Kingstone Companies, Inc.(NASDAQ:KINS) Q1 2022 Earnings Conference Call May 13, 2022 8:30 AM ET

Company Participants

Rich Swartz - CAO
Barry Goldstein - CEO
Meryl Golden - COO

Conference Call Participants

Paul Newsome - Piper Sandler

Bob Farnam - Boening and Scattergood

Operator

Greetings. Welcome to Kingstone Companies First Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll turn the conference over to Rich Schwartz, Chief Accounting Officer. Mr. Schwartz, you may begin.

Rich Swartz

Thank you very much, Rob, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 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 1, Item 1A 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's CEO, Mr. Barry Goldstein. Please go ahead, Mr. Goldstein.

Barry Goldstein

Thanks, Rich, and good morning, everyone.

We're pleased that you can join us for our first quarter 2022 and 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 indication of interest from a sophisticated private equity firm as to a potential acquisition of our company. What I can tell you is that our Board is fully engaged as it always has been.

In that regard, we have retained TigerRisk Capital Markets and Advisory as our financial adviser to assist us in exploring strategic alternatives and our Board is working to fulfill its obligations on behalf of the company's shareholders. I've received many e-mails from shareholders, some of whom I've known for many years, all had questions. I could not been, and I cannot, at this time, reply to these questions.

While I take great pride in being forthright and transparent, I cannot comment at this time. We do 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 that 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 were in alignment.

But our results declined, our 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 allow the numbers to speak for themselves, showing increasing profits and higher returns with the expectation that doing so will encourage investors to become more interested in Kingstone and lead to stock price improvement.

Yes, there are macro issues to contend with no doubt, but we must focus 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 pardon me, you just don't see it yet. We started Kingstone 2.0 to focus on profitability about 2.5 years ago. It 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 costs, and we took rate for the first time in many years. And we hired Meryl. Meryl to prepare and execute on a 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 reinsurance. 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 responsiveness throughout the company.

We've spent these last two plus years acting on that plan. We've 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 Select to Connecticut. Through the rest of the year, we will with the approval of the various state regulators bring Select to all of 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 hasn't been a positive market reaction to the work we've put in. 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. Our Northeast business is seasonal, and we again posted an underwriting loss due to winter weather. This winter was worse than the prior year with four catastrophe events and high winter water losses.

I'll let Meryl discuss the quarterly results in detail. But I've already told you about many of the things we are 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 continued to see the impact of the rate increases we've taken to keep up with trend. 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 4x 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 costs 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 in 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 PFIs 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 as you'll be able to see, is down 3.5 points from the prior year. Now this is driven in part by the quota share and the correspondent seating commission, but also by multiple expense reduction initiatives we have taken.As the quota share mix 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 $349,000, an increase of 5.4%.

Commission expense too, take a look at that. In the first quarter, it was up $127,000 just a 1.5 point increase over the prior year. Now compare that to the increase in our direct earned premiums, which were up $3, 459,000. Looking at it this way. We spent less than $0.15 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 Meryl now to review our first quarter financial results. Meryl?

Meryl Golden

Thanks, Barry.

The company posted a first quarter net loss of $9.2 million and $0.87 per diluted share compared to a net loss of $300,000 03 per diluted share for the same period last year. Our operating loss per share was $0.54 compared to $0.25 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 year period. This growth in premiums is due to rate increases, and we expect the premium growth rate to accelerate later in the year.

Due to entering into a new 30% quota share effective at year-end, net written premiums decreased by $5.9 million or 19.1% this quarter. The net loss in LAE ratio was 86%, up 20.8 points from the prior year. This increase from the prior year was attributable to two main items. First, we experienced four catastrophe events and catastrophes added 11.3 points to our quarter's loss ratio.

Last year's cat losses were only 0.7 points. Second, the increase was driven by winter-related water losses like pipe freezes that added 12.5 points to the attritional loss ratio for this quarter versus just 5.5 points for Q1 2021. The two main drivers of our attritional loss reasons throughout 2021 were not factors in this quarter.

Last year, we spoke frequently about heightened liability losses. Liability frequency in Q1 was flat for our largest line homeowners and at a level that is more in line with history, dwelling fire liability frequency declined versus the prior year, Additionally, while the frequency of fires was similar to prior years, the number of lair losses declined materially from Q1 in the prior year.

