Kingstone Companies, Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Greetings, and welcome to the Kingstone Companies Second Quarter 2018 Financial Results. 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, Amanda Goldstein, Investor Relations Director. Thank you. You may begin.

[Amanda Goldstein:]

Thank you very much, Diego. And good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2018 second 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 effecting Kingstone. For more information please refer to the section titled Factors That May Affect Future Results and Financial Conditions in the Item 7 of the company's Form 10-K for the year ended 12/31/17, along with the commentary on the 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 GAAP figures, please see the tables on the company's website under Additional Financial Details located on the Quarterly Results page. With that, I’d like to turn the call over to Kingston's Chairman and CEO, Mr. Barry Goldstein. Please go ahead, Mr. Goldstein.

[Barry Goldstein:]

Thanks, Amanda. And good morning, everyone. Joining me on the call today will be Dale Thatcher, our Chief Operating Officer and President of Kingstone Insurance Company, along with Ben Walden, our Chief Actuary. There's something I've got to get off my chest here, and it's that I'm disturbed about the 20% decline in the KINS share price since our last quarterly filing and the conference call that took place in the middle of March. On that call, we discussed the somewhat elevated quarterly loss ratio for the fourth quarter of 2017, but also disclosed the facts surrounding the horrible weather that we'd experienced in early 2018 in our market. We gave the market a well thought our range of losses incurred as a result of this horrible winter weather. We did this well before the others. In fact, some have never disclosed it. And those include publicly traded companies that we compete with. To point being to me what's important is being transparent and being timely. Many of these other carriers are trading added near the 52 week highs even after repeatedly under reserving losses, including catastrophe losses. To me -- and I can say this for my entire executive team, the single most important trade of a top insurance company is its integrity. Can I believe the balance sheet or not? Can I trust what the company's executive say? Do their actions go along with their words? If what you want is a glossy story told by those using 2018 fancy catchphrases, you're on the wrong call. Here's what you get, and what you can expect from Kingstone. First, we think and plan only for the long-term, which is going to be good for the company in the long run, it’s what occupies our thoughts today. That said, we don't focus on quarterly earnings. We don't whine around and look for creative wording to explain why quarterly earnings per share doesn't match up with analyst expectations. The biggest threat to Kingstone is weather. Knowing that weather can and will impact our results, we plan to mitigate this impact through a conservatively structured reinsurance program. The program does comply with the far greater requirements of A.M. Best compared to Demotech, but with -- but also with our mandate to protect the balance sheet at all costs. Consider this, our current structure limits the impact of a $200 million catastrophe loss to $0.30 a share, $3.2 million after-tax. We handle our finances carefully, protecting the balance sheet that we’ve built. Second, our growth in premiums has been and remains a focal point for our management team. We’ve grown our business by staying true to our agent-only never direct approach. All of our growth has been organic, no acquisitions, no renewal rights. To support this continued growth, we issued common stock in early 2017 when the timing seemed appropriate and debt in late 2017, contributing most of those proceeds from the two offerings to our insurance company as additional surplus. This allowed us to continue our growth. We are growing into this surplus. The impact of this excess capital has been a short -- has had a short-term diluting impact on our return on equity. The impact is lessening over time and will be eliminated as we return to our targeted leverage levels next year. By raising the capital before we needed to, we then were and remain well positioned and see no need to add any surplus over the next year. With that, let me turn the call over to Dale, who’s a little bit less hostile than I am.

[Dale Thatcher:]

Thanks, Barry. We had a good solid quarter and I’m happy to put first quarter’s cats behind me. Direct premiums written were up 21% to $36.9 million and net premiums were up and even greater 41.8%, reflecting the year-over-year reduction in our quota share reinsurance treaty. And for only the second time in my 35-year insurance career, my company came in with a combined ratio in the 80s at 84.2%. That’s one of the really special things about Kingstone and one of the big reasons I decided to come out of retirement and join Kingstone as the exemplary history of outstanding profitability. We’ve carved out a unique niche for ourselves in serving the smaller agents that many of the larger carriers have left behind. By providing them with the love and attention of years gone by, they provide us with the best of their profitable business. When you combine that with an A minus rating from A.M. Best, we’ve been able to parlay that into growth in excess of 20%, while maintaining combined ratios in the 80s, a pretty compelling story. We started expanding that recipe into the contiguous states, we’re now running at an annualized rate in excess of $7.6 million in premium in New Jersey and a $1 million in Rhode Island. We’ve written our first policies in Massachusetts and expect to have Connecticut and New Hampshire up and running by the end of the year. We’re truly well on our way to becoming the newest Northeast regional carrier. And we fully expect to maintain our longstanding record of profitability. One of the most important measures of our performance is the return that we generate for our shareholders. This quarter, we recorded a 12.5% return on equity, up from 11.3% last year, in spite of the fact that the combined ratio is a little higher this year. This reflects the benefit of our increasing use of leverage as we grow. We are currently writing a just under 1.1 to 1 premiums-to-surplus and fully expect to achieve a steady state of approximately 1.5 to 1, meaning that we have substantial capital currently to support our robust growth in excess of 20%. Additionally, as you saw recently, we successfully placed our July first reinsurance renewal. We purchased $445 million in excess of our $5 million retention, a 41% increase in coverage over last year to reflect our substantial growth. In spite of our increased demand, we saw a decrease in rates and an increase in participation from reinsurers. To me that represents an acknowledgement of our sound underwriting and ongoing profitability from some of the most knowledgeable reinsurance underwriters in the business. We still expect to achieve a combined ratio excluding cat losses of between a 79% and 85% for the full year this year with cat losses of between 5 points and 7.5 points on the combined ratio for the full year. All-in, we are very pleased with what we've accomplished and where we are positioned for the future. We look forward to the challenge of continuing to build on our foundation of success. Now, I'll turn the call over to Ben.

