Kingstone Companies Inc (KINS) 2015 Q1 法說會逐字稿

Greetings and welcome to the Kingstone Companies Incorporated Kingstone reports first-quarter 2015 financial results. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Thank you, Mr. Prior. You may begin.

Thank you very much, Andrew, and good morning, everyone. Yesterday afternoon the Company issued the announcement of Kingstone's 2015 first-quarter results. We will be utilizing a slide show presentation as an accompaniment to this call. This presentation is available on Kingstone Companies website at www.kingstonecompanies.com. While we will not be referring to the entire presentation slide by slide, the structure of the discussion will mirror that of the slide show. We welcome each of you to review this presentation and follow along.

On this call, Kingstone may make forward-looking statements regarding the Company, its subsidiaries, and business. Such statements are based on the current expectations of management of each entity. The words anticipate, expect, believe, may, should, estimate, project, outlook, forecast or similar words are used to identify such forward-looking information. 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 the Company, including risks regarding the insurance industry, economic factors, and the equity markets generally and the risk factors discussed in the Risk Factors section of its Form 10-K for the year ended December 31, 2014. No forward-looking statement can be guaranteed.

Except as required by applicable securities laws, forward-looking statements speak only as of the date hereof which they are made, and the Company and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

When discussing business operations, we may use certain terms which are not defined under US GAAP. In the event of any intentional difference between the presentation materials and our GAAP results, investors should rely on the financial information in our public filings.

With that, I'd like to turn the call over to Mr. Barry Goldstein, Chairman and CEO of Kingstone. Please go ahead, Barry.

Thanks and good morning, everyone. I'm joined today by Victor Brodsky, Kingstone's Chief Financial Officer, as well as Ben Walden, our Senior Vice President and Chief Actuary.

Before we begin, I want to point out that there was a small error in our press release sent out yesterday afternoon. In the table on Page 1, the amount shown for the March 2014 book value per share was incorrect as was the percentage change just to its right. Corrections have been made, and the as corrected release has been posted to the KINS website.

KINS generated solid financial results in the first quarter of 2015. These results were dramatically impacted by the long harsh winter we experienced in downstate New York and elsewhere in the Northeast. Still we were able to achieve 23% direct written premium growth in our continuing lines of business and year-over-year improvements in net income and earnings per share. Our X-catastrophe combined ratio is an excellent 70.6%, which is an improvement of 3 full percentage points over the first quarter of last year.

I hate to complain about bad weather, but the bad winter weather this year and last led to heightened claim volumes. This year was more of a nice event with February and March temperatures setting records and leading to higher severity pipe freezes and water damming claims as compared to last year where snow was a bigger contributor. Weather is a major consideration for all property and casualty carriers, just something that we have to live with good or bad.

I'll begin today's call with a discussion of what's driving Kingstone's growth and the competitive elements within our target markets. Ben will detail for each of you the impact of the severe winter weather on our financials, and Victor will review some specifics of our financial results, and then I'll return for a few closing remarks.

We have a long history in the insurance industry going back to our founding in 1886. We have a proven track record of consistently delivering underwriting profits from a growing premium base and an expanding investment portfolio. Referring to SNL.com's analysis of 2014 results, our wholly-owned subsidiary, Kingstone Insurance Company, was ranked number 24 in New York State when considering homeowner premiums written, up from number 29 in 2013.

Still our market share is but 0.75%, showing the size of the opportunity we are presented with.

Similarly, looking at dwelling fire writings, we are ranked number 20, up from number 24 last year and with a market share above 1.2%.

Looking now at the first quarter, our premium growth was driven by a 22.8% increase in our personal line writings, which includes homeowners and dwelling fire policies. Our business is focused on the downstate New York market, and we have increased our policies and force count by 20.6% over last year.

We will soon file an updated rating plan for targeted counties in the Hudson Valley and believe that we can further diversify geographically by building a presence in our own backyard. Our applications to do business in four additional states are still pending, and as soon as I can give you more information on this, I will. But I can share that we are interviewing for candidates to help us build out an agency only distribution network, leveraging our stellar reputation within the New York independent producer community.

