Q4 2020 Kingstone Companies Inc Earnings Call

Greetings and welcome to the Kingstone companies fourth quarter 2020 financial results conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my.

Pleasure to turn the call over to Amanda Goldstein Investor Relations Director. Please go ahead.

Thank you very much Kevin and good morning, everyone yesterday evening the company issued a press release day, John King from 2024th quarter results.

On this call Kingstone may make forward looking statements regarding itself and its definitely 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 kingstone from more information. Please refer to the section.

[noise] entitled Factors that may affect future results and financial condition in part one item one day of the company's form 10-K for the year ended December 31st 2000, 22020, along with the commentary on forward looking statements at the end of the companies earnings release issued yesterday.

In addition, our remarks today include references to non-GAAP measures.

Reconciliation of our non-GAAP measures to the GAAP figures. Please see the table 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 and good morning, everyone. We are pleased you can join us on net our year end 2020 conference call, we're going to mix it up a bit today I recognize these calls are intended to lend color and perspective to our historical results as well as to our future.

Scott our new CFO will resume review of the results with you and Merrell will discuss our operations and in particular, our Kingstone two point O initiative, which is ongoing and which will propel us forward.

For me I'm going to go into a bit of a different direction.

I have many responsibilities at kingstone, but none more important than guiding the allocation of capital to preserve and enhance the investment entrusted to us by our shareholders and ultimately our share price should reflect how well we've done and how well we are expected to do but.

In short in my opinion it doesn't.

We had a rough patch to get through when I returned as CEO in mid 2019.

I made the difficult decision to exit the commercial liability lines that were requiring more and more of our capital, but which were doing poorly.

I Didnt make many friends by doing this but this was 100% the correct action to take.

Now as we go forward all about surplus can be deployed in support of our personal lines with a life of the claim is far shorter than the volatility is far less.

Unfortunately, even though the lines, we exited would never more than 15 per cent about business the issues attendant to the exit brought much paying to our shareholders as the stock price suffered greatly.

I said, then and I feel the same now that the share price decline was exaggerated and by the way no. One felt the pain more than me as the company's largest holder.

I hope that the favorable results, we are generating will now take over the spotlight.

Last year, many important metrics improved we ended the year with book value at an all time high we earned over a dollar a share in operating profits excluding catastrophe losses.

But while our share price has recovered to a certain extent, we're still trading at a discount to book value and well below our intrinsic value.

We've demonstrated our belief in the future of the company and I believe we have in our improving results by eliminating the quota share treaty.

But I believe there was something else that is weighing on our share price because kingstone is coastal exposure were included in peer groups that are dominated by the five publicly traded Florida carriers.

I don't think it makes sense to compare us to the Florida companies, but many have and some continue to do so let me give you. Some third party expert information to consider that proves my point.

I refer you to a report from Corelogic, a well regarded industry data source there.

Their report ranked each state by the risk of damage from natural hazards, they're waiting for New York well, we have about 80% of our business is number 43 of all 50 states, making the Empire state one of the least risky when it comes to natural hazard exposure.

Florida by contrast is number one the single most has it exposed state in the country.

We will have catastrophe events no doubt about it major ones occurred in 2020 with tropical storm I say us and before that eight years prior in 2012 with Superstorm Sandy.

But look at any available model and you'll see there'll be many more weather events in Florida, and they will be more impactful there.

In short New York is much less risky.

But I'm not here to throw shade on Florida, what day of carriers after seeing no landfall hurricanes for 10 years or so over the past few years, a horrible set of weather events have impacted their businesses.

As a reader of the Corelogic analysis would have expected.

The catastrophe reinsurers have been hard hit by this and have responded with force tighter underwriting.

Stricter terms and had been posed major price increases.

Add to that the fact that over the last few years, the Florida carriers have seen their attrition attritional losses that is the non catastrophe losses spike higher eroding their financial results even further.

