Ladies and gentlemen, thank you for standing by and welcome to Kinsale Capital Group, Second Quarter 2020 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 second 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 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 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 and thank you for joining us on the call today. With me are Bryan Petrucelli, Kinsale's CFO and Brian Haney, Kinsale's COO. I will begin the presentation and then Bryan Petrucelli will cover the financial performance for the quarter, and then Brian Haney will provide some color on the market and our underwriting operation. Last night, Kinsale reported operating earnings of $0.84 per diluted share for the second quarter of 2020, up 47% from the second quarter of 2019. Gross written premium was up 41% for the quarter, notwithstanding the disruption of the COVID virus. The company posted an 83.8% combined ratio and a 16.9% annualized operating return on equity for the six months ending June 30, 2020. The Kinsale strategy of disciplined and highly controlled underwriting, combined with technology driven low costs, and a focus on the E&S market is propelling our profitability and growth. And we believe we'll continue to do so over the long term. In addition to our own business strategy, our growth is being enhanced by a growing level of dislocation within the P&C market. After many years of intense competition, some competitors are experiencing adverse results and are withdrawing capacity, canceling some programs, raising prices etc. We expect this dislocation to continue, thereby allowing Kinsale to grow at an elevated rate, perhaps through 2021. At some point thereafter, we expect the level of dislocation to abate and our growth rate to normalize, perhaps in the low double digit range. Beyond the accelerated growth, industry dislocation is also allowing Kinsale to raise rates and in some cases, restrict coverage to further expand our profit margins. To take full advantage of this market opportunity, there is a possibility Kinsale could raise a modest amount of equity capital before year end. At the end of the first quarter 2020, we noted that we did not expect the COVID-19 virus to have a material impact on Kinsale’s profitability or growth. Three months later, we have the exact same position. The temporary drop off in March in the growth of new business submissions reversed within a couple of weeks and we have experienced a V-shaped recovery in submission activity and premium. On the claim side, three months ago we noted a small number of claims were all policies involved had coverage exclusions that we anticipated would preclude any payout. We are essentially in a similar place today, with small number of claims against policies with coverage defenses in place, we don't see any material impact to either growth or profitability arising from the COVID-19 virus. And now I'll turn the call over to Bryan Petrucelli.

Thanks, Mike. The premium growth and the profitability that Mike just mentioned is encouraging, given the less than ideal economic conditions generated by COVID-19 in the second quarter. Just as a reminder, our primary goals as a company, are to consistently produce mid-80s combined ratios and mid-teens operating returns on equity and our second quarter 83.9% combined ratio and 16.9% annualized operating ROE are we are right in line with that guidance. We reported net income of $30.3 million for the second quarter of 2020, representing an increase of 120% when compared to $13.8 million last year. Net income this quarter included $13 million or so in pre-tax unrealized gains on our equity investments, as the financial markets came back our way and recovered nicely from the significant declines in the first quarter, that were driven by the equity markets reaction to COVID-19. Net operating earnings, which exclude the volatility from the investment gains and losses, increased by 54% up to $19 million, compared to $13.5 million in the second quarter of 2019. The company generated underwriting income of $15.7 million and a combined ratio of 83.8% compared to $10 million dollars and 84.8% last year. The combined ratio for the second quarter of 2020 included 3.7 points from net favorable prior year loss reserve development compared to 2.2 points last year. Our effective income tax rate for the first six months of 2020 was 14.8%, and again includes discrete tax benefits recognized from the exercise of stock options during the period. Gross written premiums were $134 million, representing a 41% increase over last year, for all the reasons that Mike previously mentioned including the continued market dislocation and sustained service levels. On the investment side, net investment income increased by 38% over the second quarter last year, up to $6.6 million from $4.8 million last year, as a result of continued growth in investment portfolio. Annualized gross investment returns excluding cash and cash equivalents did increase -- did decrease however, to 3% from 3.2% last year, just given lower interest rate environment. Diluted operating EPS was $0.84 per share for the quarter compared to $0.57 per share last year. And with that, I'll pass it over to Brian Haney.

