Kingstone Companies, Inc.
Q2 2021 Earnings Call Transcript

Published: 13 Aug 2021

[Operator:]

Hello. And welcome to Kingstone Companies Second Quarter 2021 Financial Results Conference Call and Webcast. 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. It's now my pleasure to turn the call over to Amanda Goldstein from Goldstein Investor Relations. Please go ahead.

[Amanda Goldstein:]

Thank you very much, Kevin. And good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2021 second 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 of 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, Mr. Goldstein.

[Barry Goldstein:]

Thanks, Amanda. And good morning, everyone. We're pleased that you can join us for this, our second quarter 2021 conference call. First off, this was not a good quarter from an operating results perspective. I don't ever recall us discussing what presents itself today. That is that we've had an uptick in personal property liability claims, and out of an abundance of caution, have set aside loss reserves appropriately. I will let Meryl cover the drivers about our elevated loss and combined ratios and what we have done to address the issue. Today, I want to talk about our competitive position. We are in an envious situation. I even think we're in the driver's seat. But to explain this clearly, let me remind you that beginning last July, our two largest Cosi agency relationships stopped writing new business with us, effectively all but shutting down the alternative distribution channel. So, when thinking of Kingstone today, think only about traditional independent agent footprint, what we call our select producers. Also, recall that we exited the commercial lines business beginning in mid-2019 and those premiums all ran off ending in late Q3 2020. So, to allow for a true apples-to-apples comparison when looking at today's premium and policy generation, as compared to prior years, be sure to carve out both Cosi and commercial lines. At the same time, you'll recall that we've been laser focused on increasing our profitability these past two years, understanding all the way through that growth would suffer as a result of the actions taken. Meryl and her team have refocused the company, and did so by taking a significant number of actions to improve our financial results, reduce volatility and better manage our catastrophe exposures. We have taken rate increases in every state, tightened our underwriting guidelines, introduced mandatory hurricane deductibles, employed catastrophe risk underwriting at the point of sale, and we non-renewed many policies that could not generate an appropriate return. I could go on, but I think you get the point. It was hard to take these steps, especially because we are the first company in our cohort to address and act on what was needed, starting in late 2019, again, under Meryl's guidance. Needless to say, our select producers were not very happy with us, not happy with our raising of rates, not happy with the multiple changes in how we did business. This led to our new business volumes declining materially. What we would no longer willing to write or write at a rate anywhere near what the others would, the producers placed with our competitors that had lower prices with less stringent underwriting standards. And they had these lower prices and looser guidelines for two years longer than us. So, what is it that they say? If you're stuck in a hole, first stop digging. We did that two years ago. But for them, the hole has only gotten deeper, and the actions required are far more painful. What we are seeing now is exactly what we expected. The tide has turned. While we remain focused on profitability and have not compromised our underwriting standards, our competitors have now started to take many of the same actions that we initiated two years ago. And because of that deeper hole, some of the actions they are taking are far more draconian. In addition to them raising rates and tightening guidelines, we are seeing some about formerly major competitors stop writing business altogether, some permanently, others supposedly temporarily. Many of our formerly unhappy agents have commented that they now understand and appreciate our approach. As we continue to be a consistent open market for them, we never shut our doors. We are now two years later in an advantageous position competitively, and this is having a very positive impact on our new business production. For all states combined, we saw our personal lines quotes increase by 30% in the second quarter versus last year. Likewise, our new business policies bound by these select producers were up 16% in the second quarter. But for the month of July, new policies issued were up 30%. In our flagship product, New York State Homeowners, our new business policies were up 65% in the second quarter and 90% in July. This is the most new business we've written in any month since August of 2019 when we began our focus on profitability. We all know that it's easy to grow in the insurance business if your price too low. In our case, the growth in personal lines new business production are at rates reflecting the rate increases we've taken, up an average of 12% over the prior year for all states combined and up 17% for New York Homeowners. Add to this two newly approved rate increases in our biggest states which will begin to take hold in Q3 and further increase our new premium production. Again, we have not compromised. We will not give back on the hard work we put in. So, this is profitable growth for us. And we are very confident that this growth will continue. Now, let me turn the call to Meryl to review our results. Meryl?

[Meryl Golden:]