We bought the increase in the number of large fire losses last year was random. And fortunately, fires and large fires in particular, had far less impact on our Q1 results. We are working hard to stay ahead of inflation and loss costs. In addition to inflation garden rate increases, we are also adjusting replacement costs on policy at renewal.

For the current quarter, the net underwriting expense ratio decreased by 3.5 points to 38.5%. The benefit of our expense reduction initiatives will be increasingly reflected and our results throughout the year. The first quarter is always unprofitable for Kingstone due to the winter in the Northeast.

The increase in our loss ratio this quarter was in great part due to the fact that last year was a much more mild winter. Otherwise, we are starting to realize the benefits of our Kingstone two initiatives, as Barry shared earlier.

I want to take this opportunity to thank the many employees of Kingstone whose hard work is making to a reality, along with our value partners in [indiscernible] Water Street and Milliman. 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 Barry to discuss our investment results. Barry?

Barry Goldstein

That's what you call 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. Felt most profoundly in the shorter maturities that Kingstone holds.

A realignment in our portfolio during the third and fourth quarters of last year led us to holding better quality bonds and a more diversified portfolio, albeit at lower rates than previous. While bond prices are down across the board, along with the 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+ rated portfolio will pay off at par upon maturity and the decline in other comprehensive income will be restored as that time approaches. Like Meryl, 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.

Operator

Question-and-Answer Session

[Operator Instructions] And our first question comes from the line of Paul Newsome with Piper Sandler. Please state your question.

Q - Paul Newsome

Good morning. Thanks for the call. I was hoping you could give us a little bit more help and color on how we should think about the first quarter as a run rate, respectively. Not necessarily for the right remainder of the year, I obviously understand the seasonality, but last year was a very light year for weather. This year, lease nationwide, it was relatively light for you, should we see this as sort of a normal level? Is it the beginning base? Or are there a number of things that we should pull out, particularly some of those weather losses that 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 what's the right cat load and what's the right non-weather - non-cap kind of low for Kingstone given its many changes.

Barry Goldstein

Yes. 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. You're asking me to predict the weather patterns in the future. I can tell you, and Meryl can embellish upon this as she likes. So we had a very mild winter in 2021. By comparison, this winter was worse.

Our business expanded mostly north. We went - 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 where we were we're located is really about - in about as good a geography, as you could expect.

I read the same things as everyone else does about the threat of hurricanes, the number of hurricanes and whatnot. But for me to spouse on what I think the likelihood of an event would be, I think it would be foolhardy for me to do that. All I could say is that the first quarter was worse than the year before.

But if you heard what Meryl said, Paul, absent that winter weather, that tightened 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 will 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. Meryl, is there anything you'd want to add to that?

Meryl Golden

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.

Paul Newsome

So maybe thinking about this slightly differently more on an annual basis, if your P&L is down, which it sounds like it probably maximal loss is down through the - in general, which means you don't need as much reinsurance and all the other good things. But is it possible that the shift in the geographic alignment is also shifting to seasonality. So first quarter is worse because you're up more north away from the coast. Because I would have thought that if the PML is down the cat load expectation would also be down at least over all for the year. And I'm just trying to kind of reconcile that with what we saw in the first quarter.

Barry Goldstein

Yes. I mean the PML represents quite a number of different issues that we have to contend with. And winter weather is included, but as is wind. So I can't profess to be an expert as to how the models weight each of these items. But I think the expansion north 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 because the further north you go, the less likely it is for a land flow hurricane, frankly. So it's very hard to answer the question. Again, I hope we've given you enough color - we'd give you something to go by.

Paul Newsome

No, thank you appreciate the help. Thanks guys for the questions.

Barry Goldstein

My pleasure. Thank you.

Operator

The next question is from the line of Bob Farnam with Boening and Scattergood. Please proceed with your question.

Bob Farnam

Hi, everyone. Good morning. Similar questions to Paul. So I think where we're getting at is you said that there was 12.5 points of the water losses this year versus 0.5 point last year. Last year seems like it's pretty low. So is it - is it - is it normal - normal year a few percentage points? What happened - what does it look like in 2019 or 2018 in terms of water losses? You're trying to figure out - how much of this is out of the norm, just because we're taking a look at the first quarter ex cat loss ratio, it's still good 10 points higher than where it has been in prior years. So just trying to figure out where that delta is coming from?

Barry Goldstein

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 PCS as catastrophe events. That's all we do.Others have another block of information about severe weather bad weather, unusually bad weather. I don't want to play that game and try to make nothing into something, frankly.

