Kingstone Companies, Inc

Greetings and welcome to the Kingstone Company's second quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the phone presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Karen Daly, Vice President of the Equity Group, and Kingstone's Investor Relations Representative. Karen, you may begin.

Thank you, Chamali. Good morning, everyone. Joining us on the call today will be Chief Executive Officer Merrill Golden and Chief Financial Officer Jennifer Gravel. On behalf of the company, I would like to note that this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. Forward-looking statements speak only as of the date on which they are made, and Kingston undertakes no obligation to update the information discussed. For more information, please refer to the section entitled Factors that May Affect Future Results and Financial Condition in Part 1, Item 1A of the company's latest Form 10-K. Additionally, today's remarks may include references to non-GAAP measures. For reconciliation of these non-GAAP measures to GAAP figures, please see the tables in the latest earnings release. With that, it's my pleasure to turn the call over to Meryl Golden. Meryl, you may begin.

Thanks, Karen. And good morning, everyone. We are so proud of our second quarter results. This is our third consecutive quarter of profitability and the most profitable quarter for Kingstone in the last seven years. I had said repeatedly that we were doing all of the right things to return the company to profitability over the years. And we are finally seeing the benefits of all of those actions consistently in our financial results. There could not be a better time for Kingston to grow faster than now, as we are priced right, insured to value, have a product that properly matches rate to risk, have the right teams in place across the organization, and have reduced our expenses markedly. And now we are faced with an unbelievable market opportunity that I wrote about in my mid-year letter to shareholders and will expand upon today. Let me remind you that more than two years ago and well ahead of many of our competitors, we recognized that loss trends were on the rise and that inflation, a primary factor driving our loss trends, would also result in many of our customers being underinsured. We acted quickly to raise our premiums. and put a plan in place to update replacement costs on every policy renewal. One of the benefits of being an early mover is that we have successfully returned to profitability while some of our competitors are still restricting their business or have shut down completely, which along with an expansion of our underwriting appetite fueled the growth in our core business this quarter. The coastal insurance market has been volatile for some time in our core state of New York, with a large competitor going insolvent and others shutting down or restricting their business over the last two years. However, market dynamics have changed profoundly in the last few weeks. Competing carriers representing more than $200 million in annual premium made the decision to exit New York State or to exit the personal property market countrywide. We knew that the policies issued by these carriers needed to be moved to alternative carriers and assumed that that would happen over the next year. However, about 10 days ago, we learned that the policies of two of those carriers, over 60,000 policies in our downstate New York footprint, will need to be moved to alternative carriers by the end of this year. For perspective, that number of policies is roughly the size that Kingstone is today. While the growth potential is seemingly limitless, we cannot write it all. Our intent is to maximize our growth only in those segments that meet or exceed our profitability targets. We are in the fortunate position to pick which segments we want to write. because marked capacity is severely constrained. Our objective is profitable growth, not growth for growth's sake. Kingston has learned this lesson before, particularly when we expanded into the non-core states, and we will not make the same mistakes again. As I stated last quarter, it's very easy to grow in the insurance business, but it's much harder to grow profitably. We plan to capitalize on this amazing opportunity by being very intentional and selective on which properties we write and very nimble to change our approach as we learn more and as market conditions evolve. It is such a difficult time for our select producers and we will do everything we can to help them through this unprecedented situation. While the specifics of these market dynamics are new and evolving, Kingstone's entire leadership team is focused on the changes we need to make to successfully seize this incredible opportunity with as minimal disruption as possible to our underwriting and service standards. We are carefully monitoring our capital position and will utilize quota share, if needed, to ensure we have the capital needed to support our growth. Year to date, most of our growth has been from increases in our average premium rather than growth in policy count. Going forward, while we'll still benefit from increases in average premium, most of our growth will come from increasing our policies in force. For visibility, I want to give you an update on some of the metrics that I shared in my mid-year shareholder letter when we had just learned about this market dynamic. At that time, I shared that our new business policy count was up three times the prior year month. Well, we ended the month of July with an overall five times increase rather than the three times that we had shared. And this has increased materially so far in August. I also shared that we were at nine times the prior year month's new business premium levels. We completed the month of July at 13 times higher new business premium, well ahead of the nine times that I had shared and are seeing the same trend so far in August. While it's hard to see beyond the current opportunity that is directly in front of us, we have been thinking a lot about the longer term and how to continue our profitable growth trajectory beyond 2025. We have what we now call our platform, our proven select product, a competitive expense structure, and expert staff in all areas of the company. We have opportunities for enhanced segmentation in our select product to better match rates of risk and will make us more competitive in our core business. We also want to grow the company in other ways. We have been discussing expansion of our platform to other geographies to increase our footprint, additional product offerings, alternative distribution channels, and potential acquisitions, among other strategies. There is a lot more work to do before we finalize our longer-term plans, but I feel confident that we now have a scalable platform to continue to drive profitable growth for many years to come. Before I touch on full year guidance, I wanted to share an update on our debt that will be maturing at year end. I am delighted to share that we have a solution and we are currently in the final stages of execution. Since this is in process, we cannot share any information or answer any questions regarding the debt at this time. However, I can share that this solution will be announced within the next month, and I have confidence that you will be happy with the outcome. Stay tuned. And finally, turning to guidance, I will first cover our updated 24 guidance that we unveiled in yesterday's earnings release, and then share our initial expectations for 2025. With half of the year under our belt, full year 2024 guidance is as follows. direct premium written growth in our core business in the range of 25 to 35%. This increased from just two weeks ago. And based on approximately 125 million of net premiums earned, we expect to achieve a gap combined ratio between 84 and 88, earnings per share between $1 and $1.30, and return on equity between 26 and 34%. We're also happy to share our initial expectations for full year 2025 as follows. Direct premium written growth in our core business in the range of 15 to 25%. And based on approximately 150 million of net premiums earned, we expect to achieve a gap combined ratio between 85 and 89, earnings per share between $1.20 and $1.60, and return on equity between 22% and 30%. The recent change in our market opportunity that I have been discussing has not been factored in our earned premium, combined ratio, earnings per share, or return on equity in the guidance provided for 24 or 25. It's just too early to be able to do that. As soon as we can forecast the impact, I will update the guidance. Otherwise, our guidance assumes no material changes in our business, and as a reminder, our results are very weather dependent, and we have assumed no major catastrophe events in this guidance. We have also assumed that the cost for catastrophe reinsurance for the 25-26 treaty year will increase modestly relative to this year's treaties. Last, note that the second half of 24 and full year 25 does not assume any gains or losses from our investment portfolio. With that, I'll turn the call over to Jen for a more detailed review of our quarterly financial results. Take it away, Jen.

