Kingstone Companies, Inc.
Q4 2015 Earnings Call Transcript

Published: 18 Mar 2016

[Operator:]

Greetings, and welcome to the Kingstone Companies' Fourth Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Please go ahead, sir.

[Adam Prior:]

Thank you very much, and good morning, everyone. Yesterday afternoon, the company issued the announcement of Kingstone's 2015 fourth quarter results. We will be utilizing a slide show presentation as an accompaniment to this call. This presentation is available on Kingstone Companies’ website at www.kingstonecompanies.com. While we will not be referring to the entire presentation slide by slide, the structure of the discussion will mirror that of the slide show. We welcome each of you to review this presentation and follow along. 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 information. 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's including risk regarding the insurance industry, economic factors, and the equity markets generally, and the risk factors discussed in the Risk Factors section of the company's 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 business operations, the company may use certain terms of our, which are not defined under U.S. GAAP. In the event of any unintentional difference between the presentation materials and GAAP results, investor should rely on the financial information in the public filings. With that, I’d now like to turn the call over to Mr. Barry Goldstein, Chairman and CEO of Kingstone. Please go ahead, Barry.

[Barry Goldstein:]

Thanks Adam, and good morning, everyone. I am joined today by Victor Brodsky, Kingstone's Chief Financial Officer; as well as Ben Walden, our Senior Vice President and Chief Actuary. I’ll begin today’s call with a discussion about our financial results and our growth in the fourth quarter and full year of 2015. Ben will then discuss our reserves, winter storm losses and give you an update on the impact of our new catastrophe and quota share treaties. Victor will review some specifics of our financial results and then I’ll return for a few closing remarks. As I hope you’ve already seen, we’ve reported very strong results for the fourth quarter completing what was an exceptional year for Kingstone. For the year, we achieved the 23.9% growth rate in written premiums in our continuing lines of business. We are ceasing more of a very large opportunity that exists in our home market of down state New York. I just saw that one of the industry’s data providers, SNL Financial posted 2015 market share data and market share data for New York only. I note that Kingstone is barely scratched the surface. We are about the 65th largest in terms of total premiums written in New York State with a market share of 0.23%. This is up from last year’s ranking of being 73rd when we had a market share of 0.18%. Need those to say, this is a very, very long run way available to us. This was our fifth consecutive calendar year of greater than 20% growth, but more importantly, we produced strong underwriting results and the bottom line improved significantly. We ended 2015 with a net combined ratio of 80.0%. Increased writings coupled with strong underwriting and investment profits translated into a 30.6% increase in our net income. Our return on average equity for 2015 was 16.2%. All this after suffering through a very difficult winter that Ben will address later on. During the fourth quarter, Kingstone’s policies in force increased, premiums grew and we continue to benefit from the changes to our quota share treaties. For the fourth quarter, we’ve reported an excellent combined ratio of 82.2%. This along with those increased writings I’ve referred to before led to a 14.6% increase in our net operating income for the quarter. We are in 1.9 million of net income from the quarter equal to diluted earnings per share of $0.25. Our quarterly results translate to an annualized return on equity of 16.6% and earlier this week, we paid a dividend of $0.0625 per share translating into a $0.25 annual rate. Our historical performance is evidenced as a company can achieve strong returns on shareholder’s equity while remaining true to our core principals of proving a consistent pricing in underwriting environment, building and maintaining strong and fair relationships and providing income to our shareholders through a policy of consistent and increasing dividend payouts. We feel our balance between employee, customer and shareholder interest is truly best of breed. The demand for our personal lines products such as our homeowners and dwelling coverages remain high. As mentioned in our last few conference calls, we’ve seen heighten competition in down state New York. We’re well equipped to compete and we continue to grow leaning on the relationships in those, excellent relationships actually that we enjoy without select producers. SNL Financial also reported that Kingstone is now the 18th largest homeowner writer in New York State with a market share of 0.95% and that’s up from being the 23rd ranked in 2014, while we had a market share of 0.6%. Please note that in New York State, the 50 largest homeowner writers last year experienced an overall 1% decline in volume. Our producer partners know exactly what they’ll get when they chose to do business with Kingstone. We don’t pay the highest commissions or offer the selective technologies, but are always true to our word and true to the independent agency system. We will never align ourselves with those who seek to disenfranchise our agency partners. Many of our competitors struggling for growth and trying to add a few pennies here or there, ignore the people that help them build their franchises. We don’t write direct to customer, we never have and we never will and we will never appoint an agency owned by a carrier selling direct-to-consumer. Before I turn the call over to Ben, I want to call your attention to the 37.1% growth rate in Kingstone’s net premiums are into the fourth quarter. As promised, we decreased the ceding rate on our personal lines treaty to 40% from the previous 55% beginning July 1st, 2015. In 2015, our net premiums earned increased 49.0% which takes into account both the decline in ceding percentage, the elimination for quota share and the growth of our commercial lines and the overall growth in our business. While we do distribute some of the earnings to shareholders in the form of dividends, our profitability allows for the growth and retain earnings and that’s allows our ability to keep more of the business that we write. We are doing it in an orderly responsible and conservative manner and I note that at year-end, our net written premium to surplus out net leverage ratio stood at just over 1.5 to one level that we are very comfortable with. With that, let me turn it over to Ben to discuss our underwriting performance and other matters and I’ll return at the end. Ben?

