Kingstone Companies Q1 2023 Earnings Call Transcript

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May 12, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Kingstone Companies First Quarter 2023 Earnings Call and Webcast. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jennifer Brezel, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you very much and good morning everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's Q1 2023 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 affected at 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 ks for the year ended December 31, 2022, along with commentary on forward looking statements at the end of the company's earnings release issued yesterday.

Speaker 1

In addition, our remarks may include references to non GAAP measures. For a reconciliation of our non GAAP measures to GAAP figures, please see the tables in our earnings release. With that, I'd like to turn the call over to Kingstone's Chairman of the Board and CEO, Mr. Barry Goldstein. Please go ahead, Barry.

Speaker 2

Thank you, and good morning, everyone. Thanks for joining Kingstone's Q1 earnings call. In addition to Jen, our Chief Financial Officer and Head of Investor Relations. Also with me today is Merrill Golden, our Chief Operating Officer and the President of our insurance company. Let's get straight to it.

Speaker 2

We're not happy to be reporting an underwriting loss, of course. And an underwriting loss in the Q1 was really not unexpected given the Northeast winter. Looking back, this year's results are in line with what we've experienced in 3 of the last 5 years and reflect a reality of operating in this region. Nevertheless, we remain committed to our focus on the Northeast. It's proven to be a valuable and productive territory for us over the long term, especially when compared to other parts of the country like Florida, California, The Southeast, the Gulf Coast.

Speaker 2

So at a high level, this winter we saw a few days of freezing temperatures that resulted in almost primarily water related and which increased our underwriting loss for the Q1. I will let Jen and Merrill go over those in Our industry offers many opportunities for growth and innovation, particularly for those who understand this highly complex and regulated field. With that said, it's also a difficult business as so many exogenous factors And a few days of freezing temperatures set us way back. And it's not just adverse weather that we are dealing with. We are also navigating record high inflation, volatile interest rates, the hardest reinsurance market we have seen in decades, just to name a few of these headwinds.

Speaker 2

So despite these challenges, I'm encouraged. I'm encouraged by the positive signs we're seeing in the market. There is light at the end of the tunnel. I believe that the macroeconomic factors that have been negatively impacting our results and our intermediary. The reinsurers we've spoken with are indicating that capacity is available in the market this year and that rates may have in fact peaked.

Speaker 2

Taken together, these developments give me confidence that we're moving in the right direction. But what that means for our shareholders is that better times are ahead. We've been working diligently to strengthen and fortify our business. And as many of those headwinds we faced begin to slow, we expect results of our efforts to play out. And as we progress through the year, we expect to realize even more of the benefits from the strategic actions we've taken.

Speaker 2

Overall, we are bullish on our future, remain committed to our strategy and are confident in our ability to position ourselves for success in the years ahead. With that, I'll pass the call over to Jen to review our Q1 results. Go ahead, Jen.

Speaker 1

Thanks, Barry. For the Q1 of 2023, Kingston reported a net loss of $5,100,000 and a 47 per diluted share compared to net loss of $9,200,000 $0.87 per diluted share for the same period last year. Direct written premiums were up 10.7 percent to $47,600,000 an increase of $4,600,000 from $43,000,000 in the prior year period. To continue to grow premiums materially faster than exposures for the foreseeable future. The net loss and LAE ratio was 88.6%, up 2.6 points from the prior year.

Speaker 1

As expected, the largest driver of this increase was catastrophe losses. 1st quarter catastrophe losses added $3,700,000 or 13.2 points to the net loss ratio for the quarter, an increase of 1.9 points over the prior year. The attritional or non cat loss ratio was 47 excuse me, 75.4%, slightly higher than the loss ratio in the Q1 last year. While frequency was in line with historical periods, the non cat loss ratio was driven by severity, likely due to inflation along with 3.7 points to 34.7 percent. We've spoken about our disciplined expense reduction efforts in the past and have made great progress on this front.

