Q4 2019 Earnings Call

The company's 20 of our team fourth quarter at yearend financial results Conference call.

This time all participants are in listen only mode. A question answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero under telephone keypad as a reminder, this conference is being recorded.

It's now my pleasure to introduce your host a medical Steve. Please go ahead.

Thank you very much Kevin and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstones 2019 fourth quarter and full year 2019 result.

On this call Kingstone may make forward looking statements regarding itself and its business.

Forward looking events and circumstances discussed on this call may not occur I could differ materially as a result, I've known and unknown risks factors and uncertainties affecting Kingston for more information. Please refer to the section entitled factors that may affect future results of financial condition in part.

One item one eight of the company's form 10-K for the year ended December 31st 20 team as an updated by the corresponding section in the 10-K for the year ended December 31st 2019 scheduled to be filed with the FCC on March 16, 2020, along with the commentary on forward looking statements.

The Companys earnings release issued yesterday.

In addition, our remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measure to GAAP figures. Please see the tables in our earnings release with that I'd like to turn the call over to Kingstones CEO Mr. Barry Goldstein. Please go ahead Mr. Michael.

Thanks, Amanda and good morning, everyone and thanks for joining on this out what quarter 2019 conference call.

I'm quite pleased to report that we ended 2019 with a fourth quarter profit.

We can now put that year into the <unk> that last year into the rear view mirror.

Before I allowed our team to do that though we sat for two days in disgust, what we learned from 29 team and we learned a lot.

And I'm confident that decision, making going forward will be up a far better quality because of these learnings.

We've also recently added a number of highly skilled executive with lots of experience will guide us forward.

We left those meetings without batteries charge in the far better sense that the future is bright but also aware that we need to work very hard to restore the lost or that was lost.

We are investing for our future and Marigold in our Chief operating officer will expand on this in a few minutes.

Our focus is squarely on profitability as you know we made it difficult decision to exit commercial liability lines last summer.

It was there that we found the need to increase our reserves in 2019.

Three points to know.

First by the very nature of allowing these books to run off our premiums will shrink.

Second we're very pleased at how the liability claims have been settling with about 40% by dollar and by volume close today and for that I think our head of claims below Brian and these new team who have done an excellent job since joining kingstone last spring.

Third Ben will discuss in more detail as Ben will discuss in more detail. We're delighted to report that we did not meet to book any prior year development related to commercial lines or any other line of business in the fourth quarter.

Like our competitors, we to see increases in loss costs, most profoundly and fire claims and non weather driven water losses to address this we began a series of rate increases in the fourth quarter.

The amount to new business written at these higher rates will shrink as our rates are now in excess of many about competitors, particularly those Florida based carriers, who do not see nor could they achieve an A.M. best Brady.

For example, but New York homeowners, we took a statewide increase of about 9% that is effective for new business.

November 1st 2019, so anything new written since then is at the higher rates.

But the rate increase didn't impact any renewals until December 15th and then only when an existing policy renews.

Since we earn our income ratably over the life of a policy the full impact into Q4 2019 inquiries wont be felt until the end of next year.

We have now preparing for our July reinsurance renewal it will be our biggest program ABA and because of our internal view of risk along with the fact that we are an A.M. best a minus rated carrier the limits, we ought to secure a far above many about competitors, which allows them.

Our cost structure.

We are working with a long time intermediary a on to build a more balanced program as our needs have grown and today's capacity providers include many participants some of which do not provide coverage through traditional reinsurance structures.

Let me turn the call all but to ban our chief Actuary Ben.

Thank you Barry as Barry noted 2019, with a challenging year and we're happy to put it behind us.

As expected the actions we took throughout the year put us on very solid footing going into 2020.

Over the last few months, both our internal actuarial team and our outside appointed actuary have performed detailed independent reviews of reserves.

As everyone knows by now we recorded prior year loss development of 11 million through three quarters of 2019, mostly related to unfavorable results in our commercial liability line.

Those lines were put into run off in July and just over 200 claims remain open.

We expected that the actions taken on reserves through three quarters would put us in a much stronger position going into year end and no further adjustments would be necessary.

The two actuarial reviews were performed entirely independent of each other and in early February we compared the results.

Net carried reserves of 65 million our internally indicated reserves were within 250000 of our appointed Actuaries Central estimate.

We consider this an outstanding result.

As we point out in all of our financial statement loss reserving is an inherently uncertain process that involves many important assumptions.

This process can lead to a wide range of reasonably possible outcome.

In 2019, both Kingstone NR appointed actual realized that some critical assumptions made in the past turned out to be incorrect.

However, thanks to the efforts of our claims team, we were able to understand where the assumptions were off and made the necessary adjustments.

