Kingstone Companies, Inc. (KINS) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Kingstone Companies 2019 Fourth Quarter Year End Financial Results Conference Call. At this time, all participants are in 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. Please go ahead.

Thank you very much, Kevin, and good morning, everyone. Yesterday afternoon, the company issued a press release, detailing Kingstone’s 2019 fourth quarter and full year 2019 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, as updated by the corresponding section in the 10-K for the year ended December 31, 2019, scheduled to be filed with the SEC on March 16, 2020 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. Barry Goldstein. Please go ahead, Mr. Goldstein.

Thanks, Amanda, and good morning everyone, and thanks for joining on this fourth quarter 2019 conference call. I’m quite pleased to report that we ended 2019 with a fourth quarter profit. We can now put that year into the rear -- that -- last year into the rearview mirror. Before I allowed our team to do that though, we sat for two days and discussed what we learned from 2019, and we learned a lot, and I’m confident that our decision-making going forward will be of a far better quality because of these learnings. We’ve also recently added a number of highly skilled executives with lots of experience, who will guide us forward. We left those meetings with our batteries charged in a far better sense that the future is bright, but also aware that we need to work very hard to restore the luster that was lost. We are investing for our future, and Meryl Golden, our Chief Operating Officer, will expand on this in a few minutes. Our focus is squarely on profitability. As you know, we made the difficult decision to exit commercial liability lines last summer. It was there that we found the need to increase our reserves in 2019. Three points to note: first, by the very nature of allowing these books to run off, our premiums will shrink. Second, we’re very pleased at how the liability claims have been settling with about 40% by dollar and by volume closed to date. And for that, I think our Head of Claims, Bill O’Brien, and his new team, who have done an excellent job since joining Kingstone last spring. Third, Ben will discuss in more -- as Ben will discuss in more detail, we are delighted to report that we did not need to book any prior year development related to commercial lines or any other line of business in the fourth quarter. Like our competitors, we too see increases in loss costs, most profoundly in fire claims and non-weather-driven water losses. To address this, we began a series of rate increases in the fourth quarter. The amount of new business written at these higher rates will shrink as our rates are now in excess of many of our competitors, particularly those Florida-based carriers who do not seek nor could they achieve an A.M. Best rating. For example, for New York homeowners, we took a statewide increase of about 9% that is effective for new business at November 1, 2019. So, anything new written since then is at the higher rates. But the rate increase didn’t impact any renewals until December 15, and then only when an existing policy renews. Since we earn our income ratably over the life of a policy, the full impact of the Q4 2019 increase won’t be felt until the end of next year. We are now preparing for our July reinsurance renewal. It will be our biggest program ever. And because of our internal view of risk, along with the fact that we are an A.M. Best A- rated carrier, the limits we are to secure are far above many of our competitors, which allow them a lower cost structure. We are working with our long-time intermediary, Aon, to build a more balanced program as our needs have grown, and today’s capacity providers include many participants, some of which do not provide coverage through traditional reinsurance structures. Let me turn the call over to Ben, our Chief Actuary. Ben?

Thank you, Barry. As Barry noted, 2019 was a challenging year, and we’re happy to put it behind us. As expected, the actions we took throughout the year put us on very solid footing going into 2020. Over the last two months, both our internal actuarial team and our outside appointed actuary have performed detailed independent reviews of reserves. As everyone knows by now, we recorded prior year loss development of $11 million through three quarters of 2019, mostly related to unfavorable results in our commercial liability lines. Those lines were put into runoffs in July, and just over 200 claims remain open. We expected that the actions taken on reserves through three quarters would put us in a much stronger position going into year-end, and that no further adjustments would be necessary. The two actuarial reviews were performed entirely independent of each other. And in early February, we compared the results. On net carried reserves of $65 million, our internally indicated reserves were within $250,000 of our appointed actuary’s central estimate. We consider this an outstanding result. As we point out in all of our financial statements, loss reserving is an inherently uncertain process that involves many important assumptions. This process can lead to a wide range of reasonably possible outcomes. In 2019, both Kingstone and our appointed actuary realized that some critical assumptions made in the past turned out to be incorrect. However, thanks to the efforts of our claims team, we were able to understand where the assumptions were off and made the necessary adjustments. The fact that the two reviews produced indicated reserve levels within 0.5% of each other provides us with great confidence that we are in a strong position as we move forward. Additionally, the runoff of commercial lines will lead to reduced reserve uncertainty, as more of our open inventory is closed in each successive quarter. We are monitoring these results closely. I’d also like to point out that both year-end actuarial reviews relied solely on historical claim outcomes and trends. Neither review assumed any benefits from improved claims handling procedures that have already been put into place. These improvements could lead to a favorable runoff of these claims, and the early indications in this regard are encouraging. However, we will not take any credit for these actions until more claims are closed, and we can be certain of these benefits. We look forward to starting 2020 with a clean slate on reserves and the opportunity to apply the learning’s from 2019. Now, I will turn the call over to our COO, Meryl Golden. Meryl?

