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spk03: Greetings and welcome to the Kingstone Company's third quarter 2023 earnings call. At this time, all participants are in 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. Thank you, Ms. Gravel. You may begin.
spk04: Thank you, and good morning, everyone. Thursday afternoon, the company issued a press release detailing Kingston's third quarter 2023 results. On this call, Kingston 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 Kingston. 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 the forward-looking statements at the end of the company's earnings release issued on Thursday. 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 on our earnings release. And with that, I'd like to turn the call over to Kingston CEO and President Merrill Golden. Please go ahead, Meryl.
spk00: Thanks, Jen, and thanks for joining us this morning. First, let me again thank the board for giving me the opportunity to lead Kingston as its CEO. I think it's important that we share more information with our investors and become more transparent to give you greater visibility as to the future. Our business is complicated. And I thought it could be explained better. So we've made further changes to our press release and 10Q this quarter. Your positive feedback on the changes so far is much appreciated. As you know, Kingstone is in the midst of a transformation. Our strategy for the near term is to return to our roots as the premier writer of coastal property insurance in downstate New York, our core business. and we have been working hard to reduce our footprint outside of New York, our non-core business. As such, we've broken down our results between core and non-core so that you can better understand the results of each segment. Please take your time going through the details contained in the press release and the 10-Q as you will see that the underlying core business is profitable with a combined ratio of 96.4 for the quarter. Core premiums are growing up just under 10% year to date. Core margins are expanding as average premiums are increasing and cost savings and efficiencies are taking hold. Non-core is shrinking and by this time next year, the drag in our financials will be immaterial if not gone. Kingston is poised for a profitable 2024. For four years, I have talked about Kingstone 2.0 and Kingstone 3.0. Our employees have worked tirelessly to implement these strategies. They are now in place and at work. While I'll never say we are done, we have accomplished an incredible amount. I believe deeply in our strategy, the team that we've built, and our progress so far. I am so proud of the company that we have become. We are smaller, highly efficient, nimble, and focused on expanding the benefits that Kingstone 2.0 and Kingstone 3.0 have enabled. These benefits are now flowing through our income statement at an accelerating rate, and as the non-core business declines further, will become even more apparent in our overall results. That makes me confident that 2024 will be a great year for the company and its shareholders. Late last year, we also laid out a plan to return the company to profitability, and I'm going to highlight our progress on those key initiatives. In Q3, we were successful in reducing our non-core policies enforced by 17% from the prior quarter, and non-core policies enforced are now down 35% from year-end 2022. Our estimate is that the non-core book will decline by close to 50% by the end of this year and by more than 80% by the end of next year. Combine that with the additional rate we've been able to take and I hope to be able to report this time next year that the standalone non-core business is running at or near break even. The non-core business added 6.4 points to our combined ratio for the quarter and 7.9 points on a year-to-date basis. So you can see how important it is that we're accelerating this decline. Our pricing team has done a fantastic job with rate filing to manage our overall rate level in the face of loss trends that we and the industry have been seeing. As mentioned previously, we are addressing loss trends, including inflation, in two ways. The most significant for this year has been our effort to update replacement costs on every policy. This effort commenced in September of last year, so all policies have now been through this process once. We will continue to update replacement costs annually so that our customers are always insured to value. Don't forget that this update to replacement costs brings with it higher premiums, and those are in addition to those that come from our rate filings. Let me point out that for the trailing 12 months, we have realized a 25.5% increase in average premium for our legacy homeowner product in New York as a result of the combination of rate and replacement cost updates. Let me also remind you that most of the added premiums have not yet been earned and will be reflected in future quarters. It takes about 18 months for rate increases to be fully reflected in earned premium, and it will be reflected on an ever accelerating basis over time. This increase in earned premium will, by definition, drive down the loss ratio and lead to further declines in our expense ratio. We did an excellent job managing our catastrophe reinsurance renewal, which resulted in a much lower increase than anticipated. We were fortunate that Jen joined us earlier in the year and brought with her the reinsurance experience she's gained from her time in Florida. We had seen two years of dramatic pricing increases in catastrophe reinsurance costs and expected this year to be even worse. We needed to be prepared. One strategy we deployed to reduce cost was to slow core new business writings of the highest cost policies, those contributing the most to our PML. This strategy was successful and this allowed us to buy to a lower limit while maintaining the same risk tolerance, and as such, the increase to seeded premiums was minimized. I also want to mention our relentless focus on improving our cost structure. I am delighted that we have made such great progress in this area. We have achieved our goal for the year, a net expense ratio of 33, a 4.2 percentage point reduction from the prior year. but our focus will not wane. We will recognize the benefits of having, we all recognize the benefits of having low expenses, and we will have a new stretch goal for 2024 to reduce expenses below 30%. With that, I'll now pass the call over to Jen to review our third quarter results. Jen?
