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spk02: Greetings and welcome to the Kingstone Company's first quarter 2024 earnings conference 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 call, please press star zero on your telephone keypad. To ask a question, please press star one to join the question queue. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Karen Daly, Vice President of the Equity Group and Kingston Investor Relations Representative. Karen, you may now begin.
spk03: Thank you, Melissa. Good morning, everyone. Joining us on the call today will be Chief Executive Officer Merrill Golden and Chief Financial Officer Jennifer Gravel. On behalf of the company, I'd like to note that this conference call may include forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. Forward-looking statements speak only as of the date on which they are made, and Kingston undertakes no obligation to update the information discussed. 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 latest Form 10-K. Additionally, today's remarks may include references to non-GAAP measures. For reconciliation of these non-GAAP measures to GAAP figures, please see the tables in the latest earnings release. With that, it's my pleasure to turn the call over to Meryl Golden. Meryl, you may begin.
spk01: Thanks, Karen, and good morning, everyone. Our results in the first quarter show that the investments we have made and the turnaround plans we have put in place have worked. This quarter was an incredible start to the year as we achieved double-digit growth in our core business, improved our underwriting results markedly, and generated net income for the second consecutive quarter. We are extremely proud of what we've accomplished and even more optimistic about the future. I've been thinking about the playbook for everything that we have done to modernize and reposition the company. Previously, we've talked about Kingstone 2.0 and Kingstone 3.0 as the strategic initiatives that we executed upon. What I've come to realize is that the foundation of those strategies was based on the underlying principles that I learned from my previous experiences, most notably my tenure at Progressive and Bridgewater. Today, I'm going to discuss our turnaround in the context of those principles and we'll highlight five of them specifically. Prioritizing profit over growth, proactively identifying trends and taking prompt action to address them, the imperative of rate segmentation and properly matching rate to risk, the importance of having low expenses, and lastly, the power of transparency. It's easy to grow in the insurance business. It's much harder to grow profitably. living by the key tenant that profit is always more important than growth makes it easier to make difficult decisions. Clearly our determination to aggressively reduce our non-core business, which at its peak represented 20% of our premiums is an example of prioritizing profit, but maybe an easier decision given how unprofitable that book has been. Another example, Last year, we significantly slowed our new business in the face of a projected material increase in our reinsurance costs. Once the increase was understood, which was much less than we expected because of the actions we had taken, and we were able to raise our rates to account for the higher cost, we relaxed some of our underwriting restrictions to expand our new business opportunities. More than two years ago and well ahead of many of our competitors, we recognized that loss trends were on the rise and that inflation, which was driving our loss trends, would also result in many of our customers being underinsured. We acted quickly to raise our premiums and put a plan in place to update replacement costs on every policy renewal. One of the benefits of being an early mover is that we have successfully returned to profitability while some of our competitors are still restricting their business or have shut down completely. This gives us the ability to take advantage of market conditions, addressing the needs of our producers, which will enable faster growth. You will see our growth continue to accelerate in the second quarter, and we anticipate that continuing for some time. While being an early mover can pose challenges, the decision is validated when you emerge successfully on the other side. We have not talked enough about our select product. Very early in my tenure at Kingstone, I recognized the need to develop a more highly segmented product that better matches rate to risk. We hired an outside actuarial firm to help us develop the product, and we went live in early 2022. The results have exceeded our expectations as reported frequency in select, which is mostly new business, is materially lower than frequency in our legacy product, which is mostly renewal business. This bodes extremely well for the future of Kingstone as select represents less than 30% of our book today and will represent a larger portion in the quarters to come. We are further enhancing our select product by adding new rating variables and further rate segmentation, which we expect will increase our growth and profitability in the future. The significance of maintaining low expenses cannot be emphasized enough. We have fundamentally changed the company in so many ways, and it's reflected in the substantial reduction of our expenses. I've talked repeatedly about the various actions taken to reduce expenses. We have also benefited from the significant increase in average premium that we implemented. Having low expenses gives us a sustainable competitive advantage, ultimately allowing us to expand our margins and to grow faster as we are now doing. And finally, I believe in the power of transparency. I want our employees to act like owners and to build trust with policyholders, regulators, reinsurers and investors. We are listening closely and proactively implementing ideas to cultivate an environment of openness. We are confident in our company and believe transparency into our operations enhances confidence, supports our strategies and raises the bar on our