Kingstone Companies, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Greetings and welcome to the Kingstone Companies Fourth Quarter and Year-End 2016 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. Please go ahead.

[Amanda Goldstein:]

Thank you very much, Kevin and good morning everyone. Yesterday afternoon the company issued a press release detailing Kingstone's 2016 fourth quarter and year-end results. We posted a PowerPoint presentation on the company Web site 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, 2016. 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 art, which are not defined in the 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 Goldstein:]

Thanks Amanda and good morning to everyone. Today I am going to update you on our quarterly results for the period ended December 31, 2016 along with the full calendar year. These results were exceptional, we’ll give some color to the various metrics and we’ll discuss with you what we see for the near-term. I’m joined today by Ben Walden, Kingstone’s Executive Vice President and Chief Actuary; as well as our Chief Financial Officer, Victor Brodsky. The financial and operational results for Q4 will be the first item of business today. Ben will discuss our loss ratios, reserve development, and underwriting initiatives. Victor will discuss some of our financial highlights and then finally I’ll return for few closing remarks. Yesterday afternoon we filed our 2016, Form 10-K, reflecting the most profitable and for me the most satisfy set of results in the company's history. We’ve deliverer another very profitable quarter completing the highest full year profit in the company's history. For the fourth quarter our combine ratio was 79.6% down 260 basis points from the fourth quarter of 2015. For the full year the combine ratio was 79.2% down 80 basis points from 2015. I'll let Ben go over the factors that gave rise to the improvement. As compared to so many other P&C carriers as of late Kingstone's saw a positive reserve development during 2016. I'm very confident in our reserve of adequacy with the legacy issues of lead paint [ph] claims finally dealt with and the problems of our former participation in the commercial auto market deep in the rear view narrow. Direct written premium growth in the fourth quarter was 12.8% while for the full year it was 13.4%, recall that we exited commercial auto as of May 2015. As mentioned in previous calls, we are seeing more competition and more competitors. We probably aided them somewhat by tightening our underwriting, seeking to improve those lines, classes and forms that haven’t given rise to acceptable underwriting profits. In addition, as we always do, we called the number of agencies we deal with eliminating new business from those which failed to hold up their end of the bargain. Those steps were warranted, and while we might see a short-term top line reduction as a result as we have in the past, these types of actions have always proven out, as you can see from our combine ratio. Our quarterly net income per share in the fully diluted basis was $0.26 or total quarterly net income of just under 2.1 million. Return on equity for the quarter was over 14% when annualized. For the full year earnings per share amounted to a $1.14 with the return on equity for the year was very healthy 17.5%. Please recall that in Q1, a difficult quarter with heightened fire losses and high freeze claims we earned only $0.07 per share. Thus, for the three quarters since then, we generated an annualized ROE of 21.7%. I've received many calls about how Kingstone was impacted by the storm that began on Tuesday March 14. In addition, other carriers have a regular process to disclose catastrophe losses, which Kingstone has not, at least not as of yet. This much I can tell you though. Through February, winter claims were far below average and did not result in the need to record a catastrophe event in the first quarter of 2017. Initial report from the Tuesday storm indicate only minor damage and a relatively small number of claims reported. Unless there are significant number of larger claims still to be reported or weather events through the rest of this month, we don’t anticipate that this storm will create a situation where we'll need to record a severe winter weather catastrophe event for the first quarter of 2017. I'm going to turn the call over to Ben now so he can give a little more detail as to our underwriting results in the fourth quarter and the full-year as well as our 2017 initiatives. Later, in the call I'll review the recently concluded public offering and our plans for reinsurance in 2017. Ben?