In terms of competition in our downstate marketplace, for years we have seen larger national carriers lessen their exposure through the gradual nonrenewal of policies. We have seen new competitors enter the marketplace, and we expect more to follow.

In spite of the perceived heightened competition, we are well-equipped to continue growing, again due to the excellent relationships we enjoy with our select producers.

During the period, we continue to see rapid growth in the livery physical damage policies we write, largely as a result of the widespread acceptance of transportation network companies such as Uber. In past quarters, I have talked about profitability struggles with the commercial automobile line of business. I outlined that our overall premium growth rate would be lessened due to our decision to run off the commercial auto liability line. We ceased writing new commercial auto policies on October 1 of last year and made the decision to not renew existing commercial auto policies, beginning with those affected May 1 of this year. At the end of Q1, commercial auto represented approximately 1.3% of our total policies in force, and by this time next year there will be none left.

We are managing the claims run off aggressively and feel our reserves are adequate to satisfy the claims generated by this line.

Now I'll turn it over to Ben Walden, our Senior Vice President and Chief Actuary.

Thanks, Barry. I will now take a few moments to discuss the loss ratio for the quarter.

As Barry mentioned, the severe winter weather affected our results considerably, specifically in personal lines. Many of the winter losses were from claims due to frozen pipes and other winter-related structural damage from snow and ice.

Kingstone's current catastrophe reinsurance treaty contains a provision that provides coverage for excessive winter weather losses. However, this provision was not triggered by the winter weather in the first quarter of 2015. The 2015 first-quarter net loss ratio improved to 68% from 73% in the prior year period. Beginning with first-quarter 2015 reporting, we specifically break out the net loss ratio into its component parts.

First, the winter weather impact is determined as excess losses over and above an average winter season. The impact on our net loss ratio from the severe winter weather was 17.7% in the first quarter of 2015 compared to 15.9% in 2014. The second component is the impact on our net loss ratio from prior year loss and LAE development. This was 1% in the first quarter of 2015 compared to 3.4% in the first quarter of 2014.

Finally, our core net loss ratio excludes the impact of severe winter weather and prior-year loss and LAE development. The core net loss ratio improved to a healthy 49.3% in the first quarter of 2015 from 53.7% in the prior year period.

The improvement in the core net loss ratio was driven by favorable results for commercial lines and a shift in the net earned premium mix towards lines of business that have a lower core loss ratio such as personal lines and delivery physical damage.

The Company's combined ratio was 97.9% in the first quarter of 2015 and 95.5% in the first quarter of 2014. Keep in mind the severe winter weather affects both the net loss ratio and the net underwriting expense ratio due to the impact that increased losses have on our contingent ceding commissions.

As a result, the total effect of the severe winter weather on the first-quarter combined ratio was 27.3 percentage points in 2015 compared to 21.9 points in the prior year period. Excluding the impact of the severe winter weather, the first-quarter combined ratio improved 3 points to 70.6 in 2015 from 73.6 in 2014.

At this point, I will turn it over to Victor Brodsky, our CFO.

Thanks, Ben. I'd like to start off talking about our combined ratio. Our net combined ratio for the quarter was 97.9%. Components of the combined ratio and net loss ratio and net underwriting expense ratio (technical difficulty). Ben has already discussed our losses for the quarter and our 68% net loss ratio, which includes the effects of severe winter weather. Our net underwriting expense ratio was 29.9% this quarter compared to 22.5% in the first quarter of 2014.

A comparison of net underwriting expense ratio between quarters is impacted by the reduction of our quota share ceding rates on July 1, 2014. The reduction in quarter share ceding rates increased our net premiums, which impacts net underwriting expense ratio by increasing the denominator of the ratio.

The three components of the net underwriting expense ratio are: first, commissions paid to us by producers; second, other underwriting expenses which is the overhead required to run our business; and last, ceding commissions we received from our quota share reinsurance partners.

Commission expense as a percentage of premiums written remained fairly constant, except for the additional commissions we paid to our select producers as a bonus. This quarter we increased the estimated bonus compared to the first quarter of last year.

Other underwriting expenses include the costs related to the writing of the insurance policies, regulatory fees and overhead costs of running our business. Other underwriting expenses as a percentage of direct written premiums increased to 15.4% this quarter from 14% in 2014. This is an unusual occurrence since we have always been reporting that our other underwriting expenses have been decreasing as a percentage of direct written premiums.