Thanks, Barry. The company posted second quarter net income of $1.3 million compared to $4.6 million net income for the same period last year. The lower income is primarily attributable to worse operating results, which I will explain shortly. For the latest three months, the company had an operating loss of $0.5 million, offset by an after-tax gain on investments of $1.8 million. For the prior-year quarter, the company had operating income of $2.5 million and an after-tax gain on investments of $2.1 million. Kingstone reported income of $0.12 per diluted share for the three months ended June 30 2021 compared to income of $0.43 per diluted share for the six months ended June 30, 2020. Direct written premiums for the quarter were $44.6 million, an increase of $2 million or 4.6% from $42.6 million in the prior-year period. The increase is attributable to $1 million increase in premium from our personal lines business and a $1 million increase in our livery physical damage business as the economy begins to reopen after the COVID-19 pandemic. The 32.8% increase in net written premiums and 33% increase in net earned premiums for the quarter were primarily attributable to the exit from the 25% personal lines quota share on December 30, 2020. What would have been otherwise then a typical loss ratio quarter was impacted by two drivers that added 10 points to the loss ratio this quarter and reduce operating earnings by about $0.24 per share. First, as Barry mentioned, the primary driver is an increase in liability frequency for both homeowners and dwelling fire. While we often see variability in claim frequency month to month and quarter to quarter, we observed a higher number of claims in the second quarter and felt that it was material enough to reflect this change in our loss reserves. This explains 8 points of the loss ratio increase. To be clear, our liability frequency for personal property is incredibly low, less than two-tenths of 1%. Moreover, less than 50 additional claims have been reported year-to-date. We do not know, but suspect this increase is related to COVID. As people return to work are less home centric and are better able to get maintenance done on their homes, we look forward to seeing frequency return to a more typical level. We will be following the situation closely and will report if this trend continues next quarter. The second driver accounting for an additional 1.5 points was an increase in frequency on our livery physical damage program. Our livery drivers are back to work as the economy reopens and miles driven increase. The Q2 frequency is close to the pre-pandemic 2018-2019 second quarter average, while severity remains stable. As mentioned before, what comes along with this is an increase in writings as the Uber and Lyft type drivers get back to business. Otherwise, the second quarter property loss experience is similar to the second quarter last year. In this quarter, we had higher water losses offset by better fire experience and very mild catastrophe activity. For the quarter, the net underwriting expense ratio was 41.8% as compared to 38.8% in the prior year, an increase of 3 points. The 3 point increase is primarily attributable to the exit from the 25% personal lines quota share treaty and the decrease in provisional feeding commission that went along with that. In addition, our results reflect an increase in IT and professional services expenses related to our Kingstone 2.0 initiatives, as well as an increase to contingent commission expense estimated to be earned by our producers. We expect our combined underwriting and commission expense dollars to be slightly higher than 2020 for the full year, and the expense ratio as a percent of direct written premium will be modestly lower. Overall, it was a disappointing quarter driven by the uptick in liability claims frequency. We believe the increase in liability frequency is related to COVID. But given the uncertainty, we need to remove the combined ratio guidance that we provided for the full year last quarter. We remain steadfast in our belief that we have done and continue to do all of the right things to enhance the company's profitability. And now, the market is also turning in our favor. Let me turn the call back over to Barry to discuss our investment results.

[Barry Goldstein:]

Thanks, Mel. Just a short update on our investments. Our portfolio continues to perform well with investment income – that is the interest in dividends net of expenses – being up 4.1% in the second quarter. As we watched rates go up in the second quarter, we were willing to stay on the sidelines, leaving us with a larger-than-usual uninvested cash balance. On July 1, we changed our fixed income investment manager and they've begun to put the excess cash to work. Increases in dividends and interest next quarter and going forward are to be expected. Realized gains were up $700,000 versus the second quarter of last year. Unrealized gains in equity securities were $1.6 million, but that was down $1.1 million from the prior year when the market had that COVID induced volatility and rebounded from its low in the second quarter. Finally, I wanted to report on our stock buyback plan, which we initiated during the first quarter. In the second quarter, we repurchased a little over 120,000 shares for just under $1 million at an average price per share of $8.09. We also paid $427,000 in dividends to our shareholders. We have about $9 million in remaining authorizations for share repurchases. Overall, while not a good quarter, this is an exciting time for the company as our growth picks up steam. We've done all the right things. And with the recent changes in the competitive landscape, my enthusiasm for the future of Kingstone could not be any higher. Now I'll turn the call back to the operator to poll for and reply to the questions you may have. Operator, please pause for questions.

[Operator:]

. Our first question today is coming from Bob Farnam from Boenning & Scattergood. Your line is alive.

[Robert Farnam:]

I agree, Barry. I didn't think I'd ever be talking about personal lines liability claims. So, being that they're so uncommon, can you give us, without getting into details, just what types of claims are these? What's been causing these?

[Meryl Golden:]

Let me, again, reiterate that liability claims frequency is incredibly low, two-tenths of 1%. So, we're dealing with a very small number, but the severity is about three times that of property losses. So, any increase is material. We think they're COVID related. We don't know for sure, but let me tell you, the majority of the claims are typical falls. So, either on the sidewalk or on the stairs. And you think about COVID, people are very home centric, they're having more visitors to their home, they're spending more time walking around the neighborhood. I know I am. And it's been very difficult to get contractors to make repairs. The second type of claim that we're seeing an increase in is dog bites. So, again, when you think about COVID, what I've heard is, many people have adopted dogs for the first time. The shelters are empty. And again, you're having – people come over to the homes, these are dogs with questionable backgrounds, and we're seeing an increase in bite activity. So, we do feel cautiously optimistic that as people return to work that the number of these liability claims will return to pre-pandemic level. So, I hope that gives you some color on what we've been seeing.

