Q1 2022 Kingstone Companies Inc Earnings Call
Greetings and welcome to Kingstone companies first quarter 2022 financial results Conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I'll turn the conference over to Rick Swartz, Chief Accounting Officer, Mr. Schwartz you may begin.
Thank you very much Rob and good morning, everyone.
Yesterday afternoon, the company issued a press release detailing Kingstone 2022 first 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 condition in part one item one a of the company's Form 10-K for the year ended December 31st 2021, 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 CEO Mr. Barry Goldstein. Please go ahead Mr. Goldstein.
And thanks, Rich and good morning, everyone. We're pleased that you can join us for their share our first quarter 2022 conference call.
To begin let me address the elephant in the room.
Last Friday, we issued a press release acknowledging that our board received a preliminary nonbinding indications of interest from a sophisticated private equity firm as to a potential acquisition about company.
What I can tell you is that our board is fully engaged as it always has been.
In that regard, we have retained tigerish capital markets and advisory as a financial advisor to assist us in exploring strategic alternatives and our board is working to fulfill its obligations on behalf.
Of the company's shareholders.
I have received many emails from shareholders some of whom I've known for many years all had questions I could not Ben and I cannot at this time reply to these questions well I take great pride in being forthright and transparent I cannot comment at this time.
We did not intend to disclose further developments unless and until we determine that further disclosure is appropriate or necessary.
At the end of this call I will take a limited number of questions and only from the analysts that follow Kingstone companies.
I've said it many times in the past at a company and its stock price did not necessarily go hand in hand.
For many years, we put up excellent numbers with double digit growth double digit returns on equity.
And our share price reflected those positive attributes.
Company and stock we're in alignment.
Our results declined and share price followed suit.
In my opinion this was due in large part to a loss of earnings power.
Shareholders have been frustrated our board demanded that we become hyper focused on profitability and restore the earnings power to its historic norms.
We set out with a plan to become a more modern company and needed to invest in our future to restore that profitability. The ultimate goal is to drive these profitability changes increasing them and allowed the numbers to speak for themselves showing increasing profits and higher returns with the expect.
Patient that doing so will encourage investors to become more interested in kingstone and lead to stock price improvement yeah.
Yes, there are macro ex macro issues to contend with no doubt, but we must focused only on what we can change and not going around moaning about things outside of our control.
And that's what we are doing and that's what we have been doing but right. Now there is this big disconnect as we've done so much to improve the profitability of our company already.
You just don't know.
Pardon me you just don't see it yet.
We started kingstone to point out is to focus on profitability about two and a half years ago. We began in July 2019, when I returned as CEO . We first exited the struggling commercial multi peril line of business to focus on homeowners coverages.
This cost us greatly both in terms of dollars and reputation.
But we needed to stop that bleeding at the same time, our premium rates hadn't kept pace with loss cost and we took rate for the first time in many years.
And we hired Merrill Merrill to prepare and execute on our plan to modernize our company and to put that plan in place. She rebuilt our management team she addressed the problems and corrected where needed she stopped our ever increasing need for more and more catastrophe.
<unk> and while our business in New York has been in good shape, she needed to take rate actions and tightened underwriting outside of New York and while doing this she has instilled a culture of profitability collaboration and responsive to this throughout the company.
We have spent these last two plus years acting on that plan, we built a new suite of products, which we call Kingstone select products that take advantage of modern analytics products that allow us to match rate with risk on an individual property by property basis and products designed to lead us to.
Greater efficiency, a reduction to our costs and a decline in our expense ratio and we are now seeing that we began selling select in New York during the first quarter and just last week, we began the expansion of selected Connecticut.
Through the rest of the year, we will with the approval of the various state regulators bring select all the states in which we operate.
One product across all of our states with a producer experience second to none.
But know this I'm aware that there hasnt been a positive market reaction to the work we've put it.
This is a business where profitability results lag well after the time actions are taken.
I do understand it is a matter of show me and we are working as hard as we can to do just that.
The first quarter was a typical first quarter for Kingstone.
Northeast business is seasonal and we again posted an underwriting loss due to winter weather.
