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Edited Transcript of KINS earnings conference call or presentation 12-Nov-19 1:30pm GMT

Q3 2019 Kingstone Companies Inc Earnings Call

Hewlett Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Kingstone Companies Inc earnings conference call or presentation Tuesday, November 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry B. Goldstein

Kingstone Companies, Inc. - Executive Chairman of the Board & CEO

* Benjamin A. Walden

Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company

* Richard Swartz

Kingstone Companies, Inc. - Controller

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Conference Call Participants

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* Paul Newsome

* Robert Edward Farnam

Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance

* Scott Preston

The Maven Group, LLC - President & Managing Member

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Presentation

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Operator [1]

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Greetings, and welcome to the Kingstone Companies 2019 Third Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rich Swartz. Thank you, Mr. Swartz. You may begin.

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Richard Swartz, Kingstone Companies, Inc. - Controller [2]

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Thank you very much, Jenny, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2019 third 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 Condition in Part 1 Item 1a of the company's Form 10-K for the year ended December 31, 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 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.

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [3]

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Thanks, Rich, and good morning. Thank you all for joining us on our third quarter 2019 conference call. I continue to share your disappointment and frustration with our recent results. No doubt the headline loss is upsetting to all. And believe me, I know misery needs no company. But before we can truly right this ship and focus on a return to profitability in 2020, I want to be as sure as I could that the past would not impair our future.

As mentioned on the August call, only a couple of weeks after my return to day-to-day management, the first action I took was to shut down commercial liability lines. It was those highly volatile lines that were the source of the vast majority of adverse development we recorded this year, including the amount we just booked. In fact, of the amount of adverse development recorded thus far in 2019, 80% of it comes from those same commercial liability lines. But it's important for you to note that the balance of about $2.3 million does relate to personal lines liability claims, but be aware that even after those amounts were added to the reserves, our results over the past 5 years reflect a redundancy in our personal lines reserves.

I'll defer to Ben to discuss the claims reserves. But know that Ben and I agreed we should get an updated viewpoint from an external independent actuary which was conducted during the third quarter. Liability case reserving is a judgmental process that depends on many, many assumptions. Individual opinions can vary and often change as new information becomes available. With all these assumptions, there is a wide range of possible outcomes, especially for commercial lines risks written in New York City. Only as results emerge, can we test if our assumptions are holding up or if they need to be recalibrated and that is what we've done over the past several quarters.

Turning to the rest of our business. Right at the top of my to-do list is a goal to retain our A.M. Best rating of A- Excellent. It took our team from mid-2009 until the first quarter of 2017 to achieve this, something I pride myself on and something I don't want to jeopardize. On an objective basis, we are taking the needed steps to preserve and improve upon the metrics employed by A.M. Best. From a subjective standpoint, Kingstone needs to return to a level of profitability more akin to our historical than our recent results, and we are taking those steps which require us to reduce our growth mandates and instead, focus strictly on profitability.

After many years of maintaining steady premium rates in New York, we've increased our homeowners rates effective November 1. We've applied for increases in other states as well. We've eliminated certain subclasses of business, seeking to deploy our capital where the near-term results can deliver the ROE we've become known for.

Finally, I'm now joined by an old friend, Meryl Golden. I've known Meryl since she ran the Northeast for progressive insurance, and my company was their biggest agent. The timing was finally right for us to work together, and she has, in just 45 days, brought much needed energy and passion to Kingstone and will be joining us on future calls.

Now I'll turn it over to our EVP and Chief Actuary, Ben Walden. Go ahead, Ben.

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Benjamin A. Walden, Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company [4]

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Thank you, Barry. As mentioned, it's important to note that our reserve adjustments are concentrated in one line that has now been put into runoff. For the last several quarters, we've been working hard to review and take appropriate actions to address commercial lines. As a public company, we've never felt it in our best interest to rely solely on my opinion regarding reserves. In order to ensure an objective and unbiased view, we rely on an independent actuarial consulting firm for our annual reserve opinions. After the liability case reserving issues started to emerge in the first 2 quarters of this year, we had an outside consulting firm perform a complete midyear review of all liability lines. We thought it was prudent to get an external opinion on reserves as soon as possible, rather than waiting for the normal year-end review. The outside actuaries review was completed in the third quarter, and it confirmed my own findings. This led to the additional $5 million in prior year reserve adjustments made this quarter. Of this amount, $4.4 million relates to commercial lines. Of the $11 million in reserve adjustments for the year, $8.8 million is from commercial lines. Writing small contractor and business owner risks in New York City is very difficult, and claims do not age well in these venues. The average claim size for these cases has turned out to be much higher than was originally anticipated.

