Q3 2020 Kingstone Companies Inc Earnings Call

Greetings and welcome to the Kingstone Companys third quarter 2020 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Amanda Gold sales Investor Relations for Kingstone companies. Thank you you may begin.

Thank you very much Jessie and good morning, everyone yesterday afternoon. The company issued a press release detailing king's some 2023rd quarter results.

This call Kingstone may make forward looking statements regarding itself and its business before booking events and circumstances discussed on this call not a car I could differ materially as a result of known and unknown risks factors and uncertainties affecting kingstone.

For more information please refer to the section entitled Doctors that may affect future results and financial condition in part one item one eight of the company's form 10-K for the year ended December 31st 2019, along with the commentary on forward looking statements at the end of the Companys earnings release issued on Friday.

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, Amanda good morning to everyone listening in today.

We're pleased that you can join us for our third quarter 2020 conference call.

And congratulate our country now Pfizer company.

Who are delivering lots of vaccine that's going to take us out of this mess we've been living through.

Joining me on today's call will be Merrell goals, then our chief operating officer.

Merrell will review with you the detailed quarterly results, but let me start with the fact that apart from the previously announced full catastrophe excess retention of $8.125 million due to tropical storm I say is we had an excellent quarter.

Without catastrophes, our combined ratio was an excellent 80.4% a big swing back from this time last year, when we posted a very ugly one always 0.5.

Over the past year, we've gone through a lot I want to walk you through the issues in the remedies out.

Commercial liability results were poor and getting worse in spite of the various underwriting actions we've taken.

We made the very difficult decision to exit this commercial liability business and we've done that it is now complete and at the end of Q3, we no longer have any commercial liability policies on our books and the volatility that it brought to our company is now.

Gone.

We needed to strengthen our reserves to account for the adverse development much of which came from this commercial liability business and we did that by taking up reserves $11 million in 2019.

We saw a personal lines loss costs rising but.

But hadn't adjusted outrage into longer time.

We did that.

We raised rates in all states in the last year, and we'll continue to address rates for each state each and every year.

I wanted to just felt there were internal control issues that needed to be remediated and we did that we.

We built our claims organization added people systems and better processes, and we are seeing the benefits.

Attorneys with nothing better to do decided to make us a target because our stock price declined due to the items I just mentioned.

But I told you we would aggressively defend ourselves and that I had a high degree of confidence in our winning the suit and we did just that they are baseless lawsuit was tossed out almost immediately after being hurt by the court.

Those issues are now in the rearview mirror, we are in a really good place.

I'd like to say that we turned the corner but.

But the last Guy who was saying that.

I'll stop here.

We're seeing some hardening in the northeast homeowners market in New York, We've raised our rates an average of 9% last November and as a result, our new business slowed.

But we're now seeing a pickup in quoting and binding as many of our competitors have raised their rates what tightened their underwriting guidelines for both.

Our top competitors include for Florida, domiciled companies, both public and private the.

The impact of reinsurance pricing is far more profound in Florida.

Couple that with the dysfunction in that market and a record number of storms. This year. It is taking a severe toll on their balance sheets and their competitive this elsewhere is declining.

We have rebuilt our company to address the market needs of today.

We've rightsized, how core staff and added the advanced skill sets that we need it.

Our focus for the past five quarters has been squarely on enhancing profitability and that continues merrells use this past year preparing for our future with Kingstone 2.0 and.

And along with that and enhanced ability to grow our top line, while maintaining and hopefully even enhancing our profit margins. Let me now turn the call over to Merrill Merrill.

Thanks Terry.

The third quarter is normally a great quarter for profitability this year.

Grown tropical storm you see I.

This was our largest catastrophe events in the history of the company with approximately 1700 claim and total direct loss in our late in our.

Approximately 7 million.

As Barry mentioned, the one car data.

<unk> 0.12 5 million after reinsurance.

That an after and had an after tax impact on earnings per share of about 60 cents.

