Q1 2021 Kingstone Companies Inc Earnings Call
Greetings and welcome to Kingstone companies Q1, 2021 financial results and conference call on.
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A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Amanda Goldstein Investor Relations Director. Please go ahead.
Thank you very much Brock and good morning, everyone yesterday afternoon. The company issued a press release each on Kingstone 2021 first quarter of results.
On this call Kingstone may make forward looking statements regarding itself on its business.
The forward looking to events and circumstances discussed on this call may not occur and could differ materially as the 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, Inc.
Part one item one a of the companies form 10-K for the year ended December 31, 2020, along with the commentary on forward looking statements at the end of the companies, earning release issued yesterday.
In addition, all of them.
Our remarks today include references to the non-GAAP measure for a reconciliation of our non-GAAP measures for the GAAP figures. Please see the tables in our earnings release with that I'd like to turn the call over to Kingstone CEO Mr. Michael <unk>. Please go ahead Mr. Goldstein.
Yeah, Thanks, Amanda and good morning, everyone. We are pleased you can join US on this on first quarter of 2021 conference call.
In preparing for this call I was reminded of what was going on last year at this time and I can only say how thankful I am that we are now and so much of a better place.
I wanted to again share my appreciation to all of those that enabled the U S to be in this position and to our producers and employees, who continue to put the needs of their clients and our policy holders first during these most difficult of times.
One thing that I love about running in the insurance company is that it's really two businesses. It's a business of underwriting charging premiums to also that the claims of the few can be covered.
Second it's the business of investing the premiums generated by those underwriting operations.
We think about our ability to deliver a return on equity and here, we get two shots at the target.
This quarter's results are a perfect example of that.
As the northeast property writer winter is almost never a profitable season and the first quarter reflects that it wasn't too bad losing 25, a share on operating EPS, but our solid investment results offset almost all of the first quarter underwriting loss, leaving us with the small <unk>.
<unk> per share overall loss per share.
Today I'll focus my remarks on our investment results and I'll, let Scott and Merrell talk about our overall financial and underwriting results.
Hum.
Sorry.
Okay, I'd like to Oh, Okay, I'm, sorry, I'm, losing my place yet we had a terrific investment returns in the first quarter, especially one contrast, it with the prior year when the markets fell due to the uncertainty of COVID-19. Our Q1 investment income that is <unk>.
Interest and dividends less expenses was up 7% to an all time quarterly high of $1 $8 million.
I'd like to call your attention to our investment committee, which formally incorporated and ESG provision to our investment guidelines.
In addition, the committee agreed to make two significant changes since the second quarter of 2020.
The first was an increased allocation to preferred stocks, primarily those bearing an investment grade rating.
This gave rise to higher after tax returns and was seen as being less volatile than the common equities and mutual funds, we exited <unk>.
Second we decided to increase our allocation to alternative investments buying one real estate limited partnership interest in adding to the one hedge fund we have invested in with great results since 2018.
Note that we have not yet fully invested all of the return premium we received as a result of the quota share treaty termination, but we expect to put that money to work sometime during Q2.
Realized gains in the quarterly growth and realized unrealized gains in our equity and other investments portfolio added almost $3 million of pretax profits to our first quarter's results. This is compared to a COVID-19 triggered six 4 million.
The decline last year.
At quarter end, our equity and other investments portfolios had unrealized gains of just under $5 million.
I've managed our investments since mid 2009, and while I might be a bit old fashion I believe that each name is bought with the intention to hold it for a long time.
But also understand that a real real risk taking is in our underwriting operations as such gains of periodically harvested.
We ended the first quarter with just over $220 million on cash and investments and we can certainly continue our conservative and prudent investment practices as we now have about $2 25 of.
Of cash and investments for each dollar of equity.
Last quarter, I contrast of the company to a Florida based competitors.
And I want to mention that the potential for investment returns like we had this quarter is another differentiator for kingstone.
