Q2 2020 Kingstone Companies Inc Earnings Call

Hello, and welcome to the Kingstone companies second quarter 2020 financial results Conference call.

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Thank you very much Kevin and good morning, everyone yesterday afternoon. The company issued a press release detailing kingstones 2022nd quarter results.

This call Kingstone may make forward looking statements regarding itself and its business. The forward looking events and circumstances discussed on this call may not occur in could differ materially as a result of known and unknown risk factors and uncertainties affecting Kingston for more information. Please refer to the section entitled Fab.

There's that may affect future results and financial condition impart 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 earning release.

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In addition, our remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measures to 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.

Thanks, Amanda and good morning, everyone.

We're pleased that you can join US on this second quarter 2020 conference call.

Joining me on the call today are marigold in our Chief operating officer, and Ben Walden, Our Chief Actuary.

A year ago, I announced the two major changes were being made to improve upon our profitability.

First I announced that we were exiting the very volatile commercial liability business.

I'll run off is more than 90% complete and we expect to have no active policies at the end of this quarter.

Second I announced that homeowner rate increases where needed and that we had started the process.

Each action taken would yield positive financial benefits reduced losses by exiting commercial and increased premiums from the rate improvements.

But I noted it would take time to you to see these changes we're just now starting to see the anticipated improvements.

Soon after these changes were made I announced at Marigold in was joining our company as its chief operating officer. Her job was to Bush kingstones forward to become a more durable carrier one better able to compete and win in todays market place.

We call. This effort Kingstone 2.0, and this is a work in progress we've made a number of changes already with many many more to follow.

Results for the second quarter, what excellent from many dimensions.

Operating income the non-GAAP measure we used to describe our operating earnings continues to grow.

Perhaps the most satisfying metric for the quarter is that we were able to deliver an 87.3% combined ratio.

Merril will be elaborating on these excellent financial results I also note that this is the third consecutive quarter without any adverse reserve development and Ben will expand upon that later.

Although our a minus rating from A.M. best was affirmed on June 10.

A revision to be plus plus was issued on July 10th.

This followed the finalization about catastrophe reinsurance placement.

Our new 2020, 2021 program provides full limits well in excess of many about competitors and more than adequate for kingstone and its policy holders needs.

The new Treaty does not get us to the required confidence interval as anticipated by best for a typical a minus rating.

And only because of that what's our rating changed.

The Cobra impacted reinsurance markets, we're extremely difficult to navigate.

Reinsurance in May and June were just beginning to recognize up to what some say, it's a 100 billion dollar event.

Risk capital was highly constrain compared to prior years and according to one industry data source and a from just yesterday by Munich Ray.

Property insurance like Kingstone was subjected to the largest price spike seen since 2000 into.

Our board met six times in May and June to discuss this matter I.

As July approach capacity at Titan didn't rates sword.

In the end it was a painful but obvious decision.

Had we placed the program at July 1st in the same way, we did last year.

We would likely have retained that a minus rating.

But what cost.

Ceded premiums would have been at least $10 million higher.

But by spending that extra $10 million, we would have eliminated all possibility of kingstone delivering an underwriting profit. This year. It would have pushed out combined ratio next year to over 100% and would have forced us to raise our premiums yet again, perhaps by as much as another.

10%.

We made the choice to forgo the rating and strengthen our profitability, we've not given up on the a minus rating as a goal, but it's just too expensive now and without the commercial lines business, we really don't need right now with that I'll turn the call over to Merrell to provide more.

Detailed in the second quarter's results and our progress towards Kingstone 2.0. Please go ahead Merrill.

Thanks Barry.

We're delighted with our results for the second quarter as they clearly reflect the changes we have made to improve profitability.

Direct written premium was down 4.8% overall due to our withdrawal from commercial line, while our personal lines business was up 9.1%. This growth is due to an increase in renewal policy count as well as an increase in average premium.

From our recent rate changes.

The net combined ratio improved 6.8 points to 87.3, driven by an improvement in our net loss ratio for both personal and commercial line.

Then we'll provide more color on our loss ratio shortly.

Our expense ratio for the quarter increased 1.7 point, resulting from a significant reduction in net earned premium from the increased quota share and the discontinuation of commercial line.

Our expenses have increased as result of investment in Kingstone too old initiatives, particularly our salary I T and professional services expenses and we will see the benefit from these investments overtime.

During the quarter, we made some changes to our staffing level to reflect a decline in new business from our actions to improve profitability as well as the expected increase inefficiency, we will see from our technology investments.

Our efforts to better manage our catastrophe exposure have impacted our new business volume.

As Barry mentioned, our reinsurance costs have increased materially and these actions will help us control the increase in this expense.

Over the last two quarters, we have stopped writing in certain areas implemented in individual cat risk, scoring tool and introduce mandatory hurricane deductibles in states, where we previously did not have them.

While these actions have slowed our new business they are required to manage our profitability.

I'm also happy to share some highlights from Kingstone, two Oh, we have a ton going on.