Thanks, Merrill, and good morning, everyone. As Merrill mentioned, we could not be more pleased with our second quarter and first half year results. This now marks our third consecutive quarter of profitability with net income of $4.5 million, or $0.41 per basic share. For the year to date, our net income is up $11.5 million over this period last year. On a consolidated basis, direct premiums increased 12%, inclusive of a 21% increase in core direct written premiums, partially offset by the continued reduction of our non-core business. which decreased by nearly 60% compared to the same period last year. The increase in our core business reflects strong pricing action with average premium up more than 18% in the quarter. Our combined ratio improved by 21 points to a 78.2% for the quarter. Our current accident year loss ratio improved by 18 points with a 15 point improvement in non-CAT losses and a three point reduction in catastrophe losses. We also had $430,000 of favorable prior year development, reducing the loss ratio by 1.4 points. Our expense ratio was 31.2%, a 1.2-point improvement from the second quarter of 2023. While our expense ratio is higher than the target shared in Merrill's year-end letter to shareholders, the difference is almost entirely due to increased employee bonus and contingent commission to our producers, which are triggered off of our better than expected underwriting results. This is a good problem to have. Our non-CAT loss ratio improvement was driven by homeowners, our main line of business, with decreases in both frequency and severity for our largest perils of water and fire as compared to the prior year. We attribute this improvement to better risk selection in our select product and the reduction in our non-core business. We also experienced fewer large losses this quarter compared to the prior year, in the three-year average for the second quarter. We are now confident that the spike in large losses we experienced in 2023 was random. For the quarter, net investment income increased 22% to $1.8 million compared to $1.5 million in the prior year quarter. Excess cash generated from operations along with maturities from our bond portfolio and proceeds from the sale of preferred stock have been invested in treasuries to take advantage of their high risk-free rate. We continue to reduce our preferred stock holdings to lessen the volatility in our portfolio, resulting in a $200,000 loss for the quarter. The average yield on non-cash invested assets was 3.81% as of June 30th compared to 3.63% as of June 30th, 2023. With the effective duration of 3.5 years and the weighted average effective maturity down to 6.8 years, With the changing of the macroeconomic factors and the anticipated decline in interest rates, we do expect to see a material improvement in the value of our bond portfolio going forward, which will be reflected in our balance sheet as an increase to other comprehensive income. For perspective, every half percent reduction in interest rates will increase our portfolio by about $2.7 million. Before I turn it back to the operator for questions, I would like to add that we benefited from a one-time $300,000 gain from a commutation of prior year reinsurance treaties during the quarter. Additionally, we had a $500,000 reduction in reinsurance costs from recognizing a no claims bonus on one of our catastrophe treaties. Overall, we had a great quarter with earnings of 41 cents per share and an annualized return on equity of 47%. As always, we thank you for your support. And with that, we'll open it up for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. And one moment, please, while we poll for questions. Thank you. Our first question comes from the line of Bob Farnham with Janie Montgomery Scott. Please proceed with your question.

