Kingstone Companies Inc (KINS) 2018 Q4 法說會逐字稿

Greetings, and welcome to the Kingstone Companies Year-end 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Amanda Goldstein. Please go ahead.

Thank you very much, Kevin, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2018 year-end results.

On this call, Kingstone may make forward-looking statements regarding itself and its business. The forward-looking events and circumstances discussed on this call may not occur 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 Conditions in Item 7 of the company's Form 10-K for the year ended 12/31/18, along with the commentary on the 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 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. Dale Thatcher. Please go ahead, Mr. Thatcher.

Thanks, Amanda, and thank you to everyone for joining us today on our year-end conference call.

It was approximately a year ago that I took the position of President here at Kingstone, so this is a good time to stop and look back at results for the year. I have to say it was a bit choppier than I expected as financial performance lagged for the year, but I still feel that we accomplished a lot.

For the year, we recorded direct written premium of $146.7 million, up almost 21%. We had our strongest growth in the fourth quarter with direct written premium of $39.5 million, up 23%. Our core business in New York continued to show very healthy growth of 15% for the year. Expanding beyond New York, we added New Jersey and Rhode Island in 2017 and Massachusetts in 2018. We expect to add Connecticut and Maine in 2019 as well as a possible restart of Pennsylvania late in the year.

Premium in our expansion states went from just under $2 million in 2017 to over $9 million in 2018. We've gotten off to our quickest start in New Jersey, which represents $7.7 million of the $9 million in expansion premium.

We continued to attract high-quality agents who are looking for quality A-rated carrier with a focus on service. We found a particular affinity with our smaller suburban and rural agents who are often left behind by our larger competitors who demand ever-increasing minimum premium volumes. Many carriers require minimum premium of $1 million or more before an agent can qualify for contingent commissions. Rural agents may not have $1 million of premium that they are willing to give to a single carrier. That makes it difficult for them to have beneficial relationships with the big players and forces them into the wholesale channel.

Kingstone gladly takes quality business from agents with production as low as $50,000 per year. By providing our agents with a quality product and superior service in spite of their small size, we're able to build solid, loyal and profitable relationships with our agents. We believe that profitable business comes in all sizes and we're nimble enough and dedicated enough to take advantage of that.

Our attention to servicing the small agent is building not only premium volume but profitability way ahead of schedule. For 2018, the expansion states delivered a loss ratio of 49%, well ahead of where we thought they would perform at this point of their development and dead even with the overall loss ratio for the company.

Our combined ratio for the quarter was 96.4%, including 3.5 points of adverse development and 0.4 point of cat losses.

Overall for the year, our combined ratio was a disappointing 94.8%. This included 6 points of catastrophe losses and 1.1 points of adverse development related to unfavorable liability settlements from 2014 and '15.

The industry as a whole has seen some deterioration of property losses, and we're not immune from that trend. We have taken steps to tighten certain underwriting criteria. We've increased both exterior and interior inspections. We filed rate increases. And we've tightened restrictions on seasonal and secondary homes.

Underwriting is a never-ending balancing act between production and profitability, where underwriting requirements are constantly adjusted to keep the trim just right. For the most part, we've been tremendously successful in balancing growth and profitability, but property trends this year ran a bit hotter than we expected. We fully expect to make the necessary adjustments to continue our history of success.

Now I'd like to turn the call over to Barry for some commentary on our investment portfolio and an update on [KOCI], our general agent operations.

Thanks, Dale. A few remarks first about our investment portfolio. During the fourth quarter, we made some changes to our fixed income portfolio by focusing on the elevated level of short-term rates. And by doing so and adding investment-grade credits with 1- to 3-year maturities, we were able to reduce our duration risk without compromising overall returns. By year-end, our overall corporate fixed income portfolio was the most conservative it's been since I began managing it 11 years ago. As an example, we now have less than 1% of our portfolio in bonds rated BBB-, making our average corporate credit a very solid A-.

But as Warren Buffett pointed out, the change to GAAP accounting brought volatilities to the company's earnings by reflecting what went on in the equity markets. In spite of our less than 10% allocation to equities and more than half of that, by the way, is in preferred stock, our fourth quarter results were significantly impacted. In addition, and along with the equities getting pounded in the fourth quarter, credit spreads grew out faster than Treasury rates declined, reducing the market value of our fixed income portfolio, translating into a decline in our book value.

Fortunately, thus far, in 2019, we've seen our values return to pre-fourth quarter levels. I'm looking forward to the end of the quarter and sharing with you the first quarter results, and we'll do that sometime in May.

