Q1 2023 Kingstone Companies Inc. Earnings Call
Hello, and welcome to the Kingstone companies' 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 Brazil, Chief Financial Officer. Please go ahead.
Thank you very much and good morning, everyone yesterday afternoon. The company issued a press release detailing its first quarter of 2023 results on this call Kingstone may make forward looking statements regarding itself isn't it.
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.
For more information please refer to the section titled factors that may affect future results and financial condition in part one item one a company's Form 10-K for the year ended December 31, 2022, along with commentary and forward looking statements.
The earnings release issued yesterday.
In addition, our remarks today include references to non-GAAP measures a reconciliation of our non-GAAP measures and that figures. Please see the tables in our earnings release with that I'd like to turn the call over to Keith Gollust Chairman of the board and Mr. Barry Goldstein. Please go ahead Barry.
Thanks, Joe and good morning, everyone. Thanks for joining Kingstone as first quarter earnings call. In addition to Janet Chief Financial Officer, and head of Investor Relations also with me today is Meryl 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.
In an underwriting loss in the first quarter was really not unexpected given the northeast winter.
Looking back. These 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 now.
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 a number of large losses that were primarily water related and which increased our underwriting loss for the first quarter I'll, let Jen and Merrell 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 just so with difficult business. There's so many exogenous factors out of our control drive our results.
We can take all the right steps and in a few days of freezing temperatures set us way back.
And it's not just adverse weather that we're dealing with were 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.
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 really slow he indicated that he is no longer just assuming that further rate 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 reinsurance 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 is that 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 face begin to slow we expect results of our efforts to play out and as we progressed through the year, we expect to realize even more of them.
Benefits from the strategic actions we've taken overall, we are bullish on our future. We 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 Jan to review a review our first quarter results go ahead, Jeff.
Thanks Barry.
First part 23, Kingstone recorded a net loss of five 1 million 47 cents per diluted share compared to a net loss of $9 2 million and 87 cents per diluted share for the same period last year.
The rest of it in premiums were up 1% to 40.
$7 6 million, an increase of $4 6 million from 43 nine in the prior year.
Well our policies in force declined by one 1% from the previous year.
We remain focused on increasing our average premium and expect to continue to grow premiums materially faster and exposures for this foreseeable future.
The net loss and LAE ratio was 88, 6% up two six 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 one nine points over the prior year.
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The Attritional and non cat loss ratio was 47, excuse me, 75.4% slightly higher than the loss ratio in the first quarter of last year, our frequency was in line with historical periods.
The non cat loss ratio was driven by severity likely just inflation along with a number of large water related losses.
For the first quarter.
Underwriting expense rate the net underwriting expense ratio decreased three seven points to 34.7% we've spoken about our disciplined expense reduction efforts in the past and have made great progress on this friends.
The reduction is primarily due to decrease in expenses from the retirement of the company's legacy systems and changes to produce the commissions.
Viewing all expenditures, but a necessity in potential savings as well as continuing to automate various processes.
In an effort to reduce expenses even further.
The rain losses comparable to the same quarter last year. This quarter, we had a $1.2 million real unrealized gains in our investment portfolio versus an unrealized loss of $4 4 million in the prior year.
Stabilization of capital markets. Additionally, the net interest income was up 13, 4%.
First quarter 2022 to 2023.
I'll now turn it over to narrow now.
Thanks Jan.
Last quarter I shared our four pillar strategy for 2023 and 'twenty four coined kingstone three O to maximize King's downs 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 'twenty. Two 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 Nonrenewals 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 'twenty, three and we are well on our way to achieving that goal.
It's worth noting that our policies in force and 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 does not.
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 or 16.5% rate change for our New York legacy dwelling fire product.
And 20% rate change for our Connecticut legacy homeowner products were affected our 9.8% New York select homeowners and 12.3% New York dwelling fire rate change were approved and we filed for rate and several other states and products as well.
As mentioned previously we are also updating 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.
Nine of our strong customer relationships are exceptional producers and the hard work of our talented team team at Kingstone.
For the first quarter, our average New York homeowner renewal premium increased by 21% from $2498 to over 3000 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 costs up.
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 is 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 P. M. L, which is the amount of reinsurance we need to buy this include making changes to our underwriting to reduce or eliminate the most.
If he exposed property as well as requiring higher hurricane deductibles in certain counties.
In the first quarter, we successfully navigated U P. CS insolvency and the surge of business that came our way without growing our P. M. L 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 four percentage points to 36 for calendar year 'twenty two I'm delighted that our first quarter 'twenty three expense ratio is down further to 30.
