Greetings, and welcome to the Kingstone Companies' Second Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amanda Goldstein, Investor Relations Director. Thank you. You may begin.

Thank you, Jess, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2017 second quarter results. We posted a PowerPoint presentation on the company website that acts as an accompaniment to this call. The speakers will not be referring to the slides, but we hope they assist in the discussion. Please review the presentation and follow along if you can. On this call, Kingstone may make forward-looking statements regarding the company, its subsidiaries and businesses. Such statements are based on the current expectations of the management of each entity. The words anticipate, expect, believe, may, should, estimate, project, outlook, forecast or other similar words are used to identify such forward-looking information. The forward-looking events and circumstances discussed on this call may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting the companies, including risks regarding the insurance industry, economic factors, and the equity markets generally, and the risk factors discussed in the Risk Factors section of its Form 10-K for the year ended December 31, 2016. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made, and the company and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. When discussing our business operations, we may use certain terms of ours which are not defined under U.S. GAAP. In the event of any unintentional difference between the presentation materials and our GAAP results, investors should rely on the financial information in our public filings. With that, I'd like to turn the call over to Kingstone's Chairman and CEO, Mr. Barry Goldstein. Please go ahead, Mr. Goldstein.

Thanks, Amanda, and good morning, everyone. Today, I'm joined by Ben Walden, Kingstone's Executive Vice President and Chief Actuary; as well as our Chief Financial Officer, Victor Brodsky. We're going to update you on our quarterly results for the period ended June 30, 2017, as well as other items that have occurred since the close of Q2. We'll begin with a discussion -- we'll begin our discussion with a recap of some of our achievements since the last conference call on May 12. I'll review the impact of the improved A.M. Best rating and the implications for the future. Ben will discuss loss ratios and reserves. Then, Victor will follow with a review of the quarter's financial metrics and highlights. Finally, we will open it up for Q&A. To recount 2 of our accomplishments since our last call, I would first point to being accepted as a member of the Federal Home Loan Bank of New York, something that would not ever happened without the A.M. Best rating of A-. We've moved sufficient collateral to the Federal Home Loan Bank and can receive a same-day advance of more than $5 million should a catastrophe occur requiring immediate liquidity. Second, we have strengthened the company's board by adding two world-class insurance executives, Ms. Carla D'Andre and Mr. Dale Thatcher. I look forward to working with them, learning from them and collaborating with the rest of the board to continue our company on its profitable growth path. We set out in Q4 2016 with a plan to improve upon our A.M. Best rating. Our goal was to achieve a financial strength rating of A- Excellent for our insurance subsidiary, KICO. The plan, which was centered on strengthening and protecting our balance sheet required us to raise a significant amount of capital through…

Thank you, Barry. We're very pleased with the continued strong results achieved this quarter. Second quarter is typically a good quarter due to the reduced level of fires and weather-related claims compared to winter months. However, although we posted a loss ratio in the 40s and a combined ratio in the 70s, we were not quite able to match the stellar second quarter of a year ago. The 2017 second quarter net loss ratio was 44.0% compared to 38.6% in 2016 second quarter, an increase of 5.4 points. The higher loss ratio is explained by random fluctuation in the impact of fire claims year-over-year. The PowerPoint contains a chart showing this effect. Due to our focus on homeowners insurance, fire claims have a significant impact on our bottom line results but can be random in nature. In fact, one of our larger claims this quarter was the random result of a lightning strike. Our long-term average frequency of fire claims per policy is less than 1 in 500, but the random nature of when they occur can affect quarterly comparisons. This quarter, the impact of fires on our personal lines loss ratio was 5.7 points higher than an average second quarter and 7.7 points higher than 2Q 2016. We do not see any particular trend or change in mix of business that is responsible for this quarterly variance in fire frequency. As Barry noted, we are very happy to see new business growth accelerate following our A.M. Best upgrade. Growth may increase further as we begin to leverage new agents seeking an A-rated carrier for the niche businesses we write. The rating upgrade is allowing us to overcome recent growth challenges due to heightened competition from nonrated carriers. Turning to the new state expansion, our New Jersey Homeowners product was…

