Greetings and welcome to the Kingstone Companies Incorporated 2017 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A 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, Ms. Amanda Goldstein, Investor Relations Director for Kingstone Companies. Thank you, you may begin..

Thank you very much, Dana and good morning everyone. Yesterday afternoon the company issued a press release detailing Kingstone's 2017 first quarter results. We posted a PowerPoint presentation on the company website that acts as an accompaniment to this call.

The speakers will not be referring to the slides, but we hope the ordering of the slides will follow the discussion. Please review the presentation and follow along if you can. On this call, Kingstone may make forward-looking statements regarding the company, its subsidiaries and businesses.

Such statements are based on the current expectations of the management of each entity. The words anticipate, expect, believe, may, should, estimate, project, outlook, forecast, or other similar words are used to identify such forward-looking information.

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 the company, including risks regarding the insurance industry, economic factors in the equity markets generally, and the risk factors discussed in the Risk Factors section of its Form 10-K for the year ended 12/31/16.

No forward-looking statement can be guaranteed.

Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made, and the company and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

When discussing our business operations, we may use certain terms of art, which are not defined under US GAAP. In the event of any unintentional difference between the presentation materials and our GAAP results, investors should rely on the financial information in our public filings.

With that, I’d like to turn the call over to Kingstone’s Chairman and CEO, Mr. Barry Goldstein. Please go ahead..

Thanks you Amanda and good morning everyone. Today I’m joined by Ben Walden, Kingstone’s Executive Vice President and Chief Actuary as well as our Chief Financial Officer, Victor Brodsky.

We're going to update you on the quarterly results for the period ended March 31, 2017 as well as other items that have occurred since the close of the first quarter. We’ll begin with a discussion of our achievements and milestones since our last call on March 17.

The financial and operational results for Q1 will be reviewed, with Ben discussing loss ratios and reserves as well as premiums and underwriting initiatives. Victor will follow with a review of the quarter’s financial metrics and highlights. Then before opening it up for Q&A I’ll return for a few updates and closing remarks.

In just a few short months, we saw the culmination of years and years of planning. A. M. Best upgraded our rating to A− (Excellent) on April 12. Achieving an A rating will lead to many opportunities for Kingstone, doors previously closed are now open.

Not having to explain that our former B++ rating was close to an A, eases the path to our geographic expansion efforts. We began to plan and put in place the needed pieces in late 2016. In early January we filed our shelf offering and by mid February our follow-on offering concluded adding over $30 million to our equity.

On March 1, we transferred 23 million to our insurance subsidiary increasing its statutory surplus. We negotiated with our longtime quota share reinsurance partners and new treaty, reducing the ceding percentage by half from 40% down to 20% beginning July 1.

We can afford to retain more of the profitable personal lines business because the added capital will allow our leverage to remain well within our risk tolerances. We plan for an enhanced catastrophe reinsurance program beginning in July by adding a modest increase to our 1-250 year protection, along with adding more protection for a second event.

Each of these items was required to be completed before our A- rating could be announced. We've been to Bermuda and met with reinsurers there as well as in New York City. It's quite obvious to us that the appreciation by the reinsurance community and how we do business and how we've grown our company.

We expect that we'll do better in the July placement, partly due to the single-digit reductions in the marketplace today, but partly because we feel our quality warrants recognition. And as a Northeast only writer, we present a bigger and better opportunity for the reinsurer community to better balance their geographic exposures.

Now with our new A- minus rating as well as a new software platform, we've begun our geographic expansion. On Thursday, May 4, Kingstone sold its first homeowners insurance policy in New Jersey. Continuing with our traditional agent only focus, we are selective and deliberate in our appointments seeking only long-term partners.

Ultimately, we’ll bring all of our lines of business to New Jersey. Later this year, we will file our rating plan in Rhode Island and Connecticut and will be doing the same thing there. Yesterday afternoon we filed our 2017 Form 10-Q for the period ended March 31.

The results for the quarter were driven for the first time in four years by a mild winter. We didn't report any cat losses. The number of large fires was muted. It was still a winter quarter, but nowhere near what we've seen recently. The weather was the driving force behind the growth in quarterly earnings of 172%.