We are making significant investments in our technology and those efforts are on track. We just implemented our new claims system. This week and we will start the conversion to our now policy management system and introduced the new producer interface in late Q3 last.

Last we're in the final stages of completing the modeling for I knew homeowners product that will be filed in all of our state before they ended the year.

We're very excited for Kingstone to Io and want to thank all of our employees and vendors who are working so hard to help make this a reality.

Now I'll turn the call ever did that then.

Thank you Merrill.

As noted we posted a solid result for the quarter and also recorded a third straight quarter of stable loss Reserve development.

For the second quarter 2020, the overall loss ratio declined from 56.6.

To 48.1, an improvement of eight and a half point.

The impact of cat events with slightly higher than the prior period with a 5.7 point effect compared to 4.6 points for the second quarter 29 team.

Prior year loss development remains stable with a small amount to favorable development recorded in comparison to five points of adverse development for the prior year period.

The loss ratio impact from commercial lines continues to decrease as commercial made up less than 3% of total net earned premium for the quarter compared to 12% to the second quarter 2019.

As previously noted all commercial lines policies will be off the books by the end of third quarter.

There were 204 open commercial liability claims at the end of June down from 227 as of March.

We've been able to close more than half of the open commercial lines inventory from a year ago revalued lower than the reserve that was in place.

We expect to see further favorable outcomes on the remaining open cases, but are taking a conservative approach is setting reserves until more of these cases get resolved.

The core loss ratio, excluding commercial lines improved 1.3 points for the quarter from 43.5 in 2019 to 42.2 in 2020.

We are starting to see the benefit of rate increases taken in personal lines late last year.

In addition, we saw a general improvement in claim frequency this quarter compared to the prior period.

The second and third quarters are normally kingstones best quarters due to the reduced impact from weather and fire claims.

However earlier this week the North East was hit with a major tropical storm, resulting in widespread power outages and a large number of wind entry damage claims.

While it is still too early to to determine an exact impact at the present time, we expect losses will reach far into our 10 million dollar direct retention prior to catastrophe reinsurance.

After the impact of quota share reinsurance, we are exposed to a maximum net loss from anyone cat event of 8.1 million.

Or an after tax impact on earnings per share of about 60 cents.

We will be watching the data closely as claims develop and we'll report a preliminary estimate of the impact as soon as we are able to more completely review all of the claim.

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

Great. Thanks, Ben and yes, we had a great quarter.

Well, it's put the company on a path sheet describe to us last year and we continue to March forward.

Stay with US please because it's just now beginning to get excited.

Now I'll turn the call back to the operator to poll for and reply to the questions. You may have operator, please pause for questions.

Thank you will now become ducking. Your question answer session, if you'd like to be placing the question could you. Please press star one under telephone keypad, a confirmation tone would indicate your line is in the question Q.

He made pro start to if you'd like to move that question from the Q.

Proposed spin choosing speaker equipment gonna be necessary to pick up your handset before pressing star one one moment. Please what we poll for questions. My first question today's coming from Paul Newsome from Piper.

Like there's not a lot.

One actually call everyone. I'm, just wondering if you could talk little bit about the expense levels prospectively and particularly the other expense.

Levels, just a need that seems to be a pretty significant delta you touched a lot with these so called investments.

But can you sort of directionally, what that might do perspectively is it something we got too.

Early in the growth who do you expect you'll you'll go pull that number back down but.

Sure. So I'm most of the increase in expenses due to the increase in our quota share from 10% to 25%, which reduced our net earned premium.

So, but we are as I mentioned, we have made significant investments I do think you'll see our expenses come down.

At least to the prior level, if not below that overtime.

So.

Is there a goal for where you want to pull the expense ratio down its.

Probably the biggest delta Puma.

Underwriting profitability. If you look it appears as the expense ratio is called.

And the 15% too high.

Well, well I wouldn't say well turn pocket.

Yeah, I think what what Merrell was alluding to is that.

The net ratio that you're looking at is driven by the amount of quota share. That's in place now that treaty at 25% expires at the end of this calendar year in sometime in the fourth quarter will make a determination as to the need for and the amount of quota share.

Our if any.

For 2021 and the future.

And I note that given the Oh.

The only slightly improved performance of the company this year.

We would expect that the a commission rate earned on any quota share going forward would be an excess of the amount that's in place now.

So you know depending upon just how much a quota share is put in place and at what commission rate. We receive a those two we'll have two major impacts on that ratio, but I think what but the important part at Merrill was making.

Is that most of the dollar is that a going into this increased spend is to build and develop and deploy our new product Kingstone 2.0. So I think we'll probably have a lot better indication on where that total spend is a summer.

Time early next year, but we continue to spend as needed hope that answers your question.

No absolutely does.

But that's what I had thank you very much.

That concludes.

Right.

Thank you as a reminder, that star one to be placed them to question Q. Our next question today is coming from Bob Farnam from Boenning and Scattergood. Your line is that a lot.

