Description

Kingstone Companies, Inc. is a regional property and casualty insurance holding company operating primarily in the Northeast through its principal subsidiary, Kingstone Insurance Company (collectively referred to as "Kingstone" or "KINS"). Kingstone specializes in insuring coastal properties, with the bulk of its premiums generated in downstate New York.

Kingstone is a high-quality insurer—boasting return on equity (ROE) exceeding 20% and a combined ratio in the low 80s—but it is currently trading at a distressed valuation of roughly 5x our 2025 EPS estimate. This discounted multiple is the result of recent business missteps and challenging macroeconomic conditions. However, under new management and a refreshed strategy, the company has executed a successful turnaround. The timing of the turnaround is fortuities because Kingstone is now well-positioned to capitalize on a significant premium growth opportunity, fueled by a meaningful shift in the competitive landscape as recently as of July.

Company and Market Background

Kingstone is a property and casualty insurer that has been in operation in the State of New York since 1886.  The company went public on the Nasdaq in October 2004, initially operating as an insurance agency (selling insurance, not underwriting their own policies). In 2005, Kingstone acquired $3.75 million in surplus notes issued by Commercial Mutual Insurance Company (CMIC), an insurance carrier. To focus exclusively on underwriting, Kingstone sold its agency and premium finance businesses and, in July 2009, acquired 100% ownership of CMIC, renaming it Kingstone Insurance Company. Over the subsequent fifteen years, Kingstone grew to write over $200 million in annual premiums and become the 15th largest writer of homeowners insurance in New York State. Kingstone’s most recent quarter was the most profitable in its 138-year history.

Kingstone’s primary business (93% of premiums) consists of personal lines, including homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies. The remaining 7% of premiums come from livery physical damage policies, which cover car service vehicles and taxicabs. Kingstone has built a niche focus on coastal property insurance, particularly in downstate New York (New York City and Long Island), where they insure high-value homes such as luxury beach houses in the Hamptons.

Larger insurers have steadily reduced their exposure to coastal risks since Hurricane Andrew in 1992, struggling to manage the complexities of these markets. Not many companies focus solely on coastal insurance, and even fewer in the downstate NY geography, which creates a significant underwriting advantage for Kingstone due to their local market presence and expertise. The competition that Kingstone does run into is primarily other smaller regional players and MGAs (MGAs are essentially outsourced underwriters, there is no reference of Kingstone leveraging MGAs mentioned in their financials or recent earnings calls). These competitors are not as well positioned as Kingstone, and on the aggregate are exiting Kingstone’s core markets.

Kingstone distributes its policies through third party agents and has never distributed their products directly to the end policy holder. Producers have access to a “KICO producer interface” and website portal that provides them the ability to quote risks for various products and to review policy forms and underwriting guidelines for all lines of business.

Kingstone's Recent Downfall

Kingstone was once considered a bit of a Wall Street darling, boasting consistent double-digit growth and high returns on equity (ROEs). However, this success led to complacency, with Kingstone failing to adjust to a rapidly changing market while also short-sightedly chasing growth by expanding into non-core markets. A cautionary tale as old as time for insurance – Kingstone ultimately expanded too quickly and failed to properly price its policies. This overreach left the company vulnerable when external conditions deteriorated between 2020 and 2022.

During this period, inflation spiked, leading to higher claim costs, while the insurance market hardened, making reinsurance more expensive. These macroeconomic pressures caught Kingstone off guard, especially with increased storm damage during those years. The company struggled to adapt, and the consequences were severe. By the end of 2022, Kingstone’s market capitalization had plummeted to just $10 million from $200 million in 2018.

The Turnaround

Kingstone underwent a two-phase transformation to recover from the missteps that led to its downfall, transitioning from "Kingstone 1.0," which had set the business up for failure, to a modernized, more resilient company.

