Earnings Call Transcript - KINS Q3 2021

Operator, Operator

Greetings, and welcome to Kingstone Companies Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

Amanda Goldstein, Investor Relations Director

Thank you very much, Tanya, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2021 third 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 1, Item 1A of the company's Form 10-K for the year ended December 31, 2020, along with the commentary on forward-looking statements at the end of the company's earnings release issued yesterday. In addition, our remarks today include references to non-GAAP measures. 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's CEO, Mr. Barry Goldstein. Please go ahead.

Barry Goldstein, CEO

Thanks, Amanda, and good morning, everyone. We're pleased that you can join us for this, our third quarter 2021 conference call. From a weather perspective, this was unlike any quarter in the company's history. We've had bad quarters before no doubt, but never had there been more than one single $1 million catastrophe event in any calendar quarter. Unfortunately, last quarter, we saw three seven-figure storms. These catastrophe losses, totally outside of our control, added 33 points to our combined ratio, and there were other items that impacted our attritional loss ratio, that Meryl 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 to work at home, little travel, and more people staying in the house using more home appliances, having more people around at the same time, 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 by two lines, and with a concentrated exposure to the Northeast. We previously noted an increase in both homeowner and dwelling fire 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 claim. We cannot control the weather, nor the number or severity of the events. All we can do is prepare ourselves to pay claims in an expedient, orderly, and fair fashion. And I'm very proud of our claims team, which has demonstrated our 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 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 the trend. While 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 1.7%. We expect that this spread will widen materially, resulting in an ever-increasing average premium rate 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 increase by over 24% 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 Meryl for some time. The two goals were simple: to build a new advanced product better able to match rate to risk, and to have a single policy issuance and management system to run our company. 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'm 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 in 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. After Meryl 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 it's the top of the seventh or 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 Meryl to review our financial results.

Meryl Golden, CFO

Thanks, Barry. The company posted a third quarter net loss of 10.6 million, or $1.01 per diluted share, compared to a net loss of 1.2 million, or $0.12 per diluted share, for the same period last year. Direct written premiums for the quarter were up by 6.8% 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 events: Elsa, Henri, and Ida that added 33.1 points to the net loss ratio. We have received approximately 1,800 claims to date from these storms, and I'm happy to report that more than 95% are closed for Elsa and Henri and more than 80% of the claims have been closed for Ida. 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 catastrophe events during the quarter, we made the decision to purchase stub coverage to reduce our retention to 5 million for the remainder of the wind 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. The dwelling fire liability is still elevated. I want to remind you that liability frequency for personal property is incredibly low, less than two-tenths of 1%. So the increased amounts to a very few number of claims. We continue to suspect this increase is related to COVID, as Barry just shared. As people return to work, are less home-centric, and as property owners are better able to get maintenance done on their homes, we look forward to seeing frequency return to a more typical level. The second driver of our high catastrophe loss ratio was an increase in severe fire claims. Let me state that we did not see any overall change in the frequency of fires. But overall severity has increased due to a number of large fire claims. Otherwise, our Q3 non-cat loss experience was comparable to prior years. For the current quarter, the net underwriting expense ratio increased 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 commissions that goes along with it. In addition, our results reflect an increase in IT and Professional Services expenses related to the Kingstone 2.0 initiatives. 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.

Barry Goldstein, CEO

Thanks, Meryl. Our investment portfolio continued to perform well with our 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 kept. Further changes were made in the fourth quarter, and I will share those with you on our next call. During the quarter, we repurchased 88,000 additional shares at an average price below the quarter-ending book value per share, so that this is a driver to our future earnings per share. We paid $0.04 a share in dividends, and we announced the fourth quarter dividend of $0.04 payable to our shareholders on December 15. 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.

Operator, Operator

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Paul Newsome with Piper Sandler. Please proceed.

Paul Newsome, Analyst

Good morning. Nice to hear you all. I was hoping you could give us maybe some examples of the losses that were really COVID-driven, because people were staying home, just to kind of frame them in our minds as to what specific types of losses you're talking about? Just a couple of examples maybe.

Barry Goldstein, CEO

Meryl, do you want to start, and I'll throw in anything extra?

Meryl Golden, CFO

Sure. So these liability claims are in our dwelling fire book. Most of our dwelling fire book are tenants in properties owned by our policyholders. They're typical trips and falls, so sidewalks, stairs, and we do believe that there is less maintenance going on, given the difficulty in getting contractors these days. And so those are what the claims are like.

Barry Goldstein, CEO

Yes. 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 hope that answers your question.

Paul Newsome, Analyst

It absolutely does. Along maybe a similar theme, a lot of what we've heard this quarter from other companies is discussion of sort of more broad inflationary trends, things like home prices and construction, material prices, and labor. What sort of impact are those more broad inflationary trends you think having on your book versus stuff that's more either very regional or to your book only?

Barry Goldstein, CEO

Meryl, do you want to start on that one?

Meryl Golden, CFO

Yes. So I do think, Paul, as other companies have indicated that we are experiencing this overall inflation. I saw a recent report from Verisk that material prices are up for building cost; prices are up I think 6.8% on a year-over-year basis. So we're definitely experiencing that in our portfolio.

