Kingstone Companies, Inc. — FY2016 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2016; it is not a standalone fourth-quarter filing. Kingstone is a property-and-casualty insurance holding company operating primarily through Kingstone Insurance Company (KICO). Business is written mainly in New York through independent agents and brokers, with personal lines the largest segment.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $77.44 million | $64.18 million |
| Net premiums earned | $61.41 million | $48.61 million |
| Gross written premiums | $103.22 million | $91.04 million |
| Net income | $8.90 million | $6.96 million |
| Diluted EPS | $1.14 | $0.94 |
| Net loss ratio | 45.3% | 47.7% |
| Net underwriting expense ratio | 33.9% | 32.3% |
| Net combined ratio | 79.2% | 80.0% |
| Net investment income | $3.12 million | $2.56 million |
| Operating cash flow | $15.20 million | $20.40 million |
Year-end position: Cash and cash equivalents were $12.04 million; investments were $95.51 million; total assets were $169.45 million; total liabilities were $112.77 million; and stockholders’ equity was $56.68 million. Loss and LAE reserves were $41.74 million gross, including $15.78 million of reinsurance recoverables. The balance sheet excerpt does not show a separate borrowings or debt line item.
Material changes versus FY2015
- Gross written premiums rose 13.4%; continuing lines grew 14.0%. Policies in force increased 11.7% overall.
- Net premiums earned increased 26.3%, reflecting greater premium retention after the personal-lines quota-share ceding rate was reduced from 55% to 40% effective July 2015, as well as premium growth.
- Net income grew 27.9%. The net loss ratio improved 2.4 percentage points and the combined ratio improved 0.8 points, though the expense ratio increased 1.6 points.
- Operating cash flow declined $5.20 million to $15.20 million. Investing cash outflow increased to $19.52 million; financing cash flow was positive $2.81 million, including the 2016 private placement.
- Net investment income rose 21.5%, while the pre-tax equivalent investment yield declined to 4.26% from 4.77%, which management attributed partly to shorter-duration holdings.
Outlook, risks and unusual items
- Management planned to begin writing homeowners business in New Jersey in the first half of 2017 and described selective geographic and product expansion as a growth strategy. Commercial umbrella coverage began in Q4 2016.
- In January and February 2017, Kingstone issued 2,692,500 shares at $12 each, receiving approximately $30.23 million net. On March 1, it contributed $23 million to KICO to support growth and a potential ratings upgrade. KICO’s A.M. Best financial strength rating was B++ (Good), with positive outlook; an upgrade was not assured.
- Catastrophe coverage was increased effective July 1, 2016 to up to $252 million per event, with a $3 million net retention for catastrophe losses under the described structure. Coverage is subject to treaty terms and annual limits; losses exceeding protection remain a risk.
- Severe winter weather increased the net loss ratio by 2.3 percentage points in 2016, versus 4.3 points in 2015. Prior-year reserve development was favorable in both years, but less favorable in 2016. Reserve estimates remain inherently uncertain.
- Kingstone recorded a $69,911 impairment charge on a Puerto Rico bond following a missed interest payment. It reported no other-than-temporary impairment for the remaining securities reviewed.
- Key exposures include catastrophe severity and frequency, reserve adequacy, reinsurance availability and collectability, investment-market and interest-rate risk, regulatory constraints, New York concentration, and dependence on a limited number of brokers (36.5% of 2016 gross written premiums from certain brokers).
- KICO was within the usual range for all IRIS ratios and reported statutory surplus of $49.96 million. KICO’s dividend capacity without prior regulatory approval was approximately $4.39 million at year-end 2016. Kingstone paid common dividends of $0.25 per share during 2016; future dividends are discretionary.
- The New York DFS examination of KICO commenced in 2016 and remained in progress at the filing date. New York cybersecurity rules took effect March 1, 2017, with compliance deadlines described in the filing.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2016; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether premium growth in New York and planned New Jersey expansion produce profitable business after acquisition costs and claims.
- Current reserve development, particularly for commercial auto runoff, and the assumptions underlying IBNR and catastrophe reserves.
- Renewal terms, pricing, counterparties, collateral and recoverability of reinsurance, including catastrophe limits and retained exposures.
- Progress toward any A.M. Best upgrade and the capital, reinsurance and operating conditions required to achieve it.
- Portfolio credit quality and concentration, including the Puerto Rico impairment and material unrealized losses.
- Cash needs at the holding company, regulatory limits on KICO dividends, and the use of public-offering proceeds and resulting share dilution.