Good morning. To start, we are pleased to announce our 25th consecutive quarterly dividend in the amount of $0.08 per share to be paid on September 15 to holders of record on August 31. During the second quarter, our book value increased to $8.50 per share, a 2.5% increase over the first quarter. This increase is primarily due to profitable underwriting results for the quarter, along with $542,000 of other comprehensive income, partially offset by our dividend payment of $850,000. Turning to our financial highlights. Quarterly net income per share on a diluted basis was $0.23 on quarterly net income of just over $2.5 million. Net income per share compared to last year was affected by the 2.7 million shares issued in a public offering during the first quarter of this year. As Ben discussed, we had an excellent quarter posting another combined ratio in the 70s at 77.6%. Our year-to-date net income has increased nearly 18% compared to 2016. The statutory surplus of KICO at June 30 stands at $75.8 million, an increase of $1.8 million relative to March 31. As of June 30, the leverage ratio was 0.932:1, about the same as the 0.92 as of March 31. The leverage ratio will move back to our historical norms as new business builds. In addition, the reduction of our quota share reinsurance rate to 20% on July 1 will cause a spike in net premiums written due to the increased retention and return of previously ceded unearned premiums. Ben has reviewed the changes to our net loss ratio. The other component of our combined ratio is net underwriting expense ratio. With no change in quota share rates between Q2 2017 and Q2 2016, a meaningful comparison of expenses between quarters can been made by using the traditional measure of…

Thanks, Victor. As mentioned, we began selling our homeowners product in New Jersey during May. We've written a modest amount through June. And with our distribution network there being built out now, we're confident that, by year-end, New Jersey writings will become something we can then discuss in detail. We filed a similar product in Rhode Island on August 4 and hope to begin writing there by the end of the year. Our new A- rating will allow us to be more easily accepted in Rhode Island, where coastal competitors are typically Demotech only or not admitted. I have been and remain very excited about our future prospects, and I'm having a great time adding the people and skills to our company, preparing to become, if not the biggest northeast regional underwriter, the best one. I look forward to keeping you informed as things progress. With that, operator, let's open the line for questions.

Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session. [Operator instructions] Our first question is coming from the line of Ken Billingsley with Compass Point.

Good morning, and thanks for taking my questions. I have three in particular I wanted to focus on. One, the growth expectations from the new agency appointments, which you said you really had not implemented here that are going to target the rating upgrade. Can you talk about -- two parts to that: One, is this going to come more from commercial or personal line side? Which side do you see will drive the most growth on a percentage basis and then on a dollar basis? And then what kind of growth would we -- should we be modeling given the fact that you had surprise uplift from the rating upgrade this last quarter?

Is that just one question or three, Ken?

Well, I hope that counts as 1.

Well, let me talk for a second. The -- again, we hadn't included anything with regards to new agencies being added, and what I gave you before were the percentage increases we experienced at the in-place agents and those who had been in place for at least a year so to make a fair comparison. The growth will be primarily personal lines. The larger agencies control the larger volume of high-valued homes. We've actually started our first division of Kingstone, a high-valued homes division and will soon be announcing the woman that will lead our efforts in that regard in New York. But I would say, while I can't give you nor would I -- I haven't given forward-looking statements in the past, and I really hesitate to try to do your job for you, I can tell you that I would expect this to become something meaningful within the first couple of years. I'm not in any hurry to do it. It's writing $1 million to $5 million homes, which we now have the capability of doing with our new reinsurance treaty. It's a different sort of business. It requires a different type of claims handling, a different type of inspection, different outlook towards the business, and we're setting it up as a division just for that reason. So, I guess in answer to the questions, it would be highly personal versus commercial, but I won't answer as to dollar amounts.

I appreciate that. The 5 million to 10 million homes targeted now, this compares -- what's the average home value currently?

Right now, our average -- this is Ben Walden. Our average building coverage amount in New York is about $450,000 for homeowners. We expect that would increase over time as we write more of these high-end risks.

And Ben, while I have you. Next question is on the fire side. I believe there was mention that random events like the lightning strike, when did these -- were these multiple events? And were they whole home loss write-offs? Or were -- was it partial losses and there was higher number frequency? And when did they occur? Were they later in the quarter?