[Benjamin Walden:]

Thanks Barry. I will start with a review of our loss ratio for the quarter and full year. The 2015 fourth quarter net loss ratio improved 5.5 points to 44.2 from 49.7 in the prior year period. The improvement was driven by a greatly reduced impact from prior year development. In the fourth quarter of 2015, there was no impact from prior year development; this contrast sharply to the fourth quarter of 2014 when the company recorded 9 points of adverse prior year development. For the full year 2015, the company’s net loss ratio improved to 47.7 from 52.2 in the prior year period. During 2015, we recorded one point of favorable prior year development as compared to 5.4 points of adverse development for 2014. This is the first year since 2011 without adverse prior year development affecting our earnings. The net loss ratio for 2015 was negatively affected by an increased impact from severe winter weather compared to 2014. We recorded the catastrophe impact from severe winter weather as the excess loss above those expected during an average winter. The catastrophe impact from 2015 winter weather had a 4.2 point effect on the full year loss ratio, whereas in 2014, the impact was 2.9 points. The 2015 core loss ratio excluding severe winter weather and prior year development increased slightly from 43.9 to 44.4. The initiatives we started in 2014 and that continued throughout 2015 have resulted in stability and transparency of our financial results. Our financial reporting now clearly outlines the three separate components of our loss ratio. Our income statement is no longer impacted by significant changes to loss projections for prior years. The changes made to claims handling including increased staffing and case reserve strengthening leave us confident that our reserves are adequate. This greatly reduces the likelihood that prior year development will create a drag on future earnings. Looking ahead, in the first quarter of 2016, we anticipate a decreasing impact from winter weather losses as compared to the previous two years. Winter weather losses in 2016 are primarily related to a single freezing event in mid-February. At this time, we expect that these losses will have a 2 point impact on the full year 2016 combined ratio. This compares favorably to the 7 point impact observed from the 2015 winter weather cat events and the 4.5 point impact from 2014 winter weather. Finally, Barry mentioned the decrease in our reinsurance ceding percentage that allows us to retain more of our profitable underwriting results. We are growing our business in a responsible way that protects us even in the event of a catastrophe. Recent changes to our reinsurance treaty structures and the ability to achieve more favorable terms have helped us greatly reduce our risk even as we grow. Because of this, the impact of Sandy type events on the full year combined ratio is dramatically lower than it was in 2012. At that time, Sandy had an overall 28 point impact on the company’s annual combined ratio. In contrast, a similar event today would have an impact of less than 10 points on our annual combined ratio. At this point, I’ll turn it over to Victor Brodsky, our CFO.

[Victor Brodsky:]

Thanks Ben. In prior calls, I discussed a net underwriting expense ratio. However, today I would like to deviate from that somewhat as comparisons between periods any difficult to decide [ph] when they were changes in our quote share ceding rates. I’d like to instead focus on the practical side of where we are and bring some light to our other underwriting expense. These expenses are the overhead and regulatory cause that we incurred to in our business. There is not much that can be done with our regulatory course; we have worked hard to manage our overhead expenses. As we see premiums continue to grow, our ratios with respect to underwriting expenses and direct premiums earns remain very consistent between periods. On looking at the ratio in the fourth quarter 2015, the ratio was 15.6%, a decrease of 40 basis points from 2014. Same consistencies true to the full year, the ratio went down by 10 basis points to 15.5%. We continued to make more efficient use of our in-place infrastructure as our business grows. We implemented image write software during the third quarter of 2015 are now seeing the benefit from the efficiencies in underwriting and claims. This allows us to better manage our company while realizing greater staff efficiencies. We also implemented StoneRiver's pro accounting software, a highly regarded system developed for the insurance industry. Please take note that we’ve made and will continue to make technology investments to better manage our business and control our expenses. Moving to our investments, our portfolio remained very consistent quarter-over-quarter with a greatest portion of our investments being in investment grade bonds. We’ve reduced the effective duration to just under five years. Kingstone’s cash and invested holdings at December 31st, 2015 increased to $90.4 million. Finally, to reiterate Barry’s earlier comments, we’re pleased to report that our previously declared dividend of $0.0625 per share was paid on March 15th, 2016. The dividend represents the 19th consecutive quarterly dividend paid by the company. With that, I’ll turn the things back over to Barry for closing remarks.

