Q3 2024 Kingstone Companies Inc Earnings Call

November 13, 2024

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Greetings. Welcome to Kingston Company's 3rd 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.

Speaker Change: 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 Karin Daly, Vice President of the Equity Group and Kingstone's Investor Relations Representative. Karin, you may begin.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Forward-looking statements speak only as of the date on which they are made, and Kingstone undertakes no obligation to update the information discussed.

Speaker Change: 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.

Speaker Change: 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?

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Meryl Golden: Thanks, Karin. Good morning, everyone, and thanks for joining our call.

Speaker Change: 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.

Let me start by talking about our growth.

Speaker Change: 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.

Speaker Change: are roughly the size that Kingston is today. There's also a third company that's exiting the homeowners 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.

Speaker Change: Our objective is profitable growth, not growth for growth's sake, and we have been thoughtful about how we are taking advantage of this opportunity so as not to compromise our profitability.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: As the business has grown, the frequency difference with legacy has increased.

Speaker Change: This gives us great confidence in our risk selection, as the legacy product is a 100% renewal business, while 43% of select exposures are new business, which typically has a higher frequency.

Speaker Change: Select only represents 34% of our in-personal lines policies today, which makes us super optimistic about the outlook for our business in 2025 and beyond.

Speaker Change: Jen will share more about our select product and our financial results this quarter.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: 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%.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: and use most, excuse me, use part of the proceeds to make an additional principal payment of three million on the debt at the end of September and fund upcoming interest payments and other holding company expenses.

As a reminder,

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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

. . . . . . . . . . .

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Sorry about that through the additional sale of stock via the ATM

Speaker Change: 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.

Speaker Change: 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

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: And finally, turning to guidance, we've updated our guidance for both 24 and 25.

Speaker Change: For 2024, we are reaffirming core business direct premiums 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%.

Speaker Change: Earnings per share between $1.40 and $1.70 and return on equity between 32 and 36 percent.

Speaker Change: For 2025, we're reaffirming core business direct written premium growth between 15 and 25%.

Speaker Change: 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.

Speaker Change: Earnings per share between $1.60 and $2.00 and return on equity between 24% and 32%.

Speaker Change: Our guidance now reflects the competitive changes in the New York marketplace.

Another exceptional quarter

Speaker Change: an expected increase to the cost for catastrophe reinsurance for the 2025-2026 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.

Speaker Change: Don't forget that 2024 was an exceptionally light year for catastrophes and we have assumed an average year for 2025.

Speaker Change: 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.

Speaker Change: Adopting new technologies and refining our strategy to continue delivering spectacular results and increased value to our shareholders for years to come.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Thank you, Meryl. And good morning, everyone. We could not be more pleased with our 2024 third quarter and year to date results. This is now marks our fourth consecutive quarter of profitability with net income of $7 million or 61 cents per basic share for the quarter.

Speaker Change: 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 $0.85 last year.

Speaker Change: 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 Meryl was just discussing.

Speaker Change: 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.

Speaker Change: Our combined ratio improved by 38.2 points to a 72% for the quarter.

Speaker Change: Our current accident year loss ratio improved by 37.6 points with a 31.6 point improvement in non-CAT losses and a 6 point reduction in catastrophe losses.

Speaker Change: Our expense ratio was 33%, 1.2 points higher than our prior year quarter. Consistent with last quarter, our expense ratio is 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.

Speaker Change: Our non-CAT loss ratio improvement was driven primarily by homeowners, our main line of business.

Speaker Change: and we experienced a decrease in both frequency and severity for personal lines as compared to the prior year.

Speaker Change: We attribute this improvement to better risk selection in our select product and to a reduction in our non-core business, which has had a much higher frequency than core.

Speaker Change: 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 the reduction of our non-core business,

Unknown Speaker, Unknown Transcript

Speaker Change: As of September 30th, we saw positive trends in our investment portfolio with some significant shifts this quarter.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: This gain is reflected in our balance sheet as an increase in other comprehensive income adding to our overall financial strength.

With that, we'll open it up to questions. Operator?

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Thank you. 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 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 pull for questions.

Robert Farnam, Meryl Golden

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Our first question is from Bob Farman with Janie Montgomery Scott. Please proceed.