It was relatively spread out throughout the quarter. And I would say most of them were actually midsized fire claims. We didn't see any that were above our excess of loss reinsurance retention. So, a lot of them were related to either older homes or lower-coverage-amount homes, where we typically do see a higher fire frequency, although this quarter was a little bit of an aberration compared to prior quarters.

Yes. We've seen this. I guess, it was a couple of years ago that we had a similar type of situation. I mean, it's not something we like to call out to point the finger at any one thing that causes it. But like Ben said, given how infrequent these things occur and how random they are, when you get a higher density of them in any one short time frame, it sticks out, and that's why we're calling it out.

Sure. And so, were there multiple lightning strikes? Or is that just an example of just the randomness of what causes it?

That was just an extreme example of the randomness. We actually have not seen very many lightning strikes in our history. This was unusual. Fortunately, there were a few people in the house that did get out without being injured, so we're happy about that. We think -- go ahead.

Sorry. I believe you'd commented that -- sorry, I was trying to focus on what you were saying there. But on the homes, themselves, were these homes that they had previously been insured? I think you had said before that there really wasn't any adjustment to mix of business. And so, I'm assuming these weren't -- it wasn't like new customers or new expansions, this is just your core group and just older homes.

Yes, there was no pattern that we saw. Again, the relative number of claims is very small. There's no pattern to be seen. One of the homes was insured with us for over 10 years, so it's just a matter of random fluctuation, I believe, for the quarter.

And last question I have for Victor is with the quota share reduction, do you have any color or guidance on -- from an unearned premium standpoint, what kind of spike we may see once the quota share adjusts a dollar-amount base now that the quarter's closed?

We're calculating and checking out numbers for submission till we finish our total review process, but it'll be several millions of dollars and as we expect.

Well, I mean, Ken, and I know this has become -- this is a -- one of the reasons I want to eliminate the quota share is having to explain things like this. I've saddled Victor with this responsibility for a long time, and I'm sure he's anxious to get off of it. But for all intents and purposes, our quota share partners will be returning to us later this month about half of the unearned premium they had on hand as of June 30. We will return to them that portion of the ceding commission we previously received but not earned -- well, actually half of that. So, in balance, we're talking -- I mean, on a net basis, something less than $5 million between the net of the returned premiums that we'll receive versus the return commissions that we'll lay out.

That's correct.

Great. Thanks.

But on a quarterly basis, it creates a spike, and that's why we wanted to call it out.

Perfect. Thank you.

My pleasure.

Thank you. The next question is coming from the line of Bob Farnam with Boenning, Scattergood. Please proceed with your question.

Yeah. Hi there. Good morning. My question is related to capital. So how much room do you have to grow? And it sounded like with the Federal Home Loan Bank, you're only using it for emergencies. Is that what I got out of the commentary?

Well, Bob, let me address the capital issue. So, we needed to raise the amount of capital we did in order to reach this threshold required by Best, raising out of a cost score to a level that would put us in line for the A.M. Best rating. Victor talked previously about how our leverage, which we used to target what we had targeted, adds up to 1.5 to 1, where we felt comfortable, as we're -- was still something less released as of June 30. We were still less than 1:1. So, we do have significant runway, but that's going to be quickly eaten up as we grow in New York at the accelerated rate we talked about, we grow outside New York as well as change our business mix towards bringing in those larger-size brokers. So, we have enough capital, I believe, to get us to and through the early to mid- part of next year. But we have no plans to raise any additional capital. If anything, given the debt markets that are available today, that's where we would seek to participate, where interest rates for seven to 10-year paper for a investment-grade company -- investment-grade-rated company like Kingstone, would bring that rate to under 6% annually. And as I'm sure you realize that, while it would be -- we would contribute from the holding company, the proceeds of that borrowing to the insurance company, the cost of capital using debt rather than equity is probably less than one third. So, I guess, in answer to your question, we're good through the middle part of next year. If anything, if we see a heightened growth, we would access the debt markets, and that may be sooner rather than later depending upon market conditions. I hope that answers your question.

Yes, agreed.

