Q2 2022 Kingstone Companies Inc Earnings Call

Greetings and welcome to the Kingstone companies' second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question. Please press star one on your telephone keypad, 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 it is now my pleasure to introduce your host Ms. Amanda Goldstein Investor Relations director. Thank you. Please go ahead.

Thank you very much Dana and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstone 2022 second quarter result.

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

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 the doctors 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 31, 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 Mr. <unk> go ahead, Mr. Goldstein.

Great. Thanks, Amanda and good morning, everyone. We're pleased that you can join us for todays second quarter 2022 conference call.

As you know prior call with the elephant still present in the room.

At the end of our remarks, I will share what I can and hope you understand what I say is limited as per an existing nondisclosure agreement.

Today as in our prior call, we will only accept questions from the analysts that cover the stock.

But first let me talk about the state of Kingstone.

Our focus remains squarely on returning kingstone to profitability.

It's not an overnight process, but much has already been done and much is underway I'd like to begin by reviewing the key changes we've made.

And which we have focused on in order to improve our profitability.

First we have been and continue to take rate in all states. We're achieving this through a combination of rate filings inflation guard increases and adjustments to coverage to properly reflect increased replacement costs.

Second through the introduction of our new select product suite, which better matches rate to risk we are targeting more profitable risk profiles select which is now live in over 85% of our footprint and which will increase to more than 90%. When our next date goes live later this quarter.

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Third we developed and have implemented a proprietary model to enable us to better identify.

Currently insured risk risks that do not meet our profitability standards.

And fourth and last we've made numerous changes to reduce our expenses and I'm pleased to note that this effort, which has begun to bear fruit as a result of Kingstone 2.0, and that'll be discussed by mail.

But one last thing before not all reviews, our operating results I'm not sure that I need to but I do feel obligated to point out what many of you already know.

Our premium rates are approved by the insurance departments of each state in which we operate and remain at that level until the next approved change we cannot and do not flow through our increased costs as they occur like so many other businesses can.

Our loss and loss adjustment expenses are subject to inflation supply chain issues make repairs more difficult makes the repair processes take longer. So yes, we price that in but the rate impact is deferred and our current results reflect the 9% to 10% inflation seen throughout.

Our northeast footprint, so with that let me turn it all but tomorrow to review our operating results for the second quarter Merrill. Please go ahead.

Great. Thanks, Barry.

Company posted a second quarter net loss of $5 4 million and 51 cents per diluted share compared to net income of $1 3 million and 12 cents per diluted share for the same period last year.

While approximately 33 cents for sure. This decline was attributable to the spike in market interest rates and the decline in value of our equities and other investments I will tackle the operations portion and Barry will rejoin and go over the investment portfolio.

Direct premiums for the quarter were up $5 2 million from the prior year to 49.8 million most.

Most of this growth was due to rate increases.

During the quarter, our written premium increased by 11.6%, while our policies enforced grew only three 3%.

Similar to what we shared in the first quarter, we are adding premium at more than three times the rate that we are adding exposures.

Stock was premium growth to continue and the delta between premiums unexpected losses to widen throughout the remainder of the year.

While we have seen our rate increase interest and we have also seen our policyholder retention increase.

Our retention is up in every major line of business. We write this along with a 20% increase in quote activity gives you a sense of a favorable competitive environment. We are operating in.

Net written premiums declined versus last year as a result of our entering into a new 30% personal lines quota share treaty.

The net loss in LAE ratio was 66, 9% up 8.3 points from the prior year period.

This increase from the prior year was attributable to two main items.

First we experienced an increase in fire severity due to some large fire claims as well as the impact of inflation.

While Q2 losses were elevated I want to point out that our year to date fire loss experience is in line with historical averages.

Second non weather water claims added approximately four points to the quarter's loss ratio relative to the prior year I noted that there were a number of large carriers, who mentioned the increase in water claims as well this quarter.

Our new select product, which includes bi peril rating prices the water apparel more accurately.

We are working hard to stay of inflation and stay ahead of inflation in loss costs. In addition to inflation guard and rate increases. We are also adjusting replacement cost on policies at renewal.