[Ben Walden:]

Thank you, Dale. As Barry noted, we strive to be transparent and proactive in all of our financial reporting. We reflect the ultimate impact from even large storms as soon as we know the scope of an event. Following that philosophy, our initial estimates for the first quarter cat events have proven to be conservative. During the quarter, we closed out all the 33 of the 515 winter cat claims and recorded 269,000 of favorable development. However, we did record a net catastrophe impact of $184,000 in loss due to three new cat events that occurred in April and May. As part of our proactive philosophy, we also constantly monitor individual claims and make adjustments to reserve levels whenever needed. Following along with that, during the quarter, we strengthened reserves on several liability claims resulting in prior year development of $341,000. Although this is still within our target range for reserve variability, it created an unfavorable variance of 2.6 points compared to 2Q 2017 when we recorded favorable prior year development. Such ongoing investments, up and down, ensure that our overall reserve levels always remain strong and accurately stated. Apart of these adjustments, our underlying loss ratio remains consistently profitable. The loss ratio excluding cats and prior year development decreased by 1 point to 44.2 from 45.2 for 2Q 2017. The improvement was primarily due to a decrease in personal lines claims frequency. Our core New York business continues to provide a strong profit engine and our underwriting profitability remains consistently solid. Now, I will turn it back to Barry for closing remarks.

[Barry Goldstein:]

Thanks, Ben. I'd like to know that Dale joined -- I'd like you to know that Dale joined us as our 100th employee a few months back. The timing was perfect as the opportunities and obligations we deal with have ramped up quickly, particularly since our elevated A.M. Best rating. Things we have seen for the first time at Kingstone have been dealt with by Dale many times before. His experience, reputation, intellect, and thoughtful approach has already had a profound effect upon our staff and in our dealings with the reinsurance and regulatory communities. We must choose those new items we seek to pursue very carefully. We are working on building out our agent-only distribution. And while we continue our traditional path of appointing new agencies with physical locations, we are working to establish a presence in other channels. We will work with online agencies, affinity marketing groups, and will access other companies’ distribution for placing Kingstone policies. We've been sort after for these new opportunities as a direct result of achieving the A-minus rating. We will bring additional products to the Kingstone select producer, including those underwritten by other carriers. Kingstone focuses on the needs of its producers, trying to fulfill those needs where we can and we will do so only when we can earn enough of a return to [warrant] taking the risk. But if we can't do that or we choose not to do that, the need at the producer level is still there. And if we can play a part and generate additional revenue for Kingstone, then that is the path we will take. With that operator, let's open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Paul Newsome with Sandler O'Neill. Please state your question,

[Paul Newsome:]

Thank you. First, I just was hoping if you could give us a little bit more thought on the competitive environment in your local markets and if it's changed recently? And then the second is, maybe you could talk again about the reinsurance changes and what may or may not happen from a financial reporting perspective because of those changes?

[Barry Goldstein:]

So, Paul, this is Barry, let me take the first part about competition. We continue to see a number of the Florida-based carriers coming into New York. All of the ones that we're seeing are Demotech-only rated companies -- I'm sorry, one has a B or a B-minus A.M. Best rating, they used to have a good rating until they had some problems I think. In any event, we've really separated ourselves from that group and we have not seen any slowing in the growth of our premiums. So I think what you'll -- I guess the best way to talk about it is the Demotech-only players are competing more with one another than they are with us. I hope that's what you were -- I just think you were looking to hear. Now with -- go ahead. Sorry, I just missed that.

[Paul Newsome:]

No, just thank you, that's interesting. Thank you.

[Barry Goldstein:]

Yes. Nothing, nothing, no dramatic change frankly. I'm going to let Ben take the question on the reinsurance.

[Ben Walden:]

Sure. So on reinsurance, I think you're referring to the quota share impact. We did not -- and we're not going to change anything on the quota share going into the next treaty. So what you'll see in the financials now is when you look quarter-over-quarter, there is an impact on expense ratio due to the quoted shared change that was made going from last year to this year, taking it from 40% to 20%. Since that will stay the same going forward in your next quarter, we will not see that impact on the expense ratio.

