Q3 2022 Kingstone Companies Inc Earnings Call

Okay.

Greetings and welcome to Kingstone companies, Inc.

Third quarter 2022 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.

Sure.

Our Chief Accounting officer. Thank you Sir you may begin.

Thank you very much Maria and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstone 2022 third 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 condition in part one item one a of the company's Form 10-K for the year ended December 31, 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 the GAAP figures. Please see the tables in our earnings release with that I'd like to turn the call over to Kingstone CEO . Mr. Barry Goldstein. Please go ahead Mr. Goldstein.

Thanks, Rich and good morning, everyone and thank you for joining us on our third quarter 2022 conference call.

Before we get into a discussion on our financial and operational results I want to provide you an update on a few matters that I know are top of mind for you all.

First as we've said our board and management team regularly regularly review Kingstone strategic operational and financial priorities with the objection objectives of driving stockholder value.

As it relates to our ongoing discussions with Griffin highlight specifically as you'll recall in August Griffin highlighted submitted a final nonbinding indications of interest to the board proposing to acquire all of the outstanding equity of the company. We agreed to extend the period of exclusivity with Griffin High line.

To further pursue that proposal and that period of exclusivity has since expired.

At this time, our discussions are focused on a potential strategic transaction with them rather than an outright acquisition of kingstone, while no assurances can be given that a transaction of any kind will be consummated with Griffin highline or any third party. Our board is committed to acting in the best interests of the company and I'll stop.

Holders, we will continue to take actions consistent with that objective our goal remains to be as transparent as possible and I'm personally committed to providing updates as appropriate that said I am limited in this regard given the confidentiality agreement in place and must stay within the bounds of what where legally.

Able to say.

Today as in our prior calls we will only accept questions from the analysts that cover the stock.

Second as the board considers all value creating opportunities.

As a management team we are not sitting still we've made significant progress executing on our operational plan, which I'll touch on in a moment.

This transformation to a stronger Kingstone has continued in the midst of a challenging inflationary environment, one which is heightened for companies like ours, which are highly regulated.

As you know kingstone checks its premium rates annually in advance and when we took a rate of rape I'll round of rate changes in the summer and fall of 2021 inflation was in the 4% range today significant uncertainty.

Remains despite the more favorable inflation data released at the end of last week, which showed the annual inflation inflation rate for the U S. At 7.7%. The 12 months ended October 2022.

The reality of our business is such that we cannot adjust our prices like most others in real time in order to flow through to the consumer the higher loss cost we incur.

We recognize this is putting pressure on our stock price.

But I want you to know that I'm confident in our foundation and believe that the changes we have invested in will put us back on the path to profitability.

As you know this return to profitability has been the single biggest focused Adar Kingstone 2.0 plan I am pleased to report that 2.0 is now complete it's taken us almost three years of hard work and significant capital investment to provide a product to better select our risks to better underwrite and price out risk.

And better manage them on a single efficient platform. While it is still in its early days, we are already seeing positive results.

We began writing a new select product in New York.

Our home state and a state that can account for about 80% of our total premium.

Let me share some very exciting details total new business premium is up about 9% driven by an increase in average new business premium per policy of 8% that is its 8% higher than the average premium than we generated in 2021 from the legacy product as a reminder.

Premium being up is very little to do with the sale of more policies. What's important is that we're able to charge a higher price for the policies we are selling.

That's one part of the story higher average premiums on new business, but another important piece is a better matching of rate to risk. Most importantly, our select new business claims frequency is almost 20% lower than what we experienced in new business in our legacy.

Product for the same period last year.

Combining higher premiums with reduced risk is translating into wider margins and higher underwriting profits were delighted with the enhanced risk selection tools built into select reflecting the elevated quality about new policyholders as most qualify for our lowest price tiers even.

With our stringent underwriting standards.

In short since completing kingstone to point out we are already reporting higher average premiums lower claims frequency and a far better mix of business.

These are all great signs for the future and while our work is never done what we've seen is better than what we had anticipated and we could not be more optimistic about select recall that premiums are earned over the life of a policy. So the expected benefits of higher earned premium and lower loss cost will.

[noise] earned in overtime.

Beyond our home state of New York, We continue to take rate in all states to account for the trends in our business, including inflation, which I said has an outside impact on us as a regulated company.