Speaker 1

The expense reduction is primarily due to decrease in IT expenses from the retirement of the company's legacy systems and changes to producer commissions. We are reviewing all expenditures for necessity and potential savings as well as continuing to automate various processes in an effort to reduce expenses even further. While Our underwriting loss is comparable to the same quarter last year. This quarter, we had a $1,200,000 unrealized gain from our investment portfolio versus unrealized loss $4,400,000 in the prior year due to the stabilization of capital markets. Additionally, the net investment income was up 13.4% from Q1 2022 to 2023.

Speaker 1

I'll now turn it over to Merrill. Merrill?

Speaker 3

Thanks, Jen. Last quarter, I shared our 4 pillar strategy for 2023 2024, coined Kingstone 3.0 to maximize Kingstone's profitability. In this quarter, I will provide an update on our early progress executing against those pillars. The first pillar is to aggressively reduce our non New York book of business. As we shared last quarter, the States in which we've operated other than New York, namely New Jersey, Connecticut, Rhode Island and Massachusetts have historically had a disproportionate negative impact on our underwriting results.

Speaker 3

After much effort to return those states to profitability, in late '22, we made the decision to focus on our profitable state of New York, where we have more than 80% of our business. I'm happy to report that through Q1, we have already reduced our non New York policies in force by 8.5%. We expect this reduction to accelerate in the Q2 when block non renewals approved by our regulators and other actions continue to kick in. Our expectation is that our policies in force outside of New York will decline by more than 50% by year end 'twenty three, And we are well on our way to achieving that goal. It's worth noting that our policies in force in New York grew by 1.2% in the 1st quarter, meaning we are replacing unprofitable non New York business with even more profitable New York business.

Speaker 3

Moving to our 2nd pillar to adjust pricing to stay ahead of loss trends, including inflation. We've adopted were effective. Our 9.8 percent New York Select Homeowners and 12.3 percent New York dwelling fire rate change We're approved and we filed for rate in several other states and products as well. As mentioned previously, we are also updating the replacement cost of our entire book to keep up with inflation and to make sure that all of our policyholders are insured to value. Consistent with last quarter, our New York retention has declined much less than we anticipated despite rate increases that were material.

Speaker 3

So this is a positive sign of our strong Customer relationships, our exceptional producers and the hard work of our talented team at Kingstone. For the Q1, our average New York homeowner renewal premium increased by 21% from $2,498 to over $3,000 due to a combination of our rate changes and the update to replacement costs. Note that more than 50% of the was due to the replacement cost update. We started this initiative in September of last year, so about half of the book has been updated through the Q1 And premiums will accelerate over the year as this round of the book update is completed. Turning to our 3rd pillar, which is to tightly manage reinsurance requirements and costs.

Speaker 3

We have implemented a host of initiatives to manage our probable maximum loss or PML, which is the amount of reinsurance we need to buy. This includes making changes to our underwriting to reduce or In the Q1, we successfully navigated UPC's insolvency and the surge of business that came our way without growing our PML by keeping our very tight underwriting criteria in place. We entered this Reinsurance renewal looking for 5% less limit than last year due to the success of these initiatives. Jen and I visited reinsurers in both London and Bermuda recently, and we left with the impression that unlike last year, Capacity will not be an issue this year. We are hopeful that our reinsurance partners recognize the changes in our portfolio and reflect them in our rates online.

Speaker 3

Last but not least, our 4th pillar is to continue our focus on expense reduction. Last year, we reduced our net expense ratio by 4 percentage points to 36 for calendar year 2022. I'm delighted that our Q1 'twenty three expense ratio is down further to 34.7 percent And it's 3.7 points below the Q1 of last year. Much of the decline is due to our restructuring and reduction of producer commission rates, which will be recognized over the life of the policy. So we will see a further reduction in our expense ratio this year.

Speaker 3

I want to end by reiterating that our first quarter results reflect the unfortunate realities of the Northeast winter. That being said, Barry, Jen, myself and the entire leadership team remain laser focused on executing our strategic plan that will lead us back to the high performing company we were for many years. We are optimistic for the future and confident that our Operator?

Operator

Thank you. Our first question today is coming from Paul Newsome from Piper Sandler. One moment please. Your line is now live.

Speaker 4

Good morning. Thanks for the call. Maybe we could just kind of go over the capital position a little bit. Where are we from an RBC Capital perspective and how will that be changing over the quarter?

