Kingstone Companies - Q4 2020

Transcript

Operator (participant)

Greetings, and welcome to the Kingstone Companies' Q4 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. It's now my pleasure to turn the call over to Amanda Goldstein, Investor Relations Director. Please go ahead.

Amanda Goldstein (Investor Relations Director)

Thank you very much, Kevin, and good morning, everyone. Yesterday evening, the company issued a press release detailing Kingstone's 2020 Q4 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 Condition in Part 1, Item 1A of the company's Form 10-K for the year ended December 31st, 2020, 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 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.

Barry Goldstein (CEO)

Thanks, Amanda, and good morning, everyone. We're pleased you can join us on this, 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 review the results with you, and Meryl will discuss our operations and, in particular, our Kingstone 2.0 initiative, which is ongoing and which will propel us forward. For me, I'm going to go in 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 to 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 didn't make many friends by doing this, but this was 100% the correct action to take. Now, as we go forward, all of our surplus can be deployed in support of our personal lines, where the life of the claim is far shorter and the volatility is far less. Unfortunately, even though the lines we exited were never more than 15% of our business, the issues attendant to the exit brought much pain 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.

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 $1 a share in operating profits, excluding catastrophe losses. 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 demonstrated our belief in the future of the company and our belief we have in our improving results by eliminating the quota share treaty. I believe there is something else that is weighing on our share price. Because Kingstone has coastal exposure, we are 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. Their report ranked each state by the risk of damage from natural hazards. Their rating for New York, where 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 hazard-exposed state in the country. We will have catastrophe events, no doubt about it. Major ones occurred in 2020 with Tropical Storm Isaias, 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 or their 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, just as a reader of the CoreLogic analysis would have expected. The catastrophe reinsurers have been hard hit by this and have responded with far tighter underwriting, stricter terms, and have imposed major price increases. Add to that the fact that over the last few years, the Florida carriers have seen their attritional losses, that is, their 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 there 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 used quota share when it was appropriate, but we no longer need to. After my retirement, 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 sheet is strong. We don't need quota share reinsurance. 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. I told them the same thing. It's unfortunate that Kingstone is included in that thought process, but while recent days have seen at least three of these companies raise new capital or announce their intention to do so, not Kingstone. We don't need to add capital. Our current surplus base is used almost exclusively to support personal lines, and the expected and enhanced underwriting profit that our business has and will deliver will grow our company. We again show our confidence by initiating our first share buyback plan that will be in place over the next two years. Point being, we've delivered many years of exceptional results. While much of the past two years were 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.

Scott Van Pelt (CFO)

Thanks, Barry. Before I go over the results, I just want to take a moment to share a little bit of my background.

I've been working in the insurance industry for over 30 years, beginning my career at Crum & Forster as a staff accountant. I've worked for a variety of insurance companies, both public and private, most recently as the CFO of a direct-to-consumer home warranty company, and before that, as the CFO of Citibank's life reinsurance companies. I'm very happy that Meryl and Barry have invited me to join them at Kingstone, and I'm excited to be part of this team. Kingstone is a great niche company with an impressive track record of underwriting profits, and I look forward to helping them add to that success. Now, on to the company items. Starting with two recent items of note. First, effective December 30th, 2020, the company terminated the 25% personal lines quota share.

By exiting the commercial liability line, the company has significantly de-risked the business, and we are well capitalized to support our core business. We do not need the balance sheet support the quota share provided. Second, earlier this week, management asked for, and the board approved, a share buyback program of up to $10 million of outstanding stocks running through March 31st, 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 the shareholders. We believe this makes sense given the stock's underlying value. As to our results, the company posted Q4 net income of $3 million compared to $1.5 million for the same period last year.

The increase is attributable to the dramatic swing 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 $32.6 million 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 2021 as the unearned reserve of $17.4 million returned to the company is earned over the course of this year. The net loss ratio for the quarter was 63.4%, or 6.4 points higher than the 57% posted in the Q4 of 2019. 4.5 points of that was from CAT activity, and the remainder due to non-CAT windstorms. For the 2020 year, gross written premium of $169.3 was essentially flat to the $171.2 of 2019.

