Kingstone Companies, Inc.
Q3 2016 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

Greetings and welcome to the Kingstone Companies Third Quarter 2016 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]. It is now my pleasure to introduce your host, Ms. Amanda Goldstein, Investor Relations Director. Thank you. Ms. Goldstein, you may begin.

[Amanda Goldstein:]

Thank you very much, Michelle and good morning everyone. Yesterday afternoon the company issued a press release detailing Kingstone's 2016 third 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 other similar words are used to identify such forward-looking information. The forward-looking events and circumstances discussed on this call may not occur, and could differ materially as a result of the known and unknown risk factors and uncertainties affecting the company, including risks regarding the insurance industry, economic factors in 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, which are not defined under U.S. 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 B. Goldstein:]

Thanks Amanda and good morning to everyone listening in. Today I am going to update you on our quarterly results for the period ended September 30, 2016 which were exceptional. We will give some color on the various metrics and we will discuss with you what we see for the near-term. 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 Q3 will be the first item of business today. Ben will discuss our loss ratios, claims reserves, and underwriting initiatives. Victor will review our accounting for net written premiums and its effect on our leverage and then finally I’ll return for some closing remarks. Yesterday afternoon we posted the best quarterly results in Kingstone’s history, wait that’s exactly what I said last quarter. Well, we did it again. We delivered an excellent, in fact outstanding combined ratio of 67.4%. Last year we were quite happy with the 72.8% we posted but as our former CEO often says, this is a fortitude [ph] business and we should enjoy the sun as it shines. Net premiums earned were up 19.2% over last year. Please note that the third quarter of 2015 was enhanced by the earn out of the return premiums generated from the cutoff of our personal lines quarter share treaty at July 1, 2015. Low losses coupled with solid growth generated from our select producers allowed us to record the highest quarterly underwriting profit in the company’s history. For the nine month period our combined ratio sits at 79%, exactly where we were this time last year. Again since net earned premiums in 2015 were enhanced by the cut off from the two prior treaties, this makes 2016 even that much better. Our working with quarter share treaties enables us to scale the level of risks we are willing to absorb and that’s a good thing. Trying to explain it has the same effect on the brain as taking 20 mg of Ambien. Sorry, but we got to do it and I’ve given Victor that pleasure. Our quarterly net income per share on a fully diluted basis was $0.43 or a total quarterly net income of almost $3.5 million. This includes $0.02 a share in realized gains. Thus our quarterly net operating income per share was $0.41. Return on equity for the quarter was over 25% when annualized and in spite of winter weather and large fire claims we reported in the first quarter, our year-to-date return on average common equity is 17.9%. Book value per share stands at $7.16 reflecting a sequential quarterly increase of 5.3% from the second quarter amount of $6.80 and up 19.3% in the past year. Please recall that at the third quarter of 2015 our book value was $6 even and we paid out $0.25 a share in dividends over the last 12 months. Overall our direct written premiums in our New York state continuing lines of business grew by 10.6% during Q3 versus the prior year. We’ve now written over a $100 million in premiums since the third quarter of last year. While we are dealing effectively and profitably with continuing competition, our product reviews allowed us to implement underwriting initiatives designed to avoid those risk where price is the only important factor to the applicant. This is true for both personal and commercial lines. These are not the types of policy holders that we covet, that is those seeking only an insurance certificate at the lowest price. Those are sold to the other companies. Homeowner and drilling coverages which make up 79% of our total written premiums continued to grow at just under 12% versus the prior year. As mentioned many times before, we are happy to compete with anyone based upon our value proposition of quality coverage, enhanced customer service, and fair prices. And what’s happened is that the quality of the new business we brought on has increased by calling out those least profitable risks resulting in fact in lower losses and lower frequency. But since Ben was responsible for those product changes, I’ll let him talk more about that. Including cash, our total investments at September 30th, exceeded a 109 million. With our fixed income holding structured for a lower duration than in the past we are far better positioned to deal with the rising rate environment. While rates have moved up following the election results, we intend to keep a little extra dry powder in the coming months. We will though opportunistically deploy our cash flow into those sectors and into those issuers which we feel present a good value proposition. Now let me turn it over to our Senior Vice President and Chief Actuary, Ben Walden. Ben?

