Kingstone Companies, Inc. (KINS) Q1 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to Kingstone Companies 2019 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Amanda Goldstein, Investor Relations Director. Thank you. You may begin.

Thank you very much, Sherry, and good morning, everyone. Yesterday afternoon, the company issued a press release, detailing Kingstone's 2019 first quarter 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 the section entitled Factors That May Affect Future Results And Financial Conditions in Part 1 Item 1a of the company's Form 10-K for the year ended December 31, 2018, along with the commentary on forward-looking statements at the end of the company's earnings release issued yesterday. In addition, our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. With that, I'd like to turn the call over to Kingstone's CEO, Mr. Dale Thatcher. Please go ahead, Mr. Thatcher.

Thanks, Amanda. Welcome to our first quarter 2019 conference call. As previously reported, this was an extremely challenging quarter for the company on several fronts. Not only did we have another rough winter season with several cat events, but we also completed a review on restructuring of our claims department that resulted in significant strengthening of reserves. In spite of those events, I want to reiterate upfront what we stated in our press release. We expect the full year to generate a combined ratio of between 88% and 91% as well as 4 to 5 points of cats. For 30 of my 35 years in the business, those results would be stellar. They're still pretty good, just not up to our expectations. During the quarter, we announced the hiring of Bill O'Brien as our new Claims Officer. I worked with Bill on a past life and can honestly say, he's one of the best claims professionals I have ever worked with. We're very fortunate to have him with us. I'm very pleased with the impact he's having already in identifying key issues and setting us on a path to improvement. Ben will discuss more details on our winter cat losses and reserve strengthening in a moment, but it's important for those of you who don't know me to understand my philosophy. I believe in a strong balance sheet. In this business, I've always said that reserve problems are like fish. They don't get any better with age. You have to recognize them early and fix them right away. We did that. Despite the difficult quarter, we remain optimistic that the underlying fundamentals and profit drivers of our business are strong. We continue to take advantage of new opportunities and markets to grow our business. Direct written premium was up 19% overall compared to the prior period, with personal lines increasing again by over 20%. Kingstone is now the 14th largest writer of homeowners business in New York State and growth in our expansion states continues as expected, contributing over $3 million in premium for the quarter. During the quarter, we started writing business in Connecticut, which is our fourth expansion state in less than 2 years. We're very happy with our speed to market outside of New York, and we are ahead of schedule on expected profitability. One key area of focus during the quarter and throughout 2019 will be improving our technology platforms. We're investing in the future to improve our agent and customer experience and are spending money now in order to scale up for future growth in an efficient manner. This will allow us to be much better positioned to take advantage of changing market conditions. We've also started our reinsurance renewal process, which will be completed by July 1. Due to our continued growth, we expect to increase our catastrophe reinsurance purchase by more than 30% this year. We continue to use reinsurance to protect our balance sheet and limit the impact of any single event to less than 5% of total surplus up to 1-in-250-year occurrence. We expect pricing to be favorable again this year for carriers with a larger northeast footprint such as Kingstone. Despite the rough start to the year, we're confident that our profit engine remained sound. The first quarter is always our most difficult quarter due to weather. With our stronger reserve position, we expect the next 3 quarters to bring us back down to a mid-90s overall for 2019. Although worse than a normal year, we have to occasionally expect this level of volatility in the insurance business. Many of our peer group companies would be happy to achieve such results on a consistent basis. As I said previously, we've been tremendously successful of balancing growth and profitability, and we will continue to make the necessary adjustments to continue our history of success. Now I'll turn it over to our EVP and Chief Actuary, Ben Walden, for some more details on the cat events we experienced and the reserve strengthening that was recorded in the quarter. Ben?

