KINGSTONE COMPANIES, INC. quarterly report, Q1 FY2019

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Kingstone Companies, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019. The unaudited consolidated statements cover Kingstone and its subsidiaries. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company, primarily via independent agents and brokers. New York remained the dominant market, contributing 91.4% of KICO direct written premiums, down from 97.2% a year earlier; the company is expanding in nearby states.

Financial performance

  • Revenue: Total revenue was $34.9 million, up 35.8% year over year. Net premiums earned rose 29.6% to $29.6 million; direct written premiums increased 18.9% to $37.5 million and net written premiums increased 28.1% to $30.4 million.
  • Profitability: Net loss was $7.3 million, or $0.68 per diluted share, versus a $2.7 million loss, or $0.25 per share, in Q1 2018. Pre-tax loss was $9.3 million; the income tax benefit was $1.9 million.
  • Underwriting and margins: Net loss ratio rose to 98.4% from 75.6%; net underwriting expense ratio improved slightly to 38.5% from 38.7%. The net combined ratio deteriorated to 136.9% from 114.3%. Underwriting income was a loss of $10.9 million, compared with a $3.3 million loss a year earlier.
  • Investment results: Net investment income rose 17.3% to $1.6 million. Net investment gains were $2.0 million, compared with a $0.5 million loss in Q1 2018, mainly reflecting $2.1 million of unrealized gains on equity and other investments.
  • Cash flow: Operating activities provided $2.7 million, versus $0.4 million in Q1 2018. Investing activities used $6.9 million and financing activities used $1.2 million. Cash and cash equivalents fell $5.4 million during the quarter to $15.8 million.
  • Balance sheet and liquidity: At March 31, total assets were $277.4 million, total liabilities $193.6 million, and stockholders’ equity $83.8 million. Investments totaled $186.1 million. KICO paid $2.0 million in dividends to the holding company during the quarter; holding-company cash and invested assets were approximately $4.5 million.
  • Debt and dividends: Net long-term debt was $29.3 million, representing $30 million of 5.50% senior unsecured notes due December 2022. Quarterly interest expense was $0.46 million. The company declared and paid $0.10 per share for the quarter and approved another $0.10 quarterly dividend for payment in June 2019.

Material changes and notable items

  • Management attributed the disappointing quarter to catastrophe losses and a reassessment of claims reserves. Winter weather events produced $5.1 million of net catastrophe losses, a 17.2-point impact on the loss ratio; the events did not reach the $5 million catastrophe reinsurance retention.
  • Prior-year loss development was $4.5 million unfavorable, compared with $0.1 million favorable in Q1 2018. An outside claims-practices review led to increased case reserves for older liability claims, particularly in commercial lines and accident years 2014, 2016, and 2017. Management also cited higher average severity from fire and non-weather water-damage claims.
  • The underlying loss ratio, excluding catastrophe losses and prior-year development, was 66.1%, up from 51.8%. The commercial-lines net loss ratio reached 185.3%, versus 75.8% a year earlier.
  • Direct written premiums grew alongside a 19.0% year-over-year increase in policies in force. Expansion-state direct written premiums were $3.2 million, versus $0.9 million. Connecticut homeowners’ business began in March 2019.
  • Effective July 1, 2018, the personal-lines quota-share ceding rate declined from 20% to 10%, increasing premium retention and net written premiums while reducing provisional ceding commissions. Management said steps begun in March included adding claims staff and changing claims practices and procedures.
  • Available-for-sale securities had $1.27 million of gross unrealized losses at March 31, versus $4.09 million at year-end. Management considered the losses temporary and recorded no other-than-temporary impairment. The portfolio included a material BBB-rated bond allocation.

Outlook, risks, and contingencies

  • For 2019, management expected a GAAP combined ratio of 88%–91%, excluding catastrophe losses, with catastrophe losses estimated at approximately 4.0–5.0 points. This outlook assumes no additional prior-year casualty reserve development. Management also anticipated launching homeowners’ products in Maine during 2019.
  • Key uncertainties include the estimation of loss and loss-adjustment reserves, future claim severity and frequency, catastrophe exposure, reinsurance availability and recoverability, and investment-market movements. The filing cautions that interim results may not indicate full-year results.
  • Reinsurance does not relieve KICO of its obligations to policyholders. The FHLBNY facility had no outstanding borrowings; eligible collateral was approximately $5.6 million. The company reported no material off-balance-sheet arrangements and no other pending litigation that management believed likely to materially affect the financial statements.
  • The company adopted lease accounting on January 1, 2019, recognizing an $855,000 right-of-use asset and lease liability; management said the adoption did not materially affect results or liquidity. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.

Important facts for investors to verify

  • Whether the substantial reserve strengthening and underlying loss-ratio deterioration persist, especially in commercial liability claims.
  • How Q1 catastrophe experience compares with the 2019 catastrophe assumption, and whether future events exceed reinsurance retentions or limits.
  • Whether management’s annual combined-ratio outlook remains achievable given Q1’s 136.9% combined ratio and the assumption of no further adverse prior-year development.
  • The renewal terms, cost, and coverage limits of reinsurance treaties expiring June 30, 2019, and the effect of retaining more personal-lines risk.
  • Cash and capital needs as the company expands outside New York, including the holding company’s reliance on subsidiary dividends and the capacity of available collateralized liquidity.
  • Investment portfolio credit quality, unrealized-value sensitivity, and reserve adequacy; the filing identifies these as judgment- and estimate-sensitive areas.