Kingstone Companies Inc (KINS) 2020 Q2 法說會逐字稿

Hello and welcome to the Kingstone Company Second Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Amanda Goldstein, Investor Relations. Please go ahead.

Thank you very much, Kevin, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2020 second quarter 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 Part 1 Item 1A of the company's Form 10-K for the year ended December 31, 2019, 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 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's CEO, Mr. Barry Goldstein. Please go ahead, Mr. Goldstein.

Thanks, Amanda, and good morning, everyone. We are pleased that you can join us on this, our second quarter 2020 conference call.

Joining me on the call today are Meryl Golden, our Chief Operating Officer; and Ben Walden, our Chief Actuary.

A year ago, I announced that 2 major changes were being made to improve upon our profitability. First, I announced that we were exiting the very volatile commercial liability business. Our runoff is more than 90% complete and we expect to have no active policies at the end of this quarter. Second, I announced that homeowner rate increases were needed and that we had started the process.

Each action taken would yield positive financial benefits, reduce losses by exiting commercial and increased premiums from the rate improvements. But I noted it would take time for you to see these changes. We are just now starting to see the anticipated improvements.

Soon after these changes were made, I announced that Meryl Golden was joining our company as its Chief Operating Officer. Her job was to push Kingstone forward to become a more durable carrier, one better able to compete and win in today's marketplace. We call this effort Kingstone 2.0 and this is a work in progress. We've made a number of changes already with many, many more to follow.

Results for the second quarter were excellent from many dimensions. Operating income, the non-GAAP measure we use to describe our operating earnings, continues to grow. Perhaps the most satisfying metric for the quarter is that we were able to deliver an 87.3% combined ratio. Meryl will be elaborating on these excellent financial results. I also note that this is the third consecutive quarter without any adverse reserve development and Ben will expand upon that later.

Although our A- rating from AM Best was affirmed on June 10, a revision to B++ was issued on July 10. This followed the finalization of our catastrophe reinsurance placement. Our new 2020-2021 program provides for limits well in excess of many of our competitors and more than adequate for Kingstone and its policyholders' needs. The new treaty does not get us to the required confidence interval as anticipated by Best for a typical A- rating and only because of that was our rating changed.

The COVID-impacted reinsurance markets were extremely difficult to navigate. Reinsurers in May and June were just beginning to recognize up to what some say is a $100 billion event. Risk capital was highly constrained compared to prior years. And according to one industry data source and affirmed just yesterday by Munich Re, property insurers like Kingstone was subjected to the largest price spike seen since 2002.

Our Board met 6 times in May and June to discuss this matter. As July approached, capacity had tightened and rates soared. In the end, it was a painful but obvious decision. Had we placed the program at July 1st in the same way we did last year, we would likely have retained that A- rating. But at what cost? Ceded premiums would have been at least $10 million higher. But by spending that extra $10 million, we would have eliminated all possibility of Kingstone delivering an underwriting profit this year. It would have pushed our combined ratio next year to over 100% and would have forced us to raise our premiums yet again, perhaps by as much as another 10%.

We made the choice to forego the rating and strengthen our profitability. We've not given up on the A- rating as a goal, but it's just too expensive now. And without the commercial lines business, we really don't need it right now.

With that, I'll turn the call over to Meryl to provide more detail on the second quarter's results and our progress towards Kingstone 2.0. Please go ahead, Meryl.

Thanks, Barry. We're delighted with our results for the second quarter as they clearly reflect the changes we have made to improve profitability. Our direct written premium was down 4.8% overall due to our withdrawal from commercial lines, while our personal lines business was up 9.1%. This growth is due to an increase in renewal policy count as well as an increase in average premium from our recent rate changes.

The net combined ratio improved 6.8 points to 87.3% driven by an improvement in our net loss ratio for both personal and commercial lines. Ben will provide more color on our loss ratio shortly.

Our expense ratio for the quarter increased 1.7 points, resulting from a significant reduction in net earned premium from the increased quota share and the discontinuation of commercial lines. Our expenses have increased as a result of investments in Kingstone 2.0 initiatives, particularly our salary, IT and professional services expenses, and we will see the benefit from these investments over time.

During the quarter, we made some changes to our staffing levels to reflect a decline in new business from our actions to improve profitability as well as the expected increase in efficiency we will see from our technology investments. Our efforts to better manage our catastrophe exposure have impacted our new business volume. As Barry mentioned, our reinsurance costs have increased materially and these actions will help us control the increase in this expense.