As we've discussed previously, Dale hit the ground running and is shaping Kingstone into a company for the future. I'm very pleased that I can continue to contribute. And in addition to my responsibilities as the Chief Investment Officer, I am also the President of our new [KOCI] agency.

KOCI allows for the distribution of Kingstone products away from the traditional independent agent and broker model of carefully selected and culled producer partners, which we call our selected producers. KOCI is working with national agencies, call centers, digital agencies, and as well with other carriers' distribution channels. It's a bit premature to share very much detail. As always, I feel it best to tell you what we've done, not what we intend to do. I look forward to giving you more color in May, but it's my hope and expectation that KOCI will be a material contributor to our business in 2019.

And with that, let me turn the call back to Dale.

Thanks, Barry. We've got some really exciting developments with [KOCI] and I look forward to seeing how that adds to our profit profile over time.

Before I close the call, I'd like to provide guidance for 2019. Based on our results this past year, trends we are seeing in the industry and the changes we've made and continue to make to underwriting and claims practices, we expect to end 2019 with a combined ratio excluding catastrophe losses of between an 82% and an 84% and catastrophe losses of 4 points. Keep in mind that, historically, most of our cat losses hit in the first quarter and we expect that again this year.

With that, I'd like to turn the call over to the operator to open it for questions.

(Operator Instructions) Our first question today is coming from Paul Newsome from Sandler O'Neill.

Could you talk about the expense ratio trends that may be embedded in your guidance? It looks like you have had some uptick in your expenses as you've expanded into other states, and I'm just wondering if that is baked into what you're looking at for next year as well?

Yes, Paul. We've -- if you look at our expenses, we'd like to look at both the overall, obviously, so we can keep control of it but also the underlying on the core. And we've been rock solid on the other underwriting on the core, so we're keeping that in line, not letting ourselves go crazy with the growth that we see. Because we are seeing, obviously, investing in the future through expenses for growing our new states. That is included in our expectation in terms of combined ratio that we will continue to invest in new states. As we indicated, we're going to be opening up Connecticut and Maine in 2019 here. We're also going to be restarting Pennsylvania. So all of those are included. We haven't provided specific guidance just on the expense ratio, but that is included in our overall projections for the year.

Can you give us any sense of what that pickup is from -- just from the new business perspective?

You mean as far as how much new business we're going to be producing in those new states?

No, no. As to what the impact on the expense ratio from the new business?

On the expense ratio?

Just roughly.

Yes, I think that it's going to be roughly what it has been in the last couple of years. It may have a little bit of upward pressure on it, but not a lot.

Our next question is coming from Bob Farnam from Boenning and Scattergood.

A question on the guidance. I'm looking -- if I normalize your combined ratio this year, if I back out the cats and I back out the reserve developments, I think you're looking more like an 87%. It was 81% last year. Just want to know how to get from the 87% this year back down to an 82% to 84% next year? What are the levers in there that's going to show the improvement?

Well, the one thing, Bob, also that's in there is you'll see, if you look at the contingent commissions line, there is with the adverse development that we did, in effect, have some adverse development on contingent commission because that refigures the calculations. So that's embedded there, too. So you have to kind of play around with that also. So it's -- we've analyzed a lot of trends. We try not to give too much credit to underwriting changes that we're making, but we're certainly cognizant of them so we take a conservative view in terms of what we're doing and what we think that's going to end up generating by way of improvements in combined ratio. So we try to get to, what I would call, a realistic expectation of combined ratio. We're certainly seeing the same pressure that the industry is seeing on property, but we think that we're going to be in a good position to be in that 82% to 84% ex cat range.

Okay, yes. So I'll take a look at the contingent commission component because that just seems like a pretty good amount of improvement relative to this year. In terms of the reserve development, you noted some liability claims from, I think, '14 and '15 or so. Was that what was driving the development this quarter?

Correct. Yes, it's a couple of old liability claims in the commercial lines side of things. So it happens now and again. One of the things is that given our size and our reserve -- overall reserve position size, what would just be a rounding error in larger companies plays a significant result in our numbers.

We've reached the end of our question-and-answer session. Let's turn the floor back over to management for any further or closing comments.

I thank you all for participating today. If you have any additional questions and would like to contact us, you can contact either Amanda Goldstein or myself and we'll be happy to discuss with you our results for the quarter. With that, I wish you a good day. Thank you.

Thank you. That concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.