Following the multiple recent internal and external reviews, we are confident the issues with commercial lines reserving have stabilized and will be put behind us. There are 188 commercial liability cases open as of September. We will be watching these very closely, as we did several years ago when we placed our commercial auto business into runoff.

Last quarter, we noted that we are reviewing reinsurance options for our commercial liability reserves. These could include a full loss portfolio transfer or an adverse development cover. We are still in the process of reviewing the cost of these options, and we'll make a decision before year-end. The good news is that we have taken the actions necessary on commercial lines, and we can now move forward with our profitable personal lines business. The reserve issues seen in commercial lines have not impacted personal lines over the long term. Personal lines business is dominated by fast-paying property claims, and the results are known quickly. These lines are not as strongly affected by the large claim volatility from prior years that we've seen for commercial lines and commercial auto. As Barry noted, we have been -- we have taken several pricing and underwriting actions to further improve our profitability in personal lines. We will begin to see the impact from those changes over the next several quarters.

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

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [5]

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Thanks, Ben. I want you to know that I'm aware that Kingstone has lost much, if not most, of its luster. I will restore the trust to stockholders, but it's going to take me some time. I want the numbers to speak for themselves as they had for so many years. It's a challenge to me, to Ben and to Meryl and Victor and the rest of the Kingstone team to do just that, but we're up to it, and we look forward to 2020 and beyond.

With that, I'll turn the call back to the operator to take some questions.

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Questions and Answers

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Operator [1]

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

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Paul Newsome, [2]

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Could you talk about the differences between the internal and external reserve estimates? And if there was a significant difference in the pivot you have -- midpoint of the estimated losses. And as well, can you talk about sort of where the reserve peg was placed in those reserve analyses in terms of the actuarial range?

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Benjamin A. Walden, Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company [3]

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Yes, I could take that, Paul. This is Ben Walden. So we are booking to the central estimate based on our internal review as of September. And as you know, that is what drove the increase in $5 million. We did get an external review as of June, and results of that were used to determine or to confirm where we think our carried reserve should be. But we are very close. We're in line with what the external actuary had through June, if we roll it forward to September. So we feel much more confident at this point that the reserves are where they should be.

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Paul Newsome, [4]

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And then my second question has to do with the new mandate to focus more on profitability and less on growth. How should we think of the magnitude of change in the growth rate in the core home insurance business with the change in the mandate?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [5]

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I think -- Paul, this is Barry. Thanks for calling in. We've been reporting growth from both our initiatives outside New York, our expansion states as well as within New York. And that's going to be tapered back. I think you should be looking at personal lines growth rates in the low to mid-teens on a going-forward basis. And that would include the impact of pricing changes that will get rolled on.

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Operator [6]

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The next question is from Bob Farnam with Boenning and Scattergood.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [7]

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Since you've kind of done more of a full-blown reserve review here with external actuaries, is it more likely that you may choose not to purchase the industrial reinsurance protection, if you're comfortable with the reserves now?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [8]

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Bob, this is Barry. We're still in the market for both an ADC and a loss portfolio transfer. It seems like what we've heard initially is they felt this, though, there's kind of blood in the water when I saw the pricing. We're very comfortable where we are at this point in the reserves. And there's no urgent necessity to moving forward on that now. We're seeing the fruits of what we've done since June. They're out. And we'll review this again before the end of the year, but I think it's probably fair what you said that we've got the reserves to a level that we feel less necessity to go out and purchase a reinsurance solution.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [9]

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Okay. And the outside actuary that reviewed the reserves at midyear -- as a midyear, that was -- it sounds like that was a different actuary that does your typical -- your full year outside review. Is that the case?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [10]

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No. No, it's not. It's the same actuary. And whatever reason, there's a level of review required when their name is used. So I'm not mentioning their name. But the answer to your question is this is one and the same.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [11]

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Okay. And then maybe for Ben, you said you've got 188 cases that are still open at the end of September. What type of policy limits are these claims -- the policies that these claims are on? And how are they reserved relative to the limits?

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Benjamin A. Walden, Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company [12]

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Okay. So the majority of these claims have a $1 million policy limits. There are a few that have a $2 million policy limit. We get very few full limit claims, but the average paid claims severity on these is about $50,000. That's after making the changes that we've adjusted in the third quarter. Prior to that, we were expecting an average claim severity closer to $35,000 $40,000. So that's what's really driving the difference in our reserve estimates at this point.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [13]

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Okay. And in terms of the personal lines, I know certainly, they had development there, but it was minor, 2 points or so. Just what -- is there any commonality in terms of what types of claims that are driving that?