We are adding to premium not only through rate filings, which are averaging 9%, but by annual adjustments to two coverage to properly reflect our homes increased replacement costs again driven by inflation.

All new homes underwriting by Kingstone underwritten by Kingstone are insured to 100% of their replacement cost and all renewing policies are updated to reflect the then current replacement cost. The combination of these actions, which vary by state will be very material.

Importantly, we continue to manage our portfolio to grow only in states in segments, where we are earning an acceptable return we are re underwriting our entire book taking actions subject to regulatory constraint to increase our returns and eliminate the unprepared under perform.

Yeah.

As we've worked towards completing kingstone two well we remain focused on operating with financial discipline and look to reduce our expenses across the business. As a result expenses went down 2.4 points for the quarter and almost four points.

On a year to date basis, we are pleased to see these cost cutting measures take hold and we are actively working to drive further expense reduction, including through the retirement of our legacy systems.

We've also taken important steps towards refinancing certain senior unsecured notes that will become due on December 30 of 'twenty 'twenty. Two we explored a number of financing and other options that were available to US we are working diligently with our bankers and attorneys on a solution that if finalized as I hope well.

As a result in a reduction to our outstanding debt and indebtedness by utilizing the liquidity now on hand at our holding company now.

Note that subject to regulatory requirements Kingstone can also received dividends of loans from our insurance subsidiary Kingstone insurance company that could be used to repay a portion of the notes in.

In light of the upcoming refinancing and our desire to maintain financial flexibility, we announced yesterday that Kingstone board has determined to suspend the company's quarterly dividend effective immediately we believe this is the prudent decision at this time in order to preserve capital to potentially help on this refinancing and the.

<unk> debt service requirements as any refinancing will result in borrowing cost at a higher interest rate than for those of the maturing notes.

And we anticipate cash savings of 1.7 million annually as a result of the dividend suspension.

The board will continue to evaluate the company's dividend policy on a regular basis, including based on any contractual restrictions imposed in connection with any debt refinancing.

In summary, we are continuing to work diligently to fully realize the benefits about transformation, while our net earnings and book value declined primarily due to the continuing impacts of inflation, our adjusted book value per share for the quarter was $5.15 as a remind.

This is a non-GAAP measure and excludes the impact that interest rate changes have had on our fixed income portfolio.

Yeah.

So I turned the page.

Okay.

Alright, I am all out of order here before I turn the call out with Tomorrow I want to reiterate three things one our board is open to all options to enhance stockholder value.

Two we are not sitting still and are taking every action to best position kingstone for the future, including with respect to the upcoming refinance it and.

And three we are optimistic that two changes we have invested in through our recently completed Kingstone 2.0 will result in a return to profitability I'm going to turn the call over to Merrell to continue marrow. Please go ahead.

Thanks Barry.

The company posted a third quarter net loss of 4 million or 13 cents per <unk>.

Sure compared to a net loss of $10 6 million or a dollar one per diluted share for the same period last year note that the mark to market decline in our equity portfolio amounted to 13 this year.

Direct written premium for the quarter were up 5.7 million from the prior year.

54.6 million.

Almost all of this growth was due to rate increases.

During the third quarter, our written premium increased by 11, 7%.

While our policies in force grew 1.2 per cent weary.

We remain focused on increasing our average premium and expect to conclude the grow premiums materially faster than exposure for the foreseeable future.

The net loss in LAE ratio was 75%.

Just wanted to 0.1 points from the prior year when we experienced a large number of catastrophe claims this quarter impact of catastrophes was de minimus.

Just over a point loss ratio compared to 33 points from the prior year.

The attritional or non cat loss ratio was higher than the prior year on a triple play.

First the largest driver was an increase in severity for non weather water losses.

Welcome back.

Insulation.

Please be aware that the frequency of water losses was in line with the prior year quarter, but severity was materially elevated as remediation and repair costs reflect not only inflation in materials, but the increased non skilled labor wage rates.

Second we experienced an increase in frequency for our livery physical damage products. However, this line of business continues to be quite profitable.

We are working hard to keep pace with and hopefully stay ahead of inflation. So it continues to weigh on our financial results inflation in loss costs requires us to increase premium rates in all states.

These rate increases that averaged about 9%.

Barry talked about making sure that newly covered homes, our insurer to their current replacement cost. We are also updating replacement cost on all of our policies at renewal.

