Kingstone Companies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Kingstone writes property and casualty insurance primarily through Kingstone Insurance Company (KICO), with most direct premiums generated in New York. New York represented 72.3% of KICO direct written premiums, down from 82.7% a year earlier.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparator |
|---|---|---|
| Total revenue | $39.5 million | $26.3 million; up 50.5% |
| Net premiums earned | $34.6 million | $26.9 million; up 28.4% |
| Net loss | $0.31 million; $(0.03) per share | $5.44 million; $(0.50) per share |
| Net investment income | $1.78 million | $1.67 million |
| Net investment gains (losses) | $2.96 million | $(6.44) million |
| Operating cash flow | $1.39 million provided | $15.26 million used |
| Cash and cash equivalents | $22.18 million at March 31 | $19.46 million at Dec. 31, 2020 |
| Total assets / stockholders’ equity | $306.9 million / $89.0 million | $317.6 million / $92.8 million at Dec. 31, 2020 |
| Long-term debt | $29.69 million net carrying value | $29.65 million at Dec. 31, 2020 |
Q1 net loss improved substantially year over year, but the insurance underwriting business reported a $2.49 million underwriting loss before investment activity, depreciation and amortization, interest and taxes. The net combined ratio rose to 107.2% from 99.9% (a ratio above 100% indicates underwriting losses before investment income). The net loss ratio was 65.2%, versus 60.8%; the net underwriting expense ratio was 42.0%, versus 39.1%.
Comprehensive loss was $3.64 million, including $3.33 million of after-tax other comprehensive loss, primarily from unrealized losses on available-for-sale securities. The company declared and paid $0.04 per share in the quarter, compared with $0.0625 a year earlier. A further $0.04 quarterly dividend was approved for payment in June 2021.
Material changes and management commentary
- Direct written premiums increased 3.9% to $38.1 million. Expansion-market premiums grew while core New York premiums declined. Net written premiums increased 32.8% to $30.8 million, and net earned premiums rose 28.4%.
- The increase in net retained premiums largely reflects expiration, without renewal, of the 25% personal-lines quota-share treaty on December 30, 2020. This also drove ceding commission revenue down from $3.83 million to approximately zero. The company retained more premium and associated risk.
- Net investment results swung from a $6.44 million loss to a $2.96 million gain, including $1.83 million of unrealized gains on equity and other investments and $1.13 million of realized gains. This change materially contributed to the improvement in consolidated results.
- Management attributed higher claims to more non-weather water damage claims and two severe fires, together adding approximately four points to the loss ratio. Catastrophe losses were modest at $0.23 million, or 0.7 percentage point of the loss ratio; prior-year reserve development was slightly favorable.
- Other underwriting expenses decreased 4.4%, which management attributed mainly to technology-related cost reductions and lower staffing costs. Commission expense increased 4.7%; depreciation and amortization rose 19.7%, partly due to new policy and claims systems.
Liquidity, debt, outlook and risks
- Cash increased by $2.72 million during the quarter. Operating cash flow turned positive, primarily reflecting changes in operating assets and liabilities. Investing activities provided $1.96 million and financing activities used $0.64 million.
- The company had $30 million principal amount of 5.50% senior unsecured notes due December 2022. KICO had no FHLBNY borrowings; collateral-based available advances were approximately $9.32 million as of March 31, 2021. KICO paid a $1 million dividend to the holding company during the quarter. Holding-company cash and invested assets were approximately $3.56 million.
- Management provided no numerical earnings or premium guidance. It said COVID-19 effects remain uncertain and could continue to affect new-business premium volumes, though the impact was expected to persist to a lesser extent for the remainder of 2021. Underwriting changes emphasizing profitability over growth may also slow premium growth.
- KICO’s A.M. Best Financial Strength Rating was downgraded from A- to B++ in July 2020; management said this has reduced and may continue to reduce Cosi business with carrier partners requiring an A- rating.
- Key exposures include uncertainty in loss and LAE reserves, reinsurance recoverability and catastrophe protection, investment-market movements, inflation and COVID-19. Available-for-sale fixed maturities included $88.7 million rated BBB. Management reported no investment impairments deemed other-than-temporary and no material changes to previously disclosed risk factors.
- The filing reports no legal proceedings, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2021. The interim statements are unaudited; management cautioned that quarterly results may not indicate full-year results.
Important investor verification points
- Assess whether the higher retained premiums following the quota-share treaty’s expiration produce adequate risk-adjusted returns and how replacement or renewed reinsurance terms affect exposure.
- Track the combined ratio, water and fire claim trends, and reserve development, especially the runoff commercial lines reserves.
- Separate recurring underwriting performance from volatile realized and unrealized investment gains and losses when evaluating the improved consolidated result.
- Review the 2022 debt maturity, holding-company liquidity, statutory limits on KICO dividends, and the availability and collateral requirements of FHLBNY advances.
- Monitor effects of the B++ rating on Cosi distribution partners, growth, and the company’s stated profitability-focused underwriting strategy.