performance. Kingstone's turnaround is largely the product of executing this playbook. Even more important is that we now have a blueprint in place to make sure that the mistakes of the past are not repeated and a new culture built to identify and quickly address potential problems. With that, I want to note a few things about the performance in the quarter. As a Northeast writer, we typically experience an underwriting loss in the first quarter due to winter weather. We were fortunate that this winter was mild, and that was certainly a contributing factor to our loss ratio improvement. Our profitability was made possible from rate continuing to earn in from the large rate increases we took last year. Seasonably favorable frequency. Mixed changes in our book from the growth of select in New York and the reduction in our non-core business. A lower number of large losses this quarter. Favorable prior year loss reserve development and lower expenses, among other factors. This was the most profitable first quarter that we have experienced in seven years. Also, a quick update on our strategic runoff of non-core business. In 2023, we reduced our non-core business by more than half, including a 16% reduction in the last quarter. Our goal is to eliminate the negative impact the non-core business has on our consolidated earnings, not to get off the book entirely. For 2023, the non-core business reduced our earnings per share by 46 cents. Our current estimate is that the non-core business will reduce our full year 24 earnings per share by 9 cents, and the impact should be de minimis in 2025. As announced in yesterday's release, we raised our 2024 guidance to incorporate the outperformance in the first quarter. For the full year, we now expect to achieve direct written premium of our core business, sorry, direct written premium growth of our core business in the range of 16 to 20%. And based on approximately 125 million of net premium earned, we expect to achieve a gap combined ratio between 86 and 90, earnings per share between 75 and $1.10, and return on equity between 22 and 30%. As a reminder, our guidance assumes no material changes in our business. Our results are very weather dependent and we have assumed no major catastrophe event in this guidance. We have also assumed that the premium rates for catastrophe reinsurance will be level with last year's cost at our January 1st renewal. However, following our recent visit with reinsurers in Bermuda, I am optimistic that we may achieve even more favorable rates. With that, I'll turn the call over to Jen for a more detailed review of our quarterly financial results. Jen?
spk04: Thank you, Merrill, and good morning, everyone. We are thrilled to report the 2024 first quarter results. our second consecutive profitable quarter with a net income of 1.4 million or 13 cents per share. This is a $6.5 million turnaround from the same period last year. As Merrill indicated earlier and I will happily reiterate, this quarter was the highest first quarter profitability we have seen in seven years. Core direct written premiums increased 12.5% to $47 million, while non-core business strategically declined 55.6% from the prior year quarter. On a consolidated basis, direct premiums written increased 3.6%, primarily due to continued pricing actions. With favorable weather, fewer large losses, and relatively mild quarter and catastrophe losses, our quarter-over-quarter performance was exceptional. Our first quarter combined ratio improved 30 points to a 93.3% due to both lower losses and expenses. Our underlying loss ratio improved by 16.6 points to 58.8%, largely due to lower frequency from the mild winter weather, better risk selection from our select product, as well as lower severity. As you may recall, last year we saw an unusually high number of large losses which we could not explain. We hired an outside firm to take a close look at these losses and ultimately determined it was random. Insurance can be a fortuitous business. The lower number of large losses in the fourth quarter and again in the first quarter confirmed that conclusion. Naturally, the reduction of our volatile non-core business also contributed to the profitable performance this quarter. In addition to the much-improved underlying loss ratio, we also experienced an eight-point improvement in catastrophe losses and two points of favorable development from prior year, primarily from the re-estimation of catastrophe losses. Our net loss ratio improved by 26.6 points overall. Our expense ratio was also down 3.4 points to 31.3 as a result of our ongoing expense reduction efforts. and trending towards our 29% expense ratio goal for the full year of 2024. For the quarter, net investment income of $1.5 million was relatively consistent with the prior year quarter. There are three key points I'd like to make about our investment portfolio. First, rates increased during the quarter and credit spreads tightened. As such, the decline in our portfolio value was muted. We also reduced our exposure to preferred stocks by roughly 13% to reduce volatility. We intend on further reducing our preferred stock holdings during the second quarter. Secondly, we will see an increasing number of maturities in our bond portfolio over the next 12 to 18 months, which carry a far lower coupon than what is available to us today. And finally, the improved operating results of the company are generating positive cash flow. you'll note that we invested this excess cash in the first quarter, leaving us with less cash and higher fixed maturity securities. This will result in an increase of our future investment income. Relative to our fixed maturity securities, our effective duration is 3.6 years with an average yield that increased to 3.67%. The weighted average effective maturity is down to 6.9 years. Our book value excluding AOCI at March 31st $4.40 per share. We are very pleased with our first quarter results, which produced an annualized return on equity at 16.2%. We expect return on equity to further increase over the balance of the year. And with that, we'll open it up for questions.
