Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 Kinsale Capital Group, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, 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 first quarter 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 first 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 turn the conference over to Kinsale's President and CEO, Mr. Michael Kehoe. Please go ahead, sir.

Thank you very much operator, and good morning, and welcome to our call. We hope everyone participating on the call is staying well and we want to especially commend all the Kinsale employees for their hard work and flexibility during this crisis in adapting so quickly to our remote work arrangement and in continuing to deliver best-in-class service to our brokers around the country. Their efforts in particular have helped to distinguish Kinsale and to drive the superior performance we reported last night. Joining me on today's call are Bryan Petrucelli, Kinsale's CFO and Brian Haney, Kinsale's COO. Last night we reported a 19% increase in operating earnings per share compared to the first quarter of 2019, a 47% increase in written premium and a combined ratio of about 84%. Our annualized operating ROE was 17% for the first quarter. Bryan Petrucelli will provide some addition detail and color on our financial performance here in a moment. Kinsale strategy of focusing on the E&S market, controlling our underwriting and claim handling operations absolutely and using technology to improve customer service and reduce costs served us well this quarter. When the virus hit and we needed to shift to a work from home model, we were able to do so quickly and with no loss in productivity or drop-off in service levels. As of now, 90% of our employees are working remotely, and our business is firing on all cylinders. There has been a considerable amount of commentary about the coronavirus and its impact on the P&C industry. This is an evolving topic and subject to some element of uncertainty. However, given what we know at this point, we do not believe the coronavirus will have a material impact on Kinsale’s profitability or growth. Specifically, Kinsale does not write any of…

Thanks Mike. And as Mike mentioned, we had another strong quarter and are encouraged by the premium growth and the profitability that we've been able to achieve, particularly given the impact of COVID-19 on overall economic conditions. Our goal is to consistently produce mid-80s combined ratios and mid-teens operating returns on equity. On our first quarter, 84% combined ratio and 17% annualized operating ROE are right in line with that guidance. The volatility in the financial markets towards the end of the quarter did have a negative impact on net income and comprehensive income. However, the markets have rebounded in April, and we've recovered approximately three quarters of the unrealized investment losses that were incurred during the first quarter. We reported net income of $5.1 million for the first quarter of 2020, a decrease of 72.8% compared to last year and again, 2020 included $16 million or so in pretax unrealized losses on our equity investments. Net operating earnings increased by 24.5%, up to $17.2 million compared to $13.8 million in the first quarter of last year. The company generated underwriting income of $14.4 million and a combined ratio of 83.9% compared to $12 million and 80.3% last year. Combined ratio for the first quarter of 2020 included 3.4 points from net favorable prior year loss reserve development compared to 10.4 points last year. As Mike mentioned, we've not received many claims directly related to COVID-19. However, we have experienced a slowdown and reported losses, which appears to be related to courts operating at limited capacity and other legal system inefficiencies related to COVID-19. We added some conservatism into our reserves and recorded approximately $5.4 million in additional IBNR in Q1 to account for any uncertainties related to COVID-19. Our effective income tax rate was a negative 1.1% for the quarter compared to 17.9% last year. The negative rate being driven by the discrete tax benefits were recognized from the exercise of stock options during the quarter and the impact of unrealized losses related to our equity investments on quarterly taxable income. Gross written premiums were $124 million, representing a 47% increase over last year, for all the reasons that Mike previously mentioned, including continued market dislocation and sustained service levels. On the investment side, net investment income increased by 32% or so over last year, up to $6 million from $4.5 million last year as a result of the continued growth in the investment portfolio. Annual gross investment returns, excluding cash and cash equivalents, did decrease however, to 2.9% from 3.2% last year, just given the lower interest rate environment here in the first quarter. Diluted earnings per share were $0.76 per share for the quarter compared to $0.64 per share last year. If you normalized, our effective tax rate that would've been -- the $0.76 would have been lowered by about $0.03 or so. With that, I'll pass it over to Brian Haney.

Thanks Bryan. As mentioned earlier, premium grew 47% in the first quarter. The highest growth rates were in our commercial property, allied healthcare, excess casualty, inland marine and management liability divisions. But, in general, we saw strong growth across the portfolio. Our spare business was up 29% for the quarter. We took significant rate actions in our personal insurance book, which as you will recall, is focused on manufactured housing in the coastal states. This has led to a more modest growth in item count, but at a more attractive margin. Pre-coronavirus submission growth was on track to be around 30% for the quarter. The first couple of weeks of the lockdown, the growth rate slowed to a single digit rate, but has recovered significantly to the low to mid-20 range in the last two weeks. Weekly numbers can be volatile, but we are encouraged by the bounce back. During that brief submission slowdown, we made the best of the situation by improving our customer service and quote ratios. As you know, we frequently count our technology as a competitive advantage. Sometimes, it's hard to put that in perspective for the investor, but this situation provides an excellent example of how we really are different. In a matter of about a week, we went from having a small percentage of our staff working from home to having more than 90% working from home. We have not missed a beat. Among our underwriting staff, we had one person working from home before COVID and more than 90% after. With one month's worth of data to look at, it is clear we are getting out more quotes per underwriter than we did previously. So, not only have we been able to smoothly transition to a work from home model, we've actually gotten better and more efficient. It's a testimony to the strength of our systems, the effectiveness of our IT team and how hardworking and diligent our employees are. So while submission growth has moderated in response to the COVID situation, quote growth has stayed high and combined with the rate increases, we've been able to continue to grow the premium at a healthy pace. The market dislocation we have discussed over the last year hasn't abated due to the virus. Accordingly, we continue to increase rates in response to market conditions. As a reminder, we have a very heterogeneous book of business, which complicates reducing all the rate movement to a single number. But that all being said, we see rates being up in the plus 10% to plus 12% range in the aggregate during the first quarter. And with that, I'll turn it back over to Mike.

