Greetings, and welcome to Kingstone Companies' Q1 2021 Financial Results and Conference Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions].

I would now like to turn the conference over to your host, Amanda Goldstein, Investor Relations, Director. Please go ahead.

Amanda M. Goldstein - Investor Relations Director

Thank you very much, Brock, and good morning, everyone. Yesterday afternoon, the Company issued a press release detailing Kingstone's 2021 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 31st, 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 B. Goldstein - Chairman and Chief Executive Officer

Yeah. Thanks, Amanda, and good morning, everyone. We are pleased you can join us on this, our first quarter of 2021 conference call. In preparing for this call, I was reminded of what was going on last year at this time. And I can only say how thankful I am that we are now in so much of a better place. I want to again share my appreciation to all those that enabled the U.S. to be in this position, and to our producers and employees who continue to put the needs of their clients and our policyholders first during these most difficult of times.

One thing that I love about running an insurance company is that it's really two businesses. It's a business of underwriting, charging premiums to all so that the claims of the few can be covered. Second is the business of investing the premiums generated by those underwriting operations. We think about our ability to deliver a return on equity, and here we get two shots at the target.

This quarter's results are a perfect example of that. As a Northeast property writer, winter is almost never a profitable season, and the first quarter reflects that. It wasn't too bad, losing $0.25 a share in operating EPS. But our solid investment results offset almost all of the first quarter underwriting loss, leaving us with a small $0.03 per share overall loss per share.

Today, I'll focus my remarks on our investment results and I'll let Scott and Meryl talk about our overall financial and underwriting results. Okay, I'd like to - I'm sorry, I'm losing my place here. We had a terrific investment returns in the first quarter, especially when contrasted with the prior year when the markets fell due to the uncertainty of COVID. Our Q1 investment income, that is, interest in dividends less expenses was up 7% to an all-time quarterly high of $1.8 million.

I'd like to call your attention to our Investment Committee which formally incorporated an ESG provision to our investment guidelines. In addition, the committee agreed to make two significant changes since the second quarter of 2020. The first was an increased allocation to preferred stocks, primarily those bearing an investment grade rating. This gave rise to higher after-tax returns, and was seen as being less volatile than the common equities and mutual funds we exited.

Second, we decided to increase our allocation to alternative investments buying one real estate limited partnership interest and adding to the one hedge fund we have invested in with great results since 2018. Note that we have not yet fully invested all of the return premium we received as a result of the quota share treaty termination, but we expect to put that money to work sometime during Q2.

Realized gains and the quarterly growth in realized - unrealized gains in our equity and other investments portfolio added almost $3 million of pre-tax profits to our first quarter's results. This is compared to a COVID triggered $6.4 million decline last year. At quarter end, our equity and other investments portfolios had unrealized gains of just under $5 million. I've managed our investments since mid-2009, and while I might be a bit old fashioned, I believe that each name is bought with the intention to hold it for a long time. But also, I understand that our real risk taking is in our underwriting operations. As such, gains are periodically harvested.

We ended the first quarter with just over $220 million in cash and investments, and we can certainly continue our conservative and prudent investment practices as we now have about $2.25 of cash and investments for each dollar of equity. Last quarter, I contrasted the Company to our Florida-based competitors. And I want to mention that the potential for investment returns, like we had this quarter is another differentiator for Kingstone.

Many of those competitors who are considered by some to be part of our peer group have been compelled to sell off large portions of their investment portfolios to fund their operations and to maintain regulatory compliance. In essence, with less to invest, this puts added pressure on them to further improve their underwriting results, if they are to achieve their return on equity targets.

This leaves them with little more than one shot at the target. As this quarter demonstrates, us having two shots is a competitive advantage and one we hope to exploit going forward. Now, let me turn the call over to Scott to review our financial results. Go ahead, Scott.

Scott Van Pelt - Chief Financial Officer

Thanks, Barry. The Company posted a first quarter net loss of $300,000 compared to a $5.4 million net loss for the same period last year. The improvement is primarily attributable to the gain on our investments this year and the dramatic decline in the financial markets last year as Barry just went through. For the last three months, the Company had an operating loss of $2.7 million offset by an after-tax gain on investments of $2.4 million.