spk02: Operator? Thank you. We'll now be conducting a question and answer session. To ask a question, please press star 1 on your telephone keypad. please make sure to pick up your handset to allow your signal to come through to our equipment. You may press star two to remove your question from the queue. One moment while I pull for questions. Our first question comes from the line of David Eidelman with Daytona Street Capital. Please proceed with your question.
spk00: Yes. Thanks a lot. That was a great presentation. It's wonderful. You made my day. My question is, given that over the last few years the book value has gone down, I wonder if you have enough net worth to grow at the rate that you want to grow, and how does the decline in book value over the last, let's say, four or five years affect your ability to grow and reach the levels you want to?
spk01: Great. Thanks for your question. We don't really see our capital as constraining our growth today. And just so you know, we always have the ability to increase our quota share if we need more capital to support our growth. But as I said, we don't at this point see it as an impediment at all to our growth.
spk00: Great. Thank you.
spk02: Thank you. Our next question comes from the line of Gabriel McClure, private investor. Please proceed with your question.
spk05: Hey, Meryl and Jennifer, I'd like to congratulate you all on the first quarter. I was just blown away when I saw that we were profitable in the first quarter. I know since I've been a shareholder in 2019, I don't think we've had a Profitable first quarter, so thank you for that. I have one question for Jennifer and then one for you, Merrill. Jennifer, the net investment income went down from prior year and just kind of helped me understand why that happened, seeing as how the yields should be increasing and actually our investable assets also went up.
spk04: Sure thing, Gabe. Thanks for the question. Effectively, what happened is we did have some increase in our stock portfolio. So we did have some unrealized gains that came through in 2023 that we didn't have quite as much in 2024 because, as you recall, at the end of 2022, all of the investments were in quite a bad state with the economy. So we did have improvement through 2023, which was greater than that of 2024, but it is still going in the right direction.
spk05: Okay, but as far as like the actual net investment income of being like $1.5 million versus I think the year prior was $1,540,000 or something, why would that number come down? It seems like we should be having more income.
spk04: Sure. It would appear that our investment income, the interest in dividends on the portfolio, went from $1.6 million in 2023 down to $1.5 in 2024, and that would be what is driving that particular change. It's a very small amount, about $70,000. The total net investment change year over year is like $38,000. Right, right.
spk05: I just wondered why it's going in the down direction when it's supposed to be going up.
spk04: Yeah, that is the only thing I can see, Gabe, is that we do have some change in the interest and dividends on the portfolio. I will look into this further and get you a more detailed response.
spk05: Okay, okay, great. And then, Merrill, my question for you is, you already answered one of my questions in your presentation about the percent of our program that's in the select program now, but I'm really curious about that, and I mean, like, I guess, how does it work? Are you guys using AI? And I understand it's a competitive business and this is a public call, but anything you could share would be helpful.