[Benjamin Walden:]

Thanks Barry. It was another exceptional quarter for Kingstone from an underwriting perspective. The 2016 third quarter net loss ratio improved 5.7 points to 32.8 from 38.5 in the prior year period. Due to our personalized property focus, the third quarter is normally a good one barring a cat event or major storm. In Q3 2016 we were fortunate to have unusually good weather and we continued to see improving trends across the business. Reduced claims frequency and a relatively small impact from large claims helped to produce a result that was much better than expected. Our core loss ratio excluding severe winter weather and prior year loss development improved nearly 9 points to 33.2 from 42.1 in the prior year period. There was no additional impact from 2016 winter weather claims recorded in the third quarter. The impact of prior year loss development was slightly favorable, accounting for a 0.4 point reduction in the calendar quarter loss ratio. Our loss ratios by line of business continued to show year-over-year improvements. Our first in line for loss ratio was an outstanding 22.9 over 10 points better than the 2015 third quarter loss ratio of 33.1. Personal lines claims frequency declined 20% year-over-year and the impact of large claims was reduced. We continued to see improving results in commercial lines driven by reduced large claim activity and higher average premiums per policy. The commercial lines loss ratio for the quarter improved nearly 10 points from 51.2 to 41.7. Our livery physical damage line continues to produce very profitable underwriting results with the year-to-date loss ratio in the mid-40s. During the third quarter we continued to settle and close the remaining open claims from our legacy commercial auto book. There are now 41 open claims remaining with just under 2.5 million of direct reserves. The impact of this line on our third quarter results was favorable as we settled and closed claims for less than amounts previously reserved. Reserves related to the commercial auto line now make up just 6% of total reserves. The impact of this line on our ongoing results is minimal. In summary it was another outstanding quarter in which we continued to show improvement on what is already a stellar result. The changes made over the last year to improve our mix of business are now bearing fruit. As competition begins to increase we are happy to let the underpriced and unprofitable business go to carriers looking only at short-term cash flow. In personal lines we have placed increased focus on underwriting through detailed renewal reviews and increased interior inspections which is clearly reducing our claims frequency and loss ratio. In commercial lines, actions we took last year to stop offering our lower priced policy forms are now resulting in a much improved mix of business. Even though we continue to report superior results we are constantly striving to improve. As a $100 million company, seeking to become an A rated carrier, we know that these are things we need to focus on especially as we expand into other markets. We will not take our eye off the ball despite our continued success in New York. At this point I will turn it over to Victor to discuss details of our financial results. Victor?

[Victor Brodsky:]

Good morning. Let me start by mentioning that on Wednesday the Board declared our 22nd consecutive quarterly dividend paid on December 15th at $0.0625 per share. I had gone over the changes to expenses repeatedly in the past, there is virtually no change in our ratio of underwriting expenses to direct premiums earned. We remain at a consistent level with a ratio of 16.2% for the third quarter of 2016 compared to 16% for the third quarter of 2015. One financial highlight that is important to note is the difference in net written premiums between the third quarter of 2016 and 2015. Accordingly effective July 1, 2015 we decreased the quota share ceiling rate in our personal lines quota share treaty from 55% to 40%. I refer to this transaction as the cut off. The cutoff resulted in a $5.9 million return to return of unearned premiums from reinsurers that were previously ceded under the expiring personal lines quota share treaty, remember the return premiums earned over the year following the cut off. There was no change to our quota share ceiling rates on July 1, 2016, which means that there was no return of -- on our premiums as opposed to return from the cut off on July 1, 2015. The lack of a cutoff this year created a $4.1 billion decrease in net written premiums during Q3 2016 compared to Q3 2015. Because of the change in quota share rates in Q3 2015, a more meaningful approach in comparing to the year ago period is to compare net written premiums before return of previously ceded premiums. When excluding the effect from the cutoff in 2015, net written premiums increased by $1.8 million or 11.4% in Q3 2016 compared to Q4 2015. If you find this hard to follow you can refer to the explanation in the 10-Q we filed yesterday which could be found in managements discussion of the third quarter. Please take this variance into consideration when analyzing our metrics based on net written premiums. While discussing net written premiums I’d like to point out that our leverage ratio which is the ratio of net written premiums for the trailing 12 months to surplus was 1.34 at September 30, 2016 substantially down from 1.52 at June 30, 2016. The statutory surplus of KICO at September 30th stood at $47.7 million. Now let me ask Barry to conclude the presentation.

