Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2020 Kinsale Capital Group, Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks, there will be a question and answer session. [Operator Instructions] 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 2020 quarterly report on Form 10-Q and the 2019 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 at the company's website at www.kinsalecapitalgroup.com. I will now like to turn the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us on our call today. With me are, Bryan Petrucelli, Kinsale's CFO and Brian Haney, Kinsale’s COO. We will follow our usual format this morning. I’ll handle an introduction and then Bryan Petrucelli follow with the financial report and then Brian Haney with an operating report, after which we’ll take questions. Last night, Kinsale reported operating earnings of $1.14 per diluted share for the fourth quarter of 2020, up over 83% of the fourth quarter 2019. Gross written premiums were up almost 34% for the quarter. The company posted an 86.7% combined ratio and a 14.7% annualized operating return on equity for the full year of 2020, consistent with our guidance of a mid 80s combined ratio and mid-teens operating returns and notwithstanding the heightened cat activity, in the third quarter. Kinsale is performing at a high level due to its unique business model. To recap briefly, Kinsale controls its own underwriting in lieu of contracting it out to third-parties, it focuses on the E&S market and it operates with a significant technology-enabled expense advantage, the combination of disciplined underwriting with low cost is a winner every time. The ongoing dislocation within the broad P&C market and the E&S market specifically is adding a tailwind to our efforts for the time-being allowing us to raise rates by double-digits and grow the top-line by 42% for the full year 2020. Once the market normalizes, perhaps sometime in the next year or so, Kinsale remains well positioned to continue to generate strong returns and to take market share. The only significant change we expect will be a slower growth rate perhaps in the low double-digit range. For both the fourth quarter and for much of 2020, Kinsale saw a lower level of reported losses than we anticipated. We believe this slowdown in loss activity is largely due to the slowdown or the shutdown of courts around the country due to the pandemic. As we stated, on our third quarter conference call, we continue to reserve as though this slowdown in losses is temporary and that there will be a catch up period in the future. Should the slowdown in losses be at least impart permanent, we would expect a benefit in the future in the form of additional reserve redundancy. From an operational standpoint, 95% of our employees successfully moved back to our one office here in Richmond, Virginia early in the fourth quarter. For our business, this arrangement is superior to remote working. It allows us to maintain better communication, to onboard and train new employees, to maintain a high level of productivity and to continue to provide superior customer service to our brokers around the country. In sum, we are positive about the results from the fourth quarter and are optimistic about our opportunity for 2021 and beyond. And I’ll now turn the call over to Bryan Petrucelli.

Thanks Mike. The results for the fourth quarter was strong and driven by continued solid premium growth, favorable loss experience and disciplined expense management. We reported net income of $38.2 million for the fourth quarter of 2020 representing an increase of almost 114% when compared to $17.9 million last year and due primarily to approximately $10 million increase in underwriting income and $11.5 million increase in investment returns. Net operating earnings, which excludes the volatility from equity investment gains and losses increased by 84% to $26 million, up from $14 million in the fourth quarter of 2019. The company generated underwriting income of $21.6 million and a combined ratio of 81.6% for the quarter, compared to $11.5 million and 86.1% last year. The combined ratio for the fourth quarter of 2020 included 3.1 points from net favorable prior year loss reserve development, compared to 1.3 points last year. Our effective income tax rate for the full year of 2020 was 11.9%, compared to 16.7% last year and lower primarily to large and discrete tax benefits related to stock options exercised during the year. Annualized operating return on equity was 19% for the quarter and a little less than 15% for the year. And as Mike mentioned, in line with our mid-teens guidance. Gross written premiums were approximately $150 million for the quarter representing a 34% increase over the last year, due primarily to continued market dislocation and the superior service standards that Mike touched on previously. Brian Haney will cover some specifics relative to market conditions here in a bit. On the investment side, net investment increased – net investment income increased by 17% over the fourth quarter last year, up to $6.5 million from $5.5 million as a result of continued growth in the investment portfolio. Annualized gross investment returns excluding cash and cash equivalents was 2.9% for the year, compared to 3.1% in 2019. Diluted operating earnings per share was $1.14 per share for the quarter, compared to $0.63 per share last year. And with that, I’ll pass it over to Brian Haney.

