Greetings and welcome to the Kingstone Company's First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Karin Daly, Vice President of the Equity Group and Kingstone Investor Relations Representative. Karin, you may now begin.

Thank you, Melissa. 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'd 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 Risk 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 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 Meryl Golden. Meryl, you may begin.

Thanks, Karin, and good morning, everyone. Our results in the first quarter show that the investments we have made and the turnaround plans we have put in place have worked. This quarter was an incredible start to the year as we achieved double-digit growth in our core business, improved our underwriting results markedly and generated net income for the second consecutive quarter. We are extremely proud of what we've accomplished and even more optimistic about the future. I've been thinking about the playbook for everything that we have done to modernize and reposition the company. Previously, we've talked about Kingstone 2.0 and Kingstone 3.0 as the strategic initiatives that we executed upon. What I've come to realize is that the foundation of those strategies was based on the underlying principles that I learned from my previous experiences, most notably my tenure at Progressive and Bridgewater. Today, I'm going to discuss our turnaround in the context of those principles and will highlight five of them specifically, prioritizing profit over growth, proactively identifying trends and taking prompt action to address them, the imperative of rate segmentation and properly matching rate to risk, the importance of having low expenses, and lastly, the power of transparency. It's easy to grow in the insurance business. It's much harder to grow profitably, living by the key tenants that profit is always more important than growth, makes it easier to make difficult decisions. Clearly, our determination to aggressively reduce our non-core business, which at its peak, represented 20% of our premiums is an example of prioritizing profit, but maybe an easier decision given how unprofitable that book has been. Another example, last year, we significantly slowed our new business in the face of a projected material increase in our reinsurance costs. Once the increase was understood, which…

Thank you, Meryl, and good morning, everyone. We are thrilled to report the 2024 first quarter results, our second consecutive profitable quarter with a net income of $1.4 million, or $0.13 per share. This is a $6.5 million turnaround from the same period last year. As Meryl indicated earlier, and I will happily reiterate, this quarter was the highest first quarter profitability we have seen in seven years. Core direct written premiums increased 12.5% to $47 million, while non-core business strategically declined 55.6% from the prior year quarter. On a consolidated basis, direct premiums written increased 3.6% primarily due to continued pricing actions. With favorable weather, fewer large losses and relatively mild quarter in catastrophe losses, our quarter-over-quarter performance was exceptional. Our first quarter combined ratio improved 30 points to 93.3% due to both lower losses and expenses. Our underlying loss ratio improved by 16.6 points to 58.8%, largely due to lower frequency from the mild winter weather better risk selection from our Select product as well as lower severity. As you may recall, last year, we saw unusually high number of large losses, which we could not explain. We hired an outside firm to take a close look at these losses and ultimately determined it was random. Insurance can be a fortuitous business. The lower number of large losses in the fourth quarter and again in the first quarter confirmed that conclusion. Naturally, the reduction of our volatile non-core business also contributed to the profitable performance this quarter. In addition to the much improved underlying loss ratio, we also experienced an 8-point improvement in catastrophe losses, and 2 points of favorable development from prior year, primarily from the re-estimation of catastrophe losses. Our net loss ratio improved by 26.6 points overall. Our expense ratio was also down 3.4 points…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Eidelman with Daytona Street Capital. Please proceed with your question.

Yes. Thanks a lot. That was a great presentation. It’s wonderful. You made my day. My question is, given that over the last few years the book value has gone down, I wonder if that is a hint, if you have enough net worth to grow at the rate that you want to grow. And how does the decline in book value over the last, let’s say, four or five years affect your ability to grow and reach the levels you want to.

Great, thanks for your question. We don’t really see our capital as constraining our growth today. And just so you know, we always have the ability to increase our quota share if we need more capital to support our growth. But as I said, we don’t at this point see it as an impediment at all to our growth.

Great. Thank you.

Thank you. Our next question comes from the line of Gabriel McClure [ph], private investor. Please proceed with your question.

Hey, Meryl and Jennifer, I’d like to congratulate you all on the first quarter. I was just blown away when I saw that we were profitable in first quarter. I know since I have been a shareholder 2019, I don’t think we’ve had a profitable first quarter. So thank you for that. I have one question for Jennifer and then one for you, Meryl. Jennifer, the net investment income went down from prior year and just kind of help me understand why that happened, seeing as how the yields are, should be increasing and actually our investable assets also went up?

Sure, thank you. Thanks for the question. Effectively, what happened is we did have some increase in our stock portfolio. So we did have some unrealized gains that came through in 2023 that we didn’t have quite as much in 2024, because as you recall, at the end of 2022, all of the investments were in quite a bad state with the economy. So, we did have improvement through 2023, which was greater than that of 2024, but it is still going in the right direction.

Okay. But as far as, like, the actual net investment income of being, like, $1.5 million versus, I think, the year prior was $1,540,000 or something, why would that number come down? It seems like we should be – we should be having more income.

Sure. It would appear that our investment income, the interest in dividends on the portfolio, went from $1.6 million in 2023 down to $1.5 million in 2024. And that would be what is driving that particular change. It’s a very small amount, about $70,000. The total net investment change year-over-year is like $38,000.