The fact that two reviews produced indicated reserve levels within a half a percent of each other provides us with great confidence that we are in a strong position as we move forward.

Additionally, the run off of commercial lines will be to reduce reserve uncertainty as more of our open inventory is closed in each successive quarter.

We are monitoring these results closely.

I'd also like to point out that both year end actuarial reviews relied solely on historical claim outcomes and trends. Neither review assumed any benefits from improved claims handling procedures that have already been put into place.

These improvements could lead to favorable run all of these claim and the early indications in this regard are encouraging.

However, we will not take any credit for these actions until more claims are closed and we can be certain of these benefits.

We look forward to starting 2020 with a clean fleets on reserves and the opportunity to apply the learnings from 2019.

Now I will turn it the call over to our COO Marigold and Merrill.

Thanks, Ben and good morning, everyone.

Since I joined in the September of last year. We've also made great progress on the key initiative, we call Kingstone 2.0.

This is our effort to modernize the company building on its great Foundation to make the company even more enduring we are adding senior leadership with deep expertise developing new products and services and investing in technology to build an even better version of Kingstone.

We're excited to know that either pack. The <unk> has joined as VP senior product manager Sri Seshadri has joined as VP, Chief Information Officer, and Rob Jacobson has joined as VP operations. All of these leaders brings decades of experience to help try.

Transform kingstone, along with below Brian who joined earlier last year as the SVP Chief claims officer, we've added a lot of talent to the company and our senior leadership team is now complete.

In addition to managing the New York products, even leading an effort to develop new homeowner dwelling fire and condo product for all of our states. These programs will incorporate new rating and underwriting elements and more granular segmentation to more accurately predict loss cost.

We are hopeful this effort combined with our new platform will improve our competitiveness and ease of use resulting in more business for kingstone.

Three joined at a critical time as we are undergoing a transformation from our legacy system to more robust and modern technology for both policy management and claims Sri is very involved in making sure. These projects go well among many other initiatives Sri is the companies.

First see I O.

Rob is focused on redefining the service, we provide to our policyholders and select producers before Rob joining the company our operations areas reported up to several different leaders. So now we have one group that manages the entire policy lifecycle Kingstones served.

It has always been a differentiator for the company. So Rob has a great foundation to build on.

I would be remiss if I did not also mentioned the great job Bill is done completely rebuilding Kingstones claims organization Bill hired a team of people with strong claims background. He refine the claims guidelines so expectations are clear and implemented a quality assurance program to identify.

Hi, further training opportunities. He also in source various functions to reduce expenses and improve service. These are just a few of the many improvements he has made.

We expect than in the short term, we'll see an increase in kingstones expense ratio because of the investments we are making but we are highly confident they will result in increased growth lower loss costs as well as improved producer and policyholders satisfaction, resulting and.

Higher returns for our shareholders now I'll turn it back to the operator to reply to the questions you might have operator, please paused for a question.

Thank you would that ducking your question answer session.

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My first question today is coming from Paul Newsome from Piper.

Yes.

Good morning, everyone.

Good morning.

Help me a little bit more with the impact of the reinsurance business.

<unk> next year.

Obviously I get the a premium decrease.

<unk> business, but could you talk a little bit about the impact.

The expense ratio.

Commission.

Yeah, Hi, Paul How's everything.

So so basically we got to the ended the year and realize that the impact of the $11 million of reserve strengthening.

Okay I was.

Flowed through to outs surplus.

Which triggered our leverage if we didn't do something about it going beyond where we were comfortable from a risk basis. I've always said, we wanted to try to stay at a below a 1.5 to one ratio of net premiums written to surplus.

So.

One one of the benefits of putting on the quota share the way we did is that the statutory accounting purposes.

That effectively gives us what's called surplus relief and allows that metric to stay on the control and we're very happy.

And looking forward to staying below that wanted to have to one.

Through the contract period, which is the end of this year.

In exchange for that we received a ceding commission.

And from a a gap perspective.

Well, we'll be taking in commission, which serves to reduce our expenses.

Is offset by and then some.

Constrain of our underwriting profits from the difference between our premiums earned and losses. So we're giving up some margin in exchange for de risking our book by shifting 25% of the loss cost to the reinsurance market and are willing to accept.

Hey, smaller margin if you would as we recover from what we just went through.

With respect to the expense ratio.

It's a little.

Don't know if I have in front of made the exact numbers to use but I think what you can look forward to in the expense ratio in 2020 is a decline as a result of this ceding Commission.

But more importantly, you'll see an increase our expense ratio will go up we are investing in our future. We as marrow said, we're bringing on skilled highly trained and quite expensive talent.

And we are building for the future. So I can't give you I'm not going to give you any guidance as to the future, but I can tell you not to expect any sort of a decline overall in our expense ratio this year.

