Kingstone Companies: Capitalizing on a Hard Market and Technological Edge (KINS) - KINS Stock Research Report

## Executive Summary / Key Takeaways * Kingstone Companies has successfully executed a multi-year transformation, returning to consistent profitability by optimizing its core New York business and aggressively shedding unprofitable non-Core operations. * The company's proprietary "Select" product, leveraging advanced analytics and data, demonstrates superior risk selection with significantly lower claims frequency compared to its legacy book, forming a critical technological moat. * Recent market dislocation in New York, driven by competitor exits, presents a substantial growth opportunity that Kingstone is selectively capitalizing on, focusing on profitable segments to accelerate premium growth. * Kingstone has significantly strengthened its balance sheet by fully paying off its holding company debt, enhancing financial flexibility and contributing directly to future earnings. * Management's 2025 guidance anticipates continued profitable growth, supported by increased earned premiums from recent growth, a reduced quota share, and lower interest expenses, though execution on capturing market opportunity and managing reinsurance costs remain key factors. ## A Regional Insurer's Transformation and the Opportunity Ahead Kingstone Companies, Inc. ($KINS) operates primarily through its wholly-owned subsidiary, Kingstone Insurance Company (KICO), a New York-domiciled property and casualty insurer with a history stretching back to 1886. While KICO is licensed in several Northeast states, its focus and the vast majority of its business remain firmly rooted in New York, particularly the Downstate region. This regional concentration has historically been both a strength, allowing for deep market and regulatory expertise, and a vulnerability, exposing the company to localized catastrophe risk and intense competition. Beginning in late 2019, Kingstone embarked on a multi-year strategic transformation, initially dubbed Kingstone 2.0 and evolving into Kingstone 3.0. This involved a fundamental overhaul of its operations, technology, and risk management. Key initiatives included strengthening the management team, enhancing efficiency through technology adoption, developing a more segmented and analytically driven product suite, and actively managing catastrophe exposure. A critical component of this strategy has been the aggressive reduction of the unprofitable non-Core business outside of New York, a process that has seen non-Core policies in force decrease significantly, down 67.6% in Q1 2025 compared to the prior year. This period of intense internal focus and restructuring has culminated in a notable turnaround. The company has achieved six consecutive quarters of profitability, a testament to the effectiveness of its strategic adjustments and operational discipline. This return to profitability coincides with a period of significant market change in Kingstone's core New York footprint, creating a unique opportunity for the company to leverage its revitalized platform. ## Technological Foundation: The Power of Select Central to Kingstone's transformation and its ability to pursue profitable growth is its proprietary "Select" product suite. Introduced as part of the Kingstone 2.0 initiatives, Select is designed to better match rate to risk through the use of advanced analytics and a richer dataset, including factors like insurance scores. This represents a significant technological step beyond traditional underwriting methods. The tangible benefits of the Select product are evident in its performance metrics. Select homeowners policies have demonstrated significantly lower claims frequency compared to the company's legacy product. In Q1 2025, Select homeowners frequency was 1.6% versus 2.3% for the legacy product. This outperformance has been consistent, with the Select product showing a 29% lower frequency for the full year 2024 compared to the legacy book. This difference is particularly compelling given that the Select book includes a higher proportion of new business, which typically carries higher initial frequency than a seasoned renewal book. The Select product's pricing and underwriting have successfully shifted the mix towards more preferred risks with characteristics like well-maintained homes, better insurance scores, and higher deductibles. The strategic implication for investors is clear: the Select product provides Kingstone with a competitive moat by enabling superior risk selection and pricing accuracy. As Select grows as a percentage of the overall book (reaching 48% of policies in force in Q1 2025 and expected to grow to approximately 60% by year-end), it is a key driver of improved underwriting profitability and forms a scalable foundation for future growth. Beyond Select, Kingstone is also leveraging technology in other areas, recently partnering with Snapsheet and Kyber Technologies to enhance claims efficiency and customer experience through intuitive software and AI-enabled correspondence. While specific quantitative efficiency gains from these partnerships are not yet detailed, the strategic intent is to streamline operations and improve cost efficiency. ## Competitive Dynamics and Market Opportunity Kingstone operates within a competitive landscape dominated by much larger national players like Progressive (TICKER:PGR), Allstate (TICKER:ALL), and Travelers (TICKER:TRV), as well as other regional insurers and, increasingly, indirect competitors like digital insurers. Compared to national giants, Kingstone operates at a significantly smaller scale, which can translate to higher operating costs relative to earned premium. Larger competitors often benefit from economies of scale, more extensive digital ecosystems, and greater financial resources for technology investment and national marketing. For instance, while Kingstone relies on agent networks, larger players like Progressive leverage dominant digital platforms for faster processing and data analytics, potentially achieving lower operating costs per policy and higher efficiency in risk assessment. However, Kingstone possesses distinct competitive advantages rooted in its regional focus and operational model. Its deep expertise in the New York market, particularly Downstate, allows it to navigate the complex regulatory environment and tailor policies for specific regional risks more effectively than some national carriers. Its established relationships with local retail and wholesale agents provide a loyal distribution channel and localized market intelligence. While Kingstone may lag in broad digital capabilities compared to pure-play tech insurers, its focus on enhancing its core Select product and integrating targeted technologies for claims processing aims to improve efficiency where it matters most for its specific business model. Crucially, recent market dynamics have created a significant opportunity that plays directly into Kingstone's strengths. The exit of several competitors from the New York personal lines market, including the non-renewal of tens of thousands of policies by Adirondack and Mountain Valley by the end of 2024, has severely constrained market capacity. This hard market environment allows Kingstone to be highly selective about the new business it writes, focusing on segments that meet its profitability targets. The business acquired from these exiting competitors has reportedly performed even better than Kingstone's already strong Select book. Furthermore, the recent renewal rights agreement with AmGUARD Insurance Company for approximately $70 million in written premium in Downstate New York presents another substantial opportunity, allowing Kingstone to expand its footprint through new distribution partners and write business directly into its profitable Select product. ## Financial Performance and Strengthening the Balance Sheet Kingstone's recent financial performance reflects the positive impact of its strategic transformation and the initial benefits of the changing market dynamics. In Q1 2025, the company reported net income of $3.9 million, contributing to its streak of six consecutive profitable quarters. Net premiums earned saw a significant 51.0% increase in Q1 2025 to $43.52 million, driven by a reduction in the personal lines quota share percentage (from 27% to 16%) and the influx of new business from market dislocation that began earning in.