But I think we're going to 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 compare to prior years. So I think it's a question we'll have to take in terms of reporting, we'll have to take it under advisement. Meryl, is there anything you'd want to add to that?

Meryl Golden

I would just add that looking back over the past five years, 2022 was the worst cat and winter weather losses other, I think, going back higher than '21, 2019. So I think '18 was higher, but the others were lower. So this was a bad year. And again, looking at - if we look at our results, ex cat and ex winter claims, our - both our frequency and severity is down versus those same 3-year period.

Bob Farnam

Yes. No, you're doing as best as you can. I'm sure. It's just - we talked about fire losses, for example. And I thought maybe the first quarter has extra 10 points or something like that of fire losses in a typical first quarter. So we're just - again, you were trying to figure out what the water losses - the pipe freezing would be as well.Am I to assume that a lot of these claims came from outside of New York. I mean, I know you're talking about the expansion northward, but where was the location of the pipes bursting and whatnot?

Meryl Golden

So I don't have the exact answer, Paul, but I'm pretty confident that it's driven by New York.

Barry Goldstein

No, I also know that we had a couple of big ones that helps at all.

Bob Farnam

Yes. I mean, obviously, over the past several years, you've been expanding outside of New York. So is this I understand the benefits from the PML perspective, perhaps the penalty from higher winter losses, but is the performance of the kind of the outside of New York book going according to your expectations? Or is that still something you're trying to address with pricing?

Barry Goldstein

Well, let me try to get back to what you just said. 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 northward. What you'd said was that effectively four out of every five policies we still underwrite come from New York, and there 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, Meryl 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 effectively, she's fixed that. We've run off the vast majority of the problem homes that we underwrote, maybe incorrectly at first.

We've increased rates to make - to put us back to a position where we can generate an underwriting profit - and the things that we've done to further improve that, whether it's nonrenewing high-valued homes or making sure that the new product incorporates the actual costs of reinsurance 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 those things will be seen very, very clearly in our efforts outside New York. Meryl, do you want to add anything to that?

Meryl Golden

Yes. I mean 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 a disproportionate number of changes in those states in terms of tightening our underwriting and raising rates, nonrenewing business really trying to manage our catastrophe exposure more than and our rate level.

And so 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 will be rolling out through the rest of the year because it's priced in a much more sophisticated way and better matches rate to risk. It's by-peril rated, so definer segmentation, and it includes the AIR cat model and our territory vector.

So it includes the cost of reinsurance and the rate. So really, that product is going to greatly improve our profitability in all states, but particularly in those expansion states for Kingstone.

So again, 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.

Bob Farnam

Great. And I guess the last question I had is actually going back to the weather losses. Was there an inflationary impact on these? Was it - was there delays in contractors being able to get to the house and impact the supply in the materials, construction materials? How much was that driven by inflation maybe relative to prior years?

Meryl Golden

So I think your question really is, is our loss costs up. And like as we've been saying, for this quarter, when both our frequency and severity were up due to the catastrophes and the winter losses. And - but if you take out those catastrophes and winter losses, you'll see that we had a reduction in both frequency and severity.

And so if you look at severity, and what really drove this quarter's attritional severity down was the lack of severe fire claims, as we've discussed. 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 costs. 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 and it's hard to detect how much of the increase is due to inflation itself. Does that answer your question?

Barry Goldstein

Yes. Let me give a bit more color on that. Talking about inflation, and the statement I made previously that actions we takes a long time to you see it go through the numbers. Well, specifically for inflation, we take rate each and every year in each and every product and 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 the next time we take rate in any given state, this heightened amount of inflation we're currently experiencing will lead to us raising rates. So I hope that gives you a little more color that, yes, loss costs certainly reflect some inflation but that translates into higher premium going forward.

Bob Farnam

Yes, I think - and I think, Meryl, you've mentioned before that you're trying to change rates lot more frequently than you have in the past. So rates probably changed annually.

Meryl Golden

Yes. We have instituted an 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 actions sooner. And so yes. And as I mentioned, we are also this year pulling replacement costs, updating replacement costs and our in-force book. So that will also drive rate.

Bob Farnam

Thanks for bearing with me. I'll leave it there.

Operator

Thank you. We've reached the end of our question-and-answer session. I'll now turn the call back to Mr. Goldstein for closing comments.

Barry Goldstein

Very short. Thank you all for listening in, 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.

Operator

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.