Speaker 2

Jen, do you want to handle that?

Speaker 1

Yes, I'm sorry. I was sitting on mute. My apologies. Yes. So we do have, from an RBC perspective, Paul, we have about $67,000,000 as of year end of capital sitting in the insurance carrier, and we really haven't had any issues as far as that goes.

Speaker 1

The insurance carrier loss is Capital of $300,000,000 that we've been looking

Speaker 4

for. Great. And then Maybe you could help me with the simple math. It looks like direct premiums were up 11% or so. And you mentioned that PIF was down about 1% So how does that square with the amount of rate that you and as well as the inflation guards That you're actually putting through the system.

Speaker 2

Merrill, you want to work on that one?

Speaker 3

I need your assistance, Barry or Jen.

Speaker 2

Paul, let me start then. So our premiums grew by a combination of things, additional rate, The continued rolling on of the higher replacement costs with what you called inflation guard, Offset in part by the running off of a significant portion of our non New York We only had 1 quarter of additional inflation guard to reflect. Now that's a total of 6. So basically, both the impact of the inflation guard And the impact of the positive rate changes gets recognized really on an accelerated and almost Geometrical basis through the year. So I can't tell How you are looking at the math, but the whole idea of this was to try to eliminate The causes of what was holding us back and for the most part, those are policies written outside the State of New York And then to optimize the book of business we have in New York.

Speaker 2

So Rationalize what we have, optimize our results and stabilize the company is really the theme for 2023. And if you'd like to, on a separate call, I'd be happy to review with you how this math

Speaker 4

it works. Is the book of business in New York profitable or is

Speaker 2

it really

Speaker 4

the loss New York so if somehow you were able to just get rid of all the New Jersey business or all the non New York, you'd be profitable?

Speaker 2

That's well, that's what our goal is. I mean, the non New York business brings with it A lower average premium, a higher loss frequency, a higher percentage of losses that become large losses. Frankly, we didn't do a good job expanding outside New York. We tried to fix it. It didn't work and we just basically threw in the towel and are running it off.

Speaker 2

And as that decrease And the impact that negative impact decreases. The positive impact of the things we're doing across the board, but obviously in New York Takes hold. And the issue here is that while we can renew Premiums at much higher rates. It does it's only a portion of the book that we are talking about here And it does take 12 months to earn those premiums. So the continued like Merrill said, the continued driving down of our expense ratio it's going to be a factor as well.

Speaker 2

I hope that answers your question.

Speaker 4

No, that's great. Thank you very much. Appreciate the help as always.

Speaker 2

Okay. Thank you.

Operator

Thank you. Next question today is coming from Gabriel McClure, a Private Investor. Your line is now live.

Speaker 5

Hey, good morning, Barry. Good morning, Merrill.

Speaker 2

Hey, Gabe.

Speaker 5

Hi. So I have a couple of questions. The first one is, what's our book yield on the portfolio right now? And do you know what it was last quarter?

Speaker 2

Gabe, I got to tell you, we disclosed that in the quarterly statement. I'm trying to give Jen a little bit of time, so if she can scurry around. We're still in draft form. We plan on filing the Q on Monday when it's due, but there is very little change in the book yield since from the prior quarter. And just a little bit of color to give her a little more time, the incremental investments we've made over the last year, Maybe even a little more than a year, have only been in government securities and for the most part in 2s or less.

Speaker 2

So we've been able to earn as higher rate or even a higher rate on short term obligations from the government than we were on the corporate bonds and other things that we've Board over the years that had a much longer duration and much longer maturity. Jen, did I give you enough time to find the numbers?

Speaker 1

No, I'm still working on it, Barry.

Speaker 2

All right. But it's almost it's 4 point I don't remember exactly, Gabe, sorry.

Speaker 5

Okay. Well, I've got another question and then Jen if you come up with it then that would be cool too. So I guess the other question is, we have a lot of things going on right And yes, we hear that we're doing the right things, pulling out of the markets That we tried to expand in and everything. But when I guess the question is, we don't know about hurricanes and all that, but When do we are we trying to turn a profit this year? Are we trying to just stabilize and breakeven?

