Greetings, and welcome to the Kingstone Companies Fourth Quarter 2020 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Amanda Goldstein, Investor Relations 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 fourth quarter results.

On this call, Kingstone may make forward-looking statements regarding itself and its business. The forward-looking events and circumstances discussed on this call may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting Kingstone. For more information, please refer to the section entitled Factors That May Affect Future Results and Financial Conditions in Part 1 item 1A of the company's Form 10-K for the year ended December 31, 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 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 B. Goldstein - Chairman and Chief Executive Officer

Thanks, Amanda, and good morning, everyone. We are 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 of tandem 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. And 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. But 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. But I believe there is something else that is weighing on our share price. Because Kingstone has coastal exposure, we're 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 ranks 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 a shade on Florida, what that carry us after seeing no landfill 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 the 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 return, 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 space 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 - Chief Financial Officer

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 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.

Very happy to know 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 30, 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 that 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 31, 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 fourth quarter 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 seeding 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 return 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 fourth quarter of 2019. 4.5 points of that was from cat activity and the remainder due to non-cat wind storms.

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 effect of 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 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 such challenges and positioned itself to produce the underwriting profits as 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 S. Golden - Chief Operating Officer

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 1.5 years 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 second quarter.

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 second quarter.

I'm so proud of everything we were able to accomplish in 2020 and especially considering that many team members were new and were 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 1 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 poll for and reply to the questions you may have. Kevin, please pause for questions.

Question & Answers

Questions and Answers:

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Operator

[Operator Instructions] Our first question today is coming from Paul Newsome from Piper Sandler. Your line is now live.

Paul Newsome - Piper Sandler - Analyst

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 pull 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 goals or it is uncertain level meanwhile [Phonetic]?

Barry B. Goldstein - Chairman and Chief Executive Officer

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

Scott Van Pelt - Chief Financial Officer

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

Meryl S. Golden - Chief Operating Officer

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 - Piper Sandler - Analyst

Right. It looks like there was a tad of reserve development in the fourth quarter. I apologize if I'm confused. Maybe you can just chat about just what exactly is going on there and how it may affect the future.

Barry B. Goldstein - Chairman and Chief Executive Officer

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

Scott Van Pelt - Chief Financial Officer

Sure. Well, first, we sit down and employ an outside actuarial firm. And at present, we are just almost good center of their midpoint. So we are exactly where we want to be in the range. The noise that you see in there is this 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 B. Goldstein - Chairman and Chief Executive Officer

Yes. Yes, I would just add, basically truing up the full year and the fourth quarter, Paul, but for the year, I think we ended up with something like $40,000 or thereabout. So nothing material but just making sure we stayed right on the midpoint of our outside actuary.

Paul Newsome - Piper Sandler - Analyst

Fantastic. And then maybe finally, just some general comments on the competitive environment in New York and the continuous states. I think last time - last year, you saw sort of an uptick in competition. Has that continued into the early parts of this year? Or are things moderating a bit?

Barry B. Goldstein - Chairman and Chief Executive Officer

Meryl, do you want to take that one?

Meryl S. Golden - Chief Operating Officer

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, so but many, many competitors in the space.

Paul Newsome - Piper Sandler - Analyst

Fantastic. Thank you, folks.

Operator

Thank you. Our next question has come from Bob Farnam from Boenning and Scattergood. Your line is now live.

Bob Farnam - Boenning and Scattergood - Analyst

Yes. Thank you and 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 B. Goldstein - Chairman and Chief Executive Officer

Meryl, maybe you want to take this?

Meryl S. Golden - Chief Operating Officer

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

Paul Newsome - Piper Sandler - Analyst

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

Meryl S. Golden - Chief Operating Officer

It's a good fourth quarter - excuse me, first quarter.

Bob Farnam - Boenning and Scattergood - Analyst

Okay. In terms of the effective tax rate, I was expecting to get so much of a benefit. Can you maybe explain some of the - what's going behind the scenes there?

Barry B. Goldstein - Chairman and Chief Executive Officer

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 - Boenning and Scattergood - 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? Are you trying to shutter that? Like, I'm trying to figure out what's going to become of Cosi going forward.

Barry B. Goldstein - Chairman and Chief Executive Officer

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 first quarter, then maybe in the second quarter, that will reinvigorate Cosi.

Bob Farnam - Boenning and Scattergood - Analyst

Great. Okay, thanks for the answers.

Barry B. Goldstein - Chairman and Chief Executive Officer

My pleasure.

Operator

Thank you. [Operator Instructions] 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 guess was wondering if you could give us a little bit of color on how that worked during Q4. That's my question.

Meryl S. Golden - Chief Operating Officer

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 we've 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 B. Goldstein - Chairman and Chief Executive Officer

Hey, Gabe, just keep in mind that we started this increasing in rates in late 2019. So it wasn't until the end of 2020 that all of that rolled, at least the New York portion, all of it rolled on to 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 is 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. I hope that answers your question.

Gabriel McClure - - Analyst

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

Barry B. Goldstein - Chairman and Chief Executive Officer

Great.

Operator

Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Barry B. Goldstein - Chairman and Chief Executive Officer

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

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KINGSTONE COMPANIES INC

Q4 2020

Earnings Transcript

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