Thanks, Bryan. As mentioned earlier, premium grew 41% in the second quarter, that is lower than the 47% growth rate in the first quarter. There are two big competing factors that have been affecting our growth rate, the hardening E&S market and the COVID related lockdowns. The bulk of the effect of COVID was felt in the second quarter, that peaked or bottomed out depending on your perspective in April. Since then, we've seen significant recovery in the growth rate. Anecdotally, I could say that the growth rate in June was essentially the same rate as the growth rate in January. So while COVID is undoubtedly still weighing on economic growth and our opportunity somewhat, that effect is being overwhelmed by the impact of the hardening of the E&S market. I would say at this point, all of the markets we compete in are trending in the direction of #[off-mic] than others. The excess casualty, commercial property, and allied health spaces are probably in the vanguard of market hardening. Years of bad underwriting and overly aggressive behavior in the market have led to seriously poor results and forced the more undisciplined among the competition to significantly pull back. Some competitors have been compelled to dramatically increase their rates, which had been inadequate for many long years of the soft market. They've also had to tighten terms and conditions, re-underwrite some books of business, reduce limits, exit some classes of business entirely, and terminate some programs. All of this has led to more opportunity for us. We have maintained underwriting discipline throughout the soft market, so we are not now being forced to pull back in the hardening market. Submission growth was 24% in the second quarter, down slightly from 25% in the first quarter. But, as I mentioned earlier, the COVID effects were worse in April. Based on what we saw in June, we believe growth rates and submissions have essentially returned to pre-COVID levels, even though there's undoubtedly still some ongoing effect from the lockdowns. As for rates, we are still pushing them up in response to market conditions. As a reminder, we have a very heterogeneous book of business, which complicates reducing all the rate movements to one single number. But that all being said, we see rates being up in the 10% to 12% range in the aggregate during the second quarter. What is not reflected in this 10% to 12% rate increase, however are, terms and conditions. As the market has hardened, we have also been pushing more favorable terms and conditions. Even though that may not be reflected in rate changes, it does affect profit margins. So we expect that the 10% to 12% might understate the change in profitability in the book. And with that, I'll turn it back to Mike.

Thanks, Brian. Operator, we're ready to open up the line for questions now.

Thank you [Operator Instructions]. And our first question is from Matt Carletti with JMP Securities. Please go ahead.

Hey, good morning.

Good morning Matt.

Mike, I was hoping -- I mean I appreciate your and Brian's comments on, you know that submissions and premium growth or you are kind of back to pre-COVID levels. Can you just give us a little picture kind of, during the quarter what you saw, kind of where it was? They may be in April, May, June and then if you have an early look at July, if you could offer that just curious of the progression?

Yeah, we touched on this the last conference call that at its most severe moment, our growth rate in new submissions went from the high 20s to low 30s down to about 2% to 5%. Right, so we saw this dramatic drop off in the growth rate. But that was, for a couple week period and then there was a -- kind of a V-shaped recovery, if you will. Premium was never that dramatic, I mean premium, you know, we don't -- we don't track the premium by day and we -- we don't have that detail to provide. But on a monthly basis, you didn't see nearly that kind of drop in premium.

Okay, great. And then just one other one, I had a question on the expense ratio was, you know, you took a nice step down in the quarter. And just curious, are there any kind of one-time or we're seeing that in some of the companies. kind of COVID-related benefits there? Or is that just the leverage in the model as the earned premium catches up with the gross written, you're getting expense ratio leverage on the bottom line?

I'm going to let -- Bryan Petrucelli wanted to handle that one.

Yeah, Matt. That's -- that's exactly what you're seeing. You know, we are hiring folks in our underwriting and claims and IT area just to kind of keep up with our growth but it's at a much lower rate than what we're seeing from a premium growth perspective. So I think you could be seeing some -- some economies of scale there.

