Kinsale’s Kehoe: “Explosion” of DUAEs offsetting E&S dislocation

Investors sent Kinsale Capital’s share price up 7 percent on Friday following the carrier’s Q4 earnings beat, with management expressing optimism for 2022 and commenting that dislocation in the excess and surplus lines (E&S) market is being offset by the “red hot” delegated underwriting market.

On the Richmond, Virginia-based carrier’s earnings call today, president and CEO Michael Kehoe commented that the dislocation in the E&S market is “more or less steady” compared to three or four years ago.

“Some very large E&S writers have run off multiple billions of dollars of premium over the last several years, and I can think of one big one that has kind of reverted to growth,” he said. “But I can think of other very large E&S writers that are still triaging their books of business.

“And then there’s a ton of anecdotes about companies, smaller, more boutique-sized E&S companies shutting down underperforming lines of business and cancelling programs and the like.”

However, Kehoe continued that offsetting the dislocation is the fact that “there’s been an explosion in the number of delegated underwriting authorities”.

“Somebody told me the other day we’re up to 21 fronting companies that more or less facilitate those kind of delegated arrangements,” Kehoe said.

“So the delegated underwriting market is red hot as well, and that would offset a lot of dislocation.”

The executive added that all of which means it is a mixed market but on the whole “still pretty favourable”.

Kehoe’s comments follow AM Best at the start of this month officially launching its Performance Assessment methodology for rating delegated underwriting authority enterprises (DUAEs) in a move it said provides a framework for differentiating between MGAs, MGUs and program administrators.

The ratings agency noted that “the presence and significance of DUAEs continue to rise”.

Kinsale trades up on earnings beat

Kinsale after markets closed on Thursday reported an earnings beat for the fourth quarter, with $1.76 operating earnings per diluted share beating the $1.38 consensus estimate and comparing to $1.14 per diluted share in Q4 2020.

The Q4 2021 included a 7.1 point improvement in the combined ratio to 74.5 percent and 36 percent growth in gross written premiums to $203.8mn.

Kinsale’s share price was trading up 7 percent as of 1.10pm ET on Friday, compared to Thursday’s closing price of $192.76.

On the earnings call today, Kehoe commented that Kinsale’s results are being driven “principally by our unique business model of focusing on smaller accounts within the E&S market, controlling the underwriting and the claim handling process instead of outsourcing it and using our advanced technology to operate at a much lower cost structure than our competitors”.

He noted an additional tailwind has been the state of the overall E&S market, which grew by double digits in 2021 for the fourth year in a row.

Kehoe stated that the strong growth combined with opportunistic rate increases is having a favourable impact on margins, with Kinsale’s operating ROE of almost 21 percent in 2021 well above its mid-teens guidance.

“Surplus lines stamping office tax data that was just released for January of 2022 shows the overall E&S market off to a strong start in the New Year with double-digit premium growth,” Kehoe said.

“Likewise, there seem to be a number of competitors struggling with adverse development from prior year loss reserves.”

He said the combination of those two factors “and the confidence we have in our own business model give us a sense of optimism about 2022, both from a growth and a profitability standpoint”.

Also on the call, Kinsale chief operating officer Brian Haney noted the 36 percent increase in premiums in Q4 was generally driven by increasing submissions, rate increases as well as economic growth, which drives up exposure basis.

“Every one of our divisions was up for the quarter, led by our allied health, inland marine and public entity team,” Haney said.

“As for rates, we continue to push them up in response to market conditions. We see rates being up in the low teens range in the aggregate during the fourth quarter, generally consistent with the past several quarters.”