[Benjamin Walden:]

Thanks Barry. It was another outstanding quarter for Kingstone and we finished with the most profitable year in our history. The numbers speak for themselves yet again. From an underwriting perspective, it was an exceptional quarter and year. The 2016 full-year net loss ratio improved 2.4 points to 45.3 from 47.7 in 2015. The fourth quarter can often be a challenging one due to the increased frequency of fire claims in personal lines. However this quarter we did not see any unusual activity in this regard. We posted a the solid 45.5 loss ratio for the Q4, 2016; which was right in line with the full-year results. Reduced claims frequency and personal lines continues to drive our overall loss ratio improvement. This decline in claims frequency is impacted by changes made on the underwriting side to improve our mix of business. We are constantly managing our agency force to ensure the best results and our steering away from risk segments that don’t meet our required returns on capital. Commercial lines also display improving trends despite the impact of it single large liability claims that affected our overall fourth quarter loss ratio by about 3 points. Our solid reinsurance program is protecting us well from the financial impacts of single large losses like this one. Our core loss ratio excluding severe winter weather and prior year loss development improved 1.3 points for the year to 43.1 from 44.4 in 2015. The impacts of winter weather claims was reduced to 2.3 points in 2016 compared to 4.3 points in 2015. In addition, for the first time in over 10 years, we reported our second straight year of favorable prior year loss developments. All three of our major lines of business have continued to run at very profitable levels in 2016. Each line finished the year with a loss ratio in the 40s. Our core personal lines result continues to be outstanding, as there was improvement for both the quarter and the year compared to prior period. For 4Q 2016, our personal lines loss ratio improves to 28.6 from the 4Q 2015 loss ratio of 40.1. This resulted in a full-year 2016 loss ratio of exactly 40, which was a 2.4 point improvement over 2015. Commercial lines loss ratio improved by 10 points in 2016 compared to 2015. In the fourth quarter, we also rolled out our new online rating platform for small business owner policies. We have seen an immediate impact on new policies written for that line. Our Livery physical damage line continues to produce profitable underwriting results with the 2016 loss ratio of 48.8, which is higher than we'd like, but we're working on improvements there. Under the strong management of our Claims VP, Jeanette Lobosco we continue to settle and close the remaining open claims from our legacy commercial auto book. We close seven more claims during the quarter and there are now only 34 open claims as of December 2016. Reserves related to the commercial auto line now make up less than 6% of our total. Under the Jennet's leadership we have implemented processes that ensure strong reserve levels and optimal claim outcomes. Our financial results are no longer impacted by volatility due to inadequate reserves unlike some carrier we compete against. Under the leadership of our Senior VP of Business Development David Delaney, our extension plan continues to focus seeing ahead. In the fourth quarter, we gained approval for our innovative new homeowners product in New Jersey. We have been carefully building out the state of the art coding platform and are now piloting this with some test agents. We are excited to export our proven business model from New York to similar niche markets in New Jersey focusing on coastal risks and higher end policy holders, but only through independent agents. We expect to be open for business in the second quarter. In summary, it was another outstanding quarter and year highlighted by consistency and continued excellent underwriting results. The number do speak for themselves, none more so than our combined ratios for the quarter and the year which came in at 79.6 and 79.2 respectively. Both of these numbers are improvements over an already excellent result and we have opportunities to get even better as we grow. We are constantly striving to improve and our dedicated employee, senior management and select producers are all working together to achieve these great results. Now, I'll turn it over to Victor to discuss additional financial highlights. Victor?

[Victor Brodsky:]

