Q2 2023 Kingstone Companies Inc Earnings Call
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Greetings welcome to Kingstone companies second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
<unk> 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. Please note. This conference is being recorded.
Now I'll turn the conference over to Tim Griffith, our CFO and head of Investor Relations. Thank you you may begin.
Thank you and good morning, everyone yesterday afternoon. The company issued a press release detailing Kingstone second quarter results on this call today Kingstone may make forward looking statements regarding itself and its business. The forward looking at that 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 titled factors that may affect future results and financial conditions in part one item one a of the Companys Form 10-K for the year ended December 31, 2022, along with a 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 GAAP figures. Please see the tables in our earnings release with that I'd like to turn the call over to Kingstone as chairman and CEO .
Mr. Barry Goldstein go ahead Barry.
Thank you and good morning, everyone. Thanks for joining Kingstone second quarter earnings call.
On Wednesday, the company announced that I would be stepping back and Merrell will become the company's next CEO effective October 1st.
I will continue to serve as chairman of the company through the next annual shareholders meeting, which will be in August of 'twenty 'twenty four.
I've been thinking about stepping back for some time and I believe now is the right time to do it and let me tell you why.
It's been almost four years since Merrill laid out her plans to the Kingstone board the modernizing the company.
She told him how we needed to build new products increase rates and cut costs. She told them, how we needed to gain efficiencies by retiring multiple old systems and most importantly, how what we needed to do was build a more diverse better skilled and experienced <unk>.
Leadership team.
You also saw the need to contain our exposure to spiking reinsurance rates.
She has accomplished each of these items.
We've been plagued with severe headwinds since forces that absent her planning and execution would've overwhelmed us.
It's my feeling that the worst is now behind us inflation has receded moving back towards the fed's, 2% target.
The economy is likely heading for a soft landing, allowing for interest rates to decline.
We saw increases in reinsurance rates for the sixth consecutive year with the two most recent years being double digit increases amounting to a cumulative total increase of over 65%.
That together with spiking inflation rendered our rate inadequate to address our heightened loss costs.
While the impact on US is also being felt industry wide. We started early and adjusted by taking rate and cutting costs. We made the difficult decision to stop writing new business outside of New York to recognize that the geographic expansion efforts that began in 'twenty.
17, where resulting in big underwriting losses for the company that could not be fixed by taking rate, we're taking underwriting actions as we had attempted to do.
Merrell has led the company's efforts to quickly reduce our book outside New York and she will discuss this in a few minutes.
But we are now turning the corner knowing there is a great opportunity for Kingstone to again grow and expand by further writing more business in New York, where we are already the number 15 writer of homeowners insurance, but only enjoy a one 6%.
Market share as of the end of last year.
As a key part of Merrill's team John joined US in January of this year and has had an immediate impact as her experience gained in dealing with catastrophe exposed property underwriting in Florida is being put to work at Kingstone together they are a great team.
So again I believe the worst is behind us and while there is much left to be done well on the right path and this is the perfect time for me to step back to leave it to Merrell and Jen and they're capable teams and allows them to move the company forward. Let me now turn the call over to Mel.
So Merrell go ahead.
Thanks Barry.
It's an honor and privilege to have been selected to lead Kingstone and our talented team in the next chapter and I'm thankful for Barry's leadership and everything he's done to build this great company and for his support.
I am delighted to report that Kingstone made an underwriting profit this quarter for the first time since 'twenty 'twenty, we still had a small loss overall, but our results improved materially from the prior year quarter.
Jan will cover our financial results and it's exciting to see the impact of the numerous actions we have taken to improve profitability more clearly take hold we are turning the corner.
Kingstone is in the midst of a transformation our strategy for the near term is to return to our roots as the premier writer of coastal property insurance and Downstate, New York and we have been working hard to reduce our footprint outside of New York.
As Barry mentioned King sounds market share in New York homeowners is less than 2%, we have a tremendous opportunity to capitalize on market condition and to write profitable business in the state that we know best.
Results for the state out states outside of New York has had a huge drain on the company for the first time I was sure policies enforce our net loss ratio for our personal lines business separated by New York versus the other states. So you can understand the progress we are making on this transformation.
And frankly, why we needed to reduce our book in each state. We have also included these metrics in our press release this quarter.
Sometimes it's not possible to rate and underwrite our book back to profitability and that's the situation. We were in after much effort to return the states outside New York to profitability in late 'twenty. Two we made the decision to aggressively reduce our book of business. There as mentioned before these states have had.
Proportionate negative impact on our underwriting results.
Relative to reducing policies enforced we've made great progress through the second quarter, we reduced the policies enforced outside New York by 27% and anticipate close to 50% reduction in those policies by year end and another 50% decline next year.
That said, we're working with regulators on additional actions, we can take to reduce the book even faster.
Relative to profitability I reduced our results outside New York have been abysmal to say the least for personal lines in the second quarter. The net loss ratio outside New York was 108.9, while New York was 64.7 for.
For the full year 'twenty to the net loss ratio outside New York was 126, reducing our underwriting profit by over 12 million.
I hope, it's clear now like getting off this book as quickly as possible will greatly improve kingstone its financial results.