[Barry B. Goldstein:]

Yes, we’ve experienced great profitability and growth this year. At this point I’d like to give you some insight as to what to expect for the future as we continue to execute on our plan to be become an A rated top tier provider of insurance products distributed solely by the small and medium sized independent agency. To remind you, we continue on our 202020 plan. That is we have three goals, achieving 20% growth, generating a 20% operating margin, and earning a 20% return on equity; two, out of three this quarter. First we’re expanding our product offerings through our recently approved commercial umbrella program. Combining this with the full rollout of our online commercial liability rate later this quarter will allow us to ramp up our commercial lines growth. With the changes Ben has made to our commercial offerings we are earning written on allocated capital very close to what we see from personal lines. We will soon expand the number of main street classes we offer to even better serve our retail agency partners. We’d like to see total commercial lines grow overtime to 30% to 40% of our total premium writings. Next I want to update you on our regional expansion efforts. We’ve been told by many including rating agencies, analysts, and investors that we are too concentrated in New York State. We developed a multi-state expansion plan but staying true to our roots distribution will be solely through independent agencies. Following the hiring of David Delaney in April to spearhead our expansion efforts, a lot of time was spent by David and his team in designing a Kingstone product to compete with others but on our terms. David has absorbed and embraced the Kingstone culture with a goal of bringing a Kingstone like product to the new markets for which he is responsible. I’m pleased to report that on October 24th our first product designed for two family homeowner risks was submitted to the New Jersey department of banking and insurance. We anticipate approval within the next month or two leading to a launch in the first quarter of next year and until then we will continue to build our selected agency force in New Jersey. As the product gets refined we will gain experience in the Garden State and will in time add our entire suite of products. It's anticipated that in the third or fourth quarter of next year we will begin to do the same in Connecticut and Rhode Island and have our eyes set on other Northeastern states in 2018. We are now at a leverage ratio under our historic target of 1.5 to 1 as we’ve added surplus faster than anticipated over the past 12 months due to our heightened profitability. We’ve begun to model out our anticipated growth. While doing so and having great confidence in the quality of our book, we feel we can comfortably expand the net written premium leverage above our historic target and are looking to 1.75 to 1. Next July we’ll have the opportunity to reduce or even eliminate the personal lines quota share. Much will depend upon our organic growth and profitability between now and then. With that operator let’s open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Ken Billingsley with Compass Point. Please proceed with your question.

[Kenneth Billingsley:]

Good morning and congratulations on the quarter.

[Barry B. Goldstein:]

Thanks so much.

[Kenneth Billingsley:]

I wanted to just clarify one thing you just said at the end, when did you say that you were targeting the potential to eliminate the quota share?

[Barry B. Goldstein:]

Well, our next opportunity is July 1st to next year Ken. And you know there is a lot of moving parts in the calculation and between now and then we’ll be assessing it. But just going through this painstakingly detailed review of what happens with cutoffs and net written and return premiums it makes understanding Kingstone far too difficult for the average investor. So it’s been great for us, we’ve been able to grow our company by being partners with two of the major reinsurance companies in the world. We’ve had 10 year relations with each of them. We’ve got props and trophies and all sorts of stuff they present us with for having these types of relationships. And it’s been great but standing on our own we could afford to do and I look forward to that day when we can.

[Kenneth Billingsley:]

I know in the past you commented that you don’t use the quota share just because it’s cheaper and that’s not the strategy. But if you are looking to expand into other states and it’s a fairly cheap source of capital, would it be prudent to maintain a portion of it even if not all of it, even if it doesn’t take you up to the 1.75 target that you guys see that you could potentially raise your leverage up to?

[Barry B. Goldstein:]

Oh no, you are right there. I mean I am saying we’re going to have the opportunity to revisit it but because the terms were so good for us this year we chose to stay at 40% and that’s why we’re having 15 minutes of conversation as to how to account for net written premiums. But it’s not a windfall to eliminate the quota share treaty but what it does is it makes understanding this company that much easier. We do have the financial footing on our own now and eliminating any type of reliance on reinsurance that we don’t need is a favorable point of reference for our rating agencies.

