Good morning, and welcome to the Kinsale Capital Group's Fourth Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded. Before we begin, I would like to remind everyone that during this call, Kinsale's management may share their thoughts and expectations about the future. These forward-looking statements are subject to certain risks that could lead to actual results varying significantly. Details on these risk factors can be found in the company's SEC filings, including the 2023 annual report on Form 10-K, which should be reviewed carefully. The company has also submitted a Form 8-K to the Securities and Exchange Commission that includes the press release announcing its fourth quarter results. Kinsale's management may reference certain non-GAAP financial measures during this call, and a reconciliation of these measures to GAAP can be found in the press release available on the company's website. I will now hand the call over to Kinsale's Chairman and CEO, Mr. Michael Kehoe. Please proceed, sir.

Thank you, operator, and good morning, everyone. As usual, Bryan Petrucelli, our CFO; and Brian Haney, our President and COO, are joining me this morning for the call. In the fourth quarter of 2024, Kinsale's operating earnings per share increased by 19.4%, and gross written premium grew by 12.2% over the fourth quarter of 2023. For the quarter, the company posted a combined ratio of 73.4% and a full-year 2024 operating return on equity of 29%. Also of note, the appreciation of Kinsale's stock price over the course of 2024 exceeded that of the S&P 500 Index for the eighth time in the last nine years since our IPO back in 2016. These results largely flow from the Kinsale business strategy of small E&S account focus, absolute control over our underwriting and claim-handling processes, best-in-class service levels, and risk appetite that we provide our brokers and technology-driven low cost. As we've said in the past, these advantages have real durability to them. Likewise, we are investing heavily in technology, automation, data, and analytics to drive further gains in the years ahead. Progress in these areas should allow us to gradually and continually improve our expense ratio, our customer service, and the accuracy and competitiveness of our underwriting, all to the benefit of our profitability and growth. The Southern California wildfires that occurred in January created considerable insured loss for the P&C industry with estimates mostly in the $30 billion to $50 billion range. For Kinsale, we expect our pretax losses net of reinsurance to be approximately $25 million. These losses arise from a mix of personal lines and commercial property business. The overall E&S market in the fourth quarter was generally steady but with a continued increase in competition. And with that, I'm going to turn the call over to Bryan Petrucelli.

Thanks, Mike. Another solid quarter with net operating earnings increasing by 19.4%. The 73.4% combined ratio for the quarter included 2.6 points from net favorable prior year loss reserve development compared to 2.3 points last year, with 2 points in cat losses this year, primarily from Hurricane Milton compared to less than 0.5 point in Q4 of last year. We produced a 21.1% expense ratio in the fourth quarter compared to 19.9% last year. The expense ratio will fluctuate from quarter to quarter, and I'd point you to the full-year expense ratio as a better measure. You can see that our 20.6% expense ratio for the full year compares favorably with the 20.8% last year. That being said, the higher Q4 expense ratio is due primarily to higher variable compensation, offset by higher ceding commissions. On the investment side, net investment income increased by 37.8% in the fourth quarter over last year as a result of continued growth in the investment portfolio generated from strong operating cash flows and higher interest rates. The annualized gross return was 4.4% for the year so far compared to 4% last year. New money yields are averaging in the low 5% range and with book yields around 4.5%, so we should see some continued investment income benefit from those higher rates as we move forward. Additionally, we're gradually increasing our allocation to common stock from 8% to 10% of cash and invested assets and will eventually increase allocation to 12% over the next year or so. Diluted operating earnings per share continues to improve and was $4.62 per share for the quarter compared to $3.87 per share for the fourth quarter of 2023. Just a couple of comments regarding capital management. We repurchased $10 million in shares during the fourth quarter. We'd expect similar modest levels of repurchases each quarter on a routine basis with larger purchases made opportunistically from time to time. And with that, I'll pass it over to Brian Haney.