But due to factors that don't exist in New York many of the carriers. They have chosen to access the reinsurance marketplace, specifically by placing and then growing their use of quota share reinsurance leaning on the balance sheets of their reinsurers to help offset the erosion.

In their capital.

But now think about Kingstone, we use quota share when it was appropriate, but we no longer need to.

After my return, we became hyper focused on profitability and we've seen our attritional results improve putting us on a path to return kingstone to being one of the industry's top performers as we had been for many years our balance Street is strong we don't need quota share.

Insurance.

Over the past few weeks I've received a number of calls from people who are regular listeners to these investor calls not all of them are current shareholders, but all wanted to know what was going on with our Florida peers as they said hey told them. The same thing. It's unfortunate that Kingstone is included in that thought process.

While recent days have seen at least three of these companies raise new capital or announced their intention to do so not kingstone, we don't need to add capital. Our current surplus space is used almost exclusively to support personal lines and the expected and enhanced <unk>.

Underwriting profit that our business has and will deliver will grow our company. We again show of confidence by initiating our first share buyback plan that will be in place over the next two years.

<unk> being we've delivered many years of exceptional results while much of the past two years with the difficult. We are again poised for exceptional results going forward with that let me turn the call over to Scott to review our financial results go ahead Scott.

Thanks Barry.

Where I go over the results I just wanted to take a moment to share a little bit of my background.

Yeah.

I've been working in insurance industry for over 30 years, beginning my career Chromebooks wall share as a staff accountant.

I've worked for a variety of insurance companies, both public and private and most recently as the CFO of a direct to consumer home warranty company and before that as the CFO of Citibank life reinsurance companies.

I'm very happy that barrel and Barry I've invited me to join them at Kingstone and I'm excited to be part of this team.

<unk> is a great company with an impressive track record of underwriting profit and I look forward to helping them to add to that success.

Now onto the company items.

Starting with two recent items of note first effective December 32020, the company terminated the 25% personal lines quota share.

By exiting the commercial liability line the company has significantly derisked the business and we are well capitalized to support our core business.

We do not need the balance sheet supports the quota share provided.

Earlier this week management asked for and the board approved the share buyback program of up to $10 million of outstanding stocks running through March 31 2023.

We will execute on that plan judiciously, when the economics make sense managing the proper capital to support the business and create value for shareholders. We believe this makes sense given the stock's underlying value.

As to our results the.

The company posted fourth quarter net income of $3 million compared to 1.5 million from the same period last year.

The increase is attributable to the dramatic swings in the financial markets that reversed losses on investments from earlier in the year and higher ceding commissions related to the 25% quota share.

These were offset by lower earned premiums of $26 9 million versus $32 six for the comparative period 2019 also as a result of the 25% quota share.

We will experience a lift in revenues from the quota share termination in 2020, one as the unearned reserve from $17 million to $24 million recurrence of the company has earned over the course from this year.

The net loss ratio for the quarter was $63 four per cent were 6.4 points higher than the 57 posted in the fourth quarter of 2019.

4.5 points of that was from cat activity and the remainder due to non cat wind storms.

For the 2020 year gross written premiums 169.3 was essentially flat to the 171.2 of 2019, however, within those numbers. The core book of personal lines grew $12 $3 billion to $1 62.2 were eight 2% higher than the 2019.

Written of 149 point non.

This increase is a result of both organic growth and the effective rate the company has been taking.

The personal lines increase was offset by the absence of commercial multi peril line of business, which we exited in 2019 and lowered livery physical damage decline attributable to the COVID-19 pandemic.

Net income for the full year was $20 7 million up from a loss a year ago of $5 nine 7 million. The increase results from a nine point to improvement in loss ratio driven by the reduced impact from prior year development and tempered by higher cat losses for.

For the year, our combined ratio was 104% were eight three points better than 2019 tropical storm piece I E S largest cat.

A year from the company and its seven six points to the combined ratio without the season, but including all other cats and winter storms. The 'twenty 'twenty combined ratio was $92 eight.

Companies made great efforts over the last 18 months to address the challenges and position itself to produce the underwriting profit she says.

