Q4 2022 Kingstone Companies Inc Earnings Call

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Speaker 4: by 7% as compared to last year.

Speaker 4: With Kingstone 2.0 behind us, the foundation is in place. Kingstone 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. Merrill will speak in greater detail about our strategic plan to do just that. Before this, however, I'm gonna 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 Kingstone 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 Kingstone as we move forward in this next phase.

Speaker 4: With that, I'll pass the call over to Jen to review our fourth quarter and full year financial results. Please go ahead, Jen. Thank you, Barry. It's great to be here today and thank you for that wonderful introduction. In the fourth quarter of 2022, Kingstone reported a net loss of $3.95 million.

Speaker 5: and 37 cents per diluted share, compared to net income of 2.2 million and 21 cents per diluted share for the same period last year.

Speaker 5: Direct written premiums were up 7.7% to $53.9 million, an increase of $3.8 million from $50.1 million in the prior year period. However, our policies in force have declined 1.8% from the previous quarter. We remain laser focused on increasing our average premium and expect to continue to grow premiums materially.

Speaker 5: from Elliott added 4.2 million or 13.7 points to the net loss ratio for the quarter.

Speaker 5: During the quarter, we also recorded a $2 million reserve development, or 6.5 points, from our commercial liability line of business.

Speaker 5: The company exited that line in 2019. We feel good about our overall reserve position and our reserves at year end have been strengthened relative to our independent actuary central point estimate.

Speaker 5: The attrition or non-cat loss ratio is 61.1%, the lowest in any quarter in 2022. If not for the cat losses and prior redevelopment, we would have made an underrating profit in the fourth quarter of 2022.

Speaker 5: For the fourth quarter, the net underwriting expense ratio decreased 6.9 points to 32.6%. Our expense reduction is driven by multiple expense reduction initiatives, most notably of our IT expense from retirement of legacy systems, changes to commission and profit sharing structure. For more information, visit www.fema.gov

Speaker 5: that will continue to be recognized over time. We've made great progress on expenses but are engaged in other efforts which will reduce the expenses even further. Before turning it over to Meryl, I'd like to add in the few short months that I've been with KingZone, I've come to appreciate the talent of our team, the compelling value of our product.

Speaker 5: services and platforms for our producers and customers. And although there's still work to be done, I've been really impressed with how much has already been completed. I can confidently say that the hard decisions have been made and the most important initiatives to turn around the business are already in process.

Speaker 5: I look forward to meeting more members of the financial community in the months to come and continue to work to ensure a new path of value creation.

Speaker 5: Now, I'll turn it over to Meryl.

Speaker 6: Thanks Jen.

Speaker 6: While our financial results for the fourth quarter were nowhere near what we want them to be, the quarter is the first sign that the business has begun to turn and we are seeing green shoots. This progress overall is a direct reflection of the transformation initiatives that we have diligently executed on since 2019.

Speaker 6: including throughout 2022, a year that was a challenge for the entire insurance industry.

Speaker 6: As a result of these efforts, we are now a more efficient company with strength and fundamentals. I want to spend a few minutes walking through some of the actions we've already taken and that are already in place to proactively address market challenges and operational inefficiencies before turning to our strategic plan for 2023 and beyond.

Speaker 6: Barry spoke to inflation, but I'd like to go into more detail given its major impact on our book at BizNup.

Speaker 6: Apart from annual rate changes, we initiated a new practice in the third quarter to update the replacement cost of our entire book to keep up with inflation and make sure that our policyholders are insured to value.

Speaker 6: Our previous practices didn't keep up with rising building costs, especially with the inflation that we've all been experiencing of late.

Speaker 6: As Barry mentioned, we adopted a process to update replacement costs of each policy with every renewal using the most recent data available. And we're pleased to share that this is producing positive results. For New York homeowners, as an example, we've seen a 25% increase in average premium.

Speaker 6: since this new practice was implemented. Let me repeat that the average renewal premium is up 25% over the expiring term. This increase reflects both the rate change that's flowing through the book as well as this update and replacement cost.

Speaker 6: Remember though we're rolling onto the book these two items and that takes a full year to work through the book and we earn the new hire premium over the 12 months of the renewal term. Thus while much of the benefit will be seen in 2023 and increasing in amount as the year goes on.