Thanks, Bryan. As mentioned earlier, premium grew 34% in the fourth quarter. Growth is still strong and the market is trending in a favorable direction. We are still seeing growth across the board. Our growth is particularly strong in our Allied Health and Management Liability, Inland Marine and Life Sciences areas. As we discussed last quarter, the overall economy is still being affected by COVID-related restrictions with significant uptick in COVID cases in the fourth quarter led many states to reimpose restrictions, particularly California and New York which are some of our bigger states. With the vaccine roll out and the rapid drop in cases we’ve seen across the country in January and February, I fully expect that those restrictions will be lifted and we should see the relief of some heads up economic activity, which should provide us with an additional tailwind. Submission growth was in the high-teens in the fourth quarter, down somewhat from the mid-20s in the third quarter. These should be – to the ongoing effects of the lockdown. However binder growth remained strong in the mid-20s. We continue to look to improve our efficiency in customer service and this allows us to bind a higher percentage of the accounts received, while maintaining underwriting and pricing discipline. We also continue to incrementally expand the product line. One new segment we are developing is insurance underwriting, which looks to capitalize our new distribution sources in the insurtech sales. This is a natural fit for us as it allows us to further exploit the advantages we have in reality. We are also expanding our offerings into our new Commercial Auto segment, our Aviation segment, as well as our – expanding our new Entertainment segment. As for rates, we are still pushing them up in response to market conditions. As a reminder, we have a very heterogonous book-of-business, which complicates reducing all the rate movement to one single number, but that all being said, we see rates being up in the low-teens range in the aggregate during the quarter. Even beyond getting pure rate, we are tightening terms and conditions, which should contribute even more to the bottom-line. And with that, I'll hand it back over to Mike.

Thank you, Brian. Operator, we're now ready for any questions that come in.

[Operator Instructions] Your first question comes from the line of Jeff Smith with William Blair. Go ahead please. Your line is open.

Hi. Good morning. I was just wondering how submission activity is looking so far just in the first couple months here of 2021 and given that the comparisons are going to be tougher this year. Are you seeing that flow down?

Yes, I mean, normally we kind like to focus on the quarter we just concluded. We are kind of early days and we see one, but I would say, it’s probably not material departure from Q4.

Okay. And then, the underlying loss ratio, it sounds like it was down a little bit on you referenced quote activity being down just during the pandemic. I guess, I was just thinking about that differential in rates versus lost cost trends. It’s pretty large there. Do you expect that to come down quite a bit more?

Jeff, we think the best way to look at the accident year loss ratio is over the course of the year versus the quarter. And I think if you look at the press release, we went from a 62.1% ex cat, accident year loss ratio in 2019 it troughed at 61.5%. Couple of things I would like to reiterate in terms of loss reserving is, number one, we strive to be very cautious and conservative. It is a really a fundamental part of our management strategy. It supports reserves that are likely to develop favorably over time. The other thing is that, hey, we are getting some significant rate increases and have been for some time. That’s obviously allowing us to stand our margins. Some of that, I think you see in that six tenths of a point lower in a accident year loss ratio, some of that is showing up a more conservatism in the loss reserves. But clearly, there is a lot of companies that have been coming out with adverse development lately and obviously we are striving to make sure that we are not ever going to be in that camp.

Right. Right. And that’s what I mean on that annual basis. That differential is so large. It seems like, yes, like you said, you are being conservative there. Okay, that’s all I have. Thanks.

You bet.

Our next question comes from the line of Mark Hughes with Truist. Go ahead please. Your line is open.

Thanks. Good morning.

Good morning, Mark.

What was like, on Brian’s submission references for Q4 versus Q3, I didn’t take that, what did you say?

