Kingstone Companies

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January 27, 2021

We have owned Kingstone (“KINS”) for several years. We wrote an investment thesis in our 2017 Q1 letter. The company has grown its New York state homeowner’s insurance business at an attractive rate ever since Superstorm Sandy hit Long Island. The company had achieved an A- taking from A.M. Best and started to expand into additional states in the Mid-Atlantic and New England. It ran into some issues as the CEO tried to install a successor. Besides homeowner’s insurance, the company wrote several other types of insurance such as business liability and commercial auto. These non-core insurance lines have presented problems. In late 2019, management decided to stop writing these other business lines, so they won’t present problems going forward.

We recently bought additional shares. We think the company is now focused solely on its homeowner’s insurance business. We expect the loss rates to normalize with the other business lines are runoff. We think stock market investors will return to the stock first for the improving profitability of the core business.  Then, investors will pay attention to Kingstone’s growth rate.

A risk for Kingstone is the higher cost of reinsurance. Kingstone cannot bear all of the insurance risk the company is underwriting. Management has to purchase reinsurance to protect the company from large losses. Until 2019, the reinsurance market had been very favorable for companies like Kingstone to offload their risks. There was a great deal of capital in the reinsurance market, and there had not been many large losses, so pricing had come down significantly. With the large catastrophe losses of recent years, the reinsurance market started to harden. (A “hard” insurance market means prices are rising for the same amount of risk.) Reinsurance prices have risen so much that Kingstone has limited the amount of reinsurance that they purchase. We expect additional capital will enter the reinsurance market and limit future price increases. If this doesn’t happen, Kingstone may have to slow its growth.

We believe Kingstone can trade up to $12 or 1.5x book value. Kingstone has traded at $7, so $12 is 70% higher than the current price. We also believe book value will grow at an attractive rate, so our target price will grow through time. We note that Kingstone has traded as high as 2.5x book value in the last three years, so we don’t view 1.5x book as an aggressive valuation.

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Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.

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