Q1 2020 Earnings Call
Twentytwenty earnings call.
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A question answer session will follow the formal presentation.
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I'd now like to turn the conference over to your host Amanda Goldstein Kingstone companies Investor Relations.
Thank you very much Brock and good morning, everyone yesterday afternoon. The company issued a press release detailing kingstones 2021st quarter results.
On this call Kingstone may make forward looking statements regarding itself and that's business. 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 Kingston.
For more information. Please refer to this section entitled factors that may affect future results at financial condition in part one item one eight of the company's form 10-K for the year ended December 31st 29 fees 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 as a reconciliation of our non-GAAP measures to our GAAP figures.
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. Goldstein.
Thanks, Amanda and good morning, we're pleased that you can join US on this out first quarter 2020 conference call. The first one ever where I wasn't wearing a certain type.
Our last call took place on March the 12.
I haven't been back to the off a sense.
It's telling just how seamless it was for almost our entire staff to begin working from home just two business days later on Monday March 16th.
I'll give an immense amount of credit to the New York Department of financial services for that.
Following superstorm Sandy over seven years ago, there were a lot of regulations that the DFS implemented and which resulted in kingstone being well prepared for this pandemic. So goes to the New York Department for that fore sight and that leadership.
From an operating standpoint, we didn't Miss a beat.
Were in regular contact without producers and while most of trying to work from home the business had slowed materially.
Our first quarter was most notable why buy what it didnt feature.
No bad weather to speak of no adverse development to record.
This is a second quarter without any adverse development and we're confident that that issue is behind us.
Together these items contributed to a terrible start to last year and without them, we're off to a great start this year.
On top of that I'm very pleased to report that this year, we saw a first quarter underlying loss ratio improved by more than five points versus last year total improvement amounts to a total of over 37 points.
Ben will give more color on that in a few minutes.
While losses would down materially we also had a quarterly decline in net earned premiums of 9%.
This is the direct result of actions that we chose to take we chose to reduce the volatility of our earnings from weather catastrophes, we chose to exit from the commercial liability lines of business, where we determined that a capital allocation was no longer warranted.
This is our focusing on profitability will win which well by its very nature will slow growth and which is led to the plan decline in net earned premium. So please take time to go through the schedules attached to yesterday's press release as data roll out for a better understanding of much of.
What we are discussing today.
Previous to that we had a 10% treaty enforce.
The benefits of this new quota share treaty or reduction in our premium leverage maintaining a sensible level of risk taking a reduction of catastrophe retention and all of which led to an improvement in our A.M. best the costs go up.
The increase in personal lines premiums that gets ceded to our reinsurance partners result in a decrease to our net written premiums and the 3.5% reduction to net earned premiums from personal lines or about $800000.
The decision to exit the volatiles commercial liability lines of business last August resulting in a decline of net earned premiums of $1.9 billion.
We expect that we will enter the fourth quarter. This year with no remaining active commercial liability policies. Ben will soon discuss how this exit is going and how well the 2019 reserve strengthening is holding up.
In addition, we're now seeing the impact on new business from the rate increases we took on the underwriting actions taken.
That all of which would done to improve profitability, most particularly on New York homeowner rate increases began in November for new business and on December 15th of last year for renewal business. We've raised our rates outside of New York as well. These actions will take some time to be fully reflected in all financial.
And they have slowed down our growth.
With the reduction to net earned premiums as discussed before.
Our net expense ratio was also impacted.
While we do receive ceding commissions from reinsurers, which served to offset our underwriting expenses did decline in net earned premium outpaced the decline in underwriting expenses and thus increased the expense ratio.
We had an operating loss in the first quarter of 2019 of almost $8.9 million and an operating loss in eight in the first quarter 2018 of 2.3 million.
This year, we all but broke even with an operating loss of about 300000.
A break even went to quarter in our north East business is very satisfying.
What I would normally say is this sets us up very nicely for the rest of the year and it does.