We are happy to report that almost 90% of these claims are now closed and feel really good about the efforts of our claims organization in achieving this result.

Direct written premium for our personal lines business was up 6.4%, while the overall direct written premium for the company was down 2.6% for the quarter due to our withdrawal from commercial line.

The personal lines growth is due to an increase in renewable policy count as well as an increase in average premium from our <unk> rate changes.

The underlying loss ratio, excluding cats and prior year development improved 14.4 points from the prior year.

42%.

Prior to your boss development remain difficult with a small amount of favorable development recorded this quarter in comparison to the 14.7 points of prior year adverse development recorded in the third quarter 2019.

With 31.5 points of Cat.

Overall loss ratio for the third quarter was 73.1.

Increased <unk> 0.7 from the private sector.

[noise] all of the commercial lines policies are now off the books is very sad and we have 189 open commercial liability claims at the end of September well. There are no EPS is policies at the end of third quarter. We will continue to receive a declining number claims and so this region.

Her statute of limitations expires, we're continuing to experience favorable outcomes on these claims that are maintaining our conservative approach to setting reserves. It's.

It should be noted that this is our fourth straight quarter with stable loss reserve development to the extra cautious as we did last year. We again had our appointed actuary. He wouldn't meet your review of our loss reserves.

And our carried reserves were very close to the midpoint of their range.

No we are in a really good place.

Our expense ratio for the quarter and year to date increased by 1.4, and 1.1 points versus the previous year due to the reduction in net earned premium from the increased quota share. While we have made investments in kingstone to O initiatives protect.

Really I T and professional services, we have also reduced expenses in other areas.

Our expenses as a percent of direct on cream.

It's a lemonade the effect of the quota share are flat versus the prior year.

The net combined ratio for the quarter was a 190 excuse me a 111.9 and our X cat combined ratio wasn't eating 0.4, clearly, reflecting the changes we have made to improve profitability.

I'm also happy to share some highlights about Keystone to our efforts to modernize the company well.

Announced last week, the hiring a search on our new Chief Actuary, replacing Ben Walden, who left the company at the end of September I am really excited to work with Sarah and a very experienced team. We now are running the company.

We continue to make significant investments in our products and technology. During Q3, we implemented our new claims system and it has definitely increased our productivity.

During Q4, we will start the conversion to our new policy management system and introduce the new producer interface last we have filed our new homeowner products in New York, We are still thrilled to go lives with some of these initiatives during the quarter.

There is still a ton more to do.

Have a great momentum I want to thank everyone involved for all of their efforts.

Now I will turn the call back over to Barry for some closing remarks.

Great. Thanks again Merrill.

A year ago I knew there were issues that needed to be dealt with and we tackled each of them.

But we needed to make kingstone and want to technologically and analytically savvy carrier.

One better equipped for the marketplace of today and we are doing just that.

Last we're now examining and next month, we'll decide upon.

Whether to continue our personal lines quota share in 2021.

After a final decision has been made we will alert investors Veer a press release.

We will at that same time be able to update our internal projections.

And commenced giving limited guidance as to certain 2021 metrics.

Including perhaps net earned premiums combined ratio and operating earnings per share.

Now I'll turn the call back to the operator to poll for questions and I'd be happy to reply to them operator, please pause for questions.

Absolutely, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad. The confirmation kindly indicate that your line is in the question queue. You May press star two if he would like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key is one moment. Please.

Now for questions.

Thank you. Our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Good morning, and thanks for the call.

Sounds like you are thinking in kind of putting a number of capital and other changes capital structure changes how might that affect it at least in the short term some of your efforts to grow outside of.

Youre are you similarly, I'm interested in grocery are you.

Considering a different.

Are there a different process or different a competitive.

Physician.

Yeah. Thank you Paul and thanks for that question.

First and foremost we deliberately tamped down our growth.

Two.

Do all the things that we've been talking about.

We rebuilt the company over this last year we.