Four 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 reality of the northeast winter that being said Barry Gen myself and the entire leadership team remain laser focused on executing our strategic plan that will lead us back to the high performing company were for many years we are.
Optimistic for the future and confident that our plan will deliver long term value to our shareholders. Thank.
Thank you as always for your support with that we'll open it up for questions operator.
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Our first question today is coming from Paul Newsome from Piper Sandler one moment. Please.
Your line is now live.
Yeah.
Good morning, Thanks for the call.
Maybe we could just kind of go over the capital position a little bit on where are we from RBC capital perspective and Oh.
How will that be.
Changing over the quarter.
Jen do you want to handle that.
Yeah, I'm, sorry, I was I was I.
I was sitting on mute.
Oh geez.
Yeah. So we do have some.
RBC.
We have about 67 million.
And of capital sitting in the insurance carrier and we really haven't had any issues as far as that goes the insurance carrier losses, only about $4 million as well this quarter, though we are still quite above the RBC minimum.
Minimalize capital of 300 that they're looking for.
Yeah.
Great and then.
Yeah.
Maybe you can help me with the simple math.
It looks like direct premiums were up.
The 11% or so.
And you mentioned that <unk> was down about 1%.
So how does that square with the amount of reach.
Got you and as well as the.
Inflation guards that you're actually putting through the system.
Barry you want to work on that one.
And I need your assistance Barry or Jen.
All right well, 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 about non New York business.
So while we all we only had.
We only had one quarter of additional inflation guard to reflect.
Now that's a total of six so basically both the and the impact of the inflation guard and the impact of the positive rate changes.
Gets you recognized really on accelerated in an almost geometrical basis through the year.
So you know I I I I can't tell you what you know 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 up.
<unk> written outside the state of New York.
And then to optimize the book of business, we have in New York.
No.
Rationalize what we have.
Optimize our results and stabilize the company is really the theme for 2023.
And if if you'd like to on a separate call I'd be happy to review with you how this math works.
It was the.
The book of business in New York profitable or as well.
Yes, really the war.
New York, So if somehow you were able to just get rid of all the new Jersey business and all of the non New York you'd be profitable.
That's well that's what our goal is I mean, the non New York business brings with it a lot.
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 the impact that negative impact decreases the positive.
Impact of the things, we're doing you know across the board, but but obviously in New York takes hold.
And the issue here is that while we can.
Renewal premiums at much higher rates. It does its only a portion of the book that's 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 it's going to be a factor as well.
Hope that answers your question.
No that's good.
Thank you very much appreciate your help zones.
Okay. Thank you.
Thank you next question today is coming from Gabriel Macquarie Private Investor. Your line is now live.
Hey, good morning, Barry Good morning, Merrill, Hey, Gabe Hi.
Alright.
So I have a couple of questions.
The first one is what's.
What's the book yield on the portfolio right now and do you know what it was last quarter.
Gabe I got to tell you the we disclosed that in the quarterly statement I'm trying to give jen a little bit of time. She if she can scurry around.
We're still in draft form we plan on filing the Q on Monday, when it's due but there's very little change in the book yield since from the prior quarter.
And just 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 though 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 Jan did I give you enough time to find the numbers now.
I'm still working on it.
[laughter] high but it's not.
I almost changed flip point I don't know what 0.3 0.44454, I don't remember exactly Gabe sorry.
Okay.
Well I've got another question and then Jan if you'd come up with that and that'd be cool too. So I guess the other question is you.
We have a lot of things going on right now and.
Yeah, we we hear that with you know we're doing the right things pull them out of the markets that we tried to expand and everything but what.
When I guess the question is yes.
We don't know about hurricanes and all that but when do we are we trying to turn a profit this year or are we trying to just stabilize the breakeven and then you know when when should we start seeing.
Now some improvement in the numbers.
Any color any any more color that you can give around that.
I mean, let me start that off Gabe and Maggie Marilyn chime in a little bit as well I mean, she's you know obviously quite.
Quite familiar with this stuff, but the again the goal was to.
Widen the margins on the business that we want to keep.
It takes time, so what Merrell had said earlier into the business. We don't want to keep yeah. We were we were happy to see 8.5% of those policies leave us during the first quarter, but the actions that mero, and particularly but Maryland negotiated with some of the various states we'll see.
See that accelerate and she did disclose that we're expecting to see have that book gone by the end of the year now it's gone 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, 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.
And the better off it's going to be for everybody. We've got a great opportunity Merrill disclose 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 the marketplace right now are the competitive landscape is 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 wanted to frankly stop losing money as fast as we can in turn and make as much money as we.
Absolutely can and I think you're seeing it look at you know 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 it.
