Earnings Call Transcript - KINS Q1 2023

Operator, 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 is now my pleasure to turn the call over to Jennifer Gravelle, Chief Financial Officer. Please go ahead.

Jennifer Gravelle, Chief Financial Officer

Thank you very much and good morning everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's first quarter 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 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, 2022, 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 Chairman of the Board and CEO, Mr. Barry Goldstein. Please go ahead, Barry.

Barry B. Goldstein, Chairman of the Board and CEO

Thank you and good morning everyone. Thanks for joining Kingstone's first quarter earnings call. In addition to Jen, our Chief Financial Officer and Head of Investor Relations, also with me today is Meryl Golden, our Chief Operating Officer and the President of our Insurance Company. Let's get straight to it. We're not happy to be reporting an underwriting loss, of course, and an underwriting loss in the first quarter is really not unexpected given the Northeast winter. Looking back, this year's results are in line with what we've experienced in three of the last five 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, and the Gulf Coast. So at a high level, this winter we saw a few days of freezing temperatures that resulted in almost $4 million of catastrophe losses that we just announced the other day. We also experienced a number of large losses that were primarily water related and which increased our underwriting loss for the first quarter. I'll let Jen and Meryl go over those in more detail. 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 for some. There are so many exogenous factors out of our control that can drive our results. We can take all the right steps, and a few days of freezing temperatures could set us way back. And it's not just adverse weather that we're dealing with; we're also navigating record-high inflation, volatile interest rates, and the hardest reinsurance market we've seen in decades, just to name a few of these headwinds. So despite these challenges, I am encouraged. I am encouraged by the positive signs we are 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 may have peaked, and conditions will soon start to improve. Over the past eight or nine months, we've seen a consistent decline in annual inflation rates, which is a promising trend. Additionally, the Federal Reserve recently indicated that it is no longer just assuming that further rate hikes will be needed, which suggests to me that economic conditions are stabilizing. From what I've heard from our team and our intermediaries, 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. Taken together, these developments give me confidence that we're moving in the right direction. But what does that mean for our shareholders? It means 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 the results of our efforts to play out. As we've progressed through the year, we expect to realize even more of the benefits from the strategic actions we've taken. 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 first quarter results. Go ahead Jen.

Jennifer Gravelle, Chief Financial Officer

Thanks, Barry. For the first quarter of 2023, Kingstone reported a net loss of $5.1 million or $0.47 per diluted share compared to a net loss of $9.2 million or $0.87 per diluted share for the same period last year. Direct written premiums were up 10.7% to $47.6 million, an increase of $4.6 million from $43 million in the prior year period, while our policies in force declined by 1.1% from the previous year. We remain focused on increasing our average premium and expect 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. As expected, the largest driver of this increase was catastrophe losses. First quarter catastrophe losses added $3.7 million 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 75.4%, slightly higher than the loss ratio in the first quarter 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 a number of large water-related losses. For the first quarter, the net underwriting expense ratio decreased 3.7 points to 34.7%. We've spoken about our disciplined expense reduction efforts in the past and have made great progress on this front. The expense reduction is primarily due to a decrease in IT expenses from the retirement of the company's legacy systems and changes to producer commissions. We're 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 $1.2 million unrealized gain from our investment portfolio versus an unrealized loss of $4.4 million in the prior year due to the stabilization of the capital markets. Additionally, the net investment income was up 13.4% from the first quarter of 2022 to 2023. I'll now turn it over to Meryl. Meryl?

Meryl S. Golden, Chief Operating Officer

Thanks, Jen. Last quarter I shared our four-pillar strategy for 2023 and 2024, coined Kingstone’s Trio, to maximize Kingstone's profitability, and 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. After much effort to return those states to profitability, in late 2022 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 second quarter 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 2023, 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 first quarter, meaning we are replacing unprofitable non-New York business with even more profitable New York business. Moving to our second pillar, we are adjusting pricing to a state ahead of loss trends including inflation. We've adopted an annual rate change cadence for all states and products in order to achieve our targeted underwriting margin. In the first quarter, our 16.5% rate change for our New York legacy dwelling fire product and 20% rate change for our Connecticut Legacy homeowner products were effective. Our 9.8% New York select homeowners and 12.3% New York dwelling fire rate change were 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. 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 first quarter, 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 increase 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 first quarter, and premiums will accelerate over the year as this round of the book update is completed. Turning to our third pillar, which is to tightly manage reinsurance requirements and costs. 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 eliminate the most catastrophe-exposed property, as well as requiring higher hurricane deductibles in certain counties. In the first quarter, 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 leveraged 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. Last but not least, our fourth pillar is to continue our focus on expense reduction. Last year, we reduced our net expense ratio by four percentage points to 36% for calendar year 2022. I'm delighted that our first quarter 2023 expense ratio is down further to 34.7% and it's 3.7 points below the first quarter of last year. Much of the decline is due to our restructuring and the 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. 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 plan will deliver long-term value to our shareholders. Thank you as always for your support. With that, we'll open it up for questions.