I also want to mention that one main driver of our high loss ratio for 2021 accident year was high liability claim frequency for dwelling fire in particular, which has not been a driver in 'twenty 'twenty. Two we attributed this increase in frequency to Covid and Fortunately we are.

Are now trending back to historical levels.

For the current quarter, the net underwriting expense ratio decreased five points four points to 36.4%.

Our expense reduction is driven by the quota share on corresponding ceding commission, but also by multiple expense reduction initiatives from our Kingstone two O strategy that are starting to take hold.

Please take a look at the press release and you'll see that each of our captions expenses is down versus the prior year order has grown far slower than direct written premium.

As the quota share makes our expenses difficult to understand but let me share some interesting facts with you.

Our underwriting expense is now down to 14.1% of direct earned premium from 15.7 in the prior year period, and our total commission expense is down to 18% of direct earned premium compared to 19, 4% for the prior period.

Our legacy system conversion one of our key Kingstone two O initiatives will be completed ahead of schedule in Q3 and will lead to an even greater expense reduction as we move forward I want to thank all of our employees who have worked so hard to make this goal a reality.

I look forward to seeing the benefit of our incredibly hard work in Kingstone financial results as we have done and continue to do all of the right things to return the company to profitability now, let me turn the call back over to Terry to discuss our investment results.

Great. Thanks, Merle I also need to dress the portfolio and as you know we've always invested primarily in highly rated limited duration fixed income securities and similar items that are meant to provide us with income while limiting our risk profile.

We like all others have seen the dramatic rise in interest rates in the first and second quarters result in a decline in bond values felt most profoundly in the shorter maturities that kingstone holds.

Our portfolio realignment during late last year, let us to holding better quality bonds, and a more diversified portfolio, albeit at lower rates than previous and lower than available today.

These bond prices are down.

And we are required to reduce their values mark them to market and flow the change through our balance sheet as other comprehensive income.

We have always invested with the intent of holding and not trading out bonds. 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 all the time as rates have already begun to return and now back to.

Early Q2 levels book value per share suffered by 57 cents in the second quarter and $1 30 year to date.

Also suffering declines where our preferred stocks and fixed income Etfs, both being bonds surrogates that behave in a very similar way to changes in rates.

As these equities declined we record those changes in our income statement, reducing our earnings realized and unrealized changes in our equity portfolio every dose reduced per share earnings by 33 for the second quarter at 67 cents for this six months period.

Finally, I'd like to briefly address the business update we provided in our earnings release late yesterday afternoon.

Our board and management team regularly review Kingstone strategic operational and financial priorities.

We do so in the context of the current operating environment and with the objective of driving shareholder value forward.

Consistent with this following our third quarter 2021 operational review, we shared with the board and then engage who then engaged an independent financial adviser to aid in the exploration of a range of options that might have those who are potential for enhanced share.

Holder value creation.

And in May we announced that Kingstone received a preliminary nonbinding indications of interest with regard to an acquisition of all of the outstanding equity of the company.

Last week it was disclosed that following that that third party substantial completion of its due diligence kingstone received the final nonbinding indications of interest and agreed to extend the previously executed exclusivity agreement to further pursue the proposal.

Well no assurances can be given that the transaction will be consummated. The Kingstone board of directors is committed to acting in the best interest of the company and its stockholders and we will continue to take actions consistent with that objective we.

We do not intend to comment further on this topic unless and until an agreement is reached or a disclosure becomes required as.

As such I ask that you keep your questions today focused on our financial results and performance with that operator, Please poll the analysts for questions.

Thank you. The floor is now opened for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time.

Our first question today is coming from Paul Newsome of Piper Sandler. Please go ahead.

Good morning, Thanks for the call.

I've got a couple of three questions here.

D. A I wanted to ask about the growth and retention.

And I guess I would like you to tie these thoughts.

Comments into what you were doing or at least more details about what you're doing.

On the in force book to essentially improve the profitability of that I know there are other things you can do.

Youre looking at.

No doubt.

Insured to value things of that nature, and I was a little surprised that retention improved because I know in your books are profitable you don't want you don't want improved retention rate you want Pip growth fusions shrink. So maybe you could kind of talk to.

