Greetings, and welcome to Kingstone Companies' Q3 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Amanda Goldstein, Investor Relations Director. Please proceed.
Thank you very much, Latonya, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2021 Q3 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 I, Item 1A of the company's Form 10-K for the year ended December 31, 2020, along with a 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.
Thanks, Amanda, and good morning, everyone. We're pleased that you can join us for this, our Q3 2021 conference call. From a weather perspective, this was unlike any quarter in the company's history. We've had bad quarters before, no doubt, but never had there been more than 1 single $1 million catastrophe event in any calendar quarter. Unfortunately, last quarter, we saw three seven-figure storms. These catastrophe losses, totally outside of our control, added 33 points to our combined ratio, pardon me. There were other items that impacted our attritional loss ratio that Meryl will review with you in a few moments. In my opinion, we've seen changes in loss patterns, much of which is attributable to COVID-19. While we operate in five states, the vast majority of our business is in the New York metropolitan area, one of the first hard-hit areas from COVID.
With more folks beginning working at home, little travel, more so people staying in the house using more home appliances, having more people around at the same time or walking in the streets. You get what I'm saying. These seem to have resulted in more opportunities for problems in and around the home, and home is our business. We're now seeing these factors abate as people return to work and the kids go back to school. Keep in mind that ours is a narrowly focused business with but two lines and with a concentrated exposure to the Northeast. We previously noted an increase in both homeowner and dwelling fire liability claims, but have now seen our homeowner liability claims return to a more normal loss pattern. It will take time to see this return to normal in dwelling fire, as those claims are generally reported later than a homeowner claim.
We cannot control the weather, not the number, nor severity of the events. All we can do is prepare ourselves to pay claims in an expedient and orderly and fair fashion. I am very proud of our claims team, which has demonstrated our never-ending commitment to our policyholders and select producers. For the past two years, we've been hyper-focused on profitability. We've taken many, many steps, big and small. We exited unprofitable lines, raised rates, almost stopped the growth in our reinsurance purchase, tightened underwriting, and all while preparing for the future. Rate increases are pending or have been approved in most of our states, and we are committed to taking rate annually to stay ahead of trend. While on a year-to-date basis, our premiums are up 5.2%, please note that our policies in force are up by one-third of that or 1.7%.
We expect that this spread will widen materially, resulting in an ever-increasing average premium rate as we have seen and have significant rate that is beginning to earn in. For example, in October, our premium grew by more than 10%. As I mentioned last quarter, we are continuing to see growth in new business due in large part to the restrictive actions taken by some of our competitors. In Q3, we've seen our quote activity increase by over 24% as compared to the prior year. Likewise, our new business policies bound by our select producers were up 18% in the Q3 . Most importantly, the average premium on this new business is up almost 16% compared to last year. I am confident this is profitable growth. You've heard us talk about Kingstone 2.0, our modernization effort led by Meryl for some time.
The two goals were simple, to build a new advanced product better able to match rate to risk. Along with having a single policy issuance and management system to run our company. In fact, we had two major milestones during the Q3 . First, we did receive approval from the New York Department of Financial Services on our new products. I'm pleased to announce that our new but yet unnamed product will launch in the Q1 of next year. Given the dramatic improvement in pricing sophistication in these new data-driven products, we're confident we will see significant improvement in our loss ratio. Second, we've made great progress in retiring our legacy systems during the quarter. We anticipate the complete exit from these old systems next year, bringing significant expense reductions as we gain efficiency.
After Meryl joined the company just over two years ago, her charge was to modernize the company, and I'm pleased to say we're now in the seventh inning. I'm not sure if the top of the seventh or the bottom of the seventh, but we're in the seventh inning, and we expect this three-year 2.0 plan to be complete by the end of 2022. Let me now turn the call over to Meryl to review our financial results. Meryl.
Thanks, Barry. The company posted a Q3 net loss of $10.6 million or $1.01 per diluted share, compared to a net loss of $1.2 million or $0.12 per diluted share for the same period last year. Direct written premiums for the quarter were up by 6.8% to $48.9 million, an increase of $3.2 million from $42.6 million in the prior year period. Due to our exit from quota share reinsurance this year, net written premium increased by 39% this quarter and net earned premiums increased by 34%. This quarter, we experienced three catastrophe events, Elsa, Henri, and Ida, that added 33.1 points to the net loss ratio.
We have received approximately 1,800 claims to date from these storms, and I'm happy to report that more than 95% are closed for Elsa and Henri, and more than 80% of the claims have been closed for Ida. I want to take this opportunity to thank our claims organization for working so incredibly hard to help our policyholders. Given the significance of the CAT events during the quarter, we made the decision to purchase stub coverage to reduce our retention to $5 million for the remainder of the wind season. Our non-CAT loss ratio was also high this quarter. There were two primary drivers. First, we continue to experience higher than historical liability claims in our dwelling fire product. Last quarter, we shared that phenomenon, and I'm happy to report that liability frequency for our larger homeowners product for Q3 was in line with prior years.