I'm not sure that gives you the answer you were looking for but I did the best directly.

No I definitely gives me into.

Direction.

Any thoughts on what might be the financial impact of July.

So right now we're very fortunate we are July 1st a candidate if you're what our peer group, which includes mostly Florida based carriers have a june 1st renewal, a we'd like to think that having not high.

Add any cat claims to speak clubs since Sandy No lost Creek that went along with that actually our our if you remember our gross losses came in well below modeled losses after sandy and not all behind us, but I think we have we're probably looking.

At a small rate increase.

In the low single digits and I think most of that is going to be the reinsurers, becoming emboldened with what happens with what happened last year with what the price increases they were able to achieve from the Florida carriers and if I if it goes according to.

What I've read from all different sources, that's going to be a once more again, a with gusto this year.

So I'd like to think we've got a reputation.

Thats well deserved.

If we'll get a couple of few points an increase fine so be it but I don't see anything materially major Andres.

Oh that was good.

Your next question is coming from Gabriel before a private investor Your line is alive.

Hey, Barry and good morning.

Good morning, good morning.

I just had a couple of question one is.

How should we think about the dividend policy going forward as profitability continues to improve and the other one is in relation to your comments on a non weather watered down as I was just kind of get an idea.

Or maybe an example of that thanks.

Okay, great well I was hoping both questions would be posed to someone else, but unfortunately I have the dividend policy question [laughter] traditionally we've we've sized our debit and paid our dividend based upon a the amount of investment income, we receive and expect to receive.

Right now as you know markets were particularly where we invest in fixed income have seen great gains in value as rates have dropped.

But our ability to reinvest that money at the same rate when those bonds mature or are called is going to be a difficult sure. This environment. So I'd have to say that our dividend policy right now.

It's going to be under review, we've declared a dividend for this quarter.

At this point and I you know you all know I'm I'm still the company's largest shareholder.

Weve far better use of return of.

Capital to our shareholders to buy back stock at 70 cents and the dollar then to pay a dividend that which served to reduce the book value. So we've got a conversation that's going to take place and I'll be speaking with the shareholders before the next quarter before we make the next dividends there.

Question.

I hope that's the that gives you what you're looking for I may not give you what you're looking for but that's my answer no bad why don't you take it to issue a non weather related water losses charts Ben Walden.

Yes, we continue to see higher average claim severity related to non weather water and these are mostly interior pipe break claim.

Sometimes they can be very costly, especially if the pipe breaks on second floor in it flows down to other floors. This is an industry phenomenon. So we've been seeing it across the industry. There really is no pattern in these claims that we see internally. So what we are doing as we are.

Factoring in rate changes to address the severity that we have been seeing so we saw the overall personal lines loss ratio go up about three points from 2018 to 19, we've taken a big rate increase at the end of 2019 in New York and we're taking similar increases in others.

States to address this trend.

Well good games.

Yes, yes, that's very helpful. Thank you.

Right.

Thank you. Our next question as a follow up from Paul Newsome from Piper Sir Your line is.

Hi, good morning.

Could you do you have any sense of how much the earnings volatility.

Change.

With the changes your me.

Sure.

Reinsurance.

These other.

<unk>.

Well.

The.

There are just so many moving parts right now Paul.

Obviously, the changes we made what geared towards a combination of reducing the claims volatility and at the same time.

Pointing towards profitability. So while some of the changes might have given rotwo may give rise to a slowing and our growth rate and believe me it's going to slow.

By taking away those risks that generated the least amount of margin will will most subject to well a claim.

We feel as though those changes will pan out overtime, but the short answer to your question as you can look for a material slowing in our growth rate this year and using this year as a.

If you would a oh.

Rebuilding year a correction here.

But I couldn't tell you I couldn't give you any sort of a range.

As to how this is going to work itself out now.

Yeah.

Okay. The pmiers.

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We're actually in the midst of doing that as we speak and that will be moving into our reinsurers and shortly.

We were supposed to be in London next week meeting with the people at Lloyds.

We canceled that trip quite early and have rescheduled everything with thank you zoom shareholders.

So we're going to be having zoom meetings between a ons offices in London, and a ons offices in Stanford, Connecticut. So, we're making we're making do with what we what we have to.

We have a Bermuda trip scheduled for next month and that's tenuous at best at this point.

I'm very understandable. Thank you.

My pleasure.

Thank you we reach of our question answer session only to turn the floor back over to management for any further closing comments.

Thank you operator, and if you've heard.

Our stronger company today, better equipped stronger talent, one diverse and with a common goal to make a better and more profitable kingstone.

This is it project, it's going it takes some time, but there will be hence in green shoots along the way.

We'll be sure to update you on our progress and look forward to doing that thank you for joining our call today and goodbye.

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 participation today.