Q2 2019 Earnings 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 through the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now turn the conference over to Rick Swartz. Thank you may begin.

Thank you very much Sherri and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstones 2019 second quarter results.

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 and could differ materially as a result of known and unknown risk factors and uncertainties affecting kingstone for more information. Please refer to the section entitled factors that may affect future results and financial condition in part one item one a of the company's Form 10-K for the year ended December 31st 2018, 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 for a reconciliation of non-GAAP , 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 Barry Goldstein. Please go ahead Mr. Goldstein.

Great and thanks, rich good morning, everyone and thanks for joining our second quarter 2019 conference call.

As I'm sure. Most of you are aware I returned as Kingstone CEO following the departure about prior CEO last month.

I share your disappointment with our recent results. It's my challenge to return Kingstone to those top tier metrics that we delivered so many years.

I'm excited to be back in the driver's seat and begun to put in place plans and have started taking actions that well overdue.

Our moratorium on writing new commercial lines business about a two month period and Enlink was used to assess whether and how long. It would take these very challenging and competitive small business risks to return to profitability.

I decided that the cost and internal effort required would be too much it would take too long and we'd risk absorbing heightened losses over an extended period, which is not the best use of shareholder capital.

My first action was to announce the exit from all commercial lines other than our auto physical damage program.

We immediately began the process of non renewing our in force book and expect all policies to be off the books before the fourth quarter of next year.

Our continued growth in personal lines will more than offset the foregone premiums.

Recently, it became clear that the long tailed claims from commercial lines create volatile reserves that require an action plan.

We are working now to see if we can in a cost effective basis use reinsurance to contain the volatility or eliminate the uncertainty entirely we are comfortable that the reserve actions already taken put us in a good position going forward I'll report back once a decision is made as to the reinsurance now for personal lines. Our core homeowners product is currently being distributed in six states and our regional diversification footprint, which began in April 2017 is almost fully in place we have only one state rollout remaining which we hope to complete during the fourth quarter.

In the second quarter, our total direct written premium reached.

38 million.

Of which 6.3 million or 16% came from risks outside of New York State.

As mentioned last quarter, our co see agency business is also expanding you may recall the co c. was set up to manage a new distribution channel outside of our core independent agency business.

She is develop relationships with three of the nation's top 10 carriers and these partnerships along with other national and digital agency appointments are now becoming a material part of our business.

While it will take some time for the book to build in time for the premiums written to be earned during the second quarter as these relationships expand it in New York Cosi added just under a million dollars of written premium or 2.5% of the total.

A better representation of the power of Cosi instead of the new business written in the second quarter Cosi contributed over 80% of that total.

So we expect the coasts. He will continue to grow and will soon expand outside of New York I'll be sure to update you each quarter as to its process progress.

But profitability is a major focus.

Yes, we've experienced weather losses that are outside of our control.

But we've also seen a deterioration in profitability that requires us to move quickly on pricing.

Underwriting and expense actions after many years of maintaining steady premium rates in New York, We are moving in earnest to increase rates.

This is a process that will take time to manifest itself in our financials as it depends on timing of approved rate increases, which then must be rolled onto our renewal book and earned out over a one year period.

We are taking underwriting actions to call out the marginal risks from a new business written and express expect this too will help.

But since the renewal business represents over three quarters about total premiums. It is a base premium rate increase that is needed.

With the expansion almost fully implemented we expect that our expense ratio will continue to decline and hope to see that reduction down to 35% to 36% next year.

Now I'll turn it over to our E B P and chief Actuary, Ben Walden Ben.

Thank you Barry.

Despite recent quarterly results, we remain very optimistic since our key profit drivers have not changed.

Kingstone is in the middle of a long planned company transformation.

Five years ago, we were a small single state company with products and systems that fit a very narrow niche.

Today, we are regional a rated carrier competing with and taking business from the big players our products pricing and systems require continuous adjustments in order to make this a successful transition.

The first adjustment is to focus on risk segments, and with high profit margins and proven profitability.

Over the last several quarters, we found that small commercial lines business in New York City is not one of those segments.

Recent volatility in claim outcomes quickly led us to the conclusion that the business is not profitable and we are now exiting that market.

