Kingstone Companies Inc

NASDAQ:KINS

Earnings Call Analysis

Kingstone's Optimistic Guidance for 2024

Kingstone is poised for growth with reduced expenses, a decline in non-core business, and a focus on profitable core sectors. The firm achieved a Q4 net income of $2.9 million or $0.26 per diluted share, compared to a net loss of $4 million the previous year. Its core business direct written premium increased by 7.1% to $47 million. Kingstone anticipates 2024 revenue growth for its core business between 12% and 16%, with a GAAP combined ratio between 88% and 92%. Earnings per share are expected between $0.50 and $0.90, alongside a 15% to 22% return on equity. A quarterly net expense ratio forecast of 29% by 2024 demonstrates improved efficiency, with the 2023 year-end book value at $2.81 per diluted share.

Return to Profitability and Future Optimism

Under the new leadership of CEO Meryl Golden, Kingstone has emerged from a challenging phase into profitability. This strategic turnaround reflects strong operational and financial management. With a recent history of adjustments, including improving product pricing and reducing expenses, the company reported a net income of $2.9 million. This marks a positive swing from the previous year's fourth-quarter net loss of $4 million, showcasing the effectiveness of the company's transformation journey.

Significant Improvements in Operational Metrics

Kingstone's fourth-quarter combined ratio—an important measure of insurance underwriting profitability—improved dramatically by 24.4 points to 89.5%. This improvement indicates that for every dollar of premiums earned, Kingstone spent 89.5 cents on claims and expenses, a strong performance in the insurance industry. This figure is a composite of a better attritional loss ratio and lower catastrophe losses, along with an expense ratio in line with the prior year. Going forward, the company forecasts an even more competitive 29% net expense ratio for 2024, which should support future profitability and allow for price competitiveness.

Strategic Focus and Guidance for 2024

Kingstone's strategy to hone in on their core business while trimming noncore activities is paying dividends, quite literally. The company intends to shrink its noncore business by 80% by year-end 2024, following a 40% reduction in the prior year. Looking ahead, for 2024, Kingstone provides initial guidance that shows confidence in its operational success—projecting core business premium growth between 12% and 16% and a GAAP combined ratio between 88% and 92%. Earnings per diluted share are expected to be between $0.50 and $0.90, with a return on equity targeted between 15% and 22%. These predictions are based on continued operational discipline and no major catastrophic event assumptions.

Financial Strength and Investment Gains

Kingstone's balance sheet reflects an increasing net income, which grew 3% and 21.7% for the quarter and the full year, respectively. The investment portfolio also saw a lift, contributing to a more robust book value per share. This financial strength sets the stage for Kingstone to both sustain its established trajectory of profitability and pursue new growth opportunities.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Kingstone Companies Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Karin Daly, Vice President of the Equity Group and Kingstone's Investor Relations representative. Karin, you may begin.

[Karin Daly]

Thank you, Kevin. Good morning, everyone. Joining us on the call today will be Chief Executive Officer, Meryl Golden; and Chief Financial Officer, Jennifer Gravelle. On behalf of the company, I would like to note that this conference call may include 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 Kingstone 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 a reconciliation of our 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.

[Meryl Golden, executive]

Thanks, Karin, and good morning, everyone. As I reflect on my first 6 months serving as CEO of Kingstone, it has been a journey of immense learning, and I am truly honored to have been entrusted to lead this great company. I want to thank our investors for your feedback leading to enhanced transparency and to inform you that we now have an investor presentation on our website with additional data that might be of interest.

It is certainly taking longer than we had hoped to get it right, but I can proudly say that we have completed the turnaround and Kingstone has returned to profitability. We are thrilled to, again, be positioned for consistent profitability and growth. Our products are priced right, our policyholders are ensured to value, business written in the select product is producing a materially lower frequency than our legacy product, indicating our advanced segmentation is working; and the reduction in our expense ratio gives us a competitive advantage at a time when there are a few active competitors in the market. I could not be more enthusiastic about our future.

Returning to profitability is not just a financial milestone, it's a reflection of our commitment to sound financial management and operational efficiency that has been unwavering. Our return to profitability is a product of the hard work, dedication and perseverance of every member of the Kingstone team. Our transformation journey has been marked by bold decisions and an intense focus on execution.