[Barry Goldstein:]

Thanks Victor. In the second half of 2015, we’re approved to write business in Texas, Connecticut and New Jersey. I estimate that in the later part of Q3 or sometime in Q4, we’ll began writing business in one or more these new states and expect that in 2017 the non-New York contribution to the total will be significant. We anticipate adding new products as needed by our select producers to the mix in 2016 as well. Having achieved the objectives, we set out for ourselves following the demutualization in 2009. We are focused now on becoming an A-rated multistate writer of personal and small - personal lines and small commercial lines serving the needs of the neighborhood producer. These are the people who rank us consistently as one of the best carriers in New York and we will bring that with us elsewhere with a smaller sized agencies right the majority of the business that we participate in. How you treat people matters, being balanced in your approach matters. In this business, you get what you give and we will never compromise our values. I have a great team, we built the great company. And with that operator, let’s open it up for questions.

[Operator:]

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

[Ken Billingsley:]

Good morning and thanks for taking my call. I wanted to follow-up on the couple just number item. I believe you said underwriting leverage was about 1.5 times. Is that correct?

[Barry Goldstein:]

Correct.

[Ken Billingsley:]

And that’s - do you have a statutory surplus number that you could provide?

[Barry Goldstein:]

I have 35 million, it’s on statutory surplus Ken and we’ll get you that number in just a second.

[Ken Billingsley:]

Okay, I’ll move on to the next one. And I apologize if I miss is about future plans on retentions and I know you’ve increased your retention. Do you have plans to step that up over the next few years as you renegotiate reinsurance terms to retain more of the business going forward?

[Barry Goldstein:]

I guess the answer is going to be yes. We do want to otherwise eliminate our quota share. Now because and then we be clear not because it’s a bad deal, because in today’s marketplace quota share reinsurance is essentially the cheapest form of capital that we can find. But it makes the changes in quota share and even just the use of quota share. If you are not someone who - you know this becomes an inside baseball type of conversation. It’s very difficult to decide for our numbers when we have changes in quota share mid-year. The fact that our treaties around the July 1st renewal period doesn’t make it easy anyway. But think the answer to your question is we do anticipate sitting down sometime in the early second quarter to review where we are - what we are going to prepare for as of July 1st with an ultimate goal although you know totally eliminating it I’ve stated by the end of 2017 or mid-2017.

[Ken Billingsley:]

But mid-2017 is when you are looking, that is the targeted day to eliminate it?

[Barry Goldstein:]

Yes.

[Ken Billingsley:]

Thank you. So next question is on the grow in area and time, obviously if you are looking to grow into new states and deploy more premium - I am sorry to gain more premium in states outside of New York and I believe you also talked about some new products. Can you saw how that from a capital standpoint, is there enough generated on an annual basis that you’ll be able to hit those targets or is just going to require you to kind of review your capital position as you grow in new states and new products?

[Barry Goldstein:]

Well, first with respect to new states, we really don’t see much of a significant contribution for the balance of this year and we’ll probably only start to see some real material change in the beginning of 2017. So I don’t think the premiums written outside in New York are going to drive the decision as to capital. With respect to new products and I am not want to like to get in front of myself and tell people what I am planning on doing. But what we’re thinking in our products that are either otherwise not available to our producers today elsewhere or products that the producers have access to but outside of Kingstone. For example, we’re working very diligently on being able to provide a commercial umbrella policy directly to the Kingstone producers. Right now we don’t supply one and in order to get a commercial umbrella over Kingstone’s policy which by the way that our producers can do that because we carry best rating of B plus, plus. But they have to go to a second source to gain the coverage. Although working very hard with our reinsurance intermediary actually we’re working - we’re hopeful that sometimes in the second - hello?

[Ken Billingsley:]

Hello, still there.