Paul Newsome, Analyst

Any sense of kind of how the majority is impacting your view or minority is the impact?

Barry Goldstein, CEO

I'm unclear about your point, Paul. When we look at our loss costs, it's evident that it's not only inflation affecting us, but we also have a responsibility to restore a home properly. For instance, if a fire damages the siding on our house due to a neighbor's fire, we need to replace that siding, possibly even half of the house's siding. If we encounter supply chain disruptions that prevent us from obtaining similar materials for repairs, we may have to purchase more expensive options. This leaves us at a financial loss. However, once the supply chain issues start to ease, we might see things return to normal.

Meryl Golden, CFO

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

Paul Newsome, Analyst

Well, thank you for your help and insights. I appreciate it.

Barry Goldstein, CEO

Great. Thanks, Paul.

Operator, Operator

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

Robert Farnam, Analyst

Yes. Hi, there. Good morning. I have a couple of questions on kind of the accident year non-cat loss ratio, so 64% for the quarter, higher than I was expecting. Maybe could you just kind of tease out how much of that was related to the higher than expected fire losses or the liability claims? I'm just trying to figure out kind of what a 'normal' quarter would look like in that net for that ratio?

Barry Goldstein, CEO

Yes, let me start this, Bob, and then I'll let Meryl add in. What you and others do is compare the third quarter of 2021 with the third quarter of 2020 to find the reasons for the variance, which makes sense. However, if you review the third quarter of 2020, we had a non-cat loss rate combined ratio of 80. Therefore, we had a challenging comparison to explain. Meryl, if you could provide more details on the high severity fires and the liability losses, please.

Meryl Golden, CFO

Yes. So, Bob, we think that the fires added roughly 8 to 9 points for the quarter, and the dwelling fire liability frequency added somewhere around 4 points.

Robert Farnam, Analyst

Is that in addition to what is typical? You obviously have fire losses every quarter, so I'm trying to figure out if there's more than that.

Meryl Golden, CFO

Bob, we do experience fires, including significant ones, frequently. This year, they have been particularly concentrated in the third quarter.

Barry Goldstein, CEO

I went back and tried to find it; I couldn't. But I think it was in the first quarter of 2016 that this same thing happened, that we had just a concentrated quarter of high dollar fires. And it's going to happen. We write homes now. We have a limit. We've reduced our limit of coverage down to $2 million. We'd had it far higher before. So we're not writing as many high-valued homes, and that should taper things in the future. But we’ve had this before. 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 I hope that answers your question.

Robert Farnam, Analyst

Yes. I have a general question about your underwriting criteria. What percentage of the homes you cover are secondary homes compared to primary homes? Also, does this distinction affect the claims in any way?

Meryl Golden, CFO

So I don't know the exact percentage, but it's something like 10%. So most of our homes are primary residences, so I don't think it's related.

Robert Farnam, Analyst

Okay. That's it for me. Thanks.

Barry Goldstein, CEO

Thanks, Bob.

Operator, Operator

Our next question comes from Gabriel McCord, a private investor. Please proceed.

Unidentified Analyst, Analyst

I have a couple of questions. The first is that many people are focused on quarterly results, but I want to look at the year-to-date results. The combined ratio is at 115, excluding catastrophes it is at 103.5, and the forecast is for the high 80s or low 90s, as mentioned earlier in the year. What have we learned so far this year that we can apply moving forward? That's my first question.

Barry Goldstein, CEO

Yes. Hi, Gabe. So we set out with high aspirations for a better combined ratio for the year. We saw the impact of 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 maybe 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 presumed a certain amount of inflation and 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 rates 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.

Unidentified Analyst, Analyst

Okay, very good. That's helpful. And then, this kind of dovetails into the next question which is, we're in that time of year where you guys are doing your rate increases. So 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?

Barry Goldstein, CEO

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

Meryl Golden, CFO

Yes. So we have been taking rate in all of our states. In general, it's like high-single digits. As an example, we just went live with an 8% increase in our New York homeowners’ book. So 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.

Unidentified Analyst, Analyst

Okay.

Barry Goldstein, CEO

Yes, I believe you're correct. What we're observing is a general need for higher rates, not just among homeowners and specifically in the New York area. It's unfortunate that circumstances have led us to this point. We had a challenging year, and we are accountable to various stakeholders. I think about our policyholders and the burden on them, my employees who will not receive a generous Christmas bonus this year, our agents, and our investors. My primary responsibility is to our investors, who have experienced a significant decline in the value of their investment in the company, which has dropped by as much as 75%, depending on the price point. Additionally, the investment income distributed to our investors in the form of dividends has decreased by 60%. This situation is disappointing, and no one is pleased with it. We initiated this process two years ago, and while we have had some rate increases, the benefits of our efforts may not yet be visible. I'm highlighting our achievements in getting products approved and improving efficiency, but I ask for your patience as we move forward. I believe these efforts will help us return to profitability. However, we acknowledge our past losses; we've lost money in this quarter and previous quarters, and we are not satisfied with that. Rest assured, we are pursuing every available avenue for improvement. I hope that addresses your questions, Gabe.

Unidentified Analyst, Analyst

Yes, it does. Thank you very much.

Operator, Operator

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

Barry Goldstein, CEO

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.

Operator, Operator

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 day.