Hello, everyone, Jennifer Gravelle. I'm CFO of Kingstone Companies. I've been in the 25 years in the insurance business, and the last 18 of those in the coastal property insurance space, heavily focused on startups and turnaround companies. I've been with Kingstone for about 18 months, and I'm absolutely thrilled to share with you the direction of this company.
Excellent. Thanks, Jen. So, at a really high level, Kingstone has been in business since 1886, but in our current form, we did go public in 2009, and our focus... We're really a niche marketer, and our primary line of business is coastal property insurance, and right now we're very much focused on downstate New York. So again, a niche writer with personal lines being 91% of our policies in force.
So I'm gonna cover a little bit about our history and tell you the story of how we got to where we are today. So Kingstone used to be, I guess, what's called a Wall Street darling, where literally for 14 years after the company went public, we had, you know, double-digit growth and double-digit ROE consistently until we didn't, and I joined the company when we didn't. And, unfortunately, during that 14-year period of incredible growth and profitability, the company had not invested in its people, its product, technology, or processes.
And so my job was to modernize the company and then ultimately to turn around the company, because we had run into some issues. So we've been working on that modernization and turnaround now, as I said, for five years, and I'm just delighted to say that we just finished our third consecutive quarter of profitability. It was, like, Q2 was an incredibly profitable quarter, so the turnaround is complete and quite successful, and now we are facing just an unbelievable opportunity for profitable growth that I'll cover today as well.
So in terms of the turnaround, there are really two phases. The first we called Kingstone 2.0, and then the second we called Kingstone 3.0. So from that, you can tell we're an unbelievably creative company. So relative to Kingstone 2.0, some of the things that I did in terms of modernizing the company, first is we hired a slate of key leaders for the company. So Kingstone was very much a company that had hired from a small geography in Kingston, New York. In order to turn around the company, we really needed leaders that had deep expertise in the different functions of the insurance company.
So a big piece of Kingstone 2.0 was hiring the senior leaders, and most of them still run the company today. The second was a real investment in systems s o Kingstone had outdated systems, many of them, and so a big piece of the initial effort of modernization was getting off of the legacy systems and getting onto new modern systems, which we completed in August of 2022, saving the company, like, $1.5 million a year without even considering the efficiency gains. We also introduced, like, a claim system, things that really helped the company move forward.
The third, probably the most important, is that we developed a product we call Select. And, you know, everything, and I don't know how much you know about insurance, but pricing is really a key differentiator h ow much you have better segmentation than the market will really determine whether you win or lose.
Kingstone didn't have a modern product, so we worked with an outside actuarial firm, and we used all of our data and lots of other data in the market, along with modern data science techniques, to build, you know, a new product suite for the company that was introduced in January of 2022.
And this product has been a real win for the company in that. In insurance, you look at frequency and how, you know, how many claims do you have? And what we're seeing is that we have much lower frequency, a 10% lower frequency in that Select product than in the other product that we were selling before the Select product, that we now call Legacy.
And, a 10% frequency gain is really... It's terrific, particularly because the Select product is where all new business is written, and usually you have a higher frequency when you write a lot of new business s o that Select product was really a game changer for the company. And then last, in terms of 2.0, we just started to better manage our catastrophe exposure.
So the company had grown a lot outside of New York, and when we did that, our catastrophe exposure grew dramatically. And it, the timing was unfortunate, because the reinsurance market you know, insurance for insurance companies, for those that don't know, and our largest expense. So the reinsurance market had gotten hard, meaning, like, more costly, and so it was just a huge increase in expenses for the company.
And so we just started an effort to better manage that, cost, and that, like doing things like introducing hurricane deductibles, and there are various things you can do to manage your, reinsurance cost, which the company had never done before. So anyway, all of that was kind of Kingstone 2.0, which you would think of it more as building the foundation for the company.
And then Kingstone 3.0, which is, you know, it's really done, but it's still a little bit underway. That was really the turning around the company s o let's call Kingstone 2.0 the modernization. Kingstone 3.0 was the turnaround, and there were four key things we did that are listed here. The first was this business outside New York w e happen to call New York business core, and outside of New York, we call non-core.
And the non-core business was incredibly unprofitable. So for two of the reasons that I previously mentioned, one is, our product wasn't very sophisticated when we wrote this business j ust so you know, we wrote it in New Jersey, Connecticut, Mass and Rhode Island. And we didn't have a very sophisticated product, so we ended up getting adversely selected against s o in other words, we wrote really bad business.
And then second, we weren't managing our catastrophe exposure, so as I mentioned, it was not only a high loss ratio business, it was also very expensive from a reinsurance perspective. So one of the key things we did as part of Kingstone 2.0, is we worked with the regulators to get off this business as quickly as we could. So, you know, sometimes in insurance, you can price your way to profitability, but sometimes if you just take the wrong risks in your book, you can't price it to profitability, you just have to get off of the business.
