Kinsale Capital Group, Inc. Price & Performance (KNSL)

Casualty is still seeing steady growth overall with excess casualty commercial auto and general liability among the fastest growing divisions and management and professional liability among the most competitive. Potentially losses in the fourth quarter were modest $8,000,000 as Mike mentioned, our California wildfire estimate is $25,000,000 pretax. As a reminder, we write catastrophe exposed property business including wildfire hurricane and earthquake and some flood But in doing so, we always seek to balance the margin in that business with the potential for excessive volatility. In addition to a careful underwriting approach, we employ a sophisticated risk management strategy and a robust reinsurance program to limit volatility and we've been successful in that approach for many years now. We don't expect recent catastrophe events in the industry will be enough to change the overall market, but it may create more opportunities in personal insurance, which we are already leaning into. Part of Kinsale's growth over the years has been due to a regular expansion of our product lines into adjacent markets, Most recently, we created a new agribusiness underwriting unit that focuses on opportunities in the farm, ranch and related spaces. This is part of our ongoing effort to gradually expand our product line so that we can offer solutions for all tough to place E and S accounts across The U. S. No matter what coverage or sector of the economy.

New business submission growth was 17% for the quarter, down from 23% in the third quarter, This number is subject to some volatility, but we in general view submissions as a leading indicator of growth. And so we see that submission growth rate as a positive signal. Overall, rents for the quarter were about flat. Excess casualty, commercial auto and construction were up high single digits, while larger layered property accounts were down mid to high teens. All of our other lines were somewhere in between. We are being more aggressive in pricing in some select areas because the margins are so high that the trade off between a lower rate and more growth is worthwhile. Keep in mind, our 29% operating ROE would imply that half of our book is producing margins above that. By trading away some of that excess profitability on some specific lines of business, we can drive better growth and maximize wealth creation for our stockholders over time. Overall, we remain optimistic. The results are good. Our growth prospects are good. And as a low cost provider in our space, we have a durable competitive advantage which will allow us to continually gradually take market share from our higher expense competitors while continuing to deliver strong returns and build wealth for our investors.

With that, I'll hand it back over to Mike. Thanks, Brian. Operator, we're ready for questions now. Our first question comes from Michael Zaremski from BMO Capital Markets.

Please go ahead. Your line is open.

Hey, good morning. So back to the commentary on the market environment. I think it sounds like larger shared accounts [indiscernible] had a one of the more meaningful impacts on growth this quarter you can kind of confirm that or I don't know, I think there's ways to look for the 10 ks to see the mix of casualty versus property if you were able to preview it just along those lines to how is pricing looking in kind of small commercial casualty? Mike, this is Mike. I think our mix of business generally is one third, two thirds one third property, two thirds casualty. The larger layered deals as Brian indicated are under some competitive pressure after just seeing tremendous inflation in rates over the prior several years. So we think that's a normal evolution of that market. The returns have been extraordinary. And it makes sense. A lot of capital has flowed back into that space. Our small property divisions are still growing very rapidly and we're getting positive rate increases there. So we're upbeat on property. Small casualty, I think as Brian said, it kind of varies by by product line. So on construction, commercial auto, excess, very healthy rate increases Other lines like management liability, professional liability, where we've seen some extraordinary levels of profitability, we're trying to be incrementally more aggressive.

Got it. Okay. And that's helpful. Maybe switching gears to the point of you're saying on this call, you said in the past too that you're willing to trade off Less excellent profits for what sounds like more growth. Is that actually Are you are we actually seeing because I know there's an overlaying impact maybe from large property having a negative impact on on overall growth, but would you say that We might be reaching a trough in terms of the ability for to kind of reaccelerate certain elements of of growth the casualty front?

I would say keep in mind that the margins on some of our highest margin business is extraordinary. When you lower rates, in certain select areas, the effect is not immediate on the profitability and the growth. It takes a little while to pursue. So I don't think where we've hit the point where We haven't exhausted our ability to pull that lever, let's put it that way. And in terms of the market, Mike, you got to remember how diverse it is, right? It doesn't move monolithically. Large accounts, small, some states versus others cat exposed versus non cat exposed. Clean accounts versus accounts with loss problems, The market is all over the place, but we feel very comfortable with the guidance around 10% to 20% growth Okay.

You very much.

Our next question comes from Bill Krakash from Wolfe Research. Please go ahead. Your line is open.