The first quarter’s combined ratio of just over 85% was about 10 points better than we've seen in recent years, with a New York only premium growth similar to what we've seen recently. I'll turn the call over to Ben now, so he can get a little more detail as to our underwriting results in Q1 and our 2017 initiatives. Please go ahead Ben..

Thank you, Barry. Once again we were very pleased with the underwriting results that we achieved this quarter. For the first time in four years we were fortunate to experience a milder than average winter season.

In recent years the first quarter has been a challenging one due to the impact of severe winter weather and the higher frequency of large fire claims. However this year, we observed better than average outcomes on both fronts. The 2017 first quarter net loss ratio improved 14.6 points to 50.7 from 65.3 in 2016 first quarter.

This quarter relatively mild winter weather resulted in losses that did not rise to the level of a catastrophe events compared to the 9.7 point impact of a year ago. Prior year loss development was in line with expectations and we did not record any impact on the quarterly loss ratio. This follows up on two straight years of favorable development.

Excluding the impact of winter weather claims, we again observed reduced claim frequency in our core personal lines business. Our core loss ratio excluding severe winter weather and prior year loss development improved 7.8 points to 50.7 from 58.5 in 2016. Most of that improvement is due to the reduced impact from large fire claims year over year.

We continue to grow our core New York book at double-digit rates even as competition increases. We seek to write only new risks that will drive favorable long-term returns on capital and we will let our competitors take the rest. The A. M.

Best rating upgrade opens up a host of opportunities that are not available to many of our competitors but that are now available to us. Even with our continued strong underwriting results, we are taking actions to generate an even more profitable outcome by constantly improving our underwriting and claims practices.

As Barry noted, after a great deal of hard work by all involved, last week we wrote our first homeowners policy in New Jersey. As we expand in that market, we are now setting our sights on the next two targets; Rhode Island and Connecticut. We expect to be writing in at least one of those markets by the end of this year. The A. M.

Best upgrade comes at the perfect time as it will give our select agents a new A rated option in hard to serve coastal market. It also allows us to compete in the higher end homeowners market against national carriers.

In the first quarter, we also introduced New York's first voluntary flood endorsement that can now be attached to eligible Kingstone homeowners policies. This endorsement is the first step in our plan to provide an integrated solution to cover all flood risks.

This innovative endorsement further separates our homeowners products from other carriers and it will strengthen our ability to attract new policyholders and increase the retention rate for existing enforced policy. On the claims side, we continue to close out the remaining cases from our legacy commercial auto book.

We closed five more during the quarter and have just 29 claims that remain open. During the quarter, we undertook a complete review of expense reserves related to legal and defense costs. The resulting adjustments further strengthen our confidence in overall reserve adequacy.

Finally, the 85.2 combined ratio for the first quarter puts us well on the way to another record year at Kingstone. As we point out each quarter, the numbers continue to speak for themselves. We are excited about what the future holds and believe that there are many great opportunities still to be realized.

It was another excellent quarter for Kingstone and we owe it to the continued dedication of our employees and the excellent relationship they have built with our select agents. With that I will turn it over to Victor for some more of our financial highlights.

Victor?.

Good morning. To start, we are pleased to announce our 24th consecutive quarterly dividend to be paid on June 15. This dividend of $0.08 per share represents a 28% increase from the previous dividend amount. During the first quarter, our book value increased $8.29 per share or 16% increase compared to the year end.

This large increase is primarily due to investment to the $30 million of net proceeds we received from the public offering that closed in January and February of 2017. In addition, profitable underwriting results for the quarter along with $382,000 of other comprehensive income aided to our book value.

In the offering, we saw the total of almost 2.7 million common shares at a price of $12 per share, netting us $11.19 per share, significantly higher than our book value of $7.15 per share as of December 31, 2016. Following the offering, our extended share count increased to 10.6 million shares.

Next, let me discuss some of our key financial highlights. Our quarterly net income per share on a diluted basis was $0.15 on a quarterly net income of just under $1.5 million. Net income per share was affected by the increase in share count from the public offering.

The proceeds from your offering has allowed us to negotiate a new person lines quota share treaty beginning July 1. We will reduce our alliance and reinsurance by one half at that time. We contributed $23 million of surplus to our insurance subsidiary KICO on March 1.

