Kingstone Companies, Inc. (KINS) Q4 2021 Earnings Call Transcript

Kingstone Companies, Inc.  (NASDAQ: KINS) Q4 2021 earnings call dated Mar. 11, 2022

Corporate Participants:

Rich Swartz — Chief Accounting Officer and Treasurer

Barry Goldstein — Chairman and CEO

Meryl Golden — Chief Operating Officer

Analysts:

Bob Farnam — Boenning and Scattergood — Analyst

Paul Newsome — Piper Sandler — Analyst

Gabriel McClure — Private Investor — Analyst

Gregory Fortuna — Private Investor — Analyst

Presentation:

Operator

Greetings welcome to the Kingstone Companies fourth Quarter and Year-end 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Rich Swartz, Chief Accounting Officer. Thank you. You may begin.

Rich Swartz — Chief Accounting Officer and Treasurer

Very much Alex and good morning everyone. Yesterday afternoon the company issued a press release detailing Kingstone’s 2021 fourth 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 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 — Chairman and CEO

Thanks, Rich, and good morning everyone. We are pleased that you can join us for this fourth quarter 2021 Conference Call. We are very happy to put 2021 behind us, what a long year it was and it was a difficult year, no doubt, but quietly and without much fanfare we’ve rebuilt our company and its products. We are poised to excel and are very bullish on our future.

Relatively speaking, the fourth quarter was okay with results quite similar to the prior year. But I’ll let Meryl, discuss the quarterly results in detail. I’m going to talk today, more about the year on the whole and I’ll also talk about our future.

We ended 2021 with a significant underwriting loss. The loss was driven by three major factors, all of which had been previously discussed with you. First catastrophe events added more than 10 points to our combined ratio. Second, a high number of severe fires added 3 points. And third and finally, there was an uptick in liability claims in our property lines of business, which added almost 2 points. Again we’ve discussed this with you previously, but we cannot control the weather nor the number was severity of the events. While we think the frequency of catastrophe events in 2021 was highly unusual. Only time will tell if that’s the case, but it is what it is and given the large decline to our company’s surplus caused by these catastrophe events and those in 2020 as well. We made the decision to strengthen our reinsurance protections and enter into a new 30% quota share treaty for 2022. This quota share derisks our company both from catastrophe losses by reducing Kingstone’s retention by more than 25% and also in conjunction with the addition of an additional layer to our single risk excess of loss treaty, our exposure to a large individual loss is cut by up to 50%. We are thankful to our reinsurance partners for their support.

The frequency of severe fire losses that we experienced in 2021 has no specific costs, we looked at every dimension, there is and could not find a specific root cause. We couldn’t find an associated driver in our book and think it was just bad luck. But with the new reinsurance structure we are better protected from the severe losses as far as liability losses go, it’s my opinion and most of it is attributable to COVID-19. People working from home and spending more time in and around the house resulted in more opportunities for problems. Couple this with a lot of deferred maintenance on the structures and property, we have seen these factors abate in the fourth quarter and into 2022. In the fourth quarter. The positive impact of rate increases we’ve taken are beginning to show up no display.

For the full year, we had a 7.3% increase in written premiums. But just a 2.9 increase in policies in force. The gap where premiums are rising faster than exposures is what we’ve been working on increasing profitability and widening underwriting margins. In the fourth quarter that impact is magnified. Premiums grew by over 13%, but with a 1.1% increase in policies in force over the prior quarter. As the rate actions taken by our team continue to work through our financials and maintaining our strict underwriting discipline, the enhanced profitability will continue we are seeing the same factors play out in 2020 to date. Again this is just an ever-widening increase of premium over risk taken.

There is always a concern about retention when raising premium rates. We will be ensured seek to shop elsewhere to contain their costs while we have seen our average rates increase and increased markedly. We are very pleased and in fact, instead, our retention is increasing, not decreasing. This bodes well for 2022 and in the future. You’ve heard us talk about Kingstone 2.0 our modernization effort for some time. Our goal since late 2019 when Meryl joined our Company and put this plan into place was straightforward and simple. First build new advanced product which better matches rate-to-risk drawing upon multiple data sources and incorporating — incorporating property-specific reinsurance factors. We call these products Select. Select homeowners, Select Dwelling Fire, Select to honor our agent partners who for the past 20 years we’ve called Select since John Ryerson was CEO, and he began this naming.