Speaker 5

And then when should we start seeing some improvement in the numbers? Any color any more color That you can give around that, just anything.

Speaker 2

Let me start that off, Gabe, and maybe Merrill will chime in a little bit as well. I mean, she's obviously Quite familiar with this stuff. But again, the goal was to widen the margins on the business that we want to keep. It takes time. So, what Merrill had said earlier, and to the business we don't want to keep, yes, we were happy to see 8.5 percent of those policies leave us during the Q1, but the actions that Merrell and particularly that Merrell negotiated See half that book gone by the end of the year.

Speaker 2

Now, it's going some of that's around during the year. So it's going to weigh on us. To say, what are we trying to do? At this point, Gabe, we are trying to squeeze as much juice out of the lemon as we can, build book value as fast as we can. And frankly, the faster we do that, The better off it's going to be for everybody.

Speaker 2

We have got a great opportunity. Merrill disclosed that Our business in New York last month was dominated by the unfortunate failure of UPC and the Requirement that all of their policies in New York be moved to another carrier. So we were quite active from that. But The marketplace right now, the competitive landscape is as favorable as it's Been in many years. So, what we need to do is clean house and stabilize the company And then we can try to be very careful to capitalize and cherry pick those areas that we want to grow.

Speaker 2

So, I think the answer to your question is, we want to frankly stop losing money as fast as we can And turn and make as much money as we absolutely can. And I think you're seeing it. Look at you'll see in the financials for the quarter, you see in the press release, almost every expense line item is Virtually flat or down in spite of all the inflation. Premiums are up where we want them to be up. Look, we got hit with just a dramatic increase in large dollar value losses.

Speaker 2

Would we have lost money this quarter? Either way, we lose money in the Q1 almost every year, actually probably every year. So we are looking forward to turning profits. When this is going to make or what it's going to make at by the end of the year, we are not in a place to give guidance to you. All I can assure you is we're doing everything we can to move as fast as we can.

Speaker 2

Merrill, is there anything you'd want to add? I probably Said everything you would have, but maybe there's something.

Speaker 3

Yes. I just I think you'll see us our profit improving continuously throughout this year and

Speaker 2

I think the important thing there is that We started these the big action was the addressing inflation. And it takes a year to go through the book. So that started last September. So we're not going to be done until this September. And then it takes a year to earn those premiums.

Speaker 2

So the vast majority of the benefit from that is going to be seen in 2024, Not 'twenty three. Written premiums up in 'twenty three, earned premiums up much more dramatically in 'twenty four. I hope that gets you where you want to go, Gabe. And, Gabe, if I don't

Speaker 1

answer your previous question, I found the information I was looking for. The average yield on cash invested assets was 3.35, but our increase was higher than that due to interest rates on Earned on interest rates earned on cash balances that we have as well.

Speaker 2

It's 3.4. Okay. I was feeling good about myself saying, well, I stand corrected. Thank you.

Speaker 1

It's customary with all the interest on cash.

Speaker 2

Okay. Thanks, Jeff. Are you good, Gabe?

Speaker 5

Yes. Thank you. Thank you.

Speaker 2

All right. Great. Thanks for calling in. Thank you. Operator, we got one more.

Operator

We do. Our next question is coming from Scott Preston from Maven Fund. Your line is now live.

Speaker 6

Ratio in the business you're rolling off and kind of how that compares to New York. And then what would be the statute on those policies and How long once you roll those off could those potentially pose a problem?

Speaker 1

That's so

Speaker 2

Merrill, you want to try to address The disparity in the loss ratio between the non New York and New York book?

Speaker 3

Sure. For last year, Scott, the loss ratio in the non New York book was over 100. It was Like really unprofitable for Kingstone. And then in terms of the statute, if that's what your question is, I don't actually know the statute of limitations for all the different states that we operate in. But In general, I think it's 3 years?

Speaker 2

I believe it is, Merrill. And really, Scott, the Fortunately, when there is a property damage, regardless of whether it's a co op or a house or whatnot, We hear about it very quickly. Liability claims are the ones that take time to present themselves and that's really more of where the statute comes into play.

Speaker 6

Got it, got it. Okay. All right. Thanks for that. And then, if you can kind of maybe provide Revenue walk maybe from kind of this quarter to maybe what we look like in a year.

