Kingstone Companies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with the three months ended March 31, 2015. Kingstone underwrites property and casualty insurance primarily in New York through Kingstone Insurance Company. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $18.44 million | $14.61 million |
| Net premiums earned | $14.53 million | $10.39 million |
| Net income | $541,032 | $382,499 |
| Basic and diluted EPS | $0.07 | $0.05 |
| Net loss ratio | 65.3% | 68.0% |
| Net underwriting expense ratio | 31.6% | 29.9% |
| Net combined ratio | 96.9% | 97.9% |
| Net cash from operating activities | $2.67 million | $834,077 |
| Cash and cash equivalents, March 31 | $5.58 million | $13.55 million at December 31, 2015 |
| Total investments, March 31 | $88.40 million | $76.85 million at December 31, 2015 |
| Total assets / stockholders’ equity, March 31 | $157.63 million / $46.22 million | $149.13 million / $45.28 million at December 31, 2015 |
Net income rose 41.6% year over year and total revenue increased 26.2%. Net written premiums increased 34.8%; direct written premiums rose 18.2%, driven primarily by growth in policies in force. Management reported no debt balance in the presented balance sheet; the filing text does not provide a separate debt metric. Dividends declared and paid were $0.0625 per share, versus $0.05 a year earlier.
Material changes versus Q1 2015
- Net premiums earned increased 39.9%, helped by retaining a larger share of personal-lines premiums after reducing the quota-share cession rate from 55% to 40% effective July 1, 2015.
- Loss and loss adjustment expenses rose 34.3% to $9.48 million, but the loss ratio improved. Favorable prior-year reserve development and a milder winter catastrophe impact helped; the core loss ratio excluding prior-year development and severe winter weather worsened to 58.5% from 49.3%, mainly due to higher personal-lines claim severity and larger fire claims.
- The combined ratio improved to 96.9% from 97.9%, while the expense ratio increased 1.7 percentage points. Ceding commission revenue declined 10.3% to $2.77 million, including contingent ceding commissions of negative $329,277, as estimated treaty loss experience reduced commissions.
- Net investment income rose 41.6% to $813,057, reflecting higher average invested assets. Other income fell to $249,347 from $631,191, largely because Q1 2015 included a $350,000 premium-finance termination payment.
- Cash decreased by $7.97 million during the quarter as investing outflows exceeded operating cash generation, including substantial purchases of fixed-maturity and equity securities.
Outlook, risks and unusual items
- The filing provides no quantified earnings or premium guidance. Management cautions that quarterly results may not indicate full-year results and that historical performance is not a reliable guide to future results.
- Key uncertainties include estimating loss and LAE reserves, reinsurance recoverables and contingent ceding commissions. Management states actual reserve outcomes may differ significantly from estimates. Reserves were $46.03 million at March 31, including $19.80 million of reinsurance recoverables.
- Catastrophe exposure remains material. Q1 2016 severe winter weather contributed $1.40 million of net catastrophe losses and a 9.7-point impact on the net loss ratio; the comparable 2015 impact was $1.84 million and 17.7 points. A February freezing event caused numerous claims and some large water-damage losses.
- Reinsurance reduces but does not eliminate risk: Kingstone remains responsible to policyholders if reinsurers do not meet their obligations. The personal-lines catastrophe program provides coverage subject to limits and retentions.
- The company discontinued new commercial-auto business in October 2014 and stopped renewals beginning in May 2015 after unsuccessful profitability measures. The line was in run-off; 34 policies remained at March 31, 2016, and none were in force at April 30, 2016.
- After quarter-end, on April 18, Kingstone sold 595,238 shares to RenaissanceRe Ventures at $8.40 per share, receiving approximately $4.85 million net for growth and general corporate purposes. The board also approved a $0.0625-per-share dividend payable June 15, 2016.
- Management reported no pending legal proceedings believed likely to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2016.
Important facts for investors to verify
- Whether the elevated core loss ratio, especially personal-lines severity and fire losses, persists in subsequent quarters.
- Reserve adequacy and collection/timing of reinsurance recoverables, as well as changes in contingent ceding commissions when treaty loss estimates are updated.
- Terms and effect of the July 2016 renewal of the personal-lines quota-share and catastrophe reinsurance programs.
- Investment portfolio credit and concentration risks: available-for-sale securities included residential mortgage-backed securities rated as low as D; management classified reported unrealized losses as temporary and recorded no OTTI.
- Use of the post-quarter $4.85 million placement proceeds and the resulting share count and dilution. The filing reports 7,317,137 common shares outstanding at March 31 and 7,912,375 as of May 12.