We put in technology, we put an entire new claims department that by the way just killed it with this last storm.

We are ready to start growing again.

And the Kingstone 2.0 initiative.

With our new product and new systems will leap frog, our traditional competitors in the northeast. So if the point is that we we've done this to prepare to grow again.

And in fact this the capital changes that you might be referring to that is the use of the quota share. It's a very difficult decision to make but mind you I've been very clear in the past that I wanted to limit Kingstones a premium leverage.

Two 1.5 to one.

And I said that.

Under the it well, while we were writing and continued to be confronting the issues of the commercial liability business.

That's no longer there.

So that the policies that are in force now that give rise to claims.

Those are almost all property claims they get resolved in a matter of weeks or months for the most part so the need to keep down the leverage ratio is no longer as important.

So I think what you'll be hearing from from us going forward.

He is a return to growth.

And without the need for any additional capital.

To be you know for the company I hope that answers your question.

Absolutely.

And then with the directory coming onboard you anticipate any.

Any material changes in the process and are you considering kind of a another.

But actuarial review and new person comes on board.

Mary you want to take that.

I don't really understand the classroom and you say process.

Can you explain [laughter]. So obviously every actuary has a different with thinking about things and a different process of putting together the actuarial review.

And I to be very but the usually when you see new actuary come in you see a different view of what the reserves are and how they should because okay well. Thanks for.

Yeah. Thanks for that explanation. So I don't anticipate any material change in the process I don't forget we use an outside appointed actually <unk> excuse me actuarial firm as well and they will continue to be our appointed actuary.

And I think we have a very sound process today, so I'm confident we will not see any material changes.

And Paul keep in mind that that outside firm.

Isn't changing the way, they're looking at things.

So.

You know Merrell mentioned, we had a mid year review done again this year as we did last year.

And our reserve sit right on their midpoint and we intend to keep it that way.

So well our internal view may change, there's always that third party review that we're going to be looking at.

Hope that answers your question.

Absolutely. Thank you very much let some other folks ask questions. Thank you for the call my answers right.

Right.

Thank you. Our next question comes from the line of Bob Farnam with Boenning and Scattergood. Please proceed with your question.

Yeah. Good morning, I wanted to get more into the expansion States you know you've been there.

A few years now.

This is short tail business I'm curious how has that.

In terms of underwriting environment.

Environment been relative to what you were expecting him I I figured you at least at this point you probably have an idea of whether you are having any issues with new business coming on did you don't you're not its premiere with so I'm trying to get a little more detail on the expense.

Merrell you want to handle the questions regarding expansion states and what we're seeing right now.

Sure. So we are very committed to.

The the expansion states, which for those that don't know, our Connecticut, New Jersey, Massachusetts, and Rhode Island.

And you know in general I would say that we had.

Profitability issues in those states that we are working as.

As an example, we have we'll be rolling out.

Hurricane deductibles on our in force book in.

Oh for our properties that are closer to the coast and we have also taken rate and all of those states.

So I get I think we're in a good place in terms of achieving the right rate level and.

We will be continuing to manage those states with an eye towards our growth as long as they can beat our profitability objectives. We have it's a very competitive environment in all of the states, but as Barry mentioned some of our largest competitors have.

Very strong headwinds from this crazy hurricane season, as well as other just function of the Florida market place and the hardening reinsurance market. So we think that.

We could see it increasing growth rate in those states as well as New York because of those headwinds.

Yeah. Bob This is Barry you know I think we've we've now gotten to the point, where the expansion states represent about 20% of our total so obviously, we're still skewed very heavily towards New York, but.

But when we do come out with our new product that Merrells talked about in the past this kingstone 2.0.

We will have ultimately after its rolled out in all states one product that deals on one system with everything so not only will we be able to address profitability issues across all states, but we'll be able to do things in a very efficient manner hope that gets to your.

Part of your question.

Yeah. It's one just want to talk I mean, so the profitability expectations for the for the expansion stage or the.