However, within those numbers, the core book of personal lines grew $12.3 million to $162.2, or 8.2% higher than the 2019 written of $149.9. 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 lower livery physical damage decline attributable to the COVID-19 pandemic. Net income for the full year was $0.97 million, up from a loss a year ago of $5.97 million. The increase results from a 9.2 improvement in the loss ratio driven by the reduced impact from prior year development and tempered by higher CAT losses. For the year, our combined ratio was 100.4%, or 8.3 points better than 2019.

Tropical Storm Isaias, the largest CAT in eight years for the company, added 7.6 points to the combined ratio. Without this event, but including all other CATs and winter storms, the 2020 combined ratio was 92.8. The company made great efforts over the last 18 months to address its challenges and position itself to produce the underwriting profits it has historically posted. And on that note, I will turn this over to Meryl to update you on the status of those endeavors.

Meryl Golden (COO)

Thanks, Scott. I'm very happy with the improvement in our financial results and the progress of Kingstone 2.0, 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 2022, so we're a bit less than halfway through. I think about Kingstone 2.0 in stages. The first stage was to hire an experienced team and refocus the company on profitability. The second stage, which we're in now, is to build the foundation. Once we have the foundation, we'll be able to continue this modernization effort but innovate at a faster pace. 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 systems and make it easier for our producers and policyholders to do business with us. Our next product conversion will go live in the Q2. 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 Q2. I'm so proud of everything we were able to accomplish in 2020, especially considering that many team members were 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 workforce and have added many analytical and technology-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% in 2020 and the lower net earned premium that resulted. Expense reduction is a focus, and we have a goal to 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 pull for and reply to the questions you may have. Kevin, please pause for questions.

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to be placed into question queue. Our first question today is coming from Paul Newsome from Piper Sandler. Your line is now live.

Paul Newsome (Managing Director)

Good morning. Thank you for the call. I wanted to ask, maybe just to head off the comments on the expense ratio reduction, is that full point something that should be done gradually over the course of the year, or will it hit pretty quickly? And what's the thought on the expense ratio beyond 2022, just over time? Is there a target or a goal to get to some certain level in the long run?

Barry Goldstein (CEO)

Scott, why don't you take part of that? Maybe Meryl can add some color as well.

Scott Van Pelt (CFO)

Sure. Well, the effects of terminating the quota share is that that premium is going to start earning in right away. So we'll see, of course, the entire year. Distortion for the quota share will go away. In terms of our expense ratio, it is a point higher. That should basically go away without that. And we don't have any specific targets other than a 1% reduction. So, Meryl, you want to add some more color to specifics on that?

Meryl Golden (COO)

Sure. So, Paul, as part of Kingstone 2.0, 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 2022 as well.

Paul Newsome (Managing Director)

Great. It looks like there was a tad of reserve developments in the Q4. I apologize if I'm confused. Maybe you could chat about just what exactly is going on there and how it may or may affect the future?

Barry Goldstein (CEO)

Scott, why don't you take that question on the Q4 development, please?

Scott Van Pelt (CFO)

Sure, well, first, we sit down and employ 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 range. The noise that you see in there is just kind of normal fluctuations, if you will, between accident years. And 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?

Barry Goldstein (CEO)

Yeah, yeah. It was just that it was basically truing up the full year in the Q4 Paul. But for the year, I think we ended up with something like $40,000 or thereabouts. So nothing material, but just making sure we stayed right on the midpoint of our outside actuary.

Paul Newsome (Managing Director)

Fantastic. And then maybe finally, just some general comments on the competitive environment in New York and the contiguous states. I think last time or last year, we saw a sort of an uptick in competition. Has that continued into the early parts of this year, or have things moderated a little bit?

Barry Goldstein (CEO)

Meryl, do you want to?

Meryl Golden (COO)

Yes. Sure. Yes, Paul, it has continued. All of our states are very competitive. So we're very focused on profit, and some of our competitors are very focused on growth, which makes for a challenging environment for us. But we're confident that we're at the right rate level. But many, many competitors in the space.