We were in the – mid, I am sorry, the upper teens in the fourth quarter and then mid-20s in the third quarter.

Okay. And then, the courts being closed, what has that meant in terms of development on older claims? Is it wrote it down, no impact, what’s the effect of that?

Mark, this is Mike. We actually – and I think this is true across the industry. We only try a small percentage of our cases go to trial to be resolved. But the slowdown in the court system, the court system a lot of times acts as a catalyst for mandatory settlement conferences, mediations and alike. So, the fact that a lot of courts have been closed now either in whole or in part for almost a year has clearly impacted kind of the claims system overall. And we’ve seen that in this drop-off in reported losses. It involves the 2020 accident year and some of the prior years as well. I think the question is, as I commented earlier, hey is there a bounce back where you go through a catch-up period as the courts reopen or hey, maybe just some accidents never took place, because of changes in people’s behavior given the lockdown across the economy. And so, we just want to reassure our investors, hey, we always take a conservative approach. We are assuming that those losses are going to bounce back. So we reserved. There is no slowdown. And then, hey, if there is good news down the road, that will be fun to announce.

And then, how do you feel about the kind of spike where we sit now. I think you said, perhaps, tying the mix you are so – normalized, I think you’ve been pretty consistent about your timeline. How do you feel about it today?

I think, we feel – we haven’t changed our minds. Right, I mean, we grew at almost 34% in Q4. That’s an extraordinary growth rate. At some point, that’s going to obviously normalize. There is a lot of new capital coming into the industry. But as you see from a lot of these announcements of other companies around the industry, there is a lot of distress out there that people are trying to work through and it just takes some time. So, at some point, the new capital overwhelms the distress and you get a more normalized competitive market. We feel pretty optimistic about 2021. Beyond that, it gets fairly speculative.

Yes, yes, How about – on that expense ratio standpoint, up a little bit sequentially this quarter, but obviously you are getting very good top-line growth and getting leverage. How you think that shapes out in 2021?

Mark, it’s Bryan Petrucelli. I think from an expense ratio standpoint, I wouldn’t expect much of a change. Obviously, with premium growth you do get some economies of scale, but I wouldn’t expect any significant deviation from what you are seeing. It’s always going to bounce around a little bit from quarter-to-quarter. But I think, if you look at what we’ve done over the past year, that’s a pretty good guide.

I’ll sneak in one more if I might just, anything on the cat losses this quarter? The – clearly, Q3 was much larger, but even Q4 you had cat losses that are higher than your norm, anything about the geography or lines of business where you’re affected there? Any changes you might make given the experience in the second half of 2020?

Mark, it’s Mike. We haven’t changed our strategy around natural catastrophe risk. We like the business. We approach it in a conservative fashion. In terms of – did you ask about the first quarter activity?

Yes. And I was just sort of curious that – well, if you want to say something about Q1, I was thinking about the Q4, rather than Q3 whether there is any different complexion to the cat losses.

No, no. It’s a similar strategy. We are very conservative in how we manage the risk. It’s quite volatile. The margins have been pretty compelling, right. So we are trying to balance the return prospects with making sure we manage the volatility appropriately. But really no changes. Obviously, there was a couple of straggler storms in Q4 in Delta and Zeta I think. And so, I think that’s where you see a little bit of a cat activity there in the financial service.

Thank you very much.

You bet.

Our next question comes from the line of Matt Carletti with JMP. Go ahead please. Your line is open.

Hey. Thanks. Good morning. Jeff and Mark covered most of what I had. But Mike, I was hoping I could ask you to expand on a comment you had there and your answer to one of the prior questions referencing adding new capital coming into the market. Are you – we’ve seen all the announcements of new capital and then I think that really realizes some of that could begin an E&S base broadly. Can you give us a little more color on what you are seeing kind of in your pocket of the E&S market being a bit smaller limit and then obviously you guys leveraging your quick broker service and technology and so forth? Is it elsewhere in E&S or are you seeing it a bit directly?