Second Kingstone 2.0 is what [Phonetic] to streamline our many systems into a single policy issuance and management system to run our company. We are making great progress on our system conversion. We’re on track to retire our legacy systems this year. This will reduce our expenses and greatly increase the efficiency of our staff. Expenses declining is the hope to our results. It is in fact a very exciting time to be at Kingstone and the benefits of the second-prong of Kingstone 2.0 will begin to work through our financials.

2022 will be a pivotal year for the company as these Kingstone 2.0 initiatives come to fruition. Already we’ve achieved the single biggest milestone. We’ve gone live with our Select homeowners and our Select Dwelling Fire product in New York, which is you know still accounts for more than 75% of our total premium generation. Given the improvement in pricing sophistication in these new products, we are confident that with its heightened segmentation and expanded granularity Select will translate into significant improvements to our loss ratio, it will enhance our profitability and our goal is to bring these Select products to all states and pending regulatory approval. We expect this process to be completed within a year.

Let me now turn the call over to Meryl to review our financial results. Meryl?

Meryl Golden — Chief Operating Officer

Thanks, Barry. The company posted fourth quarter net income of $2.2 million and $0.21 per diluted share compared to net income of $3 million and $0.28 per diluted share for the same period last year. Direct written premiums for the quarter are 13.2% to 50.1 million, a new high for the company, an increase of $5.9 million from $44.2 million in the prior year period. Due to entering into a new 30% quota share reinsurance treaty effective at year-end. Net written premiums decreased by $26.8 million or 58.5% this quarter. 2021 Q4 net loss [Indecipherable] were 61.8%, down 1.6 points from the prior year. So it was a relatively good quarter.

During the fourth quarter, we experienced two catastrophe events and catastrophes added almost 7 points to our quarter’s loss ratio. For non-cap frequency declined from Q4 in the prior year, particularly in the fire [Indecipherable], but there were several large losses both fire and water, which increased the quarterly loss ratio by 0.9 points. Liability frequency declined since the third quarter for our largest line homeowners to a level that is more in line with history. Dwelling fire liability frequency remains elevated compared to history, but we are seeing some signs of improvement over the past few months. We continued to back this increase in frequency is related to COVID as Barry previously shared. For the current quarter, the net underwriting expense ratio increased by [Indecipherable] to 39.4%, but our underwriting expense as a percent of direct written premium were down [Indecipherable] point. We would expect to see a decline in our expense ratio in 2022 due to many factors, including the retirement of our legacy system.

Overall, it was a good quarter. This is a pivotal time for the company as we will finally start to realize the benefits of our Keystone Co initiative. 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 Goldstein — Chairman and CEO

Great. So during the quarter, we realized a gain of just over $4.4 million on our bond portfolio. Our new portfolio manager is better diversifying the investments and adding new classes, while increasing the portfolio’s average credit rating. The proceeds from these sales were reinvested in limited duration high-quality fixed income mortgages and bonds. Unfortunately, like many others, we’ve seen a decline in bond values have rates in late 2021 and into 2020 to have moved up considerably most profoundly in the short-term maturities, such as Kingstone holds. During the quarter, we did not repurchase any more shares and we paid an additional $0.04 in dividends. Like Meryl, I’m very bullish that we’ve done all the right things to enhance our profitability and look forward to 2022.

Now I will turn the call back to the operator to poll for questions. So that I can reply to them. Operator, please. pause for questions.

Questions and Answers:

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bob Farnam with Boenning & Scattergood. Please proceed with your question.

Bob Farnam — Boenning and Scattergood — Analyst

Yeah, hi there, good morning. So the Kingston 2.0, it sounds like with the conversion of the legacy systems. Is that pretty much the process is going to be done in 2022?

Barry Goldstein — Chairman and CEO

Yeah.

Bob Farnam — Boenning and Scattergood — Analyst

Okay.

Barry Goldstein — Chairman and CEO

We are really working on this.

Bob Farnam — Boenning and Scattergood — Analyst

All right.

Barry Goldstein — Chairman and CEO

This is the year where the rubber hits the road right.

Bob Farnam — Boenning and Scattergood — Analyst

You noted that the expense ratio is probably going to benefit from the lack of improvement of legacy systems and changes. So can you give us an idea of maybe the magnitude that you’re expecting to see an expense ratio?

Barry Goldstein — Chairman and CEO

Meryl, you want to take that?