The dwelling fire liability is still elevated. I want to remind you that liability frequency for personal property is incredibly low, less than 0.2%, so the increase amounts to a very few number of claims. We continue to suspect this increase is related to COVID, as Barry just shared. As people return to work, are less home-centric, and as property owners are better able to get maintenance done on their homes, we look forward to seeing frequency return to a more typical level. The second driver of our high cat loss ratio was an increase in severe fire claims. Let me state that we did not see any overall change in the frequency of fires, but overall severity has increased due to a number of large fire claims. Otherwise, our Q3 non-cat loss experience was comparable to prior years.
For the current quarter, the net underwriting expense ratio increased a half a point to 39.3%. This increase is primarily attributable to the exit from the 25% personal lines quota share treaty and the decrease in provisional ceding commission that goes along with it. In addition, our results reflect an increase in IT and professional services expenses related to the Kingstone 2.0 initiative. Overall, it was a very disappointing quarter, but we remain steadfast in our belief that we have done and continue to do all the right things to return the company to profitability. Now, let me turn the call back over to Barry to discuss our investment results.
Thanks, Meryl. Our investment portfolio continued to perform well with our focus on limited duration, high-quality fixed income. Overall, interest and dividend income net of expenses was up just over 12%. During the quarter, we shifted fixed-income managers, and the goal last quarter was to achieve better diversification. We reduced our concentration in certain asset classes, adding to others and starting new ones. This had the effect of increasing the overall credit quality of our portfolio with very little change to our modest duration that we've always kept. Further changes were made in the Q4 , and I will share those with you on our next call. During the quarter, we repurchased 88,000 additional shares at an average price below the quarter ending book value per share, so that this is a driver to our future earnings per share.
We paid $0.04 a share in dividends, and we announced the Q4 dividend of $0.04 payable to our shareholders on December 15th. This is our 42nd consecutive quarterly payment. Now I'll turn the call back to the operator to poll for questions that you may have. Operator, please pause for questions.
Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for our first question. Our first question comes from Paul Newsome with Piper Sandler. Please proceed.
Good morning. Nice to hear you all. I was hoping you could give us maybe some examples of the losses that were really COVID driven because people were staying home, just to kind of frame them in our minds as to what specific types of losses you're talking about. Just a couple examples, maybe.
Meryl, you want to start, and I'll throw in anything extra.
These liability claims are in our dwelling fire book. Most of our dwelling fire book are tenants in you know properties owned by our policyholders. They're typical trips and falls, so sidewalks, stairs. We do believe that there is less maintenance going on given the difficulty in getting contractors these days. Those are what the claims are like.
Yeah. I think, you know, that's the kind of claim, Paul. It's the combination of more people being around and an inability for the homeowner or the dwelling owner to get the properties repaired as they had in the past. It's kind of like deferred maintenance that's being done now. I hope that answers your question.
It absolutely does. Along maybe a similar theme, a lot of what we've heard this quarter from other companies is discussion of sort of more broad inflationary trends, things like home prices and the construction material prices, labor. You know, what sort of impact are those more broad inflationary trends you think having on your book versus stuff that's more more either very regional or you know to your book only?
Meryl, you want to start on that one?
Yeah. I do think, Paul, you know, as other companies have indicated, that we are experiencing this overall inflation. You know, I saw a recent report from Verisk that material prices are up, you know, building cost prices are up, I think 6.8%, on a, you know, year-over-year basis. We're definitely experiencing that in our portfolio.
Any sense of kind of how, you know, is it the majority of the impact in your view, or is it a minority of the impact?
I'm not sure what you're getting at when you say that, Paul.
Well, that's.
It's really, I mean, if you look, we're seeing it in loss costs, right? It's a combination not just of inflation, but our obligation is to put a home back the way it's supposed to be put back. For example, if the next door neighbor's house caught fire and the siding on our house got burned, we've got to replace that siding, maybe even, you know, maybe half the house's siding. What if we can't get, because of supply chain disruptions, comparable material to repair the home? We have to buy more. We can't do it cheaper. You know, we're at a loss on that. Maybe when the supply chain problems start to abate, we'll see that come back to normal.
It also takes longer to get repairs done. In cases where the property is not livable, we have an increase in additional living expenses as well.
Well, thank you for your help and insight. We appreciate it.
Great. Thanks, Paul.
Our next question comes from Robert Farnam with Janney Montgomery Scott. Please proceed.
Yeah. Hey there, and good morning. I have a couple questions on the kind of the accident year non-CAT loss ratio. 64 % for the quarter, higher than I was expecting. Maybe could you just kind of tease out how much of that was related to, you know, the higher than expected fire losses or the liability claims? I'm just trying to figure out kind of what a quote-unquote normal quarter would look like in that for that ratio.
