Kingstone Companies, Inc. (KINS) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to Kingstone Companies' 2017 Fourth Quarter and Year-End Financial Results and Dale Thatcher introduction. 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. I would now like to turn your conference over to your host, Amanda Goldstein. Thank you. You may begin.

Thank you Sherrie and good morning everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2017 fourth quarter and year-end results. On this call, Kingstone may make forward-looking statements regarding itself and its business. 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 Kingstone. For more information, please refer to section entitled Factors that May Affect Future Results and Financial Condition in our Item 7 of the Company's Form 10-K for the year ended 12/31/17, along with a commentary on forward-looking statements at the end of the company's earnings release issued yesterday. With that, I would 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. Joining me today as always is Ben Walden our Chief Actuary and Victor Brodsky, our CFO. And for the very first time for those of you who don’t know him, I like to introduce you to Mr. Dale Thatcher. As of today Dale joins our board, our team as the Chief Operating Officer of Kingstone companies and as President and CEO of the Kingstone insurance company. Since the time Dale joined our board in August of 2017, he has been an active and knowledgeable influence over the company’s affairs. I look forward to the expanding role he will take on as we continue to grow Kingstone. Dale, maybe now would be a good time for you to introduce yourself.

Thanks, Barry. And I must begin by thanking the Kingstone Board of Directors for the support they have shown to me. Ever since I joined the board, I’ve been impressed by the people and performance of Kingstone. This is an exciting opportunity for me to join the executive team and help build on Kingstone’s foundation of success. For those of you who don’t know me, I have spent the last few years in my own consulting firm after spending 16 years as the CFO of Selective Insurance Group. I have over 30 years of experience in the primary P&C industry, primarily in finance and finance related roles, but always with an eye toward helping to improve the operations of my companies. I’m a CPA and [Indiscernible] of both the University of Cincinnati and the Harvard Business School. I look forward to contributing my background and experience as we continue the proud tradition of profitable growth here at Kingstone. With that, let me turn the call back to Barry.

Okay thanks, Dale. Let me start with a short look back at 2017. First, we ended the year in great shape, but I’d like to mention just a few items. Following the December $30 million note [ph] offering the subsequent $25 million surplus contribution to Kingstone insurance company, we ended 2017 with over $100 million in statutory surplus. I am reminded that when I joined the insurance company board in late 2005 and began this journey as Chairman in January 2006, the insurance company had just over $3 million in surplus. Earlier in 2017, we saw our A.M. Best rating of “A- Excellent”. 12 years ago, we started without any A.M. Best rating, and since that initial rating of B (Fair), we’ve worked hard to improve our company grow its writing, strengthen its balance sheet and reduce our reliance upon quota share reinsurance. I think you’ll all agree with me that we’ve succeeded on all counts. We began last year with a plan to become a regional carrier in the Northeast. We are now actively writing business in New Jersey, Pennsylvania and Rhode Island in addition to our home state of New York. Our plans call for further expansion into Massachusetts soon and Connecticut hopefully by year-end. I’m going to turn the call over to Ben now, so that he can give you a little more color as to what I think our sneaky good results in the fourth quarter. Ben?