Thanks, Brian. The fourth quarter saw growth in our gross written premium of 12.2%, consistent with our expectation of 10% to 20% growth over the long term. Our casualty underwriting divisions grew at 15% for the quarter, while property divisions grew at 6%. Rate declines on larger layered property transactions, in particular, had a dampening effect on the growth rate in the quarter as that market has normalized after a period of crisis pricing conditions in the prior years. Casualty is still seeing steady growth overall with excess casualty, commercial auto, and general liability among the fastest-growing divisions, and management and professional liability among the most competitive. Catastrophe losses in the fourth quarter were a modest $8 million pretax. And as Mike mentioned, our California wildfire estimate is $25 million pretax. As a reminder, we write catastrophe-exposed property business, including wildfire, hurricane, earthquake, and some flood. But in doing so, we always seek to balance the margin in that business with the potential for excessive volatility. In addition to a careful underwriting approach, we employ a sophisticated risk management strategy and a robust reinsurance program to limit volatility, and we've been successful with that approach for many years now. We don't expect recent catastrophe events in the industry will be enough to change the overall market, but it may create more opportunities in personal insurance, which we are already leaning into. Part of Kinsale's growth over the years has been due to a regular expansion of our product lines into adjacent markets. Most recently, we created a new agribusiness underwriting unit that focuses on opportunities in the farm, ranch, and related spaces. This is part of our ongoing effort to gradually expand our product line so that we can offer solutions for all tough-to-place E&S accounts across the U.S., no matter what coverage or sector of the economy. New business submission growth was 17% for the quarter, down from 23% in the third quarter. This number is subject to some volatility, but we generally view submissions as a leading indicator of growth. And so we see that submission growth rate as a positive signal. Overall rates for the quarter were about flat. Excess casualty, commercial auto, and construction were up high single digits, while larger layered property accounts were down mid- to high teens. All of our other lines were somewhere in between. We are being more aggressive in pricing in some select areas because the margins are so high that the trade-off between a lower rate and more growth is worthwhile. Keep in mind, our 29% operating ROE would imply that half of our book is producing margins above that. So by trading away some of that excess profitability on some specific lines of business, we can drive better growth and maximize wealth creation for our stockholders over time. Overall, we remain optimistic. The results are good, our growth prospects are good. And as the low-cost provider in our space, we have a durable competitive advantage that should allow us to continually gradually take market share from our higher-expense competitors while continuing to deliver strong returns and build wealth for our investors. And with that, I'll hand it back over to Mike.

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

Our first question comes from Michael Zaremski from BMO Capital Markets.

Back to the commentary on the market environment. I think it sounds like larger shared account property had one of the more meaningful impacts on growth this quarter. If you can kind of confirm that or I don't know, I think we have to wait for the 10-K to see the mix of Casualty versus Property if you were able to preview it. And then just along those lines too, how is pricing looking in kind of small commercial casualty?

Mike, this is Mike. I think our mix of business generally is 1/3, 2/3; 1/3 Property, 2/3 Casualty. The larger layered deals, as Brian indicated, are under some competitive pressure after just seeing a tremendous inflation in rates over the prior several years. So we think that's a normal evolution of that market. The returns have been extraordinary, and it makes sense. A lot of capital has flowed back into that space. Our small property divisions are still growing very rapidly, and we're getting positive rate increases there. So we're upbeat on property. Small casualty, I think as Brian said, it kind of varies by product line. So on construction, commercial auto, excess, very healthy rate increases. Other lines like management liability, professional liability, where we've seen some extraordinary levels of profitability, we're trying to be incrementally more aggressive.

Got it. Okay. And that's helpful. Maybe switching gears to discuss profit margins, you're indicating that you are willing to sacrifice some profit for potential growth. Are we witnessing this change, especially considering the possible negative impact from large property on overall growth? Do you think we might be at a point where we can lower prices enough to help stimulate some growth in the Casualty sector?

I would like to point out that the margins on some of our most profitable business segments are exceptional. When we reduce rates in specific areas, the impact on profitability and growth is not immediate. It takes some time for it to manifest, so I believe we have not yet reached the limit of our capacity to make that adjustment.

In terms of the market, it's important to recognize its diversity. It doesn't move uniformly. There are large accounts and small ones, variations among different states, and differences between cat exposed and non-cat exposed accounts, as well as those with loss issues. The market is quite varied. However, we are feeling confident about our guidance, projecting growth between 10% and 20%.

Our next question comes from Bill Carcache from Wolfe Research.

