Q4 2021 Kingstone Companies Inc Earnings Call
Greetings and welcome to the Kingstone companies' fourth quarter and year end 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I will now turn the conference over to your host Rick Swartz Chief Accounting Officer. Thank you you may begin.
Very much Alex and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstone 2021 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 titled risk factors that may affect future results and financial condition in part one item one.
The company's Form 10-K for the year ended December 31, 2020, along with 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 CEO . Mr. Barry Goldstein. Please go ahead Mr. Goldstein.
Thanks, Rich and good morning, everyone. We're pleased that you can join US for this fourth quarter 2021 conference call. We are very happy to put 2021 behind us what a long year. It was.
And it was a difficult year, no doubt, but quietly and without much fanfare, we've rebuilt our company and its products. We are poised to excel and are very bullish on our future.
Relatively speaking the fourth quarter was okay with results quite similar to the prior year, but I'll, let Marilyn discuss the quarterly results in detail.
I'm going to talk today more about the year on the whole and I'll also talk about our future.
We ended 2021 with a significant underwriting loss the loss was driven by three major factors all of which had been previously discussed with you first catastrophe events added more than 10 points to our combined ratio.
Second a high number of severe fires added three points and third and finally, there was an uptick in liability claims in our property lines of business, which added almost two points.
Again, we've discussed this with you previously.
But we cannot control the weather nor the number was severity of the events. While we think the frequency of catastrophe events. In 2021 was highly unusual only time will tell if that's the case.
But it is what it is and given the large decline to our company surplus caused by these catastrophe events and those in 2020 as well we made the decision to strengthen our reinsurance protections and enter into a new 30% quota share treaty for 2022.
This quota share de risks our company both from catastrophe losses by reducing kingstone retention by more than 25% and also in conjunction with the addition of an additional layer to a single risk excess of loss treaty.
Our exposure to a large individual loss is cut by up to 50%.
We are thankful to our reinsurance partners for their support.
The frequency of severe fire losses that we experienced in 'twenty 'twenty. One has no specific course, we looked at every dimension there is and could not find the specific root cause we couldn't find an associated driver in our book and think it was just bad luck.
But with the new reinsurance structure, we are better protected from these severe losses.
As far as liability losses go it's my opinion that most of it is attributable to COVID-19.
People working from home and spending more time in and around the house resulted in more opportunities for problems.
Couple this with a lot of deferred maintenance on the structures and property.
We have seen these factors abate in the fourth quarter and into 2022 .
In the fourth quarter the positive impact of rate increases we've taken are beginning to show up noticeably.
The full year, we had a 7.3% increase in written premiums.
But just a 2.9 increase in policies in force.
The GAAP, where premiums are rising faster than exposures is what we've been working on.
Increasing profitability and widening underwriting margins.
In the fourth quarter that impact is magnified.
Premiums grew by almost 13% with but a one 1% increase in policies in force over the prior quarter.
As the rate actions taken by our team continue to work through our financials and maintaining our strict underwriting discipline the enhanced profitability will continue.
We are seeing these same factors play out in 2022 to date again. This is just an ever widening increase of premium over risk taken.
There is always a concern about retention when raising premium rates will be insured seek to shop elsewhere to contain their costs. While we have seen our average rates increase and increased markedly. We are very pleased and in fact, instead, our retention is increasing not decreasing.
This bodes well bodes well for 2022 and the future.
You've heard us talk about Kingstone two point no our modernization effort for some time.
Our goal since late 2019, when Mel joined our company and put this plan into place was straightforward and simple.
First build the new advanced product, which better matches rate to risk drawing upon multiple data sources and incorporating.
Incorporating property specific reinsurance factors, we called these products select.
Select homeowners' select dwelling fire select honor our agent partners, who for the past 20 years, we've called select since John Ryerson was C E O and he began this naming.
Second Kingstone two point all sought to streamline our many systems into a single policy issuance and management system to run our company, we are making great progress on our system conversion, we're on track to retire our legacy systems. This year.
This will reduce our expenses and greatly increase the efficiency of our staff.
Expenses declining is the hope to our result.
It is in fact, a very exciting time to be at Kingstone and the benefits of the second prong of Kingstone 2.0, we'll begin to work through our financials.
2022 will be a pivotal year for the company as these kingstone two point O initiatives come to fruition or.
Already we've achieved the single biggest milestone we've gone live with our select homeowners and our select dwelling fire product in New York, which is you know still accounts for more than 75% of a total premium generation.
Given the improvement in pricing sophistication and these new products, we are confident that with its heightened segmentation and expanded granularity select will translate into significant improvements to our loss ratio.
It will enhance our profitability.
And our goal is to bring these select products to all states and pending regulatory approval. We expect this process to be completed within a year.