Hi, good morning. Mike, following up on your growth comments, after seeing Kinsale grow at roughly 40% since 2019 and hearing you talk about it seem like that entire timeframe, how that growth wasn't sustainable. We've indeed now seen your growth rate decelerate much more sharply Is this sort of low teens growth rate something that you think is now at a level that you would view as sustainable going forward from here? I understand you don't provide specific growth guidance, but I think your investors would really appreciate just hearing your thoughts, particularly those who weren't able to attend the Investor Day. On whether you see further deceleration from here versus the idea that at some point growth should plateau And how close are we to that point? And sort of with that as a backdrop then could you also frame whatever that top line view is as you move down the P and L is it reasonable for your investors to expect that the business model is capable of generating mid to high teens EPS growth sustainably through the cycle?

Yes, Bill, I think that 10% to 20% growth is a conservative and good faith estimate as to where we go from here. I think if you look back over five years when we were growing at a 40% clip, that was driven in large part by our business model. We're the low cost operator. We've got the best customer service in the industry, bar none. I think we've got the broadest risk appetite that we offer our brokers We've got a handle on technology that I'm not familiar with any company that's in a similar position that we are. In terms of low cost, but also data and analytics So we're very confident in what we're doing will allow us to continue to grow at that 10% to 20% clip. The 40% growth was driven in part by a level of dislocation around the and some of that's abated. We've seen billions and billions of dollars of new capital coming to the industry. And so it's things are more competitive now than they were, but we're bullish.

Thanks, Mike. And just to be crystal clear, you're 10% to 20% growth is in reference to top line?

Correct.

Because you also in your opening comments made some comments around expecting to make continued investments that are going to improve the efficiency ratio on so we should see The rate of revenue growth exceeds expense growth with positive operating leverage you're doing buybacks. So the rate of earnings growth would certainly be much stronger than that.

I think it would be, yes, because the productivity gains Brian talked about our new money in the investment portfolios being invested at higher rates than the current book yield of the portfolio Yes, absolutely.

Okay. Thank you. That's very helpful. And then separately, if I may, for Brian Petrichelli and Brian Haney on capital and buybacks. I think investors appreciate that Kinsale operates a highly capital accretive business model that's capable of supporting faster growth environments. But it seems like when growth slows, your buyback capacity increases. So I think following up on that thought, how much capital does Kaseo need to operate the businesses if growth written premium growth gross written premium growth remains at their current levels? Is the 23,000 sort of shares that you repurchased this quarter a reasonable run rate for investors to expect like sort of steady state and then you would adding additional buyback on top of that. If you wanted to be opportunistic, maybe if you could just frame how to think about those dynamics? Thank you.

Yes, Bill, this is Mike. If you look at our our current buyback strategy, it's similar to our dividend strategy in that it's very modest. And as Brian said, in his comments at the beginning of the call, We expect to make modest buybacks each quarter. I think fourth quarter is a good indicator of what we mean by that. And then, hey, we're always prepared to move opportunistically something arises where that makes sense. The dividend that we have is very modest It's grown incrementally over the years. I think the share buybacks is also kind of a modest capital allocation and The capital model that we use to manage the business has a fair degree of complexity to it that don't think it would be prudent to get into that on the call, but in general, we're going to always make sure we have enough capital to maintain our rating and satisfy the regulators. But we don't want to have a super abundance of capital beyond what's required for that. And so we think of the dividend and the buybacks as a way to address excess capital over the years ahead.

Thank you. I appreciate you taking my questions.

Our next question comes from Mark Hughes from Truist Securities. Please go ahead. Your line is open.

Yes. Thank you.

Anything on January results given that we're midway through February, anything on January that you would call out? Well, I don't think we want to comment on January, but Mark, we've reiterated our confidence in the 10% to 20 growth And we've talked about the cat loss on the the wildfires in Los Angeles. But that's probably where we want to go at this point. The expense ratio was a little bit higher this quarter Brian, Petricelli, anything unusual in that?

As I commented in my notes, it's largely driven by an increase in variable compensation that and as we've talked in the past, that ratio is going to jump around quarter to quarter So as you're sort of trying to model things out, I think looking at that that twelve month ratio is probably what you should be that's where I'm going to direct you. Yes. How about cash flow in a environment where say, you're in the 10 to 20 range if you were to parallel kind of the low double digit does cash from operations look? That's been obviously quite strong, it's been helped helping to support your net investment income what does it look like in a more modest growth environment? Does that flatten out? Does it go down? How do we think about that?

Pretty steady. It should grow with the premium, I think.

Very good. And then you talked about leaning in the personal lines.

I know it's pretty small, but what can that mean? For the top line if you do lean in the personal lines? Yes, this is Brian.