I would say, we are really not seeing any kind of dramatic impact in the market as of today, right. So, when we talk about new capital, it’s mostly things we are reading about in the Trade Press where different competitors or new companies are raising billions of dollars, some of which will go into the reinsurance markets. Some of it clearly will end up in the E&S market. And eventually, hey, new competition shifts the balance between supply and demand and inevitably, it will affect us mostly in terms of the growth rate. But as of today, I think you are hearing of continued strength of optimism.

Great. Thank you.

Our next question comes from the line of Colin Ducharme with Sterling Capital. Go ahead please. Your line is open.

Hi. Good morning. Thanks for the question and I appreciate the follow developed in Q4 here. Just a couple of quick housekeeping items upfront. Mike, I was interested in your headquarter update there. 95% of employees on-site. That sounds great. Can you give us a little color in terms of the advantages that that now gives you? I inferred a little kind of speed to market there. But maybe if you could just offer some color on what hindrances you were facing in a remote environment? And now what you – advantages gained in the in-person environment today versus where some of your peers in a remote space might still be facing? And then I’ve got a couple follow-ups.

Okay. I would say, first of all, when the pandemic struck, it’s about probably 90 plus percent of our employees were working remotely. We clearly had the flexibility in terms of our system and what not to accommodate that. It’s just that we are a company that’s in a period of rapid growth. So, as you can expect, we are hiring on a regular basis, underwriters, claims examiners. We’ve expanded dramatically, I think our IT shop over the course of the last year or so. And so, hey, part of that onboarding of new employees is training, right, because your hire some employees that are new to the industry. But a lot of it is getting employees familiar with our business culture. How we operate and it’s very challenging to do that when everybody is working by themselves. And so, hey, it made sense for eight or ten months, if you will to have people working remotely. And I think we worked hard to make sure people remain productive. But it also made sense to move people back to the arrangement we have today. There is probably about a 5% cohort of employees for a variety of medical reasons and alike that are continuing to work remotely and that works fine. But in general, we are big believers in having the team here in one location where the training, the onboarding, the communication is at excess. I would say, still far and away maintains the best service standards with our brokers. I mean, I hear that constantly. We turned quotes around very quickly. We asked a lot of our employees. I think we tend to pay better than our competitors here in town as a consequence and I think it’s a material part of our success of the business providing a good customer service experience to our brokers. So, having people back in the office, having long-term facilitates that as well.

Okay. Thanks. And then, in terms of pricing, if you could offer some color regarding the relative pricing position Kinsale is now seeing in the market versus peers. And so, we’ve seen from other peers who have already reported and also in Trade Press continued rate increases elsewhere. I don’t know if you are experiencing an improved pricing umbrella as peers have continued to kind of push rates up. And so, if you’ve got some anecdotal color or perhaps more quantitatively on a bind to quote percentage, how that differential has trended through time. What’s the relative positioning? How has that trended for Kinsale?

This is Brian Haney. So, we are seeing some acceleration into this level and that’s been here for a long time now and in fourth quarter it continued despite all the other factoring on. I would say, generally we look at industry comps are or industry surveys all right, what we are seeing is consistent with them. I think to the extent that we are getting better bind to submission numbers, it’s through better customer service from that and rather than through opting a more competitive posture which is a threat. So, as the industry is pushing up rates and they are making that productivity and efficiency up.

Okay. Thanks. And then, just cleaning up last couple of items here, kind of more forward-looking, just in thinking about how to properly kind of view the next 12 or so months. If you could comment on the Midwest weather events, I am assuming it’s down the middle with a fair way in terms of exposures and how do you think of the in-force book? And then, perhaps, longer term, when we start to think about eco data beginning to improve and domestic recovery taking hold, if you could just talk about embedded potential within your in-force book and what I am trying to articulate here is, as you go through and do perhaps policy audits with SMBs with which you have exposure. To the extent they are experiencing a snap back in revenues, and perhaps your exposure of units are greater than you initially underwrote at binding, is there a chance in your in-force book that you’ve got and embedded rate tailwind, that can take hold as the economy recovers. I hope I am articulating that well. Thank you.