Meryl Golden — Chief Operating Officer

Sure. So it’s really difficult to understand our expenses because of the quota share treaty. So we have treaties running off, and new treaties coming on. So I think the right way to look at our expenses here is a percent of direct written premium. And when you look at our expenses that way, what you’ve seen is that our underwriting expenses are actually coming down and they’ll continue to. So the legacy systems as an example, that will be retired this year, they’ll save us over [Indecipherable] annually from retiring those systems. So right now we’re kind of double-paying. We’ve also incurred quite a bit of expense relative to the development of our select product that has been expensed along the way. So those consultant expenses will be gone as well. So there is many other things that we’re doing and I think you’ll see a nice reduction in our expenses in 2022 and beyond.

Bob Farnam — Boenning and Scattergood — Analyst

Okay, great, thanks for that color. Switching to rate increases. So what type of rate increases did you achieve in 2021 and what are you filing for 2022?

Meryl Golden — Chief Operating Officer

Yeah, so in, we are now on an annual trajectory in all of our states, and in 2021, we had high-single digits on average, and we expect something similar for 2022. For example in New York, we have 8% running through our book right now.

Bob Farnam — Boenning and Scattergood — Analyst

8%, great. And the last one for me and then I’ll leave it for others to ask, for Climate Exchange some people have noted here the potential for stronger storms hitting farther north. Is that a concern for Kingstone and was that part of the rationale for increasing the reinsurance protection.

Barry Goldstein — Chairman and CEO

Let me start with that, Bob. And yeah, of course, we are cognizant of this. It’s easy to point to climate change as a factor, but yeah I mean being realistic, my job is to protect the company’s balance sheet and that’s really why we strengthened our reinsurance here.

Bob Farnam — Boenning and Scattergood — Analyst

Okay, great, thanks for that.

Barry Goldstein — Chairman and CEO

Okay great, thank you.

Operator

Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Paul Newsome — Piper Sandler — Analyst

Good morning, thanks for the call. Beyond rate you have been doing a lot of work on improving the underwriting process itself, is there any size you can point to you about the mix of change — are you less on the coast. Are you, is the age of your customer changed, maybe you could just kind of talk to [Indecipherable] composition of the book and how it’s changing, from a, from a type of customer and location perspective?

Barry Goldstein — Chairman and CEO

Yeah, I think that points directly at our new Select product and since Meryl, was really the one responsible for that. Meryl why don’t to try to give a little color as to what the impact we’re seeing and we expect to see?

Meryl Golden — Chief Operating Officer

Sure. So first of all, one thing I want to mention is, we’ve spent a lot of time managing our catastrophe exposure. So this was even before Select. And so what we’re seeing this year as we go into our next reinsurance by is even though our premium is up, our P&L is actually coming down. So I think that bodes very well for reinsurance expenses and I think it’s an example of the different things we’ve done to better manage the company. In terms of Select, we’re not seeing that much, it’s kind of early, we’re not seeing that much of a mix difference, but one thing we did when we built this new by apparel[Phonetic] product is we loaded the projected loss and reinsurance cost from the AIR[Phonetic] camp model into our territorial factors. And so we have a much better matching of rate and risk and what it’s allowed us to do is broaden our underwriting appetite because we have confidence that we are now priced adequately for those exposures. So I hope that answered your question. If not, I’m happy to answer anything else you have.

Barry Goldstein — Chairman and CEO

I mean, just to make clear, a little more from what said we buy to [Indecipherable] catastrophe loss, so return period of 130 years keeping that the same we bought $500 million limit in each of our renewals for 2020 and 2021 and for 2022 based upon the latest data, we have the limit we will need to buy to will actually be less than $500 million. So all the actions that had been taken to control out PML, it’s not that they are done, but they’ve worked and we’ve contained our cost of reinsurance by doing so. I hope that gives you a little more color.

Paul Newsome — Piper Sandler — Analyst

No, absolutely. And then just thoughts on the competitive environment. We had a period of time where you had some of the folks near Florida [Indecipherable] in particular coming in hard into your region. But it sounds like that may have abated at least a little bit but love to hear what you, — what do you think with your — given your feet is on the ground?