The statutory surplus of KICO at March 31 now stands at $74 million, an increase of 48% relative to year-end. This provides us with a capital [indiscernible] growth initiatives, reduce our alliance upon quota share reinsurance and maintain acceptable leverage ratio. As of March 31, the leverage ratio was 0.92:1, down from 1.32 at December 31.

And as new business builds, the leverage will move back to our historical norms. Ben has reviewed the improvements to our net loss ratio. The other component of our combined ratio is the net underwriting expense ratio.

With no change in quota share rates between Q1 2017 and Q1 2016, a meaningful comparison of expenses between quarters can now be made by using the traditional measure of expenses to net earned premiums. The underwriting expense ratio for Q1 2017 was 34.5%, a 2.9% increase from 31.6% for Q1 2016.

The increase of 2.9 percentage points was largely due to expense related to our new state expansion initiative and a one-time favorable impact in the first quarter of 2016 related to state premium tax rate adjustment which did not affect the first quarter of 2017.

With this in mind, we're still experiencing the same overall efficiency of ongoing operations that helps lead the way to possible results. The recent launch of business in New Jersey, we expect that the revenue generated during the remainder of 2017 will favorably impact the underwriting expense ratio in the coming quarters.

Now let me ask Barry to continue.

Barry?.

Thank you, Victor. As mentioned just last week we placed our first homeowners policy in New Jersey. Over the next few months, our distribution there will expand, our product will be tested and refined, and by year end we can expect a material contribution from New Jersey.

We will prepare and file a similar product in both Rhode Island and Connecticut, with both those filings expected to be made during the third quarter. Our new A- rating will allow us to more easily be accepted in these new states. I'm very excited about our future prospects and look forward to keeping you upraised as things move forward.

With that operator, let's open the line for questions..

[Operator Instructions] Our first question is coming from Ken Billingsley of Compass Point. Please go ahead..

I wanted to just ask a few questions on the - some comments you made about increased competition.

Could you, let me expand that, who is that increased competition and where is - and where are you seeing that competition?.

Let me start, we’re seeing the traditional carriers being a little more aggressive, Ken. We've seen Allstate and State Farm come back into the marketplace, but in not an aggressive sort of way, but anything that they do is a large movement. We've seen the Florida carriers making efforts to move into New York.

There are about five publicly traded companies, at least I think two of them are in New York or about to be in New York, one has been making waves that they intend to come to New York. But the interesting part of that is that they will just add to more Demotech only competitors.

And one of the big reasons, maybe the biggest reason, we moved quickly to get the upgrade in our AM best ratings was to separate ourselves from those companies.

The companies that are Demotech only are weak, they're undercapitalized, they're overleveraged, they don't supply the level of catastrophe coverage a reasonable person should expect their homes to have. But yet they're allowed to do so because a rating agency says that they can.

That doesn't make it right; it just makes it fall within that rating agencies model. But that’s the type of competition we’re seeing Ken..

And just kind of two-part question goes together, is one with the Demotech rated companies coming in though, how much of a price difference does that tend to make with agents and from a customer standpoint what's their price point that makes them go one way versus the other?.

Well, I wish I had a definitive answer to the second part of your question. We know and we've always been priced above the Demotech-only carriers. And that's never proved to be an impediment for our growth. Now, some of them may come in and the disparity and race may get wider. Ben has made efforts to address that through underwriting changes.

We're making improvements to our product that we have a filing in place now with the department and we're expecting an approval in the near term, but not a rate reduction. We're just trying to better address the marketplace that we’re in today..

And then regarding the larger players, all state to state form, I understand what you’re saying that if anything they do is obviously going to move the market a bit, but has their risk appetite changed from years ago, are they going back, I mean are you seeing more people coming back to the coast or are they just expanding their general footprint overall?.

Well, I don't think they're expanding their footprint. As a matter of fact, I think they're in the midst of closing offices and maybe that's a national thing, but at least with regard to Allstate, they’re certainly more active, except that they don't have perhaps the appetite in eastern Long Island that they did in previous years.

