Q4 2024 Kingstone Co Inc Earnings Call
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As a reminder, this conference is being recorded.
I would now like to turn the call over to your host.
Karen Daily Vice President of the equity group and Kingstone Investor Relations representative. Thank you you may begin.
Speaker Change: Thank you Melissa and good morning, everyone joining us on the call today will be president and Chief Executive Officer, Mel Goldman and Chief Financial Officer, Jennifer Gabel.
Speaker Change: 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.
Speaker Change: We're looking statements speak only as of the date on which they are made and Kingstone undertakes no obligation to update the information discussed for more information.
Speaker Change: Emission please refer to the section entitled Risk factors in part one item <unk> of the company's latest Form 10-K.
Speaker Change: Additionally, today's remarks may include references to non-GAAP measures for a 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 Merrell Goldman Merrill.
Robert Farnam, Meryl Golden, Jonathan Old
Merrill: Thanks, Karen good morning, everyone and thanks for joining our call I.
Merrill: I am delighted to share the results of another record breaking quarter and the remote remarkable year in Kingstone history in 2020 for the hard work to transform and turnaround the company that started over five years ago was fully reflected in our financial results.
Robert Farnam, Meryl Golden
Merrill: During the year, we saw improvement in virtually every aspect of our business I want to thank my great leadership team and our employees, who work tirelessly to make these results possible and our select producers for their commitment to the company I am proud of what we've been able to accomplish and excited too.
Merrill: To build on this foundation to achieve even better results in 2025.
Merrill: Let me start by highlighting the phenomenal growth, we achieved in the fourth quarter and for the full year.
Merrill: We finished the year with 21% growth overall and 31% growth in our core business.
Merrill: In the third and fourth quarters core business growth was driven by the exit of two competitors Adirondack and Mountain Valley, who reached an agreement with the New York Department of financial services to non renew or canceled their entire book by the end of 2024.
Merrill: In the fourth quarter, our direct our core direct written premium grew by 49% as a result of the increased market opportunity from their exit with homeowners new business policies up four times the prior year quarter overall policy count up 44% in.
Merrill: And average premium up 15% in the back half of 2024, we wrote $23 million in direct written premium and over 6000 policies from customers previously insured with these two carriers.
Merrill: For additional visibility in January we wrote an additional couple of millions of dollars of premiums from this competitive displacement, but otherwise all of these policies have moved.
Merrill: The hard market conditions in Downstate, New York footprint have not changed materially growth in written premium in 2025 to date has moderated from what we experienced in the second half of 2024 as to be expected, but it's still materially higher than the prior year quarter.
Merrill: Driven by both higher new business counts and higher average premium.
Merrill: For 2025, our plan is to continue our focus on our core state of New York and capitalize on the hard market condition. We are also investing considerable resources to learn more about other catastrophe exposed geographies and strategically developing a plan to expand.
Merrill: And our footprint beyond Downstate, New York, we will share our expansion plans later in the year when they are finalized.
Merrill: From a profitability perspective, our select product continues to outperform our expectation with a 29% reduction in frequency for the year compared to our legacy product a phenomenon that we have experienced since the introduction of the select product three years ago.
Merrill: No.
Merrill: Typically the legacy renewal book would have lower frequency than select since it's all renewals and select includes 49, excuse me, 47% new business, our select pricing and underwriting has shifted our mix to more preferred risks with more well maintained homes better insurance scores.
Merrill: And higher deductibles, which is driving our frequency improvement.
Merrill: We've also been closely monitoring the business from Adirondack and Mountain Valley and that book is running even better than our well performing select book.
Merrill: Despite our high growth rate in 2020 for only 41% of our policies in force have been written in the select product as of year end, which bodes extremely well for the future.
Merrill: Before I cover guidance I want to share an update on our debt and the aftermarket offering.
Merrill: I had previously shared that a 4 million prepayments have been made in December reducing our debt to 6 million at year end 24 today.
Merrill: Today I am pleased to share that we made three additional prepayments in January and February and our debt has been fully paid off which will save us roughly 800000 in interest expense in 2025 contributing another five cents to earnings per diluted.
Merrill: Sure it.
Merrill: It's an incredible accomplishment that we were able to pay off $20 million of debt in just five months.
Merrill: I am delighted that Kingstone is now debt free.
