Kingstone Companies, Inc. — Q3 2021 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company, primarily in New York; New York represented 79.4% of direct written premiums in Q3 and 77.5% year to date. The filing reports one operating segment.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $36.8 million | $27.5 million | $106.8 million | $81.1 million |
| Total revenue | $39.0 million | $34.8 million | $118.1 million | $95.8 million |
| Net loss | $(10.6) million | $(1.2) million | $(9.6) million | $(2.1) million |
| Loss per share, basic and diluted | $(1.01) | $(0.12) | $(0.90) | $(0.19) |
| Net combined ratio | 136.4% | 111.9% | 115.0% | 99.7% |
Balance sheet and liquidity at September 30, 2021: Cash and cash equivalents were $36.1 million, investments were $209.9 million, total assets were $320.2 million, and stockholders’ equity was $77.8 million. Long-term debt, net, was $29.8 million; the $30 million 5.50% senior notes mature December 30, 2022. The company reported $29.1 million of operating cash flow for the nine months, versus $9.5 million used in the prior-year period; investing activities used $9.3 million. Cash increased by $16.6 million to $36.1 million.
Investment income and returns: Nine-month net investment income was $5.1 million, up 7.7%; the reported average yield on invested assets was 3.42%, compared with 3.51%. Net investment gains were $5.5 million for the nine months, versus losses of $1.6 million in 2020. Quarterly net investment gains were $0.2 million, down from $2.1 million.
Material changes and operating drivers
- Direct written premiums rose 5.2% to $131.6 million for the nine months; net written premiums grew 35.0% and net premiums earned grew 31.7%. Much of the larger net-premium increase reflects the expiration of the 25% personal-lines quota-share treaty at year-end 2020, leaving more premiums with Kingstone—not solely underlying growth.
- Ceding commission revenue fell to $37,000 for the nine months from $10.8 million, also primarily because the quota-share treaty expired. The treaty change increased retained premium and loss exposure.
- Nine-month net loss and loss-adjustment expenses increased 60.3% to $79.1 million. The net loss ratio rose to 74.0% from 60.8%; the net underwriting expense ratio increased to 41.0% from 38.9%. The combined ratio exceeded 100%, indicating an underwriting loss before investment income.
- Q3’s net loss ratio was 97.1%, versus 73.1% a year earlier. Management cited catastrophe losses, elevated liability-claim frequency in Dwelling Fire, and more large fire losses. Hurricane Ida generated an estimated $9.6 million net loss and a 26.1-point quarterly loss-ratio impact; all Q3 catastrophe events contributed 33.1 points.
- Management reported a 64.0% Q3 underlying loss ratio, excluding catastrophe losses and prior-year development, compared with 42.0% in Q3 2020. Nine-month catastrophe losses contributed 11.5 loss-ratio points, versus 12.8 points in 2020. Prior-year reserve development was slightly favorable.
Outlook, risks and other items
- The filing gives no specific earnings or revenue guidance. Management said COVID-19 and related economic effects remain uncertain, and may continue to affect premium volumes; underwriting changes emphasizing profitability over growth may also slow new-business growth.
- Key exposures include catastrophe severity and reinsurance protection, claim frequency and severity, reserve-estimation uncertainty, inflation, investment-market changes, and COVID-19 effects. Management specifically noted uncertainty in recent claim trends and that actual ultimate losses may differ materially from estimates.
- Kingstone entered new excess-of-loss and catastrophe reinsurance treaties effective July 1, 2021. A subsequent stub catastrophe treaty, effective October 18 through December 31, provides $5 million of coverage excess of $5 million; freeze losses are excluded.
- After quarter-end, the company reported 86 claims from an October nor’easter and did not expect a material number of additional claims. The board approved a $0.04-per-share dividend payable December 15, 2021. The company repurchased 88,329 shares during Q3 for approximately $0.6 million.
- The filing reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of September 30, 2021. It stated there were no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the higher claim frequency and large-fire losses persist, and how catastrophe losses and Ida claims develop.
- Reserve adequacy, especially for legacy commercial policies, which management said represented approximately 20.3% of net loss and LAE reserves despite being in runoff.
- The net impact of retaining more premiums after the quota-share treaty expired, including the cost, limits, and exclusions of current reinsurance coverage.
- Liquidity and capital plans for the $30 million senior-note maturity in December 2022, and any effect of dividends and share repurchases on capital.
- Investment portfolio valuation, credit quality, and sensitivity to market movements; available-for-sale securities had $3.7 million of net unrealized losses in accumulated other comprehensive income at quarter-end.