Great, thank you. Well done and best luck going forward.

Thanks, man.

Thank you. Our next question comes from Mark Hughes with SunTrust. Please go ahead.

Yeah, thank you. Good morning.

Good morning, Mark.

And Brian Haney, you had suggested June was back to January levels or as comparable to January. Well do assume that sort of the 47% premium growth you had in Q1, is that kind of what you're saying?

We don't have those details to provide. I was just giving that just to put in context what Mike was saying about how growth rates had recovered.

Right. So June being better than the quarter as a whole?

Yeah.

And somewhat similar January is your point?

Yeah, June was -- June was much higher than April and May then.

Yeah. And that same momentum presumably continues into July, is it?

I mean, we --

Well we’re not going to -- I don't think we're going to comment on the third quarter yet. But, you know, I think if you go back to the remarks I made in the intro, Mark that, we do have a certain sense of optimism as to where the hardening of the E&S market is going. And we feel like we've got a pretty, pretty strong opportunity, certainly through 2020 and perhaps through 2021. But I'm not sure we want to get into specifics of the third quarter just yet.

Understood. How about in terms of claims activity, both new claims on the current year and then what you've seen on the older claims, how they develop through this period with the courts shut down, etc.?

Yeah, we don't have anything to report in terms of any kind of material changes. There have been -- you know, the -- I think the courts in general, this varies tremendously by state and even sometimes within each state, you know, exactly what the interruption is. But in general, yes, the courts have been closed down. We don't try a very large percentage of cases. But you know the slowdown in the court system probably has had some modest impact on the progression of claims being resolved. You know, certainly we try to account for those type of adjustments in our reserving. You know, keep in mind that we -- we frequently talk about our focus on trying to post reserves that are conservative, more likely to develop favorably than not and we certainly think we're very much on track to do that. But yeah, there probably is a slowdown at some level. Although, we're still opening new claims and closing old claims that are pretty good -- at a pretty good clip. So, that’s my thought.

Understood? And Q1, you talked about putting an extra amount into IBNR, I think related to the [current] accident year, any dynamic like that this quarter?

You know, we -- in the first quarter, you know, we got into the weeds a little bit just because of the dramatic nature of the virus and its impact on the economy. And I think there was a lot of investor concern about its impact on the P&C industry. I'm not sure we're going to go into that level of detail every quarter. But what I would say is that the, I think it was $5.4 million, that we put up in Q1, that wasn't specifically COVID exactly, it was more or less a reaction to the uncertainty created by COVID. You know the impact on the industry, the shut down, and its impact on the economy, etc. But in general, I would say, Kinsale in general has avoided the lines of business that are most exposed to litigation or claims coming out of the virus. I'm thinking of things like mortgage insurance, trade credit, event cancellation, things like that, we're not exposed at all. We do right property business, of course, commercial property but it's heavily skewed toward more of an industrial exposure. So there's, you know, most of our insured’s were not shut down during the virus the way it maybe restaurants and hotels were. And then we have very strict coverage, defenses in place that if you -- if you look at the combination of all of those factors, I think, that's how we conclude that we really don't expect any kind of material impact on the business in terms of our loss ratio, or growth too. But so you know that -- that's probably the best way to address it. We do always strive to be conservative in the reserving and that goes for the second quarter, just like every other quarter.

One final question, if I might. The excess casualties so that was the one of the lines where you're seeing a lot of opportunity. Would you anticipate outsized growth there and does that have an impact on the seeded premium ratio?

I'm going to turn that one over to Brian Haney.

I mean -- to the extent that the growth there outstrips the growth and the rest of the book, yes. But I mean, allied health is also growing and so there's other lines that are growing pretty significantly too. So it's tough to say, I mean, it could.

No obvious mix shift?

No.

That’s good.

Now, though, I mean, because basically, everyone's growing. It's just a question of how fast.

Yeah, okay. Thank you very much.