Our intention is to replace the unprofitable policies outside New York with profitable New York policies.
For the quarter, we had a decline in New York policies in force as we intentionally slowed down the pace of new business writings to manage our reinsurance costs. We have just started to loosen up our underwriting in profitable segments and New York. So we will start to grow faster for the rest of the year.
For personal lines in New York, our direct written premiums increased this quarter by 5%, while our premiums outside New York declined by 46%.
Our average renewal premium in New York was up 21% in the quarter due to a combination of rate change and an update to replacement costs during.
During the quarter, we received approval on a 6.3% increase for New York homeowners and have much larger increases still pending in New York and in New Jersey that will be effective in the fourth quarter. We also got approval on an 18.2% increase in Massachusetts.
For the quarter and year to date, we're seeing a decline in claims frequency in homeowners for both water and fire severity on the other hand is up markedly for both apparel, primarily driven by inflation.
However, similar to last quarter, we are seeing an elevated number of large losses across all states, which we are trying to understand we had a third party consultant look at many of our large losses. This year to see if any pattern could be detected one thing we knew and they confirmed is that many of the law.
Large water claims were for seasonal properties.
Otherwise nothing unusual was identified.
I want to end by how by reiterating how delighted I am that Kingstone has turned the corner, there's still a lot of work to do but I'm confident that continued execution of our strategic plan.
Especially reducing the business outside New York will lead us back to consistent profitability. We are optimistic for the future and confident that our plan will deliver long term value to our shareholders with that I'll now pass the call over to Jan to review, our second quarter results Jen.
Thank you Merrill.
The second quarter of 'twenty three at Kingstone recorded a net loss of just a half million dollars, which is five cents per diluted share compared to a net loss of $5 4 million or 51 cents per diluted share for the same period last year.
Direct written premiums were down 4.3% to $47 6 million, a decrease of $2 1 million and a $49 8 million in the prior year period, and our policies in force declined by seven 6% from the previous quarter.
All lines combined premiums in New York at six 2% while policies in force declined one 6% and premiums outside of New York declined by 45, 9% and policies in force declined by 27%.
The loss in LAE ratio was 66, 4% down five points from the prior period prior year.
Second quarter catastrophe losses added $1 4 million or four seven points to the net loss ratio for the quarter, an increase of 4.3 points on the catastrophe losses over the prior year period.
The attritional or non cat loss ratio was 61, 7% three eight points lower than the loss ratio in the second quarter last year. The improvement was driven by lower frequency, which was believed to be a result in better risk selection in the select products as well as the company's active efforts to manage less profitable segment.
Offset by an elevated large number of losses, the Merrell just discussed.
For the second quarter, the net underwriting expense ratio decreased three nine points to 32, 5%.
They've done a fantastic job and our expense reduction efforts.
This quarters expense ratio reduction is primarily due to changes to producer compensation. We will continue to see improvement in the agent Commission expense as higher commission policies expire throughout the remainder of 2023 and are replaced by policies with the lower agent Commission percentage, we have tightened expenses in all areas, which unfortunately.
Led to a reduction in head count.
We're now at their lowest staffing levels since 2017.
We're continuing to review all expenditures in an effort to reduce expenses, even further I feel great about our efforts to date.
Our investment income was much higher through the second quarter of this year in the second quarter of 'twenty to a correction of an accounting error was made to accrued investment income.
We also benefited from higher interest rates on cash balances. This quarter, we had a $200000 and gains from our investment portfolio versus a loss of $4 5 million in the prior year due to the stabilization of the capital markets.
In an effort to help compare prior with current periods with a change in our debt service is so vastly different we decided to share a new metric operating EBITDA, which removes the impact from our indebtedness coming from the notes payable and sale leaseback transaction.
Wanted to do this operating on an operating basis to remove the impact of realized and unrealized gains on investments as well.
Our press release had an immaterial included that shows the trend of operating EBITDA for the last five quarters. It provides you with a picture of the earnings power of the underlying business.
Current quarter operating EBITDA was one point out $2 million or 10 cents per share.
I want to wrap up my comments today with some highlights of this year's catastrophe excess of loss reinsurance renewal.
First we were able to maintain our retention is expiring.
Second while our cost increase the amount of the increase was materially lower than we had expected Fortunately rates online were lower than the market conjecture.
So how we proactively manage our exposures, we were able to by 6% lower limit and it is likely we will see an additional return premium adjustment when our treaty is treat up later this year.
On a risk adjusted basis, the total cost accounted for 19% of the March 31, 23 premiums in force.
One one point higher than the prior year cost so given the environment, we feel it's a really good result.
I want to reiterate my confidence that Kingstone is turning the corner.
Thank you as always for your support and with that we'll open it up to questions operator. Thank.
Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and.
And for participants using speaker equipment, it may be necessary for you to pick up the handset before pressing the star if he's one moment, while we poll for questions.
Yeah.
Our first question is from Paul Newsome with Piper Sandler. Please proceed.
Hi, good morning, Thanks for the call.
I apologize <unk>, two well two to Maryland Barry.
Thank you.
Wanted to ask about how you view sort of rate versus.