Let me now turn the call over to Mel to review our financial results Merrill.
Thanks Barry.
The company posted fourth quarter net income of $2 2 million and 21 cents per diluted share compared to net income.
I'm 28 cents per diluted share for the same period last year direct written premiums for the quarter were 13.2% Chris. This one client 1 million a new high for the company an increase of $5 9 million from $44 2 million in the prior.
Period.
Entering.
30% quota share reinsurance treaty effective at year end.
Net written premiums decreased by $26 8 million or <unk>, 58.5% this quarter.
2021 Q4, not Boston Alley.
61, 8% down.
Down 1.6 points from the prior year. So it was a relatively good quarter during the fourth quarter, we experienced two catastrophe environment and <unk> added almost seven points to our quarter's loss ratio.
For non clock frequency declined from Q4 in the prior year, particularly in the fire apparel, but there were several large losses coal fire and water, which increased the quarterly loss ratio by 12 points nine points.
[noise] liability frequency.
Since the third quarter for our largest line homeowner.
That is more in line with history.
Selling fire liability frequency.
Compared to history, but we are seeing some signs of improvement over the past few months, we've continued to look back.
Frequency is related to COVID-19 .
<unk> previously shared.
For the current quarter.
Underwriting expense ratio increased by a half a point to 39, 4%, but our underwriting expenses as a percent of direct written premium were down a half a point, we'd expect to see a decline in our expense ratio in 2020, so due to many factors including the.
The retirement of our bank.
Overall it was a good quarter. This is a pivotal time for the company as we will finally start to realize the benefits of our clean sounds duo in the second week.
John on <unk> all of the right thing to return the company to profitability.
Now, let me turn the call back over to Barry to discuss our investment results.
Okay.
Great. So during the quarter, we realized a gain of just over $4.4 million on our bond portfolio.
Our new portfolio manager is better diversifying the investments and adding new classes, while increasing the portfolio's average credit rating.
The proceeds from these sales were reinvested in limited duration high quality fixed income mortgages and bonds.
Unfortunately, like many others, we've seen a decline in bond values of rates in late 2021 and into 2022 have moved up considerably most profoundly in the shorter maturities such as Kingstone holds.
During the quarter, we did not repurchase any more shares and we paid an additional four cents in dividends.
Merrell I'm very bullish that we have done all the right things to enhance our profitability and look forward to 2022 now.
Now I'll turn the call back to the operator to poll for questions. So that I can reply to them operator, please pause for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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Our first question comes from the line of Bob Farnam with Boenning Scattergood. Please proceed with your question.
Yeah, Hi, there good morning, so the Kingstone 2.0, it sounds like you know with the conversion of the legacy systems is that pretty much the process can be done in 2022.
Yep.
Okay.
Working at this.
Alright good.
Is the year, where you know the rubber hits the road.
Right.
You noted that the the expense ratio is probably going to benefit from the lack of.
The like the improvement of legacy systems and the changes. So can you give us an idea of maybe the magnitude that you're expecting to see it in the expense ratio.
Meryl do you want to take that sure.
So it's really difficult to understand our expenses went up because of the quota share treaty. So we have running off that new treaties coming on so.
I think the right way to look at our expenses as a percentage of direct written premium and when you look at our expenses that way what you've seen is that our underwriting expenses are actually coming down and they'll continue to so the legacy systems. As an example that will be retired this year they'll say.
Give us over 1 million five annually from retiring those system. So right now we're kind of double paying we've also incurred quite a bit of a expense relative to that.
Many of our select product that has been expensed along the way. So those consultant expenses will be gone as well. So there's many other things that we're doing and I think you'll see a nice reduction in our expenses in 2022 and beyond.
Okay, great thanks for that color.
Just switching to rate increases so what what type of rent increases.
Did you achieve in 2021 and what are you filing for for 2022.
Yeah. So in our you know we are now on an annual trajectory in all of our state.
And in 2021 we had high single digits on average and we expect something similar for 2022 .
For example, in New York, we have 8% running through our book right now.
8%, Great and last one for me and then I'll I'll leave it for others to ask.
For climate change you know some people have noted your the potential for stronger storms hitting farther north.
Is that a concern for Kingstone and is that was that part of the rationale for increasing the reinsurance protection.
Well, let me, let me start with that Bob and yes of course, we.
We're cognizant of this.
You know, it's it's easy to point to climate change as a factor, but yeah mean being being realistic.
My job is to protect the company's balance sheet and that's really why we strengthened our reinsurance here.
Okay, great. Thanks for that.
Great. Thank you.
Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Hey, good morning, thanks for the cause and.
Beyond rate you've been doing a lot of work on improving the underwriting process itself.
Is there any signs you can point to about the mix of change or.