This is Mike. I’ll start. The Midwest cat, I think you are referencing kind of the cold wave and the power disruption in Texas, there is some industry headline, there is some Trade Press article saying that the industry loss could parallel Hurricane Harvey some number of years ago, which clearly, it looks like it will. I would say, it should be much less material for Kinsale. We don’t expect an enormous flow of claims from that. I am sure there will be some. But it shouldn’t be that material for us. And then in terms of the impact of economic growth on our book, Brian?

So, I think you actually saw them, Colin. I think that there is some – that [Indiscernible] we have talked about is going to result in at some point down the road, increased audits and then increased revenue and those are inevitable. But there is some growth we are going to get just from a contractor who maybe had his sales to down 25% during the pandemic, back up 25% or 30% or whatever. I think we have already some growth that we get just by the exposure growth in most of our exposure based reserve go into revenue like items.

Thank you.

Our next question comes from the line of Scott Heleniak with RBC Capital Markets. Go ahead please. Your line is open.

Yes. Good morning. I am wondering if you could talk about the – you mentioned some of the product offering expansion in Aviation products helped Commercial Auto to Entertainment. Wonder if you could comment a little more on that and how that’s going to impact your growth rate in terms of – is that – you are going to be able to maintain the kind of the similar growth rate that you saw, maybe, not necessarily in the – over the past few quarters, but maybe in the fourth quarters, some are in the 20%, 30% growth rate or more and how much of that is going to be through new product expansion or distribution expansion?

Yes. I would say that with any new product offering or any product expansion will be to offer incremental. We are not trying to corner mark having it in, so, I wouldn’t expect new products will impact growth rate kind of in the near-term. It’s really from the long-term we are standing with that. We want to be able to compete down the road, but these things take off slowly and that’s where we will get the impact. So, the short answer is, if you are looking for it to impact on next quarter growth rate I would think Aviation or Entertainment or the segments materially moving the needle. Year down the road, probably it will.

Okay. It’s fair. And then, you have, I would say, pretty much all year, without any opportunities just some of the terms and conditions, how that helped your margins. So, wonder if you could just give us a few examples of some of the bigger shifts you have seen? Is it limits, or deductibles or exclusions and kind of how that’s evolved in the past few quarters and how that’s sort of benefiting you?

Yes, I would say, definitely we have restricted our use of the time limits. So basically, on the cat, limit $10 million and then our limit on – product maybe $5 million, $2.5 million. Definitely adding fed limits when we have exclusions we are tightening rewards to make them even stricter and then we are adding new solutions because we can. And then, other areas might be more frequent use of deductibles. We have two principal coverage triggers we use. The current trigger is broader than the claims made. Not to get too technical here on an investor call, but we are pushing the more restrictive of the two, which gives us more certainty over the development of claims in the long haul. But there is a lot of things that in a more favorable market environment we are able to negotiate terms that are little bit more favorable to us at the risk there.

Okay. That’s good detail. And then the last one I have was just on the net premium retention ratio, so that premiums as a percent of gross written premiums. So was that a little bit year-over-year in the first half of 2020 and down a little bit year-over-year in second half 2020. Any sense of where that might fall for 2021 and any expectations that we will see any shifts in reinsurance treaties that might impact us for the year?

I think what you are seeing really is that, the means of business is going to drive that. So, we’ve had tremendous increase in our commercial property both in our excess casualty both subject to range round. So, I think the same retentions that react to that. I think going forward, it’s always going to bounce around a little bit depending on mix of business. But I think if you use where we are here in the fourth quarter for the next six months or a year is probably it gives us a year on, probably good value.

Okay. Thanks for the answers. Best of luck.