Speaker 6: the real effect will be in 2024.

Speaker 6: Looking forward ahead to 2024, we anticipate a continued rise in replacement costs as we believe inflation, unfortunately, will continue for the foreseeable future and expect premiums to increase accordingly.

Speaker 6: It's one thing for us to raise our premiums, but it's also worth noting that our retention has declined only slightly despite this significant increase in rates. For instance, in New York homeowners, we've experienced less than a 1% drop in retention despite rates increasing so materially.

Speaker 6: We're in the midst of a hard market with fewer competitors than in recent years and we expect these conditions will continue. That said, our continued strong retention is a positive indicator of the loyalty of our customer base and the talent of our producers and team members who are working directly with customers every day.

Speaker 6: Beyond the MACU factors discussed, the primary driver of our fourth quarter and calendar year 2022 underwriting loss has been the result of our businesses in states other than New York, namely New Jersey, Connecticut, Rhode Island, and Massachusetts.

Speaker 6: We entered these states to diversify Kingstone's footprint starting in 2017 and they have had a disproportionate negative impact on our underwriting results, especially in 2022. We attempted to address these challenges to achieve profitability in the past.

Speaker 6: We made a series of rate changes and tightened underwriting, but they were not enough and did not deliver the expected results. The impact we'd worked towards was not there, and what benefit we did see was nullified by inflation. So in late 2022, after considering this continued unprofitable trend, we were able to see a rise in the rate change.

Speaker 6: We made the difficult decision to focus on our profitable state of New York, where we have more than 80% of our business, and to aggressively reduce our non-New York book of business, subject to regulatory constraints. We are confident that the decision to limit our operations outside of New York...

Speaker 6: is the fastest way to improve profitability for Kingstone.

Speaker 6: The actions we have put in place will reduce our policies in force outside of New York by more than 50% by year end 2023 and another 40% will be reduced in 2024. By eliminating these unprofitable policies, we anticipate this to significantly improve the bottom line for Kingsborough.

Speaker 6: expense ratio to reach 33, a significant improvement in a short period and one were committed to furthering.

Speaker 6: Much of the ratio decline is attendant to our restructuring and reduction of producer commission rates.

Speaker 6: Select policies are at a 15% commission rate and our legacy policies are being renewed at lower rates as well. Due to GAAP accounting, we pay the lower commission at the policy renewal but recognize the benefit over the life of the policy. Just like the increased premiums being felt more profoundly in 2020.

Speaker 6: currently undertaken. Our four pillar strategy for 23 and 24, which we've creatively coined Kingstone 3.0, is focused on four things.

Speaker 6: One, aggressively reducing the non-New York Book of Business. Two, adjusting pricing to stay ahead of loss trends, including inflation.

Speaker 6: Three, tightly managing reinsurance requirements and costs. And last, continuing our focus on expense reduction.

Speaker 6: By executing on these initiatives, Kingstone will be positioned to achieve our goal of returning to profitability in 2023 and beyond.

Speaker 6: Barry, Jen, myself, and the entire leadership team are optimistic for the future.

Speaker 6: We have a solid foundation from which to build with a clear plan in place to capitalize on our strengths and deliver long-term value creation for shareholders.

Speaker 6: Thank you as always for your support and with that we'll open it up to questions. Operator.

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Speaker 3: Once again, that is Star 1 for today's question and answer session.

Speaker 3: The first question is coming from Paul Newsome of Piper Sandler. Please go ahead.

Speaker 7: Good morning. Thanks for the call.

Speaker 7: Maybe we can start with expense management. As you're treating the book, I would imagine that there's some negative expense leverage, just with fixed costs. Is the reduction in the expense ratio, in your view, purely a function of the lower commissions? Or is there...

Speaker 7: some leverage other pulling to reduce expenses from a pure operating perspective.

Speaker 6: Sure, I'll answer the question, Paul. So thank you for pointing out our lower expenses. We have worked really hard to reduce our expenses and so happy that we've been able to see a four point reduction in 2022. So yes, commissions play a very significant role because...