Thank you, Dale. Although this was a very challenging quarter, it was only one quarter and not the start of a trend. There were 2 main drivers behind the quarterly results: first, on the property side, we experienced another rough quarter of winter weather; second, on the liability side, we faced some newly emerging trends on older commercial lines claims. These were immediately addressed through reserve strengthening. Now I'll go through details on the cats for the quarter. During January and February, the New York metro area was hit by several PCS cat events. The first was a freeze event in mid-January that was particularly severe. Temperatures were in the single digits and low-teens for several days resulting in numerous large pipe freeze claims. Just 25 claims from that event accounted for 65% of the cat losses for the entire quarter. In total, over 200 cat claims were recorded for the quarter with net losses of just over $5 million. These events had a 17 -- point impact on the combined ratio. Although not quite as impactful as the cats recorded last winter, the events still put a significant dent in our results. We are addressing the continued impact of winter cat losses and other water claims through pricing adjustments. We've recently taken a targeted rate increase for our New York homeowners book effective in the first quarter. The rate increase is designed to improve results for the underperforming territories most affected by these losses. Early results from this change are positive. We've been able to take rate while not seeing any measurable decline in our new business conversion rates or renewal retention. Throughout the rest of the year, we have several more pricing actions planned, and we have many underwriting levers to pull that should have an immediate positive impact. Turning to reserves. We took quick and decisive steps to address some emerging trends. Over the last several months, we've seen an increasing number of older liability claims settle for amounts greater than existing case reserves. At the same time, our average defense costs per case have shown outsized increases. These trends prompted us to engage a leading consulting firm to review our claims practices. As a result, several opportunities for improvement were identified. As Dale discussed, this led to the hiring of Bill O'Brien as our new Chief Claims Officer. A detailed review of open liability claims then resulted in large reserve increases on several older cases during the quarter dating back to accident year 2014. These adjustments required us to reestimate our ultimate losses for all years and to boost IBNR. We acted decisively and the result was total reserves strengthening of $4.5 million for prior years or 15.3 point impact on the quarterly combined ratio; across all years, reserves adjustment had a $0.37 impact per share. 80% of the reserves strengthening was for commercial lines, which now contributes only 12% of our total written premium. As a result, we quickly acted to reduce the amount of business we are writing in commercial lines as we review its ongoing profitability. I would like to emphasize that our growing and highly profitable personal lines business is in no way impacted by the recent trends we've seen on older commercial liability cases. To sum it up, we took several actions to quickly and proactively address emerging issues that adversely affected the quarter's results, and it is Kingstone's mission to always act in this manner. As we move ahead, we look forward to delivering the continued levels of profitability that our investors have come to expect over the past 10 years. Now I will turn it over to Barry for some additional comments on the quarter and on our growth opportunities for the future. Barry?

Thanks, Ben. I'd first like to address the price action in Kin shares over the last 7 trading days. We announced our first quarter catastrophe losses, which by the way were in line with most analyst expectations, and at the same time we announced the $0.37 per share reserve strengthening, $0.37. The stock has since declined by $3.95, a $0.37 per share charge of which $0.30 of the $0.37 relates to a minor line of business and the stock trades a lot more than 10 times that. How does that make any sense? Because we believe in being honest and forthright and timely. Because we've shared how we want to improve our company and didn't hide. We've seen this story before, like to forget. We were an active writer of commercial automobile liability coverage. After seeing trends, I think 2015 makes those trends starting to go the wrong way we boasted our reserve and put a moratorium on new business. In the end, we couldn't fix it and we shut it down. Others, by the way, soon followed suit. We have a run off those claims. I think there's about 6 remaining. And over that time, the reserves we set have proven adequate. We've done the same thing here with commercial liability. We've added reserves, we imposed a 6-month moratorium, and we will figure out how to fix the book and deliver an underwriting profit that deserves committing capital to it. If not, we'll shut it down. We're in the business to deliver a profit and deliver returns to our shareholders. And for those who are not aware, I remain the company's largest single shareholder. I work to protect my investment along with everybody else's. So yes, and I think you could tell from the tone of my voice, I take this very personally. Some must forget that our core business is in personal lines. It represents about 80% of our total and is growing. And actually the growth is accelerating as we expand through the northeast. We've grown this, our main business, by more than 20% a year in each of the last 4 years. And over that time, our personal lines reserves have developed favorably, of cumulative redundancy. So don't read anymore into that $0.37. It's a pothole we just went over. We've done things the right way, don't lose faith in Kingstone. We've come a long way in the 10 years since the demutualization, but there's plenty of open road ahead of us. And now we found a new lever to pull. In our last conference call, I alluded to the new alternative distribution channel we've begun to build called KOCI agency. I have direct responsibility over this business. Right now, we're working with 3 of the 10 largest carriers in the country along with national agencies and digital agencies. Offices of brand name Kaptive Insurance have turned to Kingstone to assist with placing business outside of their underwriting appetite. We're just getting started, so it's very hard to make a statement about the future. But what I can tell you is KOCI is the already the single largest producer of new business for Kingstone. KOCI will write far more in the next 6 months then the commercial lines premium we're willing to forego during the moratorium. KOCI will materially accelerate our northeast growth. My conclusion is that our growth remains intact. Our value proposition for our producers remains outstanding. Actions are being taken to focus on profitability. And those who continue to see the value in Kingstone will be the ones that reap the rewards. Now let me turn it back to Dale for closing comments.