Merrill: To enable this during the fourth quarter of 'twenty four we issued 302000 shares via the ATM at an average share price of $15 41.
Merrill: And through yesterday, we have issued an additional 613000 shares at an average share price of $16.
Merrill: The ATM has been used as a vehicle to generate cash at the holding company level to fund expenses and to pay off the debt you may recall that the magnitude of prior year underwriting losses precluded the insurance company from paying dividends to the holding company until last November so.
Merrill: The ATM played a critical role in sustaining the company.
Merrill: Kingstone is in great financial condition again with a healthy balance sheet, we are generating substantial income and cash and have sufficient statutory surplus to support our growth even after a material reduction in quota share.
Merrill: And we have the ability to pay dividends to the holding company from the insurance company again, if additional capital is needed.
Merrill: As such we have put a pause on share issuance via the ATM for the foreseeable future.
Merrill: And finally turning to guidance.
Merrill: We're a few material items that are now reflected in our raised guidance for 2025.
First be updated guidance considers increased premiums written in the fourth quarter of 24 that will be earned in 'twenty five.
Merrill: Second the reduction in our quota share for 25% to 16% from 27% in 'twenty four and the higher ceding Commission received had a material positive impact.
Merrill: Third the reduction of interest expense.
Merrill: Yeah.
Merrill: From the elimination of our debt.
Merrill: And last the gain on the sale of our headquarters building, which should close next week.
Merrill: With that for 2025, we are reaffirming core business direct written premium growth between 15, and 25% and based on approximately 184 million of net premiums earned and we expect to achieve a GAAP combined ratio between 81 and 85 basic earnings.
Merrill: Per share between $1 90, and 230 diluted earnings per share between $1 75, and $2 15, and return on equity between 27% and 35%.
Merrill: While 2024 was a monumental year for the company. It has only increased our desire to achieve even better results in 2025.
Merrill: But kingstone team is working hard every day to build on our success and keep the momentum going we have a winning formula the right team a great product and a competitive expense structure as our foundation that we believe will drive increased value to our shareholders for years to come with that I will.
Merrill: Turning the call over to Jen for a more detailed review of our quarterly results Jen.
Jen: Thanks Merrill and good morning, everyone.
Jen: Could not be more pleased to share with you our record breaking fourth quarter and full year 2024 results as Mary previously mentioned this now marks our fifth consecutive quarter of profitability with net income of $5 4 million or 40 cents per diluted share for the quarter for the year. Our net income was $18 4 million compared to a net.
Jen: Loss of $6 2 million last year and earnings per diluted share of $1 48, compared to a loss of 57 cents last year.
Jen: Direct written premiums for the fourth quarter increased 37% inclusive of a 49% increase in core direct written premiums from the market dislocation that merrell had been discussing with.
Jen: It was partially offset by the continued strategic reduction of our core of our noncore business, which decreased another 60% in direct written premiums and 65% and policies in force compared to the same period last year.
Jen: Besides the high new business yield the growth in our core business also reflects strong pricing action with average premiums for personal lines up almost 20% in the quarter versus the same quarter in 2023.
Jen: For the year direct written premiums were up 21% with growth of 31% in the core business driven by a 12% increase in core personal lines policies written and a 21% increase in the average premium for the year.
Jen: Yeah.
Jen: Our combined ratio improved by 11 percentage points to 78, 5% for the quarter.
Jen: Our current quarter loss ratio improved by seven seven percentage points comprised of a $4 seven percentage point improvement in the non cat losses, and a three percentage point reduction in catastrophe losses.
Jen: Also had a small $144000 favorable prior year development, reducing the loss ratio ratio by <unk> four percentage points.
Jen: Our expense ratio was 29, 8% to nine percentage points lower than the fourth quarter of 2023.
Jen: For the calendar year, our combined ratio improved by 25.3 percentage points to 80%.
Jen: 18, five percentage point improvement in the non cat loss ratio, including a 1.4 percentage points of favorable prior year development.
Jen: 5.2 percentage point improvement in the catastrophe loss ratio and an expense reduction of one six percentage points, resulting in expense ratio of 31, 3%.
Jen: For the quarter, our non cat loss ratio improvement was driven primarily by a reduction in frequency of water losses in homeowners our main line of business.
Jen: This was offset by a few large fire claims which are typical during the fourth quarter.
