Kingstone Companies, Inc

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

Thank you, Sherry. 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?

Thanks, Karen. Good morning, everyone, and thanks for joining our call. This quarter, we had the highest income we have ever had in any quarter since Kingstone Insurance Company was acquired by Kingstone Companies in 2009. We also achieved record-setting premiums written. It's a huge feat to achieve the operating margins we realized this quarter, and it's another significant accomplishment to attain a 40% growth rate as we're experiencing in our core personal lines business. But to do them simultaneously is nothing short of remarkable. This is undisputably the best quarter that Kingston has ever had. I want to thank my great team and all of our employees who work so hard to make these results possible. I could not be prouder of what we've been able to accomplish. Let me start by talking about our growth. As discussed last quarter, our current growth is being driven by the exit of two competitors who reached an agreement with the New York Department of Financial Services to non-renew or cancel their entire books by the end of this year. Their combined policies and force in downstate New York are roughly the size that Kingston is today. There's also a third company that's exiting the homeowner's market nationally and has more than 20,000 policies in our New York footprint, and it's expected to be a growth opportunity in 2025. Our objective is profitable growth, not growth for growth's sake, and we've been thoughtful about how we are taking advantage of this opportunity so as not to compromise our profitability. Let me remind you that carriers typically lose money on new business and only make a profit over the policy's lifetime as margins expand when business renews. However, we feel confident that we're making an underwriting profit on the new business that we're writing from this market dislocation, which bodes extremely well for the future. There are many reasons for this confidence. First, we're priced right. Second, we're only quoting and writing those risks that meet our underwriting standards and profit margin objectives. We've also tightened our hurricane deductible requirements to better manage our catastrophe exposure. Third, we're growing in the segments that have historically been the most profitable for us. We've been monitoring our business mix closely, and the new business we are writing is almost identical to our Enforce book in downstate New York. Finally, and most importantly, the select product continues to outperform our expectations. Our reported frequency in select for the quarter and for each quarter this year has been more than 20% lower than the reported frequency in our legacy product. As the business has grown, the frequency difference with legacy has increased. This gives us great confidence in our risk selection. as the legacy product is 100% renewal business, while 43% of select exposures are new business, which typically has a higher frequency. Select only represents 34% of our in-person personal lines policies today, which makes us super optimistic about the outlook for our business in 2025 and beyond. Jen will share more about our select product and our financial results this quarter. Core personal lines direct written premium was up 43% this quarter versus the prior year quarter driven by an increase in average premium of 23% and a surge in new business policy count up almost four times the new business counts in the prior year quarter. New business premium was 27% of total core personal lines direct written premium this quarter and 20% for year to date. We expect a similar dynamic in Q4 with an acceleration of new business as the cancellations from this market dislocation will be sent to policyholders in December. Our current estimate is that we will write between 25 and 30 million in incremental premium in 2024 from this market opportunity and write approximately 8,000 to 10,000 new policies from these two carriers. Before I touch on guidance, I want to share an update on the at-the-market offering. For those that don't know, an at-the-market offering or ATM is a way for a public company to raise capital by selling shares of its common stock into the secondary market at the current market price. We sold almost 1.1 million shares via the ATM this quarter and an average share price of $8.48. We used the ATM as a vehicle to build a cash balance at the holding company and used most, excuse me, used part of the proceeds to make an additional principal payment of 3 million on the debt at the end of September and fund upcoming interest payments and other holding company expenses. We made an additional 2 million principal payments this week, so we now have 10 million of debt outstanding. As a reminder, the holding company does not have an independent source of income and has historically relied on dividends from the insurance company for liquidity. We learned over the past few years that we cannot rely just on dividends from the insurance company as the ability to pay dividends is subject to regulation and we were restricted until this quarter from paying dividends due to losses over the last few years. We didn't appreciate just how much of a threat having debt at the holding company could be to Kingstone until we did not have the cash to service our debt or pay other expenses. To clarify, I am not opposed to the company carrying debt. However, I believe it should be managed in a more strategic and thoughtful manner. It's incredibly important not to repeat the mistakes of the past and we're focused on paying off the debt as quickly as possible. The balance of debt will be repaid partially with intercompany dividends and partially sorry about that, through the additional sale of stock via the ATM. Given the need for statutory surplus to support our growth, we will be judicious in the use of our surplus so we can continue to grow at an accelerated pace. We also intend to reduce the amount of our quota share for 2025 to retain more of our premiums and profit, which reduces surplus as well. We are in the market now for next year's quota share and the amount of the quota share will largely be determined based on the seating commission that is offered. Our objective is to find the right balance between quota share, stock issuance, and the use of dividends to pay down our debt as expeditiously as possible while maximizing earnings. When the debt is fully retired, hopefully by the end of 2025, and we no longer have high interest costs, We can then focus on the most rational capital and reinsurance structure for the benefit of our shareholders. And finally, turning to guidance, we've updated our guidance for both 24 and 25. For 2024, we are reaffirming core business direct premium as written growth between 25% and 35%. And based on approximately 128 million of net premium is earned, we're raising our guidance and expect to achieve a gap combined ratio between 79 and 83%, earnings per share between $1.40 and $1.70, and return on equity between 32 and 36%. For 2025, we're reaffirming core business direct written premium growth between 15 and 25%, and based on approximately $165 million of net premiums earned, we are raising our guidance and expect to achieve a gap combined ratio between 82 and 86, earnings per share between $1.60 and $2, and return on equity between 24 and 32%. Our guidance now reflects the competitive changes in the New York marketplace, another exceptional quarter, an expected increase to the cost for catastrophe reinsurance, for the 25-26 treaty year, driven by exposure growth and a hardening market for catastrophe reinsurance generally, an increase in reinsurance costs from the recent purchase of winter storm coverage, which reduces our first event retention to approximately $5 million, and lower interest expense, among other changes. Don't forget that 2024 was an exceptionally light year for catastrophes, and we have assumed an average year for 2025. Before I turn the call over to Jen, I want to emphasize what a great position the company is in, perhaps the best position it's ever been in. The drag from the non-core states is all but behind us. We now have the right team, a great product, and a competitive expense structure as our foundation. We already fixed what is broken, And now we are solely focused on the future, improving our processes and products, adopting new technologies, and refining our strategy to continue delivering spectacular results and increased value to our shareholders for years to come. With that, I'd like to turn the call over to Jen for a more detailed review of our quarterly financial results. Jen?

