Q2 2021 Kingstone Companies Inc Earnings Call
[music].
Hello, and welcome to the Kingstone company's SEC.
Quarter 2021 financial results conference call and webcast at this time all participants are in listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to.
Amanda Goldstein Goldstein Investor Relations. Please go ahead.
Thank you very much Kevin and good morning, everyone yesterday afternoon. The company issued a press release and trying to find a 2021 second quarter results.
On this call Kingstone may make forward looking statements regarding itself and its business.
Forward looking events and circumstances discussed on this.
This call may not occur and could differ materially as a result of known and unknown risks doctor and uncertainties affecting kingstone.
For more information please refer to the section entitled factors that may affect future results and financial condition in part one item one a of the four.
The company's Form 10-K of the year ended December 31st 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.
Reconciliation of our non-GAAP measures to the GAAP figures. Please see the tables in our earnings release with that I would like to turn the call over to Kingstone CEO. Mr. Barry Goldstein. Please go ahead Mr. Goldstein.
Thanks, Amanda and good morning, everyone. We're pleased that you can join us for this our second quarter 2021 conference call.
First off this was not a good quarter from an operating results perspective.
I don't ever recall us discussing what presents itself today that is that we've had an uptick in personal property liability claims and out of an abundance of caution have set aside loss reserves appropriately.
I will let meryl covered the drivers of the elevated loss and combined ratios and what we have done to address the issue.
Today, I want to talk about our competitive position.
We are in an enviable situation I, even think we're in the driver's seat.
To explain this clearly let me remind you that beginning last July our two largest cosi agency relationship stopped writing new business with us effectively all but shutting down the alternative distribution channel. So when thinking that kingstone today think only about traditional independent agent footprint, what we call out.
Select producers also recall that we exited the commercial lines business beginning in mid 2019, and those premiums all ran off ending in late Q3.2020.
Should allow for a true apples to apples comparison, when looking at today's premium and policy generation as compared to prior years, we showed a carve out both cosi and commercial lines.
At the same time, you'll recall that we've been laser focused on increasing our profitability of these past two years understanding all the way through that growth would suffer as a result of the actions taken meryl.
Marilyn and her team have refocused the company and did so by taking a significant number of actions to improve our financial results reduce volatility and better manage our catastrophe exposures.
We have taken rate increases in every state tightened our underwriting guidelines introduced mandatory hurricane deductibles employ catastrophe risk underwriting at the point of sale and we nonrenewed many policies that could not generate an appropriate return I could go on but I think you get the point it was.
Hard to take these steps, especially because we the first company in our cohort to address and act on what was needed starting in late 2019 again on the Merrell guidance.
It was to say our select producers were not very happy with us not happy with our raising of rates not happy with the multiple changes in how we did business.
This led to our new business volumes declining materially.
What we would no longer willing to write or right at a rate anywhere near what the others. What the producers placed without competitors that had lower prices with less stringent underwriting standards.
And they had these lower prices and looser guidelines for two years longer than us.
So what is it that they say if you're stuck in a whole first stop digging.
We did that two years ago, but for them. The whole has only gotten deeper and the actions required a far more painful.
What we are seeing now is exactly what we expected the tide has turned.
While we remain focused on profitability and have not compromised our underwriting standards. Our competitors have now started to take many of the same actions that we initiated two years ago.
And because of that deeper hole some of the actions, they're taking a far more draconian.
In addition to them raising rates and tightening guidelines, we are seeing some about formerly major competitors stop writing business all together some permanently others supposedly temporarily.
Many of our formerly unhappy agents have commented that they now understand and appreciate our approach as we continue to be a consistent open market for them.
We never shut our doors.
We're now two years later in an advantageous position competitively and this is having a very positive impact on our new business production.
For all states combined we saw our personal lines quota increased by 30% in the second quarter versus last year.
Likewise, our new business policies bound by these select producers were up 16% in the second quarter.
But for the month of July new policies issued were up 30%.
In our flagship product New York State homeowners, our new business policies were up 65% in the second quarter and 90% in July.