And so that was something really, big that we've been doing s o for perspective, at its peak, this non-core business was about, 20% of our premium, and we are, like, way down i think we'll end this year with, you know, maybe, at 5% of our premium w e've gotten off the business very quickly. In terms of the policies in force, I think we had 20,000 in at the peak, and by the end of this year, we'll only have 3,500 on the books, and next year, 1,000 s o we've been very successful getting off of this business. So now we're only open for business in downstate New York.
Most of our business is on Long Island, and the book is very profitable, always has been, but our results were kinda masked by how unprofitable this non-core business was. The second thing we did to turn around the company is we took a lot of rate. So, you know, one of the things that I'm sure you're aware of is inflation has been a really big issue, not just insurance, but just generally.
Insurance, when there's inflation, there are a couple impacts, o ne is that when you go to pay your losses, you're paying more because it costs more to . . . You know, the labor rates are up, and material prices are up, and unfortunately, in insurance, you can only price for the increase in costs after you pay the increase in costs s o we've been working hard to try to stay ahead of those inflation trends, and make sure that the pricing we're charging is adequate to cover inflation.
And the second thing is that, the replacement cost of the homes we insure also have increased a lot, and so we had an effort to re-underwrite the book and make sure that all of our policyholders were had the appropriate amount of coverage. So the combination of taking rate to stay ahead of trend and increasing rates to, for the increased coverage for our policyholder, resulted in a pretty sizable increase in our rates for the last couple of years, and that is the second thing that has contributed to our turnaround and our profitability.
The third is managing our reinsurance costs and requirements. So I mentioned that we started this initiative back in the Kingstone 2.0 days, but we've really done I think a terrific job managing which risks we write to manage li ke, we at point of quote, we look at how much is it gonna cost us to buy reinsurance on that individual property, and if we're not charging enough to cover the reinsurance costs, plus the losses and our expenses, then we'll decline the risk.
We do require that our policyholders, all of them, share in the risk via hurricane deductibles, and we have kind of gone through all of our policyholders, and those risks that are contributing too much to the amount of reinsurance we have to buy, we have non-renewed them to better manage the expense.
And then last but not least, expenses are really the fourth thing we've done to turn around the company. We've been relentless in doing everything we possibly can to drive down our expenses, because if, you know, however hot you price for your expenses, so if you have high expenses, you have to have higher prices, and then you're not as competitive in the marketplace.
So having low expenses is really a key. And so Kingstone had, you know, you think about insurance in terms of a dollar that you pay for insurance, how much do you pay out in expenses? In 2021, Kingstone paid out $0.41 in expenses for every $1 of insurance that we earned, and now this year, we're gonna pay out only $0.31 in expenses s o we were able to reduce our expenses dramatically.
How did we do that? We, unfortunately, had to reduce our staff. I mentioned some of the technology changes that we made that made us much more efficient. We reduced our commission to producers. We renegotiated every contract that we had, and, you know, frankly, the increase in our pricing also benefited us materially s o anyway, in terms of 3.0, these are really the key things that we did to turn around the company, and as I mentioned, the results have been remarkable i would say that the turnaround is complete.
We just had our third quarter of profitability, and it's been a great ride. And now what we're facing is probably the greatest profitable growth opportunity that the company has ever faced. And, you know, just so you know, there aren't that many companies that are focused on coastal homeowners insurance. I think starting back in the Andrew days and with global warming, more and more of the very large companies like State Farm, Allstate, Travelers, Farmers, they've pulled away from the coast, and what's been created is kind of a market of niche players whose focus is coastal property.
And so in our particular case, we are facing a situation where three companies that represent more than $260 million of business in New York State have announced just in the last month or so that they are getting out of New York State or getting out of the coastal property business countrywide. And so this has created an unprecedented opportunity for us at the perfect time. Because of our turnaround and all those efforts that I just covered, we are priced right. Our Select product properly matches rate to risk. All of our properties are insured to value.
We have the right, risk management protocols that I mentioned, like, you know, we require hurricane deductibles, et cetera. We're highly efficient, and we've got a great team. So this opportunity has come when we are wide open for business and ready to take it on, and there are very few competitors in the marketplace, and many of them are still struggling.
Because we were an early mover in making these changes that I mentioned w e've been working on this for the entire five years that I've been with the company. A lot of other companies just started raising rates now or maybe just a year ago, and they haven't quite recovered. So while all of this business is now coming on the market, we're one of the few companies that is wide open and, and willing to accommodate.
