Participants

Karin Daly; IR; The Equity Group Inc.

Meryl Golden; President, Chief Executive Officer, Director; Kingstone Companies Inc

Jennifer Gravelle; Chief Financial Officer, Vice President, Treasurer; Kingstone Companies Inc

David Eidelman; Analyst; Daytona Street Capital

Gabriel McClure

Bob Farnam; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Greetings, and welcome to the Kingstone company's first quarter 2024 earnings conference call. (Operator Instructions) As 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.

Karin Daly

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 at 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.

Meryl Golden

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 have accomplished and even more optimistic about the future.
I have 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's 3.0 as the strategic initiatives that we executed upon, would have 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 and the insurance business, it's much harder to grow profitably living by the key tenant 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 was much less than we expected because of the actions we had taken and we were able to raise our rates to account for the higher cost. We relaxed some of our underwriting restrictions to expand our new business opportunities.
More than two years ago and well ahead of many of our competitors. We recognize that loss trends were on the rise and that inflation, which was driving our loss trends would also result in many of our customers being under insured. We acted quickly to raise our premiums and put a plan in place to update replacement cost on every policy renewal. One of the benefits of being an early mover is that we have successfully returned to profitability while some of our competitors are still restricting their business or have shut down completely.
This gives us the ability to take advantage of market conditions, addressing the needs of our producers, which will enable faster growth. You will see our growth continue to accelerate in the second quarter, and we anticipate that continuing for some time, while being an early mover can pose challenges, the decision is validated when you emerge successfully on the other side.
We have not talked enough about our select product very early in my tenure at Kingstone. I recognize the need to develop a more highly segmented product that better matches rate to risk. We hired an outside actuarial firm to help us develop the product, and we went live in early 2022. The results have exceeded our expectations as reported frequency in select, which is mostly new business, is materially lower than frequency in our legacy product, which is mostly renewal business.
This both extremely well for the future of Kingstone as select represents less than 30% of our book today and will represent a larger portion in the quarters to come. We are further enhancing our select product by adding new rating variables and further rates segmentation, which we expect will increase our growth and profitability in the future. The significance of maintaining low expenses cannot be emphasized enough. We have fundamentally changed the company in so many ways and it's reflected in the substantial reduction of our expenses. I've talked repeatedly about the various actions taken to reduce expenses.
We have also benefited from the significant increase in average premium that we implemented, having low expenses gives us a sustainable competitive advantage, ultimately allowing us to expand our margins and to grow faster as we are now doing. And finally, I believe in the power of transparency, I want our employees to act like owners and to build trust with policyholders, regulators, reinsurers, and investors. We are listening closely and proactively implementing ideas to cultivate an environment of openness. We are confident in our company and believe transparency into our operations enhances confidence, supports our strategies and raises the bar on our performance.
Kingstone's turnaround is largely the product of executing this playbook. Even more important is that we now have a blueprint in place to make sure that the mistakes of the past are not repeated and a new culture built to identify and quickly address potential problems.
With that, I want to note a few things about the performance in the quarter as a NorthEast [Road] we typically experience an underwriting loss in the first quarter due to winter weather. We were fortunate that this winter was mild and that was certainly a contributing factor to our loss ratio improvement. Our profitability was made possible from rate continuing to earn in from the large rate increases we took last year. Seasonably favorable frequency, mix changes in our book from the growth of select in New York and the reduction in our non-core business, a lower number of large losses this quarter, favorable prior year loss reserve development and lower expenses among other factors. This was the most profitable first quarter that we have experienced in seven years.
Also a quick update on our strategic run-off of non-core business. In 2023, we reduced our non-core business by more than half, including a 16% reduction in the last quarter. Our goal is to eliminate the negative impact the non-core business has on our consolidated earnings not to get off the book entirely. For 2023, the non-core business reduced our earnings per share by $0.46. Our current estimate is that the non-core business will reduce our full year '24 earnings per share by $0.09, and the impact should be de minimus in 2025.
As announced in yesterday's release, we raised our 2024 guidance to incorporate the outperformance in the first quarter, for the full year, we now expect to achieve direct written premium of our core business. I'm sorry, direct written premium growth of our core business in the range of 16% to 20% and based on approximately $125 million of net premium earned, we expect to achieve a GAAP combined ratio between 86% and 90% earnings per share between $0.75 and $1.10 and return on equity between 22% and 30%.
As a reminder, our guidance assumes no material changes in our business. Our results are very weather dependent and we assume no major catastrophe event in this guidance. We have also assumed that the premium rates for catastrophe reinsurance will be level with last year's cost at our January 1, renewal. However, following our recent visit with reinsurers in Bermuda, I am optimistic that we may achieve even more favorable rates.
With that, I'll turn the call over to Jen for a more detailed review of our quarterly financial results. Jen?