Yeah. Let me start this, Paul, and I'll let Meryl chime in. You know, what you do and what everybody else does is they compare the Q3 of 2021 with the Q3 of 2020 and try to look for what causes the variance. That does make sense. If you look back, and I'm sure you will, to the Q3 of 2020, we had a non-CAT loss rate, a non-CAT combined ratio of 80. In your parlance, we had a bad comp to go against to explain. Meryl, if you wanna go to a little bit of detail on the high severity fires as well as the liability losses, please.
Yeah, Bob, we think that the fires added roughly 8%-9% for the quarter, and the dwelling fire liability frequency added somewhere around 4%.
That's in kind of in addition to what a normal. I mean, obviously, you have fire losses, you know, that happen every quarter, so.
Yeah.
Is that above and beyond, you know, an extra? Okay, that's what I was trying to figure out. Yeah. Then very quickly-
We do-
Yeah.
We do get fires. You know, we get large fires all the time. They just happen to be concentrated in Q3 this year. The amount is.
Yeah. I went back and tried to find it, I couldn't, but I think it was in the Q1 of 2016 that this same thing happened, that we had just a concentrated quarter of high dollar fires. You know, it just is gonna happen. We write homes now. We have a limit, we've reduced our limit of Coverage A down to $2 million. We'd had it far higher before, so we're not writing as many high valued homes, and that should taper things in the future. We've had this before. If anything, my mentor, John Ryerson, always tells me, "Remember, this is a fortuitous business." In this case, we're on the wrong end of that fortune.
Right.
Hope that answers your question.
Maybe just more of a general question. I don't know what your underwriting criterion is, but what percentage of your homes are kind of like secondary homes versus primary homes? I didn't know if that had any impact on the claims.
I don't know the exact percentage, but it's something, it you know, like 10%. Most of our homes are primary residences. I don't think it's related.
Okay. That's it for me. Thanks.
Thanks, Bob.
Our next question comes from Gabriel McClure, a private investor. Please proceed.
Yeah, I got a couple of questions. First one is kinda, you know, a lot of people are focused on the quarters. I just wanna look at year-to-date results with the combined ratio coming in at 115%, ex cats 103.5%. And the forecast for high 80s or low 90s, whatever it was earlier in the year. I guess, what was the learnings that we've made so far this year that we can apply, you know, in the future, which is what we all care about. That's the first question.
Hi, Gabe. We set out with high aspirations for a better combined ratio for the year. We saw the impact of COVID. We saw the impact of these increased number of liability claims. We withdrew our guidance at that point. What we've learned from it is that and we're planning for now is I think there's going to be more and more hybrid work, more people will stay at home. This maybe the normal loss patterns will change some. In our projections that we're working on for 2022, we're anticipating that we're going to need to take more rate to accommodate more work from home.
Secondly, while we've always presumed a certain amount of inflation and loss costs, this spike that we've seen recently is gonna have to be dealt with. This is going to be passed through to the policyholders. Right now, I think most pundits are looking at more longer-term inflation rate closer to 3%. We'll add something like 3% on to our future trend when taking rate. Those are a couple of the things we've learned from and are reacting to.
Okay. Very good. That's helpful. This kind of dovetails into the next question, which is, we're that time of year where you guys are doing your rate increases. My question was, what kind of rate increases are we doing? Are you gonna be resuming combined ratio guidance going into next year on those?
I'll let Meryl handle the first part of that, and then I'll chime in afterwards.
Yeah. We have been taking rate in all of our states. In general, it's, you know, like a high single digit. You know, as an example, we just went live with an 8% increase in our New York homeowners book. We, you know, we do have a quarterly indication process where we look at our rate need every quarter, and we will file additional rate as needed. So far this year, it's been in the mid to high single digits.
Yeah.
Okay.
I think, you know, I think that's correct. I think what we're seeing across the board, not just in homeowners but and not just in the New York area, is that more rate is needed. You know, it's unfortunate the way these things work. We had a bad year, but we have a number of constituencies that we have to deal with. I think about our policyholders and the rate we're placing on them. I think about my employees who won't have a generous Christmas present this year. I think about our agents, and I think about our investors. Maybe more so my job, I work for the investors. My investors have seen the value of their investment in the company decline materially, depending upon your price point, by as much as 75%.
We've seen the investment income provided to our investors, at least in form of dividends, decline by 60%. I'm not happy. No one's happy. Let me just say, we started this process two years ago. You don't see the benefit other than the rate increases we've taken. You do not yet see the benefit of the things that we've done. While I'm calling out milestones in our ability to get our product approved or in making ourselves more efficient, I can only ask you to show patience on that level, because I do think that will help us and bring us back to profitability. History is history. The past is the past. We lost money in this quarter. We've lost money in prior quarters.
We're not happy about that, but there's nothing that is available to us that we're not pursuing. That I can assure you. I hope that answers your questions, Gabe.
Yeah, it does. Thank you very much.
Okay.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Mr. Goldstein for closing comments.
Great. Thank you very much. Thanks for bearing with us. Yes, this was a difficult quarter, and I'm steadfast in my belief that we've done and are continuing to do all of the right things for our company in order to return it to consistent profitability. Thank you for listening in and taking the time to hear our story. Have a great day.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.