Q3 2021 Kingstone Companies Inc Earnings Call

Greetings and welcome to Kingstone companies third quarter 2021 financial results Conference call. At this time all participants are in he looks at only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host today, Amanda Goldstein Investor Relations Director. Please proceed.

Thank you very much the Tanya and good morning, everyone yesterday afternoon. The company issued a press release detailing <unk> 2021 third quarter result.

On this call Kingstone may make forward looking statements regarding itself and its business.

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.

For more information please refer to the section entitled Thursday May affect future results and financial condition in part one item one of the company's Form 10-K for the year ended December 31st 2020, along with the commentary on forward looking statements at the end of the Companys earnings release issued.

Today.

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 CEO Mr. Barry Goldstein. Please go ahead.

Thanks, Amanda and good morning, everyone. We're pleased that you can join us for the South third quarter 2021 conference call.

From a weather perspective, this was unlike any quarter in the company's history we've.

We've had bad quarters before no doubt, but never had there been more than one single million dollar catastrophe event in any calendar quarter.

Unfortunately last quarter, we saw three seven figure storms.

These catastrophe losses totally outside of our control and it's 33 points.

To our combined ratio pardon me.

And there were other items that impacted our attritional loss ratio that Merrell will review with you in a few moments.

In my opinion, we've seen changes in loss patterns much of which is attributable to COVID-19.

While we operate in five states the vast majority of our business is in the New York Metropolitan area.

One of the first hard hit areas from Covid with more folks beginning working at home.

Little travel most people staying in their house using more home appliances, having more people around at the same time or walking in the streets, you get what I'm, saying these seem to have resulted in more opportunities for problems in and around the home and home is our business.

We're now seeing these factors abate as people return to work and the kids go back to school.

Keep in mind that ours is a narrowly focused business with two lines and with a concentrated exposure to the northeast.

We previously noted an increase in both homeowner and dwelling fire and liability claims, but have now seen our homeowner liability claims return to a more normal loss pattern.

It will take time to see this return to normal in dwelling fire as those claims are generally reported later than a homeowner claims.

We cannot control the weather not the number nor severity of the events.

All we can do is prepare ourselves to pay claims in an expedient and orderly and fair fashion and I am very proud of our claims team, which has demonstrated a never ending commitment to our policyholders and select producers.

For the past two years, we've been hyper focused on profitability.

We've taken many many steps big and small.

We exited unprofitable lines raised rates almost stopped the growth in our reinsurance purchase tightened underwriting and all while preparing for the future.

Rate increases are pending or have been approved in most of our states and we are committed to taking rate annually to stay ahead of trend.

Well on a year to date basis, our premiums are up 5.2%. Please note that our policies in force are up by one third of that or one 7%.

We expect that this spread will widen materially resulting in an ever increasing average premium rates as we have seen and have significant rate that is beginning to earn in for example in October our premium grew by more than 10%.

So as I mentioned last quarter, we are continuing to see growth in new business due in large part to the restrictive actions taken by some of our competitors.

In Q3, we've seen our quote activity increased by over 24% as compared to the prior year.

Likewise, our new business policies bound by our select producers were up 18% in the third quarter.

Most importantly, the average premium on this new business is up almost 16% compared to last year.

I am confident this is profitable growth.

You've heard us talk about Kingstone 2.0, our modernization effort led by Merrell for some time.

The two goals, where simple to build a new advanced product better able to match rate to risk.

Along with having a single policy issuance and management system to run our company.

And in fact, we had two major milestones during the third quarter.

First we did receive approval from the New York Department of financial services on our new products I am pleased to announce that our new but yet unnamed product will launch in the first quarter of next year.

Given the dramatic improvement in pricing sophistication in these new data driven products. We're confident we will see significant improvement in our loss ratio.

Second we've made great progress on retiring our legacy systems during the quarter.

We anticipate the complete exit from these old systems next year, bringing significant expense reductions as we gain efficiency.

Ask the Merrell joined the company just over two years ago her charge was to modernize the company.