For the prior year quarter, the Company had an operating loss of $0.3 [Phonetic] million and an after-tax loss on investments of $5.1 million. Kingstone reported a loss of $0.03 per diluted share for the three months ended March 31st, 2021 compared to a loss of $0.50 per diluted share for the three months ended March 31st, 2020. Direct written premiums for the quarter were $38.1 million, an increase of $1.4 million or 3.9% from the $36.7 million in the prior year period. The increase is primarily attributable to a $1.7 million increase in premiums from our personal lines business, offset by a $0.4 million decrease in the livery physical damage premiums triggered by the COVID-19 pandemic.

The 32.8% increase in net written premium and the 28.4% increase in net earned premiums for the quarter were primarily attributable to the exit from the 25% personal lines quota share on December 30th, 2020. Relative to a loss ratio comparison, the story is more about how great the first quarter of 2020 was compared to 2021, which was a more typical winter from a non-cat perspective.

The net loss ratio for the quarter was 65.2% or 4.4 points higher than the 60.8% posted in the first quarter of 2020. Catastrophe losses were low 0.7 points in both quarters. The loss ratio increase in the quarter was due to a higher frequency of non-weather water losses which added approximately 2 points to the loss ratio as well as two severe fire claims which added approximately 2 points to the loss ratio.

It's important to note that the non-weather water loss frequency was in line with history. It's really that the winter of 2020 was just that good. For the current quarter, the net underwriting expense ratio was 42%, as compared to 39.1% in the prior year period, an increase of 2.9 percentage points. The 2.9 percentage point increase was primarily attributable to the exit from the 25% personal lines quota share treaty and the decrease in both provisional ceding commissions that went along with that.

In addition, 2020 had a contingent commissions from prior year's quota share treaties. Finally, first quarter results this year reflect an increase in contingent commission expense expected to be earned by our producers of $0.4 million due to the projected increased profitability in the personal lines book. More important in thinking about the moving parts that make up the ratio, please be mindful that our net other underwriting expenses were 4.4% less than the prior year quarter.

Overall, it was a good first quarter as Northeast winter quarters go. This year's quarterly combined ratio was 3 points lower than the average of the last five years. These under writing results coupled with our terrific investment returns, put us on a good position for the year.

I'll turn the call over to Meryl.

Meryl S. Golden - Chief Operating Officer

Great. Thanks, Scott. I'm happy to report that our efforts to transform and modernize the Company, coined Kingstones 2.0, continue in earnest. While I would like everything to move faster, the reality is that the initiatives we have underway like core system conversion and new product filings, just take a long time. That said, we are still on track to complete this phase by the end of 2022. As we have reported previously in these calls, we have been squarely focused on improving profitability.

We have taken many rate increases and underwriting actions starting almost two years ago. This has slowed our growth. It's always hard when you are one of the first companies to raise rates and the sales force and producers constantly share examples that demonstrate your lack of competitiveness, even though you know that you needed to increase rate to hit profitability targets. And then time passes and competitors start to raise their rates and tighten their guidelines as well. That's the situation that we are now in.

We expect that the changes we've been making to improve our profitability will start to show in our results post this winter quarter and our growth should tick up a bit as well. It's been a while since Kingstone gave earnings guidance, but we're feeling confident. So I wanted to share some projections with you. As communicated previously, we expect direct written premium growth for the full year in the 5% to 7% range. While I want to reiterate that we priced to achieve a return, some of our competitors have acknowledged that their previous focus on growth has led them to change course by raising rates and tightening guidelines.

Our growth estimate does not anticipate the perceived favorable change to the competitive landscape. And we will adjust the range if needed as the year plays out.

Further, we expect that 2021 full year combined ratio to be in the range of 88% to 92% absent a major landfall storm. This should allow us to achieve a return on equity for 2021 of 10% to 12%. Actions already taken are producing the anticipated results. We are in a good place.

Now, I'll turn the call back over to the operator to pull for and reply to the questions you may have. Operator, please pause for questions.

Question & Answers

Questions and Answers:

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Operator

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

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

Yeah, hi there. Good morning. So Meryl, I just wanted to go farther into the competitive landscape. So one of these things I always consider is when you're raising rates, what happens to your retention ratios. But it sounds like your competitors may be raising rates as well. So have you started to see any improvement in retention yet?