Jen: Here, our attritional loss ratio improved by $17, one percentage points to 48, 2% driven by material reductions in both the frequency and severity for personal lines as compared to the prior year, particularly for water, which is our largest apparel.
Jen: Frequency for the homeowners water apparel decreased every quarter this year and improved over 25% for the year in total.
Jen: In addition to mild weather throughout the year, we attribute this improvement in frequency to better risk selection in our select product and to the reduction in our noncore business, which had a much higher frequency than core.
Jen: Water severity was also down almost 14% for the year as well driven.
Jen: Driven by better risk selection in our select product and the reduction of our non core business as I previously mentioned.
Jen: As well as fewer large losses compared to the prior year and the three year average.
Jen: He sends reserve position has continued to strengthen during the calendar year 2024 at year end, our carried reserves were $3 $2 million higher than the central estimate from our outside independent actuarial firm, which is up from $1 9 million in the calendar year end 2023.
Jen: Our net investment income for the quarter increased 21% to $1 9 million up from $1 6 million in the same period last year.
Jen: Strong cash generation from operations continues to support our investment portfolio growth.
Jen: In the quarter, we invested primarily in highly rated two to five year corporate bonds longer duration taxable municipals and mortgage backed securities. This approach reduces our portfolio's exposure to short term rates unless it's locked in attractive book yield.
Jen: Over the coming years.
Jen: During the quarter, we invested $39 million in these instruments, achieving a book yield of about 5% and an effective duration of five and a quarter years.
Jen: Our noncash invested assets you have an average of 368% with an effective duration of three nine years and a weighted average maturity of seven six years.
Jen: We continue to balance between duration and maturity, allowing us to generate steady returns, while managing sensitivity to rate changes.
Jen: Approximately $12 million of our fixed income portfolio will mature by the end of 2025 and another 34 million by the end of 2026. These securities have relatively low book yields of three 2% and three 6% respectively.
Jen: These assets mature we plan to reinvest them at the prevalent higher market rates, which will further enhance our future investment income.
Jen: Significant increases in the treasury yields across the curve pressured bond prices during the quarter, leading to a $3 $1 million unrealized decline in the value of our bond portfolio as reflected in the change in other comprehensive income.
Jen: We intend to hold the bonds to maturity mitigating the impact of the short term market fluctuations despite.
Jen: Despite these headwinds at year end, we still achieved $100000 unrealized gain for the full year.
Jen: Overall, we had an incredible quarter, 37% growth in written.
Jen: Premiums at 37.
Jen: Combined ratio of 80 778, 5% net.
Jen: Net income per diluted share of <unk> 40, an annualized return on equity of 34, 4% leading.
Jen: Leading to an exceptional year, where we achieved an increase in direct written premiums of $42 million improvement in our combined ratio by more than 25 points and increase in net income by $24 $5 million and eliminated the debt at our holding company.
Jen: It's unbelievable what a difference a year makes and with that we're going to open this up for questions operator.
Jen: Thank him if you'd 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.
Jen: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys one.
Jen: One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Bob Farnam with Janney Montgomery Scott. Please proceed with your question.
Bob Farnam: Hi, there and good morning.
Jen: Uh huh.
Jen: A couple of questions here.
Jen: On the growth expectations for 2025.
Jen: Obviously with Adirondack Mountain Valley kind of that opportunity going away I'm, just trying to get an idea of where that growth is coming from and maybe kind of get into what the competitive environment is like to be able to do that group.
Jen: Yeah.
Jen: Sure. So you know Bob the hard market conditions in our Downstate, New York footprint still persists and there are few companies writing in coastal properties and of those still open most or M. G. As in E&S writers as we've talked about in the past there have been rumors of new market entrants.
Jen: But it's just rumors so nothing has really happened today.
Jen: So you know again, we are continuing to see growth in our new business counts and our average premium and we feel super confident with our pricing so where you intend to take advantage of these hard market condition.
Jen: Do you have a sense of the new business, where they're coming from like what what the incumbent carrier whether you come at carriers are.
Jen: I don't really know the who the carriers are but our mixes like essentially the same as it has been so I mean more and more you hear about you know the.
Jen: Our standard and preferred carriers, who are not interested in coastal business in Downstate New York.
Jen: No.
Jen: You know, it's a mix of carriers and again, it's the same mix of business that we've been writing in this in Downstate New York.
Jen: Alright.
