Good day ladies and gentlemen, and welcome to the Q2 2018 Kinsale Capital Group Inc., Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] 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 would cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including the 2017 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 second 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 also available at the company's Web site at www.kinsalecapitalgroup.com. I would now like to turn the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.

Thank you, operator and good morning everyone. Joining me on today's call is Bryan Petrucelli, Chief Financial Officer for Kinsale and Brian Haney, Chief Operating Officer. I'm going to make a few introductory remarks and then turn the call over to Bryan Petrucelli for some detailed financial information, and then, Brian Haney will follow with some color on our quarter and the market opportunity that we see in front of us. Kinsale is especially insurance company that combines disciplined underwriting and claim handling with an advanced level of technology and low cost to deliver superior value to our customers and superior returns to our stockholders. At Kinsale disciplined underwriting begins by maintaining absolute control over the underwriting and claims management process. Unlike most insurance companies that contract out some or all of their underwriting to external parties. It involves targeting small and medium sized, hard-to-place accounts within the excess and surplus lines market to achieve superior risk adjusted returns. It means managing the coverage we offer to minimize inaccuracies in the underwriting process. All of these elements help drive Kinsale's favorable loss ratios. On the expense side, Kinsale uses its own proprietary end-to-end enterprise system designed and built by our analysts and developers to operate our company. Most competitors are at the disadvantage of using multiple systems sometimes dozens of systems to operate their businesses using a single advanced enterprise system that we own allows Kinsale to achieve a significant cost advantage in addition to providing superior customer service, more accuracy and more data to manage the business than our competitors. he end result of this technology combined with Kinsale's entrepreneurial business culture is an expense ratio dramatically lower than our competitors, 20% lower or 25% lower in some cases even 35% lower. It's a powerful advantage in an industry where the buyer care so much about the cost of a policy. Combining disciplined underwriting and claim handling with low costs is an end game winner every time. For the second quarter, net operating earnings increased by almost 17%. Premiums increased by 21%. Our combined ratio was 83.5% and our operating return on equity for the six months of 2018 was 14.9%. The quarter and six months results are consistent with our forward guidance of a mid-80s combined ratio in a mid teens ROE. For further detail, I'll turn the call over to Bryan Petrucelli.

Thanks Mike. As Mike noted the results for the second quarter were in line with our expectations. Although slightly higher than last year, we believe the 83.5% combined ratio for the quarter is a market leader and continues to demonstrate the strength of our low cost model particularly in periods of intense price competition. We reported net income of $10.1 million for the second quarter of 2018, an increase of 19% over the $8.5 million reported last year. Net operating earnings increased by 16.8%, $9.9 million compared to $8.5 million last year. Increases in net income and operating earnings were largely driven by an increase in net investment income and a reduction in the company's effective income tax rate. Our effective income tax rate was 18.2% in the second quarter compared to 33% last year and lower due to the impact of the Tax Reform Act that was enacted at the end of 2017. And the recognition of tax benefits from stock options that were exercised during this quarter. The company generated underwriting income of $8.4 million and combined ratio of 83.5% compared to $10.7 million and 75.2% for the second quarter of 2017. The combined ratio for the second quarter of 2018 included 3.6 points from net favorable prior year loss reserve development compared to 8.9 points for a net favorable loss reserve development last year. There was no meaningful cat activity this quarter for the second quarter of last year. Unrealized operating return on equity increased to 14.9% for the first half of 2018 compared to 13.5% last year. Gross written premiums were $59.9 million representing a 21% increase over the second quarter of 2017 and continue to be generated from an overall increase in underwriting activity across most lines of business. And Brian Haney will discuss that in a little more detail here in a bit. On the investment side, net investment income increased by 55.5% over the second quarter of 2018 up to $3.8 million from $2.4 million last year. Annualized gross investment returns increased to 2.9% from 2.3% last year. Basic and diluted operating EPS was $0.47 and $0.46 per share respectively compared to $0.40 cents per share last year. And with that, I'll pass it over to Brian Haney.

Thanks Bryan. As mentioned earlier, the premium grew 21% in the second quarter and roughly the same from the first quarter. All but two of our 17 divisions grew, commercial property continues to grow strongly and our allied health care division was up 40% for the quarter. We are seeing more opportunities in the Allied healthcare space because a number of our competitors have re-underwritten their books of business. On the other hand, we shrank slightly on our construction division due to a strategic push on our part for more rate and our general casualty division which operates in a particularly competitive part of the E&S space was also down slightly. Our [indiscernible] business was up 43% for the quarter. Overall, submissions continue to increase strongly; submissions in the fourth quarter were up 22% over the fourth quarter of 2017. We look at submissions as a good leading indicator of where the business is going and the vast majority of our 17 divisions had positive growth in-submissions. It's worth reminding there are two things in particular about how we underwrite business that separate us from most of our competitors. First we are 100% E&S, we don't write any admitted business. This gives us great flexibility by giving us the freedom to tailor rate some forms to the specific unique risks faced by our insurance. Second, we don't delegate underwriting authority to third parties. This we believe gives us greater control over the underwriting and risk selection and drives more profitable results. Moving on to rates, we continue to push rates up selectively. We took some rate increases in our casualty business in the second quarter which contributed in part to the construction division's modest shrinkage. The overall rate change for the book is still in the low single digits. One…

Thanks Brian. Operator, we're ready for any questions that come in.