Good morning. Let me start by mentioning that on Wednesday we paid our 23rd consecutive quarterly dividend in the amount of $0.0625 per share. I’d like to discuss some other financial highlights. Ben already discussed the improvements to our net loss ratio, I'm discussing the underwriting expense ratio which fluctuates when there are changes to our quota share treaties, we find it a more meaningful measure, the ratio of other underwriting expenses to direct earned premiums. This ratio has declined steadily for the last five years and 17.6% in 2012 to 15.3% for the year-ended December 31, 2016. This efficiency of operations and other factors leads to our profitably results. We have been able to maintain this consistency even while we’re currently incurring additional cost related to our expansion into New Jersey. As we expand and growth, it will be difficult to maintain this continuing decline, but my team is constantly looking for expense improvements to offset the additional cost we must incur to grow. While we work hard to manage our expenses, we have no control over how our refined values react to rising interest rates. Our strategy of reducing the effective maturity of our portfolio minimizes the effect that change in interest rates have on our bonds and other rates sensitive holdings. However, we still experienced the $1.6 million reduction that can lead to other comprehensive income in Q4, 2016. The decrease in the market value of investments reduced booked value by $0.20 per share which combined with our quarterly dividend of $0.0625 per share totally offsets the increase in book value per share attributable to net income. As a result, book value decreased in Q4, 2016 by a $0.01 per share to $7.15. We do not accurately trade our bonds, and feel that anything we buy, we're willing to hold to maturity, and the bonds par value will be paid to us. We believe this to be a temporary setback as investment income is expected to increase due to investment of $30 million in net proceeds we received in the public offering that closed in January and February of 2017. A new offering, we sold a total of 2,692,500 million common shares at a price of $12 per share netting us $11.23 per share, significantly higher than our book value of $7.15 per share as of December 31. On a pro forma basis the public offering increased our yearend book value of $8.19 per share. Finally offering our extended share count has increased to 10.6 million shares. On March 1, 2017 we use $23 million of the net proceeds of the offering, contributing capital Kingstone Insurance Company or KICO to support its rating upgrade plan and additional growth. Remainder of the net proceeds will be used for general corporate purposes. A statutory surplus of KICO at December 31st is a fully [indiscernible]. Our leverage ratio which is the ratio of net written premiums for the trailing 12-montsh to surplus was a very healthy 1.32 at year-end. Additional, surplus of $23 million enables us to support growth, reduce our reliance upon quota share re-insurance, which Barry will discuss and maintain acceptable leverage ratio, which we define as being less than 1.5 to 1. Now let me ask Barry to continue. Barry?

[Barry Goldstein:]

Thanks Victor. We've identified Kingstone for the insurance in investor communities as a traditional multi-line P&C carrier distributing its products exclusively through the independent agent system. We seek to be the premier provider to the small and medium sized agencies in the states in which we operate. That sets us apart for most if not all national carriers, who feel that with company size must come efficiency and dealing with smaller size agents is not efficient. Our model is built to capitalize on this, by having a true partnership with our agents not only those who are the biggest. Given these same agencies access to multiple product lines including commercial liability coverage's also sets us apart from the model lines home owner writers, many of which are woefully undercapitalized and we seek to increase profit margins through high catastrophe retention and purchasing limits that are the minimum needed to maintain a non-A.M. Best rating. We've prospered by always keeping in mind who we are, what we know and what we are good at. But as we seek to grow outside to Downstate New York marketplace, as we want to expand our offerings everywhere and leverage our knowledge base. More often do we see ourselves hampered by having an A.M. Best rating of less than A minus. Commercial accounts were often required to secure coverage through an A rated carrier. largely more costly homes and more often owned by sophisticated owners requiring their agent to secure coverage through an A rated carriers, and with the Downstate New York marketplace being underserved to proliferation of undercapitalized risky carriers is tolerated. It is difficult to compete with an undercapitalized carrier with rates that only generate underwriting losses year-after-year and levered up as much as Lehman Brothers was in 2008. For these reasons we chose to further separate ourselves by pursuing an A rating from A.M. Best, we've gone up market. Upon achieving the improved rating doors will be open that had previously been closed. As we walk into a perspective agent's office that barrier to entry will be gone. There is an immediate acceptance by the agency when an A rated carrier pursues a new business partner. We work with Aon our long-term intermediary to pursue the ratings upgrade. We've identified those areas we need to improve upon, so that our model results coupled with our historical business would be acceptable by A.M. Best for an upgrade to A minus. Most important was capitalization, we've achieved that through the recently completed follow-on offering and subsequent capital contributions in the insurance company. At this time, I feel confident that we will be able to reduce our reliance upon quota share reinsurance in July. We are planning to cut back the percentage ceding by half to a 20% net quota share from the current 40%. Finally, we will need to maintain the same high limits for catastrophe insurance as we begin in July of 2016, or add additional limit to provide from loss adjustment expense and we’ll increase our reinstatement premium protection, so that no premium will be due from us upon a storm that reaches the 100 year return period. Given the current state of the reinsurance market, we believe that the incremental increases to the coverage, we will purchase in July will be offset by a decline in overall rates which we now see as about 5%, perhaps a little more for a carrier with a proven track record by Kingstone. With the hardest part behind us, that is the capital raise, it is my sincere believe that we’ll soon complete what should be required to achieve that upgrade to A minus. I look forward to captioning team Kingstone through 2019 having recently signed a new three-year contract. With that operator, let’s open the line up for questions.