Yeah, hi there. Good morning, everyone. Good morning, Bob. Hi. I have multiple questions about the market opportunity in front of you, and I guess I wanted to start with You mentioned kind of the expansion of your underwriting appetite into new geographies and new products. Can you give us an idea of what you're talking about in that sense? The second part of my question is going to be, you have an immense growth opportunity ahead of you, and I totally understand that the growth and being profitable at the same time is very difficult. So you've had a lot of competitors pull out of this market because they've had issues. So how can you give us confidence that you know, the business that you're going to be writing and taking in is going to be good for you.

Okay. Well, thanks for your questions, Bob. So first of all, in terms of our underwriting appetite, if you recall last year, we severely restricted our writings given a conjecture about the reinsurance market. And so we had made some significant changes to slow our growth to reduce the overall cost of reinsurance. After we finalized our reinsurance purchase for last year, we've been slowly reverting our underwriting appetite back to what it was previously. So, you know, writing more business in Suffolk County as an example. And then this year, given the confidence we have that we are priced right and And listening to producers in the marketplace and what their needs are, we've made some changes. As an example, we now write a higher, up to 2.5 million coverage limit, which was an area where there were few companies willing to write and where we felt very confident in our pricing. So the change in our underwriting appetite is nothing like really new. This is all risk that Kingston has experience with. But we reacted to the opportunity in the market and just opened up segments that the producers needed. Relative to confidence that we're doing the right thing. I mean, Bob, we are just such a different company than we were years ago when we made some mistakes and grew too quickly. And to give you confidence, first, we have our select product. that's been on the street since 2022 and is doing a great job matching rate to risk. And I've mentioned in the past, the frequency we're experiencing in our select product is 10% lower what we are experiencing in our legacy product. And what's profound about that is that select is mostly new business. And legacy is mostly renewal business. So usually you'd see a higher frequency and we're seeing a lower frequency, which gives us a lot of confidence that the product is working in terms of risk selection. We have done a terrific job managing our reinsurance costs. And on every single quote, we measure what the loss cost and reinsurance cost is and make sure that we're adequately priced before binding those risks. We have an A-plus team across all areas of the company, and we're really closely managing and responding to the results of the business. And we're just a very nimble and efficient company now. So I could not be more confident that this is the time for Kingstone to seize this market opportunity and grow faster.

Yeah, right. I figured there'd be people a little nervous with the amount of growth that's potentially coming down. But it sounds like, one, the expansion products are stuff you've already written before, and two, it sounds like the business that you've expanded into thus far has been profitable. So my guess is with the potential book of business ahead of you, you're either going to be taking only a slice of it or you're going to have to be raising – rates or changing terms and conditions on the policies, that seems to be like what's going to have to happen if you're going to be able to absorb all these policies from your competitors.

I'm sure about this. So policies have to come on our rates and our forms, right? So it's not like we're going to be changing our underwriting there.

Okay. So you're right, Bob. We have already made some restrictions. As I said, we're being very selective in terms of which properties we want to write. So we're managing our geographic concentration. We've also stopped accepting risks that have prior losses. We're writing risks that are more financially stable. So we're using the data we have on our book on profitability by segment to make a decision on what business we want to write.

With, you know, I know you had the comment about the capital support for this growth. Do you, just remind me, the ability to change the quota share percentage, is that something you can do kind of midstream or do you have to wait to the renewal of the policy?

So, absolutely, we can do it midstream, but we can also take on additional quota share partners. So we, our broker has already reached out to our reinsurance partners, And they have expressed an interest in continuing to support our growth via quota share if needed. So we're in a good place there.

Great. Okay. And last question for Jen. You have the new CATS reinsurance treaty. And I'm just trying to get a feel for, all right, so given the new treaty, if you had a hypothetical situation where Sandy hit today, what would your net cost to Kingstone be after reinsurance?