Thank you, Barry. We ended 2017 with our most profitable year ever from an underwriting perspective. During the quarter, we saw an accelerating growth rate and solidly profitable results. However, the fourth quarter does tend to be volatile from year-to-year due to the impact of larger fires and early winter weather. Our Q4, 2017 loss ratio was higher than last year, primarily because the result for Q4, 2016 was much better than we normally see in the fourth quarter. This quarter’s result was impacted by two large claims, one in personal lines, and one in commercial lines, which reached our maximum per risk retentions. There was also an increase in claims frequency due to very cold weather that started in the last week of December. The 2017 fourth quarter net loss ratio increased 5 points to 50.5 compared to 45.5 in the prior year period. Fire claim activity was in line with seasonal averages, but significantly higher than last fourth quarter. The early onset of extreme cold weather starting in the last week of December and continuing into early January also affected our results. We had a spell of six consecutive December days with below freezing temperatures which was the longest in the past 17 years in the New York region. Turning to volume, growth and personal lines accelerated continuing the trend seen since the A.M. Best upgrade. In the fourth quarter, personal lines direct written premiums grew 28% driven by a 90% increase in new policies from our New York homeowner’s line. In contrast, the personal lines written premium growth rate was 12% for the first quarter compared to 2016, since the A.M. Best upgrade, personal lines growth rates have increased to 17%, 25% and 28% for the last three quarters of the year. The recent increases in written premiums will take some time to earn into results and fully affect the bottom line. Growth is almost entirely related to increased volume from our existing producers and we remain optimistic that further growth opportunities will present themselves. The regional expansion continues to move forward. Our New Jersey homeowners business continues to grow as we diversify throughout the state. In December, we launched a Rhode Island homeowners products just four months after the initial filing. Massachusetts will quickly follow as we filed our homeowner’s product last month and now await approval. We are targeting a second quarter rollout there. Our year-end internal and external actuarial reviews confirmed the strength of our reserve position, although we recorded a small amount of prior year developments in the fourth quarter, we ended 2017 with a third straight year of favorable loss development. Our financial results for the quarter and the year are not materially affected by changes in the adequacy of our reserves. Before concluding, I’d like to provide some guidance on expected results for the first quarter 2018. As you know, this year the New York region has already been affected by three major winter cats, including a powerful Nor'easter and a significant freeze events. The first cat events occurred in early January and the last two in early March. While it’s too early to make precise projections, we believe the combined net effect of these three storms will be from $5 million to $7 million after-tax. This is earnings per share impact of between $0.47 and $0.66 for the quarter. Non-weather related claim trends are in line with past first quarters and we do not see any unusual trends in the distribution of the storm related claims. In conclusion, although the 89.9 combined ratio for the fourth quarter was higher than we’d like, it was not unusual for a fourth quarter, and our core profitability remains solid. The 2017 full-year combined ratio of 80.6% although slightly higher than the 79.2% for 2016 resulted in record underrating profits while following an accelerating growth trends. Our strong reinsurance program and reserving philosophy lends stability to our results, even in times of short term volatility. We are very optimistic about the outlook for 2018 and to expanding our agency relationships as a premier Northeast regional “A” rated carrier. I will turn now to Victor for details on the other components of our financial results. Victor?

Good morning. As Ben noted, we continued to see strong growth and our direct written premiums increased by almost 20% in the fourth quarter compared to Q4, 2016. As we are building our business outside of New York, we are now looking at that business as our expansion business and our New York business as our core business. Accelerating written premium growth creates a lag in net premiums earned for both our core and expansion businesses, thus adversely impacting our net underwriting expense ratio even more so, the expense ratio which excludes ceding commissions and commission expense. The lag in net premiums earned is most pronounced in our expansion business. Due to this lag in the fourth quarter, we incurred more expansion expenses in expansion net premiums earned. The lag in net premiums earned and the decrease in quota share rate on July 1, 2017 distorts net underwriting expense ratio comparisons between periods. While a decrease in quota share increase in net premiums retain, it also result in immediate and significant decrease in ceding commissions. The decrease in ceding commissions is the largest driver of changes in the net underwriting expense ratio. Due to the effects of the change in quota share rate, the lag in net premiums earned and the impact of expansion expenses, we believe that utilizing the ratio of core underwriting expenses to core direct written premiums what was a more consistent comparison between periods. I will refer to this as the core expense ratio. And looking at our core underwriting expenses, during the fourth quarter, I would like to recall your attention to a significant increase in expense that we have no control over which is our New York State regulatory fees. As New York State domiciled insurance carrier, we are subject to funding a share with the department of financial services budget based on our pro rata share of premiums written in New York. We received estimated bills during the year which were the basis for the expenses recorded for the first three quarters. In the fourth quarter, we receive an actual true-up for the prior year and revised estimate for the current year. As a result, the actual expense reported in the fourth quarter was $565,000 more than expense in Q4, 2016. Without the impact of this onetime expense, our core expense ratio was 13.9% which is essentially the same as 13.7% from the prior year period. Also of note, is the reduction of federal corporate tax rates at 21% starting at 2018, which has enabled us to reduce our deferred tax liabilities and corresponding income tax expense by $405,000 this quarter. Our diluted earnings per share was $0.18 in the fourth quarter. Let me reiterate that the impact of the two large claims and December cold weather that Ben discussed amounted to $0.12 per share in the fourth quarter, and the expansion expenses together with the additional New York Regulatory fees amounted to $0.03 per share. The total effect of these items was $0.15 per share in earnings for the quarter. The reduction in tax rates gave us a $0.04 per share benefit. Now, I’ll turn it back to Barry for some concluding remarks.