So just for perspective, this opportunity really started in the month of July, and really not in earnest until August. It had really just started in July, and, in July, our new business policy count was up 5 times versus the previous July, and then the premium that we generated from those policies, those new business policies, was up 13 times the prior year, month s o it just gives you some perspective of how much opportunity there is for profitable growth for Kingstone. So again, managing, you know, an insurance company, you can grow as fast as you want a ll you have to do is have, the wrong price out on the street.
What is really tricky in insurance is profitable growth, and I am 100% confident that we are in a position to exploit this market opportunity like no other because of everything that I've shared about our pricing and our having low expenses s o anyway, great, we've been really profitable. Now we have the opportunity to grow even faster. On that, I'm gonna turn it over to Jen Gravelle, our CFO.
Thanks, Meryl. I'm just going to kind of bring you through where... Meryl, if you could switch this slide, that'd be great.
Sure. Sorry.
Thank you. Just kind of wrapping up what she has said about our profitability. We have, thus far in the first half of 2024, brought on $103 million of direct written premium in our business, which is up 8% over the first half of 2023.
And what that means to us is that we expect over, you know, the next 12 months, that premium will become earned premium and not just written premium. Premiums are earned over the policy period, unlike many other industries where your revenue is recognized immediately. Our net loss ratio is 54.3% in the first half of the year, which is a 22.9-point improvement over the same period in 2023.
That is significant and substantial, and has everything to do with a reduced frequency and severity related to that Select product, among many other things, like less large losses coming through our portfolio. Our net expense ratio, Meryl touched on this, it's sitting at 31.3%, 2.3 points lower than the same period was in June of 2023.
And our net combined ratio is at 85.6%, which is down 25.2 points. And for those of you who are not necessarily involved in the insurance space so much, this would be considered what you would consider cost of goods sold in other industries s o we're realistically making about 14.4 points on every dollar of business that we're writing.
Outside of that cost of goods sold, we actually have a large investment portfolio. A lot of times in with the insurance industry, you have excess cash on hand because we have a lot of reserves that we have to set up for, policies that haven't earned yet, or, losses that have not yet been paid out, that we will pay out in the future.
So, our net investment income is up $3.3 million for the first half of the year, which is up 9.2% from the first half of 2023. All of this watered down to our net income, and our net income thus far this year has been $5.9 million. W hich is significantly better than the loss we had of $5.6 million from last year that's an $11.5 million swing from in the last 12 months in our profitability.
Net income per basic share is sitting at $0.54, and last year it was a loss of $0.52. Our annualized return on equity is 31.6% at this point, and it was a loss of 32.7% last year at this point. Overall, very much a turnaround story, and we're absolutely looking forward to seeing how the rest of the year progresses. Meryl, if you could switch the slide to the investment portfolio?
I did.
Oh, thank you. The investment portfolio, as I had mentioned, the income has increased by 10%. We actually outsource our portfolio management on our investments to a company called Conning, who is probably the largest investment manager in the insurance space.
And so we have a dedicated person there who we meet with on a monthly basis to take a look at the opportunities that we have outstanding. And right now, we have a high-quality portfolio, which consists of 78% of fixed income in the portfolio, rated AA or higher, and we have a significant portion in the U.S. Treasuries with a great yield right now.
Average portfolio yield is 3.72, and our effective duration of 3.5 years compared to we had 4.1 years at the end of 2023. Those treasuries are liquid, and we do have a bunch of bonds maturing in 2024 and 2025, and we look to invest those at the current yields, which should increase our average yield going forward.
As far as the other information we've put out recently, we have just increased in our press release, and in our investor relations call yesterday, that our 2024 guidance has been increased. So we do expect our core business, that is that New York State business, to be running about a 25%-35% growth over where we had it last year. Our combined ratio, we expect that cost of goods sold to be sitting between 84%-88%. Currently, we're at 85.6%.
Our earnings per share on a basic is between $1 and $1.30, and currently through the first half of the year, it's $0.54. Our return on equity is 26%-34%, and our current, as of June 30th, is 31.6%. Then we went ahead, and we've had a lot of questions about, "Okay, what do you expect to see in the future?" So we actually decided to put out a little bit of guidance as to where we see 2025 coming, going to.
After the huge increase we'll have in our core business, core direct written premium coming from this market opportunity Meryl discussed earlier, we do expect we'll have another 15%-25% increase in written premium growth in 2025.
Our combined ratio will be between 85%-89%, and our earnings per share will be between $1.20-$1.60, and our return on equity will be 22%-30%, as we continue to increase our equity position based upon earnings coming through this year? So with that, I think we're able to turn it over for questions, unless, Meryl, you have anything else you wanna include?
No, I just wanted to say, like, it was an incredible ride to modernize and turn around this company w e could not be proud, any more proud of where we are. So, happy to answer any questions that you have.