This is the most new business, we've written in any month since August of 2019, when we began our focus on profitability.
We all know that it's easy to grow in the insurance business. If you priced too low in our case the growth in personal lines new business production.
Our rates, reflecting the rate increases we've taken.
Up an average of 12% over the prior year for all states combined and up 17% for New York.
Add to this two newly approved rate increases and our biggest states, which will begin to take hold in Q3 and further increase our new premium production.
Again, we have not compromised we will not give back on the hard work. We put in so this is profitable growth for growth for us and we are very confident that this growth will continue.
Now, let me turn the call to Meryl to review our results Meryl.
Thanks Barry.
The company posted second quarter net income of $1.3 million compared to $4.6 million net income for the same period last year. The lower income is primarily attributable to worst operating results, which I will explain shortly for.
For the latest three months the company had an operating loss of <unk> 5 million offset by an after tax gain on investments of $1.8 million for the prior year quarter. The company had operating income of $2.5 million and an after tax gain on investments of $2.1 million.
Kingstone reported income up 12 cents per diluted share for the three months ended June 30th 2021 compared to income of 43 per diluted share for the three months.
For the six months ended June 32020.
Direct written premiums for the quarter were $44.6 million, an increase of $2 million or four 6% from $42.6 million in the prior year period. The increase is attributable to a 1 million increase in premium from our personal lines business and a 1 million increase in our livery physical damage business.
As the economy begins to reopen after the COVID-19 pandemic. The 32, 8% increase in net written premiums and 33% increase in net earned premiums for the quarter were primarily attributable to the exit from the 25% personal lines quota share on December 30.
2020.
What would it then otherwise than a typical loss ratio quarter was impacted by two drivers that added 10 points to the loss ratio this quarter and reduced operating earnings by about 24 cents per share first as Barry mentioned the primary driver is an increase in liabilities.
Frequency for both homeowners and dwelling fire, while we often see variability in claim frequency month to month and quarter to quarter. We observed a higher number of claims in the second quarter and felt that it was material enough to reflect this change in our loss reserves.
This explained eight points of the loss ratio increase to be clear our liability frequency for personal property is incredibly low.
Then two tenths of 1%. Moreover, less than 50 additional claims have been reported year to date, we do not know, but just back to this increase is related to COVID-19 as people return to work or less home centric and are better able to get maintenance done on their homes and we look forward.
Just seeing frequency returned to a more typical level, we will be following the situation closely and we'll report if this trend continues next quarter.
Second driver accounting for an additional 1.5 point was an increase in frequency on our livery physical damage program.
Our livery drivers are back to work as the economy reopens and miles driven increase the Q2 frequency is close to the pre pandemic 2018, 2019 second quarter average loss severity remains stable as mentioned before what comes along but this is an increase in.
Writings, as the Uber and Lyft type drivers get back to business.
Otherwise the second quarter property loss experience is similar to the second quarter last year in this quarter, we had higher water losses, offset by better fire experience and very mild catastrophe activity.
For the quarter, the net underwriting expense ratio was 41, 8% as compared to 38, 8% in the prior year, an increase of three points.
The three point increase is primarily attributable to.
The exit from the 25% personal lines quota share treaty and the decrease in Provisional Ceding Commission that went along with that.
In addition, our results reflect an increase in I T and professional services expenses related to our Kingstone two O initiatives as well as an increase to contingent commission expense estimated to be earned by our producers. We expect our combined underwriting and commission expense dollar.
To be slightly higher than 2020 for the full year and the expense ratio as a percent of direct written premium will be modestly lower.
Overall, it was a disappointing quarter driven by the uptick in liability claims frequency. We believe the increase in liability frequency is related to COVID-19, but given the uncertainty we need to remove the combined ratio guidance that we provided for the full year last quarter.
We remain steadfast in our belief that we have done and continue to do all of the right things to enhance the company's profitability and now the marketing excuse me and now the market is also turning in our favor.
Let me turn the call back over to Barry to discuss our investment results.
Thanks, Marilyn just a short update on our investments I'll put folio continues to perform well with.