[Barry Goldstein:]

Yeah, okay, we had something pop in there. So we’re hopeful that the second quarter will allow us the roll out the commercial umbrella. But that will be done almost exclusively on a quota share basis and it won’t require any sort of capital in our part. But you talk about capital needs, we are always cognizant, and we do want to keep our growth rate, we are not going to tamp that down just to accommodate what I’ve said previously as a targeted leverage of 1.5 to 1. So, on the one hand I can say as I have said previously that a fact it’s up to 1.7 or 1.8, I am happy enough with that rather going through and doing an underwriting written offering to help us lower that back to 1.5. At the same time, I am looking at possible renewal rights deals. I’ve looked at whole companies. I’ve talked to investors both current investors who seek to add to their position as well as strategic investors. And we keep an open mind to everything can. But I think if I were to end the answer at one point, it would be right now we have no need to add any additional capital. We have ample use - we have ample capital to do what we need to do now. And as time goes on, we constantly review it. I hope that answers your question.

[Ken Billingsley:]

It does. And just to clarify, so we’re still talking about the high-teens, low 20% growth targets in the current mix of business that you have in upcoming to 2016?

[Barry Goldstein:]

Yes.

[Ken Billingsley:]

Okay. And for the 1.7 to 1.8 leverage ratio, how does that impact your - the target of become an A-rated company like where would you - where - are there level that just to maintain that I am sure there is a lot of dials have to turn but that one specifically?

[Barry Goldstein:]

Yeah, is nothing - as I know, there is nothing written in stone by the rating agencies as to maximum leverage. In fact what we’re going to be working on over the next couple of months, we have our best presentation due in the middle of April. A.M. Best is in the middle of changing over their modeling; actually have their conference call on it today. So I think while leverage does factor in that’s only one piece of the discussion. They seem to be very highly focused on levels of catastrophe reinsurance, heighten levels of catastrophe reinsurance in order to achieve various ratings. And while we’ve provided those levels, we purchased catastrophe insurance last July to a level at which A.M. Best could consider us an A minus carrier and we’ll probably add to amount of cap we buy come July. But you know with respect to leverage and how that’s going to play into best ratings that just one piece and we’ll just take it as it comes.

[Ken Billingsley:]

Right, just one more question if I may and then I requeue. On the growth, particularly on the Uber and Lyft business, there is obviously been a lot of news on those regarding the drivers in relations with the states for employment status, but has there been any discussion on insurance side or any changes that you guys had to make to your own policies relative to your regulator pushback?

[Barry Goldstein:]

Well couple of things to note. What seems to have happened, in New York City, it has to be taken apart from the other 49 states and everything else in New York. New York City is taxi limit [p] commission. And what we’ve seen in New York City is a transition from the drives from yellow cars moving into Uber. And what that cause for has been a shortage in drivers. So as a lot of concern being expressed by the drivers, you’ve over dropped rates in New York City I think last month, so there are a lot of changes going on. We also note that the legislature in this session is going to take up a bill to potentially regulate Uber and Lyft in the other transportation network companies. And how that affects the insurance part of the business both the liability side which we don’t participate in today and the physical damage side which we do is yet to be seen. But certainly before the end of this session or this legislator session, I’d expect to see some movement on that front. And to the extent, it impacts us then will have to get back to you. So right now, we continue to see Uber and Lyft taking share from the yellow cars at least with respect to their drivers.

[Ken Billingsley:]

Alright, great, I appreciate you taking my questions.

[Barry Goldstein:]

My pleasure.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from Casey Alexander from Ladenburg Thalmann. Please proceed with your question.

[Casey Alexander:]

You’ve answered a lot of my questions. But first of all, thank you for the completeness of your release. It really is a very complete comprehensive. You’ve mentioned that you expect to take on even a larger cap program this coming year. Obviously you are in discussions, how do you feel as though cap rates are developing for the 2016-2017 season as compared to the season behind us?

[Barry Goldstein:]

Good question Casey and thanks for the complements on the completeness of our release. I would say - from what we are hearing, we are seeing the likelihood of another decline in rates but at a smaller percentage decline than in previous years. So we’re talking about a single digit decline rather than low double digits. I think a lot of it it’s going to depend upon what happens in June with the Florida programs. We come up in July after that. But you know there is lot of different things happening in Florida at the same time. I don’t know how that’s going to translate into both demand and pricing in their market place. But certainly given that the Northeast had rough winter but yet a hurricane free season. We feel confident that we’ll be able to get at least small decrease. And more than likely, we’re not going to try to turn that decrease in pricing into a bottom line increase. We’re going to try to increase the quality of our company, the quality of the product we offer and continue to further separate ourselves from some of our competitors who buy the least possible amount to catastrophe insurance just to satisfy the Demotech rating that they enjoy.

[Casey Alexander:]

Okay, I get that. Now on the other side of that ledger, how do you see your premium rates developing, are you looking to kind of hold the line on your premium rates or do you see those up or down for the coming year?