Hey, mean, if you look at it, the homeowner space is larger by itself than the E and S space in The U. S. And an increasing percentage of it, even though it's small, is moving into the E and S space So I think there's a huge opportunity for it, especially given like things like highway owners in California. It's like it's a very concentrated market that's just suffered a giant loss among a small number of players I think there's an opportunity there. I think there's an opportunity to expand what we do in the manufacturing housing space. I think there's an opportunity to expand and sort of adjacent type of businesses like [indiscernible] Again, these are hard to place catastrophe exposed high margin business, but there's just a lot of it.

And right now, I think there's a it's probably one of the harder areas in the overall P and C industry. Yes. And it will be kind of a gradual expansion over time. So I think it was like 2% of our book last year.

But we're optimistic that will continue to grow quite a bit in the years ahead. Thank you.

Next question comes from Andrew Anderson from Jefferies. Please go ahead. Your line is open.

Just thinking about the California loss, maybe a little bit bigger than I would have thought just given exposures in the state as of year end twenty twenty three. You maybe talk about maybe the size of the gross loss there, where the losses are coming from and kind of how growth has trended over the last year and maybe how you see it into '25? For California specifically? The gross was about 45 the net pretax 20 It's a mix of commercial [indiscernible] personal lines, I can't really speak to the specific growth rate in California or that area, but Andrew, I would look at it this way. We've always written cat business because the margins are pretty compelling. And we've always written it with some degree of conservatism around risk management. And making sure that we control for the volatility, whether it's wildfire or coastal wind or what have you. And so I think actually this is a result that's for us. It's a very manageable loss on business that throws off pretty attractive margins. In general.

Thank you.

And then on the 17% submission growth, Kind of the slowest in a little bit here, But as we turn to 25 and maybe you could just talk about the mix within that 17% if it's more casualty going forward. I'd also be interested to hear if you're perhaps seeing about kind of increasing your quote to submission ratio or your bound policy to submission ratio to be more competitive to a certain degree? We are definitely seeing a higher quote to submit ratio.

It's one of the upsides of lower growth is, it makes it easier for us to hit our customer service targets, including our corporate share standards. So yes, we are quoting more and we are buying more. And then keep in mind that 17%, that number does jump around.

Is it starting to be a bit more casually rather than property compared to maybe the last twelve to eighteen months? Yes. I mean, it depends on what I mean, without getting too much into the weeds, it depends on what specific product you're talking about. We are seeing a lot more personal insurance submissions. We're seeing maybe fewer of the shared and layered submissions But we're still seeing more inland marine submissions It varies across the book. Yes. And just I think Brian you meant we're seeing a lower growth rate in shared and layered, but it's still growing.

Right.

Thank you.

Our next question comes from Scott Helmiak From RBC Capital Markets. Please go ahead. Your line is open. I think we lost Scott. Scott.

Good morning. Yes, just wondering if you could comment on the Q4 the core accident year loss ratio there. You saw there was improvement year over year. Anything worth calling out the tick down year over year I know you kind of commented before as it sort of improves year end if loss trends come in better than expected, but anything notable to call out there? Scott, I would characterize it as general success across the portfolio. But the impact on that quarter was probably a little bit driven by some pretty exceptional results in the property area that shorter tail business. So you tend to see those positive results more quickly. Okay. That makes sense. And then I wonder if you could expand on you referenced the Agro business, the new product line there. If you can expand on the kind of the exposure and geographies you might be planning to go to there? And then also any other new products you want to call out for 2025? I know there was a lot in the previous two years, but anything else to call out there too? I'll answer that last question first. Most of the new products we're thinking about for 2025 aren't nearly as significant as let's say in the personal insurance push we're making in the last few years or the agribusiness Keep in mind the agribusiness would be virtually everywhere in The United States, agricultural the agricultural economy is basically present in every state.

And it's going to be a mix of casualty and property exposures and then some sort of unique exposures relative to farming and ranch. Yes. So I wouldn't expect any like dramatic new product in 2025, just gradual incremental moving into adjacent lines very gradually and solidly so that we take excessive risk. Got it. That makes sense. Just the last one too on the moving up the equity exposure, which you expect to take to 1010% and eventually 12%, is that Is that a similar strategy with using the Basically stock ETFs, is that the way you're going to do that, just stocking exposure to the existing investments you have in? Equities or anything different there? Yes, Scott, this is Mike. We have a portfolio that we met internally It's kind of a value oriented large cap, mostly dividend paying kind of a buy and hold strategy there. And then we've got the two ETFs with the passive strategy. So it's a mix. Okay.

Yes, a little bit of both. Okay.

Our next question comes from Michael Phillips from Oppenheimer. Please go ahead. Your line is open.