Speaker Change: And when you talk about your potential expansion plans or are you are you talking about new England or are you thinking of other states around the country.
Speaker Change: Yes, so actually both so you know what I want to say is this is the perfect time for kingstone to expand geographically for two reasons.
Speaker Change: First we are in a great place our select product is proven to match rate to risk. We have an incredible team we have a low expense ratio and our balance sheet is strong and at the same time as I'm sure you know the homeowners market around the country. There are so many states that need.
Speaker Change: Capacity and so we've committed significant resources to learning about many of these catastrophe exposed states trying to understand the market the market potential the regulatory environment. So we can better prioritize among them and we're not in a hurry.
Speaker Change: We're gonna be super thoughtful about our expansion. So thanks for asking that question Bob.
Do you have a sense of the new business, where they're coming from like what what the incumbent carrier where they can come and carriers are.
Speaker Change: Okay.
Speaker Change: You talked to you about the improvement in the expense ratio you have you ever a good idea of where your where that expense ratio is going to get to over time.
Speaker Change: Is there do you have a goal for for kind of an expense ratio.
I don't really know the who the carriers are but our mix is like essentially the same as it has been so I mean more and more you hear about you know that.
Speaker Change: Well I'd like to say is that it's now part of our culture to be very focused on having low expenses, because having low expanses allows us to have either.
Our standard and preferred carriers, who are not interested in coastal business in Downstate New York.
Speaker Change: More competitive rates are higher margin. So it's something that we continue to work at my goal for this year is to take another points out of our expense ratio and again, because we wrote so much business in the second half of last year, that's going to earn in 2025, plus the reduction in our quota share.
No.
You know, it's a mix of carriers and again, it's the same mix of business that we've been writing in this in Downstate New York.
Alright.
And when you talk about your potential expansion plans or are you are you talking about new England or are you thinking of other states around the country.
Speaker Change: Our earned premium should be higher so I'm pretty sure we can achieve that.
Yes, so actually both so you know what I want to say is this is the perfect time for kingstone to expand geographically for two reasons.
Right right Okay.
Speaker Change: And last question kind of.
Speaker Change: Getting into the realm of a forward looking but how would you characterize first quarter, whether it was it's been a kind of a regular.
First we are in a great place our select product is proven to match rate to risk. We have an incredible team we have a low expense ratio and our balance sheet is strong and at the same time as I'm sure you know the homeowners market around the country. There are so many states that need.
Speaker Change: Winter season for you guys are better or worse.
Speaker Change: Sure. So you know last year was an incredibly mild winter.
Speaker Change: And this year, we have definitely had more snow than last year and it's been colder.
Capacity and so we've committed significant resources to learning about many of these catastrophe exposed states trying to understand the market the market potential the regulatory environment. So we can better prioritize among them and we're not in a hurry.
Speaker Change: There have not been any material catastrophe events and in fact the <unk>.
Speaker Change: Frequency of catastrophe events has been pretty low.
Speaker Change: So Q1 is looking good for a winter quarter.
Speaker Change: Yeah.
Speaker Change: Great. Thanks for the input.
Speaker Change: My pleasure.
We're gonna be super thoughtful about our expansion. So thanks for asking that question Bob.
Speaker Change: Thank you. Our next question comes from the line of Gabriel Macquarie Private Investor. Please proceed with your question.
Okay.
You talked to you about the improvement in the expense ratio do you have do you have like an idea of where your where that expense ratio is going to get to over time.
Speaker Change: Oh, Hi Merrill.
Merrill: Congratulations on the fourth quarter.
Speaker Change: Okay.
Speaker Change: Yeah, and also I would like to say thank you for all you do.
Is there do you have a goal for for kind of an expense ratio.
Well I'd like to say is that it's now part of our culture to be very focused on having low expenses, because having low expanses allows us to have either.
Speaker Change: Thank you.
Yeah.
Speaker Change: I think Bob just stole my my my first question about the first quarter. So that was good.
Speaker Change: I guess my second my My second question I've got one for you and then one for Jennifer.
More competitive rates are higher margin. So it's something that we continue to work at my goal for this year is to take another points out of our expense ratio and again, because we wrote so much business in the second half of last year, that's going to earn in 2025, plus the reduction in our quota share.
One for you is maybe getting a little deeper into the guidance.
Speaker Change: When I go back and look at your your June quarter, ending June quarter into September I remember last quarter the growth has accelerated sequentially by.