The increase stemmed from employment costs, professional fees, and rate increases, data assessments, and premium taxes. I'd like to address some of these items individually.

During the quarter, our salaries and other employment costs increased by 32% compared to the first quarter of 2014. The increase was due to the hiring of additional staff to service our current level of business and the anticipated growth to come. We believe that the experience our new hires bring to Kingstone allows us to efficiently manage additional growth. In addition, there were annual rate increases in both salaries and the cost of employee benefits.

The first quarter of 2015 includes a large increase in professional fees. We are now recording these fees in the quarter in which the service are rendered.

The final component is ceding commission revenue. These amounts are offset against our other underwriting expenses and reduced the net underwriting expense ratio. The reduction of quarter share ceding rates results in a lower ceding commission amount. Further severe winter weather produced our contingent ceding commissions due to resulting increased loss ratio. Reduction in ceding commission increased due to the net underwriting expense ratio.

Regarding investments, our philosophy is very basic. We seek stable after-tax income on our portfolio. Kingstone's cash invested holdings at March 31, 2015 increased $75 million. The vast majority of our investments are investment-grade fixed income securities. One trend worth noting is that over the past several quarters we have successfully shortened the effective duration of the portfolio to a current 5.5 years.

To summarize the highlights of net income, our direct written premium growth and increase in net written premiums due to know new quota share agreements, along with increased investment income, led to bottom-line improvements, despite the impact of the winter weather that Ben detailed.

Kingstone's net income for the quarter increased 16.8% from the prior period. Before I turn it back to Barry, I'm also very pleased to report that our Board declared a dividend of $0.05 per share to be payable on June 15, 2015, to shareholders of record on June 1, 2015. This marks our 16th consecutive quarter of dividend distributions.

With that, I will turn things back over to Barry for closing remarks.

Thank you, Victor. Our quarter was defined by the harsh winter storms that affected our markets. We explained in our last call that we anticipated the winter's impact to be similar to what we saw last year. In fact, the total winter losses incurred this year were greater than last year.

However, due to changes in our quota share agreements and a change in the mix of business, the net loss ratio showed some improvement year over year.

As previously discussed, Kingstone governs itself by adhering to a limited set of core values. One of these is the maintenance of a conservative operating leverage by trying to maintain a conservative ratio of net written premiums to surplus. Historically we've set this at 150% over the treaty term, which begins July 1. We will continue to utilize quota share reinsurance to allow us to take on the business and share the risks of doing so with others. But we will be reducing the ceding percentage in July based upon the volume of business we expect to write over the treaty term.

Right now it appears that the current personal lines treaty, which carries a 55% ceding percentage, will be reduced to 40%, while the final decision as to ceding percentage will be made in late June, I feel confident in saying that I expect Kingstone to stand on its own and eliminate the need for all quota share by July of 2017. Based on current favorable market conditions, we also anticipate achieving better pricing and better terms on all of our reinsurance treaties.

Operator, let's open it up for questions.

(Operator Instructions) Paul Newsome, Sandler O'Neill.

Good morning and thank you for the conference call. I wanted to ask about the elimination of the quota share and your goal to get rid of it entirely. Could you talk about sort of the pros and cons of that choice? I certainly understand that in the context that we have a pretty cheap reinsurance environment, and there are some diversification mismanagement benefits to the quota share agreements.

Sure, Paul. Basically it's a financial decision. Whatever we cede to our reinsurance partners is done understanding that they are generating a profit on the business, which otherwise would have been to our benefit if we had the surplus to support it. Depending upon the type of agreement we enter into, we will either have a gross quota share treaty, which includes a proportionate share of our catastrophe needs, or a net quota share treaty, which will give us only a very limited amount of catastrophe coverage.

So in the gross treaty, which is the way we have been doing it, the reinsurers have built in a margin for both the use of their balance sheet, as well as the profit they hope to generate by providing us with the cat cover. If you remember and what sticks in my throat repeatedly is that following Superstorm Sandy, our loss ratio went from an amount that otherwise would have given us the maximum possible benefit by that treaty to one in which we at least stood to lose money on every dollar we ceded to the reinsurance partners starting in November.