Thanks, Ben and good morning, everyone. Since I joined in September of last year, we’ve also made great progress on the key initiative we call Kingstone 2.0. This is our effort to modernize the company, building on its great foundation to make the company even more enduring. We are adding senior leadership with deep expertise, developing new products and services, and investing in technology to build an even better version of Kingstone. We’re excited to announce that Eva Paxhia has joined as VP, Senior Product Manager; Sri Seshadri has joined as VP, Chief Information Officer; and Rob Jacobson has joined as VP, Operations. All of these leaders bring decades of experience to help transform Kingstone. Along with Bill O’Brien, who joined earlier last year as the SVP, Chief Claims Officer, we’ve added a lot of talent to the company. And our senior leadership team is now complete. In addition to managing the New York products, Eva is leading an effort to develop new homeowner, dwelling fire and condo products for all of our states. These programs will incorporate new rating and underwriting elements and more granular segmentation to more accurately predict loss costs. We are hopeful this effort, combined with our new platform, will improve our competitiveness and ease of use, resulting in more business for Kingstone. Sri joined at a critical time, as we are undergoing a transformation from our legacy systems to more robust and modern technology for both policy management and claims. Sri is very involved in making sure these projects go well among many other initiatives. Sri is the company's first CIO. Rob is focused on redefining the service we provide to our policyholders and select producers. Before Rob joined the company, our operations areas reported up to several different leaders. So now we have one group that manages the entire policy life cycle. Kingstone service has always been a differentiator for the company, so Rob has a great foundation to build on. I would be remiss if I did not also mention the great job Bill has done completely rebuilding Kingstone's claims organization. Bill hired a team of people with strong claims backgrounds. He refined the claims guidelines so expectations are clear and implemented a quality assurance program to identify further training opportunities. He also in-sourced various functions to reduce expenses and improve service. These are just a few of the many improvements he has made. We expect that, in the short term, we'll see an increase in Kingstone's expense ratio because of the investments we are making. But we are highly confident they will result in increased growth, lower loss costs as well as improved producer and policyholder satisfaction, resulting in higher returns for our shareholders. Now I'll turn it back to the operator to reply to the questions you might have. Operator, please pause for questions.

[Operator Instructions] Our first question today is coming from Paul Newsome from Piper Sandler. Your line is now alive.

Good morning everyone. I was hoping you can help me a little bit more with the impact of the reinsurance business on the financials for next year. Obviously, I get the premium decrease as you cede off business. But could you talk a little bit about the impact on the expense ratio with the ceding Commission?

Hi, Paul. How is everything? So basically, we got to the end of the year and realized that the impact of the $11 million of reserve strengthening took it – was – flowed through to our surplus, which triggered our leverage, if we didn't do something about it, going beyond where we were comfortable from a risk basis. And I've always said, we wanted to try to stay at or below 1.5:1 ratio of net premiums written to surplus. So one of the benefits of putting on the quota share the way we did is that for statutory accounting purposes, that effectively gives us what's called surplus relief and allows that metric to stay under control, and we're very happy and looking forward to staying below that 1.5:1 through the contract period, which is the end of this year. In exchange for that, we received a ceding commission. And from a GAAP perspective, what we'll be taking in, in commission, which serves to reduce our expenses, is offset by and then some a constraint of our underwriting profits from the difference between premiums earned and losses. So we're giving up some margin in exchange for derisking our book, by shifting 25% of the loss cost to the reinsurance market, and are willing to accept a smaller margin, if you would, as we recover from what we just went through. With respect to the expense ratio, it's a little – I don't know if I have in front of me the exact numbers to use, but I think what you can look forward to in the expense ratio in 2020 is a decline as a result of this ceding commission, but more importantly, you'll see an increase. Our expense ratio will go up. We are investing in our future. As Meryl said, we're bringing on skilled, highly trained and quite expensive talent. And we are building for the future. So I can't give you – I'm not going to give you any guidance as to the future. But I can tell you not to expect any sort of a decline overall in our expense ratio this year. I'm not sure that gives you the answer you were looking for, but I did the best I could.

No, it definitely gets me into the right direction. Any thoughts on what might be the financial impact of the July reinsurance renewals?

