsurers and other capital providers’ tolerance for loss wanes. We are continuing to keep an eye on inflation.

We feel we are in a good position because we have been achieving rate increases ahead of loss cost trends for several years now. These increases combined with our strategy of conservative reserving further protects the company from the threat of inflation that some of our peers may be more exposed to.

The market conditions are generally favorable across the board. We do see a proliferation of MGAs and other delegated underwriting authority arrangements. We do not delegate underwriting authority ourselves, but virtually all our competitors do.

Although there are certainly some well managed MGAs in the market, we consider this dramatic proliferation to be a harbinger of undisciplined market behavior to come in the long run in the form of overly aggressive pricing and lax underwriting; but at this point, it is not affecting the market much because many of the new entrants are just beginning to ramp up and because MGAs typically rely heavily on reinsurers, whose enthusiasm for aggressive expansion will be curbed by their significant losses from Hurricane Ian.

As for Kinsale, the fact that we are able to deliver results like these, even with a significant catastrophe in the quarter, is a testament to the hard work of our people and the soundness of our business plan.

Our disciplined underwriting and technology-enabled low costs have allowed us to deliver superior returns for our investors even in a difficult quarter for the industry. With that, I’ll hand it back over to Mike..

Just one correction - the diluted operating earnings per share for the quarter was actually $1.64 per share..

Okay. Operator, we’re ready for any questions that come in..

[Operator instructions] Our first question will come from the line of Mark Hughes with Truist Securities. Please go ahead..

Yes, thank you. Good morning. The ceded premium ratio was up a bit in the quarter.

You’d mentioned you’d entered into a quota share June 1 - was that it, and could we assume that you’ll be--I’m seeing kind of a 17% ceded premium, should it continue at that level, go higher, go back lower?.

Yes Mark, this is Brian. That was the primary driver. There was a little bit of reinstatement premium in there as well, but you should see that retained premium sort of at a lower level than we have seen historically, yes..

So back to kind of the low, mid teens, is that what you’re saying?.

I think that’s a good estimate, yes..

Okay.

Then you said the personal lines underperformed - I assume that’s manufactured housing? Did you just happen to have a concentration where the storm hit, or do you think it’s a broader issue than that?.

Hey Mark, good morning, this is Mike.

Yes, we certainly write a lot of business in Florida, so we had plenty of accounts in that area; but I would just phrase it as the frequency and severity of the storm, we’re just reconciling that with some of the underwriting and pricing assumptions, and like we do with all of our business, hey, we have to react where the business didn’t perform as well as we anticipated.

That involves underwriting, pricing, concentration issues, reinsurance and the like. We are long term committed to the homeowner space. We do see that as a long term opportunity to grow the business.

I would say right now, it’s not so material to the company - it’s probably about 3% of our overall business, but we’re optimistic about getting that on track and continuing to grow..

How would you characterize your appetite for coastal property? That’s 10% or so of your book that’s exposed to coastal, I assume that’s going up because I assume the pricing will be pretty attractive, but you tell me, and then how much higher would you be willing to take that?.

We don’t really have a macro ceiling that we manage to - it’s really more of a bottom-up strategy depending on--you know, we have very strict limits on concentration, right, so that’s always a constraint on growth, especially when you get into urban areas like South Florida or Houston and the like.

But I would say in general, our commercial property book performed exceptionally well in the storm. For a number of years now, it’s generated very significant returns for the company in a way that doesn’t create a lot of volatility in our results, so we are looking to incrementally grow that business.

If 10% of our book today is some sort of hurricane-exposed property, certainly that could go up a few points but I wouldn’t expect it to be dramatically higher than that..

Thank you very much..

You bet..

Your next question will come from the line of Casey Alexander with Compass Point. Please go ahead..

Yes, hi. Good morning. A couple questions. One, first of all, my estimate for the quarter was way off the mark, and I wholly overestimated the losses that would result from Ian, and so I sort of apologize for that - it wasn’t my intention to raise alarm bells or to distort consensus.