But the pandemic has filled our lives with uncertainty.
It seems like most every morning, but taking a step forward and conquering a better dealing with the disease, but by the ended the day, there's something new in nasty to consider.
What I know he said it kingstone because of where we do business each and every employee agent and insured is that the epicenter of the disaster.
It was on the sorts with New York City in long Island being ground zero.
We see this from the comfort out TV sets and our Internet feeds.
But the hospital personnel and first responders or on the battlefield. They are our heroes just as a soldiers afforded certain benefits when sent off to war with their wages are untaxed I feel the same should be true of all hospital workers at every level well first respond this we're putting themselves at risk to keep us.
Yes.
I've got a few additional points to go through which I think are of interest first with regard to the dividend. The board has decided to reduce the quarterly dividend from six in the quarter sense to four cents beginning in the June quarter.
This puts us in line without peer group at about in a 3% yield.
Reserving capital and improving holding company liquidity makes sense at this time.
We did buy back some shares in the first quarter and building cash at the holding company or allow for US to act opportunistically when the situations present themselves.
Every day I see how she has trading so materially below book value.
And with confidence in the future I see the buyback as a great tool to increase shareholder value because I firmly believe that Kingstone 2.0 is on track to bring us to a higher level of profitability and as we put up those more profitable numbers quarter after quarter, our share price will.
Be reflective and no longer be in the bargain basement.
Next item as investments the quarterly decline in book value was entirely due to the payment of the dividend coupled with the cool decline in market value of securities that had not yet been sold.
As mentioned in yesterday's press release, we've already <unk> recovered more than half of that decline.
Next item relates to cope with 19.
And you may have heard a lot about business interruption claims and conversations around the country about that again, we chose to exit writing business owners policies last year, and we haven't written a new one over a year.
There is proposed legislation in New York that could require kingstone to provide this business interruption coverage inspite of the fact that out policies first require that there'll be a loss to covered property, which there is not.
This would the passage of a law would effectively be retroactive coverage.
The U.S. Constitution specific we precludes the passage of any ex post facto legislation.
Common sense as carriers never price the typical business and policies to include this as a carbon cause of loss.
Needless to say, we're closely monitoring but have faith in the law. We did not have caused to reserve for this possibility at this time, but we are closely monitoring the situation.
At this point, let me turn the call over to Ben to review the first quarters loss and reserve results. Please go ahead Ben.
Thank you Barry.
The first quarter typically runs at a much higher loss ratio than other quarters because of winter weather and large fire claims.
This quarter, we were fortunate that there was a very mild winter season.
For the first quarter 2020, the overall loss ratio declined from 98.4%.
60.8% <unk>.
An improvement of 37.6 points.
The impact from winter cat events with minimal with only 0.7 points of cat losses recorded this quarter.
This compares to attack impact of 17.1 points a year ago.
And a 24.3 point impact in first quarter 2018.
The core loss ratio, excluding commercial lines improved 6.2 points from 63.3 in first quarter 2019 to 57.11st quarter 2020.
We observed a lower claim frequency in both our personal lines and auto physical damage <unk>.
Which drove the improvement.
Large fire claim activity this quarter was inline with the prior period.
As Gary noted, we continue to observe stable prior year loss development.
During the quarter there were favorable outcomes on several large commercial liability claims from older years.
This is a very encouraging results.
For the quarter, we recorded 0.5 points of favorable prior year development.
Compared to 15.3 points of adverse development in first quarter 2019.
Our internal actuarial review continues to apply conservative assumptions for the more recent accident years.
We will continue this more conservative reserving approach until claims handling improvements made over the past year, our realized in the data.
By line of business, the underlying loss ratio trends for the quarter were favorable.
The personal lines underlying loss ratio, excluding cats in prior year development improved to just over five points compared to first quarter 2019.
We saw a much lower non cat claim frequency due to the milder winter.