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 profit.
When this is going to make or what it's going to make it by the end of the year.
You know, we're not in a place to give guidance to you well I can assure you is.
We're doing everything we tend to move as fast as weekend, Maryland is there anything you'd want to add I, probably said everything you would've, 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 actually is the big action was the addressing inflation.
And it takes it takes a year to go through the books. 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 vast majority of the benefit from that is going to be seen in 24 not twenty-three.
Written premiums up in twenty-three earned premiums up much more dramatically in 'twenty four.
I hope that gets you where you wanted to go okay.
Great.
Yes. Your previous question I found the information that was looking for and the average yield on cash invested assets was 335 is that our increase was higher than that due to you know the interest rates on our earned on interest rates earned on cash balances that we have as well.
Oh, it's 3.4, okay.
Feeling good about myself, saying well I stand.
Correct. Thank you.
With all the interest.
Okay.
Thanks, Jeff.
You're good Gabe yeah.
Yes. Thank you. Thank you alright, great thanks for calling in.
Thank you operator, we got one more with you. Our next question is coming from Scott Preston from Evil funds. Your line is now live.
Hi, guys. Thanks for taking the question.
First one.
Can you characterize maybe the loss ratio in the business Youre rolling off and kind of how that compares to New York.
Then what would be the statute on on those policies and how long once you roll those off could those potentially pose a problem.
At Cerro you wanted to try to address the yes parity in the loss ratio between the non New York and New York Book.
Sure for last year, Scott the loss ratio in the non New York book was over 100. It was more it was like really unprofitable for Kingstone.
And then in terms of the statute is if that's what your question is I'm I I don't actually know the statute of limitations for all the different states that we operate in but you know.
In General I think it's three years.
I believe it is Maryland and really Scott.
Fortunately when Theres, a property damage, regardless of whether it's a co op or a house or whatnot, we hear about it very quickly liability claims as the ones that take time to present themselves and that's really more of where the statute comes into play.
Got it got it okay, alright, thanks for that and then if.
If you can kind of maybe provide a.
Walk maybe from kind of this quarter to maybe what we look like in a year. If you are rolling off.
My math is correct here kind of 50% of the non New York in the next year.
I think that'd be about 10% that'd be kind of your total premium at that if that's right and then how much would you say that that would be offset by just your rate increases and replacement cost increases in New York not assuming we bring in new policies, but how much would that offset that that kind of roll off in business.
But let me start this I mean, we we havent given any specifics on this frankly, there's many many moving parts, but I think what we can tell you is that well and marrow correct me and and and embellish. Upon this we're expecting our overall premium in 'twenty.
<unk> 23 to two 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 Asti non New York book is what constitutes that and you know if we grow in New York a couple of points it'll be a lot.
So that's where the margin comes from Merrill you want to give a little more color on that.
Yeah. 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 were taking for both you know our annual rate change cadence as well as the increase in inflation, where we.
We're adjusting.
Adjusting our cafe to make sure our policyholders are insured values. So we do expect an increase in premium in both years.
Okay.
And then on the other 50% of non New York policies should we expect those roll off and start rolling off in 24 are those profitable policies that you guys expect youll retain.
We are doing everything we can to reduce that business as quickly as we can so like I you know we have.
<unk> gotten approvals from regulators for a block non renewal, we pruned our agents we've.
We're re underwriting the book, we have greatly reduced commission.
So I do anticipate that are more of the book will fall off in 'twenty, four and we are doing everything possible to make it all off in 23.
Okay excellent and then.
Last question.
Okay.
Maybe.
More and more in general sense, but if you took in 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 the to where premiums will be on rate and replacement costs and once that rolls through the book.
How how close would it in New York and the profitability once those things once they're in place in the world through versus the losses you had.
Is that because it makes sense 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.
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 bet, Barry Chad I don't yeah.
Yeah, it's yeah I'm not sure that the question itself as a wall I think what's more important Scott is to recognize that New York has been profitable new Yorks 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. 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 Marilyn said earlier is at least to the extent that we planned for.
The rate increase and the and the increase in covered Jay that translates into additional premium as well.
We.
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 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. It's just the fact of the matter I mean, yeah, you P C failed.
Another Florida based company that tried to expand to New York, where at least bought a company that worked in New York hasn't written a policy in Downstate New York This year or probably the last six months of last year. So.
Travelers is almost writing nothing it's a it's a very difficult market place now so were able to keep these policies that are now properly priced and we're able to add as you know 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 you know for what 2023 years.
Okay.
I appreciate you guys answering my questions and look forward to seeing the progress.
Great. Thanks, Thank you for that.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.