Saying that you're looking for in New York or are they have they have you have you.

For a little leeway in expansion states just because they are new.

Well, let me let me start I mean, when when we began the expansion which was a three years ago.

We started with the premise that we didn't expect the incremental profitability to match. What we were what we had received in New York to that time.

So yeah, we did allow for a little bit of flexibility, but where were very careful to monitor it and as well as we've said we've taken rate in all of those states already we've addressed these profitability issues. There's other incremental changes that were going to me.

Mike, but its all to get us to a point.

Where the expectations of each state should be equal.

I hope that gets to what Youre looking for yeah, No. That's what I was looking for thanks to the color.

Okay.

Thank you as a reminder, if he would like to ask a question. Please press star one on your telephone keypad at this time. Our next question comes from Gabriel Maclaurin <unk>, a private investor. Please proceed with your question.

[laughter], Yeah, Hey, Barry first off just want to congratulate you on the X X Cat results you got during the quarter, that's something to jump up and down about.

My first question I have two my first question was.

Pretty simple basically you know picking out you know like next year a lot of the transitional noise is going to be coming out of the business and so is there any color on what kind of growth rate you guys are looking to achieve in 2021.

I mean nice to nice to speak again with you gave and yeah, you're right a lot of the noise is gone that's really what I was trying to call attention to and I'm trying to set the stage that by giving you an giving investors our expectations of what 2021.

Ken and will look like.

It reflects how our heightened ability to do just that.

In terms of growth rate I think it's a little premature for me to be guessing at that the most important factor in our growth rate is determined by a whether we're going to maintain the.

Quota share or not and so we've got a lot of decisions to make surrounding that.

You're not going to see kingstone growing at an excessively high rate as we had a couple of years ago, but I think you know what we can be looking forward to is the return you know to to hopefully double digit rates in the near future hopefully that is.

Where you're looking to go here.

Yeah. That's helpful. Very helpful. Thank you, Okay and then the other question I had was.

Kind of on that net investment income number you know it was down I think quarter over quarter, 19% and the total asset levels look to be basically the same. So I was just hoping to get a little more color on you know about investment portfolio and.

What was going on there. Thanks, yeah. So so that's you know that's a good point and there's a number of reasons for it.

Probably the most important of which was we are a company that likes to keep a big bucket of funds liquid.

And we invest short term just for issues like a try.

Tropical storm that I can't pronounce I see I guess or something like that where where we had to call upon and spend over $8 million. So we remain liquid but we show US we saw short term rates plummet between last year and this.

So whatever returns that we were getting last year, our way greater than than what were receiving now.

At the same time, we've seen an overall interest rate market decline in all but just the last few months were actually six months or so.

So now bonds that have matured or bonds that have been called our ability to reinvest them is fine except the rates at which Ah were earning on the new investment.

Our below what the those bonds that were mature to called we're paying us and finally.

Weve allocated not emit curiously much more but we've allocated more money to preferred stock.

And those do maintain you know much better returns for us given the risk that we're taking so I think what you can look forward to is more of the same I think the rates have come down and I think we have to tamp down the expectations along.

That and we'll be able to make up some of the lost ground through increased exposure to prefers.

Okay, great. Thank you.

My pleasure.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back to management for closing comments.

Great well, thank you very much and.

I'm supposed to have my notes in front of me, but [laughter] I Oh here, we go I'd be I have closing remarks.

Yeah. The office. Thank you for listening in and taking the time to hear our story.

We've dealt with the problems about past I really in the future don't want to be focused on that we're not going to repeat the mistakes. We made that I can assure you.

We've made the changes to make a return to a highly profitable enterprise that kingstone was known for and were embarking on a new path to make sure that kingstone becomes that premier northeast regional personal lines carrier I've talked to you all about.

At this point, let me thank you Walt and I wish our new President Good luck and wish a science I'm glad that we stayed with designs anyway that you all have a great day.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.

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