State Farm is back and I would say State Farm, relatively speaking, seems to be more active than perhaps Allstate is..

Okay.

On your New Jersey expansion, are there any agent carryover from New York that you’re writing, either prior relationships or agents that were writing in both states?.

And our Vice President of Development David Delaney has been, let's say, very demanding in how he wanted to set this up and he's done a phenomenal job. We have a three tier rollout with the agents that he had selected, met with repeatedly, vetted all their business.

We don't just, like some other companies, throw our product against the wall and hope something sticks. So we're right now in the first tranche of agents using our program.

We'll find mistakes, there'll be changes we're going to have to make, but over time, the product will be rolled out much wider in New Jersey and at the same time, we'll be adding in those agents that are now operating in New York who also have business in New Jersey, but we wanted to make sure that we've got the product right from the people with the strongest, if you would, the strongest boots on the ground.

And those are the domestic agents inside the state of New Jersey..

Great. And just one more question if I may, obviously, the loss ratio was significantly better than we expected in the prior year. So I hate to harp on one other question on the expense side, but I saw the general expenses were a little bit elevated and I think the comments in the press release was that it was related to your expansion plans.

So would this be a consistent run rate that we should expect as you continue growing or will -- is the dollar amount going to be fixed, was it going to be more of a fixed percentage increase or more of a fixed dollar?.

Well, it looks like it’s a fixed dollar. We hired some people to help make this happen who are going to be ongoing, involved in the New Jersey and the other states. So we're not looking for any significantly large increase on that end. So at this point, we’re just waiting for the premiums to roll in and that should alleviate the change in the ratio.

So we're confident that we've handled this well and seem to work and we’re going to continue doing it..

Thank you. Our next question is coming from Paul Newsome of Sandler O'Neill. Please go ahead..

I want to ask about the loss ratio, excluding catastrophe losses for the quarter and if we should make it anything of the implied profit margin for the business in the quarter, most companies would look at that measure as sort of an ongoing level of profitability and change in profitability.

Is there anything in the quarter that would suggest that that's not sort of a fair run rate for profitability in general or anything else that we should think about with that measurement?.

Yeah. This is Ben Walden. As I said, our first quarter is usually the most challenging just because we're highly weather dependent and the winter claims come in the first quarter. That said, this quarter was better than expected on that front, however, we did have approximately $1 million in winter related direct to losses.

And that would be expected to happen in any first quarter. So if you're looking at profitability for the year, our first quarter is not typical of what we would see in other quarters during the year, just because there is always an impact from winter weather.

There's also an impacts related to larger fires, which does occur mostly in the fourth quarter and first quarter of each year for us. You should be seeing the same things in Chicago that with the winter you guys had..

Yeah. It's been miserable. Well, it's not over yet.

I want to also ask about and maybe just give us a little bit more details about the process of hiring new agents in the new states and I think most of us are trying to figure out just how quickly that process is happening or will happen and I also like to know a little bit about sort of the exact kinds of agents you're looking to hire, are they different from the folks usually use, are they different from the folks you usually use, are they certainly particular sort of classification you’re thinking of what the new agent relationship is outside of New York?.

Well, I mean we've followed the same process that we've used in New York. We vet each of the agents that we pursued in New Jersey in the very same way. And since we're just getting started, we found some metrics where we could identify professional, more professional agencies by perhaps how active they are in the insurance industry trade groups.

So we’ve pointed a lot of our attention at those who are active who some who actually teach the continuing education courses. But this is a contrast to others who we compete against who find it reasonable to appoint an MGA and just let the MGA decide how to allocate where the business is going. We don't have any of that Paul.

We don't have right now in New Jersey even a wholesaler appointed. We need to get the best input from those who can give us the best answers.

So that's how we've gone about it, but I think the answer to your question is we're not doing this with any sort of a gun at our head, yeah, we want to try to generate premium and -- but only profitable premium and we also know we've got a new product working on a new system. And we have to be a little bit careful just as to how we do everything.

So I think what you'll see as we move forward is a wider distribution plan going into places the year goes on, but still being careful and walking before we run if you would. I hope that answers your question..

Thank you. Our next question is coming from Bob Farnam of Boenning & Scattergood. Please go ahead..