Operator, Operator

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

Paul Newsome, Analyst

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 that will be changing over the quarter?

Barry B. Goldstein, Chairman of the Board and CEO

Jen, do you want to handle that?

Jennifer Gravelle, Chief Financial Officer

Yeah, I'm sorry. I was sitting on mute. My apologies. Yeah, so we do have from an RBC perspective, Paul, we have about $67 million as of year-end of capital sitting in the insurance carrier. And we really haven't had any issues as far as that goes. The insurance care loss is going to be about $4 million as well this quarter. So we are still quite above the RBC minimalized capital of 300 that we've been looking for.

Paul Newsome, Analyst

Great. And then, maybe you could help me with the simple math. Looks like direct premiums were up about 11% or so. And you mentioned that PIF was down about a percent or 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?

Barry B. Goldstein, Chairman of the Board and CEO

Meryl, do you want to work on that one?

Meryl S. Golden, Chief Operating Officer

I need your assistance, Barry or Jen.

Barry B. Goldstein, Chairman of the Board and CEO

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 were offset in part by the running off of a significant portion of our non-New York business. So while we only had one quarter of additional inflation guard to reflect. Now that's a total of six. 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 throughout the year. So, I can’t tell you 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. 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. So, rationalize what we have, optimize our results, and stabilize the company is really the theme for 2023. If you'd like to on a separate call, I'd be happy to review with you how this math works.

Paul Newsome, Analyst

Is the New York business profitable? If you were to eliminate all the New Jersey business or all the non-New York operations, would you then be profitable?

Barry B. Goldstein, Chairman of the Board and CEO

That's our goal. The non-New York business has a lower average premium, higher loss frequency, and a higher percentage of losses that turn into large losses. We didn't manage to expand effectively outside New York. We attempted to address it, but it didn't work, so we've decided to wind it down. As that decreases and its negative impact lessens, the positive effects of our initiatives, particularly in New York, will become more apparent. While we can renew premiums at significantly higher rates, this applies only to a portion of our portfolio, and it takes 12 months to fully realize those premiums. Additionally, as Meryl mentioned, the ongoing reduction of our expense ratio will also play a significant role. I hope this addresses your question.

Paul Newsome, Analyst

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

Barry B. Goldstein, Chairman of the Board and CEO

Okay, thank you.

Operator, Operator

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

Unidentified Analyst, Private Investor

Hey, good morning Barry. Good morning, Meryl.

Barry B. Goldstein, Chairman of the Board and CEO

Hey Gabe.

Meryl S. Golden, Chief Operating Officer

Hi.

Unidentified Analyst, Private Investor

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?

Barry B. Goldstein, Chairman of the Board and CEO

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's very little change in the book yield since from the prior quarter. 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 twos or less. So, we've been able to earn as a 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 bought over the years that had a much longer duration and much longer maturity. Jen, did I give you enough time to find the numbers?

Jennifer Gravelle, Chief Financial Officer

No, I'm still working on it Barry.

Barry B. Goldstein, Chairman of the Board and CEO

Alright. But it's almost 4.3 or 4.4. I don't remember exactly, Gabe. Sorry.

Unidentified Analyst, Private Investor

I have another question. Jen, if you have something to add, that would be great. The question is that we have a lot happening right now, and while we hear that we are taking the right steps by withdrawing from some markets, we are curious about our timeline. Are we aiming to achieve profitability this year, or are we focusing on stabilizing and breaking even? When can we expect to see improvements in our numbers? Any additional insights you can provide would be appreciated.

Barry B. Goldstein, Chairman of the Board and CEO

Let me start that off Gabe, and maybe Meryl 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 Meryl had said earlier into the business, we don't want to keep, yeah, we were happy to see 8.5% of those policies leave us during the first quarter, but the actions that Meryl and particularly Meryl negotiated with some of the various states will see that accelerate. She did disclose that we're expecting to see half that book gone by the end of the year. Now it's going to weigh on us. To say, what are we trying to do? At this point, Gabe, we're trying to squeeze as much juice out of the lemon as we can, build book value as fast as we can. Frankly, the faster we do that, the better off it's going to be for everybody. We've got a great opportunity; Meryl 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. We were quite active from that. The marketplace right now, the competitive landscape is as favorable as it's been in many years. What we need to do is clean house and stabilize the company so we can try to be very careful to capitalize and cherry-pick those areas that we want to grow. So I think the answer to your question is we want to stop losing money as fast as we can and turn and make as much money as we absolutely can. 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 a dramatic increase in large dollar value losses. Would we have lost money this quarter? Either way, we lose money in the first quarter almost every year, actually, probably every year. We're looking forward to turning profits. When this is going to make or what it's going to make by the end of the year, we're not in a place to give guidance to you. All I can assure you is we are doing everything we can to move as fast as we can. Meryl, is there anything you would want to add? I probably said everything you would have, but maybe there's something.