The second adjustment is to focus on pricing of our personal lines business.

In the five years I've been a kingstone rate actions have not been needed since the business has consistently run at a combined ratio in the low eightys.

Other non rated carriers have price their personal lines business below ours, yet, we continue to grow and increase market share.

The a rating accelerated our momentum and allowed us to grow at an even quicker pace. However, we now see that growth has put some pressure on profitability.

To address that we've already taken a targeted rate increase for New York homeowners earlier this year.

We plan on another more significant rate change by the end of the year.

We're also taking significant rate in the expansion states in order to ensure their continued profitability.

Finally, we are transforming our business through technology. So that we can remain nimble and proactive as we grow.

We're in the process of consolidating our systems infrastructure from legacy systems to new platforms. These will support growth reduce expenses and enhance our ability to quickly react to emerging trends.

We recently updated our homeowners predictive model and we are using that to target underwriting actions to further improve profitability.

Along with these positive adjustments, it's important to note that our underlying business remains profitable despite recent challenges.

During the quarter, we recorded a combined ratio of 94 inclusive of some unusual weather and continued volatility from our commercial lines book.

Excluding the unusual items, we posted a quarterly combined ratio in the mid Eightys.

As Barry noted we are closely monitoring reserve levels with our internal and external actuarial teams.

This is an ongoing process that we have followed each quarter since 2014.

We will take the needed actions to contain the uncertainty arising from older commercial liability claims.

Our book value at the end of the quarter is $8.14, which is now higher than our stock price.

That is an interesting situation for an a rated company with strong underlying profit continued growth and many positive actions in the pipeline.

Now I will turn it back to Barry for some closing remarks.

Barry.

Thanks, Ben again, I share what the entire board a disappointment in our recent results.

We are deliberately moving on many fronts and hope you will show us the patients required as we rebuild shareholder value.

We have decided to reduce the dividend to allow kigo, our operating entity to retain more surplus that strengthening its already strong balance sheet.

I have no intentions of leaving this job until it's done and quite frankly, no. One I know will derive anywhere near as much benefit its I will from the actions that I'm, taking so with that let me turn the call back to the operator and open it up for questions.

Thank him if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Our first question is from Paul Newsome with Sandler Oneill. Please proceed.

Hi, good morning.

I wanted to ask about the rate need.

It is a is it yeah.

Is the rate need driven by.

Underlying claims inflation or is it you know.

The.

Segmentation outside of the core New York book.

Or is it some sort of new build business penalty I can you talk about just sort of what.

Well see underlying.

Driver of the rate eat.

Then you want to take that.

Sure.

So Ben Walden, Yeah, most of the rate need right now is driven by a combination of increased claim severity.

Especially on water damage claims were seeing some higher severity on those types of claims.

So it's really not not driven by anything other than that we are seeing increased a little bit of an increase in reinsurance costs as well.

Factors into the indication, but again, we haven't taken a rate change in New York.

Since I've been here so.

We're at the stage, where we do need to address some of these increasing severity trends and that's the reason we're.

Going to go out with further increases let me, let me add a little color to that also applaud set I've been very anxious to two to be a strong competitor.

And.

Our ability and our consistency to maintain rate with very very little change.

It's something that that always quite proud of but things began to change.

And probably we should have been getting to taking these rate increases last year. So were a little late to the party, but we're gonna catch up here I don't think you're going to see anything dramatic but claims inflation does factor into it no doubt is just general inflation. So Oh I hope that addresses your question no. It does.

We also talk about the dividend cut are you targeting similar level of payout ratio over time or how are you thinking about the the dividend.

Both the new and going forward.

Typically you know we looked at the dividend as being supported by our investment income, which by the way is Immaculate.

And as you know with a book of almost exclusively if not fixed rate instruments that interest certainly interest sensitive instruments, we've seen quite a good reaction now portfolio recently.

But just to be safe just to be a little more cautious I thought it was prudent to cut back on the dividend and we'll address that each quarter going forward as we have.

But it's really just a factor of trying to be a little more cautious and.

A little more conservative with how we are handling the business going forward.

And then finally could you talk about the components of the.

<unk> expense reduction and that's it.

Pretty good cut you seem to be targeting for next year.

Where exactly are those cuts coming from.