And I'm pleased to say, we're now in the seventh inning not sure if the top of the seven to the bottom of the seventh but we're in the seventh inning and we expect this three year 2.0 plan to be complete by the end of 2022.

Let me now turn the call over to Merrell to review our financial results Merrill.

Thanks Barry.

The company posted a third quarter net loss of $10 6 million or a dollar one per diluted share compared to a net loss of $1 2 million or 12 cents per diluted share for the same period last year.

Written premiums for the quarter were up by six 8% to $48 9 million, an increase of $3 2 million from 42.6 million in the prior year period.

Due to our exit from quota share reinsurance this year net written premium increased by 39% this quarter and net earned premiums increased by 34%.

This quarter, we experienced three catastrophe event.

And Reed and either that added 33.1 points to the net loss ratio. We have received approximately 1800 claims to date from these storms and I'm happy to report that more than 95% are closed for Elisa and Ann Marie and more than 80% of the claims have been closed.

For either I want to take this opportunity to thank our claims organization for working so incredibly hard to help our policyholders.

Given the significance of the cat events during the quarter, we made the decision to purchase stock coverage to reduce our retention plus 5 million for the remainder of the winter season.

Our non cat loss ratio was also high this quarter. There were two primary drivers first we continue to experience higher than historical liability claims in our dwelling fire product.

Last quarter, we shared that phenomenon and I'm happy to report that liability frequency for our larger homeowner product for Q3 was in line with prior years, but dwelling fire liability, it's still elevated.

I want to remind you that liability frequency for personal property is incredibly low less than two tenths of 1%. So the increase amounts to in theory you'd number of claims we continue to suspect. This increase is related to COVID-19 as Barry just sure as people return to work or less homes.

Sentra and as property owners are better able to get maintenance done on their homes and we look forward to seeing frequency returned to a more typical level.

The second driver of our high Cat loss ratio was an increase in severe fire claims let me state that we did not see an overall change in the frequency of fighters, but overall severity has increased due to a number of large fire claims otherwise our Q3 non cat loss experience.

Comparable to prior years.

For the current quarter, the net underwriting expense ratio increased a half a point to 39, 3%. This increase is primarily attributable to the exit from the 25% personal lines quota share treaty and the decrease in Provisional Ceding Commission that goes along with it. In addition, our results for <unk>.

The increase in IP and professional services expenses related to the Kingstone two <unk> initiative.

Overall, it was a very disappointing quarter, but we remain steadfast in our belief that we have done and continue to do all the right things to return the company to profitability.

Now, let me turn the call back over to Barry to discuss our investment results.

Thanks Merrill our.

Our investment portfolio continued to perform well with a focus on limited duration high quality fixed income.

Overall interest and dividend income net of expenses was up just over 12%.

During the quarter, we shifted fixed income managers and the goal last quarter was to achieve better diversification.

We reduced our concentration in certain asset classes, adding to others and starting new ones.

This had the effect of increasing the overall credit quality of our portfolio.

With very little change to our modest duration that we've always count.

Further changes were made in the fourth quarter and I will share those with you on our next call.

During the quarter, we repurchased 88000 additional shares at an average price below the quarter ending book value per share.

So that this is.

Driver to our future earnings per share.

We paid four cents a share in dividends and we announced a fourth quarter dividend of four cents payable to our shareholders on December 15th.

This is our 42nd consecutive quarterly payment.

Now I'll turn the call back to the operator to poll for questions that you may have operator, please pause for questions.

Yeah.

Thank you at this time, we will conduct a question and answer session.

We would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith Once again, that's star one to ask a question at this time.

One moment, while we poll for our first question.

Okay.

Our first question comes from Paul Newsome with Piper Sandler. Please proceed.

Good morning nice.

Nice to hear you all.

I was hoping you could give us maybe some examples of the losses that were really COVID-19 driven.

Because people are staying home just to kind of frame them in our minds is too.

What specific types of losses Youre talking about just a few weeks a couple of examples maybe Mary you want to start and I'll throw in anything extra.