Our earned premium should be higher so I'm pretty sure we can achieve that.
Speaker Change: Quite a bit with the <unk>.
Speaker Change: 49% and core.
Right right Okay.
Speaker Change: And then we were guiding for 15% to 25% growth in core for the year.
And last question kind of kind.
Kind of getting into the realm of a forward looking but how would you characterize first quarter, whether it was it's been a kind of a regular winter season for you guys are better or worse.
Speaker Change: So.
I know you know we've got about two and a half months ended this year. So how are you thinking about that.
Speaker Change: But where do you see them out there Merle how does that square.
Merle: Yeah, So I still feel very good that we can achieve core growth between 15 and 25%.
Sure. So you know last year was an incredibly mild winter.
And this year, we have definitely had more snow than last year and it's been colder.
Merle: So you know I've mentioned there are few active writers and we really have not heard of well there's no reality about other companies entering the market yeah just rumors.
But there have not been any material catastrophe events and in fact, the frequency of catastrophe events has been pretty low. So Q1 is looking good for a winter quarter.
Merle: And so we have because we've done a broad open market. There's lots of new producers that are knocking on our door looking for appointments. So we are expanding our producer base and then we're always out in the field talking to our producers about their needs and so we have.
Okay.
Great. Thanks for the input.
My pleasure.
Thinking our next question comes from the line of Gabriel Macquarie Private Investor. Please proceed with your question.
Merle: Updated our underwriting appetite, where there's a market need and we're priced adequately for example, we're now writing up to three and a half million in replacement costs and also we anticipate seeing an improvement in retention because our rate changes this year will be less than it was certainly be more.
Yeah.
Oh, Hi, Meryl and congratulations on the fourth quarter.
Game, Oh, Yeah, and also I like to say thank you for all you do.
Yeah.
Thank you.
Yeah.
I think Bob just stole my my my first question about the first quarter. So so that was good.
Moderate than they were in the last few years. So combination of all those things gave I feel very confident with our guidance on core of written premium.
I guess my second my My second question I've got one for you and then one for Jennifer but the one for you is maybe getting a little deeper into the guidance.
Jennifer: Okay very good and then I've got a question for Jennifer.
When I go back and I look at your your June quarter, ending June quarter into September I remember last quarter. The growth has accelerated sequentially by quite a bit.
Speaker Change: Jennifer I think you might have said it but just kind of I don't think I'd call. It but what is our book yield on the portfolio right now.
Jennifer: 386.
Jennifer: Okay. Thank you.
Jennifer: Yeah, well, thank you Gabe.
The 49% and core.
Jennifer: Hmm.
And then we're guiding for 15% to 25% growth in core for the year.
Speaker Change: Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Ms. Goldman for any final comments.
So.
And I know you know we've got about two and a half months ended this year. So how are you thinking about that.
Jennifer: Yeah.
Goldman: Thank you it continues to be an exciting time for Kingstone, we could not be more optimistic about the trajectory of our business and our ability to generate long term value for our shareholders.
Well what are you seeing out there merrell how does that square.
Yeah, So I still feel very good that we can achieve core growth between 15 and 25%. So you know I've mentioned there are few active writers and we really have not heard of well there's no reality about other companies entering the market yeah. It just rumors and.
Jennifer: Thank you for joining the call today and for your continued support.
Jennifer: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.
So we have because we've done a broad open market, there's lots of new producers that are knocking on our door looking for appointments. So we are expanding our producer base and then we're always out in the field talking to our producers about their needs and so we have updated.
Our underwriting appetite, where there's a market need and we're priced adequately for example, we're now writing up to three and a half million in replacement costs and also we anticipate seeing an improvement in retention because our rate changes this year will be less and less certainly be more modern.
Or it than they were in the last few years. So combination of all those things Gabe I feel very confident with our guidance on core of written premium.
Okay very good and then I've got a question for Jennifer.
Jennifer I think you might have said it but you kind of I don't think I caught it but what is our book yield on the portfolio right now.
386.
Okay. Thank you.
Yeah, well, thank you Gabe.
Hmm.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Ms. Goldman for any final comments.
Yeah.
Thank you it continues to be an exciting time for Kingstone, we could not be more optimistic about the trajectory of our business and our ability to generate long term value for our shareholders. Thank you for joining the call today and for your continued support.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.