[Robert Farnam:]

I had a question this morning from one of our sales guys. He was just wondering if there was any fraud involved. It just seems like it's something that came out of nowhere. So, it doesn't sound like that's the case. But I just want to…

[Barry Goldstein:]

I wouldn't say that, Bob. We have a team of, I would say, bullshit experts. They know when to call bullshit on a claimant. So there is a lot of model of people out of work, people have lost their jobs, people have seen their income declined dramatically. And this is the type of situation – I saw this going back to 2008 when the market – if you remember what happened with the Great Recession. So, I do agree with Meryl. This is we believe to be a transitory thing and can't wait for this COVID situation to be over with, but fingers crossed. Hopefully, that'll be soon.

[Robert Farnam:]

Second question I have is on the substantial amount of new business you're getting. So, obviously, the new business comes with a "new business penalty," just because you're not as familiar with the actual risk. Do you have any concerns about – what makes you confident that the new business you're putting on is going to be as profitable as maybe what you're thinking?

[Meryl Golden:]

As Barry said, this new business that we're putting on is at a much higher rate level. So that is one thing that gives us confidence. But the second thing is we have incredibly tight underwriting relative to the last couple years. So, we are writing good quality – much better quality business than in the past. As an example, we're now requiring hurricane deductibles on all new business. We have catastrophe scoring at point of sale, which we did not have in the past that we can manage our reinsurance costs. So, we're just managing the business in a very different way. So, it gives us confidence that this is very profitable growth for us.

[Robert Farnam:]

Is any of this business, former accounts that are coming back to you because the competitors have had to raise their rates?

[Meryl Golden:]

I don't know that. I assume there's some small portion that might be that. But I think it's more people buying new homes and others that are in the markets just shopping for a better rate.

[Barry Goldstein:]

Bob, we have an in-house process to deal with those former policyholders and let's just say that the ones that we elected to be former policyholders don't get back in again, if you follow me.

[Operator:]

The next question today is coming from Gabriel McCord , a private investor.

[Unidentified Participant:]

I wanted to kind of piggyback on Bob's question about the personal liability claims. And thanks, Meryl, for providing that color. I guess my question there was, are you guys seeing the same stuff going on in Q3 so far? And then, I've got one more after that. Thanks.

[Barry Goldstein:]

What we've seen so far is a tapering in – we are not seeing it growing. And we are seeing it taper back. But it's very hard to give an answer to that because claims come in – you get three in one day, and you won't see any for three weeks. So, we certainly need at least a few months of action to draw a better conclusion as to what's going on.

[Unidentified Participant:]

My other question is about your increase in business, which is really exciting. And I think we've been waiting for this to come across for a while. My question is, when will we see this come across in the reporting that you guys do, the quarterly or whatever?

[Barry Goldstein:]

As everybody says, great question, Gabe. But that is the point. New business accounts is somewhere between 15% to 20% of total business. So, it does take a while for the impact of the increase in new business to make itself felt as, while we might be writing new business, we need to earn that in over the policy period. So, what you can look forward to, and maybe we can in the next quarterly report, try to set out a little bit of a graph to show you the impact of new business on the total. And how, over the past few years, that percentage has gone down and down and down, or went down, as we wrap wrote fewer and fewer new policies. But I think we've seen the trough and now we're coming back up. And certainly, that should be able to be expressed graphically at least.

[Unidentified Participant:]

As far as that direct written premiums numbers, is it going to hit that number, like, say, next quarter, the second quarter or…?

[Barry Goldstein:]

What you see is a little bit in there in June. The action these guys took that I alluded to before, one company shut down effective July 1. So, nothing's in that report you saw. People started to quote knowing that they were going to shut, so they quoted in advance. We've had one carrier who we compete – one of these insure tech guys who seems to have lost their ability to find an underwriter for their product. So, there's a lot of influences in the market. The influences of the Florida based companies expanding to the northeast in 2016, 2017 and 2018 is what drove us to the point where we tried to compete, we didn't do a good job and we fixed that. But they've continued and they continue to sell policies far, far below a price that we could generate any return on. So, that's why we weren't – our prices were higher, they kept selling, their hole kept getting deeper. And now instead of just price correcting and underwriting correcting, the hole has gotten so big, one of them sold off most of their northeast operation and maybe in the process of selling the balance of it as we speak. So, while I might have harped on our being consistent for far too long, and certainly too long to try to maintain a consistency in pricing as I did and which Meryl has since corrected, we were consistently in the marketplace. We know those agents, they certainly didn't – Meryl came in. They didn't have too many nice things to say about what she did. But now, she's their best friend. So, go figure. Anyway, that's the color I can give to you.

[Meryl Golden:]

Gabe, to more directly answer your question, I think you'll see a little bit of a benefit in Q3. But as Barry said, new business is 15% to 20% of our total premium. But in Q4, in addition to the growth, you'll start to see the benefit of these two large rate increases we got that will be effective in our two largest homeowner books. And so, I think you'll see a nice lift in Q4.

[Operator:]

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Barry for any further or closing comments.

[Barry Goldstein:]

Well, I was looking forward to more questions. Anyway, thank you all for listening in and taking the time to hear about Kingstone, what's going on. So, I look forward to our next call. And more important, please stay healthy between now and then. Thanks, everybody.

[Meryl Golden:]

Thank you.

[Operator:]

Thank you. That does conclude today's teleconference webinar. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.