Thanks. Good morning. I'm curious if you provide any updated thoughts on what you're seeing in your GEO book loss trend? And then I mean, I think your commercial umbrella in excess book isn't that small relative to your overall book. So maybe if you could even go deeper into say what the trends are seeing in the umbrella piece as well? I don't think we've got a lot of specifics There's a lot of industry data out there. I think our loss trends would probably conform to what you're hearing. Hearing. I didn't bring that information. I would say just on an absolute basis that the margins in our umbrella book and our geo book are really strong.

And unlike saw an interesting chart the other day, our development has been consistently better than the industry's reserve development. So I think we are doing a better staying on top of those loss trends in the reserving process.

Do think it's going to be a maybe a problem for the industry going forward. Okay. Yes. Thanks, Brian. And maybe one more on California. I mean given the news that we're kind of hearing about the eating side of the losses there, any chance you'd take your $25,000,000 and split it Eton versus Andy Palisades. [indiscernible] It's all Palisades.

Okay.

Thank you very much.

Our next question comes from Pablo Singzon from JPMorgan. Please go ahead. Your line is open.

Hi, good morning.

As you're lowering prices in exchange for growth, is the trade off confined within the specific line or are you willing to cross subsidize across lines, right, like using more profitable lines to support less profitable lines or maybe you're looking at dollar profitability more holistically on an account level base instead. So just some perspective on how you're carrying out the strategy would be helpful. Thanks.

Well, I would say we don't cross subsize anything because we don't have loss leaders. Every division, every product is supposed it has to be able to hit our profitability targets. It is a CAC [indiscernible] individual division level. Obviously, some divisions All of our divisions are doing well. Some of our divisions are doing remarkably well from a margin perspective.

Those are the ones where we're looking at sharpening our pencil and getting a little more aggressive in places. Got you. That makes sense.

And then second question, was hoping you could comment prior year development this quarter, so favorable overall, but would be curious about the breakdown of positives and negatives. Are you still adding to construction [indiscernible] where are you getting the releases?

Well, we talked about property as a short tail line of business. You see those results more quickly. And we've pushed our construction related book loss ratios they're well into the 80% range. And that's largely because if you go back to accident years, I forget where it starts, maybe either 2015 or 2016, 2017, 2018, 2019. We did see the impact of inflation in particular on those lines where the cost of repair, labor costs, etcetera, jumped pretty dramatically in a couple of year period. So So we've raised rates dramatically. Our coverage is a little tighter than it used to be. Made a lot of adjustments on the underwriting that gives us confidence that the results for the say 2020 through 2024 are going to be a bit better. But we don't know definitively It's a long tail line and so we Just like we do across the whole book, we set aside what we think are very conservative loss reserves. And if there's good news in the future, that'll be great. If not, we're prepared with our current reserves to absorb that.

Got you.

Thanks, Mike.

And then if you can just last one.

As a follow-up on the question about the attritional loss ratio, would it be reasonable to assume flat to higher attritional loss ratios just given the more competitive pricing environment and your strategy of creating off pricing and growth going forward? Well, it's a broad product line with a lot of a lot of different component pieces, but in general, as Brian, I think said earlier, rates are flat for the quarter. So So I would make some assumptions based on that. Thank you. Next question comes from Andrew Kligerman from TD Securities.

Please go ahead. Your line is open.

Hey, good morning. Just a little nuance on some of the prior questions. I guess Tacking on to the loss ratio question, I mean, you came in at an exceptional 73.4% combined. I mean, I would any other company I would have thought it was their loss ratio, not their combined. But if I look at a chart, and I go back ten years, I see that you've kind of maybe closer to ten years ago, you were in the low 70s, one year you were at 60.

Maybe in the middle years that you were in the low to Loading. Lower mid-80s So So given that the environment is getting a lot more competitive, in various areas, Any sense of the cadence of what could happen going forward? Could we see kind of a gradual drift into the low 80s over the next few years.

I think that's certainly possible. We want to maximize Wealth building for our stockholders. I think you do that by balancing profitability and growth And I think that's what Brian is trying to address earlier with his comments around fine tuning our pricing on certain ultra high margin lines. But in general, I think we'll we're going to maintain is best in class profitability, very strong growth rates, and we expect Kinsale's stock price to appreciate in value in the years ahead?

Maybe on the verticals, could you remind me of how many segments that you have right now similar to the Ag segment and I know you mentioned in an earlier question that this year it's going to be big in personal lines and ag for growth.

Maybe thinking out to 26 or 27, how many of these verticals would you like to add each year? And again, how many do you have right now?