Now with regard to the Federal Home Loan Bank, we gave an example of what we already have in place today. I mean, I'm very proud of my Kingstone staff for turning around an application and getting us approved as a member faster than it's ever been done at the Federal Home Loan Bank. They called us out for that. But while it's important that we have access to that capital in an emergency, what that's really saying is, if there's an emergency, we don't either have to sell investments to create liquidity nor do we have to leave an excessive amount of cash on the sidelines just in case. That was just one example we gave. But the opportunity for a participant -- or a P&C carrier participant with the Federal Home Loan Bank is to take advances on a fully secured basis using our in-place mortgage loans that we already own and borrow at a rate below 1.5%. So that's the initial opportunity for us. As we grow, and we may be able to access more of their programs, that's a good thing. And finally, the ability to leave our excess cash on deposit with the home loan bank is a far better idea than leaving it with our commercial bank, who pays us, at best, just a few basis points in interest.

All right, okay. That's good. And last question from me, so any change in the business plan because of the proposed acquisition in Narragansett by Heritage? I don't know how that impacts you guys.

Well, I mean, it impacts me on an intellectual level, I can tell you that. But on a business level, it's no change for us. We've competed with Narragansett. They're a fine company. They do a great job. Their CEO has, I think, done an excellent job since he took over. And of course, the valuations ascribed to a company like they are flatters the valuation of my company. But the answer is, whoever owns Narragansett won't change our business attitude, our prospects nor the processes we're undertaking now. So, no change for us.

All right, thanks Barry.

My pleasure.

Thank you. [Operator instructions] Our next question is coming from the line of [Andrew with Kenny Capital]. Please procced with your question.

Hi. Good morning. Thanks for taking my question. And I was interested to hear about the voluntary flood product you announced a few months back. And after Hurricane Sandy, New York received billions of dollars in claims from the National Flood Insurance Program, which is many times the amount of policies that they collect every year. And so, I was wondering how -- if you all felt you could offer a competing product with a favorable risk profile given this history?

Well, thanks for participating, [Andrew]. I appreciate it. And yes, what we did was announce the introduction of a very limited product in the New York market, and that would only be where homes located in the X zone for flood coverage, which is homes that are really not subject to coastal storm surges are located. It's a -- our first in what we hope to be a three-part package of flood offerings. But the answer to your question is, we don't intend to compete with the NFIP coverage that's out there today. We watch what's going on in Washington very carefully because that does impact us. I live right off the water, so it impacts me in particular. But the answer to your question is, no, we don't intend to compete with the NFIP.

Okay. Is it more of just an additional feature of the policies that you can offer your customers?

Exactly, Andrew. It's something that we offer that is very uncommon. I think it's certainly not found elsewhere in the admitted market in New York, or at least the last time we looked it wasn't. But we're trying to separate Kingstone, first, as I talked about from a rating agency perspective, separate us from the competition. We're not Travelers or The Hartford. We're not Chubb or PURE. We're not the Demotech-only or single-product companies. We stake -- we want to stake out our own ground. And by having this product and by ultimately introducing the other two features we're talking about, Kingstone will be able to settle a claim, like 1 of the 3,400 we saw from Superstorm Sandy with one adjustor rather than two and sometimes three that many carriers experience. The objective is to make our product better, make the experience better, even in the worst-case analysis for the homeowner. Our job is, unlike some of my competitors seem to think, it's not just find a way to collect premiums from people. It's to have the ability to pay claims fairly and quickly and be able to respond in a top-shelf fashion. So, think about Kingstone in that way. But thank you for your question.

Yes. Yes. If I could just have one more follow-on, I appreciate that response. Do you see being able to introduce that in other states as you move into other states as well?

Yes. I mean, we're giving consideration to that. Like I responded before, one of our challenges is adding high-shelf, high-class, highly skilled people. We've got a lot of ideas, but between me and Ben and Victor and the rest of our team, we'd have to ultimately do things sequentially where we should be doing things contemporaneously. So, by building out our staff and the accelerating growth in our premiums will allow us to keep our expense ratio contained while we do that, we'll have the ability to accelerate our process as we go forward. I hope that responds to what you're looking for.

Yes. Thank you so much.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr. Goldstein for any additional concluding comments.

Great. Thanks, everyone, for taking the time to listen. For my entire team, we're pleased and proud to have delivered these outstanding results and look forward to continuing our buildout of Kingstone to a multistate, multiline carrier. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.