Thanks, Barry. As we noticed, it's been a rough start for the year, but that's the business we're in. If he didn't have rough weather now and again, people wouldn't buy insurance. We have a lot of things to be excited about. Over the next 3 quarters, we expect to make progress in many areas and take care of more low-hanging fruit. We continue to cease on growth opportunities, and we expect the actions we've taken will soon lead us back to the underwriting results that our investors have come to expect. With a lot of work to do, but the team we've assembled is more than up to the task. It's unfortunate that some investors unduly panicked and artificially drove down our stock. But I'm confident that we'll be reporting a quick reversal in results. And I can only hope the market recognizes its overreaction to the normal volatility and a thinly traded insurance stock. With that, I'd like to turn the call over to the operator to open it for questions.

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

Good morning. Thanks for the call. Could we talk a little bit about the results excluding the catastrophe losses and excluding the reserve releases? It looked like the accident year ex cat number was certainly a little bit higher than I expected. And why would that sort of return to -- looks like that your guidance assumes that, that returns to a lower level for the remainder of the year. And can you talk about why that may or may not happen?

Yes. It's Ben Walden, I'll answer that. First quarter seasonally, even outside of cats, is normally our worst quarter. We have elevated fire claim frequency. So we did have about 15 points of impact from fires in the quarter, which is a little higher than usual. But we're also seeing little bit elevated non-weather-related water claim activity, which we are addressing through some of the claims initiatives that Bill O'Brien will be undertaking.

Which I have listened to some of the other conference calls and looked at some of the other press releases, it seems to be a new phenomenon in the industry in terms of pipe breaks that are not frozen pipe related. So we're trying to get our arms around that and figure that out. The other thing, Paul, is to make sure that you realize that -- and you may have already taken care of this, but just to make sure that everybody else is listening, is we did have $500,000 of the reserve charge hit the current year. So the $4.5 million was prior year. We also had $0.5 million in the current year to up the picks for the current year related to the commercial lines.

Great. Thank you. And could you talk a little bit about your thoughts about the cat load for the remainder of the year? Kind of what do you think is sort of a normal type level for cat loads in the remainder of the year?

I'll start and then I'll let Ben add any color he'd like to add. But for Kingstone, I'd say, about 80% to 90% of our catastrophe losses occur in the first quarter. So the rest of the year ends up being a very light year. The one-off that you'd see in our history with that was when Hurricane Sandy hit. So obviously, if we have a hurricane up in the Northeast, that would change the cat load, but our expectation that we've seen over time is the remainder of the year is pretty light.

Right. And I would just say that the first quarter is fairly consistent for cats. The rest of the year is very lumpy, especially third and fourth quarter. So you may get a big event. Sandy, Irene happened third and fourth quarter, but in most years, you'll have very minimal impact from cats in the last 3 quarters. We've seen on average about 2 to 3 points in total for the last 3 quarters of the year traditionally outside of large events.

Great. Thank you.

Our next question is from Bob Farnam with Boenning and Scattergood. Please proceed.

Yeah thanks. good morning. So Ben, the 15 point impact from the higher cat losses -- sorry, higher fire losses, what would be a typical first quarter in terms of fire losses? I mean that sounds like a...