Many of those competitors, who are considered by some to be part of our peer group have been compelled to sell off large portions of their investment portfolios to fund their operations and to maintain regulatory compliance.
In essence with left to invest this puts added pressure on net to further improve their underwriting results. If they are to achieve their return on equity targets.
This leaves them with little more than one shot at the target.
As this quarter demonstrates us having to shocks as a competitive advantage and one we hope to exploit going forward now.
Now, let me turn the call over to Scott to review our financial results go ahead Scott.
Thanks Barry.
The company posted the first quarter net loss of $300000 compared to a $5 $4 million net loss for the same period last year. The improvement is primarily attributable to the gain on our investments this year on the dramatic decline in the financial markets last year as Barry just one true.
For the last three months of the company had an operating loss of $2 7 million offset by an after tax gain on investments of $2 4 million.
For the prior year quarter. The company had an operating loss of $3 million and an after tax loss on investments of $5 one.
<unk> reported a loss of <unk> <unk> per diluted share for the three months ended March 31, 2021 compared to the loss of <unk> 50 per diluted share for the three months ended March 31 2020.
Direct written premiums for the quarter were $38 $1 million, an increase of $1 4 million or three 9% from the $36 7 million in the prior year period.
The increase was primarily attributable to a $1 $7 million increase in premiums from our personal lines business offset by a 4 million dollar decrease in the livery physical damage premiums triggered by the COVID-19 pandemic.
The 32, 8% increase of net written premium in the 28, 4% increase in net earned premiums for the quarter were primarily attributable to the exit from the 25% personal lines quota share on December 30 of 2020.
Relative to a loss ratio of comparison. The story is more about how great. The first quarter of 2020 was compared to 2021, which was a more typical winter from a non cap perspective.
The net loss ratio for the quarter was 65, 2%, we're four four points higher than the 68% posted in the first quarter of 2020.
Catastrophe losses were low <unk> seven points in both quarters.
The loss ratio increase in the quarter was due to a higher frequency of non weather water losses, which added approximately two points to the loss ratio as well as two severe fire claims, which also added approximately two points to the loss ratio.
It is important to note that the non weather water wash frequency was in line with history.
Really that the winter of 2020 was just that good.
For the current quarter, the net underwriting expense ratio was 42%.
39, 1% on the prior year period, an increase of 2.9 percentage points the.
For the two 9% point increase was primarily attributable to the exit from the 25% personal lines quota share treaty.
And the decrease in both provisional ceding commissions that went along with that.
In addition, 2020 head of contingent commissions from prior year's quota share treaties.
Finally first quarter results this year, reflecting the increase in contingent commission expense the expected to be earned by our producers of.
$4 million due to the projected to increase profitability in the personal lines book.
More important in thinking about the moving parts that make up the ratio. Please be mindful that our net other underwriting expenses were four 4% less from the prior year quarter.
Overall it was a good first quarter as northeast Winter quarters go. This year's quarterly combined ratio was three points lower than the average of the last five years.
The results coupled with our terrific investment returns put us on the good position for the year.
I'll turn the call over to Merrell.
Okay.
Great. Thanks, Scott.
Happy to report that our efforts to transform and modernize the company coin Kingstone to continue.
Continue in earnest.
I would like everything to move faster. The reality is that the initiatives, we have underway like core system conversion and new product filings just take a long time.
That said, we are still on track to complete this phase by the end of 2022.
As we have reported previously on these calls we have been squarely focused on improving profitability. We have taken many rate increases on underwriting action starting almost two years ago. This has slowed our growth. It's always hard when you are one of the first companies to raise rates on the sales force and <unk>.
The service constantly share of examples that demonstrate your lack of competitiveness, even though you know that you needed the increased rates of hit profitability targets, and then time passes and competitors start to raise their rates on <unk>.
Their guidelines as well.
That's the situation that we are now in.
We expect the the changes we've been making to improve our profitability. We will start to show on our results post this winter quarter, and our growth should tick up of that as well.
