Kingstone Companies, Inc

Stone Company's 2022 Fourth Quarter and Full Year Earnings Call. At this time, all participants are on a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Jennifer Gravel, Chief Financial Officer and Head of Investor Relations. Thank you. Please go ahead.

Thank you, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's 2022 fourth quarter results. On this call, Kingstone may make forward-looking statements regarding itself and its business. The forward-looking events and circumstances discussed on this call may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting Kingstone. For more information, please refer to the section entitled Factors that May Affect Future Results and Financial Conditions in Part 1, Item 1A of the company's Form 10-K for the year ended December 31st, 2021, 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 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.

Great, and thank you, and good morning, everyone. In addition to Jen Gravel, our new CFO and Head of Investor Relations, also with me today is Merrill Golden, our Chief Operating Officer and President of the insurance company. So welcome to the fourth quarter earnings call, and goodbye to a highly challenging 2022. Despite the many hurdles we got through it, this was in no small part due to the multi-year transformation that we methodically and deliberately undertook. Most importantly, this transformational journey has laid the foundation needed to support our success and profitability in the years ahead. Indeed, we believe that 2023 will be a year that will prove out our hard work, return us to profitability, and set the stage for double-digit returns on equity in the future. We're moving forward as a company more focused than ever before, more efficient in its processes, with a lower cost structure, and most importantly, with a product that'll get us back to what we had been known for in the past. We will review with you the regular financial and operational metrics, business updates, and market trends, but our comments are primarily focused on our strategic priorities. the actions that have already been implemented, and how they will result in profitability. Today we will share with you some early indications that those actions have taken hold and are already delivering clear results, even as we, in our industry, continue to navigate a challenging environment. The environment includes a number of macro factors we have no influence or control over, though which we have already taken significant steps to fortify our business against. As we have shared, results in 2022 were impacted by a surge in inflation. We were advised by the Fed that this spike would be what they called transitory, but it didn't work out that way, did it? This surge resulted in rapidly increasing market interest rates and a near shutdown of the credit markets. Our reinsurance partners felt the same thing. Higher rates meant that their bond portfolio valuation would be declining just as ours did. Questions about property cat insurance were more dramatic as bad weather resulted in more catastrophe claims and the failure of many Florida companies. Our reinsurance placement last July was a bit more than just difficult. Our rates forced higher as long-time reinsurers cut back or were far less interested in taking on catastrophe risk. These macro factors are continuing to impact the entire industry, including Kingstone in 2023. How are we responding to these challenges? That's what I'm going to talk about today, specifically inflation, interest rates, and reinsurance. Relative to inflation, we've taken a two-pronged approach. First, we include an estimate for future inflation in all of our premium rates. we like others were unprepared for the sudden spike in inflation during late 21 and early 2022, while our rates anticipated a far lower rate than we actually experienced. And while I hope that we have seen peak inflation and are on a declining path, know this, that our rate levels are reflective of this difficult environment, and we will continue to appropriately adjust them to address ongoing inflation. Second, as we've discussed previously, we're updating the replacement cost of every property we insure so that each of our policyholders are properly covered and their homes are insured to its then current replacement cost, including inflation that had already been experienced. We permanently adopted this process. We followed this practice on every renewal. Merrill will discuss this in more detail, but at a high level, we're confident in our approach to keeping up with and managing the ongoing impact of inflation. As we've all seen with the rapid onset of inflation came higher interest rates. Since Kingstone's investment portfolio comprises fixed income securities, the rising rate environment has had a material impact on their valuation. Our bond portfolio, which is externally managed by Conning, has an average credit rating from the three major rating agencies of AA-, and a relatively short 4.4-year duration. As such, our portfolio was hard hit as short-term rates spiked higher along with inflation. It's important to state that we do not trade our portfolio. It's designed to provide us with additional income, avoiding credit risk by investing in obligations from the strongest of borrowers. We hold most securities until their scheduled maturity, and at which time we expect to receive par value. We expect that the current level of unrealized losses will shrink as time passes, and hopefully more quickly as interest rates retreat. Our portfolio is closely aligned with the five-year Treasury rate. So following that, you can see how values are changing. We have seen a significant decline in the five-year rate recently. And keep in mind that at the year-end 2022, the five-year rate was at 4%. It moved up to 4.17% at the end of February, and I think it closed yesterday 50 basis points lower at 3.67%. I believe we will report in Q1 an improvement in AOCI and a quarterly increase in unrealized gains on our equity securities, which are primarily preferred shares and fixed income ETFs. Relative to reinsurance costs, many say it is as hard of a reinsurance market as they have ever seen. As those who follow the industry know, the growing frequency and severity of natural disasters and a host of other factors are driving up the cost of reinsurance, and it's become more difficult for primary carriers like Kingston to obtain reinsurance coverage at reasonable rates. Reinsurance companies are becoming more selective in the risks they are willing to cover, leading to ever higher premiums for insurers, and that poses challenges for all of us who need reinsurance. But know this. Over the last 10 years, Kingstone's loss ratio on its catastrophe coverage has been just over 7%. We have been a cash cow for the reinsurers, with us receiving back just 7 cents of every dollar of premium that we'd paid in. Yet, we're continuing to expect a tough market this July. We've anticipated and adapted to these changes by proactively taking actions to better manage our risk and to slow the growth in the amount of reinsurance we need to buy, which we refer to as our probable maximum loss, or PML. We manage this by utilizing a real-time upfront underwriting tool, which we call CAT score. At the time of quote, it helps us to determine if the policy to be underwritten will pass our self-imposed thresholds. We have materially tightened criteria to better manage PML growth, and while the current competitive environment has far fewer active competitors, we remain active but are highly selective, as the only writings we are undertaking now are those that are far less catastrophe exposed. In the same rain, we've tightened our underwriting and reduced the maximum coverage aid that we're willing to ensure and have non-renewed policies that are outside of our new, tighter guidelines. Working closely with the New Jersey and Rhode Island regulators, we were granted approval for block non-renewals of many policies that are contributing the most to Kingstone's PML. We are now modeling our entire portfolio every month and measuring the impact of these and other underlying strategies. Looking ahead, we'll continue to use all the tools available to us to keep our reinsurance needs as low as possible in such a challenging marketplace. I'm delighted to share with you that these efforts are already bearing fruit and we will be able to further reduce our 2023 reinsurance requirements by 7% as compared to last year. With Kingston 2.0 behind us, the foundation is in place. Kingston 3.0 is underway, with changes having been made to address these macro factors as best we can. While laser-focused on the strategic plan that will lead us back to the high-performing company, We were for so many years. Meryl will speak in greater detail about our strategic plan to do just that. Before this, however, I'm going to turn the call over to Jen Gravel. As I mentioned, Jen joined us early this year as our CFO and head of investor relations and is already a valuable part of our team. She brings to Kingston a 20-plus year successful track record in executive financial management, including most recently as CFO of Slide Insurance and previously CFO of both Allied Trust Insurance Company and Olympus Insurance Company. Jen is an expert when it comes to reinsurance and particularly matters involving homeowners insurance companies who are exposed to wind-related risks, as well as coastal-focused property insurance. Her deep knowledge in these areas are instrumental to Kingston's as we move forward in this next phase. With that, I'll pass the call over to Jen to review our fourth quarter and full year financial results. Please go ahead, Jen.