Paul Newsome (Managing Director)

Fantastic. Thank you, folks.

Operator (participant)

Thank you. Our next question is coming from Bob Farnam from Boenning & Scattergood. Your line is now live.

Bob Farnam (Managing Director and Senior Research Analyst)

Yep. Thank you. Good morning. So the core accident year loss ratio ticked up a bit. You mentioned there was some increase in kind of non-catastrophe weather losses. Can you just kind of maybe give us a bit more color on that?

Barry Goldstein (CEO)

Meryl, maybe you want to take this?

Meryl Golden (COO)

Sure. So in particular, in December, there was a significant windstorm that affected the Northeast. So that was part of it. We also had several large fire losses, unfortunately, in theQ4. So that's really the driver. Those are the drivers.

Bob Farnam (Managing Director and Senior Research Analyst)

Okay, and honestly, we're pretty much through the Q1. How would you characterize the weather losses that you've seen the last few months?

Meryl Golden (COO)

It's a good Q4. Excuse me, Q1.

Bob Farnam (Managing Director and Senior Research Analyst)

Okay. In terms of the effective tax rate, I wasn't expecting to get so much of a benefit here. Can you maybe explain some of what was going behind the scenes there?

Barry Goldstein (CEO)

I mean, let me start by saying that because we generated a loss from our statutory operations, which differs, of course, from our GAAP, mostly because of how investment income or the pieces of investment income get categorized, we'll have a net operating loss for 2020 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 at 34%. So we're going to get a lot of benefit from that carryback. And I think that's probably the biggest single item that's driving the tax question you're asking.

Bob Farnam (Managing Director and Senior Research Analyst)

Okay. Great. And the last question for me is, so with the rating change, what's the status of COSI? Is that still going to be an operation that's going to be ongoing, or are you trying to shutter that? I'm trying to figure out what's going to become of COSI going forward.

Barry Goldstein (CEO)

So I'll take that. COSI continues to operate. We've generated quite a lot of premium that's sticking. Unfortunately, our two main sources of business required us to maintain that A-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, we are maintaining the book. And we're actively searching for new partners, and I hope we'll be able to announce something. If not in the Q1, then maybe in the Q2, that'll reinvigorate COSI.

Bob Farnam (Managing Director and Senior Research Analyst)

Great. Okay. Thanks for the answers.

Barry Goldstein (CEO)

My pleasure.

Operator (participant)

Thank you. As a reminder, that's star one to be placed into question queue. Our next question today is coming from Gabriel McClure from private investor. Your line is now live.

Gabriel McClure (Analyst)

Congratulations, Barry, first off, on getting the share repurchase authorization. And then my question is probably for Meryl. I guess we talked earlier, in earlier calls about getting a more systematic rate increase going in. And I just was wondering if you could give us a little bit of color on how that worked during Q4. That's my question.

Meryl Golden (COO)

Sure. Well, 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 6.5% this year. And certainly, our results in 2020 benefited from some of the rate changes we took then. So I don't know if that answered your question or if you want to ask a further question.

Barry Goldstein (CEO)

Hey, Gabe.

Hey, Gabe.

Gabriel McClure (Analyst)

Barry. Hey, Barry.

Barry Goldstein (CEO)

Keep in mind that we started this increasing in rates in late 2019, so it wasn't till the end of 2020 that all of that rolled, at least the New York portion, all of it rolled onto the book, and then it takes a good year for it to earn itself through, so we've seen some of the positive benefit of the initial set of rate increases, and I think what Meryl's trying to say, or what Meryl has said, is there's a continual process to continually update rates, and you'll see more of that as time goes on. Hope that answers your question.

Gabriel McClure (Analyst)

Yep. Very good. That's helpful. Thanks.

Barry Goldstein (CEO)

Great.

Operator (participant)

Thank you. We appreciate it. Our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Barry Goldstein (CEO)

Great. Well, thank you all for spending the time to hear us out today. We look forward to updating you in May for our Q1's 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.

Operator (participant)

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.