This winter was worse than the prior year with for catastrophe events and high winter water losses, I'll, let Marilyn discuss the quarterly results in detail.
But I've already told you about many of the things we're doing to return kingstone to profitability now I want to share some of the results that we're starting to see from these initiatives, let's talk about margin expansion in the first quarter. We we we continue to see the impact of the rate increases we've taken to keep up with.
Trends.
During the quarter, our written premium increased by 12.7%.
While our policies in force grew by only 3.5%.
Please consider that we've added premium at almost four times the rate that we added risk.
We expect this premium growth to continue and the delta between premium revenues and expected losses to widen throughout the year.
And with our focus on expenses keeping cost in check while increasing revenue will further help increase our profits again, not so easy to see what we've already accomplished.
During the quarter, our quote activity increased materially for personal lines.
And in spite of the higher premium prices and strict underwriting standards.
New business production was up by 15% overall.
And what we've seen as rates have increased is kind of counterintuitive, but we've also seen our retention increase retention is up.
Every major line of business that we write this along with the increased quote activity gives you a sense of the favorable competitive environment. We are operating in.
Some of the drivers of last year's Unprofitability seem to have abated at least for this quarter. The number of severe fires in the first quarter was lower than in prior years liability loss frequency declined if only we can control the weather.
Now, let me talk a bit about our expense ratio, which is you'll be able to see is down three and a half points from the prior year. Now this is driven in part by the quota share and the corresponding ceding commission, but also by multiple expense reduction initiatives, we have taken.
As the quota share makes our expense is very difficult to understand let me share some interesting facts with you.
I said, we're starting to see the benefit of our actions.
Take a look at these underwriting expenses, but look at the dollars.
Underwriting expenses were up over last year by $349000, an increase of five 4%.
Commission expense to take a look at that in the first quarter was up $127000 or just one and a half point increase over the prior year.
Now compare that to the increase in direct earned premiums, which were up $3 million 459000 and look at it this way.
We spent less than 15 cents of every incremental dollar of earned premium on expenses make no mistake, our expense ratio is coming down.
With our catastrophe reinsurance renewal coming up very shortly we are pleased to report there is not a need to increase the amount of coverage we ought to purchase in fact, it will be down by about 5% from last year.
So excluding changes in rate.
None of these incremental premium dollars that I just referred to will be spent on catastrophe coverage.
Let me turn the call over to Marilyn now to review, our first quarter financial results Merrill.
Alright.
Our company culture.
Net loss of $9 2 million on 87 cents per diluted share compared to a net loss.
On three cents per diluted share for the phone through last year.
Our operating loss per share was 54 cents compared to 25 cents last year.
Direct written premiums for the quarter were up 12, 7% to $42 9 million, an increase of $4 8 million from the prior to.
This growth in premiums due to rate increases and we expect the premium growth rates like celebrate later in <unk>.
Can you just aren't turning into a new 30% quota share activate your own not written premium decreased by $5 9 million or 19, 1% this quarter.
The net loss and Alan you can share with six of 20.8 points from the prior.
This increase from the prior year was attributable to two main items firstly of screens for catastrophe events on catastrophes added 11 points throughout quarters loss ratio.
Cat losses were only <unk> seven points.
Second the increase was driven by winter related watering losses like hype freezes that added 12.5 points with your personal philosophy. So for this quarter.
Versus just one five points for Q1, 2020 one.
The two main drivers of our personal loss rusin, our 2020. One we're not factors when this quarter last spoke frequently about hating liability losses liability frequency.
Wow.
Homeowners.
Well that is more in line with history.
Dwelling fire liability frequency decline versus the prior year. Additionally, while the frequency of fires, but similar to prior years the number of banks like the boss of decline that's really from Q1 in the prior years, we've got the increase in the number of large fire losses last year.
Rhonda Unfortunately fire and large buyers in particular have far less impact on our Q1 results.
We are working hard to grow ahead of inflation in loss costs. In addition to inflation garner rate increases. We are also adjusting placement cost I'm policies at renewal.
For the current quarter, the net underwriting expense ratio decreased by five point preferred.