Over the last 2 quarters, we have stopped writing in certain areas, implemented an individual cat risk scoring tool and introduced mandatory hurricane deductibles in states where we previously did not have them. While these actions have slowed our new business, they are required to manage our profitability.

I'm also happy to share some highlights from Kingstone 2.0. We have a ton going on. We are making significant investments in our technology and those efforts are on track. We just implemented our new claims system this week and we will start the conversion to our new policy management system and introduce the new producer interface in late Q3.

And last, we're in the final stages of completing the modeling for our new homeowners product that will be filed in all of our states before the end of the year. We're very excited for Kingstone 2.0 and want to thank all of our employees and vendors who are working so hard to help make this a reality.

Now, I'll turn the call over to Ben. Ben?

Thank you, Meryl. As noted, we posted a solid result for the quarter and also recorded a third straight quarter of stable loss reserve development. For the second quarter 2020, the overall loss ratio declined from 56.6% to 48.1%, an improvement of 8.5 points. The impact of cat events was slightly higher than the prior period with a 5.7-point effect compared to 4.6 points for the second quarter 2019.

Prior-year loss development remained stable with a small amount of favorable development recorded in comparison to 5 points of adverse development for the prior year period. The loss ratio impact from commercial lines continues to decrease as commercial made up less than 3% of total net earned premium for the quarter, compared to 12% in the second quarter 2019. As previously noted, all commercial lines policies will be off the books by the end of third quarter.

There were 204 open commercial liability claims at the end of June, down from 227 as of March. We have been able to close more than half of the open commercial lines inventory from a year ago for values lower than the reserve that was in place. We expect to see further favorable outcomes on the remaining open cases, but are taking a conservative approach in setting reserves until more of these cases get resolved.

The core loss ratio, excluding commercial lines, improved 1.3 points for the quarter from 43.5% in 2019 to 42.2% in 2020. We are starting to see the benefit of rate increases taken in personal lines late last year. In addition, we saw a general improvement in claim frequency this quarter compared to the prior period.

The second and third quarters are normally Kingstone's best quarters due to the reduced impact from weather and fire claims. However, earlier this week, the Northeast was hit with a major tropical storm resulting in widespread power outages and a large number of wind and tree damage claims.

While it is still too early to determine an exact impact, at the present time, we expect losses will reach far into our $10 million direct retention prior to catastrophe reinsurance. After the impact of quota share reinsurance, we are exposed to a maximum net loss from any one cat event of $8.1 million or an after-tax impact on earnings per share of about $0.60. We will be watching the data closely as claims develop and will report a preliminary estimate of the impact as soon as we are able to more completely review all of the claims.

Now I'll turn it back to Barry for some closing comments. Barry?

Great. Thanks, Ben. And yes, we had a great quarter. Meryl has put the company on a path she described to us last year and we continue to march forward. Stay with us, please, because it's just now beginning to get exciting.

Now I'll turn the call back to the operator to pull for and reply to the questions you may have. Operator, please pause for questions.

(Operator Instructions) Our first question today is coming from Paul Newsome from Piper Sandler.

I was wondering if you could talk a little bit about the expense levels prospectively and particularly the other expense levels. Just that seems to be a pretty significant delta. I think you touched on it with these so-called investments. But can you sort of directionally what that might do prospectively? Is it something we have to earn in with growth? Or do you expect you'll be able to pull that number back down a little bit?

Sure. So most of the increase in expense is due to the increase in our quota share from 10% to 25%, which reduced our net earned premium. So -- but we are -- as I mentioned, we have made significant investments. I do think you will see our expenses come down, at least to the prior level if not below that, over time.

Is there a goal for where you want to pull that expense ratio down? It's probably the biggest delta from a underwriting profitability if you look at your peers as the expense ratio is probably, what, 10% to 15% too high? (inaudible) long terms out there.

I think what Meryl was alluding to is that the net ratio that you're looking at is driven by the amount of quota share that's in place now. That treaty at 25% expires at the end of this calendar year. And sometime in the fourth quarter, we'll make a determination as to the need for and the amount of quota share, if any, for 2021 and the future. And I note that given the obviously improved performance of the company this year, we would expect that the commission rate earned on any quota share going forward would be in excess of the amount that's in place now. So we'll -- depending upon just how much quota share is put in place and at what commission rate we receive, those 2 will have 2 major impacts on that ratio. But I think what the important part that Meryl was making is that most of the dollars that are going into this increased spend is to build and develop and deploy our new product, Kingstone 2.0. So I think we'll probably have a lot better indication on where that total spend is sometime early next year, but we continue to spend as needed. Hope that answers your question.

Yes, absolutely it does. That's what I had.