Yes. Look, we have 26 now. I would look at these verticals as a judgmental way to divide and organize our underwriting teams around industry segments and coverage. Right. So we want experts at the desk level. And so you have to have some degree of focus to really be an expert at the underwriting and underwriting [indiscernible] all the characteristics of this business that drive loss exposure and trends on the legal side and who are our competitors and how do they segment in price risk So there's no magic number It certainly may incrementally grow over time. And then just a quick correction on the the new business lines. I think Brian said earlier we don't expect extraordinary growth from our new business. We expand the product line over and over again over the years. And we get incremental growth It's part of our strategy to roll out new products in a methodical fashion. To really increase the probability that we're getting things right.

I see. When you say when you say, Mike, expanding incrementally, that would mean within a vertical a new product line Yes, incremental expansion of the product, but if we roll out a new underwriting division, we might write several million dollars we're not going to go corner the market the first year we're in business. And that's been a good strategy for us over the six this is our sixteenth year in business. So it's yes, I think it's worked well for us over time.

Super helpful. Thanks a lot.

Our next question comes from Michael Zaremski from BMO Capital Markets. Please go ahead. Your line is open.

Okay, great. Just a couple of follow ups. In terms of employee growth, I know the 10 ks is not out, but would you just say kind of high level as the company gets larger, the employee growth rate has been decelerating a little bit? Any color there?

I think we've gotten incremental gains in productivity every year if you measure that by gross written premium per full time employee. I think it's gone up every year. And with the work we're doing in the technology area, we certainly would expect that to continue.

Got it. And lastly, going back to kind of loss cost trend and reserves, I mean, if I'm crazy, but given how robust your Kinsale reserve releases have been, relative to the kind of the pricing stats you all give out It kind of implies that your loss cost trend is closer to zero, than to to the high single digits of lots of companies talk about on the casualty side.

Any comments?

Yes. Our loss trend assumptions would definitely not be zero. It would be somewhere in the high single digits There's some variability by line of business, but we're definitely conservative on estimating future losses.

Okay. I tried just a pretty steady reserve release, so pause you're being a little too conservative. Our last question will come from Casey Alexander from Compassport. Hey, good morning. Most of my questions have been asked and answered, but I have a couple for you. First of all, you talk about the wildfires with $45,000,000 of which $25,000,000 is your end of it. Is that top of limit without much slack to that number or Because Because the losses are kind of across personal and commercial property, is as you adjudicate those losses, is there some opportunity to drive that $25,000,000 number down some.

Yes. I mean, it's an estimate, Casey. I mean, we're we're working through quickly. I mean, property claims typically are resolved much more quickly than they are on the casualty side. So but I think it's a good faith estimate and it's certainly possible it could move up or down, but I wouldn't expect it to be dramatically different.

Okay. Thank you. Secondly, I'm just kind of curious and I'm not trying to irritate you because I know you guys don't like to be measured on a price to book basis. You don't think that's appropriate. But the fact of the matter is that there's a lot of investors who look at price to book value and it just slows them down in terms of whether or not to invest in the company based upon the valuation. So I'm curious why the share repurchase program is sort of an on the run thing that that actually is dilutive to your book value when you could easily take some of that capital and better devote it to the dividend, which wouldn't have necessarily the same level of impact on your book value and would still be a positive way of returning capital to shareholders and thus leaving the share repurchase program for periods where there was really Yes. So number one, the share repurchase program is very modest. Right? We bought $10,000,000 worth of stock on a market cap of somewhere north of $10,000,000,000 The second point I'd make is we we respect the fact that a lot of people look at price to book It's just that you have to remember, we are we are a very capital efficient company.

So we have enough capital to operate our business and then we have some extra because there's some variability in our business and we have to be able to absorb that. We have competitors that have tremendous amounts of redundant capital beyond what they need to operate their business. So someone that has a very bloated capital base and Kinsale that has a very efficient capital base. And if you're comparing our respective price to book multiples, you're comparing apples and oranges. Whereas if you look at forward earnings or last twelve months earnings, I think it's more of an apples to apples comparison. And then the last point I'd make is we think our stock price is really driven by expectations around future earnings. And we think most investors don't value us on our assets.

Or assets minus liabilities or our book value. So that's the rationale basically. Thank you for taking my questions.

We have no further questions. I'd like to turn the call back over to Michael Kehoe for closing remarks.

Okay. Well, we appreciate everybody's time this morning. We're optimistic about the future and look forward to talking again here in a couple of months. Have a great day.

Concludes today's conference call. Thank you for your participation. You may now disconnect.