Bob Farman: Hi there and good morning. I've got a few quick questions and maybe some broader questions. So on the guidance,

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Hi, Bob. So to answer your question, yes, we are assuming for next year, a roughly 6% cat load, because as I said, 2024 was exceptionally light for catastrophes. And for next year, we've assumed the long term average.

Speaker Change: In terms of our expense ratio, we are expecting a decrease in our expense ratio because our earned premium will be up quite substantially.

Speaker Change: and what we have assumed is roughly a 28% expense ratio for next year.

Okay, great.

Speaker Change: And then I have, you know, I'll have questions on the growth potentially have ahead of you. I'm sure I'm going to have questions every quarter. But for right now, I want to know.

Speaker Change: More in advance of plan. Just kind of curious to the quotes and binds. Are they going as you expected?

Speaker Change: 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?

Speaker Change: So it's kind of hard to say that our growth is going according to plan because...

Speaker Change: 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.

Speaker Change: And then relative to the price that customers are experiencing, you know, I don't really know because I don't have visibility into what the customer was paying previously, but certainly we're having.

Speaker Change: 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.

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

Speaker Change: So that company is Amgard, it's a Berkshire Hathaway company, and they announced that they were withdrawing from the homeowners market.

nationally, so they entered New York

Speaker Change: a couple years ago and grew fast and furiously. And so we'll have to see what the you know, what the market delivers. We're confident in our pricing, and hopefully the customer will find our pricing competitive.

Speaker Change: Okay, and if that 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?

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: So the products are completely different. Select, if you recall, is a by peril rated product. It's using years of Kingstone data and industry data in order to price the to, you know, properly match rate to risk.

Speaker Change: So I would say one of the primary differences besides the fact that it's biparal radiant from our legacy product is the use of insurance score in the pricing and underwriting

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

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

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Our next question is from Gabriel McClure, Private Investor. Please proceed.

Gabriel Mcclure: Good morning and congratulations on a quarter that's so good. I don't really have a word for it

Speaker Change: 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

Speaker Change: So that's the only impact from, you know, potential impact from those storms.

In terms of our pricing, excuse me.

Speaker Change: We did, in the quarter, raise rates for our select homeowners product, 5%.

and our dwelling fire product by 10%.

Speaker Change: Typically, around this time, we do a legacy rate change and

Speaker Change: 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.

Speaker Change: 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.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Okay, great. Got it.

Speaker Change: And then the capital allocation front, I know we talked about the debt and we got the announcement about the share sale.

Speaker Change: Unknown Attendee, Jim Collins, Unknown Member of the Audience, Eugene Higginson, Unknown Attendee, Unknown Member of the Audience, Jim Collins, Unknown Attendee, Ryan Higgins, Unknown Member of the Audience, Unknown Attendee, Gary Sud sobbing, Unknown Attendee, Secretary of General Сommissioner Special Appointment, Unknown Attendee, Rene Thomas Webster, Unknown Attendee, Donnathan Curtis, Unknown Attendee, Jim Collins, Unknown Attendee, Rahul Adityarani, Unknown Attendee, Jade Thomas, Diana Gonzalez,

I understand what we're trying to do is

Speaker Change: 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 share, the dilution to the shareholders. Do you have a range of like how much we could experience an increase in shares or how much dilution we could get by the end of 2025?

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: 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.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: As a reminder, it is star 1 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.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: Our next question is from Brad Nelson, Private Investor. Please proceed.

Brad Nelson: I just have a quick question on what can you tell me what the reason is that you're

Brad Nelson: I think it's something that's a little bit out of the ordinary. I mean, maybe this has to do with the ATM, but what is the reason?

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Brad Nelson: 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.

Speaker Change: Okay, I just wanted to know if there was any particular reason, but it just sounds like

Speaker Change: It just sounds like you, 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.

Speaker Change: and obviously that if it's only if you're only going to use the ATM, then eventually they may get a bit closer.

Speaker Change: But anyway, okay. Thank you for that information. I appreciate it.

No problem.

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

Speaker Change: 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.

Meryl Golden: 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.

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

Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

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Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

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Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

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Fountainhead, Unknown Attendee, Unknown Executive, Meryl Golden, Jennifer Gravelle

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Robert Farnam, Meryl Golden

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