I’m more trying to figure out how I could be as far off the mark as I was.

I compared your losses to, given the magnitude of Ian, to the loss ratios that you had in 2020, and is the difference between the two the fact that 2020 had multiple events that dug into your retention in multiple ways compared to Ian, which was a much greater magnitude storm but only one event that only dug into your retention one time?.

Casey, this is Mike. It may be best to take that question offline. I don’t know that we have that information in front of us to do a detailed comparison with 2020 and 2022.

We’re happy to go back and talk to you about maybe the reinsurance structure we had two years ago versus today - that’s all public information and that probably contributed to a lot of the difference. .

Okay. Secondly, there had been a number of reports out recently that market participants can expect significantly reinsurance renewal cost increases, including increased retention.

How does that contour your strategy going forward in the southeast markets, and how might those changes in the reinsurance renewal and retention impact your margins?.

Well, I would say this - we are and always have been interested in managing volatility in our business.

We do that in part through our reinsurance purchases - that’s an important part of how we manage volatility, but also with our own underwriting decisions, what limits do we put out, what concentration of business do we allow in a specific area, how do we price the risk that we take onto our books.

We just renewed our reinsurance program a couple months ago, so we’ll have the better part of a year to look at the way the reinsurance market develops, but as I mentioned a few minutes ago, we’re already proactively making some adjustments on our own.

I would say in general, our reinsurance partners have made a lot of money on Kinsale over the years - we’re a valuable client, and so I think that puts us probably in a little bit of a different position than some competitors, but it probably varies company by company.

The short answer is it’s a little bit early to speculate, but certainly we’re aware of those headlines and the like as well. .

All right, great. Thank you for taking my questions. I appreciate it..

You bet..

Your next question will come from the line of Pablo Singzon with JP Morgan. Please go ahead..

Hi, good morning. First one, I just wanted to follow up on the--I believe I heard 8% pricing improvement you mentioned.

Is that comparable to the low double-digit range you had--you’ve been mentioning for the past couple of years, or is there an inflation adjustment to be considered there, because I believe you also mentioned the term real in your remarks. Just wanted to make sure I’m comparing apples to apples here..

You’re correct - this is Brian Haney. In the past, we’ve stated nominal rate increases, and so this quarter we’ve pivoted to real rate increases, which are adjusted for loss cost trend and premium trend. We find that’s a clearer--it provides a clearer view of the movement of the rate adequacy and the margin. .

Okay, so if you sort of make it apples to apples, it seems like inflation mid-single--that will probably be back to low double-digit, right, so no material change there [indiscernible] the bottom line, right?.

Yes. .

Okay, got it. Then the second question I had, negative surprise on the personal property side, but I guess, Mike, your comments on outperforming on commercial property, I was wondering if you could talk through the elements there in your underwriting approach that enables that.

Is most of your coverage there, like, [indiscernible] peril versus all risk, or was there an element of geographic spread? Just your thoughts on why that part of your book outperformed expectations..

Well I mean, there’s a lot of things that go into it, Pablo. Certainly the limits that we put up when there’s a pronounced hurricane exposure tend to be smaller rather than larger. How we price that risk, we’ve achieved--and candidly, the market has allowed us to achieve over the last couple of years very significant rate increases.

Partly, we use coverage to drive a more accurate underwriting process. We control our own underwriting, we think that gives us a little bit better results. We have strict limits on concentration, we buy a lot of reinsurance in that area, so lots of things go into it.

But the general takeaway is the bulk of our property business comes through that commercial property division, and it’s an outperformer even in the face of a pretty significant hurricane in Florida, so again it’s--we find it very encouraging..

Got it. I had a couple more. Maybe the next one is for Bryan Petrucelli. I think Ian losses were negative surprise this quarter, or at least versus my number, but you put up a pretty strong [indiscernible] loss ratio at about 67%, so year-over-year roughly consistent but then sequentially that’s a pretty significant improvement.

I was just wondering if you could help us think about how that might evolve going forward, whether there is something one-off this quarter, was is the renewal of business you wrote last year? Any comment there that could help us think about how that ratio could evolve going forward?.