We're also starting to see the benefit of higher average premiums, earning in as a result of the recent homeowners rate increase.
There was a sharp decline in auto physical damage claim frequency starting in mid March and this is reflected in the first quarter loss ratio.
The commercial lines business that was placed into run off last July is now much smaller percentage of our books.
As of March 31st less than 3000 policies remain on the books.
Commercial lines represented only 6% of our total net earned premiums for the quarter.
We do expect that commercial lines will continue to run at high loss ratios until it is fully run off later this year.
With that I will turn it over to narrow for an update on operations Merrill.
Thanks Ben.
And good morning, everyone.
A quick update on our efforts to modernize the company sound Oh.
We're working on the last call we.
The hiring of art <unk> added some number.
Very much <unk> company.
During the quarter, we made great progress on your unless it's a that I'm delighted to highlight.
[laughter] courses, but it's not for both power management and claim.
How does that we just started version of our New York homeowners product <unk> and it's going well, we have a long road to go and look forward to streamline our progress on all that we retired our legs.
We're also in the process a good phenomena.
Right.
And our friends will have a more modern but can you know and will automate many of the crops that are performed manually.
The implementation of R&D.
Then there is also going well and we're on target.
<unk> claims on it I July or.
We also continued to make headway on our new product development effort.
Overall, we remain confident that we're making the right that's not and that they will.
Improve then when the company performance.
On that note I'd like turn call back to the operator, so that we can answer any questions.
Operator possible.
Thank you.
This time will be conducting a question answer session. If he would like to ask a question. Please press star one on your telephone keypad.
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Our first question today is from Paul Newsome Piper Sandler. Please proceed with your question.
Good morning, I didn't hear everyone seep unhealthy.
Could you talk about Oh, the outlook for <unk> expense ratio perspective leads is this could be appropriate.
Levels today, given the changes in the reinsurance plus what you're investing.
In.
Systems.
Yeah. Paul This is Barry. Thank you Yeah. I think this is probably appropriate for the short term again with with not trying to focus on growth and and seeing the commercial lines continue to run off.
That net earned premium is really what's driving the percentage we've had a moderate amount of increased expenses to support Kingstone 2.0, but really nothing unusual there. So this is being being driven just by out a goal towards getting more profitable.
I know this is very small for your book, but on the business owners policies did you have a separate borrow exclusions wells the.
Definition, the loss a new property loss.
Hey, Merrell you want to comment on that.
Sure. So I would not have a separate exclusion, but as good or bad.
During the call, we'd only cover those losses Theres, a a covered wassa damage to property.
Certainly the pandemic or not there.
Not pull out our forms that we use in most every other company that uses standardize forms a they're structured the same way.
It's not the <unk> you did include the ice standardize so.
<unk>.
We don't have a specific exclusion.
Okay. Thank you and testing appreciate it. Thank you very much pleasure. Thank you.
The next question is from Scott Preston of me even group. Please proceed with your question.
Hi, good morning, very I'm on a couple questions I'll just ask them all and then I'll. Let you guys are I smoke once your first on the buyback good to see that it roughly 60% of book.
Is there is there and now you have for that and that's my first question second on me.
Investments.
Was there anything that was permanently impaired those investment losses or budgets.
Normalize back to where it was over time.
And then tomorrow night on they do you know they amounted to commercial claims dot standing how many you have and then.
It's there's still kind of assessing the options with that book and then finally as far as a 25%.
Ceding a business what is that how long does that Ron before you might start to lower that that's all.
You've done.
Yeah, [laughter], so I'm going to take number is one two and four and then I'll, let Ben talk to the.
Commercial claims that you asked about a first we don't have a specific dollar amount.
We've talked before that the repurchase of shares must come through with.
The holding company and holding companies liquidity.
As we not we don't keep a great amount of liquidity there the money that had been raised through our [noise] to prior public offerings, a debt offering all almost all of that money was contributed directly to the surplus of the insurance company.