Kingstone 2.0 (2021-2022): Rebuilding the Foundation

1. Leadership Overhaul: Historically, Kingstone sourced much of its talent locally from Kingstone, NY, which limited its access to deep industry expertise. Recognizing this, the company brought in key senior leaders with significant experience in the broader insurance industry, helping to rebuild and modernize operations.
2. System Modernization: Many of Kingstone's internal systems were outdated and built on legacy technology. To address this, the company invested heavily in upgrading its infrastructure, completing the transition to modern systems—including a new claims management system—by August 2022.
3. Introduction of "Select" Product Suite: Perhaps the most significant change was the development of the new "Select" product line, introduced in January 2022. Pricing, a critical differentiator, was enhanced through collaboration with an external actuarial firm, leveraging modern data tools to design a more competitive and accurate product suite. The result was a 10% reduction in claims frequency for policies under the "Select" umbrella. Since its launch, all new business has been written through this improved product line.
4. Catastrophe (CAT) Exposure Management: Kingstone’s expansion beyond New York had led to a sharp increase in CAT exposure, especially in a hardening reinsurance market. To mitigate these risks, the company began better managing its catastrophe exposure, focusing on reinsurance costs and risk mitigation strategies.

Kingstone 3.0 (2022-2023): Finalizing the Turnaround

1. Reducing Non-Core Business: One of the largest contributors to Kingstone's previous poor performance was its non-core business outside of New York, which was largely unprofitable, particularly in states like New Jersey, Connecticut, Massachusetts, and Rhode Island. This non-core segment represented 20% of premiums but an outsized share of costs. By working with regulators, Kingstone has significantly reduced its non-core portfolio to just 5% of its business, focusing now primarily on the profitable downstate New York market, including Long Island.
2. Pricing Adjustments: To stay ahead of rising loss trends and inflation, Kingstone implemented pricing adjustments, ensuring that premiums accurately reflected increased replacement costs for homes and other insured assets.
3. Reinsurance Cost Management: Kingstone has also refined its reinsurance strategy, now factoring reinsurance costs into its underwriting decisions. Policies are priced with a clear understanding of how much reinsurance will cost, ensuring better alignment between risk and cost.
4. Expense Reduction: A relentless focus on driving down expenses has been central to the turnaround. Since 2021, Kingstone has reduced its expense ratio from 41 to 31, below the industry average of 33. This reduction was achieved through staff cuts, renegotiation of contracts, reduced commissions for producers, and technology-driven efficiencies. The company aims to further reduce its net expense ratio to 33 by the end of 2024.

Business Going Forward

Kingstone’s policies are now properly priced, and the company is being run and managed with far greater efficiency. The clearest indicator of Kingstone’s successful turnaround is its combined ratio, a key measure of underwriting profitability. For those unfamiliar, the combined ratio is calculated by dividing the costs of claims and expenses by the premiums generated, similar to gross margin in other industries. A combined ratio of 100 means break-even, with anything below representing profit and anything above indicating a loss.

The combined ratio is divided into two components: the net loss ratio (claims paid out) and the net expense ratio (costs of acquiring premiums). These sub-measures can be very informative because they help identify why an insurer is making (or losing) money.

For Kingstone, both ratios trended upward starting in 2017, resulting in abysmal underwriting performance for several years. However, the improvements since 2022 have had a significant impact. The expense ratio has dropped from 41 in 2021 to 31 over the last two quarters, reflecting the company’s cost-saving initiatives. This expense ratio is now slightly below that of larger peers. A lower expense ratio provides more stability, as it remains relatively fixed year to year compared to the more variable loss ratio, which depends on claim events. Kingstone's loss ratio has also improved, aided by better pricing and the avoidance of riskier policies, which should help keep future claims lower relative to premiums.

The key takeaway is that Kingstone's turnaround efforts have been successful, with its improved combined ratio appearing sustainable. In the most recent quarter, the combined ratio was an impressive 78.2, a result comparable to the absolute best in the industry. While more quarters of similar results would be ideal, we expect Kingstone to maintain a combined ratio in the mid-80s to low-90s over a full insurance cycle—placing it among higher-quality insurers.