The underlying claims inflation on the core New York book isolated from the rest of the business do you think we're moving up continuously.
Can you give us any sense of like how much.
Yeah.
Margin expansion, we might be looking at if we're just looking at that club book of business perspective.
Sure. So we are taking the maximum rate that we can support in all states, including New York I mentioned, we had a 6.2% increase approved which really was just to cover an increase in our reinsurance costs, but we.
Have another a very significant rate increase filed in New York that will be effective in the fourth quarter and we also don't forget our increasing policies to reflect the increase in replacement costs, which in New York is roughly about 8% annually. So we've been taking a lot of room.
It's on the other hand, we have seen a decline in our frequency for both water and fire. So that is you know our largest apparel. So that's a really great sign like the rest of the industry we are seeing.
An increase in severity of double digit increase in severity and we have had some elevated large losses as I mentioned, so we are doing everything we can to keep the rates ahead of claims inflation.
Great could you maybe give us a sense of the competitive environment and the New York and and then separately and then my last question.
Any thoughts on your regulatory pushback on the rates and you know they are going slower or faster than the normal I understand there's a big backlog in New York and companies like Allstate.
Progressive site in New York is one of the three states that are.
Hum pushing back on rates. So I don't know if that's been your experience or not.
Yeah, Let me start there you know New York, It's I would say in general it's going a bit slower than it normally has gone, but we our filings earlier and then we follow up repeatedly.
And so we get a rate approved so working hard with New York, but I think it is true there are bits slower I would say that outside of New York, We have been working very closely with the regulators I'm trying to get agreement two additional block Nonrenewals and raid and other things we can do to reduce.
Our book outside New York faster because as I'm sure you can see doing that is really key to our turnaround because the business has been so unprofitable.
Relative to competitors. This is I think the hardest market than anyone has seen I feel for our producers who every day are learning about different company tightening guidelines stop writing business, reducing compensation, it's been really difficult I would say in general.
We have a couple of our competitors that are continue to be open for business.
But like route very different company than those we competed with a year ago or a year and a half ago. So again really really tight market and I think a great opportunity for us we feel very comfortable with our pricing and our new select product that we introduced last year.
We're comfortable with the segmentation and so we are opening up now that we have certainty on our reinsurance renewal and we're hoping to take advantage of these market conditions.
Great. Thank you I appreciate the answers mobile help.
My pleasure.
Our next question is from J P. L me clearer with Mclaren management. Please proceed.
Oh, Yeah, Congrats Maryland Baird. Thank.
Thank you yeah.
I have a few questions.
So we did get a good combined ratio a profitable combined ratio, but my question is as you guys know.
What kind of combined ratio, we're going to need to break even in the future.
Yeah.
Yeah.
Well when you say breakeven I mean are you, saying relative it isn't that a function of what our investment returns are as well so I'm kind of confused by your question.
Yeah, well I guess I'm, a little confused too because every every other investment.
And that's why I've had with the property and casualty companies because they've had a positive come back they've had a combined ratio below 100, I can always count on what makes it so.
Is there any kind of rough number that you guys model or could you model because yes. We hit this number we're gonna be breaking even or better because of the fact that we didn't make money and we had at 99.
Kind of threw me for a loop.
It's a different Gabe it is what we're looking at here is the difference between the underwriting book and the entire operation. So we would need to make probably another tab.
Half a point to cover that other half million dollars.
Okay. Thank you.
And then do you.
Thanks, Jennifer and then Jennifer do you know with a book yield of the investment portfolio is right now and then and then also what do you think the market yield is.
I don't have the market yield handy, but the book yield is sitting at 363%.
Okay.
And then.
I guess the last question that I had and first of all I want to I want to thank you.
Thank you, all Maryland, and Jennifer and Barry for disclosing.
The non New York business and that that brings down a lot of angst and frustration when once we get that clarity. So thank you for disclosing that but.
At what point do you think that because you guys are growing rapidly and I know you're doing everything you can to get out of there.
But just your best guess on when this is not gonna be non New York business is not going to be an issue impacting us.
Yeah.
So.
We are reducing this book as fast as we can gave like we as I mentioned, we have already gotten approval in both New Jersey, and Rhode Island for block Nonrenewals and now we're back talking to them about further block Nonrenewals and just yesterday, we had a conversation with kinetic.
Yet I'm, hoping to do the same so but we have pruned the agent days, we'd cut commission a lot to encourage the producers to move the business we've been non renewing as much of the business as we can so it's falling off quickly by the end of this year as I said.
Ed I think it will be cut in half.
And I'm, hoping to go even faster than that so and then by the end of next year. Another half. So I think it's going to be with us through the end of next year, but it will continue to be a smaller and smaller drag on our operating results.
Okay.
Add to that a little bit the analysis was done to determine which of those policies, where the greatest drag on the companys financials and that was where the policies that were.
At first for non renewals.
So it should it should be.
More beneficial.
Okay alright, thank you.
Thank you.
We have reached the end of our question answer session I would like to turn the conference back over to Merrell for closing comments.
Excellent well I would just like to thank you for calling in today and thank you as always for your support much appreciate it have a great day.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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