Yeah, Hi, there and good morning I have.

He just maybe a couple of questions on the I'd say, it's losses to kind of put the number claims in the context, you know 1000 claims.

We're not quite sure how that.

How that is relative to maybe how many claims you get a normal winter storm for example.

Yes, Ben Walden I'll take that a normal winter storm typically two to 300 claims for for a really big storm.

So it is unusual the biggest one we've had since sandy.

Also to put it in context, we have about a thousand open claims prior to this.

So this is going to double our open claim count.

And do you happen to remember how many claims you actually had for sandy.

Yeah, jogging your memory bit, but [laughter], the long time ago, but yes, Andy was about 3500 claims now we had much lower policy count at that point. So it would be much more today, but that puts it in general context hopefully.

Okay.

And the the policy limits on on the majority of these are the homeowner policies do you have.

Yeah, our typical coverage area, which is building coverage is a little less than 500000, we do expect nearly all of these claims to be relatively small so not involving structural damage, but lower average severity claims we don't really express too many too many people okay.

Okay.

Great and.

Maybe back to Bury the impact the A.M. best downgrades.

I'm just kind of curious what you think it's going to have in terms of your ability to generate premium.

Overall from independent agents and from the Cozy operations.

Well I think so the question there had a good one I do I don't think that the rating downgrade itself.

To the independent agent channel is gonna be all that impactful as I mentioned in my comments are the need for this D.A.M. best rating as.

As much more profound when you're talking about the commercial business and our exiting that business.

Really reduce the need for us to maintain that weighted.

Surely our relationships that we developed in cozy that relied upon a minus so a better rating constrains us a though those efforts to writing new business from those carriers are now put on hold a we maintain that book of business that we develop.

Then we continued to service sitting maintain the relationship.

And the opportunities available to cosy with other carriers other national agencies and other entities seeking to access in one way or another kingstones distribution network that remains in full force in effect. So.

Yeah, it's going to doing close these efforts are but overall the need for the rating was much more profound if we had maintained the commercial liability business and obviously we have.

I hope that answers your question Bob.

Yeah. So I don't have been a month or so have you had.

Yeah from agents you know given your reasoning for why or why it was downgraded in terms of the reinsurance protection.

Marrow you want to give up Bob your thoughts on what you've heard from our agent base.

Sure So most of our agents understood.

Why we had to make the decision then no at many of our competitors are not A.M. best rated at all.

So we are still buying more reinsurance than many of our competitors and our producers many of them were with US before Kingstone was an a minus rate a carrier. So we have not seen a noticeable decline in business as a result of the change in our rating.

Bob just to give you an idea.

Of the five largest coastal competitors, where confronting and the Tri state area.

I think only one of them maintains an A.M. best rating I don't want to use their name, but I can tell you that that rating is b minus and it doesn't stop them from doing business.

Okay, great. Thanks for the answers.

Okay great.

Thank you. My next question today is coming from Gabriel Mccourt, a private investor Your line is not a lot.

Hey, Barry Congrats on a great quarter, I'm, especially in light of the adverse circumstances number one.

I have a couple of questions. The first one is can you give us any color on the decline in a <unk> that's not income number.

Most of the fact that cash investments were higher this time and sometime last year and the second question I had to do you anticipate doing another rate increase I sure. Thanks.

So let me answer the first question Gabe and that decline is strictly as a result, there was a one shot one time 2019 item.

That wisdom maturity I forget exactly what type of an instrument. It was but that was a one time items. So actually exclusive of that are in fact I didn't shrink.

Uh huh.

With regards to rates going forward I think merrell is better equipped to answer that so merrell why don't you take on that question.

Yeah. So we plan to do a rate change.

Every year for all of our products are going forward. So we'll be much more active in terms of managing our product.

So I would say, it's likely that we will do a small a rate increase I. It varies by state, but I would imagine that our rate level will go up later this year.

Okay, great. Thanks, Dave Let me, let me just add one point to that.

Our had we maintain the rating.

And added on $10 million and cost that we would have to pass on to our policyholders.

That would have caused a dramatic rate shock, we had that lever to pull it was a difficult one we chose to give up the rating instead of compromising who we work as a company.

But I would point out we had that lever, which our competitors didnt.

So what we're starting to see now and it's only the beginning our underwriting changes being imposed by at least one major competitor rate changes other than material amount being taken by all competitors with at least one of them, noting that before they could get to rate adequate.

See they'll need to do three more three more years of changes so.

You know right now.

We we took it on the Chen when we took a big increase last year.

We separated ourselves pricewise hitting the market it slowed our gross.

And now what we anticipate is the market is going to come back up to us.

So that's the future that's <unk>.

Okay, Great. That's helpful. Thank you.

Anything else game.

Thank you that does conclude our quest freights recession.

And ladies and gentlemen that does conclude todays teleconference. You may disconnect. Your lines at this time another wonderful day, we thank you for your participation today.

Thanks, everybody and yeah.