... Great. Thank you, Meryl and Jen, for the overview. We can now open the floor for Q&A, and we have a couple questions from the attendees here i think our first question talks about the market opportunity in front of you. I think it's really interesting that competitors have been pulling out of the New York coastal market. But our first question here is how do you manage that growth opportunity in front of you, I guess from an underwriting and risk perspective? And then as a follow-up, how much of that... I think it was a $260 million opportunity, how much of that do you think you can capture and exploit?
Sure. So in terms of how we manage it, we have really good data on our profitability by segment, and by segment, I mean it could be someone who's had a prior loss l ike, how do we... how much money do we make on homeowners insurance for individuals that have had losses versus those that haven't? Or those in by county, or one family versus two family. You know, there's lots of different characteristics that are-
And so we have results by segment, and we are going to be intentional and very selective in writing the business we know has the highest margin for the company s o it would be a huge mistake to grow for growth's sake, or to jeopardize this amazing turnaround we've had by growing too quickly and not making money.
So we are gonna use o ur actuarial team is A plus, and we're gonna use the data we have to select which segments will help us through. In terms of how much? I'm thinking maybe 20%, maybe 30% i m not quite sure. We have to see how the situation evolves.
Initially, we thought that all this business would be moved over a 12-month period, which would have allowed us to write even more of it. What we've been doing is, like, very quickly hiring people and, you know, really trying to get our processes in line so we can maximize this opportunity, but I think it's unlikely that we would write more than 20%-30% of the business on a policy count basis.
Great, great, that's helpful. Our second question here, I know you talked about reinsurance, the reinsurance market a little bit, and ways that you've been managing the cost pressure there, but what's your outlook for reinsurance costs, you know, looking out over the next 12 months or so?
Sure. So, you know, you may have seen, if you've done some research on Kingstone, that we have our treaties are July 1st to June 30th for catastrophe reinsurance, which is our largest expense. And last year when we went to market, we actually saved $6 million over the previous year, which is amazing, and part of that was due to the actions we took on a risk management perspective.
Part of it was due to the health of the reinsurance market. There was no real global catastrophes last year, were way down t he companies were making a lot of money t hey'd raised their rates a lot, and so there was capacity available, and they wanted to use that capacity, and we were the beneficiary of that.
For next year, we actually included in our 2025 guidance an increase, a modest... a moderate increase in our reinsurance costs for two reasons. One is, we know our exposure count is gonna go up because of this, you know, great market opportunity we have w e're gonna be insuring more risks, and each risk requires reinsurance.
But second, we really don't know what's gonna happen with the catastrophes l ike, there's this, you know, a forecast for a really bad hurricane season s o far it has not been, but who knows? And, really, the, you know, the reinsurance market is global, so if there's catastrophe in Japan or wherever in the world, it's gonna affect our rates here s o to be very conservative, we did plan for a moderate increase for next year in our guidance.
Got it, and we have a question on the 2025 revenue guidance I believe you provided. Can you bridge the more modest 2025 revenue guidance with the much larger growth opportunity that you're seeing as of late?
Yes, so in terms of the guidance, there are a couple key assumptions that you should know. First of all, the 2025 guidance, with the exception of core written premium growth, does not account for this market opportunity that I covered. It's just too early.
So, you know, I think we've given an estimate of earned premium, earnings per share, return on equity. None of that guidance assumes any- You know, we haven't been able to do the forecasting to know what this opportunity means. So, you know, overall, I would say our guidance might be conservative, because our earned premium is gonna be much higher from these policies. But the other thing to know, in our 2025 guidance, and in our 2024 guidance, we do not assume a major catastrophe event.
So we get lots of catastrophes through the year t hey're called PCS events, t hey're smaller in nature, but then there are, like, big events, like, recently there was Debby d idn't affect us, but that is an example of a big event. So we have not planned for any big event in our guidance, and, you know, I would say that that's a key thing t he second is that we don't project gains and losses in our investment portfolio, and so that's not included in the second half 2024 guidance or in the 2025 guidance. And then I told you that for reinsurance, we did assume a moderate increase for 2025.
Great. Well, Meryl and Jen, we really appreciate the overview and presentation today i think it's, it's a great story. That brings us to the end of our conference. I know there may have been a couple questions we didn't get to, but if anybody has any follow-up questions, feel free to reach out to Kingstone directly, or you can reach out to Sidoti. My email is bmccarthy@sidoti.com b ut Meryl, Jen, thank you very much for your time.
Thank you, Brendan.
Thank you. We're happy to answer your questions if we weren't able to do that on the webinar today.
Great. Great, thanks, everybody. Have a great day.
Bye. Bye.