Sure. So the company has been really consistent on the attachment and different layering of the reinsurance, actually since Sandy came into New York. So ultimately, Sandy at that point was a loss to our second layer, didn't go all the way through the second layer. It would be the same here. We actually modeled that on a on an annual basis as we are placing our reinsurance, just making sure that we're able to cover those kinds of storm events. And as we continue to put new policies on the books, we're continuously modeling our PML to determine if we're comfortable with the amount of reinsurance that we have. It's entirely possible that we might go back out to market and say, hey, we need to buy a little bit more up top just to make ourselves comfortable with the amount of policies that are coming on the books.

Okay, and with the retention changes and stuff, so if it's gone into the reinsurance layer, if it doesn't flow through the top, can you give us an idea of the range of how much the loss would be on a net basis?

On a net basis for us with Sandy, we actually bought down on our reinsurance tower this year. So instead of attaching it $10 million, our reinsurance will attach it $5 million, and we have some quota share underneath that. A Sandy event for us would be like a $4.75 million event. Great.

All right, guys. Thanks for all the additional color.

Thank you.

Thank you. Our next question comes from the line of John Oldwood, Long Meadow Investors. Please proceed with your question.

Thank you very much. And Marilyn, Jen, just as a long-term shareholder, just Gushing with appreciation. Thanks for all you've done.

Thanks, John.

Yeah, it's been fantastic. Anyway, just a question on the expense ratio. I noted in the presentation materials that you still hope to get to a 29% number for the year, if I've read it correctly. So if I've done the math right, that would imply roughly 27% for the second half. I was curious if that Is that sort of becomes the new expense ratio, or is there a reason that it's seasonally higher in the beginning and maybe lower in the end, or is Plan I still the long-term target? Thank you very much.

So, Jen, let me start, and you could jump in. So, you know, when I laid out the 29% goal, I had a certain profitability target in mind. And what we've been experiencing since our profit is so much greater, we have a higher expense for employee bonuses and for contingent commission for our producers. So that's really what's driving our 31 versus the 29 that I had laid out. That being said, our average premium is continuing to increase, and it is true that some expenses are front-end loaded. So I do think the expense ratio will decline a bit, but I think it's unlikely we'll hit our 29 target for the year. Janet, anything else you want to add?

No, that's perfect, Meryl.

Okay, well, I'll just say that... whatever bonuses you're billing out are well-deserved. Thank you very much.

Thank you. Thank you, John.

Thank you. And our next question comes from the line of Gabriel McClure, which is a private investor. Please proceed with your question.

Good morning, Jen. Good morning, Meryl. Good morning. Yeah, and congratulations on a great quarter again.

Thanks. Thanks.

Yeah. Meryl, you touched on this again, but I wanted to go back to that comment you made in your mid-year letter. I'm not sure I understand it. I've kind of gone over it a few times. But you say that you're quoting two times the new business policies, three times the new business premium, and you're up three times the business policies. grew up nine times on business premium. I don't understand that. I don't know what I'm not getting, but can you kind of help me out with that, Meryl?

Sure. I actually updated those numbers too. So what I'm comparing is in July, once this material change of these competitors exiting the market was announced, what I'm sharing is how much our business was impacted just in the month of July. Now, since then, it's increased. But at the time, when I wrote that mid-year shareholder letter, what we were seeing is our quotes doubled versus July of the previous year. And our new business policies were up three times versus July of the previous year. Now, it ended up being up five times, not three times. And then the premium from those new business policies was up nine times versus the amount of new business premium we wrote in the month of July was higher than July of 2023 by nine times. So that's what I was trying to explain is that this change in the marketplace was monumental in terms of what it meant for Kingstone's growth trajectory. Does that make sense, Gabe?

Yeah, I think so. So are you telling me that you took in, for business premiums, you took in nine times the amount of cash from the market that you did the prior July?

Well, not cash necessarily because not all policies are paid in full, but in terms of the new business premium that we booked, yes, it was nine times the previous July.

Okay. Okay. I got it. I appreciate that. That's all for me. My pleasure. Okay. Thank you, Gabe. Thank you.

Thank you. And we have reached there are no further questions at this time. I would like to turn the floor back to Marilyn Bolden for closing remarks.

Thank you. It is an incredibly exciting time for Kingstone, and we could not be more optimistic about the trajectory of our business. Before ending the call, I'd like to share that we'll be presenting and hosting meetings at the Sidoti Conference on August 15th and 16th. And in September, we'll be participating in the JANI Financial Services Conference in Washington, D.C. If you'd like to join either of those events, please reach out to their respective sales team. And thank you for joining our call today.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your line at this time.