Good day, ladies and gentlemen, and welcome to the Kinsale Capital Group Q1 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before we get started, let me remind everyone that through the course of the teleconference, Kinsale management may make comments that reflect our intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain risk factors, which could cause the actual results to differ materially. These factors our 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 a press release announcing the first quarter results. Kinsale management may make reference during the call to underwriting income, which is a non-GAAP financial measure for our financial results. Kinsale's underwriting income represents the pretext 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. Good morning, everyone. I'm Michael Kehoe, CEO of Kinsale. I'm going to give a brief intro, and then I'm going to turn the floor over to Bryan Petrucelli, who is the Chief Financial Officer of the company. Bryan is going to provide some additional financial results, after which, Brian Haney, our Chief Operating Officer, will provide some color on Kinsale's operations and the market in which we compete. Last night, Kinsale reported favorable results for the first quarter. The highlights of which include the following: net income of $6.3 million, that's up 19.5% over the first quarter 2016; annualized ROE of 11.8%; a combined ratio of 82.6%; underwriting profit of $7 million; and premium growth of just under 23%. Just as a recap, Kinsale strategy combines disciplined underwriting and claim handling with a technology-enabled low-cost operation. Kinsale's expenses run anywhere from 20% to 40% lower than most of our competitors. Kinsale writes exclusively in the E&S market, where returns have historically been superior to the broader standard market. Unlike all of our competitors, Kinsale never delegates underwriting or claims authority to outside parties. We maintain absolute control over the underwriting and the claims management to drive better results. And we really maintain an owner/operator business culture, where most of our employees and all of our senior managers are heavily invested in the company, creating an unusual alignment of interest between the management and the stockholders. So we think our model creates a powerful competitive advantage that should allow us to continue to deliver both profit and growth over the long term, even in the face of the type of intense competition like we face today. So with that, I'm going to turn things over to Bryan Petrucelli.

Thanks, Mike. As Mike noted, the first quarter was another solid quarter for Kinsale. As a reminder, the company's goal is to consistently generate a mid-80s or lower combined ratio and to produce return on equity in the mid-teens over the long term. We reported net income of $6.3 million for the first quarter of 2017, representing an increase of 19.5% over the first quarter of 2016. The company's generated underwriting income was $7 million on a combined ratio of 82.6%, an increase of 12.9% from the first quarter of 2016. Underwriting income in the first quarter benefited from $5.1 million of net favorable prior year loss reserve development and an annualized ROE of 11.8% for the quarter. We continue to expect ROE to meet our mid-teens goal as we absorbed a new capital from last year's IPO and are encouraged by the growth in premium here from the first quarter. Gross written premiums were $52.9 million, representing a 22.5% increase over the first quarter of 2016. Premium growth continues to be generated from an overall increase in underwriting activities, including submissions, quotes and binds. No significant changes on the investment side. Approximately 95% of total investments are in fixed income securities with a AA average credit rating and a weighted average duration of approximately 3.6 years. Investment income increased by 36.4% over the first quarter of 2016 as a result of continued growth in the investment portfolio. Gross investment returns continue to be in the low 2% range. Basic and diluted EPS were $0.30 and $0.29 per share, respectively, and in line with our expectations. With that, I'll pass it over to Brian Haney.

Thanks, Bryan. As Bryan noted, premium grew 23% in the first quarter, which is significantly faster than the growth rate in the fourth quarter of last year. New business submissions were up around 15%, which we see as a good leading indicator. Product expansion over the last 2 years, improved customer service, geographic expansion of personal insurance and pockets of dislocation have all contributed to the growth. Growth was widely spread with most divisions showing significant increases year-over-year. One thing that hasn't changed is our underwriting philosophy. We are still writing business with the same approach. We focus on hard-to-place business, playing careful attention to coverage, making sure that we understand the risks we are taking and that we are appropriately paid for taking them. Overall, the market is still very competitive. Although we have seen a number of competitors experience adverse results in a few specific areas, there is still overall plenty of excess capacity in the market. When a particular competitor gets overly aggressive, that invariably leads to them experiencing some adverse results later, which, in turn, forces them to pull back. When that happens, sometimes, there will be another competitor willing to take on that same business at the same inadequate prices. But at other times, there's not. Hence, we see small pockets of dislocation modestly helping our growth rate. Eventually, market forces will dictate, and prices will appropriately reflect the risk. But some of the behavior we are still seeing in the market is unsustainable and will have to be corrected at some point. This leads me to conclude that we will see more dislocation in the market in the future, which we regard as a good thing. One last comment about growth. We're obviously quite pleased with 23% growth. But investors should remember that given our size, the growth rate will naturally have some variability in it, and it would be a mistake to conclude the 23% growth is the new normal based solely on one quarter's results. In any given quarter, we can't know for certain what the growth rate will be. But long term, given the advantages of our business model, we are confident we will grow the business and take market share from our competitors. Now moving on to rates. We did not make any changes to technical rates in the first quarter. We anticipate we will make changes selectively beginning in the second quarter. I would expect the overall effect of our rate changes this year to be very modestly upward low single digits, but that will depend on how experience develops and what trends we see in the market. And with that, I'll turn it back over to Mike.