It has historically posted.

That note I will turn this over to Merrell to update you on the status from those endeavors.

Thanks Scott.

I'm very happy with the improvement in our financial results and the progress of Kingstone two O. Our effort to modernize the company. This effort started when I joined the company about a year and a half ago and will continue until the end of 'twenty 'twenty two so we're a bit less than halfway through.

I think about Kingstone too low in stages. The first stage was to hire an experienced team and refocused the company on profitability. The second stage, which we're in now is to build the foundation. Once we have the foundation will be able to continue this modernization effort, but innovate at a faster.

<unk>.

During Q4, we started the conversion to our new policy management system and introduced a new producer interface. This is a great step forward for the company as we need to get off of our various legacy system and make it easier for our producers and policyholders to do business with US. Our next product conversion will go live in the search.

Florida relative to our new product development effort, we filed our new homeowner products in New York during the quarter and have made significant progress on developing those products for our other states. Our goal is to have them all filed by the end of the second quarter.

And so proud of everything we were able to accomplish in 2020, especially considering that many team members of our new and we're all working remotely.

I'm also delighted to share that while we made significant investments in our technology and analytics initiatives in 2020, our overall expense ratio increased only modestly as we were able to make reductions in other areas. We've had a shift in our work force and have added many analytical and tech.

Allergy focused positions, while our expense ratio is almost a point higher than 2019 that was driven by the increase in the quota share to 25 per cent in 'twenty 'twenty and the lower net earned premiums that resulted.

<unk> reduction is a focus and we have adults reduce our expenses by a full point in 2021 while continuing to make these investments.

Now I will turn the call back to Kevin the operator to poll for in reply to the questions. You may have Kevin please pause for questions.

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Our first question today is coming from Paul Newsome from Piper Sandler Your line is now live.

Good morning, Thank you for the call.

Wanted to ask maybe just head off net.

How much on the expense ratio reduction is that pool point something that should be done gradually over the course of the year.

Or will it hit pretty quickly and and.

What's the thought on the expense ratio.

Beyond 2022, just overtime is.

Is there a target or goals.

Some certain level.

In the world.

Scott why don't you take part of that May be Merrill can add some color as well.

Sure well the effects with carbonated the quota share that the premiums from the start earning in right away.

So we'll see it of course the entire year.

Stewart from for the quota share will go away.

In terms of bar expense ratio.

As a point higher.

So that should.

Basically go away without that and we don't have any specific targets other than one per cent reduction so.

Meryl do you want to add some more color to the specifics on that.

Sure. So you know pulp as part of Kingstone to well, we're really transforming the company and challenging everything we do so moving much more to automate.

Versus some of the things, we've historically done manually and so.

Certainly our expense ratio is high and we understand that that drives the competitiveness of our pricing.

So I would imagine you'll see throughout this year, a continuous reduction in our expenses and throughout 'twenty 'twenty two as well.

Right.

It looks like there was a tad Mr developments in the fourth quarter.

Well Joseph shoes.

Maybe used to chat about just what what exactly is going on there and.

How it may or may affect the future.

Scott why don't you take that question on the fourth quarter development. Please.

Sure well first we sit down and employee.

An outside actuarial firm.

And at present, we are just almost dead center of their midpoint. So we are exactly where we want to be in the ER.

Range the noise that you're seeing there is just kind of normal fluctuations if you will between accident years.

And.

You know I don't think that there's anything in there that's showing that we are not properly reserved so I think that the development that we've seen in the past is over and done with.

Barry you want to add to that yeah, Yeah, I would just add.

Basically truing up the full year in the fourth quarter.

Paul but you know for the year I think we ended up with something like $40000 or thereabouts, so nothing material, but just making sure. We stayed right on the midpoint of our outside actuary.

Fantastic and then maybe finally, some just some general comments on the competitive environment in New York in the contiguous states.

I think last time last year, we saw sort of an uptick in competition does that.

<unk> into the into the early parts of this year.