So that's not a result that I want to revisit. I certainly don't believe that the likelihood of a major cat event this year is heightened in any way. I mean reports are that the number of estimated number of storms and the number of named storms that would hit the US is down versus prior year's estimates. But I think the point is that the real need for leaning on someone else is because they have the surplus to help us support the spreading of the risk. So if we have our own surplus, we don't need to rely on anybody else. And, frankly, after listening to Victor's commentary and Ben's trying to explain what the impact is on ceding commission, contingent ceding commission, underwriting expense ratio, change in quota shares, I look forward to the day where I basically could cross that part out of their presentations. I hope that's responsive to what you are looking for.

Absolutely. Thank you very much.

(Operator Instructions). Ken Billingsley, Compass Point.

Good morning. I just wanted to verify you said that your statutory underwriting leverage target is 1.5 times, correct?

Generally that's true.

Okay.

The problem we've had is it's easy to say that number, but we have to draw an estimate as to what we're actually going to write on a going forward basis. And now with the prospect of expanding our writings elsewhere in New York, as well as some type of rollout in one, two, three, or four more states over the treaty term, it's a big guess, and in the past I've been ultraconservative. I think if you were to look, our current trailing 12-month net leverage ratio is but 1.2 to 1. So we're not taking on as much risk as we can because of the conservative estimate I put in place last July. I'm not saying I want to undo that because it can't, but I'm going to be very -- I'll be a little less weary of taking a shot with our writings, let's say.

And it doesn't sound like the 1.5 is necessarily a ceiling how much higher can you take that maybe temporarily if opportunities presented themselves.

If we went up to 1.7, 1.8, I wouldn't be uncomfortable. I just find it is easier to gravitate towards a few core amounts, a few core metrics, and explain the way we conduct the business at our Company around it. And maybe you'll pardon me for sounding repetitive in these calls, but I know I constantly say the same few things. We only sell through independent agents, we try to be conservative, and we honor the way we do business over a long history. I intend to someday -- although not anytime soon -- pass the baton on to a successor. So I want to leave it in a better position than I got it, and gravitating around these few measures helps me to explain that.

Your delivery product -- can we discuss why -- what makes your product attractive considering it is just property damage? Is it because they are not required to have anything else with -- I'm speaking specifically to the Uber and Lyft purchasers. But why are they purchasing your product when I would imagine that they may need some additional liability coverage as well?

Well, they do need the liability coverage. Under New York rules and TLC regulations, there's a heightened amount of coverage that's required of a livery car owner in New York as compared to many other places. The question, though, is, in addition to that liability coverage, who needs the physical damage coverage, where do they get it from, and why are you guys doing so much of it?

And I think it starts with the fact that we have an entrenched network of producers we've worked with on this line and other lines for many, many years. There are only a handful of livery liability writers who are operating in the New York metropolitan area, and only a small number of those even offer the physical damage coverage.

So when Uber requires drivers to have new or relatively new cars where limousine bases trying to keep up with Uber are requiring their drivers to have new vehicles, most of those vehicles or many of those vehicles, let's say, have a financing against them where the lender or lessor requires physical damage coverage be put in place.

So we've been the beneficiary of this new car surge mostly triggered by Uber. There's nothing magical about our product. I think if there's any one thing I would point to apart from market conditions, it is our ability to turn around claims faster than anybody in the area. We've got the experience. We've got the know-how. We've got the personnel. The drivers know that if they have a Kingstone policy and they get into a fender bender, that car will get back on the road faster than any other carrier could do it. And we are very proud of that. I don't like to see it too loudly to my claims department, but they will ask for a little extra compensation.

Okay. What keeps these -- the liability writers from writing the physical damage? Especially if you are making money on it, they already have a captive audience writing the liability side. Is there anything that keeps them from offering the product and packaging it up?

I think that going back to the claim servicing I just said, we do a better job than they did when they wrote it. They are also kind of capital constrained as the growth of the -- the number of cars on the road has surged, the amount of cover that they have to provide has gone up, and the capitalization is limited. So by focusing more of their surplus toward handling the liability portion of the business, that leaves the physical damage for us.