Jennifer Gravelle

Thank you, Meryl, and good morning, everyone. We are thrilled to report that 2024 our 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 and 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 determine it was random insurance can be a fortuitous business, lower number of large losses in the fourth quarter. And again, in the first quarter confirm that conclusion, naturally, the reduction of our volatile non-core business also contributed to the profit 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 to 31.3% as a result of our ongoing expense reduction efforts and trending towards our 29% expense ratio goal for the full year of 2024.
For the quarter, net investment income of $1.5 million was relatively consistent with the prior year quarter, there are three key points I'd like to make about our investment portfolio. First, rates increased during the quarter and credit spreads tightened. As such, the decline in our portfolio value was muted. However, we also reduced our exposure to preferred stocks by roughly 13% to reduce volatility. We intend on further reducing our preferred stock holdings during the second quarter.
Secondly, you will see an increasing number of maturities in our bond portfolio over the next 12 to 18-months, which carry a far lower coupon than what is available to us today. And finally, the improved operating results of the company are generating positive cash flow. You'll note that we invested this excess cash in the first quarter, leaving us with less cash and higher fixed maturity securities. This will result in an increase in our future investment income.
Relative to our fixed maturity securities, our effective duration is 3.6 years with an average yield that increased to 3.67%. The weighted average effective maturity is down to 6.9 years. Our book value, excluding AOCI at March 31, was $4.40 per share. We are very pleased with our first quarter results, which produced an annualized return on equity of 16.2%. We expect return on equity to further increase over the balance of the year.
And with that, we'll open it up for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) David Eidelman, Daytona Street Capital.

David Eidelman

Yes, thanks a lot. That was a great representation. This is wonderful you made my day. My question is, given that over the last few years, the book value has gone down. I wonder if there's a if you have enough net worth to grow at the rate that you would 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?

Meryl Golden

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.

David Eidelman

Great. Thank you.

Operator

(Operator Instructions) [Gabriel McClure], Private Investor.

Gabriel McClure

Hey, Meryl and Jennifer. I'd like to congratulate you on a first quarter and I was just blown away when I saw that we were profitable. And first quarter I note since I've been a shareholder in 2019, I don't think we've had a profitable first quarter. So thank you for that.
I've 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 I understand why that happens and is how the yields are should be increasing and actually, our investable assets also went up?

Jennifer Gravelle

Sure thing, Gabriel, thanks for the question is effectively, what happened is we did have some increase in our stock portfolio. So we did have some unrealized gains that came through in 2020 -- 2023 that we didn't have quite as much in 2024 because as you recall, at the end of 2022, our 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 so going in the proper -- in the right direction.

Gabriel McClure

Okay. But as far as like the actual net investment income, it being at $1.5 million versus I think the year prior was [$1.54 million] or something. But why would that number come down, it seems like we should be having more income?

Jennifer Gravelle

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

Gabriel McClure

Right, I just wondered why it's dormant in the down direction when it was supposed to be going up?

Jennifer Gravelle

Yeah, that is the only thing I can say, Gab, 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.

Gabriel McClure

Okay, great. And then Meryl, my question for you is you already answered one of my questions in your in your presentation about the percent of our program that's in the select program now, but I'm really curious about that. And I mean, like again, tough to work. Are you guys using AI I understand it's a competitive business and this is a public call, but anything you could share would be helpful.

Meryl Golden

Sure. So I'd like to tell you that we're using a AI, but our rates are highly regulated 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 '22. So for the year or so before, then we took all of the data for Kingstone for the past 10 or so years. And we built a what's called a by [peril rating] plan, which it is a very specific way of pricing for homeowners where each peril like hurricane or liability, the different perils water there, each priced based on the data that is most relevant to predicting loss cost for the apparel.
So it's a very 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 Gabriel 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.

Gabriel McClure

Sure, thank you. Thank you very much.

Meryl Golden

My pleasure.

Operator

(Operator Instructions) Bob Farnam, Janney Montgomery Scott.

Bob Farnam

Hey there good morning. I actually have a couple of questions. One is just let's just go back and touch and that's the select product again, are you trying to get out of the legacy business. So in other words, 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?

Meryl Golden

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. And the primary reason is there would be a very massive dislocation between if we were trying 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.

Bob Farnam

Okay. So you're not trying to just to eliminate legacy book is just going to unwind as the policyholder I'll leave. But if they continue to write (technical difficulty) renewed, that will just keep going on indefinitely that's basically.

Meryl Golden

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

Bob Farnam

Okay. And if I did I hear you correctly with the non-core book it sounds like you're 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?

Meryl Golden

Exactly, we're subject to regulation in terms of how much of the book we can get off. We did withdraw from the state of New Jersey. So at the end of 2025, we will have no business in New Jersey within the other states. We continue to take rate, we have had we non-renew the maximum that we can, 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 that in 2025. It will have very little impact, if any, at all on our results.

Bob Farnam

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

Meryl Golden

Sure. So it is 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 multi-line 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, we there are definitely companies writing close to 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?

Bob Farnam

Yeah, no, that's good is this New York have a like a market of last resort if policyholders just can't find something reasonably priced for them.

Meryl Golden

There is a clear plan, but it's really small and they're what I've heard. First of all, we compete mostly with MGAs at this point and there have been some E&S a new E&S markets entering the space. So there is availability is just extremely expensive. So that's, I don't think we're seeing much growth in the fare plan.

Bob Farnam

Okay, great. Thanks for the color Meryl.

Meryl Golden

My pleasure.

Operator

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 email address can be found on the most recent earnings release.
I'll now turn the call back to Meryl Golden for closing remarks.

Meryl Golden

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.

Operator

Thank you. This concludes today's conference call, and you may disconnect your lines at this time. Thank you for your participation.