Kingstone Companies, Inc. (NASDAQ:KINS) Q2 2023 Earnings Conference Call August 11, 2023 8:30 AM ET

Company Participants

Jennifer Gravelle - CFO
Barry Goldstein - Chairman and CEO
Meryl Golden - COO

Conference Call Participants

Paul Newsome - Piper Sandler

Operator

Greetings. Welcome to Kingstone Companies Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Jen Gravelle, CFO and Head of Investor Relations. Thank you. You may begin.

Jennifer Gravelle

Thank you, and good morning, everyone. Yesterday afternoon, the company issued a press release detailing Kingstone's second quarter results. On this call today, 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 titled factors that may affect future results and financial conditions in Part 1 Item 1A of the company's Form 10-K for the year ended December 31, 2022, along with the 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's Chairman and CEO, Mr. Barry Goldstein. Go ahead, Barry.

Barry Goldstein

Thank you, and good morning, everyone. Thanks for joining Kingstone's second quarter earnings call. On Wednesday, the company announced that I would be stepping back and Meryl will become the company's next CEO effective October 1. I will continue to serve as Chairman of the company through the next Annual Shareholders Meeting, which will be in August of 2024.

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 Meryl laid out her plans to the Kingstone Board about modernizing the company. She told them 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, what we needed to do was build a more diverse, better skilled and experienced leadership team. She 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 have 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 almost 65% that together with spiking inflation rendered our rates 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 2017 were resulting in big underwriting losses for the company that could not be fixed by taking rate or taking underwriting actions as we had attempted to do. Meryl's 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 1.6% market share as of the end of last year. As a key part of Meryl's team, Jen 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, we're on the right path. And this is the perfect time for me to step back to leave it to Meryl and Jen and their capable teams and allow them to move the company forward.

Let me now turn the call over to Meryl. Meryl, go ahead.

Meryl Golden

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 2020. We still had a small loss overall, but our results improved materially from the prior year quarter. Jen 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 in Downstate, New York and we have been working hard to reduce our footprint outside of New York. As Barry mentioned, Kingstone's market share in New York homeowners is less than 2%. We have a tremendous opportunity to capitalize on market conditions and to write profitable business in the state that we know best.

Results for the states outside New York have had a huge drain on the company. For the first time, I will share policies in force and 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 these states. We have also included these metrics in our press release this quarter.

Sometimes it's not possible to rate and underwrite a 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 '22, we made the decision to aggressively reduce our book of business there. As mentioned before, these states have had a disproportionate negative impact on our underwriting results. Relative to reducing policies in force, we've made great progress. Through the second quarter, we reduced the policies in force outside New York by 27% and anticipate close to a 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, 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 the full year '22, the net loss ratio outside New York was 126%, reducing our underwriting profit by over $12 million. I hope it's clear now why getting off this book as quickly as possible will greatly improve Kingstone's 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 and profitable segments in 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 cost.

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 perils, 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 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 Jen to review our second quarter results. Jen?

Jennifer Gravelle

Thank you, Meryl. For the second quarter of '23, Kingstone reported a net loss of just $0.5 million, which is $0.05 per diluted share compared to a net loss of $5.4 million or $0.51 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 from the $49.8 million in the prior year period. And our policies in force declined by 7.6% from the previous quarter.

For all lines combined, premiums in New York were up 6.2%, while policies in force declined 1.6%. 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 5 points from the prior year. Second quarter catastrophe losses added $1.4 million or 4.7 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%, 3.8 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 of better risk selection -- in the Select products as well as the company's active efforts to manage less profitable segments offset by an elevated large number of losses that Meryl just discussed.

For the second quarter, the net underwriting expense ratio decreased 3.9 points to 32.5%. We've done a fantastic job in our expense reduction efforts. This quarter's 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 headcount. We're now at our lowest staffing level since 2017. We're continuing to review all expenditures in an effort to reduce expenses even further, but feel great about our efforts to date. Our investment income was much higher through the second quarter this year. In the second quarter of '22, 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 $200,000 in 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, where the 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.

We're going 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 new material included that shows the trend of operating EBITDA for the last five quarters. It provides you with a picture of the earnings part of the underlying business. For the current quarter, our operating EBITDA was $1.02 million or $0.10 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 as expiring. Second, while our costs increased, the amount of the increase was materially lower than we had expected. Fortunately, rates online were lower than the market conjecture. Due to how we proactively managed our exposures, we were able to buy 6% lower limit. And it is likely we'll see an additional return premium adjustment when our treaty is trued up later this year.