Thanks, Brian. Operator, we're now ready for questions.

[Operator Instructions] And our first question comes from the line of Sarah DeWitt from JPMorgan.

My first question is just on the combined ratio in the quarter. I know it's within your target of mid-to low 80s, but it is up a bit from where you've been running the past couple of quarters. So just wanted to know if you expect that to trend down as the year progresses or if there was anything unusual in there, or perhaps, that it reflected some sort of new business penalty given how much business you're writing.

Thank you, Sarah. This is Mike Kehoe. I would say 2 things about the loss ratio for the quarter. One, if you look at the current accident year number, given our conservative approach to reserving, it would not be unusual to see that number start out a little bit higher and then drift down a little bit over the course of the next several quarters. In addition, there's also going to be just some natural variability in the number. We're still a small company, and just a normal variance in loss activity could cause it to move up or down. I mean, we've -- in the past, we've offered guidance around the mid -- I guess, mid-80s, 85% combined ratio. We think that's a conservative number that we're reasonably confident we're going to hit or exceed. I think the last 2 quarters of last year put us in the mid- to upper 70s. So again, we're just seeing a slight variance because of just the nature of the variability of the claims and then again the conservatism on the current accident year at the beginning of the year versus the subsequent quarters.

Okay. Great. And then just on the ROE in the quarter of 12%. I know it's still being dragged down by some of the capital that you raised. But given you're now seeing some faster growth and some more opportunity to deploy that, could we just get your latest thoughts on how long you think it'll get -- take to get back to you mid-teens target?

I would hope a few more quarters, and we would start to see a reversion to our mid-teens target. Obviously, the 23% growth is going to allow us to put that extra capital from the IPO to work quite a bit more quickly than the 6.5% growth that we posted in 2016. So I think it's encouraging from that regard.

Our next question comes from the line of Mark Hughes from SunTrust.

Can you talk about the -- expense ratio was 26.7%. Do you think that'll be something we'll see in coming quarters? Or is it a little higher this quarter? Any one-timers?

Yes. First, I'd say, hey, we -- that expense ratio is a very fundamental part of our business plan. The fact that we operate at dramatically lower cost than a lot of our competitors, we think, is of paramount importance, and it's something we focus on constantly. The 27.9% is a little bit higher than we'd like. Part of that drift upward over the last 3 quarters has resulted from some public company expenses. As the business grows, we realized some modest economies of scale. We think that'll drift down. There's also a little bit of seasonality with some concentration of expenses in the first quarter. And so we would hope that the 27.9% is kind of the high watermark for the year, and we'd like to see that drift down over the balance of 2017.

When you think about the rate increase, I think you've mentioned low single digit, perhaps, is what you'd be anticipating. Do you think that'll keep ahead of loss trends within your book?

This is Brian Haney. I think that -- we look at each individual division separately. And so for some of the divisions, it will be at or ahead of loss trends. For some of them, it might be a little bit below it. But we intentionally -- if we intentionally pick a rate change that's lower than trend, it's because we're doing very well in that division and don't particularly need the rate. So I would assume, overall, it's probably going to be pretty close to trend.

Our next question comes from the line of Adam Klauber from William Blair.

Couple of different questions. How is the level of submissions this quarter compared to a year ago?

It was -- new business was up 15%.

First quarter.

The first quarter. And that's a little faster than the growth rate in the fourth quarter, very little.

Okay. Great. And how is Aspera doing? What's the -- and that's coming from a small base. But can you give us an idea of how quickly that's growing?

Yes. Aspera, obviously, it's a small part of our business. But that's principally personalized right now, and it grew pretty dramatically last year. I think it's close to that growth rate in the first quarter. And that's partially due to a big geographic expansion in the new states, the appointing of new brokers, pretty robust marketing effort. But we think that'll continue to expand at a good clip.

Okay. And then you've started some newer lines in the last 12 months, I think, environmental, 1 or 2 others. And then you've got your usual strongholds, construction. Would you say more of that, the above extra growth came from the core lines? Or is that more of a reflection of some of the new lines getting traction? Or is it really both together?

It's really both. We're really seeing pretty widespread growth.

It always adds inflows a little bit division-by-division. But in general, as Brian said, it's pretty widespread. And the other things Brian highlighted earlier in his comments, I think, are important, too. It's the new products, it's the pockets of dislocation in the industry that create little opportunities here and there. It's the geographic expansion of the personal lines. It's the improved customer service, which has helped, I think, in any business, right? The better the service for the customer, that can drive growth, too.