The investment income that has the interest and dividends net of expenses being up four 1% in the second quarter.
As we watched rates go up in the second quarter, we were willing to stay on the sidelines, leaving us with a larger than usual uninvested cash balance on July one we changed our fixed income investment manager and they've begun to put the excess cash to work incretion.
In dividends and interest next quarter and going forward are to be expected.
Realized gains were realized.
Realized gains were up $700000 versus the second quarter of last year.
Unrealized gains on equity Securities were $1.6 million, but that was down $1.1 million from the prior year when the market had that COVID-19 induced volatility and rebounded from its low in the second quarter.
Finally, I wanted to report on our stock buyback plan, which we initiated during the first quarter.
In the second quarter, we repurchased a little over 120000 shares for just under $1 million.
At an average price per share of $8 nine.
We also paid $427000 in dividends to our shareholders, we have about $9 million in remaining authorizations for share repurchases.
Overall, while not a good quarter. This is an exciting time for the company as our growth picks up steam we've done all the right things and with the recent changes in the competitive landscape my enthusiasm for the future of Kingstone could not be any higher.
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Our first question today is coming from Bob Farnam from Boenning and Scattergood. Your line is now live.
Yeah, Hi, there good morning.
Barry.
They've got to ever be talking about personal lines liability claims.
So.
Being out there. So uncommon can you give us without getting into detail just what what types of claims are these like what's the what are what's been causing these well Meryl why don't you pick that up.
Sure. So hi, Bob So let me again reiterate that liability claims frequency is incredibly low two tenths of 1%.
So we're dealing with a very small number but the severity is about three times that of property losses.
So any increase is material.
We think their COVID-19 related we don't know for sure, but let me tell you. The majority of the claims are typical falls so either on the sidewalk or on the stairs and you know you think about Covid people are very home centric, they're having more visitors to their home they're spending more time.
I'm walking around the neighborhood I know I am and its been very difficult to get contractors to make repairs.
The second type of claim that we're seeing an increase in his dogfight.
So again, when you think about Covid, what I, what I've heard is.
People have adopted dogs for the first time, the shelters are empty and again, you're having you know people come over to the homes. These are dogs with questionable backgrounds, and we're seeing an increase in buyer activity.
So we do feel.
Optical cautiously optimistic that as people return to work that the number of these liability claims will return to pre pandemic levels. So I hope that gives you some color on what we've been saying.
Yeah.
I had a question. This morning from one of our sales guidance I was just wondering if there was any fraud involved it just seems it seems like it's something that came out of nowhere. So it doesn't sound like that's the case, but I just wanted to ask for it but I wouldn't say that Bob and I think we have a team of I would say bullshit experts.
They know when to call bullshit on the climate.
So [laughter].
There is a lot of model look people out of work people have lost their jobs.
People have seen their income declined dramatically.
And this is the type of situation I saw this going back to 2008.
When the market you know if you remember what happened with the great recession. So.
I do agree with Merrill. This is we believe to be a transitory thing and.
Can't wait for this COVID-19 situation to be over with but fingers crossed.
Hopefully that will be soon.
Okay. Thanks, and second question I have is on the substantial amount of new business Youre getting so obviously, the new business comes with a quote unquote new business penalty, just because you're not as familiar with the actual risk.
Do you have any concerns about it like what makes you confident that the new business, you're putting out is going to be as profitable as maybe your what youre thinking.
Well Meryl why don't you start that and I'll chime in as needed.
Sure. So as Barry said this new business that we're putting on is at a much higher rate levels. So that is one thing that gives us confidence.
But the second thing is we have incredibly tight underwriting relative to.
The last couple of years. So we are writing good quality much better quality business than in the past as an example, we're now requiring hurricane deductibles on all new business, we have a catastrophe.
Scoring at point of sale, which we did not have in the past that we can manage our reinsurance costs. So we're just managing the business in a very different way. So it gives us confidence that.
This is very profitable growth for us.
Okay and as any of this business.
Former former accounts that they're coming back to you because our competitors have had to raise their rates.
I don't I don't know that I assume there is some small portion that might be that.