[Barry Goldstein:]

Yes. The impact is essentially what you'd guide -- I guess, you guys would call a bad comp and this was the last quarter of that. Going forward, since we continue to have a 20% quota share, the quarter-over-quarter results will be comparable.

[Operator:]

[Operator Instructions]. Our next question comes from Bob Farnam with Boenning and Scattergood. Please state your question.

[Bob Farnam:]

So with the leverage getting up to 1.5 to 1, it sounds like by next year if I heard that right, is A.M. Best okay with that, I just want to make sure that at least they’re aware of your plans and there’s no jeopardy to your ratings?

[Dale Thatcher:]

I mean as always as you’re particularly familiar with Bob is the -- you never know exactly when A.M. Best is going to say this or that. But they’re definitely aware of it and definitely comfortable with it. So as long barring any changes in how A.M. Best views the business, more broadly, we don’t expect any kind of issues with that at all. One of the things to keep in mind as a homeowners’ writer, there’s a lot less volatility and a lot less reserve risk with a company like ours. And therefore, they are much more accepting of a higher leverage ratio. So even though the industry sits at a 1.1 to 1, they’ve got no problem with a 1.5 to 1. And we think it’s a much more appropriate area of leverage to operate in. To be honest with you, I could theoretically from a finance perspective argue that a higher leverage ratio would be even more appropriate. But we’re very cognizant of our rating agency obligations and the need to maintain a positive outlook from that process. So 1.5 to 1 is a good range for us to operate in.

[Bob Farnam:]

Okay, Dale. Thanks. I -- obviously you’ve got the A minus now and I don’t want anything to jeopardize that. So we just make me …

[Dale Thatcher:]

We don’t either Bob, we don’t either. If anything we wanted to go the other direction and keep moving up.

[Bob Farnam:]

So you’ve had a game plan getting into your new states. What’s been your biggest challenge that you found getting into some of these new territories?

[Barry Goldstein:]

Yes. I think that as with any new state that you open up regardless of what company you are, it’s finding your way into any crowded field and convincing the agents that you provide something different. And particularly given Kingstone’s size, it’s not like everybody throughout the Northeast knows us already. So it is an effort to work on the agents, select the best agents and help them understand that the Kingstone proposition is different than what they find elsewhere. One of the big benefits that we do have, though ongoing in is, there are a lot of smaller agents that have gotten left behind by the bigger players that have minimums that the small agents just can’t meet. And therefore, Kingstone comes in and provides them with an outlet and an opportunity and some tender loving care that in the olden days they used to get from the bigger players but don't get anymore. And it really creates I think a real affinity and a real loyalty from those agencies.

[Bob Farnam:]

Have you -- has the -- has your ability to get your name out there and talk to the distribution force gone as well as you expected or is this been slower than maybe you thought going into it?

[Barry Goldstein:]

No, I think it's going just as we expected. We brought on board a couple of years a fellow by the name of David Delaney, who wouldn't be missed in any room he walks into because he's like 6’6” and about a mile wide. But ….

[Ben Walden:]

Not a mile wide.

[Barry Goldstein:]

Alright, David's on the call, sorry David. In any event, he's …

[Ben Walden:]

He was a very fit football player.

[Barry Goldstein:]

Exactly. Now he's done a great job. He does exactly what is needed in terms of assessing who the best prospects are. We tend to gear towards agencies that have a long track record, maybe family owned for a long period of time, agencies with the principals are actively involved in agent organizations such as the Big Eye or PIA. People who can spread what we think will be the good news we bring to them, and they'll spread it by word of mouth. So it's going as expected. If anything I think we're ramping up in a couple of places a little quicker than we thought, but still little premature to gauge that.

[Bob Farnam:]

Okay, great. And one final question for -- probably for Ben. So net investment income was up stronger than I expected in this quarter, was there any particular driver there? Are you finding any of your specific assets that have been producing more than others?

[Barry Goldstein:]

Okay. I'll take that. No it’s really a matter of we didn’t rush to invest all the capital from that was placed in the insurance company and moved in right at the end of December. So what you're seeing is a fully deployed balance sheet now with a lot of money was left as dry powder if you would at the end of the first quarter but it’s fully deployed at this point.

[Bob Farnam:]

Okay. So it's more having everything out there to in your earning now than ....

[Dale Thatcher:]

More fully invested, and I would say, the other thing that we are seeing as you well know and as everyone else is seeing is that the new money rates going into the portfolio, we're definitely seeing a little bit of an increase there in investing 40 to 50 bps higher than we were a year ago.

[Bob Farnam:]

Right. Great. Thanks for the answers guys.

[Operator:]

Thank you, ladies and gentlemen. There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

[Barry Goldstein:]

Great. And thanks everybody for taking the time to listen. With my entire team, we're pleased and proud to have delivered strong and consistent results and look forward to doing more of the same in the future. Have a great day.

[Operator:]

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