What you're doing to.

Work that existing book into a more profitable state. Besides just rolling it into the new product yeah. So I mean, there's there's a few parts to that question I'll try to handle them, Paul and you know I'll, let Merrill correct me or embellish upon what I say first I mean your statement that our returns.

It sounded as though you think retention is a bad thing.

When were unprofitable in the fact of the matter is in most sections of our book we are profitable. It's those are those specific areas that have not proven to meet our requirements that we're targeting I'm not going to tell you what our secret sauces, because I know we have competitors listening to this call.

But at a minimum we've we've eliminated our exposure to the high value market, we no longer write high valued homes and over time and we'll continue to eliminate those risks from our book.

So that's the kind of thing I'm talking about we have.

A lot of other pieces to that algorithm, we've built but again I I can't share that with you.

In terms of Merrell would you want to pick up anything here.

Sure.

Paul where we're taking rate we're non renewing unprofitable segments. We are working with unprofitable producers to move some of their business elsewhere, where pulling our updated replacement costs and making sure that our books are.

Our book is insured to value. So it's a combination of all those factors and and others.

But I I, Paul I think the operative thing here is we are selling new business, we're selling new business I mean, 80% of our business still comes from New York. So we're selling a new business in New York, and adding Pip count there.

While we're eliminating these unprofitable risks so that the small single digit I think it was 3% growth in Pip count. This quarter is the net of new business ads that are far better priced and underwritten and the.

Nation of those risks that we're targeting you know that we're targeting getting getting away from so I hope that I hope that gives you a little color to what we're doing.

It absolutely does and then I wanted to ask you about the net investment income level.

It was.

The unrealized losses, which I think are pretty normal this quarter for insurers.

The straight up.

Income was a little bit lower than I expected is that the impact of the Etfs and.

The other items that you mentioned no not really.

Yeah, I mean, you know we're going to publish our 10-Q, it's due on Monday afternoon, and we'll have that out timely.

In that report, you'll see that in the quarter, we needed to make an adjustment and reduce.

Our accrued interest receivable on a handful or I don't I shouldn't say handful.

A segment of Fannie Mae bonds.

And it frankly was a result of our third party software processor.

Having an over accrual we rely upon them we rely upon there.

Saks, one filing, but we had to take a one time write off of I think on a pre tax basis, something north of $700000.

So youre going to see that as a an item disclosed in the footnotes, but I think if you were to add back that charge. This quarter's investment income is pretty much where you'd expect it to be.

Okay. Thank you with that.

So that should snap back.

Yeah.

Level. So it had nothing to do with 2022 at all.

Right.

And then finally is there anything you could add about.

The the rest of the capital structure, you've got some debt this refinancing and obviously I know there may be some limited.

Comments, you could make but I'm getting a lot of questions on it.

I'm sure you are in China.

Well I can assure you is that we're not just cognizant of it cognizant of it but are actively working on that and I would hope that we'll be able to share with you and everybody else.

The progress, we're making but at this point those bonds come due on December 30th.

We fully expect and will pay off those bonds on a timely basis as you know.

We do have an opportunity.

When we have the refinancing done to pay them off early but the terms of those bonds makes it prohibitively expensive because if we wanted to pay them off early effectively which still have to pay the interest through December 30th with a minor discount. So I guess the answer to your question.

And as we're aware of it we're working on it we've got a lot of major activities going on at the same time as am I I think theres, a more than one allison, but at least I've been talking about one.

And I would hope that our confidence that our investors have had over the years and which we've discharged our obligations timely without fail.

Frankly, that's what's going to happen again, and but thank you for bringing that up.

Thank you I'll, let some other folks ask questions. Thank.

Thank you for your help.

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Thank you at this time I'd like to turn the floor back over to Mr. Goldstein, President and Chief Executive Officer of Kingstone companies for closing commentary.

Well, thank you operator and much appreciated that concludes our call for today and thank you all for listening in and hope to speak with you all very soon bye bye.

Ladies and gentlemen, thank you for your participation and interest in Kingstone companies. You may disconnect your lines for block off the webcast at this time and enjoy the rest of your day.

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