Speaker 6: But beyond that, we have made major efforts in all areas of the company to review and reduce our expenses. I've talked repeatedly about the retirement of our legacy systems that saved us a million and a half dollars. We have reviewed every contract. I mean, we're really relentless.

Speaker 6: in managing our expenses and that's what will be driving our expense reduction going forward.

Speaker 7: Could you give us a little bit more color on the reserve development in the quarter, the sources of that reserve development, the frequency, varying where it's coming from in your view? theatre

Speaker 4: Yeah, I think that's thanks for the question, Paul. There was a $2 million.

Speaker 4: additional reserve put up, all of it relating to commercial multi-parrel policies, a line of business that we exited in 2019, and the statute of limitations is just about run on all of those old policies.

Speaker 4: But in an abundance of caution, this is the first additional strengthening we've taken on that. We recall that we put up a lot of strengthening in 2019.

Speaker 4: But it's directly related to a line of business that we exited and The total amount on a pre-tax basis was two million dollars

Speaker 7: Great. Could you guys talk or maybe walk us through the...

Speaker 7: the debt refinancing, the impact that we should think about on the model, respectively.

Speaker 4: Sure, I'll start that and if Jen or Meryl want to chime in, please do. So we had, as you recall, a $30 million loan coming due in December of last year.

Speaker 4: And it was, we were paying an interest rate that was set five years earlier at five and a half percent. When we finally got through the debt exchange, you know, thanks in large part to the great team at, I guess across the wall from you Paul, at Piper Sandler.

Speaker 4: increase in our interest expense.

Speaker 4: And you'll also see that the costs of the financing will be amortized over the life of that loan. And further, we issued warrants to the note holders, and those costs will also be reflected as time goes forward.

Speaker 4: We'll be fine, you know, I think a lot of this will be clear to you, Paul. We should file our 10K by end of business today, and there's quite a detailed discussion of what's included in the 10K.

Speaker 7: Hope that answers your question. Yeah, I guess the more challenging piece is to figure out the impact of the warrants on the...

Speaker 7: shares outstanding.

Speaker 4: Yeah, I think what you'll see is they're accounted for as equity warrants.

Speaker 4: And, you know, they go through the entire Black-Scholes discussion, and I think it'll be clear to you exactly what it'll be when you can read the 10K.

Speaker 7: And then I guess one last question and I'll let anybody else want to ask questions. Can we early read on the July renewals for this year?

Speaker 4: Well, I'm going to let Meryl and Jen talk. They just got back from London, so.

Speaker 4: Well, I'm going to let Meryl and Jen talk. They just got back from London. So ladies, why don't you go ahead.

Speaker 5: Yeah, so we're just coming back from London earlier this month. Somewhat interesting conversations over there with our reinsurance partners and new markets that we were talking to. So what we're hearing is that they actually have, we're going to have some additional capacity in the Northeast in this upcoming renewal for us.

Speaker 5: But the question is at what cost, right? So that is the bigger challenge is how much it is going to be to place the reinsurance. In the forecast that Merrill has created there is absolutely expectations of increased reinsurance costs going through and it's just whether or not we can come in underneath those reinsurance costs that are expected.

Speaker 5: Yeah, you know one of the things that I love telling these reinsurers is that hey look you need to go to a flight to a higher quality book and the fact that Kingstone has only produced a 7.27% catastrophe loss ratio for these reinsurers on this program. They really need to start paying attention to this company.

Speaker 5: versus others who are providing a higher rate on, sorry, loss ratio on their CAT business.

Speaker 4: Yeah, I don't know if you don't want to add anything to that.

Speaker 4: I mean, yeah, I think the important point, Paul, is while we're not prepared to guess at what's going to happen, we will have our own personal hope for us.

Speaker 4: What drove last year's increased pricing, which was almost 20%, was a lack of interest by the reinsurers.

Speaker 4: They were confronted by the same issues that we were and they were stung repeatedly in Florida to the point our renewal is in July , the Florida renewals are primarily in June .

Speaker 4: And to say that we got the after effect of the pounding that the Florida carriers took, I think would be fair.

Speaker 4: You know, we've all gone through this, the times are challenging, but the combination of an expectation that capacity is freeing up, that new capital is entering the reinsurance market..