The past few years have been a period of profound change, growth and adaptation. The benefits of Kingstone 2.0 and Kingstone 3.0 are now flowing through to our income statement and doing so at an accelerating rate. Our numbers now speak for themselves. You can see this in the fourth quarter results and it will become even more apparent in our overall results as the noncore business continues to run off.

I'm extremely optimistic about the results that Kingstone can deliver in 2024 and beyond. We have successfully taken a series of actions since year-end 2022 that resulted in the rapid reduction in our noncore business. At December 31, our noncore premium declined by 40% and Policies-in-force by 48% year-over-year. In the fourth quarter, we obtained regulatory approval to withdraw from New Jersey in line with our strategy and feel confident that we will reduce our noncore policies by 80% by the end of 2024, two years after starting this initiative.

We continue to take rate to stay ahead of loss trend and inflation. During the quarter, we increased rates 20% in both our New York legacy and New Jersey homeowners products, in addition to rate changes in other states, as well as increased replacement cost, so our policyholders continue to be ensured to value. Our core legacy homeowner rate change was 24% for the full year. Our strategy to focus on our core business will allow us to continue deepening our producer relationships and to operate more profitably over time.

To further strengthen our product offering and underwriting, this week, we announced a partnership with Zojacks, an insurtech firm that specializes in flood prevention, which will help mitigate the risk of water damage for our policyholders. We managed our exposure to catastrophe reinsurance very conservatively by slowing our core new business particularly those risks contributing most to our PML and since the rates for catastrophe reinsurance did not spike as high as feared, the increase in catastrophe premiums was less than we planned for.

During the quarter, we began lifting these new business restrictions, resulting in a higher new business growth rate on our core business, which is accelerating even faster in 2024. We also successfully completed the placement our 2024 Quota Share Treaty with improved terms. For 2024, we received 27% of adjusted personal lines written premium, down from 30% in the prior year and will receive a higher ceding commission rate than last year as our reinsurance partners recognize the positive changes that we have made to our business.

Before I turn the call over to Jen, I am pleased to share that for the first time in several years, we are sharing our expectations and providing initial guidance for full year 2024. I want to remind you that our results are very weather dependent, and we have assumed no major catastrophe events in this guidance. We also assume the same level of quota share and ceding commission as we currently have and that our reinsurance cost would stay flat at our July 1 renewal.

With those assumptions, our guidance is as follows: We believe our core business direct written premium will grow between 12% and 16% year-over-year and will achieve a GAAP combined ratio between 88% and 92%; earnings per diluted share between $0.50 and $0.90; and return on equity between 15% and 22%. Our improved results are the culmination of the initiatives that have already been successfully executed, so we are confident that the benefits will become increasingly apparent in our quarterly results going forward.

Our margins are increasing due to our efforts to increase premiums. At the same time, the reduction in the noncore business is improving our loss ratio and the company's expenses have been reduced materially. With that, I'll turn the call over to Jan to review our financial results. Take it away, Jen.

[Jennifer Gravelle, executive]

Thank you, Meryl, and good morning, everyone. We're very pleased to report the profitability during the fourth quarter, achieving a net income of $2.9 million or $0.26 per diluted share. This is a very significant improvement from the same period last year when we saw a net loss of $4 million or a loss of $0.37 per share. Core direct written premiums increased 7.1% to $47 million while the noncore business successfully declined 40.8% during the quarter.

On a consolidation basis, direct premiums written decreased slightly with price increases and new business premium in our core business, offset by our planned noncore policy runoff. For the full year, direct premiums written were flat to the prior year period. Our fourth quarter combined ratio improved 24.4 points to 89.5%, primarily driven by strong underwriting results coupled with lower catastrophic losses. The attritional loss ratio improved 7.3 points to 53.8% and catastrophe losses were 10.7 points lower than the prior year period. There was no development of prior year reserves for the quarter. Our expense ratio was generally in line with the prior year period at 32.7%.

For the year, our combined ratio improved 8 points to 105.3%; the attritional loss ratio improved 2.9 points to 65.3%; catastrophe losses were 0.4 points lower than the full year of 2022 and there was no development of prior year reserves. Our expense ratio improved by 3.1 points to 32.9%. As outlined in our most recent shareholder letter from Meryl, we expect to receive further improvement in our expense ratio, forecasting a 29% net expense ratio in 2024.