(Operator Instructions) Our next question today is coming from Bob Farnam from Boenning and Scattergood.

I have a -- just maybe a couple of questions on the [ISAs] losses just to kind of put the number of claims into context. A 1,000 claims, we're not quite sure how that is relative to maybe how many claims do you get in a normal winter storm, for example?

Yes. It's Ben Walden. I'll take that. A normal winter storm typically 200 to 300 claims for a really big storm. So it is unusual. It's the biggest one we've had since Sandy. Also to put it in context, we have about 1,000 open claims prior to this. So this is going to double our open claim count.

Ben, do you happen to remember how many claims you actually had for Sandy?

Yes.

I was jogging your memory a bit, but…

It's a long time ago. But yes, Sandy was about 3,500 claims. Now we had much lower policy count at that point. So it would be much more today, but that puts it in general context hopefully.

And the policy limits on the majority of these -- the homeowners policies do you have?

Yes. Our typical coverage A, which is building coverage, is a little less than $500,000. We do expect nearly all of these claims to be relatively small. So not involving structural damage, but lower average severity claims. We don't really expect too many big one.

And now maybe back to Barry on the impact of the AM Best downgrades. Just kind of curious what you think that's going to have in terms of your ability to generate premium overall from your independent agents and from the Cosi operations?

Thanks for the question there and a good one. I do -- don't think that the rating downgrade itself to the independent agent channel is going to be all that impactful. As I mentioned in my comments, the need for this -- the AM Best rating is much more profound when you're talking about the commercial business. And our exiting that business really reduced the need for us to maintain that rating. Surely, our relationships that we developed in Cosi that relied upon a A- or a better rating constrains us. Those efforts for writing new business from those carriers are now put on hold.

We maintain that book of business that we developed and we continue to service it and maintain the relationship. And the opportunities available to Cosi with other carriers, other national agencies and other entities seeking to access in one way or another Kingstone's distribution network, that remains in full force and effect. So yes, it's going to ding Cosi's efforts. But overall, the need for the rating was much more profound if we had maintained the commercial liability business and obviously we haven't. Hope that answers your question, Bob.

Yes. So I mean it's only been a month or so. Have you had any reaction yet from the agents given your -- the reasoning for why it was downgraded in terms of the reinsurance protection?

Meryl, you want to give Bob your thoughts on what you've heard from our agent base?

Sure. So most of our agents understood why we had to make the decision. And many of our competitors are not AM Best rated at all. So we are still buying more reinsurance than many of our competitors. And our producers, many of them were with us before Kingstone was an A- rated carrier. So we have not seen a noticeable decline in business as a result of the change in our rating.

Bob, just to give you an idea, of the 5 largest coastal competitors we're confronting in the Tri-State area, I think only one of them maintains an AM Best rating. I don't want to use their name, but I can tell you that that rating is B- and it doesn't stop them from doing business.

Our next question today is coming from [Gabriel McCore] a private investor.

Congrats on a great quarter, especially in light of the adverse circumstances, number one. I have a couple of questions. The first one is, can you give us any color on the decline in the net investment income number in light of the fact that cash and investments were higher this time than the same time last year? And the second question I had is, do you anticipate doing another rate increase later this year?

So let me answer the first question, Gabe. And -- that decline is strictly as a result -- that was a one shot, onetime 2019 item. That was the maturity. I forget exactly what type of an instrument it was. But that was a onetime item. So actually, exclusive of that, our investment didn't shrink. With regards to rates going forward, I think Meryl is better equipped to answer that. So Meryl, why don't you take on that question?

Yes. So we plan to do a rate change every year for all of our products going forward. So we'll be much more active in terms of managing our product. So I would say it's likely that we will do a small rate increase. It varies by state, but I would imagine that our rate level will go up later this year.

Gabe, let me just add one point to that. Our -- had we maintained the rating and added on $10 million in cost that we would have to pass on to our policyholders, that would have caused a dramatic rate shock. We had that lever to pull. It was a difficult one. We chose to give up the rating instead of compromising who we were as a company. But I would point out, we had that lever, which our competitors didn't. So what we're starting to see now -- and it's only the beginning -- are underwriting changes being imposed by at least one major competitor, rate changes of a material amount being taken by all competitors with at least one of them noting that before they could get to rate adequacy, they'll need to do 3 more years of changes. So right now, we took it on the chin when we took a big increase last year. We separated ourselves price-wise from the market. It slowed our growth. And now what we anticipate is the market is going to come back up to us. So that's the future that I'm looking at. Anything else, Gabe?

That does conclude our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Thanks, everybody.

Thank you.