Sure. So these liability claims are in our dwelling fire book most of our dwelling fire book our tenants.

In you know properties owned by our policyholders, they're they're they're typically trips and falls the sidewalks stairs.

And we do believe that you know there is less maintenance going on given the difficulty in getting contractors. These days and so those are what the claims are alike.

Yeah, I think you know that that's the kind of claim Paul it's the combination of more people being around.

And an inability for the homeowner or the dwelling owner to get the properties repaired as they had in the past so it's kind of like deferred maintenance that's being done now I.

I hope that answers your question.

It absolutely does.

But along maybe a similar theme a lot of what we've heard this quarter from other companies is discussion.

Hmm.

Sort of more broad inflationary trends things like home prices and.

Construction material prices labor.

What sort of.

Impact are those more broad.

Inflationary trends you think having on your book versus stuff that's more.

Yeah.

More.

Either very regional or.

Hum.

To your book only.

Mary you want to start on that one.

Yeah, So I I do thing called.

As other companies have indicated that we are experiencing this overall inflation.

You know I I saw a recent report from various cause that material prices are up four building cost prices are up I think six 8% on it you know year over year basis. So we are definitely experiencing that in our portfolio.

Yeah.

Any sense of kind of health.

Is it the majority of the impact in your view.

Annuity.

Perfect.

I'm not sure what you're getting at when you say that pool.

But that is really I mean, if you look we're seeing it in loss costs right.

And it's a combination not just of of inflation.

But our our obligation is to put a hold back the way it's supposed to be put back.

And if for example, if the next door Neighbor's house caught fire and deciding on our house got burned we've got to replace that side, maybe even the whole scale you know maybe half to half the houses siding, but what if we can't get because of supply chain disruptions comparable material to read.

The home.

So we have to buy more we can do it cheaper.

So you know where we were at a loss on that and maybe.

Maybe when the supply chain problems start to abate, we will see that come back to normal.

And it also takes longer to get repair is done so in cases, where the property is not livable, we have an increase in additional living expenses as well.

Well, thank you for helping insight I appreciate it.

Great. Thanks, Paul.

Our next question comes from Bob Farnam, with Boenning and Scattergood. Please proceed.

Yeah, Hey, there and good morning.

I have a couple of questions on the kind of the accident year non cat.

Loss ratio, so 64% for the quarter.

Higher than I was expecting maybe can you just kind of tease out how much of that was related to.

You know the higher than expected fire losses, or the liability claims I'm just trying to figure out kind of what are.

Quote unquote normal quarter would look like in that for that ratio. Yeah. Let me, let me start this Paul and I'll, let merrell chime in but you know what you do and what everybody else does is they compare the third quarter of 2021 with the third quarter 'twenty 'twenty and.

Try to look for what causes the the variance and that does make sense.

But if you look back and I'm sure you will to the third quarter 2020.

We had a non cat loss rate non cat combined ratio of 80.

So in your parlance, we had a bad comp to go against to explain.

Mel if you want to go to a little bit of detail on the a high severity fires as well as the liability losses. Please.

Yeah. So.

Bob we think that the fires added roughly eight to nine points.

For the quarter.

And the dwelling fire liability frequency added.

Somewhere around four points.

Is that kind of in addition to what a normal I mean, obviously you have fire losses.

Happen every quarter, so yeah that above and beyond what extra okay. That's what I was trying to figure out yes.

Just like we do when you do get buyers you know we get large fire. So all the time.

They just happened to be concentrated in Q3. This year. So I wish I, Yeah, I went back and tried to find that I couldn't but I think it was in the first quarter of 'twenty 16 that the same thing happened that we had just a concentrated quarter of high.

Dollar fires.

And then you know, it's just it's going to happen.

Right homes now we have a limit our we've reduced our limit of cover J down to $2 million, we'd had at far higher before so we're we're not writing as many high valued homes and that should taper things in the future.

But we've had this before if if anything.

My mentor, John Ryerson always tells me remember this is a fortuitous business and in this case, we're on the wrong end of that fortune. So.