Sure.
Yes on the coast are you.
Is the age of your customer change.
Maybe you can just kind of talk to the sort of composition of the book and how it's changing.
From them from a type of customer and location perspective, yeah.
I think that points directly at our new select product and since Merrell was really the one responsible for that matter I wanted to try to give a little color as to what the impact we're seeing and we expect to see.
Sure. So so first of all one thing I want to mention.
Mention is we've spent a lot of time managing our catastrophe exposure. So this was even before so I.
And so what we're seeing this year as we go into our next reinsurance by is even though our premium is up our P. M. L. A is actually coming down so I think that bodes very well for reinsurance expenses and I think it's an example of the different things we've done to better manage the company.
In terms of select we're not seeing that much you know it's kind of early we're not seeing that much of a mix difference, but one thing we did when we built this new by apparel product.
As we loaded the projected loss in reinsurance our cost from the AI, our cat model into our territorial factors and so we have a much better matching of rate and risk and what it's allowed us to do is broaden our underwriting appetite.
Because we have confidence that we are now priced adequately for those exposures.
So I hope that answered your question, if not I'm happy to.
Is there anything else you have I mean, just just to be clear you know a little more from what Mel said.
You know, we buy two or one 134 catastrophe loss. So return period of 130 years, keeping that the same way.
We bought two of our $500 million limit in each of our renewals for 'twenty, 'twenty and 2021 and.
And for 2022 based upon the latest data we have the limit will need to buy two will actually be less than $500 million. So all the actions that had been taken to control our P. M L.
It's not that they're done but they've worked.
And we've contained out.
Our cost of reinsurance by doing so.
I hope that gives you a little more color.
No absolutely.
And then just thoughts on the competitive environment, we had a period of time, where you had some some of the folks need to Florida writers in particular coming in hard into you reaching but.
It sounds like that may have been at least a little bit.
But love to hear what you are.
Do you think with your given your feeds on the ground.
Yeah.
You know what I would say is you know theres always competition <expletive> somebody always takes the place of you know a new company comes in to take the place of one exiting but at least with respect to the Florida writers, who expand it to New York, Yes, there they're not as much.
The other factor.
If a factor at all frankly as they had been.
So, but there are others and we continue to manage that I think Merrill you want to add a little more to this.
Sure I mean, I would just say, it's a very robust competitive environment and as Barry said some of the companies that historically were the strongest start more on the sidelines now, but there's plenty of other companies are writing business in that we're competing with and you know at different times, some get really aggressive and they are.
It hurts our volume and all we can do is just hope that they learn quickly from their mistakes. So we haven't really seen any new players that are you know has much of an impact but it is a very competitive marketplace, where and we are very well positioned in this marketplace.
Right.
Best of luck on the rest of the year. Thanks.
Thanks, Paul.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Gabriel Mclaren a private Investor. Please proceed with your question.
Hey, good morning, guys.
Congrats on the direct written premium record.
Thank you yeah yeah.
Yeah, that's really great Hey, so I wanted to ask a clarifying question.
The policies in force.
First of all and then maybe get into the portfolio later.
The policies in force.
Did I hear you right Barry when you said they grew by two 9% during the year and 1% in the fourth quarter.
The yearly increase was two 9% in the sequential quarterly change was one 1%.
Okay, great I'm, saying that.
Match those numbers up from what you said.
Okay.
Cool.
Okay. I mean look we've spent the better part of a more than two years focusing on profitability.
Profitability by taking rate.
Profitability by being smarter about underwriting.
Profitability in many measures, but to me the most obvious inference is if you're growing the dollars faster than the amount of risk you're taking on then by definition you have profitability widened.
And that that's really what we're talking about.
Okay got it thank you.
And then.
Just kind of like to dig into the portfolio realignment.
You know what what's what's the overall credit quality of the bond portfolio look like and then maybe what is the other 22% of the portfolio look like.
Stuff like that yeah. So that's fine.
The bond portfolio.
Is it the biggest single component had been corporate bonds and when we changed.
Folio advisers during 2021, they felt that a reduction in the corporates was needed and an expansion into mortgage bonds was in order.
So that's that's really what got underway and you saw a lot in the third quarter. So we've.
Better diversified the bonds I don't know it had been overall, an a minus rating and I think the last time I looked it might be on an overall a rating.
The average credit quality of the bonds, we have maintained a limited duration of give or take five years, we've been to that so when you look at the interest rate markets. Most people see the 10 year really our portfolio varies with the five year.
And what's happened recently as you know the short end of the curve has been the one that lurched forward first.
Dissipating the fed rate increases so I.
I hope that gives you a little more idea about our fixed income the rest of the portfolio is made up primarily of preferred stocks.
And some common but really as a percentage I'm not sure.