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

Certainly. [Operator Instructions] And our first question comes from the line of Matt Carletti with JMP Securities.

Hey, good morning.

Good morning, Matt.

Got a couple of questions. First is just a clarification, just falling on Brian's comments there. That, that commentary about the brief slowdown and then quickly responded to re-rebounded to the mid-20s. Is that submission count growth you're talking about and not a premium level, so not taking into account, pricing or exposure, just the submission count?

Correct.

Okay. Perfect. And then my other question relates to another numbers question. Just -- yeah, the small amount of the favorable prior period development in the quarter, can you give any color kind of where that came from accident year where they're larger puts and takes, or was it just kind of very small movement across the board?

We don't have any specific info. I think it was -- is generally across the board, Matt.

Okay. Great. Wonderful. That's all I got. Thank you very much and best of luck.

Thanks, Matt.

Thank you. And our next question comes from the line of Mark Hughes with SunTrust.

Yeah, thank you. Good morning.

Good morning, Mark.

Could you talk about the -- just what you've seen with small accounts? Obviously, a lot of concern about what happens in all business. What is your experience so far? What do you anticipate?

Yeah, I mean, we, as a company, definitely focused on small accounts. Our average premiums in generally in that $10,000 per policy range. Clearly, there's a lot of dislocation in the economy now. You see all the headlines, but I think our business -- we've kind of laid out what exactly what we're seeing, right? We saw a material drop-off in submissions for a few weeks. We've seen a real nice rebound, not back to the 30%, but into the 20% range. The premium growth has been less impacted. And I think Bryan noted part of that is rate increases, part of that is -- we've been able to quote a higher percentage of the submissions that come in. But …

How about in terms of -- how about cancellations or mid-term premium adjustments? Any sign of that happening?

Yeah, I mean, we're doing a lot of one-off accommodations. If someone calls and says, hey, my business has been shutdown for two months. Okay. Why don't we extend your expiration date by two months for no additional premium, right? And just kind of working those things out on a case by case basis

And how material has that activity been?

It hasn't been overwhelming, but there's clearly, a number of transactions every day. I mean, keep in mind, we write tens of thousands of policies. We have hundreds of thousands of submissions. So, in the grand scheme of things, it hasn't been dramatic enough that it's impacted our top line. But we're trying to do the right thing. This is an incredible crisis that's come up very suddenly, and we want to trade our policyholders fairly. And that's essentially what we're doing.

Bryan, you had mentioned that you put a $5.4 million in additional IBNR in 1Q. Could you expand on that? Is that to say that you're -- was this tied to the drop in claims, given the claims you would have normally booked, lower losses, but you added to the IBNR for conservatism sake?

Hey, Mark, this is Mike again. Yeah, we noticed a modest downtick in claim frequency. But the real driver is just kind of the general uncertainty created by this crisis. You can read all the commentary out there about its a possible impact on the P&C industry. We feel that we're very well-positioned, but there's still a lot of uncertainty out there. And so, we're just trying to drive a little bit of additional conservatism in our IBNR.

So, you're suggesting that in other things being equal with the claims volume with the pricing, the loss pick might have been lower $5.4 million lower, but you added some additional conservatives?

Yeah.

Okay. How about -- the expense ratio was quite good. You're appeared to be getting operating leverage. I think you said in the past that you think 25 is a kind of a good number, 25, 26. This is, I think 24. Is -- should we expect a lower number to be sustainable?

Mark, I think, that 25% pick is probably a good number. We -- obviously, premium is growing. We're adding staff in the underwriting areas and some of the IT areas. We're monitoring what's going on sort of with the premium and we'll add at a staff accordingly. But I think, just like we always have, I think we're very conscious on managing expenses to a reasonable level. What's going to ebb and flow a little bit, but I'd say the 24.5, 25 is probably a good place to look.

Then how about -- any commentary on pricing trends as you've seen them in April? I think, Mike, you said you expect the dislocation to continue through 2020, no change in that upward trajectory in April.

Yeah, this is Bryan. No. No change. It's -- we're still pushing rate. And we're going to change the trajectory.