Barry Goldstein — Chairman and CEO

Yeah, what I would say is, there is always competition Paul somebody, always takes the place of new company comes in to take the place of one exiting, but at least with respect to the Florida [Indecipherable] who expanded to New York. Yes. They’re not as much of a factor. If a factor at all frankly as they had been. So, but there are others. And we continue to manage that. I think, Meryl, you want to add a little more to this.

Meryl Golden — Chief Operating Officer

Sure. I mean, I would just say it is a very robust competitive environment. And as Barry said, some of the companies that historically were the strongest are more on the sidelines now, but there is plenty of other companies writing business that we’re competing, and at different times some get really aggressive and that hurts our volume and all we can do is just hope that they learn quickly from their mistakes. So we haven’t really seen any new player that has much of an impact, but it is a very competitive marketplace and we are very well positioned in this marketplace.

Paul Newsome — Piper Sandler — Analyst

Best of luck. On the rest of the year.

Operator

[Operator Instructions] Our next question comes from the line of Gabriel McClure a Private Investor. Please proceed with your question.

Gabriel McClure — Private Investor — Analyst

Hey, good morning guys, and congrats on the direct written premium record.

Barry Goldstein — Chairman and CEO

Thank you.

Gabriel McClure — Private Investor — Analyst

That’s really great. So I wanted to ask a clarifying question on the policies in force. First of all and then maybe get into the portfolio later, but the policies in force, did I hear you right, Barry, when you said they grew by 2.9% during the year and then 1% in the fourth quarter?

Barry Goldstein — Chairman and CEO

The yearly increase was 2.9% and the sequential quarterly change was 1.1%.

Gabriel McClure — Private Investor — Analyst

Okay, great.

Barry Goldstein — Chairman and CEO

I’m saying that right if I match those numbers up from what you said.

Gabriel McClure — Private Investor — Analyst

Okay.

Barry Goldstein — Chairman and CEO

We’ve spent the better part of more than two years, focusing on profitability. Profitability by taking rate, profitability by being smarter about underwriting, profitability in many measures, but to me the most obvious influence is if you’re growing the dollars, faster than the amount of risk you’re taking on then by definition, your profitability widens and that’s really what we’re talking about.

Gabriel McClure — Private Investor — Analyst

Okay, got it. Thank you. And then just kind of like to dig into the portfolio realignment. What’s the overall credit quality of the bond portfolio looks like and maybe what is the other 22% of the portfolio look like and stuff like that. Thanks.

Barry Goldstein — Chairman and CEO

Yeah. So, that’s fine. The bond portfolio. Is it the biggest single component had been corporate bonds and when we changed Portfolio Advisors during 2021 they felt that a reduction in the corporate was needed and an expansion into mortgage bonds was in order. So that’s really what got underway and you saw a lot in the third quarter, so we better diversified the bonds. I don’t know, it had been overall an A minus rating, and I think the last time I looked, it might be on an overall A rating. The average credit quality of the bonds, we have maintained a limited duration of give or take five years, we’ve been to that. So when you look at the interest rate markets, most people see the 10-year really our portfolio varies with the 5-year and what’s happened recently, as you know, the short end of the curve has been the one that lurched forward first anticipating the fed rate increases. So I hope that gives you a little more idea about our fixed income.

The rest of the portfolio is made up primarily of preferred stocks and some common, but really as a percentage, I’m not sure I believe you are 70% some odd percent of fixed income is. It’s actually higher than that, but virtually more than 95% of what we own is either a bond or a dividend-paying stock or a fixed income type of ETF. So we — our goals for the portfolio remain unchanged. It’s to enhance our profitability but protect our balance sheet while doing so, we don’t swing [Technical Issues] runs. We’re happy just hitting singles.

Gabriel McClure — Private Investor — Analyst

Okay, great. That makes a lot of sense.

Barry Goldstein — Chairman and CEO

Great, thank you.

Operator

Our next question comes from the line of Gregory Fortuna, a private investor. Please proceed with your question.

Gregory Fortuna — Private Investor — Analyst

Hey, good morning Barry, how are you?

Barry Goldstein — Chairman and CEO

Great, thanks for calling Greg.

Gregory Fortuna — Private Investor — Analyst

Okay. A couple of things. So, you mentioned a few times on the call this the first quarter. And since we’re fairly far along. Can you talk about that, I mean any comments as far as how it’s looking.