spk04: Thank you, Carol. For the third quarter of 2023, Kingston recorded a net worth $3.5 million or $0.33 per diluted share, improving from a net loss of $4 million or $0.38 per diluted share for the same period last year. Direct student premiums were down 4.8% to $52 million, a decrease of $2.6 million from $54.6 million in the prior year period. Our core premiums were up 4.7% for the quarter, while non-core premiums declined by 43.9%. The net loss and LAE ratio was up 3.5 points from the prior year to 78.5%. The third quarter catastrophe losses added 2.2 million or 7.7 points to the net loss ratio for the quarter, an increase of 6.6 points on the catastrophe losses over the prior year. Most of the catastrophe losses were from a rain event that hit downstate New York particularly hard the last few days of September. The attritional or non-CAT loss ratio was 70.8%, 1.6 points lower than the loss ratio in the third quarter last year. Let me emphasize the importance of our separating the core from non-core results. The core attritional loss ratio was 64.7% for the quarter, while the non-core attritional loss ratio was 125%. The improvement in our attritional loss ratio was driven by lower frequency, which is believed to be the result of better risk selection in our select product. In addition, we have been actively managing and reducing less profitable segments. These actions have been offset by a higher severity due to inflation as well as elevated number of large losses. For the third quarter, the net underrating expense ratio decreased 5.2 points to 31.7%, the lowest in the company's history. This quarter's expense ratio reduction is due to decrease in most components of the company's expenses, as Meryl said, and we have been relentless in our efforts to reduce costs. renegotiating many contracts, and reevaluating the necessity for all expenditures. Our investment income was slightly higher in the third quarter. We benefited from higher interest rates on cash balances. From the macroeconomic perspective, the increased interest rates continue to apply pressure on our bond portfolio, resulting in unrealized losses on those investments. The effective duration of our fixed maturity securities is 4.3 years, with an average yield of 3.53%. Since the cost of our 2022 notes included a far higher interest rate, we initiated a sale lease in the fourth quarter of 2022. I think it's important too that we share the operating EBITDA, which removes the impacts of these two items. And we're doing this on an operating basis to also remove the impact of realized and unrealized gains on investments. Our press release shows the operating EBITDA for the past five quarters. For the current quarter, our operating EBITDA was a loss of $1.8 million. We have done and continue to do everything we can to bring Kingston to a consistent and sustainable level of profitability. As the quarters progress and the benefits of what we've done are reflected, I'm confident that you'll continue to see the progress we've made reflected in our financial results. Thank you, as always, for your support. And with that, we'll open it up for questions. Operator?
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Paul Newsome from Piper Sandler. Mr. Newsome, please proceed.
spk02: Good morning. Thanks for the call. I was hoping you could give us a little bit more thoughts on the competitive environment in New York and whether or not it's getting better or getting worse.
spk00: Sure. So, you know, I would say that we are Definitely in a hard market in downstate New York for coastal business. And I think it's going to continue. Our two largest competitors historically are no longer writing business. One is insolvent and the other has a moratorium on new business for about two years. The large multi-line competitors have pulled back even further. due to reinsurance costs and other factors. So there definitely are a few companies writing coastal properties, but many fewer than in the past. And the brokers will tell you that it's the hardest market they've ever seen. So I view this as a huge opportunity for Kingstone. We're very comfortable with our pricing right now. We know our reinsurance costs. So we are, and our market share in New York is less than 2%. So we have a huge opportunity to increase our growth in downstate New York, and we hope to do that going forward.
spk02: Great. And then maybe a different topic. Could we talk about Kingstone's capital position? We've incurred a few losses along the way, and, you know, Where do you stand from an RBC capital ratio perspective? Where do you stand from an overall capital perspective in your opinion?
spk00: Sure. Jen, do you want to jump in?
spk04: Sure. Paul, our statutory numbers will be coming out in the middle of this week. But again, some of the amounts of debt that we have on our books on the holding company level are actually surplus in the insurance carrier. And we continue to expect to see our RBC ratios that above 300 for sure. And we are, you know, maintaining to that level. We do have a little bit of an underwriting loss for the quarter going into the statutory numbers as well. But we do expect to start having that turnaround here fourth quarter in the beginning of next year.
spk02: Great. Thank you. Appreciate the help.
spk03: Our next question comes from Gabriel McClure, who is a private investor. Gabriel, please proceed.
spk01: Hi, Meryl. Hi, Jennifer.
spk03: Hi, Gabe.
spk01: Hey, I want to congratulate you for hitting your expense ratio. That's very good. And I have one question for you, Meryl, and one for Jennifer. Merrill, you referred to increasing the premiums on the New York business 25%. So you didn't really break out on average how much that was in rate and how much it was in replacement costs. So I'm kind of curious if we had that. But I guess my thing is I guess we've heard that before. I think we heard that last year. And if you look at your press release, At the nine months to date core losses excluding catastrophe, on our underwriting, we're actually up on the losses about 3.4 points over 2022. So how do we know, I guess, it's going to be different this time as far as making a better combined ratio on the core business going forward?
spk00: Sure. So let me answer your first question, which is the breakout between rates and replacement costs. So for that legacy homeowner book, about 16, almost 17% of the increase had to do with the increase in replacement costs, and the rest had to do with rate changes. So then your question about losses. So what I can tell you for the quarter is that our frequency is down, which is really the leading indicator for what losses will be. So our frequency is down, we believe, because we're writing a higher, a more responsible customer in our select program. And our select program currently is about 20% of our book and growing. And then also we're reducing non-core business, which has a much higher frequency. But our severity is up double digit, just like the rest of the industry. And we are seeing claims inflation in our numbers. And in addition to that, as Jen mentioned, We have had an increase in the number of large losses this year. It's something we saw in every one of the quarters. And we're trying to figure out what is driving that. We have re-looked at everything. We even hired an outside firm to take a look. And we really found nothing. And I feel, you know, I've talked with others in the industry. And I'm hearing that they're seeing the same thing as well. But at the end of the day, we have now priced for this increased severity in our product. And so that, along with the decline in frequency, will result in a better loss ratio next year.
spk01: Okay, great. Thank you. And then Jennifer says, Thanks for giving us the yield on the bond portfolio. What is the average maturity of our bond portfolio now?
spk04: About 4.3 years.
spk01: Okay. Okay, great. Thanks, guys.
spk00: Thank you, Gabe.
spk03: This concludes our question and answer session. I would like to turn the floor back over to Meryl Golden for closing comments.
spk00: Great. Thanks for joining us bright and early on Monday morning and have a fantastic day.
spk03: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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