Thank you, Meryl, and good morning, everyone. We could not be more pleased with our 2024 third quarter and year to date results. This now marks our fourth consecutive quarter of profitability with net income of $7 million or 61 cents per basic share for the quarter. For the year to date, our net income was 12.9 million compared to a net loss last year of 9.1 million and an earnings per basic share of $1.16 this year compared to a loss of 85 cents last year. On a consolidated basis, direct written premiums for the current third quarter increased 28.1%, inclusive of a 39.4% increase in core direct written premiums from the market dislocation that Merrill was just discussing, partially offset by our continued reduction of our non-core business, which decreased another 60% in both the written premium and policies enforced compared to the same period last year. The increase in our core business reflects the strong pricing action with an average premium for personal lines up more than 23% in the quarter versus the prior year quarter. Our combined ratio improved by 38.2 points to a 72% for the quarter. Our current accident year loss ratio improved by 37.6 points with a 31.6 point improvement in non-CAT losses and a six point reduction in catastrophe losses We also had a $641,000 favorable prior year development, reducing loss ratio by 1.9 points. Our expense ratio was 33%, 1.2 points higher than our prior year quarter. Consistent with last quarter, our expense ratio was higher than target, primarily due to increased employee bonus and contingent commission for our producers, both of which are triggered off our better than expected underrating results. Our non-CAT loss ratio improvement was driven primarily by homeowners, our main line of business, and we experienced a decrease in both frequency and severity for personal lines as compared to the prior year. We have seen a decline in reported frequency every quarter this year. For the third quarter of 2024, our ex-CAT reported frequency for personal lines was 2.3% versus 3.5% for the same period in 2023. We attribute this improvement to better risk selection in our select products, and to a reduction in our non-core business, which has had a much higher frequency than core. Severity has also declined in every quarter this year. XCAT severity was down 27% during the current quarter when compared to the same period last year. In addition to better risk selection in our select product and in reduction of our non-core business, just as mentioned, we also have experienced fewer large losses this quarter compared to the prior year and the three-year average for the quarter. As of September 30th, we saw positive trends in our investment portfolio with some significant shifts this quarter. Walking you through these key highlights to our performance, let's start with investment income for the quarter, which increased 14% to $1.7 million, up from $1.4 million in the same period last year. Until recently, we had been investing excess cash generated from operations as well as proceeds from maturing bonds and the sale of preferred stocks into treasuries. to take advantage of the high risk-free rates they offered. However, given the speculation during the quarter of Federal Reserve's rate cuts, we made a strategic decision late in the quarter to shift most of our short-term positions to highly rated two to five year corporate bonds. This move reduces our portfolio's exposure to short-term rates and lets us lock in an attractive book yields for the upcoming years. These corporate bonds have an average book yield of 4.21%. and an effective duration of three years. Our non-cash invested assets yield an average of 3.39% with an effective duration of 3.7 years and a weighted average maturity of 6.9 years. This balance between duration and maturity allows us to generate steady returns while managing sensitivity to rate changes. On the operations side, we're generating consistent cash flow with an EBITDA close to $11 million for the quarter This cash flow is instrumental for fueling our portfolio's growth, giving us an additional capital to invest in higher-yielding assets. By aligning our investments with the yield curve, we position ourselves to further increase investment income over time. Approximately 13% of our fixed income portfolio will mature by the end of 2025, with relatively low book yields of 2.8% and 3.18%. This is an excellent reinvestment opportunity as these assets mature. We can reinvest them at higher market rates, which will enhance our future investment income. With a drop in interest rates at the end of the quarter, we saw a $3.6 million net increase in the value of our bond portfolio and $3.2 million over the first nine months. This gain is reflected in our balance sheet as an increase in other comprehensive income, adding to our overall financial strength. Overall, we had an incredible quarter with a 28% growth in direct written premiums, a combined ratio of 72%, net income per share of 61 cents, and an annualized return on equity of 55.6%. With that, we'll open it up to questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Bob Farmer. with Jannie Montgomery Scott. Please proceed.

