Q3 2019 Earnings Call

Right.

I've come to the Kingstone companies 2019, so called <unk> earnings call.

These signs all participants are they send all anymore.

A brief question answer session, we follow the former presentation.

If anyone should require operator, let's see stuff you end the call Frank Please press the star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host <unk>.

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Thank you Mr. Schwartz you may begin.

Thank you very much Jenny and good morning, everyone yesterday afternoon. The company issued a press release detailing king since 2019 third quarter results.

This call Kingstone may make forward looking statements regarding itself and its business. The board 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 kingstone for more information. Please refer to the section entitled factors that may affect future.

The results and financial condition in part one item one of the company's Form 10-K for the year ended December 31st 2018, along with the commentary on forward looking statements at the end of the company's earnings release issued yesterday.

In addition, our remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measures to the GAAP figures. Please see the tables in our earnings release with that I'd like to turn the call over to Kingstone CEO Mr. Barry Goldstein. Please go ahead Mr. Goldstein, Thanks, Rich and good morning. Thank you all for joining last another third quarter 29.

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Continued to share your disappointment in frustration with our recent results.

No doubt the headline losses upsetting to all and believe me I know misery needs to know company.

But before we can truly righted the ship and focus on a return to profitability in 2020 <unk>.

I wanted to be as sure as I could the past would not impair our future.

As mentioned on the August cool only a couple of weeks. After my return to day to day management. The Fercs action I talk was to shut down commercial liability lines.

It was those how highly volatile lines that where the source of the vast majority of adverse development. We recorded this year, including the amount we just booked.

In fact.

The amount of adverse development in recorded thus far in 2019, 80% of it comes from those same commercial liability lines.

But it's important for you to note that the balance of about two point threemillion.

Does it relate to personal lines liability claims but.

Do you be aware that even after those amounts were added to the reserves our results over the past five years reflect a redundancy in our personal lines reserves.

I'll defer to bend to discuss the claims reserves, but know that bad and I agreed we should get an updated viewpoint from an external independent actuary, which was conducted during the third quarter.

Liability case reserving is a judgmental process that depends in many many assumptions individual opinions can vary and often changes new information becomes available.

With all these assumptions there was a wide range of possible outcomes, especially for commercial lines risks written in New York City.

Only is results emerge can we test of our assumptions are holding up well if they need to be recalibrated and that is what we've done over the past several quarters.

Turning to the rest about business right at the top of my to do list is a goal to retain our A.M. best rating of a minus excellent.

It took out team from mid 2009 until the first quarter 2017 to achieve this something I cried myself on and something I don't want to jeopardize.

On objective basis, we're taking the needed steps to preserve and improve upon the metrics employed by A.M. best.

From a subjective standpoint, kingstone needs to return to elaborate all level of profitability more akin to our historical then our recent result.

And we are taking those steps, which require us to reduce our growth mandates and instead focused strictly on profitability.

After many years of maintaining steady premium rates in New York, We've increased our homeowners rates effective November 1st.

We've applied for increases in other states as well we've eliminated certain sub classes of business seeking to the seeking to deploying our capital where the near term results can deliver the are all we we'd become known for.

Finally, I'm now joined by an old friend in Merrell goal.

I've known Merrell since she ran the northeast for Progressive insurance and my company was their biggest agent.

The timing was finally right for us to work together and she has done just 45 days, what much needed energy and passion to Kingstone and will be joining us on future calls now I'll turn it over to our SVP and Chief Actuary Ben Walden.

Got it Ben.

Thank you Barry.

As mentioned, it's important to note that our reserve adjustments are concentrated in one line that it's now been put into run off.

For the last several quarters, we've been working hard to review and take appropriate actions to address commercial lines.

As a public company, we've never felt it in our best interests to rely solely on my opinion regarding reserves.

Sure to ensure an objective an unbiased view, we rely on an independent actuarial consulting firms for our annual reserve opinion.

After the liability case reserving issues started to emerge in the first two quarters of this year, we had an outside consulting firm perform a complete mid year review of all liability lines.

We thought it was prudent to get an external opinion on reserves as soon as possible rather than waiting for the normal year. Andrey view. So it was one of the outside Actuaries review was completed in the third quarter and it confirmed my own findings.

This led to the additional 5 million in prior year reserve adjustments made this quarter.

This amount 4.4 million relates to commercial lines.

The 11 million in reserve adjustments for the year 8.8 million is from commercial lines.

Writing small contractor and business owner risks in New York City is very difficult and claims student not age well in these venues.

The average claim size for these cases has turned out to be much higher than was originally anticipate.