Mike, following up on your growth comment. After seeing Kinsale grow at roughly 40% clip since 2019 and hearing you talk about it seemed like that entire time frame, that growth wasn't sustainable. We've indeed now seen your growth rate decelerate much more sharply. Is the sort of low teens growth rate something that you think is now at a level that you would view as sustainable going forward from here? I understand you don't provide specific growth guidance, but I think your investors would really appreciate just hearing your thoughts, particularly those who weren't able to attend the Investor Day on whether you see further deceleration from here versus the idea that at some point, growth should plateau. And how close are we to that point? And sort of with that as a backdrop then, could you also frame whatever that top line view is? As you move down the P&L, is it reasonable for your investors to expect that the business model is capable of generating mid- to high teens EPS growth sustainably through the cycle?

Yes, Bill, I believe that a growth rate of 10% to 20% is a cautious yet reasonable forecast for our future. If you consider the past five years, during which we experienced a growth rate of 40%, that was largely due to our business model. We operate at a low cost and provide exceptional customer service, unparalleled in the industry. Additionally, we have a broad risk appetite for our brokers and a strong grasp of technology. I am not aware of any other company in a similar position in terms of low cost paired with data and analytics. Therefore, we are confident that our strategies will enable us to maintain a growth rate of 10% to 20%. The previous 40% growth was partly influenced by an industry dislocation that has since diminished. We are now seeing significant capital influx into the industry, making the environment more competitive than before, but we remain optimistic.

And just to be crystal clear, your 10% to 20% growth is in reference to top line?

Correct.

Because you also, in your opening comments, made some comments around expecting to make continued investments that are going to improve the efficiency ratio. And so we should see the rate of revenue growth exceed expense growth. With positive operating leverage, you're doing buybacks, so the rate of earnings growth would certainly be much stronger than that.

I think it would be, yes, because of productivity gains, Brian talked about our new money in the investment portfolios being invested at higher rates than the current book yield of the portfolio. Yes, absolutely.

Thank you for your insights. Moving on, I would like to ask Bryan Petrucelli and Brian Haney about capital buybacks. It is clear that Kinsale has a capital-efficient business model that enables growth in favorable conditions, but it seems that as growth slows, your buyback capacity increases. Following up on this, how much capital does Kinsale require to maintain operations if gross written premium growth stays at current levels? Is the 23,000 shares repurchased this quarter a reasonable benchmark for investors to anticipate in terms of steady state, with additional buybacks on top of that if you choose to be opportunistic? Could you clarify how we should think about these dynamics?

Yes, Bill, this is Mike. Our current buyback strategy is quite modest and mirrors our dividend strategy. As Bryan mentioned at the start of the call, we plan to implement modest buybacks each quarter, and the fourth quarter is a good example of that. We are always ready to take advantage of opportunities if they arise. Our dividend is also modest and has grown incrementally over the years, similarly to our share buybacks, which reflect a modest capital allocation approach. The capital model we use to manage the business is quite complex, and it wouldn't be wise to delve into that during this call. Generally, we ensure we have enough capital to maintain our rating and meet regulatory requirements, but we don't want to hold excessive capital beyond what's necessary. Therefore, we view the dividend and buybacks as ways to manage excess capital in the coming years.

Our next question comes from Mark Hughes from Truist Securities.

Anything on January results given that we're midway through February? Anything on January that you'd call out?

I don't think we want to comment on January. However, we have reiterated our confidence in the 10% to 20% growth. We have also addressed the losses from the wildfires in Los Angeles. That's likely where we want to focus at this point.

The expense ratio was a little bit higher this quarter. Bryan Petrucelli, anything unusual in that?

As I mentioned in my notes, it's primarily due to an increase in variable compensation. However, as we've discussed before, that ratio will fluctuate from quarter to quarter. Therefore, when modeling, I recommend focusing on the 12-month ratio instead.

Yes. How about the cash flow in an environment where, say, you're in the 10% to 20% range? If you were to parallel kind of the low double-digit quarter, how does cash from operations look? That's been obviously quite strong. That's been helping to support your net investment income. What does it look like in a more modest growth environment? Does that flatten out? Does it go down? How do we think about that?