On a risk-adjusted basis, the total cost accounted for 19% of the March 31, '23 premiums in force, just 1 point higher than the prior year costs. 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?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Paul Newsome with Piper Sandler. Please proceed.

Paul Newsome

Good morning. Thanks for the call. Congratulations to Meryl and Barry.

Meryl Golden

Thank you.

Paul Newsome

I 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 in that continuously or can you give us any sense like how much margin expansion we might be looking at if we're just looking at that core book of business prospectively?

Meryl Golden

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 rate.

It's -- on the other hand, we have seen a decline in our frequency for both water and fire. So that is our largest peril. So that's a really great sign. Like the rest of the industry, we are seeing an increase in severity, a 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.

Paul Newsome

Great. Could you maybe give us a sense of the competitive environment in New York? And then separately and then just my last question, any thoughts on regulatory pushback on the rates? And they're growing slower or faster than normal. Understanding there was a big backlog in New York and companies like Allstate and Progressive cite, New York is one of the three states that are pushing back on rate. So I don't know if that's been your experience or not.

Meryl Golden

Yeah. Let me start there. In New York, it's -- I would say, in general, it's going a bit slower than it normally has gone. But we are filing earlier and then we follow up repeatedly. And so we get our rate approved. So working hard with New York, but I think it is true, they're a bit slower. I would say that outside of New York, we've been working very closely with the regulators trying to get agreement to additional block non-renewals and rate 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 a 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 continue to be open for business, but like very different companies than those we competed with a year ago or 1.5 years 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 products 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.

Paul Newsome

Okay. Thank you. Appreciate the answers.

Meryl Golden

My pleasure.

Operator

Our next question is from Gabriel McClure with McClure Management. Please proceed.

Unidentified Participant

Yeah. Congrats, Meryl and Barry.

Meryl Golden

Thank you.

Unidentified Participant

Yeah. Had a few questions. So we did get a good combined ratio or profitable combined ratio. But my question is, do you guys know what kind of combined ratio we're going to need to break even in the future?

Meryl Golden

Well, when you say breakeven, I mean, are you saying relative -- isn't that a function of where our investment returns are as well? So I'm kind of confused by your question.

Unidentified Participant

Yeah. Well, I guess, I'm a little confused, too, because every other investment I've had with a property and casualty company if they've had a positive combined -- if they had a combined ratio of below 100%, I can always count on them make it money so is there any kind of rough number that you guys model -- could you model that says, yes, if we hit this number, we're going to be breaking even or better because the fact that we didn't make money we had at 99% was -- kind of through me for a loop.

Jennifer Gravelle

It's the difference, Gabe, 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 0.5 point to cover that other $0.5 million.

Unidentified Participant

Okay. Thank you. Thanks, Jennier. And then Jennifer, do you know what the book yield of the investment portfolio is right now? And then also, what do you think the market yield is?

Jennifer Gravelle

I don't have the market yield handy, but the book yield is sitting at 3.63%.

Unidentified Participant

Okay. And then, I guess, the last question that I had and first of all, I want to thank you all, Meryl and Jennifer and Barry, for disclosing the non-New York business. And that brings down a lot of angst and frustration once we get that clarity. So thank you for disclosing that. But at what point do you think that because you guys are going 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 going to be -- this non-New York business is not going to be an issue impacting us.

Meryl Golden

So we are reducing this focus as fast as we can, Gabe. Like we, as I mentioned, we have already gotten approval in both New Jersey and Rhode Island for block non-renewals, and now we're back talking to them about further block non-renewals. And just yesterday, we had a conversation with Connecticut hoping to do the same. So -- but we have pruned the agent base, we cut commission a lot to encourage the producers to move the business. We've been nonrenewing as much of the business as we can. So it's falling off quickly. By the end of this year, as I said, 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.

Unidentified Participant

Okay.

Jennifer Gravelle

Add to that a little bit. The analysis was done to determine, which of those policies were the greatest drag on the company's financials and those were the policies that were listed first for non-renewals. So it should be more beneficial.

Unidentified Participant

Okay. All right. Thank you.

Meryl Golden

Thank you.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to Meryl for closing comments.

Meryl Golden

Excellent. Well, I would just like to thank you for calling in today. And thank you, as always, for your support. Much appreciated. Have a great day.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.