[noise] following the multiple recent internal and external reviews, we are confident the issues with commercial lines reserving have stabilized and will be put behind us.

There are 188 commercial liability cases open as of September .

We will be watching these very closely as we did several years ago, when we placed our commercial auto business in Toronto.

Last quarter, we noted that we are reviewing reinsurance options for commercial liability reserves.

These could include a full loss portfolio transfer or an adverse development cover.

We are still in the process of reviewing the cost of these options and we'll make a decision before year end.

The good news is that we have taken the actions necessary on commercial lines and we can now moved forward with our profitable personal lines business.

The reserve issues seen in commercial lines have not impacted personal lines over the long term personal lines business is dominated by fast paying property claims and the results are known quickly.

These lines are not as strongly affected by the large claims volatility from prior years that we've seen for commercial lines and commercial auto.

It's Barry noted we have been we have taken several pricing and underwriting actions to further improve our profitability in personal lines.

We will begin to see the impact from those changes over the next several quarters.

Now I'll turn it back to Barry for some closing comments.

Thanks, Ben I want you to know that I'm aware that Kingstone has lost much if not most of its luster.

I will restore the trust to stockholders, but it's going to take me some time.

I want the numbers to speak for themselves as they had for so many years.

It's a challenge to me to ban and to Merrell and Victor and the rest of the Kingstone team to do just that but were up to it and we look forward to 2020 and beyond with that I'll turn the call back to the operator to take some questions.

Thank you we will now be conducting a question answer session. If you like to ask a question. Please press star and one on your telephone keypad.

Confirmation sung will indicate your line is in the question Q you May press the star into if you will like to remove your question from the Q.

Well participants using speaker <unk> men it may be necessary to pick up your handset before pressing the star Keith.

One moment, please why we pull for questions.

Thank you. Our first question is from Paul Newsome with <unk>. Please go ahead.

Good morning, Thanks for the call could you talk about.

The differences between the internal and external.

External reserve.

Estimates and if there was a significant difference in the so [noise].

The midpoint of the estimated losses and as well could you can you talk about sort of where the reserve peg was placed in in those reserve analysis in terms of the up the actuarial range.

Yeah, I can take that Paul this is Ben Walden.

So we are booking to the central estimate based on our internal review as of September .

And as you know that is what drove the increase in the 5 million.

We did get an external review as of June .

And results of that we're used to determine.

Core to confirm where we think are carried reserves should be but we are very close were in line with what the external actuary had through June if we roll it forward to September so we feel much more confident at this point that the reserves are where they should be.

[noise] and then my second question has to do with the new mandate to focus more on profitability and less on growth.

You know how should we think of the magnitude of change in the growth rate.

In the core home insurance business with the change in the mandate.

I think Paul this is Barry thanks for calling in.

We've been we've been recording growth from both our initiative outside New York <unk>, our expansion states as well as within New York and that's going to be tapered back I think you should be looking at personal lines growth rates in the low to mid teens on a going forward basis.

And that's would include the impact of pricing changes that will get rolled off.

Great. Thank you.

Thank you.

The next question is from Bob Farnam with Boenning and Scattergood. Please go ahead.

Yeah, Hi, there and good morning, if you know since you kind of done more of a full blown reserve review here with external actuaries.

Is it more than likely that you may choose not to purchase the additional reinsurance protection, if you're if you're comfortable with the reserves now.

Hey, Bob It's Barry.

We were still in the market for both in a D.C. and a loss portfolio transfer.

It seems like what we've heard initially is they felt as though that's kind of blood in the water when I saw the pricing.

Were very comfortable where we are at this point in the reserves.

And there's no.

Urgent Nasa's necessity to moving forward on that now.

We're seeing the fruits of what we've done since June .

Bear out and I will review this again before the end of the year.

But I think it's probably fair what you said that we've got the reserves to a level that we feel less necessity to go out and purchase a reinsurance solution.

Okay any any the outside actuary that reviewed the reserves at mid year has there been here is that was it sounds like that was a different actuary that does your typical your your full year outside review is that the case no no. It's not it's the same actua.

Our aim at whatever reason, there's a level of review required when their name is used.

So I'm not mentioning that name, but the answer to your question. It's one of the same.

Okay.

And then maybe for you for a band you said you got to 188 cases that are still open at the end of September .

What.

What type of Lin policy limits are these.

Claims on power the policies that these claims are on and how are they reserved relative to the limits.

Okay. So the the majority of these claims have a $1 million policy limit. There are few that have a $2 million policy limit we get very few full limit claims, but the average paid claims severity on these is about 50000.

After making the changes that weve.

Adjusted in.