But I think it's more people buying new homes and others that are in the markets.
Just shopping for a better rate.
Yeah, I mean, Bob we have an in house process to deal with those former policyholders and let's just say that the ones that we elected to be former policyholders.
Don't don't get back in again, if you're following okay, I gotcha alrighty, thanks for that.
Okay.
Okay.
Thank you. Our next question today is coming from Gabriel Macquarie Private Investor. Your line is now live.
Yeah.
Hey, Barry Gabriel.
Hi.
I wanted to kind of piggyback on.
On Bobs question about the the personal liability claims and meryl for providing that color.
I guess my question. There was are you guys seeing the same.
The stuff going on in Q3, so far.
And then I got one more after that thanks.
Well I think it's a little what we've seen so far is it tapering in we are not seeing it growing and we are seeing it taper back, but it's very hard to give an answer to that because claims come in you get three in one day and you won't see any for three.
Weak. So it's we certainly need at least a few months of action to draw better conclusions as to what's going on.
Okay, great. Thanks, Barry and then.
My other question is about your increase in business, which is really exciting.
I think we've been waiting for this to come across for awhile.
My question is when will we see those come across.
The reported that you guys do the quarterly or <unk> or whatever.
Yeah.
And that's probably I mean it is.
Everybody says great question Gabe, but.
That is the point new business accounts for somewhere between 15% to 20% of total business. So it does take a while for the impact of the increase in new business.
To make it make itself felt as while we might be writing new business, we need to earn that in over the policy period.
So what you can look forward to and maybe we can in the next quarterly report tried to set out a little bit of a graph to show you the impact of new business on the total and how over the past few years that percentage has gone down and down and down.
I went down.
As we wrote fewer and fewer new policies.
But I think you know we've seen the trough and now we're coming back up and.
Certainly that should should be able to be expressed graphically at least.
Hope that answers your question.
Okay, Yeah, so I mean.
As far as.
Direct written premiums numbers is it going to hit that number like I say next quarter or the second quarter or whatever it.
What you didn't what you see is just a little bit in there in June the action. These guys took that I alluded to before.
One company shut down the effective July 1st.
So nothing's in that report you saw.
People started to quote it knowing that they were going to shot show they quoted in advance.
We've had one carrier, who we compete with who.
One of these and ensure tech guys, who seems to have lost their ability to find a an underwriter for their products. So you know theres a theres a lot of a lot of influences in the market.
The influences of the Florida based companies expanding to the North East in 2016, 17, and 18 is what.
Drove us to the point, where we where we needed to we tried to compete and we didn't do a good job and we fix that.
But they've continued and they continued to sell policies fall far below our price that we could generate any return on.
So that's why we werent, we our prices were higher they kept selling.
Their whole kept getting deeper.
And now instead of just price correcting an underwriting correcting the whole has gotten so big.
One of them sold off most of their northeast operation and maybe in the process of selling the balance of it as we speak so.
While I might have harped on our being consistent for far too long and certainly too long to try to maintain a consistency in pricing as I did in which Meryl has since corrected.
We were consistently in the marketplace, we know those agents.
Certainly didn't Meryl came in they didn't have too many nice things to say about what she did but now she's their best friend So go figure anyway.
That's the best color I can give you if I gave to more directly answer your question I think you'll see a little bit of a benefit in Q3, but as Barry said, new businesses of 15% to 20% of our total premium but in Q4. In addition to the growth you'll start to see the benefit of these two large.
Rate increases we got.
That will be effective in our two largest homeowner books and so I think you'll see a nice lift in Q4.
Okay. Thanks, guys. Thanks, a lot.
Thank you.
Thank you we reached end of our question and answer session I would like to turn the floor back over to Barry for any further or closing comments.
Well.
Looking forward to more questions.
[laughter]. Thank you all for listening in and taking the time to hear about Kingstone and what's going on.
I look forward to our next call and more importantly, please stay healthy between now and then thanks everybody.
Thank you Yeah, hi, Thank you that does conclude today's teleconference. Webinar you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yeah.