I believe your 70, some odd percent to fixed income.
It's actually higher than that.
But virtually.
95% of what we own is either a bond or a dividend paying stock or a fixed income type of E. T S.
So we you know are our goals for the portfolio remain unchanged, it's to enhance our profitability, but protect.
Protect our balance sheet, while doing so so we don't swing thoughtful runs we're happy just hitting singles.
Okay, great. Thanks that makes a lot of sense great. Thank you.
Our next question comes from the line of Gregory Fortunoff, a private Investor. Please proceed with your question.
Hey, good morning, Barry how are you all right thanks for calling Greg.
Okay.
Couple of things. So you mentioned a few times in the call.
This the first quarter and since we're fairly.
Far along can you talk about that I mean.
Any comments as far as how it's looking.
Yeah, I mean to the extent that I can't can Greg I will and you know you're right I have alluded to it we have seen a continued.
Growth in our portfolio at a rate.
Very much matching what we saw in the fourth quarter.
Premiums are growing nicely, but much faster than policy count.
Further showing the rate burning through our portfolios. So in that way I can I can help you.
Give some thought to what the first quarter it looks like.
And it's as far as catastrophic.
Vic or I forgot to turn that to use the losses. It seems like it's been a pretty mild fourth quarter or is that.
You know at least from my eye is that is that yeah.
Yeah, well, if I remember, Greg you're only about 10 miles from me. So you see basically the same things, we do Maryland, where you are you aware of any P. C. S events in the first quarter.
I think we may have had one small events, but youre right. Its a mild winter yeah keep in mind, Greg that we go from Massachusetts to New Jersey. So there's a lot of weather that takes place outside of the New York Metropolitan area that we don't see or.
Hear about until I look at the claims counts come through.
Okay.
So obviously based on what Youre reporting you know a lot of things are hitting on all cylinders and all of a sudden people work for is coming to fruition. So on a normalized year. We don't have the events that you know.
Our catastrophic you know the real big ones, what can we expect like what would an earnings expectations would be I know its hard with storms and all but based on your you mentioned history a lot of in the call about historically, so historically, if we went back to a normalized type storm season like what can we expect as in earnings.
Oh level, Yeah, I mean twice in the past, we've tried to give guidance as to earnings or combined ratio and whatever and quite frankly I found my foot in my mouth. Both times, so I'm not anxious to do that again, what I can say is that.
If you just take knowledge that so much of the the volatility in our financial results comes from the volatility in weather.
Then.
Typical non heavy cat year.
Should see our results come into.
Call It mid Ninety's combined ratio.
So underwriting profitability.
And we're.
Our return on equity in the higher single digits, if you would mid to high single digits.
Craig it's very difficult for me to of course the storm.
What storms are gonna come you would probably wouldn't be you're probably doing b on the beach right now no.
I actually IP at aqueduct.
[laughter] Alright last question I saw you didn't buy any stock back this.
Last quarter I'm, assuming that's just for capital reasons. It at some point will you start buying stock back or is that on hold until.
Results improve yeah, no I think the you're right we didn't make any purchases.
And we're trying to be very considerate of the amount of remaining capital we have I mean, each of those two storms I say, Oh, However, you pronounce it and then either they were $10 million of events for our company.
Yeah, I mean, I think a stock that's trading that I feel so good about that's trading at 70% of book value is.
For for me running the company.
It's a great place to put excess capital.
Right now I'm not sure that I want to consider what we have as excess.
Okay, well since you opened the door to.
To that can you is there any I saw that there was some.
Awards that you I think you elected stock in Missouri thing you know from the inside or point of view as far as the stock.
Purchases or positions and stuff like that.
No I mean, I've I've have always filed with the SEC timely for all my share purchases and I think what you might be talking about is a I had a restricted stock awards that vested.
At the beginning of this year.
That's publicly on record and.
I think I wind up now owning at least according to S&P global.
Nine point, 95% of the.
Shares of the company.
So yeah.
There's no intention.
To do anything, but but more of the same.
Keep in mind that the the tax cost.
Two that vesting for me was in the hundreds of thousands of dollars.
So okay.
I pay for the privilege.
I understand alright, well I'm looking forward to a good year and hopefully we won't have too many storms. Thank you very much. Thank you Greg.
Okay.
Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Barry Goldstein for closing remarks.
Great and thanks, everybody for joining in and thanks for following up with Kingstone.
We are in the midst of a pivotal year, we've got a team in place that is happy and working really hard to deliver and I'm really hopeful that the results will pan out and even be better than what we've we can hope for so thanks again, we will talk again.
Soon.
Hi.
This concludes today's conference and you may disconnect your lines at this time.
You for your participation and have a wonderful day.
Okay.
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Yes.
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