spk01: Sure. So I'd like to tell you that we're using AI, but our rates are highly regulated. And at this point, they need to be explained to regulators, which excludes the opportunity to use AI in our rates. But what we did... As I said, we went live in 22, so for the year or so before then, we took all of the data for Kingstone for the past 10 or so years, and we built what's called a bi-peril rating plan, which is a very specific way of pricing for homeowners where each peril, like hurricane or liability, the different perils, water, They're each priced based on the data that is most relevant to predicting loss cost for their apparel. So it's a common way for homeowners to be priced, but we feel that we're very far ahead of our competitors in the coastal space. And so what we've seen in our select product, as I mentioned, is that the reported frequency is lower than our legacy product. And in fact, we're seeing upwards of a 10% reduction in our frequency. So typically, you would see higher frequency for new business. So the fact that we're seeing lower frequency when the majority of our book is new business is really fantastic. So I hope that answers your question, Gabe. Our intent is to continue to enhance this select product and improve our rate segmentation so that we can grow faster and become even more profitable. So we're very excited about the select product.
spk05: Sure, so am I. Thank you. Thank you very much.
spk01: My pleasure.
spk02: Thank you. Our next question comes from the line of Bob Farnham with Johnny Montgomery Scott. Please proceed with your question.
spk06: Hey there. Good morning. I actually have a couple questions. One is just let's just go back and touch on that. So the select product again. Are you trying to get out of the legacy business. So in other words, you trying to get everything to be on the select platform. And if so, how soon do you think you can kind of do that transition.
spk01: So the answer, Bob, is no. We have grandfathered our legacy book, and we will continue to renew those policies and legacy for some time. And the primary reason is there would be a very massive dislocation if we were to try to convert those policies. And frankly, the legacy book is profitable. So we really are hoping that our customers will retain in that book, and we don't see any need to move them at this time.
spk06: Okay. So you're not trying just to eliminate the legacy book. It's just going to unwind as the policyholders leave, but if they continue to write, you know, renew, that'll just keep going on indefinitely. That's basically what you're saying.
spk01: Exactly. Exactly. I mean, at some point it will probably get small enough that we'd move them over, but certainly not at this time.
spk06: Okay. And did I hear you correctly with the non-core book? It sounds like you're not planning on exiting that completely. It's just you're reducing the negative impact of it, but you will still have a non-core book going forward indefinitely?
spk01: Exactly. You know, we're subject to regulation in terms of how much of the book we can get off of. We did withdraw from the state of New Jersey, so... At the end of 2025, we will have no business in New Jersey. But in the other states, we continue to take rates. We have had, you know, we non-renew the maximum that we can. But our goal is just to minimize the drag on our earnings from the non-core business. And so we feel very confident with the rate we've taken and the other actions we've taken that in 2025, it will have very little impact, if any at all, on our results.
spk06: Great. And last question. So competition in the space, you know, I know that there are a bunch of kind of Florida, you know, specific coastal writers, but I'm not sure who you face in the New York area. What's the competitive environment like up there?
spk01: Sure. So it is, it continues to be a very hard market in downstate New York. coastal business, and I think that's going to continue for some time. We've talked about in the past that two of our largest competitors historically, one is out of business and the other has a moratorium on all of their business. And the large multi-line writers have pulled away from the coast for a multitude of reasons. And even in the first quarter, we had another large competitor put a moratorium on on all new business. So, you know, there are definitely companies writing coastal business, but the brokers would tell you that they have many fewer choices than in the past. And because we feel so confident about our pricing, we are going to take advantage of this hard market position and you will see our growth accelerate in the second quarter and beyond. So I hope that answered your question, Bob.
spk06: Yeah, no, that's good. Does New York have a market of last resort if policyholders just can't find something reasonably priced for them?
spk01: There is a fair plan, but it's really small. And what I've heard, first of all, we compete mostly with MGAs at this point. And there have been some E&S, new E&S markets entering the space. So there is availability. It's just extremely expensive. So that's, you know, I don't think we're seeing much growth in the fair plan. Okay.
spk06: Great. Thank you for calling me on.
spk01: My pleasure.
spk02: Thank you. There are no further questions at this time. Should you have any follow-up questions, you can contact Karen Daly from the Equity Group, Kingstone's Investor Relations Representative. Her telephone number and email address can be found on the most recent earnings release. I'll now turn the call back to Meryl Golden for closing remarks.
spk01: Great. Thank you for joining our call today. I want to express my gratitude for your support and your interest, and mostly I want to thank our entire Kingston team for their great efforts. Have a wonderful day.
spk02: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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