Right.

Question, Yeah. So.

And then maybe just a more of a general question how much I don't know what your your underwriting criteria and is but are there what what percentage of your homes or kind of like secondary homes versus primary homes and I didn't know if that if the if that had any impact on the claims.

So I don't know the exact percentage, but it's something like.

Like 10%. So most of our homes are primary residences. So I don't think it's related.

Okay.

That's it for me thanks.

Thanks, Bob.

Our next question comes from Gabriel Mcclure, a private Investor. Please proceed.

Yeah, I've got a couple of questions first one is it's kind of you know a lot of people are focused on the quarters I just want to look at year to date results with a combined ratio coming in at 115 ex cats, one O three five.

And the forecast for high eighties, or low ninety's whatever it was earlier in the year.

I guess what was the learnings that we've made so far this year that we can apply.

In the future, which is what we all care about.

First question.

Well Hi, Gabe.

Yeah.

So we set out with.

High aspirations for Oh.

A better combined ratio for the year.

We saw the impact.

Covid, we saw the impact of these increased number of liability claims.

We withdrew.

Our guidance at that point, but what we've learned from it is that and we're planning for now is I think there's going to be more and more hybrid work more people will stay at home.

So this the they may be the normal loss patterns will change some.

And in our projections that we're working on for 2022.

We're anticipating that we're going to need to take more rate.

To accommodate more work from home.

Secondly, while we've always always presumed a certain amount of inflation in loss costs. This spike that we've seen recently is going to have to be dealt with this is going to be passed through to the policyholders.

Right now I think most pundits are looking at more longer term inflation rate closer to 3%. So we'll add something like 3% onto our future trend when taking rate.

Those are a couple of the things we've learned from and are reacting to.

Okay very good that's helpful.

And then just kind of dovetails into the next question, which is.

We're we're that time of year, where you guys are doing the rate increases. The my question was what kind of rate increases are we doing and then are you going to be resuming combined ratio guidance going into next year on those.

I'll, let Mary handle the first part of that and then I'll chime in afterwards.

Yeah. So we have been taking rate and all of our states in general.

Like a high single digit you know as an example, we just went live with an 8% increase in our New York Homeowners book. So we you know we do have a quarterly indication process, where we look at our rate need every quarter and we will file additional rate as needed, but so far.

This year, it's been in the mid to high single digits.

And yeah.

I think you know I think that's correct I think what we're seeing across the board not just in homeowners, but and not just in the New York area.

Is that we need more rate is needed and it's unfortunate the way.

Hey, these things work we.

We had a bad year, but we have we have a number of constituencies that we have to deal with I think about our policyholders and the wait we're placing on them.

Think about my employees.

Who won't.

Won't have a generous Christmas present this year.

I think about our agents.

And I think about our investors and maybe more so my job I work for the investors.

My investors have seen the value of their investment in the company declined materially.

Depending upon your price point by as much as 75%.

We've seen the investment income provided to our investors at least in form of dividends declined by 60% I'm I'm not happy no one's happy.

But let me just say we started this process two years ago, you don't see the benefit other than the rate increase you would take it you do not yet see the benefits of the things that we've done.

And while I'm, calling out milestones and our ability to get a product approved or.

In in and making ourselves more efficient.

I can only ask you to show patients on that level.

Because I do think that will help us and bring us back to profitability.

But history is history, what's the past is the past we lost money in this quarter, we've lost money in prior quarters, we're not happy about that but there's nothing that is available to us that we're not pursuing that I can assure you.

So I hope that answers your question Gabe.

Yes. It does thank you very much.

Okay.

Ladies and gentlemen would you have reached the end of our question and answer session I would like to turn the call back to Mr. Goldstein for closing comment.

Great. Thank you very much thanks for bearing with US yes, this was a difficult quarter.

And I'm steadfast in my belief that we've done.

And are continuing to do all of the right things for our company in order to return it to consistent profitability. Thank you for listening in and taking the time to hear our story.

Have a great day.

Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great.