So on a regular basis there is a dividend paid from the insurance company to the holding company a that money is used to pay dividends or to service debt and what and a holding company expenses and when there is money left over to the extent that it makes sense.
We would buy back stock shares.
Certainly in the last quarter.
As the price to book has gotten worse or the opportunity was there and Oh, we took advantage of it to the extent that we could but we don't have a at this point.
A particular way to access additional holding company liquidity without challenging our leverage ratio.
And putting out cells at rating risk finally, it makes no sense to me to go out and raise any money in the equity markets or at least in a traditional sense.
When the stock is trading at such a cheap values. So I hope that show responsive to what you're looking for.
With regard to investments.
The is to permanent impairment no.
In fact, I think on an overall basis the valuation of our fixed income holdings is all but somewhere between 15, and 10% or 15% to 20% I should say of the decline is still enforceable, we've we've gotten back.
More than 80% of the decline so we're in we're in real good shape there.
I wrote down what the first part of that question was.
And that can't read my hand, writing.
So you asked about I guess permanently a pad was all that well there was a.
She is that was that's what you were looking for.
Yes, that's right. Okay on the last thing was the 25% quota share which started December 15th of last year extends through December 31st of this year and certainly on our radar will be sometime towards the end of the third Florida will decide whether we're going to keep.
What change that quota share.
It's something I've always been opposed to a we do have or at least we had a far stronger balance sheet.
Before 2019 than we have today.
I'm.
Just to take advantage of the market and give us that opportunity to work through these rate changes and not run the risk of having a bad winter again.
Kinda blow us up that's why we put that quota share in place, but I see us generating more surplus from our operations. This year rebuilding backout surplus so I'm feeling good that whatever we do towards the end of this you won't be under this stress is that we.
The faced last year.
Ben I think what you were looking for Scott was some kind of a claim count as regarding the a commercial policies.
That's right Yeah, great band you want to take that.
Oh.
Will continue to monitor that overtime.
Okay. That's all I had I <unk>, yeah, let me jump to enhance on that just a little bit because you know we put obviously <unk> an immense amount of work went into having us put up the amount of reserve a strengthening we did last year and well much of it with regards to these commercials.
Liability cases was done in the first and the second quarters, we're carefully monitoring each of those enhanced reserves and what what we said in the press release and what you'll see in the queue is that as time has gone on we've been able to run off some.
Thing about half these claims now Ben.
Yeah out of the ones that were open at June 2019, we've closed about half of those and.
And they've closed favorably overall, yes, the amount paid on those claims was 10 per cent approximately 10% lower than reserves that was in place.
Which is a much better result than we had been seeing previously.
<unk>, we're no longer exploring as a result of that we're no longer exploring the use of any reinsurance to protect us on that we if we feel comfortable in the level of reserves the amount that sort of run through his statistically significant as I understand that so.
So just a matter of time till they work their way out of our reserves.
I hope that answers your question that Scott.
Yeah, Yeah, Thank you and a good quarter and stay healthy.
Thank you you too.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Bob Farnham of boating and Scattergood. Please proceed with your question.
Hi, there and good morning, I haven't question on.
No. It's kind of a disconnect you you had no storms no severe storms you had no adverse reserve developments you had no reserves set up for Kobe 19 claims you had fire activity. In line you you still came up with you know 100, or so combined ratio in a slight operating loss for the quarter. So.
What what's the difference in there.
Oh, thank thank you for that and hope everything's well it boning.
[laughter], but no I think you should focus your attention not on the expense or the combine ratios I said the.
Just the the balance sheet restructuring through the use of quotas share is impacting that rate the ratio of expenses in an unfavorable way.
But look at just the loss ratio. So yeah, we didn't have the bad weather this year and yeah. We didn't have any adverse development this year, but what we like to look at his out corollary loss ratio has improved materially.