And then I'll ask -- in any noteworthy change in Lloyd's. I just was intrigued as to they seem to trim some of their exposure in California in the first quarter. And they have been -- I guess, at least the latest data, it wasn't clear that they were reducing the E&S business. Anything from Lloyd’s, or maybe just more broadly about the dislocation?

Yeah. Mark, this is my Mike again. I don't think we want to comment on competitors. We'll let them speak for themselves. But in general, I think to Bryan's point, right? The dislocation in the market is continuing. There's a -- we went through a long period of very intense price competition. I don't think it's unusual that it takes the industry a little bit of time to kind of get things on track, right? So, that's why we made that comment. Obviously, we're speculating. We don't know definitively how the year is going to unfold, but our general guess at this point is that the trading environment in terms of rate trends and reduction in capacity and all these restructurings that are ongoing, we think that's going to continue for the balance of the year.

Thank you.

Thank you. And our next question comes from the line of Ron Bobman with Capital Returns.

Hi, and thanks again for taking my questions. I'm wondering that without sort of addressing the competitive questions that were just asked, I'm wondering if you could sort of come at it from a different way. Are you seeing any change to your buying to quote ratio of late?

No.

Okay. And then separately, there's a reasonable probability that there's going to be some -- a lot more pain for certain lines of business by virtue of the pandemic and the weakening economy. And I mean, it's conceivable that some segments could actually sort of approach sort of crisis mode where there's just not enough capacity in certain lines. Are there opportunities that are sort of on your radar where you may enter a new line if it were to approach that, that are sort of on a short list if it -- if rates move in terms of conditions move to such a dramatic effect?

I would say we're always looking to -- we're always looking for new opportunities. We're always working on incremental expansion of our product line. Keep in mind, we write on non-admitted or excess and surplus lines paper only. And I think some of the areas you're talking about, if it's -- I'll just use surety as an example, right? You have to have license paper for that. So, the answer is yes. We're always looking to expand, but we're also, near term, just looking at the E&S market.

Okay. Thanks a lot.

Thanks Ron.

[Operator Instructions] And I am showing now further questions at this time. So, with that, I'll turn the call back over to CEO, Michael Kehoe, for closing remarks.

Yeah, we'll take him. Do we -- do we have one more call operator, or one more question?

Yes. I see we just had Sam Hoffman from Lincoln Square, queue up. Sir, your line is now open.

Good morning.

Good morning, Sam.

Thanks for taking my question. I'm just following up on Mark's question, where you said that the cancellations and mid-term premium adjustments were relatively minor at this point. To what extent do you believe that these are lagging indicators and that they should increase dramatically in the second corridor? Because I guess maybe your insurance company, you might be the last party that you would call at the beginning of the crisis. And so, have you think about that going forward in terms of your expectations to receive additional cancellations and mid-term adjustments?

Well, I would just say as an E&S company that focuses on small commercial buyers, we have a very high volume of cancellations every day of the week in a normal operating environment, right? It's not unusual that small businesses don't pay their premium promptly or somebody buys coverage because they -- they're a contractor and they get a job where the general contractor requires it. The job's over in three months, they cancel the policy. But we're six weeks into it, Brian, eight weeks and …

We're not seeing an upward trend in the requests. If anything, it's slightly downward and it is -- I wouldn't characterize it as material at all.

So, it's possible that it picks up, but we feel pretty good about that that's not going to be a big problem for us.

Is this different from your experience in previous recessions, like the financial crisis or consistent?

I think, it's consistent. I mean, if you look back at the E&S market broadly during the 2008 recession, the E&S market did shrink a couple percentage points. But it's an industry where our customers are typically buying insurance, because it's compulsory, either their landlord or the general contractor requires it, or if you worked for the highway department, they require the coverage. If your product's being sold to a retail store, the retailer requires the coverage. So, you don't have wild swings in revenue volatility like you might have in other industries, like say, auto manufacturing. We're kind of insulated I think from some of that dynamic.

Okay. I missed the beginning the very beginning of the call, but did you comment on your exposure to restaurants and bars and the retail and other types of industries that are shutdown and how that affects what we're talking about?

We did as respects the property book. Well, we write commercial property that was 8% of our premium volume last year. And our property book is skewed heavily in favor of a more industrial type exposure. So, warehouses and processing facilities, recyclers. We have very, very limited exposure to, I think, the type of occupancies you're talking about in our property book, restaurants, theaters, gyms, things like that. We think anecdotally that overwhelmingly our insureds continue to operate during this crisis. It's not to say universally, but most of them we think are. And that combined with our coverage limitations, we think put us in a very good spot in terms of exposure to COVID related claims.

Great. Thanks for taking my questions.

Okay. Thanks, Sam.

Thank you. I will now turn the call back over to CEO, Mr. Michael Kehoe, for closing remarks.

Thank you, operator. And thanks everybody for joining us on the call today, and stay well and we look forward to speaking with you again in a few months. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.