[Barry Goldstein:]

Well, first we haven’t changed our rates at least for personal lines in many, many years, seven or eight years I think. In the fourth quarter of 2015, we made some changes and put some enhancements to our program by allowing credits certain discounts to encourage out insurance, the better quality of insurance and we’re seeing that click in very, very nicely. We’re seeing an increase - we saw an increase in the fourth quarter and we see a continuing increase in the first quarter to the number of quotes we’re giving out. We’re seeing an increase to our conversion rate. And so when it comes to being able to deliver on our promise to our producers, we are doing just that. This acceleration in our new business growth is going to be - it gives us an opportunity to look back and start calling out some of the risks that we wrote in prior years that our of the same quality of the company we seek to be today. As an example, I think we sometime last year where we decided to no longer write, we’re decided to increase the minimum coverage level with which will leave in participate things like that allowing us to continue to grow but allow for a better overall quality of the business is how we are pointing ourselves. I hope that answers your question.

[Casey Alexander:]

Yeah. That last part when you say that I mean as an example like you are setting, you won’t you know cover a home that has assessed value less than 150,000 or something like that, you’re raising that number, is that what you mean?

[Barry Goldstein:]

That’s what we did but we also - what we see is that we provided a market a very, very market of coverages. And we think that we can improve our overall quality by not writing some of the risks that have attended loss ratio above our target. So the very old homes, while they may look very pretty, while they may have undergone complete renovations in the past few years. One way or another, the older the home the more likely have a problem. And so we focus more of our attention now on the newer homes the higher valued homes, the homeowners how seek to get the best coverage not necessarily the cheapest, we’ve never competed on prices of company, we never will compete on price, that’s not our thing. I mean I understand others doing it. And we’re very happy not to right the business that doesn’t give us the appropriate return on the capital we commit to it. So you know as an example, I’ll use older homes; the example you gave what we did already was the lower valued homes.

[Casey Alexander:]

Right, okay, well that makes sense. One last question just to make sure that I understand it, your table with the net combined ratio excluding the effect of catastrophes, is what I look at the - at the number that you have excluding the effect of catastrophes, is that comparison really apples-to-apples with the reduction in the quota share or does the reduction in the quota share actually effect that number if it was an apples-to-apples comparison?

[Barry Goldstein:]

I think the answer is, is in apples-to-apples comparison, while I can tell you that the impact of the catastrophes each year changes. Well, let’s put it this way. We adjust what is an average winter each year. We back ten years to look at weather. So when we first started looking at this in calendar year 2014, that was after a very long series of very good winters. 2015’s benchmark included the horrible winter we had in 2014. So we raise the bar of what could be considered a catastrophe as a result. Again after 2014 and 2015, the ball was further raised for this coming winter season, for this winter season. So the impact of catastrophes relates to a rolling ten year period and the actual catastrophe losses that we record. But what you are looking at when you take out the catastrophe losses, you are looking at a very consistent performance in our underwriting. And I think what you are seeing and it answers your - it goes to the factor the question that you started with is that we don’t really see the need for us to change our premium rates. What we’re striving to do is stay at the level we’re at, stay as close to what is we can and we don’t believe and trying to play around the edges and take a point to here and there to ruffle the market place just because we can. So I think the answer to the question is the paying is apples-to-apples. The competition of catastrophe might be a rolling one forward. But I think what it does is it places the catastrophe competition on a more conservative levels as compared to keeping that same benchmark level each and every year.

[Casey Alexander:]

Okay, great, I get it. Thank you answering my questions. I appreciate it.

[Barry Goldstein:]

My pleasure. Just before we go on to the next question, the question was asked previously is to the amount of statutory surplus billing we wanted to know and at year-end the statutory surplus was 39.73 million

[Operator:]

[Operator Instructions] We have reached out of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

[Barry Goldstein:]

Well, I am glad we’re able to have this call today. I am surrounded by a team that we work very hard together. Ben and Victor have done an exceptional job. We rely very heavily on one another and we pride ourselves in being able to make and rational decisions taking into the account the expertise that each of them enjoys in their field and the overall business knowledge that I think I bring to them. So I think as I said before, I think we’ve put together a great company here. We’ve taken an investment in insurance company ten years ago. We paid $3.75 million for the right to control what was then commercial mutual insurance company. It took us few years to get the company demutualize. It became part of what is now Kingstone Companies and I take a lot of pleasure in noting that the tax bill generated by this company last year what we pay over to our government was more than what we’ve paid for the entire company ten years before. Now I am not happy to pay tax, but like I said, I reach an age where I understand the balance between what people need and what people should have and very proud, we’re able to deliver on that. And I am thankful for everybody who on the call and look forward to the next one. Thank you very much.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your lines this time and have a wonderful day. We thank you for your participating today.