Speaker 6

If you're rolling off, if My math is correct here, kind of 50% of the non New York in the next year, I think that'd be about 10% Kind of your total premium, if that's right. And then how much would you say that that would be offset by just your Rate increases and replacement cost increases in New York, not assuming we bring in new policies, but how much would that offset that kind of roll off in business.

Speaker 2

Let me start this. I mean, we haven't given any specifics on this. Frankly, there's many, many moving parts. But I think what we can tell you is that what and Meryl, correct me and embellish We are expecting our overall premium in 2023 to equal What we had in 2022. But we are expecting our total policies in force to go down by more than 10%.

Speaker 2

So getting rid of half the non New York book is what constitutes that. And if we grow in New York a couple of points, it will be a lot. So that's where the margin comes from. Merrill, you want to give a little more color on that?

Speaker 3

Yes. So Scott, we actually expect that our premiums will be up this year modestly and up again next year. As Barry said, it's Totally due to the large rate changes that we're taking for both our annual rate change cadence as well as the increase in inflation where we're adjusting COVID to make sure our policyholders are insured to value. So We do expect an increase in premium in both years.

Speaker 6

Okay. And then on the other 50% of non New York Should we expect those roll off and start rolling off in 2024? Are those profitable policies that you guys expect you'll retain?

Speaker 3

We are doing everything we can to reduce that business as quickly as we can. So like I we have Gotten approval from regulators for a block non renewal. We've pruned our agents. We We're re underwriting the book. We have greatly reduced commission.

Speaker 3

So I do anticipate that More of the book will fall off in 2024 and we are doing everything possible to make it fall off in 2023.

Speaker 6

Okay. Excellent. And then, last question and this is just maybe more in general sense, but if you took New York in Q1, just to get a sense of what we might look like in the future. But if you take New York in the Q1 and You kind of re rate the top line to where premiums will be on rate and replacement costs. Once that rolls through the book, How close would have New York been to profitability once those things once they're in place and rolled through versus the losses you had,

Speaker 3

I mean, that's a really hard question to answer because in the Q1, we had 13 points of cat losses. And as Barry said we also had some large losses more than we've had historically. It's not just a function of premium. So I don't Barry, Jed, I don't have to answer this.

Speaker 2

Yes. Yes. I'm not sure that the question itself is all I think what's more important, Scott, is to recognize that New York has been profitable. New York's profitability is going up. And As we accelerate away from those other states, that will shine through.

Speaker 2

I'll try to put some more disclosure about things like This in our next quarterly statement, I recognize that there's more questions being asked about it. I mean, we're just we've got so many moving parts at the same time here. It's just It's very difficult to be able to put pen to paper with any sort of confidence. So Bear with us through this. I think what Merrill said earlier is at least to the extent that we planned For the rate increase and the increase in coverage A that translates into additional premium as well.

Speaker 2

We are very happy that we haven't chased people away as a result. Yes. There is some fall off, but nowhere near what we expected. And we're able to take this high rate And add on a lot of coverage, A, in a marketplace that is very, very hard right now. There are very, very few carriers Who are willing to participate in Downstate New York.

Speaker 2

That's just a fact of the matter. I mean, yes, UPC failed. Another Florida based company that tried to expand to New York or at least bought a company that worked in New York hasn't written a policy in Downstate New York This year or probably this last 6 months of last year. So, Travelers is almost writing nothing. It's a very difficult marketplace now.

Speaker 2

So, we're able to keep these policies that are now properly priced And we're able to add as we can, but we're not going to try to grow this business. We're trying to optimize what we've got while we rationalize our expenses. I think that's the theme You know for what 2023 is.

Speaker 6

Okay. Well, I think I appreciate you guys answering my questions and look forward to seeing the progress.

Speaker 2

Great. Thanks. Thank you for that.

Operator

Thank you. We reached the end of our question and answer session. I'll turn the floor back over for any further or closing comments.

Speaker 2

Yes. So thank you everybody for joining and I mean, I could say thank you for your patience. I have none left and I'm sure you don't either.

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Kingstone Companies Q1 2023
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