Kingstone Companies, Inc.
Q2 2016 Earnings Call Transcript

Published: 12 Aug 2016

[Operator:]

Greetings and welcome to the Kingstone Companies, Inc. 2016 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 Director for Kingstone Companies. Thank you. Ms. Goldstein, you may begin.

[Amanda Goldstein:]

Thank you very much, Kevin, and good morning, everyone. Yesterday afternoon the company issued a press release detailing Kingstone's 2016 second quarter results. We posted a PowerPoint presentation on the company website that acts as an accompaniment to this call. The speakers will not be referring to the slides, but we hope the ordering of the slides will follow the discussion. Please review the presentation and follow along if you can. On this call, Kingstone may make forward-looking statements regarding the company, its subsidiaries and businesses. Such statements are based on the current expectations of the management of each entity. The words anticipate, expect, believe, may, should, estimate, project, outlook, forecast, or similar words are used to identify such forward-looking statement. 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 the company, including risk regarding the insurance industry, economic factors and the equity markets generally, and the risk factors discussed in the Risk Factors section of its Form 10-K for the year ended December 31, 2015. No forward-looking statement can be guaranteed. 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 publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. When discussing our business operations, we may use certain terms of us, which are not defined under US GAAP. In the event of any unintentional difference between the presentation materials and our GAAP results, investors should rely on the financial information in our public filings. With that, I’d like to turn the call over to Kingstone’s Chairman and CEO, Mr. Barry Goldstein. Please go ahead, Mr. Goldstein.

[Barry Goldstein:]

Thanks, Amanda, and good morning to everyone listening in. I’m excited to update you on our company and what it achieved during the second quarter, which is quite a lot. This quarter marks the seventh anniversary of Kingstone Insurance being a part of our company. It would be easy to spend at least an hour talking about all the progress we’ve made. But keeping it short and leaving room for questions is the order of the day. I’m joined today by Ben Walden, Kingstone’s Senior Vice President and Chief Actuary; as well as our Chief Financial Officer, Victor Brodsky. The financial and operational results for the second quarter will be the first item of business today. Ben will discuss our underwriting profitability as well as our reserves. Victor will review our leverage and expense ratios and then finally I’ll return for a few closing remarks. So let’s get started. Yesterday afternoon, we posted the best quarterly results in Kingstone’s history. We delivered a very solid combined ratio of 73.7% and with net premiums earned increasing by 38% over the last year, our underwriting profits were excellent. Please note that our six-month loss ratio is a full 4 percentage points ahead of where we were at this same time in 2015 and at year-end 2015 we finished the year at net loss ratio of 47.7%. Our quarterly net income of $2.8 million translates to diluted earnings per share of a record $0.36. This includes $0.02 per share in realized gains and please note that the computation includes a heightened share count due to the private placement that closed on April 18. Return on equity for the quarter was over 22% when it’s annualized. Book value per share increased by 7.6% in just the last quarter to finish this quarter at $6.80 per share. Please note that at this time last year the book value was about $5.73 and since then we’ve also paid our dividends totaling $0.24 a share. Written premium in our continuing lines of business grew by 13% during the second quarter. Note that our second quarter writings put us at a run rate in excess of $100 million annually. Homeowner and dwelling coverages which make up 75% of our total written premiums continued to grow, albeit at a slower pace as competition has increased some. But Kingstone does not compete on price. We offer a fair price for each risk we're willing to underwrite, enough for us to pay the claims to ensure it's a fair commission to our select producers, enough to pay reinsurance to keep our balance sheet strong and protect us and our policyholders from a catastrophic event, enough to cover our operating expenses and finally enough to deliver a return on equity to our shareholders. With some non-A.M. Best rated carriers offering rates we don't feel worthy of allocating capital to with what looks like bare bones catastrophe protection, we're happy to step back and watch. We've made some underwriting changes which are designed to enhance the flow of higher quality new business and personal lines new business production is well ahead of where we were at this time last year. We've seen modest growth in commercial liability lines, but we expect our new software rollout scheduled for the third quarter to really ratchet up new business. We expect the percentage contribution for commercial lines to grow significantly and our commercial lines underwriting team is ready for the challenge. The pace of growth in our physical damage for livery vehicles has slowed which muted our overall growth rate somewhat. And as mentioned in our May conference call, we ran off the last of our commercial auto policies. My only regret here would be not pulling the plug on that line sooner. We did our best to try to turn it around, but time ran out and we could no longer devote any capital to that line of business. We will not participate in a line of business where an adequate return cannot be forecast. Ben will discuss the implications for our reserves and profitability without this highly volatile line. Including cash, our total investments at June 30 exceeded $100 million for the first time. We're very pleased to have finalized the restructuring of our bond portfolio during the second quarter. Our fixed income holdings now represent 88% of our total investments, which isn't much different than previous periods, but when looking at the overall bond holdings at June 30 you'll see they now carry an average rating of A- and a duration of just about four years. This is more in line with the structure of an A-rated company we aspire to be. We've improved the quality of the portfolio and at the same time have better positioned ourselves to take advantage when higher interest rates take hold. Now, let me turn it over to our Senior Vice President and Chief Actuary, Ben Walden. Ben?