Barry Goldstein — Chairman and CEO

Yeah, I mean to the extent that I can Greg I will, and you’re right. I have alluded to it, we have seen continued growth in our portfolio at a rate very much matching what we saw in the fourth quarter. Premiums are growing nicely, but much faster than policy count further showing the rate burning through our portfolio. So in that way I can — I can help you give some thought to what the first quarter looks like.

Gregory Fortuna — Private Investor — Analyst

And as far as the catastrophic or I forget the term that is used a lot [Indecipherable]. It has been a pretty mild fourth quarter. Is that — at least from my eye is that, is that —

Barry Goldstein — Chairman and CEO

Yeah, well as I remember Greg you’re only about 10 miles from [Indecipherable]. You see basically the same things we do. Meryl, will you — are you aware of any PCS events in the first quarter?

Meryl Golden — Chief Operating Officer

I think we may have had one small event. But you’re right, it’s a mild winter.

Barry Goldstein — Chairman and CEO

Yeah. Keep in mind, Greg, that we go from Massachusetts to New Jersey. So there’s a lot of weather that takes place outside of the New York metropolitan area that we don’t see or hear about until I look at the claims counts come through.

Gregory Fortuna — Private Investor — Analyst

Okay. So obviously, based on what you’re reporting a lot of things are hitting on all cylinders and all the stuff you have worked for is coming to fruition. So on a normalized year, we don’t have the events that are catastrophic, they are real big ones. What can we expect — like what would an earnings expectation be? I know it’s hard with the storms and all but based on, you mentioned history a lot in the call about historically, so historically if we went back to a normalized type storm season like what can we expect at an earnings level?

Barry Goldstein — Chairman and CEO

Yeah, I mean twice in the past we’ve tried to give guidance as to earnings or combined ratio and whatever, and quite frankly I found my foot in my mouth both times. So I’m not anxious to do that again. What I can say is that if you just acknowledge that so much of the volatility in our financial results comes from the volatility in the weather, then typical non-heavy [Indecipherable] year should see our results come into, call it mid ’90s combined ratio. So underwriting profitability and return on equity in the higher-single digits. If you would, mid to high single digits. But Greg, it’s very difficult for me too.

Gregory Fortuna — Private Investor — Analyst

Yeah, of course, the storm if you know what storms are going to come, you would — you probably wouldn’t be on the beach right now.

Barry Goldstein — Chairman and CEO

No, I actually I’d be at Aqueduct.

Gregory Fortuna — Private Investor — Analyst

Alright. Last question, I saw you didn’t buy any stock back this last quarter. I’m assuming that’s just for capital reasons at some point will you start buying stock back or is that on hold until results improve?

Barry Goldstein — Chairman and CEO

Yeah, no, I think you’re right, we didn’t make any purchases and we’re trying to be very considerate of the amount of remaining capital we have. I mean, each of those two storms Isaias or however you pronounce it and then Ida, they were $10 million events for our company. And yeah, I mean I think a stock that’s trading that I feel so good about, that’s trading at 70% of book value is — for me running the company, it’s a great place to put excess capital. Just right now, I’m not sure that I want to consider what we have as excess.

Gregory Fortuna — Private Investor — Analyst

Okay. Well, since you opened the door to that, can you — is there any, I saw that there was some awards that you, I think you [Indecipherable], is there anything from the insider point of view as far as the stock purchases or positions, something like that?

Barry Goldstein — Chairman and CEO

No, I mean I’ve have always filed with the SEC timely for all my share purchases. And I think what you might be talking about is, I had a restricted stock-awards [Indecipherable] at the beginning of this year, that’s publicly on record. And I think I wind up now owning at least according to S&P Global 9.95% of the shares of the company. So, yeah, and there is no intention to do anything but more of the same. Keep in mind that the tax cost to that vesting for me was in the hundreds of thousands of dollars. So, I pay for the privilege.

Gregory Fortuna — Private Investor — Analyst

I understand. All right. I’m looking forward to a good year and hopefully, we won’t have too many storms. Thank you very much.

Barry Goldstein — Chairman and CEO

Thank you, Greg.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Barry Goldstein for closing remarks.

Barry Goldstein — Chairman and CEO

Great. And thanks to everybody for joining in, and thanks for following up with Kingstone. We are in the midst of our pivotal year. We’ve got a team in place that is happy and working really hard to deliver and I’m really hopeful that the results will pan out and even be better than what we can hope for. So thanks again, we’ll talk again soon. Bye.

Operator

[Operator Closing Remarks]