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Benjamin A. Walden, Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company [14]

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These are all liability claim issues. We write a lot of policies in the city, and a lot of the personal lines claims are slipping to all claims on sidewalks, they're in venues where you have very difficult challenging outcomes. So there is an overlap between some of the commercial lines and the personal lines. The good news on personal lines is that percentage of claims that fall into that category for personal lines is much smaller than it is on the commercial lines side.

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Operator [15]

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The next question is from Scott Preston with Maven Fund.

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Scott Preston, The Maven Group, LLC - President & Managing Member [16]

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2 questions. Barry, first, can you just talk about how the change in what you guys do on the growth side might affect the Cosi relationship you guys, kind of, just started?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [17]

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Yes, I can, Scott. Thanks for the question. That would incorporate Cosi as well. Some of the change in the growth is going to be a reduced desire on our part for those marginal lines of business that we had written previously. To be -- a lot of it had to do with competition. And when we had a competitor willing to write a certain type of line of business, which we didn't or which we didn't stress. We had a choice of trying to preserve and maintain strong relationships with our best producers or otherwise, allowing competitors, even some who are on the call today to pursue that business inside of our stronger agents. So at this point, we're tapering back. We've already made changes to reduce those. And that's going to apply both to -- both in the independent agent channel and the Cosi agency.

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Scott Preston, The Maven Group, LLC - President & Managing Member [18]

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Okay. And then finally, can you just kind of maybe provide a stair-step for us with your comments about it taking a while to kind of get things back on track. But on the other end, you're saying that you've kind of ring-fenced commercial. So I would think that going forward, the results should improve dramatically if you preserve properly for that. So can you kind of maybe walk through how the next couple of quarters, you might still have some impacts from commercial and how that might have prevented you from kind of returning from those -- to those normal levels of profitability sooner?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [19]

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Yes. When you take even the noise out of where we are today, and just to look at us on an ex cat basis to get to development, we're still running sub-90 combined. That's not going to -- we should stay there and start to improve. But as the price increases take hold, as the changes in underwriting take hold, and without giving any credit to a better outcome from our claims department, our strengthened claims department, we feel that, that combined should go back towards the, call it, the mid-80s, sometime towards the end of next year.

So what happens is we are rolling on an 8.9% increase in New York state, which when you -- it really excludes 2 counties in New York City that we've taken rate in February of last year. So overall, it probably winds up a 9% overall rate change during this year. But from November 1 on, all new business is being booked at those higher rates, but only starting December 15 this year, will the existing policyholders see a pricing change. It's -- we're going to monitor that very carefully to keep an eye on our retention. But at this point, when you start to think about the written premium rolling on, and then you need 12 months to earn out each policy to conclusion, it's going to take us the better part of a year or 1.5 years, till you really get -- we get -- start getting the full benefit of those price changes. So when I say you need patience, this is not a 1-year endeavor. I don't want...

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Scott Preston, The Maven Group, LLC - President & Managing Member [20]

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Then -- the price increases. But can you just walk through how -- what impacts commercial will still have on the business in the next 4 quarters as you run that off?

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [21]

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Well, I'll let Ben take the commercial part of that.

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Benjamin A. Walden, Kingstone Companies, Inc. - Executive VP & Chief Actuary of Kingstone Insurance Company [22]

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So over the same time period, we're non-renewing all of our commercial lines policies, and that will be completed by the end of third quarter next year. At the same time, we are going to be continuing to close out claims that are currently open, and we think that the reserve levels that we have adjusted till now will be enough to cover that, but we'll see that over the next few quarters. The early results are favorable, as Barry had said.

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [23]

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Yes. I don't feel comfortable in giving too much more color than that. Yes, the reserve -- the reset reserves are to the extent that we've closed out claims have been set properly. I'd asked Ben earlier, how many of these claims need to close before we can see some statistical significance out of them, and it's premature. We're not there yet. If, in fact, we get there by the end of this quarter, which it doesn't sound like we will, but it's possible. But as soon as we do, we'll start giving indications so that you'll have a better idea of just how this is panning out.

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Operator [24]

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

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Barry B. Goldstein, Kingstone Companies, Inc. - Executive Chairman of the Board & CEO [25]

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Yes. Thank you very much. This is Barry Goldstein. All I can say is there's a few things that's happened to me in my life that have been very positive from a professional level, and, perhaps, the most pleasing is my having Meryl Golden join us in managing Kingstone on a going-forward basis. Together with Victor and Ben and the other Kingstone executives acting as a team, I think, we're far better placed now with her managerial expertise and leadership. And I'm sure you'll enjoy speaking to Meryl on the coming calls. Thank you all for your time today. Have a great day.

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Operator [26]

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