Well, it's it's not so much of a cot is the benefits where the heightened growth.

Coupled with the unwinding of our quota share if you recall.

Well, maybe we haven't mentioned it we did have a personal lines quota share treaty that we began we thought we were going to be a 20% or one of our participants saw their fortunes change. So we ask them out of the treaty, we reduced it to 10% for the last year and as of June Thirtyth. It's all.

We so we have no further quota share, but the we've seen the benefits of our expenses remaining close to level, but with our business growing and we don't see the need for the incremental costs.

To develop those other states that we've we've had to experience. So I think what you're going to see is just a maturity in the footprint and get us getting the benefit of scale from it.

Great. Thank you all well, let some other folks ask questions appreciate it.

Okay. Thank you.

As a reminder, this star one any telephone keypad, if you would like to ask a question. Our next question is from.

With.

Scattergood. Please proceed.

Yeah, Hi, there and good morning, I think quite I have a question on the cosy agencies sounds like that's going to be a pretty good driver of growth.

And I wanted to get more information on how it works who is doing the underwriting what paper. It's written on it just I just want to make sure I understand.

How the underwriting is going to be for that business relative to the traditional business.

Okay sure and thanks for the question, Yes. So just to go back co C is a subsidiary of the holding company as is Kingstone insurance company.

And the insurance company appointed co C. to act as its general agent.

So while the co c. has very similar.

Underwriting guidelines as the independent agent channel would have.

In more cases than not where there's a difference it's a restriction placed on cosi.

So it is company employees, whether they're Kingstone insurance company employees or close the agency employees, who are underwriting the business using the same systems.

And well yeah again, while there are certain nuances that make the underwriting for co see a little bit different they're almost exclusively more difficult than the independent agents would would see.

There's really not all that much more difference than that Bob.

All right so.

How is the business how does that business come to you is that these these partners are saying, hey, we want to right.

A package policy on the coast here, but we don't want to take this this particular risk can you take that I mean, I just oh, okay. Okay, I'm, sorry, I wasn't clear what that so all of our business is written on Kingstones paper.

So cosy its general has appointed the general agencies of three of the very large national name brand companies.

Who is lease for those three all have.

Store front offices or call center offices that originate business initially.

Anywhere intense intending for the.

That carriers book, but each of those carriers has different appetites then we do have different restrictions than we do whether we're willing to write to a high of cover Ajay real willing to write closer to the water or whatever it is so when when the business that comes into these carriers does it meet their appetite it can move through cosi and on to Kingstone.

It's really our same policy just being originated by a different group of agents and while the.

These three national carriers in a number of the digital and national agencies represent only a handful of relationships.

Frankly, it winds up.

A couple more than a couple of hundred offices or originating that some of them are named brand store front offices I'm not permitted at least at this point to use the name of the national carriers were doing business with.

But I'm sure that you'd you'd find them to be recognizable.

All right and so the benefit to these national carriers is that they will take the other pieces perhaps.

Auto policy or the umbrella policy isn't that stuff and you just take the homeowners risk exactly exactly and.

It's not as though that this is only really gain traction we started the the major rollout of this in the third week of March So I'm talking about this after another quarter I think you're going to see a significant.

The increase in the next quarter and the quarter after that as these.

Individual offices were allocated codes and began doing business with us.

Right right.

Okay. That's that's a I just wanted to at least make sure I understand what's going on because he so.

Okay. Thanks.

Thanks, Bob.

We will pause for a brief moment to poll for questions.

[noise].

Our next question is from Paul Newsome with Sandler Oneill. Please proceed.

Just one more kind of follow up.

The issue could you talk a little bit about the dist.

The process in assessing the claims reserves on the.

Runoff book of commercial business.

You know are there are a number of.

Upcoming serve second looks at it didnt.

Im just trying to get a sense of whether or not we'll see.

Much activity on the actual reserve.

You know themselves.

Before we.

There is a possible reinsurance.

Situation.

Let me start that question, Ben and we're in two different places Paul So.

Please understand if Ben chimes in after a couple of seconds, but.

Yes, so we did take a little further strengthening during the quarter a little over a million dollars.

We did have an independent actuarial firm take a look at what we were doing.