If things moderate.

I'm Marilyn yeah.

Sure.

Yes, Paul It has continued our all of our states are very competitive.

So we're very focused on profit and some of our competitors are very focused on gross.

Which makes for a challenging environment for us, but we're confident that we're at the right level.

But many many competitors in this space.

Fantastic. Thank you folks.

Thank you. Our next question is coming from Bob Farnam from betting and Scattergood. Your line is that life.

Yeah, Thank you and good morning.

So the core accident year loss ratio ticked up a bit you'd mentioned there were some increase in kind of non catastrophe weather losses can you just kind of maybe you can give us a bit more color on that.

Narrow maybe you want to take this.

Sure. So in particular in December there was a significant wind storm that affected the north east. So that was part of that we also had some several large fire losses. Unfortunately in the fourth quarter. So that's really the draw.

<unk> those are the drivers.

Okay.

And <unk>.

Honestly, where we're pretty much through the first quarter, how would you characterize the weather losses that you've seen the last few months.

It's a it's a good fourth quarter excuse me first quarter.

Okay.

In terms of the effective tax rate I wasn't expecting to get so much of a benefit there can you maybe explain some of them to make that well you know what what's going behind the scenes there.

Well I mean, let me, let me start by saying that you know because we generated.

Our loss from our statutory operations.

Which differs of course from a GAAP, mostly because of how investment income or pieces of investment income get categorized.

We will have a net operating loss for 'twenty 'twenty to carry back and because of the cares Act.

We're able to carry back those losses to a prior year, where the tax rates were 34%.

So we're going to get a lot of benefit from that carry back and I think that's probably the biggest single item that's driving the tax question you're asking.

Okay great.

And last question from me is.

So with with the the rating change what's what's the status of cozy that is that still going to be an operation that's going to be ongoing or are you trying to shutter that like I'm trying to figure out what the what what is going to be kind of cozy going forward.

So I'll take that.

Cozy continues to operate we've we've generated quite a lot of premium that's sticking Unfortunately, our two main.

Sources of business.

Required us to maintain that a minus rating in order to write new business, but neither one of them is seeking to eliminate the business. They have with kingstone as a result, so at least those two.

Carriers, where we are maintaining the book and we're actively searching for new partners.

I hope, we'll be able to announce something if not in the first quarter than maybe in the second quarter that will reinvigorate coffee.

Right, Okay. Thanks for answers.

My pleasure.

Thank you as a reminder, that star one to be placed in the question queue. Our next question today is coming from Gabriel Mcclure from private Investor Your line is alive.

Oh, congratulations Barry first off on getting the share repurchase authorization.

And then my question is probably for for Merrell.

I guess, we talked earlier in earlier calls about them getting them more systematic rate increase.

Go in and I just was wondering if you could give us a little bit of color on how that works during Q4.

That's my question.

Sure well I my answer won't be just related to Q4, but to rate changes in general.

So I can tell you we do have rate filings pending in most of our states and we plan to increase rates an average of six 5% this year.

And we've certainly our results in 2020 benefited from some of the rate changes we took them.

I don't know if that answered your question or if you.

Want to ask a further question.

Hey, Barry.

Hey, Barry that keep it keep in mind that we started this.

Increasing in rates in late 2019, so it wasn't till the end of 'twenty 'twenty that all of that rolled at least in New York portion all of it rolled onto the book and then it takes a good year for it to turn itself through so we've seen some of the pause.

The benefit of the initial set of rate increases and I think what merrill's trying to say well what Merrell has said is there where there is a continual process to continually update rates and you'll see more of that as time goes on.

I hope that answers your question.

Yeah very good that's helpful. Thanks.

Great.

Yeah.

Thank you we've reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.

Great well. Thank you all for spending the time to hear us out today.

We look forward to updating you in may for our first quarters results and of course anything that occurs that's worthwhile, stating we'll be sure to send out press releases. So again. Thank you all for your time stay healthy please.

Bye bye.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.

Yeah.