Right. I just wondered why it’s going in the down direction when it is supposed to be going up.

Yes, that is the only thing I can see, Gabe, is that we do have some change in the interest and dividends on the portfolio. I will look into this further and get you a more detailed response.

Okay. Okay, great. And then, Meryl, my question for you is you already answered one of my questions in your presentation about the percent of our program that’s in the Select program now. But I am really curious about that. And, I mean, like, I guess, how does it work, are you guys using AI? And I understand it’s a competitive business and this is a public call, but anything you could share would be helpful.

Sure. So I’d like to tell you that we’re using AI, but our rates are highly regulated, and at this point, they need to be explained to regulators, which excludes the opportunity to use AI in our rates. But what we did as I said, we went live in 2022, so for the year or so before then, we took all of the data for Kingstone for the past ten or so years and we built a what’s called a by-peril rating plan, which is a very specific way of pricing for homeowners where each peril, like hurricane or liability, the different perils water, they’re each priced based on the data that is most relevant to predicting loss cost for the peril. So it’s a very – it’s a common way for homeowners to be priced. But we feel that we’re very far ahead of our competitors in the coastal space. And so what we’ve seen in our Select product, as I mentioned, is that the reported frequency is lower than our legacy product. And in fact, we’re seeing upwards of a 10% reduction in our frequency. So, typically you would see higher frequency for new business. So the fact that we’re seeing lower frequency when the majority of our book is new business is really fantastic. So I hope that answers your question, Gabe. Our intent is to continue to enhance this Select product and improve our rate segmentation so that we can grow faster and become even more profitable. So we’re very excited about the Select product.

Sure. So am I. Thank you. Thank you very much.

My pleasure.

Thank you. Our next question comes from the line of Bob Farnum with Janney Montgomery Scott. Please proceed with your question.

Hey there. Good morning. I actually have a couple questions. One is just, let’s just go back and touch on the Select product again. Are you trying to get out of the legacy business? So in other words, are you trying to get everything to be on the Select platform? And if so, how soon do you think you can kind of do that transition?

So the answer, Bob, is no. We have grandfathered our legacy book and we will continue to renew those policies in legacy for some time.

Okay.

And the primary reason is there would be a very massive dislocation between if we were to try to convert those policies. And frankly, the legacy book is profitable. So we really are hoping that our customers will retain in that book and we don’t see any need to move them at this time.

Okay, so you are not trying to just eliminate the legacy book. It’s just going to unwind as the policyholders leave. But if they continue to write renew, that will just keep going on indefinitely. That’s basically what you’re saying.

Exactly. Exactly.

Okay.

I mean, at some point, it will probably get small enough that we’d move them over, but certainly not at this time.

Okay. And if I – did I hear you correctly with the non-Core book, it sounds like you are not planning on exiting that completely. It’s just you’re reducing the negative impact of it, but you will still have a non-Core book going forward indefinitely.

Exactly. We’re subject to regulation in terms of how much of the book we can get off of, we did withdraw from the state of New Jersey. So at the end of 2025, we will have no business in New Jersey. But in the other states, we continue to take rates. We have had – we non-renew the maximum that we can’t but our goal is just to minimize the drag on our earnings from the non-Core business. And so we feel very confident with the rate we’ve taken and the other actions we’ve taken, then in 2025, it will have very little impact, if any at all, on our results.

Okay, great. And last question. So competition in the space, I know that there are a bunch of kind of [indiscernible] specific coastal writers, but I’m not sure who you face in the New York area. What’s the competitive environment like up there?

Sure. So, it continues to be a very hard market in downstate New York coastal business, and I think that’s going to continue for some time. We’ve talked about in the past that two of our largest competitors historically, one is out of business and the other has a moratorium on all of their business. And the large multiline writers have pulled away from the coast for a multitude of reasons. And even in the first quarter, we had another large competitor put a moratorium on all new business. So, there are definitely companies writing coastal business, but the brokers would tell you that they have many fewer choices than in the past. And because we feel so confident about our pricing, we are going to take advantage of this hard market position, and you will see our growth accelerate in the second quarter and beyond. So I hope that answered your question, Bob.

Yes. No, that’s good. Does New York have like a market of last resort if policyholders just can’t find something reasonably priced for them?

There is a fair plan, but it’s really small. And what I’ve heard – first of all, we compete mostly with MGAs at this point, and there have been some E&S, new E&S markets entering the space. So, there is availability. It’s just extremely expensive. So, I don’t think we’re seeing much growth in the far plan.

Okay, great. Thanks for the color Meryl.

My pleasure.

Thank you. There are no further questions at this time. Should you have any follow-up questions, you can contact Karin Daly from the Equity Group, Kingstone’s Investor Relations representative. Her telephone number and e-mail address can be found on the most recent earnings release. I will now turn the call back to Meryl Golden for closing remarks.

Great. Thank you for joining our call today. I want to express my gratitude for your support and your interest. And mostly, I want to thank our entire Kingstone team for their great efforts. Have a wonderful day.

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.