Pretty steady. It should grow at the premium, I think.

Very good. And then you talked about leaning into personal lines. I know it's pretty small, but what can that mean for the top line if you do lean into personal lines?

Yes, this is Brian Haney. The homeowner market is larger than the excess and surplus space in the U.S. An increasing, though still small, segment of it is shifting to the excess and surplus space. I believe there is significant opportunity, particularly with high-value homeowners in California, where there's a concentrated market that has experienced substantial losses among a limited number of players. Additionally, there is potential to grow in the manufactured housing sector and to branch into related businesses like stick-built homes or non-manufactured housing. All of these are challenging, high-margin markets that are exposed to catastrophe, yet there is a substantial amount of business available. Currently, this area is likely one of the more challenging segments within the overall property and casualty industry.

Yes. And it will be kind of a gradual expansion over time. So I think it was like 2% of our book last year. But we're optimistic that will continue to grow quite a bit in the years ahead.

Our next question comes from Andrew Andersen from Jefferies.

Just thinking about the California loss, maybe a little bit bigger than I would have thought just given exposures in the state as of year-end '23. Could you maybe talk about maybe the size of the gross loss there, where the losses are coming from and kind of how growth has trended over the last year and maybe how you see it into '25 for California specifically?

The gross was about $45 million and the net pretax $20 million. It's a mix of commercial, inland marine, personal lines. I can't really speak to the specific growth rate in California or that area but, Andrew, I would look at it this way. We've always written cat business because the margins are pretty compelling. And we've always written it with some degree of conservatism around risk management and making sure that we control for the volatility, whether it's wildfire or coastal wind or what have you. And so I think actually, this is a result that's kind of right in the strike zone for us. It's a very manageable loss on business that throws off pretty attractive margins in general.

And then on the 17% submission growth, kind of the slowest in a little bit here. But as we turn to '25, and maybe you could just talk about the mix within that 17%, if it's more casualty going forward. But I'd also be interested to hear if you're perhaps thinking about kind of increasing your quote-to-submission ratio or your bound-policy-to-submission ratio to be more competitive to a certain degree?

We are definitely seeing a higher quote-to-submit ratio. On one of the upsides of lower growth is it makes it easier for us to hit our customer service targets, including our quote ratio standards. So yes, we are quoting more and we are binding more. And then keep in mind, that 17%, that number does jump around.

Is it starting to be a bit more casualty rather than property compared to maybe the last 12 to 18 months?

Yes, it varies depending on the specific product in question. We are experiencing an increase in personal insurance submissions, although there are possibly fewer shared and layered submissions. However, we are still receiving more inland marine submissions. It really varies across the portfolio.

Yes. I think, Brian, you meant we're observing a lower growth rate in the shared and layered products, but they are still growing.

Our next question comes from Scott Heleniak from RBC Capital Markets.

I think we lost Scott. Scott?

Could you provide some insight on the Q4 core accident year loss ratio? We noticed an improvement year-over-year. Is there anything specific to mention regarding the decrease year-over-year? I recall you mentioned that it tends to improve by year-end if loss trends come in better than anticipated, but is there anything notable there?

Scott, I would characterize it as general success across the portfolio. But the impact on that quarter was probably a little bit driven by some pretty exceptional results in the property area. That's shorter tail business, so you tend to see those positive results more quickly.

Okay, that makes sense. Could you provide more details about the agribusiness and the new product line? What exposure and geographies are you considering? Also, are there any other new products for 2025 that you'd like to highlight? I know there was a lot introduced in the last two years, but is there anything else noteworthy?

I'll address the last question first. Most of the new products we are considering for 2025 are not as impactful as the personal insurance initiatives we've implemented over the last two years or the agribusiness sector. The agribusiness will be present throughout the United States, as agriculture is essential in every state. It will involve a combination of casualty and property risks, along with unique risks associated with farming and ranching. Therefore, I do not anticipate any significant new products in 2025; instead, we will gradually expand into adjacent lines carefully to avoid excessive risk.

Got it. That makes sense. Just the last one, too, about moving up the equity exposure, which you expect to take to 10% and eventually 12%. Is that a similar strategy using stock ETFs? Is that how you're planning to increase your exposure to the existing investments you have in equities? Or is there anything different involved?