These coverage increases could result in an additional 8% to 10% of premium depending on retention, we recognize that the combination of higher rates and higher values could contribute to a significant decline in retention, but thus far that is not there.

Kate.

We attribute this bolt to customer stickiness and some market conditions as other insurers make similar changes to address inflation as well.

These efforts will be increasingly reflected in our results as the higher premiums earn in over time.

For the current quarter, the net underwriting expense ratio decreased to four point to 36, 9%.

Our expense reduction was driven by the quota share and corresponding ceding commission, but also by multiple expense reduction initiatives from Kingstone two O that are starting to take hold.

Note that the significant capital expenditures that were required to design build and rollout chiller and allow us to get off our legacy systems will no longer burden our future.

Capital expenditures going forward will be greatly reduced we've made great progress on expenses, but are engaged in other efforts will which will reduce expenses even further.

As Barry mentioned, we have completed our kingstone to own their success and have taken numerous actions to address inflation, but it takes time to see these benefits reflected in our financial results.

I want to thank the entire kingstone team for their incredibly hard work. We are continuing to work diligently to return the company to profitability and are evaluating all options available to us to ensure the company is best positioned to get there with that operator.

<unk>. Please open the line for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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Our first question comes from Paul Newsome with Piper Sandler. Please proceed with your question.

Good morning.

Perhaps you could give us a little bit more detail about the walk through to profitability.

Maybe you can put it into the context.

What you are getting with rate versus your perception.

Future inflation.

And then I.

Maybe as a follow up to that could you talk a little bit more about the.

Non rate impacts.

They're not really actions that you're taking in their impact as well I was little surprised to see the retention is holding up as well as it would be I would've thought.

You'd be trying to actually lower than it was.

Tension.

With non rate actions to improve.

Improved profitability, but that can be run their course.

There does not indicate that.

Yeah go ahead Merrell.

Okay.

Paul So as I mentioned, we're doing a lot to return the company to profitability. So we've taken rate in all states. We also have this impact of replacement cost.

That is adding a lot to rate as we.

Increased coverage.

We have implemented a plan to re underwrite the book, where we are non renewing risks as we can by regulation and we are also re inspecting a lot of properties that are also result in either.

Our actions to.

Address the what our findings were from the inspections.

Or non renewal.

We have pruned some of our producers that have.

Resulted in unprofitable business for us and we are also very focused on reducing our expenses. So that the combination of all of those factors should result in kingstone being much more profitable in the future.

So maybe it'd be helpful to put some numbers on that you said if I got it correct Youre looking at.

Right that somewhere around nine.

I think you mentioned something eight to 10 on inflation guards.

What's your perception of the underlying inflation.

So to be clear the 8% to 10% is not increasing inflation guard, we're actually re pulling replacement cost on all of our properties and making sure that the policyholders are insured to value.

In terms of future inflation I believe what we've built into our pricing is a future inflation. So on top of what we've already experienced.

<unk>, 6%.

Great and then.

Switching topics could you talk a little bit about.

And company liquidity, which is cash you have at the parent at the moment as well.

How mechanically legally the dividend capacity at the subsidiary works in Newark.

Yeah, I'll I'll take that one Paul and AR in order for an insurance company to pay a dividend.

There are a number of different metrics that need to be met them. The most important one is it has to be the lesser of 10% of the insurance companies a surplus.

Or a quieted elaborate formula that compares the amount of investment income generated over the prior three years to the amount of dividends taken during that prior three year period.

So we were able through a series of transactions to staying within regulatory guidelines make transfers to the holding company, who now which now has approximately $10 million $12 million in liquidity.

And right now.

Our active filing that will take place I think today, where maybe it happened yesterday the surplus of the insurance company is at $76 million.

And the insurance company has no debt.

So the holding company owns 100% of the stock and the insurance company, which is $76 million in surplus and no debt.

And right now if if if.

Fast our RBC is about 400.

So we're in a very very strong financial position at the insurance company. The holding company is preparing to reduce its debt. Upon the refinancing that is being worked on and we're very hopeful that a positive conclusion is in order.

I hope that responds to what you were looking for.

No no that was great that was all I was looking for.

Thank you very much for your help with those great. Thank you Paul.

We have reached the end of our question and answer session and I would now like to turn the floor back over to Barry Goldstein for closing comments right well, thanks, everybody for listening in and I look forward to our next call and take care between now and that have a good day.

Okay.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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