Meryl S. Golden, Chief Operating Officer

I believe you will see our profits improving throughout this year and into next year as well.

Barry B. Goldstein, Chairman of the Board and CEO

I think the importance there is that we started these actions; the big action was addressing inflation. 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 it takes a year to earn those premiums. So the vast majority of the benefit from that is going to be seen in 2024, not 2023. Written premiums are up in 2023, earned premiums up much more dramatically in 2024. I hope that gets you where you want to go, okay.

Unidentified Analyst, Private Investor

Thanks.

Jennifer Gravelle, Chief Financial Officer

In response to your earlier question, I found the information I needed. The average yield on cash invested assets was 3.35, but our increase was greater than that because of the interest rates earned on our cash balances.

Barry B. Goldstein, Chairman of the Board and CEO

Oh, it's 3.4. Okay. I was feeling good about myself saying 4.5. Well, I stand corrected. Thank you. Okay, thanks Jen. You good, Gabe?

Unidentified Analyst, Private Investor

Yes, thank you. Thank you.

Barry B. Goldstein, Chairman of the Board and CEO

Alright, great. Thanks for calling in. Operator, we got one more.

Operator, Operator

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

Scott Preston, Analyst

Hi guys. Thanks for taking the question. First one, can you characterize maybe the loss ratio in the business you're ruling 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?

Barry B. Goldstein, Chairman of the Board and CEO

Meryl, you want to try to address the disparity and the loss ratio between the non-New York and New York book?

Meryl S. Golden, Chief Operating Officer

Sure. For last year, the loss ratio in the non-New York book was over a hundred. It was really unprofitable for Kingstone. Regarding the statute, I don't know the statute of limitations for all the different states we operate in, but generally, I think it's three years.

Barry B. Goldstein, Chairman of the Board and CEO

I believe it is, Meryl. Really Scott, fortunately when there’s 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.

Scott Preston, Analyst

Got it. Got it. Okay. Alright. Thanks for that. And then if you can kind of maybe provide a revenue walk from kind of this quarter to maybe what we look like in a year. 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% 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 costs increases in New York, not assuming we bring in new policies, but how much would that offset that kind of roll off in business?

Barry B. Goldstein, Chairman of the Board and CEO

Let me begin by stating that we haven't provided any specific details on this. There are a lot of moving factors involved, but what we can share is that we expect our overall premium in 2023 to match what we had in 2022. However, we anticipate that our total policies in force will decline by more than 10%. This is largely due to the reduction of half the non-New York book. If we manage to grow in New York by a couple of points, that would be significant, as that is where our margin comes from. Meryl, would you like to add more details on this?

Meryl S. Golden, Chief Operating Officer

Yeah, 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 to make sure our policyholders are insured to value. So we do expect an increase in premium in both years.

Scott Preston, Analyst

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

Meryl S. Golden, Chief Operating Officer

We are doing everything we can to reduce that business as quickly as possible. We have received approval from regulators for a block non-renewal. We have streamlined our agents, re-underwritten the book, and significantly reduced commissions. I anticipate that more of the book will decline in 2024, and we are doing everything we can to accelerate this decline in 2023.

Scott Preston, Analyst

Okay. Excellent. And then last question, and this is just maybe more in general sense, but if you took New York in the first quarter, just to get a sense of what we might look like in the future, if you take New York in the first quarter and you kind of rerate 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, if that makes sense?

Meryl S. Golden, Chief Operating Officer

I mean, that's a really hard question to answer because in the first quarter, we had 13 points of cat losses, and as Barry said, we also had some large losses more than we've had historically. So, it's not just a function of premium. So I don't, Barry and Jen, I don't know how to answer this.

Barry B. Goldstein, Chairman of the Board and CEO

Yeah, I'm not sure that the question itself is well. 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'll shine through. 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. We have so many moving parts at the same time here; it's just very difficult to be able to put pen to paper with any sort of confidence. So bear with us through this. I think what Meryl said earlier is at least to the extent that we've planned for the rate increase and the increase in Coverage A that translates into additional premium as well. We're very happy that we haven't chased people away as a result. There is some fall-off, but nowhere near what we expected. 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. That's just the fact of the matter. I mean, 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 six months or last year. So, travelers are almost writing nothing. It's a very difficult marketplace now. We're able to keep these policies that are now properly priced and add them 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 for 2023.

Scott Preston, Analyst

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

Barry B. Goldstein, Chairman of the Board and CEO

Great, thanks. Thank you for that.

Operator, 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.

Barry B. Goldstein, Chairman of the Board and CEO

Yeah, so thank you everybody for joining. I mean, I could say thank you for your patience. I have none left, and I'm sure you don't either. But my head is down; we're pushing forward, and the math will work here. So bear with us and thank you for spending the time again today. Have a great day.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.