[Benjamin Walden:]

Thanks, Barry. It was an excellent quarter for Kingstone from an underwriting perspective. The 2016 second quarter net loss ratio improved 5.3 points to 38.6% from 43.9% in the prior year period. In this quarter, we were clicking on all cylinders with lower claims frequency across the board and relatively small impact from large claims. As a result, the core loss ratio excluding severe winter weather and prior year loss development improved 6.1 points to 36.5% from 42.6% in the prior year period. There was no additional impact from 2016 winter weather claims recorded in the second quarter in contrast to 2Q 2015 when we recorded 1.6 points of impact. Looking at our loss ratio by line of business, this was a very good quarter. Our personal lines loss ratio was a strong 31.9%, just slightly higher than 2015 2Q loss ratio of 28.9%. Although our loss ratio was a little higher than the prior period, claims frequency continued to trend lower. We're seeing improved results in commercial lines as large claim activity has been reduced and results are not affected by prior year reserve development as was the case in previous years. Commercial lines loss ratios have been trending favorably due in part to changes in mix of business that are now attracting higher quality risks with higher average premiums. The commercial lines loss ratio for the quarter improved over 32 points from 74.7% to 42.6%. We also posted a solid 40% loss ratio for livery physical damage and this line has continued to contribute an increasing share of profits as it now makes up 16% of our total net earned premium. Our loss ratio continues to benefit favorably from exiting commercial auto. During the second quarter, we completed the run off of this line and no longer have any policies in force. There are now 45 open claims remaining with just under $3 million of direct reserves and the impact of this line on the current calendar year loss ratio is immaterial. Reserves related to the commercial auto line now make up less than 7% of our total reserves, by contrast in 2013 commercial auto reserves made up over 26% of our total reserves. This added a great deal of uncertainty to our reserve position and volatility to our financial results. In 2013, we posted a commercial auto loss ratio of 111%, which reduced our underwriting profit by $1.6 million or 7 points on the combined ratio. The decision to exit commercial auto was necessary and our financial results will no longer be adversely affected. Turning to reserves, our overall reserve adequacy continues to be strong. In the second quarter, we recorded some reserve strengthening related to loss adjustment expenses. However, we continued to display favorable prior year loss developments year to date. We are constantly making incremental improvements to claims handling and to the expertise of our claims staff which leaves us confident in the continued strength of our reserve position. At this point, I’ll turn it over to Victor to discuss trends in our underwriting expense ratios. Victor?

[Victor Brodsky:]

Good morning. Let me start by mentioning that on Wednesday the Board declared our 20th consecutive quarterly dividend payable on September 15 in the amount of $.0625 per share. As previously announced in April, we received $4.8 million of net proceeds from private placement. During the second quarter, we started to put some of the proceeds to work. In June, we invested $3 million as a surplus contribution to Kingstone Insurance Company, KICO, to support its continued growth. This surplus contribution allowed us to achieve our leverage ratio goal that is the ratio of net written premiums to surplus of 1.52, just two basis points above our target of 1.50. The statutory surplus of KICO at June 30 stood at $44.9 million. Barry and Ben already discussed where we stand on our written premiums and net losses. Comparisons between periods for the net underwriting expense ratio which utilizes CD commissions and net premiums earned are difficult to make when there are changes in quota share ceding rates. Instead I'd like to discuss trends in our other underwriting expenses. These expenses include the overhead regulatory course that we incur to run our business. While there's not much that can be done about regulatory course, we have worked hard to manage our overhead expenses. As we see written premiums continue to grow, our ratio of underwriting expenses to direct premiums earned has remained very consistent between periods. For the second quarter of 2016, the ratio was 15.2%, a slight increase of 0.4% from the second quarter of 2015. We were able to temper the growth in staffing needed for our underwriting and claims units. We accomplished this by leveraging efficiencies gained from the use of ImageRight software which we implemented during the third quarter of 2015. We continue to make efficient use of our in-place infrastructure as our business grows. We've made other technology investments and we’ll continue to do so allowing us to better manage our business and control expenses as we grow. Now, let me ask Barry conclude the presentation.