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While the net combined ratio remained relatively stable at 93.7% in Q1 2025 (compared to 93.3% in Q1 2024), the underlying components show the strategic shifts at work. The net loss ratio slightly increased to 62.4%, influenced by higher severity from large fire losses in the quarter, although overall personal lines non-cat frequency was lower. Favorable prior year development of $0.6 million provided a 1.4 point benefit to the loss ratio. The net underwriting expense ratio remained flat at 31.3%, as increased expenses related to staffing up for growth and higher employment costs were offset by the significant increase in earned premiums.

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Beyond underwriting, net investment income grew 36.3% to $2.05 million in Q1 2025, benefiting from strong cash generation from operations supporting a larger investment portfolio and strategic investments at higher yields. The company also realized a $1.97 million gain from the sale of its headquarters building in Q1 2025.

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A major financial achievement has been the complete payoff of the holding company debt. Utilizing proceeds from an at-the-market (ATM) offering and intercompany dividends (which were restricted until late 2024), Kingstone paid off approximately $20 million in debt over five months, becoming debt-free by February 2025. This eliminates significant interest expense (saving over $800,000 annually) and strengthens the balance sheet, providing greater financial flexibility and sufficient statutory surplus to support planned growth initiatives, including the AmGUARD opportunity.

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## Outlook and Key Considerations Kingstone's management has provided and reaffirmed guidance that reflects confidence in the company's trajectory and ability to capitalize on the current market environment. For the full year 2025, the company expects core business direct written premium growth between 15% and 25%. Based on projected net premiums earned of approximately $184 million, guidance includes a GAAP combined ratio between 81% and 85%, basic earnings per share between $1.90 and $2.30, diluted earnings per share between $1.75 and $2.15, and return on equity between 27% and 35%. This outlook is underpinned by several key assumptions: continued growth in earned premiums driven by the momentum from late 2024 and the reduced quota share, ongoing improvements in underwriting profitability from the Select product, and the benefit of eliminating holding company interest expense. The guidance assumes an average year for catastrophes in 2025, acknowledging that 2024 was exceptionally light. It also factors in an expected modest increase in catastrophe reinsurance costs for the 2025-2026 treaty year due to exposure growth and a hardening market, as well as the cost of recently purchased winter storm coverage. Importantly, the potential benefit from the AmGUARD transaction, estimated to generate $25 million to $35 million in premiums over a 12-month period starting in late Q3 2025, is not yet fully incorporated into the guidance due to inherent uncertainty, suggesting potential upside. While the outlook is positive, investors should consider potential risks. Reserving uncertainty is inherent in the insurance business, and actual loss development could differ from estimates. Inflation continues to pose a risk, potentially impacting loss costs, investment yields, and operating expenses beyond current assumptions. The availability and cost of reinsurance, particularly catastrophe coverage, remain subject to market conditions. Although the company has strengthened its balance sheet and liquidity, its ability to execute on capturing the market opportunity profitably and managing growth while maintaining underwriting discipline will be critical. ## Conclusion Kingstone Companies has successfully navigated a challenging period of transformation, emerging as a profitable regional insurer with a strengthened balance sheet and a clear strategic direction. The core investment thesis rests on the company's ability to leverage its proven Select product and enhanced operational efficiency to capitalize on the significant market dislocation in its core New York market. The payoff of holding company debt provides a solid financial foundation and frees up capital for future growth. While Kingstone operates in a competitive industry alongside much larger players, its localized expertise, agent relationships, and technologically differentiated Select product provide a competitive edge in its target market. The current hard market conditions and competitor exits offer a compelling opportunity to accelerate profitable growth. Key factors for investors to monitor include the successful execution of the AmGUARD renewal rights transaction, the continued outperformance and adoption of the Select product, trends in loss cost inflation, and the dynamics of the reinsurance market. If Kingstone can effectively seize the current market opportunity while maintaining its underwriting discipline and expense control, it appears well-positioned to continue its trajectory of profitable growth and deliver value to shareholders.