Thanks, Victor. With the winds at our back, the strengthened management team and a rock solid balance sheet, and a reputation we’ve build over many years, we look forward to becoming a northeast regional “A” rated agent-only underwriter. We have achieved our success by honoring our select producers and with their continued input and support we will reach our next set of goals. We charge our values of loyalty and finesse [ph] in everything that we do pointing only to the long-term, not quarter-by-quarter as we approach the 132nd anniversary of Kingstone Insurance. With that operator, let me open the line for questions. Thank you.

Thank you. [Operator Instructions] Our first question is from Paul Newsome with Sandler O'Neill. Please proceed with your question.

Good morning. I’ve got a bunch of questions, but let’s sort of harm [ph] down a little bit. I guess, the first question is, can you just talk about the timing of when you knew that the fourth quarter would be disappointing and -- from the financial result perspective and sort of thoughts about pronouncements in the future?

Sure. Let me start that then I'll turn it over to Ben. We started getting in a lot of the winter related frozen pipe type claims, but they take quite a while to develop and the gravity of the claim, even today from the early January freeze still isn’t fully known. Our intention is to pre-announce things once we have enough color around them for. And as it is, it’s a little bit of discomfort and having to give a range as wide as we already have. So with that, maybe Ben can give a little more detail as to what we saw during the quarter and how we’ll handle things for the rest of this quarter.

Sure. So we noted there were two large claims in the quarter. One of them was a personal lines fire which occurred in December, so we didn’t really know about that till late in the quarter. But the freeze claims as Barry said were not known until later in first quarter due to the fact that they occurred in the last week of December. We did not feel it was a very unusual quarter outside of the two large claims. The fire activity was actually similar to what we had seen in prior fourth quarters, but as noted the result was worse than last fourth quarter because last fourth quarter had an unusually low amount of fire activity.

Paul, I’m sorry, I’m not sure we are answering your question. Was yours directed towards the free announcement of the first quarter or the detail regarding the fourth quarter?

Really, the fourth quarter, I do never -- anyhow you’ve addressed it as I’d hoped. This is a related question for the first quarter. Historically it sounds like based upon what you’ve given us that the first quarter will end up being a loss given the size of those events. Historically, reinsurances has allowed you to kind of squeak by with the fairly minimal losses in those events. Can you talk about how that has changed over time in terms of both the reinsurance coverage as well as how you think of basically catastrophe management's sort of quarter by quarter from a financial perspective?

So, in terms of prior treatment of reinsurance, you recall, when we had Sandy, we did not have the coverage that we have today to sustain an event like this. One of the important additions to our reinsurance in the last several years is reinstatement premium protection which limits the effect of a single cat to a known number. In this case it's $4 million. So that limits some of the volatility. However, for this particular quarter, we do have three separate storm events. We believe that one of them will likely hit the cat retention, the other two will not. So that will fall to the bottom line after reported share. That answers your question. Paul?

Sorry. I have [ph] been on the phone here. I think that’s very helpful.

Yes. Let me just chime in a little bit. We’re company in transition going from essentially a single state rider, when we negotiated our last set of reinsurance treaties and moving towards a regional carrier. So the way we will construct our program as of July 1, which is our renewal date, we’ll reflect more about us being a regional company and with more exposure throughout the Northeast, the likelihood of us being impacted by winter weather increases and we’ll restructure the program to take that into consideration.

Great. Thank you. Appreciate it. It’s helpful.

Thank you.

[Operator Instructions] There are no questions at this time. I would like to turn the call back over to management for closing remarks.

Great. Thanks very much. And I think we had an excellent fourth quarter. I think calling an 8099 a miss is a stretch of the imagination that I can’t get my arms around. Insurance is a business built for a long-term. If you try to game the system and try to bet on quarter-by-quarter activity, it’s a fool’s game. I’d only say that we are very proud to hold control over a company that’s been in business and paid every claim over a 130-year period. And that’s how we run this company. But in the end, it is what it is. Thank you for taking the time to listen. And from my entire team which now includes Dale Thatcher, I want to say that we’re pleased and proud to have delivered these strong and consistent results and look forward to more of the same in 2018 and beyond. Thank you very much.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.