Five person the benefit of our expense that's something that's occurring increasingly reflected in our results throughout the year.
The first quarter is always unprofitable for Kingstone.
Winter in the northeast the increase in our loss ratio. This quarter was in great part due to the fact that last year. It was a much more mild winter.
Otherwise, we are starting to realize the benefits of our.
Oh initiatives as Barry shared earlier I wanted to take this opportunity to thank the many claims of Kingstone.
Art work is making to our reality along with our valued partners.
Water smooth an element we have done.
All of the right things to return the company to profitability now, let me turn the call back over to Perry to discuss our investment results.
Barry.
That's what you called being on mute sorry about that everyone. Let me catch up to where we are here.
So.
I need to address our investment portfolio as you know we've always invested primarily in highly rated limited duration fixed income securities and we like many others have seen the dramatic rise in interest rates over the past four months result in a serious decline in bond values.
Small felt most profoundly in the shorter maturities that kingstone holds a realignment in our portfolio during the third and fourth quarters of last year, let us to holding better quality bonds and a more diversified portfolio I'll be it at lower rates than previous.
While bond prices are down across the board along with a decline in prices of the fixed income Etfs preferred stocks and other assets that we hold we are required to reduce their values on our income statement and balance sheet and flow the changes through.
We've always invested with the intent of holding and generating income to support our underwriting efforts. We are not traders, we fully expect that our a plus rated portfolio will pay off at par upon maturity and the decline in other comprehensive income will be restored as that time approaches.
Like Merrill I continue to believe that we've done all the right things to return the company to consistent profitability and look forward to sharing the results of our efforts with you in future quarters now I'll turn the call back to the operator.
Operator, please pause for questions.
Thank you Mr. Goldstein will now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue you.
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Thank you and our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Good morning, Thanks for the call.
And you could give us a little bit more help and color on how we should think about the first quarter.
Run rate respectively.
Obviously for the remainder of the year I, obviously understand the seasonality but.
Last year was a very light year for weather this year.
Used nationwide. It was relatively light for you should we see this as sort of a normal level.
Beginning base.
Or are there a number of things that we should pull out.
Particularly some of those weather losses.
Do you think don't reflect kind of a normal quarter and I think we're just sort of trying to figure out.
In general kind of whats the right cat load and what's the right number there.
Non cat weather kind of mode.
Who kingstone given its many changes.
Yeah. Thank you for the question, Paul and I do think if I was able to accurately answer that question I'd be much better off going to Belmont This afternoon and betting the horses.
We're asking you're asking me to predict the weather patterns in the future I can tell you and Merrill can embellish. Upon this as she lives. So we had a very mild winter in 2020 one.
By comparison. This winter was worse that you know our business expanded mostly north we when we did go to New Jersey, but we also went to Connecticut, and Rhode Island, and Massachusetts. So we're more exposed to winter weather by definition, but also less.
Exposed to wind losses from catastrophes as a result, so we're we love where we're located is really as about in about as good a geography.
As you could expect.
You know I read the same things as everyone else does about the threat of Hurricanes the number of current gains and whatnot.
But for me to espouse on what I think the likelihood of an event would be I think it would be foolhardy for me to do that.
Well I could say is that the the first quarter was worse than the year before but if you heard what Meryl said Paul.
Absent that winter weather that heightened winter weather.
Our attritional loss ratio in the first quarter was below what it was last year.
I think that's the driver here, so if you're thinking about.
What to look forward to for the balance of the year I think what you'll you'll we'll see is that loss costs are being contained by a lot of things, but what I'm, hoping to see is that that attritional loss ratio will continue to contract, Maryland is there anything you'd want to add.
To that.
Yeah, the only thing I'd add Paul is that the two items that really plagued us throughout last year. This increase in liability frequency as well as a higher frequency of severe fires. Fortunately we saw neither of those driving the first quarter results.
So we're feeling really good.
Okay.
So maybe thinking about it slightly differently more on an annual basis. If you P. O L is down which it sounds like your probable maximum loss is down.
So the in general, which means you don't need as much reinsurance and all the other good things.
But you know is it possible that the shift in the geographic.