Note on New Management 

The leadership team driving Kingstone's turnaround has proven itself  capable, with impressive credentials for a micro-cap insurance company. Below are brief profiles of the CEO and CFO:

• Meryl Golden: Meryl joined Kingstone as COO in October 2019 and was promoted to CEO in October 2023, where she now leads the newly revamped business strategy. Her extensive experience includes 18 years at Progressive, a two-year stint as a management advisor to Ray Dalio at Bridgewater, and roles at insurtech firms Earnix and Arity. Meryl currently owns 1.14% of Kingstone shares, valued at approximately $1.5 million.
• Jennifer Gravelle: Jennifer became CFO in January 2023, bringing 25 years of insurance industry experience, with a focus on coastal property insurers. She has served as CFO at three insurance firms since 2008, including Olympus (10 years), Allies Trust Insurance (2.5 years), and Slide (1.5 years). Her expertise in startups and turnarounds makes her well-suited to Kingstone’s current phase of growth.

Large Market Opportunity Up for Grabs 

Kingstone is facing the most significant profitable growth opportunity in its history. In July, three major players—Adirondack, AmGUARD, and Mountain Valley—announced their exit from the New York coastal property market, leaving over $260 million in premiums up for grabs. This opportunity comes at a pivotal time, as Kingstone’s turnaround is complete, and the company is primed to capture a large portion of this business.

With few competitors remaining in the market, and many of those still struggling to modernize, Kingstone is uniquely positioned to take advantage. Management believes the company can capture 20-30% of this available market within the next 12 months, prioritizing the highest-return policies.

The impact is already being felt: in July, Kingstone’s new business policy count increased fivefold compared to the same period in 2023, with new business premium volume surging 13x (this implies ~100% increase in pricing for these new policies). The Holy Grail of growth for insurance is being able to grow both volume and pricing – that is exactly what Kingstone is positioned to do.

Future Growth Expectations

With Kingstone successfully reducing its combined ratio, the next step is to grow the business profitably. The guidance for 2024 and 2025 is outlined below, with the 2025 earnings per share (EPS) range suggesting a price-to-earnings (P/E) ratio of approximately 5x to 7x.

This is where this idea becomes even more interesting because none of the 2024 or 2025 guide includes growth from the market opportunity highlighted above. Management has yet to update their forecasts since this opportunity arose in July. With that said we can back into some rough estimates of how meaningful of an impact this will have on EPS by parsing through some management’s recent comments on their Q2 earnings call and the Sidoti micro-cap conference. The below calculations and assumptions are not perfect but do give us an idea of how cheap the company is both before and after the market growth opportunity in front of them.

1. The market opportunity is estimated at over $260 million in premiums.
2. Management anticipates capturing 20-30% of these premiums over the next 12 months, focusing on the most profitable policies. We adjust expectations to reflect a more conservative capture rate: a base case of 20% and an optimistic scenario of 25%.
3. We estimate the percentage of premiums that will be ceded to reinsurers based on recent results.
4. Although not all new premiums in 2025 will be earned in that year due to timing, we consider this offset by the new premiums from 2024 that will be recognized in 2025.
5. The combined ratio range is based on the 2025 guidance for the overall company. This estimate is conservative, as Kingstone will be able to selectively underwrite the most profitable policies while pushing for better pricing, resulting in a lower combined ratio for new business (the most recent quarter reported a combined ratio of 78.2!).
6. This back-of-the-napkin estimate treats the combined ratio as gross profit, deducting taxes, without accounting for potential increases in fixed costs or new hires required to handle the new business. However, the conservatism in the other assumptions should offset any additional costs.
7. Overall, this market opportunity could result in a 10% to 40% boost in EPS, with a 22% increase in the base case appearing reasonable. This would drive the already attractive P/E ratio down further to a range of 6.5x to 4.2x for 2025.

