Kingstone Companies, Inc. (KINS) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Kingstone Companies Third Quarter 2020 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 for Kingstone Companies. Thank you. You may begin.

Thank you very much, Jessie, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone’s 2020 third 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 condition in Part 1 Item 1A of the company’s Form 10-K for the year ended December 31, 2019, along with the commentary on forward-looking statements at the end of the company’s earnings release issued on Friday. 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. Good morning to everyone listening in today. We are pleased that you can join us for our third quarter 2020 conference call, and congratulate our country and Pfizer company for delivering us a vaccine that’s going to take us out of this mess we’ve been living through. Joining me on today’s call will be Meryl Golden, our Chief Operating Officer. Meryl will review with you the detailed quarterly results, but let me start with the fact that apart from the previously announced full catastrophe retention of $8.125 million due to Tropical Storm Isaias, we had an excellent quarter. Without catastrophes, our combined ratio was an excellent 80.4%, our big swing back from this time last year when we posted a very ugly 108.5%. Over the past year, we’ve gone through a lot. I want to walk you through the issues and the remedies. Our commercial liability results were poor and getting worse in spite of the various underwriting actions we’ve taken. We made the very difficult decision to exit this commercial liability business, and we've done that. It is now complete. And at the end of Q3, we no longer have any commercial liability policies on our books. And the volatility that it brought to our company is now gone. We needed to strengthen our reserves to account for the adverse development, much of which came from this commercial liability business. And we did that by taking up reserves $11 million in 2019. We saw our personal lines loss costs rising, but hadn't adjusted our rates in too long a time. We did that. We raised rates in all states in the last year. And we'll continue to address rates for each state each and every year. I wanted to [indiscernible] internal control issues that needed to be remediated, and we did that. We built out claims organization, added people systems and better processes and we are seeing the benefits. Attorneys with nothing better to do decided to make us a target, because our stock price declined due to the items I just mentioned. But I told you we would aggressively defend ourselves, and that I had a high degree of confidence in our winning the suit. And we did just that. Their baseless lawsuit was tossed out almost immediately after being heard by the court. Those issues are now in the rearview mirror. We are in a really good place. I'd like to say that we turned the corner. But the last guy who was saying that, I'll stop here. We're seeing some hardening in the Northeast homeowners market. In New York, we've raised our rates an average of 9% last November. And as a result, our new business slowed. But we're now seeing a pickup in quoting and binding as many of our competitors have raised their rates will tighten their underwriting guidelines or both. Our top competitors include Florida domicile companies, both public and private. The impact of reinsurance pricing is far more profound in Florida. Couple that with the dysfunction in that market and a record number of storms this year. It is taking a severe toll on their balance sheets and that competitiveness elsewhere is declining. We have rebuilt our company to address the market needs of today. We've right-sized our core staff and added the advanced skill sets that we needed. Our focus for the past five quarters has been squarely on enhancing profitability, and that continues. Meryl was this past year preparing for our future with Kingstone 2.0, and along with that an enhanced ability to grow our top line while maintaining and hopefully even enhancing our profit margins. Let me now turn the call over to Meryl. Meryl?

Thanks, Barry. The third quarter is normally a great quarter for profitability, but this year we experienced Tropical Storm Isaias. This was our largest catastrophe event in the history of the company with approximately 1,700 claims and total direct loss and LAE of approximately 17 million. As Barry mentioned, this storm cost us 8.125 million after reinsurance and we hit an after – and had an after tax impact on earnings per share of about $0.60. We are happy to report that almost 90% of these claims are now closed and feel really good about the efforts of our claims organization in achieving this result. Direct written premium for our personal lines business with up 6.4%, while the overall direct written premium for the company was down 0.6% for the quarter due to our withdrawal from commercial lines. The personal lines growth is due to an increase in renewal policy count as well as an increase in average premium from our recent rate changes. The underlying loss ratio, excluding cats and prior year development, improved 14.4 points from the prior year to 42%. Prior year loss development remains stable, with a small amount of favorable development recorded this quarter in comparison to the 14.7 points of prior year adverse developments recorded in the third quarter 2019. With 31.5 points of cat, the overall loss ratio for the third quarter was 73.1, an increase of 0.7 from the prior year. All of the commercial lines policies are now off the books, as Barry said, and we have 189 open commercial liability claims at the end of September. While there are no active policies at the end of the third quarter, we will continue to receive a declining number of new claims until the three-year statute of limitations expires. We're continuing to experience favorable outcomes on these claims, but are maintaining our conservative approach to setting reserves. It should be noted that this is our fourth straight quarter with stable loss reserve development. To be extra cautious, as we did last year, we again had our appointed actuary do a midyear review of our loss reserves, and our carried reserves were very close to the midpoint of their range. So, we are in a really good place. Our expense ratio for the quarter and year-to-date increased by 1.4 and 1.1 points versus the previous year due to the reduction in net earned premium from the increased quota share. While we have made investments in Kingstone 2.0 initiative, particularly IT and professional services, we have also reduced expenses in other areas. Our expenses as a percent of direct earned premium, which eliminates the effect of the quota share, are flat versus the prior year. The net combined ratio for the quarter was a 111.9 and our ex-cat combined ratio was an 80.4, clearly reflecting the changes we have made to improve profitability. I'm also happy to share some highlights about Kingstone 2.0, our efforts to modernize the company. We announced last week the hiring of Sarah Chen, our new Chief Actuary, replacing Ben Walden who left the company at the end of September. I am really excited to work with Sarah and the very experienced team we now have running the company. We continue to make significant investments in our products and technologies. During Q3, we implemented our new claim system and it has definitely increased our productivity. During Q4, we will start the conversion to our new policy management system and introduce the new producer interface. Last, we have filed our new Homeowners products in New York. We are thrilled to go live with some of these initiatives during the quarter. There is still a ton more to do, but we have great momentum. I want to thank everyone involved for all of their efforts. Now, I'll turn the call back over to Barry for some closing comments.

