Geoff Gannon August 22, 2021

Kingstone Companies (KINS): A Homeowner’s Insurance Company Focused on Selling Through Agents in Downstate New York

From time-to-time, I research a company where I think I’ll do a write-up of the stock and then discover it isn’t as interesting a situation as what I first thought. That’s the case here. Kingstone (KINS) seemed fairly cheaply priced on the surface. And seemed like an easy enough business to understand. But, several of the things I found – while not individually all that serious – added up to a pass for me. Instead of writing about the company, the valuation, etc. in a lot of detail – I’ll just go over what I found that were hurdles I couldn’t clear.

We can start with valuation. Value investors are often attracted to insurers where the stock is trading below tangible book value. As of the last 10-Q, Kingstone had about $88 to $89 million in tangible equity. Shares outstanding are about 10.6 million. So, tangible book value is a bit north of $8.30 a share. The stock last traded at a price a bit below $7 a share. So, you are getting in at a discount of something like 15% of tangible book value.

There are two ways of looking at this.

One, it gives you upside. If a company can compound at 10% a year and you buy it below tangible book value – you can get an earnings yield higher than 10% a year and you can get an additional capital gain from the increase in the price-to-book multiple over the time you own it.

This is the “Davis Double Play”. You buy at say 8 times earnings. Earnings compound at 10% a year. After a number of years, you sell at 16 times earnings. Over 10 years, a doubling of the earnings multiple provides a 7% a year return. The business itself only has to grow at a “modest” 8% a year for this combination (7% plus 8%) to add up to a 15% a year return over 10 years. That’s a low-ish hurdle to clear for a very nice, very market beating return. So, that approach appeals to value investors.

Two, tangible book value can provide downside protection. An insurer could make an attractive acquisition target for another insurer if the price-to-book multiple of the acquired insurer is below that of the acquiring insurer and if it’s below book value. If paid in cash, an acquirer gets more assets by paying less than book value. If paid in shares, an acquirer gets more assets than it gives up because the shares it is giving up in itself have less asset backing than the shares it is acquiring.

There’s a third way of looking at it.

This is the “Buffett” approach. When Buffett bought National Indemnity (an insurer) for Berkshire Hathaway – he thought of his purchase price as only the amount he was paying over the investments held by the company. This is because he was going to own cash, stocks, and bonds anyway. And once he bought National Indemnity, he’d have control of the …

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