[Operator:]

[Operator Instructions] Our first question today is coming from Ken Billingsley from Compass Point. Please proceed with your question.

[Kenneth Billingsley:]

I wanted to ask on the follow-up on the A.M. Best review. What was the timing that you would expect, I know there is a normal review process, but what would your expectations on timing on giving some color on the steps you have taken?

[Barry Goldstein:]

Good morning, Ken. We feel pretty confident we’ll have an answer sometime early in the second quarter.

[Kenneth Billingsley:]

And with or without, but obviously that does impact your plans for growing obviously, in New Jersey and some of the other states that you're licensed in. That’s not going to be an impairment with or without that rating correct?

[Barry Goldstein:]

No, I mean we’re shuffling -- its funny to say we’re suffering with the impairment, we’re suffering so much that in the last five years, I think we did a competition yesterday afternoon, Ken that if you took the five years of incurred losses and the last five years of earned premiums, our five year's combine ratio is less than 82. So, we’re really suffering.

[Kenneth Billingsley:]

Okay. And just on the rating side, I saw this morning that Demotech withdrew its guidance on Flora property insurance underwriters. And I know you're not in Florida, but it looks like they are reevaluating how they're rating companies. Does that impact how they're looking at the rest of the U.S. and have they had any conversations with you regarding that?

[Barry Goldstein:]

Well, I have no conversation with Demotech, we enjoy an A rating from Demotech as do a lot of carriers. But in our mind just having the rating, while that maybe the threshold to allow a carrier to write home owners insurance for a mortgage underwritten by Fannie and Freddie, that's looking at some of these weaklings how are doing it, that's not much to brag about if you ask me.

[Ken Billingsley:]

And then, I have two other questions. One on Livery physical damage segment, obviously, it's becoming a larger percentage of total premiums as of the fourth quarter, it looks like the loss ratio was the little bit higher, was there something going on in particular in the fourth quarter, I think it's kind of the highest you've seen in the last two years.

[Benjamin Walden:]

Yes, Ken. This is Ben Walden. Two things are happening there that are putting pressure on the loss ratio, one is we're seeing a change in the mix of business towards some smaller type vehicles that have lower average premiums and higher average severity. So we're working on some things there to adjust our rates going forward. The other item that occurred in the fourth quarter was our annual review of reserves and as part of that we made some adjustments on auto physical damage to reflect the fact that we're not getting quite as much in segregation recoveries as we had in the past, so there were small impacts related to that as well. That should just be a onetime quarterly impact and not as overall ongoing it act.

[Ken Billingsley:]

And does that impact and I think for the year and if you mentioned that your peers are all of reserve but leases it looks like in the quarter you may have actually added just slightly was that part of the review process mostly coming from on the auto side?

[Barry Goldstein:]

Yes, that was part of that whole review process we also strengthened commercial line reserves particularly for loss adjustment expense related to higher expenses on the legal side to gain better settlements on the loss side and that happens in the fourth quarter.

