Description

Kingstone was last written up in 2016. While the thesis began playing out, the company has stumbled over the last year for a number of reasons. The last writeup gives a decent overview of the business so I’ll only provide a short description and focus on the more recent issues. Shares currently trade at 0.9x book.

KINS is a multi-line regional property and casualty insurance company writing business exclusively through retail and wholesale agents and brokers. KINS operations were historically based out of NY state but the company began expanding to other states in 2017, which I believe has played a part in the recent troubles.

Prior to 2018, the company ran a reliable operation that earned attractive returns on capital. CEO Berry Goldstein transformed the company over his first tenure between 2001 – 2018, before retiring at the beginning of 2019. He continues to be the largest shareholder with 6.55% of shares outstanding and has purchased an additional 19,706 shares since being reappointed to the CEO role in July 2019.

There’s been two major issues over the last year that have impacted loss ratios:

Catastrophes: 2018 saw a 6 point increase to net losses due to catastrophes while Q1-19 experienced a 17.2 point increase. Part of the issue in 2019 was that none of the events reached the per occurrence catastrophe reinsurance retention rate.

Unprofitable Underwriting: the issue has been two-fold, but the major piece has been with commercial lines which the company has had to strengthen in 2019 after further analysis. This has had an 11.7 point impact for 2019 ytd.

The net loss ratio on the remaining business, ex commercial, has also been a bit elevated, which I think is related to the rapid expansion of the business over the last several years.

Prior to 2017, KINS only operated in NY. In 2017, the company started writing homeowners’ policies in New Jersey and Rhode Island, Massachusetts in 2018 and Connecticut and Maine in 2019. As of Q3-2019, NY represented 84% of net premiums written.

In response to the issues, the company has done the following:

-Goldstein rejoined as CEO in July of 2019.

-The company stopped writing commercial business as of July 2019. Commercial represented 12% of net premiums earned in 2019 but 46% of loss and loss adjustment reserves. All commercial policies will expire by September 2020.

-Catastrophe reinsurance was increased by 30%.

-Began increasing premium rates in NY.

Our view is that Goldstein knows this business very well and is a proven operator. The company earned good returns in NY for many years and continues to have an attractive runway for growth that is being obscured by issues that are largely transient. While the insurance industry has been soft for an extended period of time, we have begun to see hardening in certain segments over the last year.

If we assume that the core business continues to operate with an elevated net loss ratio that’s ~6 – 8 points higher than historical, the business could still earn a low double digit return on equity. If Goldstein is able to improve underwriting back to historical levels, we could see a return to mid teens returns on equity. Both scenarios should improve the valuation and it wouldn’t be unreasonable for the business to trade at 1.25x – 1.5x book, which would be a ~40 – 70% return from today's share price, in addition to book value compounding at a high single digit to low double digit. Goldstein’s employment contract runs until December of 2022 which seems like a reasonable timeline.

Catalyst

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