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

Thank you. Good morning.

Good morning, Mark.

The 22% increase in submission account what period was that for again?

That was the fourth quarter over -- second quarter over second quarter.

Second quarter over second quarter. Okay. And then, I think you suggested that continues to be a robust here in the third quarter?

I don't know, if I have mentioned that, I would expect it to continue at the rate its going.

Okay. And then thinking about the favorable development, last few quarters have been more like flat up kind of low single digits a little bit behind your earlier pace in early 2017 full year 2016. How do you see losses developing in the book, do you know is there any kind of change in the trajectory there, any inflation perhaps a little bit more? What's going on?

I think whenever you compare different quarters or different years, you have to acknowledge there's some variability in our results just based on -- the natural volatility in the business and the fact that hey it's a smaller company that probably exacerbates the volatility a little bit. I think if you're comparing second quarter '18 with '17, second quarter in 2017 was a bit of an anomaly, it was kind of an exceptionally good quarter. We think second quarter 2018 was exceptionally good as well but not quite as good. In terms of last trends, I think there's definitely inflation in jury verdicts and damages and that type of thing and it's something we address in our actuarial review and our profitability analysis and all of our divisions and it's just a normal part of how we manage our pricing to account for inflation on the claims front. But I don't know if there's anything exceptional underway today. So you would say the inflation is similar to what you've seen in prior years, has that picked up a little bit?

I would say its somewhere what we are seeing.

And then, the large accounts you had mentioned you are seeing some opportunities that are emerging there, anything you can spot in terms of end markets or types of business or line that that are creating that opportunity?

It's across the board. I would say there's some more in the allied space -- allied healthcare space and the skilled nursing facilities. But many of our divisions are seeing these accounts.

I would also emphasize that we're talking about a handful of accounts, right? So our strategy has been to focus on the small to medium sized transactions because we think in a competitive market that's where the best margins are. And that's consistent today. I think Brian mentioned that on his remarks, more as an indication of a market trend that's becoming a little bit more favorable to the risk there the fact that we see no opportunity for larger accounts and now we might see 5 or 10 a month.

And despite a follow-up on those larger accounts, would you normally put up higher loss spec associated with that you're getting more volume. So the profit contribution is good, but it might involve a little higher loss ratio?

And we're not going to reserve specifically for a handful of accounts, so we don't specifically address it in reserving. I will say this -- these accounts that come to us are distressed. So they have a really bad loss experience and they get a very high rate when they come to us. So I would expect these accounts, the handful that we do right, I would expect them to actually have better loss experience.

Understood. Thank you.

Thanks Mark.

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

Yes. Good morning. Mark Hughes took a few of my questions already. Not much to say on the results. I think appreciate the market commentary that you've given. If you look at the areas where you're growing or where you're contracting, I guess what portion of the growth would you say is primarily driven just by being a strong economy which usually drives a lot more E&S volumes as compared to how much is because you continue to penetrate the market and expand your distribution relationships and so forth.

I don't know that. Mark, good morning, Mark. This is Mike Kehoe. I don't know that we actually have a precise answer to that. Clearly part of our growth is driven by -- we've got a very robust economy and that's probably driving growth across the P&C industry. I think clearly the E&S segment is growing at the expense of the standard market, which is a long-term trend not every year but most years E&S has been taking share if you will from the standard line segment. And I think, clearly, with Kinsale's strategy and business model, we are taking market share from our competitors. Bryan, I don't know if you have any?

I think one way you could sort of guesstimate that number is, just to look at the growth in the E&S market as a whole and say that the difference between our growth rate and that average growth rate is probably are taking market share.

Okay.

Which I would guess would be somewhere around half and half.

In the allied healthcare line that you talked about I assume that's primarily a liability exposure. Can you just describe a little bit more about kind of what exposures you're writing there just by way of kind of understanding the risks?

The allied healthcare division at Kinsale focuses on essentially non-physician non-hospital healthcare risks. So it's everything from home healthcare agency, social service, drug and alcohol treatment, independent living, assisted living, skilled nursing home. And the one thing we've noticed here in the last year or two is that the market for this liability insurance for skilled nursing homes has -- the pricing is firmed up. Up until about a year or so ago, we wrote no business in that segment because the rates had come down so low that it was not a favorable risk trade for us as the risk there. Now that you've seen the low prices, we get losses in some companies, we've seen carriers withdraw from the market. There's a lot more dislocation in that segment, still very competitive. It's not an area where we're writing a ton of business, but we're starting to see some opportunities. And that's it. So the big driver of loss is a liability book for skilled nursing homes would be resident injury, either improper medical care could be a fall that type of thing.

