Kingstone Companies, Inc. (NASDAQ:KINS) Q3 2019 Results Earnings Conference Call November 12, 2019 8:30 AM ET

Company Participants

Rich Swartz - Controller
Barry Goldstein - Chairman and CEO
Ben Walden - Executive Vice President and Chief Actuary

Conference Call Participants

Paul Newsome - Sandler O’Neill
Bob Farnam - Boenning & Scattergood
Scott Preston - Maven Fund

Operator

Greetings. And welcome to Kingstone Companies 2019 Third Quarter Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [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.

Rich Swartz

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 Conditions in Part I, 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.

Barry Goldstein

Thanks, Rich, and good morning. Thank you all for joining in 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 ride the ship and focus on our return to profitability in 2020, I wanted 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 returns to day to day management, the first action I took was to shutdown 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 five 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 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 till 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 homeowner’s rates effective November 1st. We’ve applied for increases in other states as well. We’ve eliminated certain sub classes of business seeking to deploy our capital, where the near-term results can deliver the ROE we become known for.

Finally, I’m now joined by an old friend in 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, 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?

Ben Walden

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 run-off. 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 interests 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 opinion.

After the liability case reserving issues started to emerge in the first two quarters of this year, we had an outside consulting firm to 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 run-off.

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 your 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 scene and 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 -- 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.

Barry Goldstein

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 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question is from Paul Newsome with Sandler O’Neill. Please go ahead.

Paul Newsome

Good morning. Thanks for the call. Could you talk about the differences between the internal and external reserve estimates, and if there was a significant difference in the midpoint of the estimate losses and as well can you can you talk about sort of where the reserve peg was placed in those reserve analysis in terms of the actuarial range?

Ben Walden

Yeah. 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.

Paul Newsome

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?

Barry Goldstein

I think -- Paul, this is Barry. Thanks for calling in. We’ve been recording growth from both our initiative 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.

Paul Newsome

Great. Thank you.

Barry Goldstein

Thank you.

Operator

The next question is from Bob Farnam with Boenning & Scattergood. Please go ahead.

Bob Farnam

Yeah. Hi, there, and good morning. If -- 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?

Barry Goldstein

Hey, Bob. It’s Barry. We are still in the market for both in ADC and a loss portfolio transfer. It seems like what we’ve heard initially is they felt as though this kind of blood in the water when I saw the pricing. We are very comfortable where we are at this point in the reserves. And there is no urgent necessity to moving forward on that now.

We are 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.

Bob Farnam

Okay. And the outside actuary that reviewed the reserves at mid-year, hasn’t been year that was -- it sounded like that was a different actuary that does your typical year -- your full year outside review. Is that the case?

Barry Goldstein

No. No. It’s not. It’s the same actuary.

Bob Farnam

Same actuary?

Barry Goldstein

Whatever reason, there is a level of review required when their name is used. So I’m not mentioning their name.

Bob Farnam

Okay.

Barry Goldstein

But the answer to your question is one in the same.

Bob Farnam

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 limit -- policy limits are these claims -- on policies that these claims around and how are they reserved relative to the limits?

Ben Walden

Okay. So the majority of these claims have a $1 million policy limit. There are 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.

Bob Farnam

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

Ben Walden

These are all liability claim issues. We write a lot of policies in the city and a lot of the personal lines claims are slip and fall 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 a commercial line side.

Bob Farnam

Right. Okay. Thanks, guys.

Barry Goldstein

You are welcome.

Operator

The next question is from Scott Preston with Maven Fund. Please go ahead.

Scott Preston

Hi. Thanks for taking my call. Two questions. Barry, first, can you just talk about how the change in what you guys doing on the growth side might affect the Cosi relationship you guys could have just started?

Barry Goldstein

Yeah. 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 we -- 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. And so at this point, we are tapering back, we’ve already made changes to reduce those and that’s going to apply both to -- both the independent agent channel and the Cosi agency.

Scott Preston

Okay. Thank you. And then, finally, can you just cut up, maybe provide a stair step for us, with your comments about a taken a while to kind of get things back on track. But on the other hand, you’re saying that you’ve kind of ring fence commercial. So we 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 quarters, you might still have some impact from commercial and how that might bring you from kind of returning from those to the normal levels of profitability center?

Barry Goldstein

Yeah. When you take even the noise that is where we are today and just look at us on an ex-cat basis and to get the development, we’re still running at 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 outcomes from our Claims Department and our strengthens Claims Department, we feel is that combined should go back towards the, call it, the mid-80s sometime towards the end of next year.

So, what happens is we’re rolling on an 8.9% increase in New York State, which you -- when you -- it really excludes two counties in New York City that we taken rate in February of last year.

So, overall, it probably winds up a 9% overall rate change during this year, but from November 1st on all new business is being booked at those higher rates, but only starting December 15th of this year, well, the existing policyholders see a pricing change. It’s -- we’re going to monitor that very carefully and 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 a better part of a year or a year and a half to really get --- we get -- start getting the full benefit of those price changes.

Scott Preston

Okay.

Barry Goldstein

So when I say you need patience, this is not a one year endeavor. I don’t want to…

Scott Preston

Yeah. No. I understand that.

Barry Goldstein

Yeah.

Scott Preston

The price increases, but can you just walk through how -- what impacts commercial will still have on the business in the next four quarters as you run that off?

Barry Goldstein

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

Ben Walden

Yeah. So for the same time period we are 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 to 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.

Barry Goldstein

Yeah. I don’t feel comfortable in giving too much more color than that. Yes, 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 at -- by 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 an indication so that you’ll have a better idea of just how this is panning out.

Scott Preston

Okay. Thanks. That’s all I had.

Barry Goldstein

Right. Thank you, Scott.

Operator

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

Barry Goldstein

Yeah. Fine. Thank you very much. It’s 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. With together with Victor and Ben and the other Kingstone executives acting as a team, I think, we’re far better place now with her managerial expertise and leadership. And I’m sure you will enjoy speaking to Meryl on the coming calls. Thank you all for your time today. Have a great day.

Operator

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