[Barry Goldstein:]

Thank you, Victor. Kingstone is in fine shape and that’s something I take an immense amount of pride in. We renewed our reinsurance treaties at July 1 and have re-upped our personal lines quota share at 40% through next June. We increased our catastrophe coverage to cover a 250-year event. In spite of the increase in coverage, the cost per dollar of earned premium remains virtually unchanged from the prior year. In fact, we offset the decline in rates with a better balance sheet protection. We've maintained our conservative risk tolerances and have no need, nor any plans, to raise any capital. A.M. Best financial strength rating for Kingstone Insurance remains at B++. The issue of credit rating for KICO is now BBB with a positive outlook, which is an improvement. But the stair-stepping approach in spite of the aggressive measures we've taken to reduce volatility and increased health coverage have gone unrewarded. We will continue on the path of us becoming an A-rated carrier. With that operator, let's open the lines for questions.

[Operator:]

[Operator Instructions] Our first question comes from [Ken Billingsley], a private investor.

[Unidentified Analyst:]

I wanted to – just on the number side, were there any reserve releases in the quarter? I know you mentioned a legal – or LAE for the legal side, but were there any reserve releases that offset that?

[Benjamin Walden:]

There were fairly consistent trends in all of the lines of business. So we didn't feel we needed to release reserves at this time, although we are always looking at that and by year end we do hope to release more, but we will do the full analysis to determine that. So the answer to the question is no releases. There were none.

[Unidentified Analyst:]

So the entire 2.1%, it was not a net number, that was all regarding to the LAE?

[Benjamin Walden:]

100% LAE, about 50% the ULAE, 50% ALAE. There were no loss adjustments for reserves; it was all in the expense side.

[Unidentified Analyst:]

Could you just remind us what you said it was for legal expense associated with a larger liability claims, just where you are and the status of that and maybe what promulgated the charge for the increase?

[Benjamin Walden:]

So over the last year and a half, we've taken initiatives to settle and close some of the bigger liability cases. This is resulting in us spending a little bit more on the expense side to save money on the loss watch side. In this quarter, we decided to increase our provision for LAE reserves to account for that. We expect in the future that that should have a corresponding benefit on the loss side.

[Unidentified Analyst:]

Pay now, save later?

[Benjamin Walden:]

Correct. Reserve now and release later.

[Unidentified Analyst:]

The other two questions is just about expansion, I know you talked about competition in general coming in, pricing still remains favorable overall, can you talk about what your New Jersey expansion plan will look like, when do you expect to see some tangible numbers and when should we expect to see growth out of New Jersey? And then in addition to that, the commercial product as well, kind of where you see that going and the timing of ramp up?

[Barry Goldstein:]

So let talk to New Jersey first. We brought on a team leader in Dave Delaney. Dave has taken charge of really everything with respect to our growth outside New York and just yesterday he assured me that not only would our product be ready to go for submission to this date next quarter, but our software will be in place. We are hopeful that we'll be able to start writing new business in New Jersey before the end of the year. But as I said in prior calls, even if we are able to, the amount to be immaterial. We would expect to see some ramp up during the first part of next year. We're not in a hurry. We're going to watch what we do. We're not interested in just throwing premium on the books as some companies seem to be. We're very circumspect as to the people who we will deal with and we've been able to find thus far quite a number of very good agencies in New Jersey for us to work with. David has assured me that these – the profile of these agencies match up pretty well with what we have in New York and that's really what our goal is, to take what we've built in New York, focus on those small producers who’ve been neglected by the large national carriers and bring them into the Kingstone fold. So I think what you'll see is something starting in the middle of next year when it starts to make a difference in our numbers, but not much before that. With regard to commercial lines, right now we offer essentially three commercial liability products. We offer an artisan product, a bought product and a package or SMP product. We feel like we've got good products, the rates are good, the rates are fair, they’re the type of products our producers want. But we don't have today a online submission program like so many of the bigger companies do. We've been working on this. It seems like forever, but Ben sitting across to me with a big smile on his face because we think it will go into UAT testing within the next week or two, with the rollout hopefully by the end of the third quarter, early fourth quarter. When we changed over from paper and fax to online submissions in every other line of business we have, the volume of business blossomed. The producers want to work with Kingstone. They like the personal contact, our pricing is fair. We're not going to be the cheapest guy on the block, we’re not going to offer bare bones coverage like so many companies do to try to buy business, that's not us. But what we give the producer is a good product at a fair price and personalized service and that's something that separates us. So I think what you'll see and I’d hope that we'll see is increased volume starting in the fourth quarter with that becoming more and more significant all the time. I hope that answers your two questions.