Hi there and good morning. I've got a few quick questions and maybe some broader questions. So, on the guidance, are you still assuming maybe a 6% cat load in that combined ratio guidance? And do you have an expectation for an expense ratio target in that combined ratio?

Hi, Bob. So to answer your question, yes, we are assuming for next year a roughly 6% catload because, as I said, 2024 was exceptionally light for catastrophes. And for next year, we've assumed the long-term average. In terms of our expense ratio, we are expecting a decrease in our expense ratio because our earned premium will be up quite substantially. And what we have assumed is roughly a 28% expense ratio for next year.

Okay, great. And then I'll have questions on the growth potentially you have ahead of you. I'm sure I'm going to have questions every quarter. But for right now, I want to know how has the business gone according to plan? short, more in advance plan. Just kind of curious, are the quotes and binds, are they going as you expected? Is the pricing for the new customers, is it sticker shock? What type of pricing increases do you suspect you're getting over your competitors at that point when they renew with you?

So it's kind of hard to say that our growth is going according to plan because Who's ever been through something like this before, honestly? So I would say I'm particularly proud of the way we've handled our growth while maintaining our service standards and our underwriting standards. And then relative to the price that customers are experiencing, I don't really know because I don't have visibility into what the customer was paying previously, but certainly we're having a very high conversion rate on the business that is coming from these two companies that are out of business. So I assume our pricing is competitive.

Okay. And the third company that's pulling out of the market, you said it was a pretty good amount of policies. Do you know what premium size that is?

So that company is Amgard. It's a Berkshire Hathaway company, and they announced that they were withdrawing from the homeowner's market nationally. So they entered New York a couple years ago and grew fast and furiously. And so we'll have to see what the market delivers. We're confident in our pricing, and hopefully the customer will find our pricing competitive.