It's been awhile since Kingstone gave earnings guidance, but we're feeling confident so I wanted to share some projections with you as communicated previously we expect direct written premium growth for the full year in the 5% to 7% range well I want to reiterate that we price to achieve a return.
Some of our competitors have acknowledged that their previous focus on growth has led them to change course by raising rates and tightening guidelines a growth estimate does not anticipate the perceived favorable change the competitive landscape and we will adjust the range if needed as the year plays out.
Further we expect the 2021 full year combined ratio to the in the range of 88 to 92 absence of major landfall storm.
This should allow us to achieve a return on equity for 2021 of 10% to 12%.
The actions already taken are producing the anticipated results. We are in a good place now I'll turn the call back over to the operator to poll for in reply to the questions. You may have operator, please pause for questions.
Thank you.
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Our first question today comes from Bob Farnam of Boenning and Scattergood. Please proceed with your question.
Yeah, Hi, there good morning, So Merrell I just wanted to go farther into the competitive landscape.
One of these things I always considered when you're raising rates what happens to your retention ratios for it sounds like your competitors may be raising rates as well. So have you started to see any improvement in retention yet.
Good morning, Bob Thanks for your question so.
Our retention is pretty much flat versus last year. So.
The changes that we are seeing from our competitors have just started.
So but the.
Those wouldn't impact our retention anyway, it's really our rates set of facts retention. So what it will be impacted as our new business growth and we look for it to that.
Let me just add a little color there because Bob I don't know if you remember but in previous calls when we started to take rate. We mentioned that we didn't see any appreciable change to the retention.
I mean that was to me that was the the gave us the impetus to keep going forward and taking rate because we werent, losing customers Kingstone has a great reputation in the marketplace and we hadn't raised rates in the long time people understood and they stayed with us.
Great. Okay. So it sounds like if you're going to go if you're going to if you're going to grow more than you expect this year between the the $5 seven it's going to come from new business, rather than a rate increases on your.
The retained the business.
Yes, I think that that's correct okay.
Okay.
In terms of the investment income Barry So the $1 8 million was higher than expected and I appreciate the comments about the preferreds and the alternatives.
Is this should we use this more as a run rate going forward.
This level.
Yes, I mean, I was trying to allude to the fact that we still have quite of bit of dry powder.
And it was increased by the cash we received after cutting off the quota share.
The reinsurance had to return to us the premium we'd already paid all of it to them, but that they hadn't yet earned so that money needs to be put to work. So there should be a moderate increase in the amount of assets that are invested but I couldnt give you any more guidance other than that I think it's pretty fair to look at the.
The current quarter and anticipate something very similar moving forward.
Okay.
And actually the last question for having some things in a similar basis. The the expense ratio of 42% is that a good run rate to go work out for them at this point based on the fact that you don't have the the.
For the ceding commissions coming back.
Mary you want to handle the that well.
So who's going to share.
I can handle it so I do think that you'll see our expense ratio come down as time goes on of course the.
We're going to feel the impact of the reduced ceding commission throughout the year, but we all of these efforts that we're making on Kingstone two O will be gaining more and more efficiency and so I do think youll see our expense ratio coming down throughout the year.
Coming down from the kind of the 42 level the correct. So.
I just wanted to confirm that okay. Thank you.
Hey.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
Hi.
Okay.
Okay.
The next question is from Andrew <unk> of Candy Capital. Please proceed with your question.
Hey, good morning.
Hope you all are doing well I know at the end of last quarter you announced.
An ambitious buyback plan.
And I was wondering if you had any updates on that or.
Guidance on what you expected.
How are you spoke to the to play out over the next year or so.
Sure Hey, Andrew How're you doing.
Been a while.
Yes. So we did we did announce a buyback plan.
As you know.
We havent yet filed the Q, but you'll see in there that during the first quarter, we bought back on a modest amount of stock something less than 10000 shares.
On that.
That process and that you know.
Of that two year.
Anticipation of buybacks is in place and we will be reporting on that each quarter as we go forward.