That's helpful. Thank you. The last question I had just in terms of the investment portfolio. Obviously it continues to benefit, any changes or anything different that's happening there that it's worth noting?

Mark, its Bryan Petrucelli. It's not really enough -- no real changes in the strategy other than what we talked about in the past. We still continue to purchase the floating rate in kilos just take advantage of some of the increases in interest rates we are seeing but no dramatic changes there.

The size of the portfolio of course continues to grow at a healthy club.

Of course that's a good part. That's all my question. Thanks very much.

Thanks Mark.

Thank you. [Operator Instructions] Our next question comes from the line of Adam Klauber with William Blair. Your line is now open.

Good morning guys.

Good morning, Adam.

How fast did the [indiscernible] grown and how big is that unit now?

I think then you said 42% growth for the quarter, so it'll come in somewhere around 5% of our book this year up from I think 4.25% of our book last year. So it's small part of the business, but it it's growing at a healthy club.

Yes. And then, did you grow your property book -- how did the property book grow?

Don't know the exact figure. But it was pretty strong.

It was probably our strongest growth. We think the growth is being driven by some of that catastrophe activity last year, but also just that was a highly competitive area for a long time. And I think, again, when prices get too low, it starts to drive adverse results for insurance companies. And as you see poor results give way to carriers exiting the business, tightening up their underwriting standards and that dislocation creates pretty good opportunities for a company like Kinsale in the space.

Right. Right. Great. And then, I think you mentioned that over time. Clearly E&S market has expanded at the expense of the standard market. Over the last six months. And I know its market-by-market. But have you seen I guess more prevalence to the standard market coming out of E&S like risk or more moving into E&S like risks?

It's just kind of anecdotal, but I would say right now we're seeing business come into the E&S space. It's not that there's not a lot of business going the other direction. It's a pretty dynamic market of course. But in general, we really feel like good sense of optimism not just for Kinsale's opportunity, but kind of the broader E&S opportunity.

Okay. Okay. And then in the last couple of months have you brought on any new teams or starting any new product areas?

Nothing. No new teams. Obviously, we're always working on product enhancements. That's a normal part of what we do as a insurance company, but no new teams or new divisions in the last six months.

Okay. Okay. And then, finally, your expense ratio is doing very well this year. Do you think this is a good sustainable level as you grow over the next -- as you grow?

I think so. I think that 25% expense ratio, it's going -- it's always going to have a little bit of variability to it. And I think if the business grows there's an opportunity to drive that lower. But there's also an opportunity now to kind of invest more in the business. And I'm thinking particularly in the technology area because I think the payback on some of the technology investments is so powerful that might be a little bit more of our focus in the near term as opposed to driving the 25% expense ratio to 23%. We like the idea of reinvesting in our business. We've made a lot of progress over the last 9 years in building our system, driving a really superior level of automation, but we also have a long way to go on that front. And so what I would say we're kind of balancing the two, managing our expenses very aggressively. But also reinvesting in the business to get even better in the future.

Great. Thanks a lot.

Thanks Adam.

Thank you. We do have a follow-up question coming from the line of Mark Hughes with SunTrust. Your line is now open.

Yes. Thank you. Refresh me on how much of competition Lloyd is relevant to your space at the kind of the smaller end of the market? And then, do you anticipate any impact on the E&S, I think they're going through a restructuring or strategic review perhaps, any observations about their behavior?

Yes. Lloyd is pretty significant in many of our lines. I think for the whole E&S space for about 23%.

Yes. Collectively they are the largest E&S writer by far.

So anything that significantly affects Lloyd's will probably significantly affect the market and then us.

Are you -- could it be -- you're getting some of these larger accounts that might have been Lloyd's accounts before?

The ones that I can think of specifically were not more Lloyd's accounts.

Mark I think typically Lloyds underwrites larger accounts directly in London. And the smaller accounts where Kinsale focuses that we tend to compete with Lloyds through -- Lloyds delegates underwriting authority to its brokers to underwrite that business on Lloyds' behalf. And that's a not unique to Lloyds. I would say probably three quarters of the business we write we're competing with binding authorities from our competitors.

But that presumably for Lloyds would you think that probably has not been a great experience for them or could that be an area that they didn't focus on perhaps for some retrenchment?

We've seen a little bit of dislocation in the delegated underwriting authority space whether you're talking about the contract binding business or larger homogenous programs, personally I haven't followed it closely enough to know that hey it's Lloyds specific or its other carriers. Obviously, we are very partial to our own strategy, which is very different in that we manage and control the underwriting directly. Every piece of business on the books at Kinsale is underwritten by Kinsale underwriter in our office. We think that's a better model that drives better risk selection and a better result. But Lloyds is like every other carrier we will compete with. They contract out the underwriting frequently because some companies struggle with the cost of underwriting small accounts.

Thank you.

Okay.

Thank you. We have no further questions at this time. I would now like to turn the call back over to Mr. Mike Kehoe for any further remarks.

Okay. Thank you, operator. I think we're all done today. But I want to thank everybody for participating and I look forward to speaking with you again in three months.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.