Speaker 4: And at least as early as, I guess, yesterday, there's an expectation that the projected number of storms to affect the Atlantic seaboard is going to be less than it was in prior years. So a lot of hope, positive signs to hope for, but the proof will be in the pudding.

Speaker 4: I hope that gets you to where you need to be.

Speaker 7: Always appreciate the help. Thank you very much. Thank you, Paul.

Speaker 3: Thank you. Once again, that is Star 1 if you would like to register a question at this time.

Speaker 3: The next question is coming from Gabriel McClure, a private investor. Please go ahead.ienscen nesti

Speaker 8: Thank you. Hello, Barry and Meryl. Welcome to Team General.

Speaker 8: Hello Barry and Meryl and welcome to Team Genera. Hi.

Speaker 8: Hello Barry and Meryl and welcome to Team General. Hi. Yeah.

Speaker 8: Hi. Yeah, so my first question as kind of a...

Speaker 8: Just more follow up with the with Paul's question on the the reserve development on the commercial lines That that was kind of a surprise seeing as how we discontinued that in 2019 For me that was a surprise. So my question is is

Speaker 8: When are these reserve developments going to be done? Are we going to see any more? What's your best guess on all that?

Speaker 4: I mean, let me start by saying, and first, thank you for the question, Gabe.

Speaker 4: This was the first additional reserve

Speaker 4: since the third quarter of 2019. It was a painful exit from a problem that the, I'll just say the prior administration refused to acknowledge.

Speaker 4: And I think we did a pretty damn good job in sizing it up. But inflation got in the way and COVID got in the way.

Speaker 4: Inflation, obviously everything costs more. And COVID slowed the ability to resolve these claims. The courts were closed. Attorneys weren't working. So I think $2 million, while it might be a surprise, is not something that I would consider unusual in size at all.

Speaker 4: hopefully that just shuts the door on everything going forward.

Speaker 5: Additionally, Barry, if I may add that we as a company have a little bit more conservative about reserving policies than what was in place back in 2019.

Speaker 5: We are now, we have our chief actuary on in-house Sarah, and we have an independent actuarial firm who reviews our reserves on an annual basis and tells us where we are within their range. And we are $2 million above their central point estimate.

Speaker 5: So we are also being more conservative to ensure that our reserves are adequate and reasonable going forward.

Speaker 5: That being said, you never know. Commercial liability is a very volatile line, so there is some exposure there still. But we don't expect additional claims to be coming in as the statute of limitations runs out. So it's just a matter of handling what's currently open.

Speaker 5: That being said, you never know. Commercial liability is a very volatile line, so there is some exposure there still. But we don't expect additional claims to be coming in as the statute of limitations runs out. So it's just a matter of handling what's currently open. Okay, got it. Thanks, Merrill.

Speaker 8: I have a question about the bond portfolio. Your duration is stated at 4.5 or 4.4. Where do you see the duration going?

Speaker 8: about the bond portfolio. Your duration is stated at four and a half or four point four and I guess my question is is where do you all see the duration going? you know

Speaker 8: It's really nice that we all think that the Federal Reserve is going to...

Speaker 8: lower rates later this year or next year, but what if they don't? What if rates go up and what if they do lower rates for a year or two and then rates go up again? So, well, just how are we thinking about that?

Speaker 4: Yeah, I mean it's a good question and I think maybe I should have added before.

Speaker 4: that I think it's just about the entire last year.

Speaker 4: Whatever proceeds we've received from principal paydowns and the mortgage bonds we own or the maturity of bonds proceeds that we get, even the interest that we earn on the portfolio, the only new securities we've purchased have been short-term treasuries.

Speaker 4: So, the duration is going down not just as the existing portfolio marches towards their scheduled maturities, but the incremental amount of new securities we add is at a much lower duration.

Speaker 4: So bringing it down so, you know, I think in general if if you know bond bonds are basically Mirroring a Treasury rate plus a credit spread, right?

Speaker 4: So if there were no changes, and there have been quite a lot of changes recently in credit spreads with, you know, everything going on in the world, but in general, 100 basis point reduction or increase for that matter.