I think as you mentioned, it’s pretty consistent to where we were last year in the third quarter, and I think if you look going back in the years, that loss ratio has a tendency to drift down throughout the year from quarter to quarter.

I think if you look at Q2 of last year to Q3 of last year, the movement there relative to Q2 this year to Q3 this year, I think it’s a fairly similar trend, so nothing unusual to comment on..

And is the downward drift because of the business that renews in the second half of the year, or is there a change in loss picks throughout the year? Any color you could provide as to why that pattern exists in the first place?.

Pablo, this is Mike again. I would just attribute it to our generally conservative approach to reserving.

Each sequential quarter across the calendar year, you have a little bit more information and you have a little more confidence in where the losses are going to trend, and so I think you see some of that show up in the loss pick - it’s higher in the first quarter, tends to be lower in the second half of the year. .

Okay, makes sense. Then the last one from me, I was looking at stamping office data, and it seems like premium growth in California was actually negative this quarter.

Obviously it didn’t detract from the overall premium growth number, but just curious to hear any commentary on what’s happening there and, I guess, the opportunities you’re seen in California versus other geographies. Thanks..

Yes, this is Mike again. I would just attribute that to normal volatility when you get down to a state-specific number like that.

I think with the stamping offices as well, sometimes there can be maybe a slight lag in reporting that causes that number to vary month by month, but in general, I think Brian Haney commented, we’ve seen very robust growth across the quarter and across our whole portfolio..

All right, thank you..

Again, for any questions, please press star, one. Your next question will come from the line of Scott Heleniak with RBC Capital Markets. Please go ahead..

Yes, good morning. Just wanted to ask a quick question on--you know, we’ve heard this earnings season, a few of the specialty insurers talk about a little more competition in a few areas, typically liability lines where some of the rates may be drifting down a little bit.

It sounds like you’re really not seeing that much at all, but I wonder if you had any comments on what you’re seeing versus the past couple quarters, and then also the submission counts, how they’ve sort of trended during the quarter, whether those strengthened towards the end of the quarter and into October. .

Yes, this is Brian Haney. We see in our markets, things pretty stable. Now keep in mind, we focus on smaller accounts than a lot of our peers, so it wouldn’t surprise me if the people that focus on larger accounts are seeing a little bit more competition. We certainly don’t see prices where you’re getting rate decreases.

We might be seeing some where the rate increases are less than the market average. Excess casualty is still pretty firm relative to casualty. Property is obviously the firmest, some professional lines are probably some of the last firm, but everything seems to be going in a positive direction.

We don’t really pay a lot of attention to movement month by month in submissions, but it tends to be pretty stable, so. The submission growth has been pretty consistent all year, it’s just been on this very slight upward accelerated trajectory..

Yes, it sounds like it was pretty close to what you saw in the second quarter, maybe a little bit better on the submissions but definitely very strong. .

If I could expand my answer on one thing, when I talked about the MGAs, the MGAs tend--those new start MGAs tend to focus on larger deals, so that’s why we’re not seeing a big effect from them in particular right now..

Okay, yes. Makes sense. Then I was just curious, you mentioned some of the growth areas that you saw in the quarter on the casualty, energy, entertainment, and just wondering if those--if you see any new growth areas or initiatives you have planned for 2023.

Is it just continue to build out with existing products, new hires, expanding distribution? How do you see that over 2023, because it sounds like you’re pretty optimistic on the market itself, so I’d imagine you’re preparing for growth there..

Yes Scott, this is Mike. I would just say yes to the optimism, both because of the market conditions and because we’re--we think our business model is a little bit different and we think that helps quite a bit as well.

In terms of the product line, we’re always working on incremental expansion - that’s been going on for years, and certainly it’s gone on this year and will continue into next, so that will be part of the growth story.

I think if you look at how we roll out new products, they tend to be very incremental, so it’s a small part of the growth story in any given year but over a long period of time, it’s very meaningful..