Great. Thanks again, Meryl. A year ago, I knew there were issues that needed to be dealt with. And we tackled each of them. But we needed to make Kingstone a more technologically and analytically savvy carrier, one better equipped for the marketplace of today. And we are doing just that. Last, we're now examining, and next month we'll decide upon, whether to continue our personal lines quota share in 2021. After a final decision has been made, we will alert investors via a press release. We will at that same time be able to update our internal projections and commence giving limited guidance as to certain 2021 metrics, including perhaps net earned premiums combined ratio and operating earnings per share. Now, I'll turn the call back to the operator to poll for questions and I'll be happy to reply to them. Operator, please pause for questions.

Absolutely. [Operator Instructions]. Thank you. Our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Good morning, and thanks for the call. It sounds like you are thinking and contemplating a number of capital and other changes – capital structure and other changes? How might that affect, at least in the short term, some of your efforts to grow outside of New York? Are you similarly interested in growth or are you considering a different process or a different competitive position?

Yes. Thank you, Paul, and thanks for that question. First and foremost, we deliberately tamp down our growth to do all the things that we've been talking about. We rebuilt the company over this last year. We put in technology. We put in an entire new claims department that by the way, just killed it with this last storm. We are ready to start growing again. And the Kingstone 2.0 initiative with our new product and new systems will leapfrog out traditional competitors in the Northeast. So if the point is that we've done this to prepare to grow again and in fact, the capital changes that you might be referring to that is the use of the quota share. It's a very difficult decision to make. But mind you, I've been very clear in the past that I wanted to limit Kingstone’s premium leverage to 1.5 to 1. And I said that under the – well, while we were writing and continued to be confronting the issues of the commercial liability business. That's no longer there. So the policies that are enforced now that give rise to claims, those are almost all property claims, they get resolved in a matter of weeks or months, for the most part, so the need to keep down the leverage ratio is no longer as important. So I think what you will be hearing from us going forward is a return to growth and without the need for any additional capital for the company. I hope that answers your question.

Absolutely. And then with the new actuary coming on Board, do you anticipate any material changes in the process? And are you considering kind of another actuarial review as the new person comes on board?

Meryl, do you want to take that?

I don’t really understand the question when you say process. Can you explain that?

So, obviously, every actuary has a different way of thinking about things and a different process of putting together an actuarial review. And to be very blunt, usually when you see a new actuary come in, you see a different view of what the reserves are and how they should be calculated.

Okay. Thanks for that explanation. So I don't anticipate any material change in the process. Don't forget, we use an outside appointed actuarial firm as well. And they will continue to be our appointed actuary. And I think we have a very sound process today. So I'm confident we will not see any material changes.

And Paul, keep in mind that that outside firm isn't changing the way they're looking at things. And Meryl mentioned, we had a midyear review done again this year as we did last year and our reserves sit right on their midpoint, and we intend to keep it that way. So while our internal view may change, there's always that third party review that we're going to be looking at. Hope that answers your question.

Absolutely. Thank you very much. I’ll let some other folks ask questions. Thank you for the call and the answers.

Great.

Thank you. Our next question comes from the line of Bob Farnam with Boenning and Scattergood. Please proceed with your question.

Yes. Hi, there. Good morning. I wanted to get more into the expansion states. You've been there a few years now. This is a short tail business. I'm curious, how has that performed in terms of underwriting? How has the competitive environment been relative to what you were expecting? I figured at least at this point, you probably have an idea of whether you're having any issues with new business coming out that you're not as familiar with. So I'm trying to get a little more detail on the expansion states.

Meryl, do you want to handle the questions regarding expansion states and what we’re seeing right now?