And then when you take out the the the effect of the Ah commercial lines loss ratio, which is still at a very elevated level, it's down even more so I think what you're gonna see while it well it does add up to 100, if if we were allowed on that.
Gap I guess to to strip out a lot of the things and come with a direct computation you'd see it was a far more profitable quarter than what looking at 100 combine gives you and you know maybe we can take a this conversation off line to work through the quota share account.
If you'd like.
Sure Okay.
So they're going forwards.
See there's still an impact the the <unk> the commercial lines book with the higher the higher loss ratio.
So if I'm looking at kind of a normalized current accident. Your loss ratio you had like 60 60 ones right around that this quarter.
What what should we be expecting going forward.
I'm going to let bend try to answer that but let me just <unk> preface is that you know as a as a C.E.O. I've never been one to to try to give guidance I liked to let the numbers speak for themselves, but I think you questions legitimate and Ben if you could give some color us too.
You know given how moderate the winter was and the the lack of reserve a influence over the loss ratio can you give her a little bit of color as to what you see the full your loss ratio would look like.
Sure. So our first quarter is typically do you run much higher than other quarters.
And the reason for that is typically winter weather, yeah, we didn't have any winter weather this quarter.
But we do always have a higher claim frequency on the fire side.
And that makes up typically between 10 and 15 points of the loss ratio for first quarter.
So the fact that this quarter was higher than a normal quarter is not unusual for us.
Going forward, we do have this homeowners rate increase which will be flowing through.
And we anticipate that that will improve our loss ratio from 19 to 20.
By about four to five points as it earns through.
So we should see an improvement this year to to to improved rate levels and also do the fact that first quarter has come in much better than a typical first quarter would.
Right Okay.
In terms of.
You know obviously, all your business or vast majority business comes through your independent agents <unk> and they were at home.
Just you you mentioned, maybe having some issues with trying to get new business in the door. What what is your where did your field for expectations in terms of new new business going forward.
Let me, let me start that off Merril, maybe can pick up a little bit I mean, so you know the independent agents, a a more like storefront or retail store owners and that many of them or just totally shot and the ones that we're better.
Prepared continue to do business, both online and over the phone, but there are quite a few that a neighborhood type operations, who just have seen their business all but stops so we're compromised on that level.
Sure. So are there we haven't seen a slowdown in our partner, Vermont independent names and I go mine, a business them or severely impacted bike who've. It has been our physical damage product or river drivers.
Yeah, obviously, there's no business for them.
When south isn't great.
Theory significant drop off and not mine Berger.
But you know in in general a new business makes up a a smaller portion of our total premium. Unfortunately, we've not seen impact on retention and that's the majority of our premium so I I totally a plot our producers for helping us retain customers and so while we.
Anything new business smoking slower <unk> to we're thinking that it won't be that.
Significant because new business and such a small portion of our told premium.
Right and and looks like you drew the homeowners book at least on the <unk> the direct basis in the expansion States. <unk> is there was there any states in particular that that they grew more than others.
Ah, yes, though when compared or last quarter last year, we hadn't yet entered Massachusetts or Connecticut.
<unk>.
I certainly are you know driving some of our growth, but all of our the the four newsday.
All of them grew significantly versus first quarter of last year.
Okay, great. Thank you.
Okay.
[noise] there are no additional questions at this time I would like to turn the call back to Bury Goldstein for closing remarks.
Well, thanks, very much a everybody for joining and I think we're off to a great start the numbers are all over the place it's gonna take a a lot of working through for you to see that.
But where we are very hopeful that the the actions we've take will with certain at the actions we've taken having the unintended effects.
But we do live in an environment right now we're seeing the future is obviously out of the question. So at this point, let let's just say I'm feeling very good about the direction, we're going in and I hope that everybody on the call has stay safe stay sheltered.
And we'll look forward to a reopening of Erica safe reopening of our economy. Thank you also very much.
By now.
Concludes today's conference you may disconnect your lines at this time, thank you for your participation.
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