Okay. And if I was the last question for me, so it sounds like the Select product is obviously the frequency is much better under Select than it is the Legacy. What are the primary differences between the Select book and your Legacy book?

Sure. So, you know, just to reiterate how great Select is doing – For the quarter, our select reported frequency for personal lines was 1.6% and legacy was 2.2%. And we've seen this difference every quarter. So the products are completely different. Select, if you recall, is a bi-parallel rated product. It's using years of Kingston data and industry data. in order to properly match rate to risk. So I would say one of the primary differences, besides the fact that it's by peril-ridden from our legacy product, is the use of insurance score in the pricing and underwriting.

Interesting. Okay. That's it for me. I'll let others ask questions. I may come back if I have more. Thanks.

Our next question is from Gabriel McClure, private investor. Please proceed.

Good morning, and congratulations on a quarter that's so good I don't really have a word for it. Good morning, Gabe. I have a couple of questions. Good morning. I have a couple of questions. I think you answered the one about the opportunity in 2025 with the third company. But could you talk about pricing? If memory serves, this is the time of year where we go up on pricing to do the rate changes. How much are we going up? And did Hurricane Helene and or Milton factor into those decisions at all? I've got another question after that.

Okay, so we fortunately had no impact at all from Hurricane Helene or Milton. However, it will probably impact us through reinsurance rates for next year because, you know, we had heard earlier in the year a lot of maybe that the reinsurance market is softening, and now what we're hearing is not so much so. So that's the only impact from – you know, potential impact from those storms. In terms of our pricing, excuse me, we did in the quarter raise rates for our select homeowners product 5% and our dwelling fire product by 10%. Typically around this time we do a legacy rate change and I don't remember the exact effective date and it was in the low single digit. So we are pretty confident that we are, well, actually very confident that we're priced adequately at this time. And don't forget that in addition to the rate change, we now update replacement costs on every policy annually so that we are insured to value. So while that's an increase in coverage, it is also an increase in price for the policyholder.

Okay, great. Got it. And then the capital allocation front, I know we talked about the debt, and we got the announcement about the share sale. So I understand what we're trying to do is get rid of the debt. Do you have any projections or range? Because this is kind of a curveball for some of the shareholders that have been around about the – the share, the dilution to the shareholders. Can you, do you have a range of like how, how much we could experience an increase in shares or how much dilution we could get by the end of 2025?

So I, unfortunately I really don't. I, you know, I just want to say that we, I very much view this debt is like a noose, like having lived through 22. I just don't want to deal with the debt. I want to pay it off as quickly as possible. So unfortunately, We're really trying to find the right balance between the quota share, the stock issuance, and the use of dividends to pay down the debt as expeditiously as possible and to maximize earnings. But I cannot give you an exact number of shares that we plan to sell at this time.

Okay. Got it. Thanks.

As a reminder, there's star one on your telephone keypad. If you would like to ask a question, we will pause for a moment to see if there's any final questions. Our next question is from Brad Nelson, private investor. Please proceed.

Hey, guys. I appreciate the work that you've done in going through the last few years, the phases that you mentioned, and in stabilization and now growth. I just have a quick question. Can you tell me what the reason is that you're switching guidance from a diluted share count to a basic share count? I think it's something that's a little bit out of the ordinary. Maybe this has to do with the ATM, but what is the reason?

So we don't really have, like we changed it earlier in the year where there really wasn't a difference between basic and diluted. So it's just what we have out there now. There's no rationale behind it, honestly. If it makes more sense to do diluted, we can certainly change our guidance to include diluted.

Okay. I just wanted to know if there was any particular reason, but it just sounds like you've You know, you made a quick decision on this, and that's fine. I mean, right now, the share count difference is like about 10% or something like that. And obviously, if you're only going to use the ATM, then eventually they may get a bit closer. But anyway, okay, thank you for that information. I appreciate it. No problem.

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

It's an incredibly exciting time at Kingstone, and we could not be more optimistic about the trajectory for our business. Thank you to our shareholders for your continued trust and support as we work together, sorry, as we work towards delivering long-term value. And thank you for joining our call today.

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