Yes, Scott, this is Mike. We have a portfolio that we manage internally. It's kind of a value-oriented large cap, mostly dividend paying kind of a buy-and-hold strategy there. And then we've got the two ETFs with the passive strategy. So it's a mix.

Our next question comes from Michael Phillips from Oppenheimer.

I'm curious if you'd provide any updated thoughts on what you're seeing in your GL book loss trend. And then, I mean, I think your commercial umbrella in excess book isn't that small relative to your overall book. So maybe if you could even go deeper into, say what the trends you're seeing in the umbrella piece as well.

I don't think we've got a lot of specifics. There's a lot of industry data out there. I think our loss trends would probably conform to what you're hearing. I didn't bring that information.

The margins in our umbrella book and our GL book are really strong. Our development has consistently outperformed the industry's reserve development, indicating that we are managing loss trends effectively in our reserving process. I believe this could pose a challenge for the industry moving forward.

Okay. And maybe one more on California. I mean, given the news that we're kind of hearing about the Eaton side of the losses there, any chance you'd take your $25 million and split it, Eaton versus Palisades?

It's 100 and 0. It's all Palisades.

Our next question comes from Pablo Singzon from JPMorgan.

As you're lowering prices in exchange for growth, is the trade-off confined within a specific line? Or are you going to cross-subsidize across lines, right, like using more profitable lines to support less profitable lines? Or maybe you're looking at dollar profitability more holistically on an account level basis instead. So just some perspective on how you're carrying out the strategy would be helpful.

I would say we don't cross-subsidize anything because we don't have loss leaders. Each division and product needs to meet our profitability targets, and we assess this on an individual division basis. Clearly, all of our divisions are performing well, with some showing exceptional margins. These are the areas where we plan to be more aggressive and strategic.

Got you. That makes sense. And then second question, I was hoping you could comment on prior year development this quarter. So favorable overall, but would be curious about the breakdown of positives and negatives. Are you still adding to construction defect reserves from over the years? And where are you getting the releases?

We discussed property as a short-tail line of business, which allows us to see results more quickly. Our construction-related book-to-loss ratios are now well into the 80% range. This is primarily due to the impact of inflation on accident years from around 2015 to 2019, where repair costs and labor expenses increased significantly within a few years. As a response, we've raised our rates considerably, and our coverage has become tighter. We've made substantial adjustments to our underwriting practices, which gives us confidence that the results for the years 2020 through 2024 will be much better, although we can't say for sure. Since this is a long-tail line, we maintain what we believe are very conservative loss reserves across our entire portfolio. If positive developments occur in the future, that would be beneficial. If not, we are ready with our current reserves to handle any shortfalls.

Got you. And then sneaking just last one. As a follow-up on the question about the attritional loss ratio, would it be reasonable to assume flat to higher attritional loss ratios just given the more competitive pricing environment and your strategy of trading off pricing and growth going forward?

Well, it's a broad product line with a lot of different component pieces. But in general, as Brian, I think, said earlier, rates are flat for the quarter. So I would make some assumptions based on that.

Our next question comes from Andrew Kligerman from TD Securities.

I just wanted to add a little context to some of the previous questions. Regarding the loss ratio, you achieved an impressive 73.4% combined ratio. For any other company, I would have assumed that was their loss ratio rather than their combined. Looking back over 10 years, it's clear that you were in the low 70s a decade ago, hit 60% in one year, and spent the middle years in the low to mid-80s. With the increasing competitiveness in various sectors, do you have any insights on the potential trajectory moving forward? Should we expect a gradual increase into the low 80s in the coming years?

I think that's certainly possible. We want to maximize wealth building for our stockholders. And I think you do that by balancing profitability and growth. And I think that's what Brian was trying to address earlier with his comments around fine-tuning our pricing on certain ultra-high-margin lines. But in general, I think what we're going to maintain is best-in-class profitability, very strong growth rates. And we expect Kinsale stock price to appreciate in value in the years ahead.