[Unidentified Analyst:]

It does. And if I could ask one more on a comment that you had made, you mentioned increased competition in general and not that obviously it seems pretty – that you expected to have a significant decline in premium, but can you say where is that competition coming from? Is it some of the larger players coming back? Is it smaller guys offering bare bones that you just mentioned?

[Barry Goldstein:]

It's more of the latter. There is three or four companies at our size, a little bit bigger than us, a little bit smaller than us, all of them are either Demotech-rated or used to have financial strength rating with Best that was good, but have seen themselves downgraded to fair. But they're fighting based upon price. Their pricing risks along the coast and Suffolk County at rates that we can't justify, we want to buy an appropriate amount of catastrophe coverage. We want to be sure that in the event of a major storm, there’ll be a company when all is said and done and merely buying to 100-year event because that's the minimum requirement that Demotech may ask of these other carriers isn’t enough I feel to protect our book of business and certainly isn't enough to protect our company. So we're happy to let them price these risks and drop the prices on these risks to the point where it doesn't work for us and sold to them. Good luck.

[Operator:]

Our next question comes from the line of Paul Newsome with Sandler O'Neill.

[Paul Newsome:]

I was hoping you could just refresh my memory about your plans for the use of reinsurance prospectively in terms of should we expect to continue to see a ratcheting up of the amount of risk that you – actually the amount of proportion of the premium you've taken of each business prospectively as you had done in recent years?

[Barry Goldstein:]

We have three basic risk measures that we set forth for the company. In terms of leverage or that type of risk, we want to limit our net premiums written to 1.5 times our surplus. Second, on a single loss from any one event, we don't want to have any one loss impact our balance sheet by more than 1%. So we’re willing to absorb losses on an after tax basis of an amount up to but not greater than 1% of our equity. And finally, catastrophe reinsurance. Two things there. First, we don't want to have any one event cause us more impact to our balance sheet after tax [is it 5%] after tax. So right now we purchased $250 million worth of catastrophe reinsurance this quarter, I'm sorry in the treaty that we just entered into. If we hadn't gone to the 250-year event, we would have had to buy about 20% more than the $180 million of coverage we had in the prior year. We bought it at 250-year level because using the new stochastic modeling of A.M. Best and the requirements to reach an A- rating and its 99.5% confidence interval, that's what's required. So I think overall I hope that answers your question as to our risk tolerances, but the process by which we manage the company and those metrics that I laid out, those haven’t changed for as long as I've been the CEO of the company. I hope that answers it.

[Paul Newsome:]

Absolutely, it’s very clear and it’s a good update. No question about it. Separately, I wanted to ask about some of these new efforts to go into states, to new states. Have you explored other states other than the ones that you have recently announced? I guess I am curious over the longer term, should we expect you to be licensing a new state or two every year and kind of expanding geographically over time or so is this a continuing process or the three or four states that you are in kind of what you are going to be working on for the near future and we shouldn't see any other efforts beyond that yet?

[Barry Goldstein:]

I'm glad you're thinking far in advance. I think between adding Connecticut, Rhode Island, New Jersey and Texas, we've bid off quite a lot. The order of preference for us is the easier it is for me to drive there the more likely it is we're going to do business there. So we're starting in New Jersey, most likely the next place will be Connecticut. We've done business previously in Pennsylvania. And David and I have talked quite a great deal about this. Once our product is in place and fine tuned, then we will move quickly to enter Connecticut and update Pennsylvania. Those would be the next goals in mind for 2017. We applied for and received permission to do business in Texas last year. Being a slow mover or being accused of being a slow mover as I often am, given the weather situation in Texas, I don't think there's a spot you could find in that state that wasn't subjected to something one news reporter call a 100-year event or a 300-year event. So I'm not in any hurry there. If we can find an appropriate segment of the business to write in we will. But I would say we pushed that kind of back on our timetable. As to other states, I'm not adverse to other states, Paul. If opportunity presents itself, particularly if the opportunity was in the way of a whole company transaction, no doubt I'd look at it. But what we've planned for is the organic expansion of Kingstone as it exists today. But I sleep with one eye open. I'm always waiting for somebody to call me the next morning. I hope that answers your question.

[Paul Newsome:]

It does indeed. Thank you and congratulations again on the quarter. It is hard to argue with a 20% plus ROE.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

[Barry Goldstein:]

Again, thanks everybody for spending the time with us. Victor, Ben and myself along with the entire Kingstone team are really proud of ourselves for what we achieved, there's a lot of hard work that goes into tinkering and preparing and analyzing and updating. Like Ben said sometimes you just click on all cylinders and that's what the second quarter was. So we're hopeful that we can continue that going forward. We appreciate the support you've given us and look forward to speaking with you soon. Thanks again.

[Operator:]

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