Sure. So we are very committed to the expansion states, which for those that don't know are Connecticut, New Jersey, Massachusetts, and Rhode Island. And in general, I would say that we had some profitability issues in those states that we are working to resolve. As an example, we have – we'll be rolling out hurricane deductibles on our in-force book in four properties that are closer to the Coast. And we have also taken rate in all of those states. So I think we're in a good place in terms of achieving the right rate level. And we will be continuing to manage those states with an eye towards growth as long as they can beat our profitability objective. We have – it's a very competitive environment in all of the states. But as Barry mentioned, some of our largest competitors have very strong headwinds from this crazy hurricane season as well as the dysfunction of the Florida marketplace and the hardening reinsurance market. So we think that we could see an increasing growth rate in those states as well as New York because of those headwinds.

Bob, this is Barry. I think we've now gotten to the point where the expansion states represent about 20% of our total. So, obviously, we're still skewed very heavily towards New York. But when we do come out with our new product that Meryl’s talked about in the past, this Kingstone 2.0, we will have ultimately after it's rolled out in all states, one product that deals on one system with everything. So not only will we be able to address profitability issues across all states, but we’ll be able to do things in a very efficient manner? Hope that gets to the heart of your question.

Yes. Just one follow up. So the profitability expectations for the expansion states, are they the same that you're looking for in New York or are they – have you allowed for a little leeway in the expansion states just because they're new?

Well, Meryl, let me start. When we began the expansion, which was three years ago, we started with the premise that we didn't expect the incremental profitability to match what we had received in New York to that time. So yes, we did allow for a little bit of flexibility. But we're very careful to monitor it. And as we've said, we've taken rate in all of those states already. We've addressed these profitability issues. There's other incremental changes that we're going to make. But it's all to get us to a point where the expectations of each state should be equal. I hope that gets to what you're looking for.

Yes. That’s what I was looking for. Thanks for the color.

Thank you. [Operator Instructions]. Our next question comes from Gabriel McFore [ph], a private investor. Please proceed with your question.

Yes. Hi, Barry. First off, just want to congratulate you on the x-cat results you got during the quarter? That's something to jump up and down about. My first question – I have two. My first question was pretty simple. Basically taken out [ph] like next year, a lot of the transition or noise is going to be coming out of the business. And so is there any color on what kind of growth rate you guys are looking to achieve in 2021?

Nice to speak again with your, Gabe. And yes, you're right. A lot of the noise has gone. That's really what I was trying to call attention to. And I'm trying to set the stage that by giving you and giving investors our expectations of what 2021 can and will look like, it reflects our heightened ability to do just that. In terms of growth rate, I think it's a little premature for me to be guessing at that. The most important factor in our growth rate is determined by whether we're going to maintain the quota share or not. And we've got a lot of decisions to make surrounding that. You're not going to see Kingstone growing at an excessively high rate as we had a couple of years ago. But I think what we can be looking forward to is the return to hopefully double digit rates in the near future. Hopefully, that is where you're looking to go here.

That's very helpful. Thank you. And then the other question I had was kind of on that net investment income number. It was down I think quarter-over-quarter 19%. And the total asset levels look to be basically the same. So I was just hoping to get a little more color on that investment portfolio and what was going on there. Thanks.

Yes. So that's – it's a good point. And there's a number of reasons for it. Probably the most important of which was we are a company that likes to keep a big bucket of funds liquid. And we invest short term just for issues like a tropical storm that I can’t pronounce, Isaias or something like that, where we had to call upon and spend over $8 million. So we remain liquid, but we saw short-term rates plummet between last year and this. So whatever returns that we were getting last year are way greater than what we're receiving now. At the same time, we've seen an overall interest rate market decline in over just the last few months or actually six months or so. So, now bonds that have matured or bonds that have been called, our ability to reinvest them is fine, except the rates at which we're earning on the new investment are below what those bonds that were mature or called were paying us. And finally, we've allocated, not a materially much more, but we've allocated more money to preferred stock. And those do maintain much better returns for us given the risk that we're taking. So I think what you could look forward to is more of the same. I think the rates have come down. And I think we have to tamp down the expectations along with that. And we'll be able to make up some of the lost ground through increased exposure to preferreds.

Okay, great. Thank you.

My pleasure.

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back to management for closing comments.

Great. Well, thank you very much. And I'm supposed to have my notes in front of me, but I – here we go. I have closing remarks. Thank you for listening in and taking the time to hear our story. We've dealt with the problems of our past and I really in the future don't want to be focused on them. We are not going to repeat the mistakes we made, that I can assure you. We've made the changes to make a return to a highly profitable enterprise that Kingstone was known for. And we're embarking on a new path to make sure that Kingstone becomes that premier Northeast Regional personalized carrier I've talked to you all about. At this point, let me thank you all and wish our new President good luck and wish science – I'm glad that we stayed with the science. So, anyway, thank you all. Have a great day.

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