Yes. Normally, it about 12 points. So it's a little higher that we normally see. But in the first quarter and the fourth quarter, we see elevated fire frequency as people use their heat more, fireplaces, candles all of that happens in the fourth quarter and first quarter.

Okay. Thanks. And the -- how much -- with the moratorium amount the commercial line premium, how much new business -- I'm trying to figure what impact it would have on the actual premium. So you're going to be renewing policies, but how much new business have you been writing in commercial lines that would be not there in the next 6 months?

Yes. So the moratorium will start soon. We expect for the remainder of the year that will be about $3 million in new business premium that will go away for the 6 months. Probably another $1 million or $2 million of renewals as we expect to take some actions on the renewal book over the next 6 months as well.

And Bob, this is Barry. My point is that the new business premium coming in from the new distribution channel will well more than offset that. And the way the business is coming into this point, the quality of the business we've seen, it should match up with the personal lines business that Kingstone normally sees, if not a snitch better.

Okay. And the KOCI stuff, that's all homeowners?

It's all personal lines home, condos, dwelling whatnot. And it -- right now, it's almost exclusively New York, although we have contracts with these national companies to expand outside New York. This is a complete new distribution channel for us.

Got it. Okay. And in terms of the reserve issues, can you give us maybe some detail on the types of claims that were problematic for you that you're trying to address?

Well, really it's literally a handful of claims. I mean that's one of the difficulties with -- we have a very small reserve base and obviously, a small premium base. So for a handful of claims, that will be a rounding area at a larger company. But for us, it creates an event obviously. It's older commercial liability claims that in our estimation upon further review, as you're approaching litigation on an old claim from a 2014 time frame, you would expect to have a substantially higher level of reserve than what we had. And I'd say that we were -- our claims folks were a bit too optimistic, given the age of the claim and given the venue of the claim. As soon as I have some details on some of those claims -- even I, a non-claims professional, said wow, that needs to be reserved at a higher number than that. So we had Bill go through and look at all those older claims and assess them with his professional eye and give us, to me, a more realistic possibility for a claim. So it's -- again, it's only a handful of claims, but it has an outsized impact on the quarter as a result of that. And also an impact on Ben's diagonals as we have to apply that through the triangle. Hopefully that helps a little bit without giving precise details on a claim.

Yes. No, I get it. That's -- so this is a handful of claims. So how many open claims do you have for this commercial liability-type stuff? I mean how many claims are we actually talking about in total, not just 2014, 2015 ones?

That's a good question. I don't have it off the top of my head. I can tell you that how many commercial lines have been in that business since 2009. It's a small line of business, has been a small line of business all of that time. And it is -- it's craft pack. It's artisan contractors. So it's a contractor style of business. The life cycle of those claims tends to have a duration of about 3 years. So Ben, do you have any other data in terms of numbers?

Right now, in total, we have about 200 open claims, but about half of those are from the latest accident year. So you're talking less than 100 open claims for these older accident years. But again, a little bit of a change on some really old years can affect your assessment of the loss ratio overall for all years.

Right. And Ben you basically -- it sounded like you basically reached the reserves on all of those claims? Is that...

Yes. So -- yes, because the impact was significant on 2014, which is 5 years old, that development translates to all the more recent years and particularly the current year, we boosted that one up another $500,000 because of this emerging data that we were seeing on the older years.

Bob, as a recovering actuary, you remember those triangle things, right?

I do remember those triangles, yes. Alright, that's it for me. Thanks.

Thanks.

[Operator Instructions] Okay. We have reached the end of our question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

I'd like to thank everybody for attending the conference call today. If you have any questions as you get back and perform your analysis, by all means, give us a call. Just want to reiterate what Barry indicated is that in our opinion, this is a gross overreaction to a normal kind of pothole that you see in the road for an insurance company. And we fully expect to have the coming quarters be right back on track and hopefully, the marketplace will react to that in an equally and opposite reaction in terms of driving the stock back up to where we think is a much more appropriate level. So with that, I will bid you good day, and I hope that you have any questions, you give us a call. Thank you.

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