So right now, we're very fortunate. We are a July 1 candidate, if you would. Our peer group, which includes mostly Florida-based carriers have a June 1 renewal. We'd like to think that having not had any cat claims to speak of since Sandy, no loss creep that went along with that, actually, our – if you remember, our gross losses came in well below modeled losses for Sandy, and that all is behind us. But I think we're probably looking at a small rate increase in the low-single digits. And I think most of that is going to be the reinsurers becoming emboldened with what happens – with what happened last year, with what – the price increases they were able to achieve from the Florida carriers. And if I – if it goes according to what I've read from all different sources, that's going to be, once more again, with gusto this year. So, I'd like to think we've got a reputation that's well deserved. If we'll get a couple of few points in increase, fine, so be it. But I don't see anything materially major on rates. I hope that was good. Are you there? Okay.

Thank you. Your next question is coming from Gabriel McFore [ph], Private Investor. Your line is now live.

Hi, good morning, Gabriel.

Good morning. Good morning. I just had a couple of questions. One is how should we think about the dividend policy going forward as profitability continues to improve. And the other one is in relation to your comments on non-weather water damage. I was just trying to get an idea or maybe an example of that. Thanks.

Okay. Great. Well, I was hoping both questions would be posed to someone else. But unfortunately, I have the dividend policy question. Traditionally, we've sized our dividend and paid our dividend based upon the amount of investment income we receive and expect to receive. Right now, as you know markets were, particularly where we invested in, fixed income, have seen great gains in value as rates have dropped. But our ability to reinvest that money at the same rate when those bonds mature or are called is going to be a difficult chore in this environment. So I'd have to say that our dividend policy right now is going to be under review. We've declared a dividend for this quarter. At this point, and I – as you all know, I'm still the company's largest shareholder. We've far better use of return of capital to our shareholders to buy back stock at $0.70 on the dollar than to pay a dividend that would serve to reduce the book value. So we've got a conversation that's going to take place, and I'll be speaking with the shareholders before the next quarter before we make the next dividend declaration. I hope that's – that gives you what you're looking – well, it may not give you what you're looking for, but that's my answer. Ben, why don't you take this issue of non-weather-related water losses?

Sure. It's Ben Walden. Yes, we continue to see higher average claim severity related to non-weather water, and these are mostly interior pipe break claims. Sometimes, they can be very costly, especially if the pipe breaks on second floor and it flows down to other floors. This is an industry phenomenon. So we've been seeing it across the industry. There really is no pattern in these claims that we see internally. So what we are doing is we are factoring in rate changes to address the severity that we have been seeing. So we saw the overall personal lines loss ratio go up about 3 points from 2018 to 2019. We've taken a big rate increase at the end of 2019 in New York, and we're taking similar increases in other states to address this trend.

All good, Gab?

Yes. That’s very helpful. Thank you.

Great.

Thank you. Our next question is a follow-up from Paul Newsome from Piper Sandler. Your line is now live.

Good morning again. Could you – do you have any sense of how much the earnings volatility might change, hopefully decline, with the changes you're making with both the quota share and expected reinsurance and some of these other underwriting changes?

Well, the – there are just so many moving parts right now, Paul. Obviously, the changes we made were geared towards a combination of reducing the claims volatility, and at the same time, pointing towards profitability. So while some of the changes might have given – well, may give rise to a slowing in our growth rate, and believe me, it's going to slow, by taking away those risks that generate the least amount of margin where we're most subject to a claim, we feel as though those changes will pan out over time. But the short-run answer to your question is you could look for a material slowing in our growth rate this year and using this year as a, if you would, a rebuilding year, a correction year. But I couldn't tell you – I couldn't give you any sort of a range as to how this is going to work itself out. No.

Have you done the – updated the PML calculations yet? And how might that...

We're actually in the midst of doing that as we speak, and that will be moving into our reinsurer's hands shortly. We were supposed to be in London next week, meeting with the people at Lloyd's. We canceled that trip quite early and have rescheduled everything with – thank you, Zoom shareholders. So we're going to be having Zoom meetings between Aon's offices in London and Aon's offices in Stanford, Connecticut. So we're making do with what we have to. We have a Bermuda trip scheduled for next month, and that's tenuous at best, at this point.

Very understandable. Thank you.

My pleasure.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for further or closing comments.

Thank you, operator. And if you've heard, we're a far stronger company today, better equipped, stronger talent, more diverse and with a common goal to make a better and more profitable Kingstone. This is a project. It's going to take some time, but there will be hints and green shoots along the way. We'll be sure to update you on our progress and look forward to doing that. Thank you for joining our call today, and goodbye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.