Alignment is also shifting the seasonality so.
First quarters worse, because you up north and away from the coasts because I would've thought that.
P a nose down.
The cat load expectation would also be down.
All through the year.
And I'm, just trying to kind of reconcile that with what we saw in the first quarter.
Yeah, I mean, the E. P. M. L represents quite a number of different issues that we have to contend with.
And and winter weather is included but as this wind.
So you know I I I cant profess to be an expert as to how the models weight each of these items, but I think the expansion north.
It does make us more exposed.
To winter weather than say the company. We were when we were just in New York and almost exclusively in Downstate New York.
So, but again what goes along with that exposure heightened exposure to winter weather is effectively a reduced exposure to wind events.
The further north you go the less likely it is for a landfall hurricanes frankly so.
It's it's very hard to answer the question again.
I hope we've given you enough color to give you something to go by.
No. Thank you I appreciate the help.
Thanks for answering my questions.
My pleasure. Thank you.
The next question is from the line of Bob Farnam with spending this category. Please proceed with your questions.
Yeah, Hi, there and good morning, similar similar questions. Paul So I think I think where we're getting at it is you said that there was 12 and a half points of the the water losses.
This year versus a half a point last year.
Last year it seems like its pretty low so you know is it.
Is it not is it novel you put a quite a normal year.
Few percentage points.
What happened and what does it look like in 2019 or 2018 in terms of our water losses, and we're trying to figure out how much of this is our is the out of the out of the norm just because you know we're taking a look at the first quarter ex cat loss ratio. It's still you know.
A good 10 points higher than where it has been in prior years. So it's just trying to figure out where that Delta is coming from you know.
It's interesting and we started to have this conversation just recently, there's a lot of other homeowner only type companies that report their results differently than we do.
So we limit our reporting.
To separating out P. C S. A catastrophe as catastrophe events, that's all we do.
Others have another block of information about severe when severe weather bad weather unusually bad weather.
I don't want to play that game.
And and try to make nothing into something frankly, but I think we're gonna be having to address that going forward because that's really the question you're asking.
How unusual was this heightened level of winter water losses.
And how does that.
Compared to prior years. So I think it's a question of will have to take you know in terms of reporting will have to take it under advisement, Maryland is there anything you'd want to add to that.
I I would just add that if looking back over the past five years 2022 was the worst.
Our cats and winter weather losses.
Others, I think going back higher than 'twenty, one 'twenty 19, So 80 I'm on I think you know team was higher but the others were a lower so this was a bad year and again looking at you know if we look at our results ex cat and acts of winter.
Lames, our free both our frequency and severity is down versus the same three year period.
I hope that helps.
Yeah no.
You're doing it as best as you can I'm sure.
It's just you know we talked about fire losses for example, and I thought maybe with the first quarter has an extra 10 points or something like that of fire losses and a typical first quarter. So we're just again, where you were trying to figure out what the what the water losses are the pipe pricing would be as well.
And am I to assume that there's a lot of these claims came from outside of New York I mean, I know, what you're talking about the expansion northward, but you know where where was the accretion of the AR that pipes bursting and and whatnot.
So our results are very much driven by New York still so I don't have the.
Exact answer Paul, but I'm pretty confident that it's driven by New York.
No I I also know that we had a couple of big ones in Connecticut. So.
That helps you at all.
Yeah, I mean, obviously over the past several years, you've been expanding outside of New York. So is this.
I understand that benefits from the P&L perspective.
Perhaps the penalty from from higher winter losses, but it is the performance of the kind of outside of New York book.
Going according to your expectations or is that still something you're trying to address with pricing.
Let me try to get back to what you just said.
Well all Meryl said was that this season in total was worse than last year and worse than what we've seen in quite a while I don't want to draw you to a conclusion that it's coming from an expansion north toward what you'd said was that effectively Florida of every five policies.
We still underwrite come from New York and it wasn't a very wide disparity in the weather amongst the states. We write albeit it's worse as you get north in terms of temperature, so I wouldn't draw that conclusion.