Just a couple of more questions. The first development in the quarter, I don't recall if you said where that was from and what years?

I think there was two points, and I'll let Ben chime in. First, we had a 1% adverse development in the quarter, which was about a third of what we experienced last year. That 1% came almost entirely from fourth quarter late December claims that matured and were developed during the first quarter. So this is a normal occurrence, I think, for virtually all P&C carriers that you will see some development on fourth-quarter amounts. Let me let Ben maybe give a little bit more to that.

Sure. So the development we saw in the quarter was really related to four larger claims. Three of those were from ex the year 2014. So, as Barry would say, we strengthened our reserves for that year a little bit. Just to be a little bit more conservative, we had some timing issues with those large claims getting reported just after year end. So technically it's prior year developments, but we've increased the 2014 year a little bit. And in terms of lines of business, it was coming from commercial lines, and we had one commercial auto claim reported in December that caused us to increase our reserve for that year slightly.

I think the takeaway though, Ken, is that we spent a lot of time and devoted a lot of effort towards strengthening our reserves over the past year and a half that Ben has joined us. Victor talked earlier today about the increase in our salaries and wages, and the vast amount of increase -- the vast majority of increase is attributable to our building our claims department.

We hired many more people. We didn't do as good a job handling the claims and reserving for the claims as we did forwarding the business on our books. We were very good in bringing the business in, but recording and servicing and analyzing claims, we were weak. I think we solved that issue. I feel very comfortable in saying that we are very proud that the adverse development in the first quarter was but 1%, and we look forward to a nominal if any contribution from prior years to our loss ratio for the rest of 2015.

Just two other questions. I believe this one might be for Victor. I believe you said that the expense ratio was higher due to some accounting changes and the way you are recording it and that it won't repeat maybe even through the remainder of 2015. First of all, do I have that correct? The next part is, how much was that of an impact on the expense ratio this quarter?

It was about a 0.5% on the expense ratio. It was mostly due to the cost of the 2014 audit and the actuary services. All those services are rendered in the first quarter of 2015. Once that is over with, we have just some nominal professional fees throughout the rest of the year, and the actuarial services really won't begin again until next January or February.

So it's very much a timing difference, Ken. We're picking up a lot of professional (inaudible) in Q1 versus the prior year and a much lesser amount in Q2, Q3 and Q4.

Okay. And so -- that 0.5%, though, it was really an audit fee. It's not necessarily related to -- is it the actual increase to change the way you did it, or is it just strictly the audit fees that we'll see in 2015?

It's the timing of it. I wouldn't say it's gone up by much. It's just -- it was (inaudible) in the first quarter because that's when the services are rendered.

I understand. So it's not that it won't recur, it's just the timing. I misread that then.

Okay.

And then the last question I have -- and this is probably maybe for you, Barry -- is you talked about the four states, and maybe this is my word not yours about a delay in getting the approval. Has there been a delay in getting the approvals? Is there anything that's holding it up?

There is nothing that's holding it up. I guess this is kind of like, that's okay for government work type of stuff. But there's really -- it's out of our hands. We haven't been confronted with any issues. There's nothing that I'm aware of that made it slower. We've -- we'd like to see it happen. We like to see it happen tomorrow, but there is really not much we can do. I'm not going to be visiting someone's office and shaking them up. I'll let them do their work. We've been around since 1886, so we've got plenty of time in front of us to get there.

Great. Thank you for taking my questions.

My pleasure.

(Operator Instructions) Brad Nelson, Private Investor.

One quick question. Should we expect a smaller effect due to the severe winter storms on the June quarter?

Yes. We have factored in ID&R for the remaining claims we expect to get in the second quarter. So right now we don't anticipate any future developments on the winter losses in future quarters.

Okay. Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. Great. It's, of course, my pleasure to host calls like this, and I look forward to speaking with you all again. I will be sending out a release as soon as we have the final details with respect to our reinsurance placements. I'll be heading to Bermuda to start it next month and maybe get a little sun in my face at the same time after this long winter. But, as soon as I've got the information available, I'll get it out to everybody.

Again, thanks very much for your time and talk to you soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.