Looking beyond this short-term growth catalyst, what truly makes Kingstone attractive is management’s commitment to long-term value creation and sustainable growth beyond 2025. Although management has not yet formally unveiled their long-term growth strategy, the groundwork laid during the turnaround positions the company well for future profitable growth.

Valuation

We assign a conservative valuation of $17 per share to Kingstone, based on an estimated 2025 EPS of $1.70 multiplied by a P/E ratio of 10x. We believe that a 10x multiple is appropriate for Kingstone, given its lower combined ratio, higher return on equity (ROE), and superior near- and long-term growth prospects compared to many larger (albeit more diversified)  property and casualty (P&C) insurance peers, which currently trade at an average P/E of 15x. Historically, Kingstone has traded at a low to mid-teens multiple on projected earnings. This valuation suggests nearly 100% upside potential from its recent closing price of $8.85.

Other Bullish Notes 

• Kingstone’s fixed-income investment portfolio, valued at $180 million, yields an average of 3.72%. This translates to a yield of approximately 7% relative to its current market capitalization of around $100 million.
• The company recently restructured a ~$20 million note originally taken out in 2022 during a challenging financial period. The new debt structure is self-amortizing, enabling Kingstone to repay the principal without incurring any premium or penalty. Management has indicated a commitment to rapidly pay down this debt, which would significantly reduce the corresponding interest expense (the annual interest expense in 2023 was $4 million, equating to about $0.33 per share).
• The expense ratio is projected to decline by an additional 200 basis points, from 31% to 29%, as growth stabilizes. While the target net expense ratio for full-year 2024 is set at ≤29%, it has been elevated due to increased performance bonuses for employees.

Risks

• The most obvious risk is a major storm impacting New York. While the frequency and severity of such storms are lower compared to Gulf Coast states, New York has experienced 37 hurricanes and tropical storms since 1970 (through 2022). The most notable events include Gloria in 1985, Floyd in 1999, Irene in 2011, Sandy in 2012, and Ida in 2021, averaging roughly one to two severe events per decade. With the current reinsurance policies in place, management estimates that a Sandy-like event would result in a $4.75 million impact, equating to about a $0.40 hit to EPS. While this would be a significant blow, it is not something the company couldn’t recover from.
• The risk of multiple smaller weather events affecting the New York region also poses a challenge, as they can cumulatively impact claims and underwriting results.
• This is a micro-cap insurance company, shares have rallied a lot this year, and a large percentage of the float is retail. Expect some volatility.

Conclusion

This is a compelling idea because shares are still trading at an attractive valuation, there is a major near-term catalyst that could add up to 40% to EPS in 2025, and the longer-term growth prospects for the business are attractive. Kingstone is positioned for both strong earnings growth and multiple expansion as the market begins to pay attention to this mostly forgotten micro-cap insurer.

Catalyst

Market Growth Opportunity: The impending market growth is expected to boost EPS in 2025 significantly.

Financial Transformation: Kingstone's turnaround is beginning to reflect positively in its financials.

• 2024 is projected to be the first profitable year since 2020.
• Trailing twelve-month (TTM) numbers will continue to improve with the results from Q3 and Q4, although the current trailing P/E ratio still appears elevated at 20x.

Potential for Re-Rating: Increased investor interest may lead to a re-rating of Kingstone’s shares.

• With a market capitalization just exceeding $100 million, Kingstone has been too small for substantial institutional investment. As the market cap grows, more investors will take notice.
• Currently, only one analyst (from Janney Montgomery) covers the company. Increased analyst coverage could enhance exposure and interest.

AM Best Rating: Kingstone is not currently rated by AM Best, as the rating was withdrawn at the company’s request during its recent financial struggles. A positive rating from AM Best would serve as further validation of Kingstone’s recovery and could enhance investor confidence.