Right, right. Okay, okay. And you mentioned, obviously, that's going to move up and down a little quarter-to-quarter. It's not -- quarter-to-quarter is not exactly linear. But were there any big policies or anything unusual that really drove the GPW up this quarter?

No. No, I mean, most of our policies are small, and there was no individual big policy driving it.

Okay, okay. And then just following up on the expense ratio. That makes sense, you have somewhat more cost now. To the extent that ratio can trend down, should that be sort of linear as you ramp up your premiums?

Yes, I think if you look at where we were last year, I think we were like a 26.5% GAAP expense ratio if you eliminated the multiline quota share. That would be kind of our near-term target to get back to that level. I think longer term, we could probably do slightly better than that. I don't think it's going to be a dramatic reduction. But I think I'd definitely like to see a 26% handle versus a 27% in the near term.

Okay. That's helpful. And then as far as on the law side, how are legal trends today compared to maybe a year or 2 years ago? Are they any different or around the same?

That's -- Adam, that's always going to be difficult to nail down with certainty because we operate in 50 states, and they have a lot of -- the tort system, of course, is based on state law, so there's going to be some variability state-by-state. But in general, I think you'd say there is some adverse trend in terms of jury verdicts and the like. I think with the -- some of the headlines around the industry related to transportation and commercial auto, obviously, there have been some pernicious trends from the risk bearer standpoint in terms of frequency and severity. If there is -- if there's bad trends in auto, it wouldn't be unusual that those trends would jump other lines of business at some point, right? If you have car wreck and somebody's driving a vehicle on their job, hey, that's going to start to impact work comp results and the like. It's something we're certainly -- we look at and evaluate on a regular basis. I think we do a good job of staying ahead of that, but it is a perpetual business challenge.

Our next question comes from the line of Mark Dwelle from RBC Capital Markets.

Just a couple of questions. On the -- in the 10-Q, you commented related to the reserve releases that those came mainly from the '15 and '16 accident year. Can you just describe a little the review process on that is? Are you able to take those reserves because your mainly claims-made policies, and so you set fat reserve? And then when the claim doesn't happen, then you have much more kind of room to kind of quickly take those reserves back? Or is it more complicated than that?

I think it's a little more complicated than that. I would just say that we tend to -- in our models, we tend to assume that a lot more is going to come in early on than does. So what you're seeing is when those early years come down, we were expecting to see more losses and just didn't. And so rather than just keep those reserves up, which, I guess, would be -- we want to be guarding against being too conserved on the reserves. But yes, it's basically that we expect to see a certain amount of losses come into those first few years after the accident year-end, and we don't.

And then in terms of expectations for how quickly losses are reported, obviously, that varies by line of business. So we write property, which tends to report very quickly. We write excess casualty, which tends to be much more of a slower report. And we write a lot of business in between. Certainly, the claims made where the policyholder can't report losses after the expiration of the contract is going to have a quicker development or quicker reporting pattern than [ a currents ]business. And all those factors are taken into account. But the general takeaway is we try to be conservative in our reserving. The goal is to set reserves over the years that are more likely to develop favorably, and we think that puts us in a great position.

Okay. That's helpful. Can you remind me, as we head into tornado and hurricane season, what states you have the most exposure to on the personal lines book?

Yes. Florida is our biggest state, but we're also spreading out along the Gulf. But we have very little exposure in what you would consider the southern tornado alley. So most of what we'll right in the Gulf, and let's say Mississippi, Louisiana or Alabama would be in the southern sort of beach areas. We don't write in Northern Alabama. But the bulk of our exposure is in Florida and then extending out along the Gulf Coast.

Yes, so it's southeastern-focused on the coast, and that kind of dovetails with our focus on a preferred occupant, if you will. You have an anomaly where the closer you get to the ocean or the Gulf of Mexico, the more expensive the land. And so there's a trade where bigger cat exposure but lower attritional loss exposure, and so we're trying to balance those 2.

I see. So plausibly, ultimately, more exposure on a hurricane-type event, less exposure on tornado kind of events.

That's right.

But I -- Yes, I see. Got it. Last question, and this is probably just a timing thing. But looked like the level of cash that you were holding was a little bit elevated. Was that just timing? Or was there some more conscious decision behind that?

I think that's just a measure of conservatism on the part of our fixed income manager. We've got a healthy allocation in municipal bonds. There's some issues around mutinies with tax reform on the horizon. So it's just -- again, it kind of reiterates the conservatism of our strategy on the investment side. We really focus on risk-taking in our insurance business, a little more caution on the investment side.

I am showing no further questions. And now I'd like to turn the call back to Mr. Michael Kehoe for any further remarks.

Okay. Well, I'd just -- we'll go ahead and wrap up. I want to thank, certainly, all the Kinsale employees for another strong effort. They're certainly the ones responsible principally for the great results we're posting. And I want to thank our investors for their confidence in the Kinsale team, and I thank all the participants on the call. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may now disconnect. Everyone, have a great day.