[Kenneth Billingsley:]

Okay, I want to talk expense ratio and then I am looking at the just total expenses for the company and dollar spend, there has been growth on the top line but it sounds like you are doing a little bit more active management on the underwriting side through inspections and other visits, could you just comment like for how are you able to maintain expense ratio here which is not much more than we have seen in some prior quarters if not a little bit better than other quarters, while implementing this new strategy?

[Barry B. Goldstein:]

I think there is a lot of moving parts to that. First, we spent a lot of time making sure we don’t overpay for anything. So I think if you would talk to our vendors we could be a little bit annoying on pricing and we keep things tight. But yes, we’re very circumspect and we can afford to be a little more careful when we have the type of margins that we do. We are writing dwelling fire policies in areas which are often -- which often have housing units that look like there is one family living there but there are in fact six different families. That’s not the type of risks that’s going to lead to a good result in the long-term. So spending an extra $50 or $75 to knock on the door and look around, is money well spent. So as we’ve grown we have so much fixed cost that have already absorbed the marginal incremental cost, don’t add to the overall ratio. I hope that’s gives you a little bit of flavor for what we do.

[Kenneth Billingsley:]

Sure and one more question and then I’ll step out and back into the queue is on the livery business. From a gross standpoint there is obviously a lot of attention from that from you and other insurers as well, can you talk about maybe what conversations you’re having as a provider of coverage and how that needs to adapt and change with what they’re doing on their business models?

[Barry B. Goldstein:]

And that’s a good one. So there was pending legislation last spring that went nowhere in Albany. The national model for the transportation network companies was not going to be adopted in total in New York State. It was essentially excluding New York City, that’s where we get more than 90% of our risks. So while the rest of the State looks like it might be influx and might be looking forward to some changes, the vast majority of the risks that we underwrite are in the city and if the 2017 legislation because I think that’s when it’s going to take place if it does, if that continues to hold and exclude New York City it’s really not much we need to change or do. But we keep our eyes out for opportunities. There is new legislation, new regulation centered around the capital district of New York that we’re looking at carefully. The same maybe so in parts of the Hudson Valley, local initiatives versus State wide. So, I think the point is we don’t just see unless the pending -- the proposal legislation were to change we don’t foresee the changes to New York City. But we will opportunistically participate in the rest of New York once we understand what the game plan is. Right now there is no game on at all, if that’s good for you.

[Kenneth Billingsley:]

Thank you for taking my questions.

[Barry B. Goldstein:]

My pleasure.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Louis Master [ph] with May Facts Investor [ph]. Please proceed with your question.

[Unidentified Analyst:]

Hi, great job. Just wondering if there are any thoughts about the coming year as to whether you’re optimistic and how you feel about the outlook?

[Barry B. Goldstein:]

Well and thanks for giving me that one. I didn’t include in my prepared remarks what I see coming from the Trump Presidency and I am not going to speak to the Presidency itself but job creation, new business formations that’s been solely lacking in the last 8 years. From a commercial perspective we’ve been looking at a zero sum gain. There has been so few new businesses started that the growth in our business has only been by taking business previously underwritten by other carriers. This presents a tremendous opportunity for companies like Kingstone which functions at looking at those main street risks. You ask we’ll continue to write the homeowner policy and maybe the prospect of higher interest rates will lead to less turnover in homes, we’ll see how that pans out. But on the other hand any economic stimulus, fiscal measures taken by our Congress and hopefully States will lead to more opportunities for us to underwrite risks. And frankly a lot more fun in doing business. So I am very optimistic at least with regards to how the Trump Presidency will affect Kingstone from what we know today. Hope that was the response to your question.

[Unidentified Analyst:]

Yes.

[Barry B. Goldstein:]

Okay, thank you.

[Operator:]

Thank you. [Operator Instructions]. Mr. Goldstein I am showing there are no further questions at this time. I would like to turn call back over to you for any closing remarks.

[Barry B. Goldstein:]

Well I would like to think we did such an excellent job there were no questions but I got a feeling I was right and Victor put everybody to sleep. But thanks for taking the time to listen. From my entire team, we are pleased and proud to have delivered these outstanding results and look forward to continuing our build out of Kingstone to a multistate, multi-lined A rated carrier. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.