Thanks Mark.

Thank you. Our next question comes from Rowland Mayor with RBC Capital Markets. Please go ahead.

Good morning guys.

Good morning.

So a couple quick ones on the balance sheet. First, can you remind us, within that other liabilities line, why it’s -- other liabilities line, why it’s gone from, you know, less than $1 million to $20 million this year?

Bryan?

Yeah, this is Bryan. That -- it includes things like securities payable. There is some -- some liabilities in there with respect to the building. You know that's our headquarters, that's currently under construction. And that's really the majority of that.

Yeah, it makes sense. And that headquarters is still on track to be done sort of in Q3 and there's been delays?

Now we're largely on target, I think. And Mike, you correct me if I've got this wrong. I think we're looking at sort of mid September-ish, mid -- mid-September or late September to complete that.

Got it. And then one last final one. The investment portfolio duration is up a bit and critical is down a bit from year end, anything notable going on there and should we get used to that longer term?

I think it's just the most a modest adjustment in our portfolio to take advantage of some of the dislocation that you saw in the markets related to COVID. I wouldn't expect any dramatic change in duration going forward.

Got it. And is equities still, that's going to be about 10% of the portfolio or are you seeing opportunities there?

Yeah, I wouldn't expect too much of an increase there. We did add to our position a little bit to take advantage of the, you know, the severe decline in the market in the -- in the March, April timeframe, but I wouldn't expect it to increase much more than 10%.

Okay, perfect. Thank you for your answers. That was all I had.

Sure.

Thank you.

Thank you. And our last question is from Jeff Smith with William Blair. Please go ahead.

Hi, good morning.

Good morning.

I came on a little late but did you touch on or could you touch on the rate increases you're seeing in some of your lines of business?

Yeah, Brian Haney, do you want to take that one?

Yeah, I think what we said was the rates are up 10% to 12%, in the aggregate. You know, we don't generally go into detail about differences in lines, but I would say that, I mentioned that the allied health management liability, commercial property, excess casualty spaces were more hard than others. So you can infer that those rates are going up higher than average.

Okay. And then you've historically been kind of conservative with loss picks in the first half. I mean, it seems like that was the case here with Q1 in particular. And then you'd see sort of lower picks in the second half, is there anything that would change that this year or do you think that will be the case?

Yeah, I don't know that we have any kind of real seasonality to our loss reserving. I think, you know, our goal is of course to put forth our best estimate but tempered with a very strong measure of conservatism to account for the fact that it's -- it can be an uncertain business. And, you know, we really strive to be conservative and cautious in how we set those estimates. We want investors to have a lot of confidence in our balance sheet. And, in general, I think we've been successful. You know, we're not a company that's been around for decades, but we are in our 11th accident year now. And all of our accident years, except for 2011 have developed favorably on an inception to-date basis. So, you know, I think we've got a good track record and we're looking to build on that. Bryan Petrucelli, which would you add anything to that?

Yeah, I think that's -- that's a good way to describe it, Mike.

Okay. And then what was the impact of exposure on GPW growth in the quarter?

Brian Haney, you want to take that?

Yeah, we don't have those exact figures. I would -- I would just be speculating if I answered it. I would say, it was probably -- had probably less of an impact. Or let's put it this way, exposure growth probably contributed less to our growth in the second quarter than it did in previous quarters because of the effects of COVID.

Right, but it was -- it wasn't negative, it stayed positive, you think?

I would -- yeah, I think it stayed positive because I think the majority of the businesses we insure didn't actually shut down during the lockdown.

Okay. Okay, thank you.

Thank you. And this concludes our Q&A session for today. I will like to turn the call to Michael Kehoe for his final remarks.

Okay, well, thank you operator for organizing the call and thank you for everybody who participated. And we look forward to speaking with you again here in a few months. Have a great day.

And with that, we thank you ladies and gentlemen, for participating in today's conference. You may now disconnect. Have a great day.