Net income increased 3% and 21.7% for the fourth quarter and full year, respectively. The increase was driven by higher interest rates earned on cash balances. And in regards to the improvement for the full year, there was a reversal of accrued interest income due to an accounting error in 2022. There was no correction necessary in 2023.

Equity holdings, including preferred shares, fixed income ETFs, mutual funds and hedge fund investment, increased by $1.5 million. Bond holdings, excluding those classified as held to maturity, increased by $6.1 million pretax, resulting in a $4.8 million after-tax increase to other comprehensive income and a $0.43 increase to book value per share. The effective duration of our fixed maturity securities is 4.1 years with an average yield of 3.58%.

Book value at December 31, 2023, was $2.81 per diluted share and $3.80, excluding AOCI. We are very pleased with the progress we have made, leading to the return of equity of 9.7% during the fourth quarter. As Meryl mentioned earlier, we believe we can achieve a return on equity of 15% to 22% for the full year 2024. And with that, we'll open it up for questions. Kevin?

[Operator]

[Operator Instructions] Our first question today is coming from Jon Old from Long Meadow Investors.

[Jonathan Old, analyst]

Congratulations. So I'm just curious, what level of -- I know you were talking about assuming no major storms, so what level of sort of general cat amount you're assuming in '24? And then I hope it will be helpful for me and everyone else to understand that how much noncash depreciation, amortization and interest is embedded in the guidance because I think your depreciation and amortization is elevated due to the perfect spending you did on software projects and such that's bearing fruit, but a lot of that will go away over time. So if you could just add a little commentary there because I think your earnings are probably a little bit understated on a cash basis.

[Jennifer Gravelle, executive]

Go ahead, Meryl.

[Meryl Golden, executive]

Sorry. Yes. So before I answer your question, Jon, I just want to correct, Jen, when she was talking about net investment income, she said net income. And so it was investment income that she was talking about that increased 3% for the year. So to your question about cat, so we've included 7 points of cats in the plan for 2024. And that is based on what our trailing 12-year or so history has been of what we call PCS events, so normal catastrophe events and not like major hurricanes. So 7 points are included in the forecast. Jen, do you want to take a shot at the noncash question.

[Jennifer Gravelle, executive]

A lot of the -- I'm looking it up for you right now, Jon, trying to find it in front of me here. Yes, I don't have the file in front of me, John. We're going to have to revert back to you on that one.

[Jonathan Old, analyst]

Okay. But your depreciation and amortization is going down and actually keep going down because it's -- most of it is a 3-year amortization, correct? So I mean a lot of that expense is going to go away over time.

[Jennifer Gravelle, executive]

That is correct. That is correct.

[Jonathan Old, analyst]

Yes. So that in itself is about $0.20, eventually it would go away. I just wanted to clarify that.

[Meryl Golden, executive]

We'll get back to you on a more clear answer.

[Operator]

Your next question today is coming from [Gabriel McClure ] a private investor.

[Unknown Attendee]

Congrats, Meryl and Jennifer on a great quarter. Yes. I just had a couple of questions. One, the diluted and basic shares, there's a gap now there that didn't exist before. So did the debt investor do the exercise warrants there? Or what happened there?

[Meryl Golden, executive]

So I'll take that, Jen. So no, the warrants are not yet exercised. But per GAAP, when you make a profit, there is a formula where you include some of the warrants in the share count. So that's the difference for the quarter.

[Unknown Attendee]

Okay, okay. And then kind of going forward, I know it's really early, but inquiring minds want to know, how are you thinking about capital allocation priority now that we're starting to make some money, Meryl?

[Meryl Golden, executive]

Well, I would say that our top priority right now is our debt maturity. And as you know, that we have $20 million of debt that matures in -- at the end of the year. So we have 9 months to figure out what to do. So that is certainly our top priority in terms of capital allocation.

[Unknown Attendee]

Okay. Good enough. And congrats again on a great quarter.

[Operator]

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Meryl for any further or closing comments.

[Meryl Golden, executive]

Great. So thank you again for joining our call today. I want to express my deepest appreciation to our talented team members who have worked tirelessly through the various initiatives and to our producers, reinsurers and shareholders for your unwavering support. We're committed to delivering long-term value to our shareholders and have a great day.

[Jennifer Gravelle, executive]

Bye.

[Operator]

That does conclude today's teleconference webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.