And when I said in my release and in my introduction earlier that we feel comfortable with where we are.

It's just that I think we're in a good spot.

The process in order to.

To see if there is interest in and at what kind of rate a reinsurance transaction could be entered into requires this third party actuarial assessment.

And then it will be marketed to the various run off type carriers that a on is familiar with we've had quite a lot of interest in this.

Whether it will make sense for us given you know our comfort and the reserves to pay some sort of premium to either kept them off what to eliminate them entirely is really going to depend upon the market and the pricing.

So weve started that process by having the third party actuary and take a look and will move in earnest on it right now.

Well, there's two other major reserve looks at it either outside or inside in the plan for the next.

Your future.

And when you say reserve looks your read you a speaker i. a a heightened level of reserve processing reserve analysis. Some companies do you have a higher level process that they'll do maybe the third or fourth quarter.

Just.

Well, let me let me, let Ben discussed how he normally goes about this and how he's worked with our outside actor lunch you give a little more color here Ben.

Sure.

So we do use an outside actuary to sign or statement of opinions. We do that annually. So there is a full review is done by them at year end.

Internally, we do or review every month and every quarter in detail.

However, with the commercial lines volatility in last few quarters, we've had our outside actuary take another look as of 630.

And that is being used to support where our carried reserves are now.

So we will.

Continue to have them look as we get closer to year end spot.

Combination of their review and our review we feel.

Comfortable where the reserves are in.

You know things change every quarter, we get new information. So we'll continue to to look at that and react to it as it comes in.

Great. Thank you.

Okay.

Our next question is from Todd <unk> private Investor. Please proceed.

Good morning.

Good morning.

Welcome back Barry.

Thank you. Thanks, very much [laughter] got much time off did I I was going to say that those shorts, all short lived and might not inox knocked off all the buckets there.

Yeah.

Well of course, you about your underwriting ratio seems just back of the envelope.

For this year, you're probably going to be pushing all not one five.

Wondering how you're thinking about that capital wise.

Yeah, I mean, you're right I mean, we are looking at that and we will probably.

Because of the run off of the commercial lines book not see all that much increase to that leverage between now and the ended the year.

No doubt a heightened premium levels that are going on that are coming on now.

From some of the targeted areas in New York, where we took great early this year, we'll add premium.

And on the other hand that.

The we don't have any idea when the department will approve our rate increases for the rest in New York that we're looking at but.

You know I would say, we'll be button up to that one five or pretty close to it by year end and.

Well before we get there we'll take a look at it if we need to do something to.

To deal with that we will and you know we're quite familiar with the reinsurance solutions that are available to us.

Gotcha, Okay secondly.

With the stock where it is.

Would the board consider some repurchases.

Good question and we've been struggling with this well I should say I'm struggling with answering the question.

Because the liquidity at the holding company is what would drive our ability to make share repurchases.

Right had enough number of parties come forth.

Offering us types of solutions and.

Seeing the stock trade at a below book is obviously.

Makes for an interesting opportunity.

On the other hand, it kinda Sickens me just to see how much work has gone down the drain by that yeah as much as we'd like to do I think the capital is precious at this time.

Oh right trying to put any kind of strain on the company to take advantage of it and I'm, hoping it's only a short lived advantage.

You know our our directors have all bought shares in the stock and.

I don't doubt there'll be more purchases by insiders showing their you know there's that with what they believe that the company's future, but right now I don't see any near term share repurchases in a meaningful way.

Gotcha.

Thanks, a lot.

My pleasure.

This concludes the question answer session Uh Huh.

Friends I would like to turn the conference back over to Barry Goldstein for closing remarks.

Right well listen thanks, everybody for listening in and it's it's been.

A short period of time than I was away from being the CEO and maybe a little bit longer period. Since I was responsible for the day to day efforts of the company, but but I'm I'm happy to be back I'm happy doing the things that I think need to be done.

Each of them has a targeted purpose each thing has been vetted and is sound in the way we're going about it.

They will take time to run through our financials.

But please just keep track of the the measures we are taking and you'll see that.

Our goal to get us back to where we were.

While it may take a little bit of time is well within our reach so thank you again all for listening in and I look forward to chatting with you on our next call.

Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.

Hey, Thank you.

Yeah.