I guess I'm looking more on the risk side, so you're expanding into New Jersey, obviously coastal New Jersey seems very similar to New York City area there.

I'm wondering what it did, but it can't -- the risks can all be the same, but what's going to be different about the risks in New Jersey relative to what you're experiencing -- what you're used to in New York and for that matter anything in New Jersey and Connecticut and Rhode Island and how will these risks differ from what you're currently writing in New York?.

This is Ben Walden. There is a lot of similarity, but the differences I would say, especially in New Jersey, are on the coasts. Your average coastal building value is a little bit lower than what you see in New York on Long Island. But to counter that, we are targeting inland risks and more of the high value homeowners.

So coverage A, which is the building coverage greater than 500,000 and we feel we can compete on those risks because of the way we've set up out product and also the fact that we now have the A rating, which allows us to compete effectively against the national carriers that rate as high end homeowners risks.

So that's probably the area I would say is going to differ the most for us in New Jersey and these other states versus what we have in New York..

So it’s not necessarily the catastrophe exposed, it’s more of the high valued homes?.

Correct, inland. I mean, let me just add that it's interesting that we're now getting -- we try to get competitive intelligence on all of our competitors, but we're spending a lot more time talking about the Chubs [ph] of the world and pure and AIG than we ever did before and that's -- we’ve got a whole new set of players..

And obviously well entrenched large players, so it's tall task I would imagine?.

Well I mean if I can respond to that, it is a tall task, but what those companies share is a desire to write the entire set of products for the insured. They want their artwork, they want their jewelry, collector cars, boats, you name it. Kingstone for the homeowner and particularly the higher end homeowner will be looked at as a value proposition.

We don't give every type of coverage that Chub does. If you need kidnap and ransom insurance, you're not coming to Kingstone, trust me.

But what you will get is a solid product from a company that's 131 years old that's rated as high when nearly as high as these competitors at a price point that’s typically much more value to -- much more appealing to the value conscious shopper, which we think there are a plenty of them out there as you, I’m sure you’d agree..

And the flood endorsements, how do you view that product? Is that more of a help to get the retention because you're offering more rounded product or is that going to be a profit driver like how should we think about the fun endorsement and how sizable will that be?.

So, Ben Walden again. This is not a profit driver in itself, but it will help us to drive profits within our homeowners program for two reasons. One, it is something completely unique in the market. No other company has tried. We think that we have appropriate reinsurance for this now and it's the right time to do this.

So this will help us write more new policies because it's unique. It will also help us retain the existing policyholders, again, because it's unique, if someone needs flood coverage, they can get it through us. And they can't get it anywhere else in the market. It's the first step in our overall plan to offer flood in all different types of scenarios.

This scenario that we're writing right now is for inland risk and it really covers just basement flooding, but in the future, we plan to offer an FIP flood policies as well as options in addition to that. So we're trying for a fully integrated suite of flood options to provide to our policyholders..

Bob, this is Barry. Let me interrupt there. We’ve spent probably almost two years handling all the claims we received from Superstorm Sandy.

We saw commonality there and a, the commonality was the disappointment that so many insurers had with the way their flood policies that were NFIP backed were handled and we have a plan in place that we don't yet have fully filed nor approved, which we think can deal with the problems, maybe Sandy was a one in 600 year event like some say and maybe I won't be here or maybe no one in the room, maybe my daughter might be here for the next one.

But the fact of the matter is we've experienced going through a catastrophe. My friends in Florida who are coming up here now, I wish them good luck because most of them have never had to pay a cat plan or really substantively add to.

So we've been through this, we've staffed, we've put together tools and other ways of handling claims that arise, but we think we've got ultimately a better mousetrap on the way in. So stay tuned for more on that..

Gentlemen, we're showing no additional questions in queue at this time..

Well, thank you very much and I'd like to thank everybody for taking the time to listen, for my entire team who are pleased and proud to have delivered these outstanding results and look forward to continuing the build out of Kingstone to a multi-state multi line carrier so it’s serving only the independent agent community. Thanks very much..

Ladies and gentlemen, thank you for your participation. Today's conference has concluded. You may disconnect your lines at this time and have a wonderful day..