Our next question comes from the line of Casey Alexander with Compass Point. Go ahead please. Your line is open.

Yes. Hi, good morning. And thanks for taking my question. Most of my questions have been asked and answered. But I would ask Bryan. Bryan, do you have a reasonable tax rate to go - going forward to use for modeling purposes?

Yes. Obviously, we are a 21% statutory tax payer and when we went public in 2016, we issued our options at that point. The last tranche is vested this year. So I would expect to see few of those - key exercise going forward. They are - still they are now outstanding. But you shouldn’t see as much of an impact going forward here in the fourth quarter. I think for our guide, long-term, 17.5% it seems probably good guide.

All right. Great. Thank you. That’s my only remaining question. So thanks for taking my question.

[Operator Instructions] Our next question comes from the line of Ron Bobman with Capital Returns. Go ahead please. Your line is open.

Hi. Thanks and congrats on the continued fabulous results. Almost all the questions I had in mind were asked. But I would be curious, Mike, you talked about the current weather and losses and the conversation about it being a little bit sized in the Harvey neighborhood. And I imagine that you are speaking to Kinsale’s exposure to be not all that significant, I guess it because your book is principally predominantly casualty book. But I was wondering if I could sort of test your knowledge, for those companies that write E&S property, is E&S property sort of – would you sort of say, like exposed to this event as admitted property or would be an E&S property writer be a little bit less exposed whether it be because of coverage terms or deductibles. Would you hazard to guess this to sort of the relative vulnerability to this event for that type of writer and again, I know that you guys dominate your book with casualty business and as the modest or insignificant exposure that you referenced?

Yes. I think for the industry, it’s significant. I think it’s significant for the admitted companies and the E&S companies. You got it coastal exposure along the Gulf, you’ve got, hey, it was a big issue in the Dallas area. Lot of E&S homeowners has written up there. And then, Texas is a – it’s a big E&S state anyway, right?

Right.

So, there is plenty of E&S exposure. I just think for Kinsale, it’s early days. We don’t know definitively, but I suspect whatever the problem is for the industry, it’s going to be considerably lighter than it – for us at Kinsale, just because of our strategy.

Okay. The other thing I would add is, Mike, you said that, when the courts reopened and the plumbing sort of gets unclogged that if the losses don’t come in, it will be fun to report that good news. Having put up an 81 combined, I would think that it would be plenty of fun reporting today these results. So, congrats. But I don’t know, maybe it’s funner, it will be funner if that happen. But outstanding, outstanding operation and report – results.

Thanks, Rob. Appreciate it.

Our next question comes from the line of Heather Takahashi with Thrivent. Go ahead please. Your line is open.

Hi guys.

Good morning.

Good morning. Couple of questions. You mentioned in your opening remarks that you would have been hit by the closures in New York and California in terms of the premium growth in the quarter. Do you have a sense of what it would have been very, very roughly if that hadn’t been for the COVID lockdowns?

Not really. I mean, I can just tell you that the – we were in a lot of construction business and we were in a lot of premises writer business and those would have been the two most affected. But it would be tough to. I mean, it definitely have been sort of as best as conservative.

Okay. Okay. Good. Okay. And then, another question. You mentioned that you are expanding into insurtech underwriting. Could you talk a bit more about that?

Yes. So, there is a lot of new avenues that are not traditional brokers, but really sort of a whole role of distribution and they found some insurtech or really technology companies and we are creating a unit that it’s job is to – different sources just the way we distribute for wholesale. And the way we are paying separate units more is they have is – it’s going to happen to be in different processes as much more tech intensive much layers in. But paying for this – are still small medium size accounts, still controlling the underwriting price and it’s just through default.

Okay. That’s just the distribution is different.

Yes. Same businesses through different distribution channels.

Got it. Great. Thank you.

There are no further questions at this time. I’d like to turn the call back over to Mr. Kehoe.

Okay. Well, I just want to thank everybody for participating today and we look forward to speaking with you again here in at the end of the first quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.