Meryl S. Golden - Chief Operating Officer

Good morning, Bob. Thanks for your question. So our retention is pretty much flat versus last year. So the changes that we are seeing from our competitors have just started. So, but those wouldn't impact our retention anyway. It's really our rates that affect retention. So what - it will be impacted as our new business growth and we look forward to that.

Barry B. Goldstein - Chairman and Chief Executive Officer

Let me just add a little color there because, Bob, I don't know if you remember, but in previous calls when we started to take rate, we mentioned that we didn't see any appreciable change to the retention. I mean that was - to me, that was the - gave us the impetus to keep going forward and taking rate, because we weren't losing customers.

Kingstone has a great reputation in the marketplace, and we hadn't raised rates in a long time, people understood and they stayed with us.

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

Great. Okay. So it sounds like if you're going to go, if you're going grow more than you expect this year between the 5% and 7%, it's going to come from new business rather than rate increases on your retained business?

Barry B. Goldstein - Chairman and Chief Executive Officer

Yeah. I think that's correct.

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

Okay. In terms of the investment income, Barry, so the $1.8 million was higher than expected and I appreciate the comments about the preferreds and the alternatives. Is this - should we use this more as a run rate going forward, this level?

Barry B. Goldstein - Chairman and Chief Executive Officer

Yes. I mean, I was trying to allude to the fact that we still have quite a bit of dry powder, and it was increased by the cash we received after cutting off the quota share. The reinsurers had to return to us the premium we had already paid over to them, but that they hadn't yet earned. So that money needs to be put to work. So there should be a moderate increase in the amount of assets that are invested, but I couldn't give you any more guidance other than that. I think it's pretty fair to look at the current quarter and anticipate something very similar moving forward.

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

Okay. And actually the last question I have is something in a similar basis, the expense ratio of 42%, is that a good run rate to go - work off from this point based on the fact that you don't have the ceding commissions coming back?

Barry B. Goldstein - Chairman and Chief Executive Officer

Meryl, you want to handle that? So, who's going to handle that?

Meryl S. Golden - Chief Operating Officer

Sure. I can handle it. So I do think that you'll see our expense ratio come down as time goes on. Of course, the - we're going to feel the impact of the reduced ceding commission throughout the year, but we - all of these efforts that we're making on Kingstone 2.0 will be gaining more and more efficiency. And so, I do think you'll see our expense ratio coming down throughout the year.

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

Coming down from the - kind of the 42% level at this point?

Meryl S. Golden - Chief Operating Officer

Correct.

Robert Farnam - Boenning & Scattergood, Inc. - Analyst

So [Multiple Speakers] Yeah. That's - I just wanted to confirm that. Okay, thank you.

Meryl S. Golden - Chief Operating Officer

Yeah. Okay.

Operator

[Operator Instructions]. The next question is from Andrew Balcom [Phonetic] of Candy [Phonetic] Capital. Please proceed with your question.

Andrew Balcom - Candy Capital - Analyst

Hey, good morning. I hope you all are doing well. I know at the end of last quarter, you announced an ambitious buyback plan, and I was wondering if you had any updates on that or guidance on what you expect to - how that - how you expected that to play out over the next year or so.

Barry B. Goldstein - Chairman and Chief Executive Officer

Sure. Hey, Andrew. How are you doing?

Andrew Balcom - Candy Capital - Analyst

I'm fine.

Barry B. Goldstein - Chairman and Chief Executive Officer

Been a while. Yeah, so we did - we did announce a buyback plan and as you know, we haven't yet filed the Q, but you'll see in there that during the first quarter, we bought back a modest amount of stock, something less than 10,000 shares. But that, that process, and that, that two year anticipation of buybacks is in place and we'll be reporting on that each quarter as we go forward.

Hope that answers your question.

Andrew Balcom - Candy Capital - Analyst

Yeah, I think that'll be something I'll look out for, for sure. Thanks.

Barry B. Goldstein - Chairman and Chief Executive Officer

My pleasure.

Operator

The next question is from Paul Newsome of Piper Sandler. Please proceed with your question.

Paul Newsome - Piper Sandler - Analyst

Good morning, and thanks for the call. I was hoping maybe you can just give us an update or refresher on the steps that Kingstone 2.0 will take over the next two years. And are there any couple of milestones that we should be expecting to see in that process that we should take note of over the next several quarters?

