Kingstone Companies, Inc.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Greetings, and welcome to the Kingstone Companies Incorporated First Quarter 2018 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. I would now like to turn the conference over to your host, Rich Swartz, Financial Controller.

[Rich Swartz:]

Thank you very much, Diego, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2018 first quarter results. As a reminder, some of the statements and projections made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We refer you to Kingstone's annual report on Form 10-K and any subsequent 10-Qs filed with the U.S. Securities and Exchange Commission for a detailed discussion of risks and uncertainties. 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 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 non-GAAP measures, which are not defined under U.S. GAAP. We believe that providing certain non-GAAP measures makes it easier for investors to evaluate our insurance business. However, they are not intended to act as a substitute for GAAP financial measures as provided in the company's public filings. With that, I'd like to turn the call over to Kingstone's Chairman and CEO, Mr. Barry Goldstein. Please go head, Mr. Goldstein.

[Barry Goldstein:]

Thanks, Rich. Good morning, everyone. Joining me today are Dale Thatcher, our Chief Operating Officer; Ben Walden, our Chief Actuary; and Victor Brodsky, our Chief Financial Officer. Of note is the fact that Amanda Goldstein, our Investor Relations Executive, is on her honeymoon on a Safari. Our discussion today will center around 4 items of particular note. First, the impact of the severe whether we experienced in the Northeast during the first quarter, particularly the early January freeze. Second, how our company actually excelled during this first quarter, exclusive of the impact of these catastrophes, and how we see 2018 unfolding. Third, how our reserves remained solid and our updated method of reporting catastrophes. Fourth and finally, additional financial commentary about our growth rates, expense ratio and per share amounts. With that, I'll turn the call over to Dale Thatcher. Dale, please go ahead.

[Dale Thatcher:]

Thanks, Barry. Clearly, the big story for this quarter was the impact of the 3 named winter storms. Our net losses from those cumulative storms ended up being $4.6 million after taxes, less than we initially estimated, but still quite significant to our overall results. As an organization, we strive to learn from every loss we cover, and I'm sure we'll learn something here, too. But more importantly, there was nothing glaring as we looked at these winter losses. They were unfortunate, but clearly the kind of losses we would expect on occasion in the normal course of business. As we look beyond the cat losses, underlying results turned in a very solid 88.7% combined ratio, though I'm sure that even this number had some winter weather in it. We're very pleased with our ongoing ability to combine strong growth of 20.7% with a very profitable underlying combined ratio. In the past year, we've opened the New Jersey and Rhode Island to expand and diversify. We're in the process of adding Massachusetts, Maine, and Connecticut. We're well on our way to becoming a Northeast regional personal lines carrier with an expectation of growing commercial lines in the future as we build capabilities and infrastructure in those lines. We're currently growing our strength and expect to deliver another year of excellent results in spite of the winter losses in the first quarter. For the first time in our history, we're providing earnings guidance to help our investors and analysts to understand the company better. For the full year 2018, we expect the following

[Ben Walden:]

Thank you, Dale. As noted, it was a busy quarter from a claims perspective. In January, Kingstone experienced the second largest cat event in its history. Our claims unit did an outstanding job stepping up to handle over 500 winter claims from three separate storms. As of the end of April, over 75% of these claims have been closed, so there is little uncertainty in the remaining reserves. The deep-freeze event in early January made up the bulk of the claims with direct losses exceeding our catastrophe reinsurance retention of $5 million. After 20% quota share reinsurance, our pretax loss was limited to $4 million from that event. The 2 March storms did not rise to the same level and did not generate as much in losses as originally anticipated. Even prior to these events, Kingstone had decided to change its definition of a catastrophe to be simpler and more in line with industry reporting. Going forward, we will record catastrophe losses associated with any event that is assigned an Insurance Services Office PCS number. These are storms where the expected industry loss exceeds $25 million. Such events are relatively common across the United States. However, in the areas where we operate, only 1 or 2 a year are expected to have a material impact on our results. With 3 events already this year, we hope for a reversion to the mean for the rest of 2018. Our reserve levels remained strong with a small amount of favorable development recorded during the quarter. The actual loss emergence for the quarter was better than both our internal and external year-end actuarial analyses had indicated. The underlying loss ratio, excluding winter weather, was consistent with prior periods. And homeowners' claims frequency, excluding catastrophes, declined in comparison to first quarter 2017. Now I will turn to Victor for details on other components of our financial results. Victor?

[Victor Brodsky:]

Good morning. As already discussed, we continue to see strong growth in direct written premiums, which increased by 20.7% in the first quarter compared to Q1 2017. Growth is driven by the continued acceleration of our personal lines business from the A.M. Best upgrade to A- last April. For the quarter, personal lines direct written premiums increased 27.6%. New York Homeowners new policies grew 84% compared to the prior period. As explained on our last call, we're now looking at our business outside New York as our expansion business and our New York business as our core business. Expansion business contributed 9% of total personal lines policies written in the first quarter. On the previous call, we defined the core expense ratio as the ratio of core underwriting expenses to core direct written premiums. We believe this measure is most appropriate for comparison of our expenses across periods. For the first quarter, our core expense ratio was 15.16%, which is essentially the same as the 15.24% from the prior year period. Our goal is to maintain a consistent core expense ratio, while scaling up for growth. This consistency in expenses helped reduce volatility in the combined ratio that can result in large losses or catastrophe events. Our diluted loss per share was $0.25 in the first quarter, and our net operating loss per share was $0.22. The overall after-tax impact of the 3 catastrophes was $0.39 per share, which also includes the indirect effect on expenses. Excluding the impact of catastrophes with operating earnings of $0.17 per share, this compares favorably to the operating earnings in the prior period of $0.15 per share. Now I'll turn it back to Barry for some concluding remarks.

[Barry Goldstein:]

Thanks, Victor. Last month, we celebrated the 132nd anniversary of the founding of Kingstone Insurance Company. We have a rich history, and our executive team continues to embellish upon it. Over the past year, we've gained strength in management with the addition of Dale Thatcher. We gained strength in our surplus through the capital contributions by the parent company. We've made a sensible conservative level of risk, we've maintained a sensible conservative level of risk taking and expanded our reinsurance program. We've grown geographically over the past year by adding business in New York and in New Jersey and Rhode Island. We are particularly proud of our customer service, giving personal service to each insured producer while at the same time providing users tools comparable to any national carriers offerings. We maintain the exceptional history of Kingstone being a customer-centric company based on personal service. We believe our aging-only business model serves us best, and we will shortly bring our offerings to Massachusetts and Maine, adding more lines of business as we go. This is taking us closer to becoming the planned for A-rated Northeast regional carrier focusing on small to midsized agencies. With that, operator, let's open the lines for some questions.

[Barry Goldstein:]

Well, I'm glad to be able to say everything we put out on our press release, and Q was self-explanatory, rising to the level of no questions. But thanks to everyone for taking the time to listen, and for the entire Kingstone team, we thank you for your interest and look forward to delivering exceptional results in 2018 and beyond. Have a great day, everyone.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.