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spk04: Hello, and welcome to the Kingstone Company's first quarter 2023 earnings call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. 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 Gravel, Chief Financial Officer. Please go ahead.
spk01: 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 in Financial Condition in Part 1, Item 1A of Companies Form 10-K for the year ended December 31st, 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 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.
spk05: 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 Merrill 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, 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 the 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 with so many exogenous factors out of our control drive our results. We can take all the right steps, and a few days of freezing temperatures 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, the hardest reinsurance market we've seen in decades, just to name a few of these headwinds. 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 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 readings, which is a promising trend. Additionally, the Federal Reserve recently indicated that it is no longer just assuming that further race hikes will be needed, which suggests to me that economic conditions are stabilizing. And from what I've heard from our team 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. 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. 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.
spk01: Thanks, Barry. For the first quarter of 2023, Kingston reported a net loss of $5.1 million and a 47% per diluted share compared to a net loss of $9.2 million and 87 cents 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 a prior year period. While our policies and 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 in 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 decrease in IT expenses from the retirement of both companies' 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 capital markets. Additionally, the net investment income was up 13.4% from first quarter 2022 to 2023. I'll now turn it over to Meryl. Meryl? Thanks, Jen.
spk00: Last quarter, I shared our four pillar strategy for 2023 and 2024, coined Kingstone 3.0, 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 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 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 23, and we are well on our way to achieving that goal. It's worth noting that our policies enforced 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 to adjust pricing to stay 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 cost. 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 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. Last but not least, our fourth quarter, excuse me, our fourth 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 22. I'm delighted that our first quarter 23 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 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 a 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?
spk04: Thank you, and I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants, using speaker equipment may be necessary to pick up your handset before pressing star 1. One moment, please, while I poll for questions. Our first question today is coming from Paul Newsome from Piper Sandler. One moment, please. Your line is now live.
spk06: 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 – that be changing over the quarter?
spk05: Jen, do you want to handle that?
spk01: 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 the 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 minimum, um, minimalized capital of 300 that we've been looking for.
spk06: Great. And then, um, you know, maybe you can help me with the simple math. Um, it looks like direct premiums were up, um, 11% or so. Um, 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?
spk05: Merrill, you want to work on that one?
spk00: I need your assistance, Barry or Jen.
spk05: 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 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 through the year. So, you know, I can't tell you how you're 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. 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 works.
spk06: Is the book of business in New York profitable? Yes, sir. 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?
spk05: 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. And as that decreases and that negative impact decreases, the positive impact of the things we're doing you know, 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's only a portion of the book that we're 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 is going to be a factor as well. I hope that answers your question.
spk06: No, that's good. Thank you very much. Appreciate the help as always.
spk04: Okay, thank you. Thank you. Next question today is coming from Gabriel McClure, a private investor. Your line is now live.
spk02: Hey, good morning, Barry. Good morning, Merrill. Hey, Gabe. Hi. Hi. 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?
spk05: Gabe, I got to tell you, we disclosed that in the quarterly statement. I'm trying to give Jen a little bit of time if she can scurry around. We're still in draft form. We plan on filing the queue on Monday when it's due. but there's 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 twos or less. 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 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?
spk01: No, I'm still working on it, Barry.
spk05: All right, but it's almost – it's 4.3, 4.4. I don't remember exactly, Gabe. Sorry.
spk02: 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, you know, we have a lot of things going on right now, and – Yeah, we, we hear that, um, we, you know, we're doing the right things, pulling out of the, 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 break even? And then, you know, when, when should we start seeing, you know, some improvement in the numbers? Any more color that you can give around that? Just anything.
spk05: 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, the business we don't want to keep, yes, We were happy to see 8.5% of those policies leave us during the first quarter, but the actions that Merrill, and particularly what Merrill negotiated with some of the various states, will see that accelerate. And she did disclose that we're expecting to see half that book gone by the end of the year. Now, 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're 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. We've 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. 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. 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. Would we have lost money this quarter? Either way, we lose money in the first quarter almost every year. Actually, probably every year. So 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're doing everything we can to move as fast as we can. Merrill, is there anything you'd want to add? I probably... said everything you would have but maybe there's something yeah i just i think you'll see us in our profit improving continuously throughout this year and next year as well i think the importance there is that we started these actions the big action was the 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. So the vast majority of the benefit from that is going to be seen in 24, not 23. Written premiums up in 23, earned premiums up much more dramatically in 24. I hope that gets you where you want to go, Gabe.
spk01: Thanks. Thank you. To 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 earned on cash balances that we have as well.
spk05: Oh, it's 3.4. Okay. I was feeling good about myself saying 4.4. I stand corrected. Thank you.
spk01: Okay.
spk05: Thanks, Jim. You good, Gabe? Yes. Thank you. Thank you. All right. Great.
spk04: Thanks for calling in. Operator, we got one more? We do. Our next question is coming from Scott Preston from Avon Funderline is now live.
spk03: Hi, guys. Thanks for taking the question. First one, can you characterize maybe the loss 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?
spk05: Meryl, you want to try to address the disparity in the loss ratio between the non-New York and New York book?
spk00: Sure. For last year, Scott, the loss ratio in the non-New York book was over 100. It was like really unprofitable for Kingston. 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 three years.
spk05: I believe it is, Marilyn. And 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.
spk03: Got it, got it. Okay. All right, thanks for that. And then if you can kind of maybe provide a revenue walk maybe 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 would be about 10% of 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 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?
spk05: 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, well, and Meryl, correct me and embellish upon this. We're expecting our overall premium in 2023 to to equal what we had in 2022. But we're expecting our total policies in force to go down by more than 10%. 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'll be a lot. So that's where the margin comes from. Meryl, you want to give a little more color on that?
spk00: 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 to make sure our policyholders are insured to value. we do expect an increase in premium in both years.
spk03: Okay. Um, and then on the other 50% of non New York policies, should we expect those roll off and insert rolling off in 24 or those profitable policies that you guys expect you'll retain?
spk00: We are doing everything we can to reduce that business as quickly as we can. So like I, you know, we have, gotten approval from regulators for a block non-renewal. We've pruned our agents. We're re-underwriting the book. We have greatly reduced commission. So I do anticipate that more of the book will fall off in 24, and we are doing everything possible to make it fall off in 23.
spk03: Okay, excellent. And then last question, and this is just Maybe more in general sense, but if you took New York in first quarter, just to get a sense of what we might look like in the future, but if you take New York in the first quarter 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 New York have been to profitability once those things are in place and rolled through versus the losses you had? if that makes sense.
spk00: 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, you know, large losses more than we've had historically. So, you know, it's not just a function of premiums. So I don't, I don't, Barry, Chad, I don't know how to answer this.
spk05: Yeah. It's yeah. I'm not sure that the question itself is all about, 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, you know, 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. We're very happy that we haven't chased people away as a result. You know, 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. That's just a fact of the matter. I mean, yeah, 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, you know, Travelers is almost writing nothing. It's a very difficult marketplace now. 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 for what 2023 is. Okay. Well, I think
spk03: I appreciate you guys answering my questions, and I look forward to seeing the progress.
spk04: Great. Thank you for that. Thank you. We reach the end of our question and answer session. I'll turn the floor back over for any further closing comments.
spk05: Yeah, 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. 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.
spk04: 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.
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