Meryl S. Golden - Chief Operating Officer

Sure, Paul. Thanks for asking about Kingstone 2.0, I kind of felt like no one ever ask about it. So I'm delighted that - to talk about it, because that's what I live every day. So in terms of the next two years. So, first of all, Kingstone 2.0 there is really a multiple things that we're doing. One was adding a lot of new senior leadership to the Company. So that's in place.

The second is, we need to get off of our legacy systems and that has started. Last December we started that conversion to a company called WaterStreet, and that will continue throughout this year and into next year. And as we're able to retire those legacy system, we will have a greater expense reduction. And so the next product that will be converted is our umbrella product and then our dwelling fire product later this year.

So there is a rollout schedule that continues into next year. And then third major piece is introducing new products, all of our products reconfigure to be more sophisticated from analytics perspective and where we are on that is we're hoping to launch New York homeowners later this year, and hopefully dwelling fire before the end of this year as well, but it depends on regulation and systems. And as I said in my remarks, it just goes slower than I would want it to go. And then our plan is to introduce all of those products to all of our states next year.

So it's homeowners, condo, renter and dwelling fire, new products in all the states. And so, as we have these calls, we'll keep you posted on our progress there and those I think are key milestones for the Company that will result in more profitable growth. Did that answer your question, Paul?

Paul Newsome - Piper Sandler - Analyst

It did. Is there a long-term, post 2022 kind of expense ratio target that you think you can achieve after all of the - the benefits of 2.0 are in place?

Meryl S. Golden - Chief Operating Officer

Well, I can tell you, I think that Kingstone 2.0 will save us at least a point this year and maybe an additional point next year of course, we're aiming to lower our expenses more than that, but I - that's our most recent estimate of the benefits from Kingstone 2.0.

Paul Newsome - Piper Sandler - Analyst

Got it. A couple of points is material [Phonetic] [Technical Issues], there's no question about it. Thank you. Appreciate it. And good luck for the rest of the quarter.

Meryl S. Golden - Chief Operating Officer

My pleasure. Thank you.

Operator

The next question is from David Adelman of Adelman Capital. Please proceed with your question.

David Adelman - Adelman Capital - Analyst

Thank you. Hi Meryl and Barry. My question is the 10% to 12% ROE that you're talking about this year, that's good, going into the right direction, I wonder just if given the cost cuts in new products and Kingstone 2.0 that you're implementing, do you think that the ROE over time obviously fluctuates depending upon the incidents in weather, etc, [Indecipherable] in average would you hope that it could be higher than that or do you have a goal or kind of, what are you shooting for?

Barry B. Goldstein - Chairman and Chief Executive Officer

Yeah, thank you for the question, David and good talking with you. I think, yes, so what we've gone through and the measures we had to take that crimped our profitability and allowed us to realign the Company to being almost exclusively a property writer, those things are very much in the past now. I think a short-term goal of - or short-term target of 10% to 12% is very attainable, and as we alluded to before, that doesn't anticipate much more than 5% or 7% growth happening.

So if we can, the point being, I guess that the actions we took to improve upon our profitability are now showing up in our numbers so that we can look forward to growing that 10% to 12% in the future. But I'd hate to put a target on it. You may remember, and I think you invest a long ago when Kingstone was able to deliver high teens ROEs consistently, the competitive landscape changed that. I'm not saying that couldn't happen again in our favor, but I'd hate to put a put a goal out there beyond the 10% to 12% that we're talking about now.

I hope that's consistent with what you were thinking.

David Adelman - Adelman Capital - Analyst

Right. Absolutely. Thank you.

Barry B. Goldstein - Chairman and Chief Executive Officer

Great, thank you.

Operator

There are no additional questions at this time, I would like to turn the call back to Barry Goldstein for closing remarks.

Barry B. Goldstein - Chairman and Chief Executive Officer

Great. Thanks everybody for listening in. I can only tell you that this job is getting to be a lot of fun again. I had a lot of fun. There was a couple of years that was like our walk through the desert, if you would. But we've come out on the other side and we're having a blast. So stay tuned to these calls in the future, and please stay healthy until then. Thank you, Operator.

Operator

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KINGSTONE COMPANIES INC

Q1 2021

Earnings Transcript

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