The third quarter prior to that we were expecting an average claim severity closer to 30 540000. So that's that's what's really driving the difference in our reserve estimates at this point.

Okay.

And in terms of the personal lines I know you know certainly they had had development there, but it was it was minor two Q2 points are so just to what is there any common commonality in terms of what types of claims that are driving that.

These are all liability claim issues.

We write a lot of policies in the city and a lot of the personal lines claims are slip and fall claims on sidewalks, there and then use where you have very difficult.

Challenging outcomes. So they there is an overlap between some of the commercial lines and the personal lines. The the good news on personal lines is that.

Percentage of claims that fall into that category for personal lines is much smaller than it is on the commercial line side.

Right Okay.

Okay.

Thanks, guys.

You're welcome.

The next question is from Scott Preston with Maven Fund. Please go ahead.

Hi, Thanks for taking my call.

Two questions very first can you just talked about how.

The change in.

You bet you on the growth side might affect because she relationship you guys kind just started.

Oh, Yeah, I cant Scott. Thanks for the question that would incorporate co see as well.

Some of the change and the growth is going to be a reduced desire on our part for those margin all lines of business that we had written previously.

To be you know it a lot of it had to do with competition.

And we when we had a competitors are willing to write a certain type of line of business, which we didn't two of which we didn't stress.

We added choice of trying to preserve and maintains strong relationships with our best producers or otherwise, allowing competitors, even some who were on the call today to to pursue that business inside of our stronger agents and so at this point a with.

Hey bring back.

We've already made changes to reduce those and.

Ah that's going to apply both to both at the independent agent channel and the Cosi agency.

Okay. Thank you and then.

Finally can you just kind of maybe provide a stair step for us.

With your comments about a taken a while the kind of good things back on track, but on the other and you're saying that you've kind of ring sense commercial I'm, sorry, I would think that going forward. The result should improve dramatically if youve reserve properly for that so can you kind of maybe walk through how.

You know the next couple of quarters, you might still have some impacts from commercial and how that might have prohibit you from kind of returning from those kind of normal levels of profitability sooner.

Yeah, you know when you take even the noise out of where we ought today.

And just to look at us on an ex cat basis and forget the development, we're still running a sub 90 combined.

That's not going to we should stay there and start to improve but as the price increases take hold.

As the changes in underwriting take hold.

And without giving any credit to a better outcome from our claims department now strengthens claims department.

We feel is that that combined should go back towards the.

Call at the mid eighties sometime towards the end of next year.

So what happens is were rolling on a an 8.9% increase in New York State, which is when you. It really excludes two counties in New York City that we've taken rate in February of last year. So.

Overall, it probably winds up a 9% overall rate change during this year, but from November 1st on all new business is being booked at those higher rates, but only starting December 15th is that she will be existing policyholders see a pricing change.

It's you know, we're going to modest to that very carefully and to keep an eye on our retention.

But at this point when you start to think about the written premium rolling on and then you need 12 months to earn out each policy.

To conclusion, it's going to take us the better part of a year or a year and a half do you really get that we got start getting the full benefit of those price changes.

Okay. When I say that you need patients. This this is not a one year endeavor.

No I don't want.

Yeah, the price increases, but can you just walk through how what impacts commercial well still have on the business in the next four quarters as you run that off.

I'll, let Ben take the commercial part of that yes. So over the same time period, where non renewing all of our commercial lines policies and that will be completed by the end of third quarter next year.

At the same time, we're going to be a continuing to close out claims that are currently open and we think that the reserve levels that we have adjusted to now.

We'll be enough to cover that but we'll see that over the next few quarters. The early results are favorable as Barry had said, yeah, I don't feel comfortable in giving too much more color than that yes. The reserve the reset reserves.

Artist to the extent that we've closed out claims have been set properly.

I'd ask Ben earlier, how many of these claims need to close before we can see some statistical significance out of that and it's premature we're not there yet.

If in fact, we get there.

By the end of this quarter, which it doesn't sound like we well, but it's possible, but as soon as we do we'll start giving indications are that you'll you'll have a better idea of just how this is patting out.

Okay. Thanks, that's all I had.

Right. Thank you Scott.

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

Yeah that's.

Hi, Thank you very much as Barry Goldstein.

Well I can say is.

Yeah, there's a few things that's happened and to me in my life.

That have been very positive from a for professional level and perhaps the most pleasing is my.

Having merrell Golden join us in managing Kingstone on a go at <unk> going forward basis.

Together with Victor and Ben.

And the other Kingstone executives acting as a team I think were far better place now with her managerial expertise and leadership and job.

I'm sure you'll enjoy speaking to merrell on the coming calls. Thank you all for your time today have a great day.

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

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