Speaker 4: in the five-year Treasury rate will result in a $6 million change to our carrying value of our portfolio. It's a very rough measurement.

Speaker 4: But, you know, in answer to your question,

Speaker 4: We see the duration going down over time while the quality of the portfolio by adding just treasuries is going up.

Speaker 4: So, we feel real good about the portfolio. Yeah, we'd be very happy to see rates come down. I'd love to see rates come down, not because of a recession, but I'd like to just see rates come down. But you're right. I mean, rates could go up. And I think we've taken a conservative approach to this.

Speaker 4: and have limited further exposure to the valuation of the portfolio by relying on AAA rated or short-term treasuries. I hope that answers your question.

Speaker 8: No, that's great. That does. Thank you very much. And I just have one last question for y'all. Maybe something to think about.

Speaker 8: On the reporting, you know, we were, and I know it's customary for a lot of these other property and casualty companies to provide reports excluding catch-thrust, free losses, and this and that.

Speaker 8: But I'd like us to think about maybe.

Speaker 8: taking that out and just reporting the numbers straight up.

Speaker 8: Guys, we're in New York, so we're going to have winter storms and hurricanes. It's just kind of, in my opinion, it's part of doing business. I'm from South Alabama, and if I reported a catastrophe every time it got hot out in the middle of the summer, people would laugh at me. Wow.

Speaker 4: No, and I think you know and look you've been a participant in these calls for many years

Speaker 4: And you know, that's never been my go-to find an excuse by blaming it on catastrophes.

Speaker 4: That's never been my go-to finding an excuse by blaming it on catastrophes.

Speaker 4: Kingston always has been compared and has a peer group to compare itself against and that's how they report. It's also important to note.

Speaker 4: always has been compared and has a peer group to compare itself against and that's how they report. It's also important to note that

Speaker 4: We got to the almost the end of December We're sitting on what looked to be a really good quarter from an underwriting perspective And then got up ended by this winter storm Elliott. We'd never had a freeze event in December like that I mean I've lived in New York. It's now look I'm living here 70 years

Speaker 4: We've never had something like that before and You know you're right It is what it is whether you want to call it a cat loss or an attritional loss or like some of the Florida carriers call it bad weather that doesn't reach the level of a Catastrophe

Speaker 4: at the end of the day money is money losses are losses and you know, I appreciate your sentiment and but I hope that

Speaker 4: You can parse out the extra information if you don't want to look at it But like I said since we're being compared to others and others do that I thought it appropriate to leave that in

Speaker 8: So I hope that's okay. Got it. Thanks.

Speaker 8: So I hope that's okay. Got it. Thanks for great.

Speaker 3: Thank you. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to management for any additional or closing comments. Thank you, operator. Thanks, everybody, for listening.

Speaker 4: We've all put up with a horrible 2022.

Speaker 4: Our company has been materially impacted by things that were outside of our control and our plan for 23 and going forward is to turn the tables, take control over the things that we can and agree on in any way that we can.

Speaker 4: And if it results in having to raise consumer premiums by these material amounts of 20, 25 percent, like Meryl's talking about, we have to do that. And if we're going to be confronted with a higher cost of doing business through increased reinsurance costs, our obligation is to pay claims as they come due.

Speaker 4: and if there's left, and we must purchase reinsurance in order to stay in business. So if there's less money left over after paying those reinsurance premiums and higher claims costs due to inflation,

Speaker 4: then we had to share the burden of this and not just dump it all on the

Speaker 4: to share the burden of this and not just dump it all on the policyholders.

Speaker 4: So we had to cut commissions. We changed the overall dynamic of the company in response to these changing macro factors. This will prove through in 23 and like Merrill said, because of GAAP accounting and the need to earn through the heightened premiums and get the benefit of the lower commissions.

Speaker 4: More of it will be seen in 24 and 23, but I think you'll see as we report going forward These actions are purely math. They will represent be represented in each of the quarterly statements as we discuss And I think our next call is going to be in mid-bay and I look forward to

Speaker 3: sharing more data with you then. So thank you all for listening in. Thanks for hanging in there with Kingstone. And I hope that you remain as good and loyal shareholders. So thank you again. Have a great day. Ladies and gentlemen, thank you for your participation.