Hope that answers your question.
Yeah, I think that'll be something all of lookout for for sure. Thanks.
My pleasure.
The next question is from Paul Newsome of Piper Sandler. Please proceed with your question.
Good morning.
Thanks for the call.
I was hoping maybe you could just give us an update refresher on the steps that.
Kingstone to Guido will take over the next two years and are there any couple of milestones that we should be.
We're expecting to see in that process that we should take note of over the next several quarters.
Sure Paul Thanks for asking about Kingstone, two I kind of felt like no one ever asked about it so I'm delighted to talk about it because that's what I live every day.
So in terms of the next two years so.
First of all Kingstone two out of there is really.
A multiple things that we're doing one was adding a lot of new senior leadership to the company. So that's in place.
The second is we need to get off of our legacy systems and that has started last December we started that conversion to a company called water Street.
And that will continue throughout this year and into next year and as we're able to retire those legacy system. We.
We'll have a.
Greater expense reduction.
And so the next product that will be converted is our umbrella product and then our dwelling fire product later this year. So there's the rollout schedule of that continues into next year.
And then third major piece is introducing new.
New products all of our products reconfigure to be more sophisticated from.
Analytics perspective.
And where we are on that is we're hoping to launch New York homeowners later this year.
And hopefully dwelling fire before the end of this year as well, but you know it depends on regulation and systems and as I said of my remarks. It just go slower than I would want it to go.
And then our plan is to introduce all of those products to all of our states next year. So it's homeowners condo renter and dwelling fire on.
New products in all the states and so as we have these calls we will keep you posted on our progress there and those I think are key milestones for the company that will result in more profitable growth.
Did that answer your question Paul.
It did.
There are long term post 2022 kind of.
The expense ratio target that you think you can achieve after all of the.
The benefits of two point or are in place.
Well I can tell you I think that kingstone too low we will save us.
At least the point this year and maybe an additional point next year of course for aiming to lower our expenses more of them, but that's our most recent estimate of the benefits from Kingstone too low.
A couple of points isn't true.
Question, but thank you appreciate it.
My pleasure of luck for the rest of the globe.
Thank you.
The next question is from David Adelman of Edelman Capital. Please proceed with your question.
Thank you.
Hi, Merrill and Barry.
My question is.
Uh huh.
The 10% to 12% or are we talking about for this year.
That's good going into the right direction I want the weakness.
If given the cost cuts the products Kingstone 2.0 did you're implementing.
Do you think that the Rowley.
Over time, obviously fluctuates depending upon the.
The incidence, whether it's sort of interest average.
Would you hope the there could be higher than that or do you have of coal.
The kind of what are you shooting for.
Yeah.
Thank you for the question, David and good talking with you.
I think you have to what we've gone through.
And.
The measures we had to take that crimped our profitability in <unk>.
Allowed us to realign the company to being almost exclusively of property writer those things are very much in the past now.
Think of short term goal of what short term target of 10% to 12% is very attainable.
And as we alluded to before that doesn't anticipate much more than five or 7% growth happening. So if we can.
The point being I guess that the the actions we took to improve upon our profitability on now showing up in our numbers.
So that we can look forward to growing that 10% to 12% in the future, but I'd hate to put a target on it you may remember and I think you you invest the long ago, when Kingstone was able to deliver high teens Roe consistently.
On the.
On the competitive landscape change that I'm, not saying that couldn't happen again in our favor, but I'd hate to put put of goal out there beyond the 10 to 12 that we're talking about now.
I hope that.
Consistent with what you were thinking.
Absolutely. Thank you.
Great. Thank you.
There are no additional questions at this time I would like to turn the call back to Barry Goldstein for closing remarks.
Great. Thanks, everybody for listening in I can I can only tell you that this job is getting to be a lot of fun again I had a lot of fun. There was a couple of years that was like.
Our walk through the desert, if you would but we've come out on the other side and we're having a blast so stay tuned to these calls in the future and please stay healthy until then thank you operator.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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