[Ken Billingsley:]

Okay, and Barry may be this is a question -- a last questions just for you. Obviously, I know you are looking to expand here in Downstate New York and looking at Jersey and the footprint of where your license geographically seems all offset right there. Can you talk about Upstate New York and maybe I've just missed this in the past but is there a reason you don’t turn your attention in that direction more heavily is it just developing those relationships with the agents and brokers or what precludes that if you consciously decided not to go Upstate New York.

[Barry Goldstein:]

A good question Ken, but we have not consciously avoided, upstate that's a place that where there are an extreme number of A rated carriers available to the local agencies. So regardless of our price points really there is no reason for a carrier with a dozen other -- an agency with a dozen carriers to work with higher ratings to use [indiscernible]. Now the other side of that is, it's a very, very difficult business once you get north of Westchester County because the average premiums go straight down. So if you look at our expansion plans staring with New Jersey and ultimately moving into Rhode Island's and Connecticut, you will see those areas that have a very high average premium for home owner's policies. In Upstate New York, average premium is less than a half of Downstate. So it's just becomes a very costly thing to manage and it drives up your expense ratio as a result.

[Ken Billingsley:]

Well, great. Thank you for taking my questions.

[Barry Goldstein:]

My pleasure.

[Operator:]

Thank you [Operator Instructions] Our next question today is coming from Paul Newsome from Sandler O'Neil. Please proceed with your question.

[Paul Newsome:]

Maybe you could talk just a little bit about the -- I think I know the answer, but just as it heads up to everybody the accounting impact that will happen when you change the sitting commission in the quarter? Just so the people know, it will be a little bit.

[Barry Goldstein:]

Okay. Well, thank you for bringing that up Paul. And as it is obvious, it wasn’t a lively enough discussion. I'm going to turn it over to Victor to go accounting 301. Victor?

[Victor Brodsky:]

Okay. Hi, good morning. Okay. So, as in the return of the ceding premiums and with that that’s where ceding commission come into play. So, its premiums and commissions. So, the I think we’re going to get a big impact of the increase of net return premiums during that quarter. But the earned premiums it takes the year for that to get earned. But its not in the same rate that normal would be over 12 months. 40% of it because of the way it flows into the bucket we'll earn during the Q3 and then 30%, 20%, 10%. So, for the quarter, its accelerated in the first quarter after the quarter share change. And at the same time, with the return of ceding commissions, also will get earned in the same ratio. So if you're trying to model it, you really need to segregate that part of our premiums compared to the normal business.

[Barry Goldstein:]

So, just to embellish upon that a little more Paul and reminding myself that I used to teach accounting at Hofstra University in 1983 and my son was born on their medical program in 1984. It's just, there is two parts to this, there is the go forward ceding, where we’re going to only ceding 20% of the premiums instead of 40%. But at that cut off state that Victor's talking about, whether its June 30 or July 1. [Multiple Speakers] The carrier that now hold the un-earned premiums at the 40% rate are going to send us back half of it, since we’re going from 40 to 20. At the same time, the commissions we’ve received that we haven't yet earned, we have to send half of that back those carriers who paid it to us. And what Victor was alluding to, was since this isn’t new business that's starting as of July 1, it actually burns off in a rate that’s kind of accelerating. So, 40% of the amount of the premium will get back will be earned in the third calendar quarter approximately, 30% in the fourth quarter and then 20% and 10% in the first quarters and second quarters of next year. But now that we put everybody else back to sleep, all right I hope that answers your question Paul.

[Operator:]

Thank you, sir. We have reach the end of our question-and-answer session. I’d like to turn the floor back over to management for further and closing comment.

[Barry Goldstein:]

Well, thanks everybody for taking the time to listen. My entire team we're pleased and proud to have delivered these outstanding results and look forward to continuing our build out Kingstone. Through a multistate, multiline carrier. Thank you.

[Operator:]

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