Okay. Could you remind me of how many segments you currently have similar to the agriculture segment? You mentioned earlier that this year will see significant growth in personal lines and agriculture. Looking ahead to '26 or '27, how many of these segments do you plan to add each year? Also, how many do you have right now?

Yes. Look, we have 26 now. I would look at these verticals as a judgmental way to divide and organize our underwriting teams around industry segments and coverage, right? So we want experts at the desk level. And so you have to have some degree of focus to really be an expert at the underwriting and understanding the businesses we're insuring and all the characteristics of those business that drive loss exposure and trends on the legal side and who are our competitors and how do they segment and price risk. So there's no magic number. It certainly may incrementally grow over time. And then just a quick correction on the new business lines. I think Brian said earlier, we don't expect extraordinary growth from our new business. We expand the product line over and over again over the years, and we get incremental growth. It's part of our strategy to roll out new products in a methodical fashion to really increase the probability that we're getting things right.

Our next question comes from Michael Zaremski from BMO Capital Markets.

Great. Just a couple of follow-ups. In terms of employee growth, I know the 10-K is not out, but would you just say kind of high level as the company gets larger, the employee growth rate has been decelerating a little bit? Or any color there?

I think we've gotten incremental gains in productivity every year, if you measure that by gross written premium per full-time employee. I think it's gone up every year. And with the work we're doing in the technology area, we certainly would expect that to continue.

Okay. Got it. And lastly, going back to kind of loss cost trend and reserves. Tell me if I'm crazy, but given how robust your reserve releases have been relative to the kind of the pricing stats you all give out, it kind of implies that your loss cost trend is closer to 0 than to the high single digits lots of companies talk about on the casualty side. Any comments?

Yes. Our loss trend assumptions would definitely not be 0; they would be somewhere in the high single digits. There's some variability by line of business, but we're definitely conservative on estimating future losses.

I attempted to indicate that your reserve releases have been consistent, suggesting that you might be a bit too cautious.

Our last question will come from Casey Alexander from Compass Point.

Most of my questions have been asked and answered, but I have a couple for you. First of all, when you talk about the wildfires with $45 million, of which $25 million is your end of it, is that top of limit without much slack to that number? Or because the losses are kind of across personal and commercial property is, as you adjudicate those losses, is there some opportunity to drive that $25 million number down some?

Yes, it's an estimate, Casey. We're working through it quickly. Property claims are usually resolved much faster than casualty claims. I think it's a reasonable estimate, and while it could change, I wouldn't anticipate a significant difference.

Okay. Secondly, I'm just kind of curious, and I'm not trying to irritate you because I know you guys don't like to be measured on a price-to-book basis. You don't think that's appropriate. But the fact of the matter is that there's a lot of investors who look at the price-to-book value, and it just slows them down in terms of whether or not to invest in the company based upon the valuation. So I'm curious why the share repurchase program is sort of an on-the-run thing that actually is dilutive to your book value when you could easily take some of that capital and better devote it to the dividend, which wouldn't have necessarily the same level of impact on your book value and would still be a positive way of returning capital to shareholders and thus leaving the share repurchase program for periods where there was really excess volatility in the market. I'm just curious.

Yes. So number one, the share repurchase program is very modest, right? We bought $10 million worth of stock on a market cap of somewhere north of $10 billion. The second point I'd make is we respect the fact that a lot of people look at price to book. It's just that you have to remember, we are a very capital-efficient company. So we have enough capital to operate our business. And then we have some extra, because there's some variability in our business, and we have to be able to absorb that. But we have competitors that have tremendous amounts of redundant capital beyond what they need to operate the business. So someone that has a very bloated capital base and Kinsale that has a very efficient capital base, and if you're comparing our respective price-to-book multiples, you're comparing apples and oranges. Whereas if you look at forward earnings or last 12 months earnings, I think it's more of an apples-to-apples comparison. And then the last point I'd make is we think our stock price is really driven by expectations around future earnings. And we think most investors don't value us on our assets or our assets minus liabilities or our book value. So that's the rationale basically.

We have no further questions. I'd like to turn the call back over to Michael Kehoe for closing remarks.

Okay. Well, we appreciate everybody's time this morning. We're optimistic about the future and look forward to talking again here in a couple of months. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.