Kingstone Companies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO), primarily in New York; New York represented about 80% of KICO direct written premiums. The company had discontinued new commercial-lines underwriting in July 2019; those policies remain in runoff.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $34.8 million | $38.4 million | $95.8 million | $107.9 million |
| Net premiums earned | $27.5 million | $34.2 million | $81.1 million | $95.0 million |
| Net loss | $(1.23) million | $(1.73) million | $(2.06) million | $(7.42) million |
| Loss per diluted share | $(0.12) | $(0.16) | $(0.19) | $(0.69) |
| Net combined ratio | 111.9% | 109.8% | 99.7% | 113.1% |
The combined ratio was below 100% for the nine-month period, indicating underwriting profit before investment and other items; it exceeded 100% in Q3. Net investment income was $1.5 million for Q3 and $4.8 million year to date. Net investment gains were $2.1 million in Q3, but the nine-month period recorded a $1.6 million net investment loss. Nine-month comprehensive income was $2.2 million, reflecting $4.2 million of other comprehensive income from available-for-sale securities.
- Premiums and reinsurance: Nine-month direct written premiums declined 2.5% to $125.1 million, while personal-lines direct written premiums rose 9.6%. Net premiums earned fell 14.6% and net written premiums fell 24.3%, largely reflecting higher quota-share cessions under the 25% treaty effective December 15, 2019, as well as commercial-lines runoff. Ceding commission revenue increased to $10.8 million from $3.0 million.
- Losses and expenses: The nine-month net loss ratio improved to 60.8% from 75.3%, with favorable prior-year development and lower underlying claim frequency; the improvement was partly offset by catastrophe losses. Q3’s 73.1% loss ratio included a 31.5-point catastrophe impact. The net underwriting expense ratio increased to 38.9% for nine months and 38.8% for Q3.
- Cash flow: Operating activities used $9.5 million in the first nine months, versus $19.5 million provided in 2019. Investing activities provided $3.9 million and financing activities used $2.5 million. Cash decreased $8.0 million to $24.4 million. KICO paid $5.0 million in dividends to the holding company during the period.
Financial position and liquidity
At September 30, 2020, total assets were $327.4 million, total investments $196.4 million, and stockholders’ equity $89.3 million. Loss and loss-adjustment reserves were $85.0 million, up from $80.5 million at year-end 2019; reinsurance receivables increased to $55.5 million from $40.8 million. Long-term debt, net, was $29.6 million, representing $30.0 million principal of 5.50% senior unsecured notes due December 2022. The filing reports no borrowing under KICO’s Federal Home Loan Bank facility; available advances were limited by collateral, with approximately $5.7 million of collateral-based capacity reported at quarter-end. The holding company held about $2.1 million in cash and investments.
Material changes, outlook, and risks
- Catastrophe and reinsurance exposure: Tropical Storm Isaias generated $8.1 million of net losses through September 30, including 1,700-plus reported claims in Q3. The filing describes a $2.5 million gap in catastrophe reinsurance coverage effective July 1, 2020, between the quota-share limit and the first catastrophe layer. The personal-lines quota-share treaty expires December 31, 2020; the filing says coverage in January–June 2021 is excess-of-loss and catastrophe reinsurance only.
- Rating and distribution: A.M. Best downgraded KICO from A- to B++ on July 10, 2020 and assigned a negative outlook, citing the revised catastrophe reinsurance program and reduced protection. Management expects a material decrease in Cosi business because some carrier partners require an A- rating.
- COVID-19 and outlook: Management said the pandemic and economic contraction were affecting premium volumes, especially in the second and third quarters, and expected the effect to persist, though to a lesser extent, for the remainder of 2020. The ultimate financial impact was not quantifiable. Underwriting changes prioritize profitability over growth and are expected to slow premium growth. No numeric earnings or revenue guidance was provided.
- Other notable items: The company recorded no investment impairment losses for the periods presented. The CARES Act permitted a five-year carryback of 2019 federal net operating losses; Kingstone elected to carry back a $7.2 million 2019 loss. A securities class-action case was dismissed and closed after the plaintiff did not replead. The board approved a $0.04-per-share dividend payable December 15, 2020.
Management concluded disclosure controls were effective as of September 30, 2020, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Isaias claims develop, whether reserve estimates remain adequate, and whether reinsurance recoverables are collected as expected.
- The terms, cost, and availability of replacement reinsurance after the quota-share treaty expires, including the disclosed catastrophe coverage gap and KICO’s reduced protection.
- The continuing effect of the A.M. Best downgrade on Cosi’s carrier relationships, premium production, and KICO’s capacity to write business.
- Drivers of negative operating cash flow, holding-company liquidity, and the extent to which dividends from KICO remain available.
- COVID-19 effects on premium volumes and investments, including potential credit deterioration in corporate, municipal, and mortgage-backed securities.