Kingstone Companies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Kingstone is a regional property and casualty insurer operating primarily through Kingstone Insurance Company (KICO), selling personal and commercial coverage through independent agents and brokers. New York generated 93.7% of KICO’s direct written premiums.
Financial performance and condition
- Premiums and revenue: Direct written premiums rose 20.7% to $146.7 million; net written premiums increased 29.0% to $119.8 million, and net premiums earned increased 33.7% to $103.4 million. Total GAAP revenue was $113.8 million, up 22.6%.
- Profit: Net income fell 69.0% to $3.1 million from $10.0 million; diluted EPS was $0.29 versus $0.94. Pretax income was $3.0 million. Fourth-quarter net loss was $0.9 million, or $0.08 per diluted share.
- Underwriting and margins: The net loss ratio increased to 56.4% from 44.2%; the net underwriting expense ratio rose to 38.4% from 36.4%. The net combined ratio increased to 94.8% from 80.6%, indicating an underwriting profit before investment income in both years, but a narrower one in 2018.
- Investment results: Net investment income rose 49.7% to $6.2 million. Net investment losses were $2.5 million, compared with an $84,000 gain in 2017. Cash and invested assets totaled $195.6 million at year-end.
- Cash flow and liquidity: Operating cash flow was $22.3 million, down from $28.0 million. Investing activities used $43.4 million; financing activities used $6.1 million. Cash and cash equivalents declined to $21.1 million from $48.4 million, largely as funds were invested. Total assets were $266.8 million and stockholders’ equity was $88.7 million.
- Debt: Long-term debt, net, was $29.3 million. The company has $30 million of 5.50% senior unsecured notes due December 2022. KICO had no borrowings under its Federal Home Loan Bank facility at year-end.
- Claims reserves and dividends: Gross loss and loss adjustment expense reserves were $56.2 million, versus $48.8 million a year earlier; net reserves were $40.5 million. Dividends declared and paid were $0.40 per share for 2018, compared with $0.3025 in 2017.
Material changes versus 2017
- Growth reflected a 19.3% increase in policies in force and expansion outside New York; expansion-state direct written premiums reached $9.1 million, versus $1.8 million. Massachusetts homeowners coverage launched in 2018.
- Effective July 1, KICO reduced the personal-lines quota-share ceding rate from 20% to 10%. This increased retained premiums and potential underwriting returns but reduced ceding commission revenue, which fell 46.3% to $5.3 million.
- Nine catastrophe events affected results in 2018, principally winter storms and freeze-related water damage. Catastrophe losses reduced the net loss ratio by an adverse 6.0 percentage points. Prior-year loss development was unfavorable by $1.15 million, compared with favorable development of $61,000 in 2017; the underlying loss ratio also increased.
- The company increased catastrophe reinsurance limits to $450 million per event, with a $4.5 million retained amount per catastrophe occurrence. Coverage is subject to annual limits and does not protect losses above the stated program limits.
- Net investment losses included approximately $2.4 million of unrealized losses on equity and other investments. A newly adopted accounting standard required fair-value changes on equity investments to be recorded in earnings, affecting comparability with 2017.
Outlook, risks and other notable items
- 2019 outlook: Management expects a GAAP combined ratio, excluding catastrophe losses, of 82.0%–84.0%, assuming no prior-year casualty reserve development and approximately 4.0 percentage points of catastrophe losses. The company anticipated launching homeowners products in Connecticut and Maine in 2019.
- Principal risks: Catastrophe and severe-weather exposure; claims severity and reserve-estimation uncertainty; reinsurance availability and reinsurer credit risk; investment-market and interest-rate volatility; concentration in New York and among a limited number of brokers; regulatory and capital requirements; and ability to service parent-company debt using funds subject to insurance-subsidiary dividend restrictions.
- KICO’s A.M. Best financial strength rating was A- (Excellent), and management reported compliance with risk-based capital requirements. The company reported no IRIS ratios outside the usual range.
- KICO’s statutory dividend capacity without prior regulatory approval was approximately $4.85 million at year-end; KICO paid $3.6 million to the parent during 2018. The parent depends substantially on subsidiary distributions for debt service and shareholder dividends.
- The filing reports no material pending legal proceedings apart from ordinary-course insurance claims. Management and the independent auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified, with explanatory language regarding the accounting change for equity securities.
Important facts for investors to verify
- Whether the higher loss ratio and unfavorable prior-year reserve development persist, and whether reserve estimates prove adequate.
- Whether growth outside New York can continue while maintaining underwriting profitability and controlling expansion costs.
- How lower quota-share cessions affect net earnings, capital needs and catastrophe exposure, and whether reinsurance remains available on acceptable terms.
- How investment losses and portfolio credit, interest-rate and valuation risks affect earnings and statutory capital.
- Whether KICO’s permitted distributions, operating cash flow and available liquidity are sufficient to support the parent’s debt service and dividends.
- Progress against the 2019 combined-ratio outlook, including actual catastrophe losses and any casualty reserve development.