In terms of the expansion outside New York Merrell had a lot of work to do when she joined the company to fix the expansion efforts that were undertaken mostly while I was sidelined and wasn't the CEO , but but effective she she's fix that we've we've run off.
The vast majority of the problem homes that we underwrote maybe incorrectly at first.
We've increased rates too to make to put us back to a position where we can generate an underwriting profit.
And you know the things that we've done to further improve that whether it's a non renewing high valued homes or <unk>.
Making sure that the new product incorporates the actual costs of our reinsurance when when trying to take on a new risk. There's so many things that have been done but the benefit I think the benefit of all of those things will be.
Seen very very clearly in our efforts outside New York Meryl do you want to add anything to that.
Yeah, I mean, I I would just say that well first of all I want to thank our producers outside of New York for sticking with us because we have made.
Disproportionate number of changes in those states in terms of you know a tightening our underwriting and raising rates non renewing business move you know.
Really trying to manage our catastrophe exposure more than and our rate level and so we we feel good about where we are but the real fix is our new select product that we just introduced in Connecticut. This week and we'll be rolling out.
Rest of the year, because it's priced in a much more sophisticated way and better matches rate to risk. It by apparel rated so the finer segmentation and it includes the AAR cat model in our territory factors. So it includes the cost of reinsurance and the rate so really that.
<unk> is going to greatly improve our profitability in all states, but particularly.
In those expansion states for Kingstone, so again.
You know we've made a lot of changes to become more profitable in those states, but the real answer is to have a different product and select is the one and that will allow us to grow much faster and more profitably everywhere.
Great.
Thanks for that color.
And I guess the last question I had is is actually going back to the the weather losses.
Was there an inflationary impact on these it was it was there you know delays in contractors being able to get to the house and impact the.
Supply in the materials of construction materials now how much of it how much was that driven by inflation maybe relative to prior years.
Okay.
So you know I think your question really is is that our loss class up and like as we've been saying for this quarter.
When you are both our frequency and severity were up due to the catastrophes in the winter losses.
But if you take out those catastrophes in winter losses, you'll see that we had a reduction in both frequency and severity and so if you look at severity and you know what really drove this quarter's attritional Ah severity down was the lack of severe fire claims as we do.
Scott So at a company our size Bob is we're really too small to be able to determine the exact amount of inflation that drives our loss Clos and so while inflation is definitely in our numbers. It's just hard to detect the exact amount and we have to rely on.
Outside sources to determine how much inflation is for us it's more about the mix of perils and that's what drives our severity. So as I mentioned, we had more water losses and cat losses versus fire and so that's really what drove our severity this quarter end.
It's hard to detect how much of the increase is due to inflation itself does that answer your question, Yeah, Let me a bit more color on that.
You know talking about inflation and the statement I made previously that actions we take take it takes a long time do you see it go through the numbers well and it is specifically for inflation.
We take rate each and every year in each and every product in each and every state and one of the factors that determines how much rate we need to take is inflation.
So we don't have our own independently determined amount of inflation, we rely on the same types of local statistics that you and everybody else can see but the fact is that you know the next time, we take rate in any given state this heightened amount of inflation.
We are currently experiencing will lead to us raising rates so.
So I hope that gives you a little more color that that yes loss costs, certainly reflect some inflation, but that translates into higher premium going forward right.
Right. Okay, I think yeah, I think and I think Merrill you've mentioned before that you're trying to change rates a lot more frequently than you had in the past so rates reached probably change annually.
Yes. So we have instituted at you know our annual cadence of rate change we have indication meetings.
Every quarter to look at how much rate is needed in each state and whether we need to take any action sooner and so yes, and as I mentioned, we are also this year pulling replacement cloth updating replacement cost on our in force book, So that will also drive rate.
I hope that's okay.
[laughter] that covers just about everything thanks for bearing with me.
Ah yes.
I'll leave it there and I'll, let you guys off the hook.
Thank you.
Yeah.
Thank you we've reached end of our question and answer session I'll now turn the call back to Mr. Goldstein for closing comments.
Well very short thank you all for listening and taking the time to hear our story about the first quarter and we look forward to reporting on the second quarter. This summer so have a great day, everyone bye.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.