Yes, okay.

Then just a question on the July 1 reinsurance renewals, was there anything--I mean, you entered the quota share, but was there anything notable, any notable changes there versus what you had previously? I was also wondering if you could quantify the ceding commission benefit that you saw in the third quarter versus before you had the quota share, the new quota share treaty..

I’ll let Bryan handle the ceding commission question, but the big shift was we moved away from an excess of loss approach on our commercial property business to a quota share approach, and so the effect of that is it does generate a little bit of ceding commission whereas the excess of loss approach, those treaties were net.

They had the effect of actually--I don’t know if artificial is the right word, but they had the effect of pushing up your expense ratio, the ceding commission pushes it down slightly. I don’t know if we can quantify it on this call, but--.

Yes, it had about a point, one-point impact on our expense ratio. .

Okay, all right. That’s perfect, thanks a lot..

Okay, thank you..

Our next question is a follow-up from Mark Hughes with Truist Securities..

Yes, anything from an economy standpoint, any slowdown in business, exposure units, that sort of thing, payroll, that you’re seeing among your customer base?.

Yes Mark, this is Brian Haney. We’re seeing the very early signs of that in some of the construction-related business, but honestly it’s a pretty broad product line and across most of it, we’re not seeing that yet. But if we’re seeing it anywhere, we’re seeing it in the construction-related accounts..

Understood, and then I don’t know whether it was Mike or Bryan, you had mentioned the possibility that this hard market in reinsurance could extend to the casualty line.

I wonder if you could just expand on that a little bit - is that something you’ve seen in the past? How likely is that, in your judgment?.

We’re just speculating, Mark, I wouldn’t go too far with that. When there’s a big cat, sometimes that can bleed over into other lines beyond property in terms of reduced capacity.

I think the bigger issue in casualty historically has been reserve adequacy, and if you talk to a lot of reinsurers, some intimate that they suspect that the industry - I’m not talking about Kinsale, but for the industry - that there’s some accident years where perhaps reserves aren’t as robust as they need to be, and so that certainly can prolong a more favorable hard market, if you will.

I always like to reiterate, we at Kinsale really strive to establish conservative reserves and people, investors in particular, should have a lot of confidence in our balance sheet. But maybe for the broader industry, some companies yes, some companies no. .

Understood, thank you..

Our next question is a follow-up from the line of Pablo with JP Morgan. .

Hi, thanks for taking my follow-up. First one I have is for Mike.

Based on your experience of past pricing cycles and, I guess, looking out further into the future, do you think that [indiscernible] that’s moved from admitted to E&S remains in E&S, or would it be reasonable to assume some of [indiscernible] back at some point in the future when the cycle does turn?.

I think it’s good to keep in mind, Pablo, how dynamic the E&S market is, even today when it’s grown. I think E&S grew last year, the whole industry grew by 25%. Even in a boom year like that, you’ve constantly got business moving back and forth from standard to non-standard.

I just think an example would be a new business would start out in the non-standard market many times, a couple years later if they’ve had favorable loss history, they’ll probably go the standard side, so that back and forth goes on all the time.

I would say the long term trend if you look back 30 years is the E&S market growing from 3% of the P&C industry, I think last year was 10.5%. Not every year does it grow.

I think in the great recession back in ’07, ’08, there were only four or five years in a row where the E&S market actually shrank relative to the standard market, particularly by, like, a percent or two each year.

It can ebb and flow, but the long term trend, we think is likely to continue where E&S continues to grow at the expense of the standard market..

Got it, and then just a quick follow-up on the question on the construction exposure. I think based on the notes I have, it seems like your exposure to construction is less than 20% of the [indiscernible] premium book.

Does that sound right?.

I don’t have the exact numbers in front of me, but that’s probably relatively close..

Okay, all right. Thank you..

We have no further questions at this time. I’ll turn the call back to Michael Kehoe for any closing remarks..

Okay, thank you Operator, and thank you everyone for participating today, and we look forward to speaking with you again in three months. Have a great day..

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect..