Kingstone Companies, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are with fiscal 2014. This is an annual filing, not a standalone fourth-quarter report. Kingstone is a property and casualty insurance holding company whose principal subsidiary, Kingstone Insurance Company (KICO), writes mainly in New York through independent agents and brokers.
Financial results and key metrics
- Revenue: $64.18 million, up 28.2%. Net premiums earned rose 49.0% to $48.61 million; net written premiums rose 39.5% to $60.38 million.
- Premium growth: Gross written premiums increased 19.3% to $91.04 million; policies in force increased 17.9%. Personal lines represented 76.0% of gross written premiums.
- Profit: Income before taxes was $10.31 million, up 30.9%; net income was $6.96 million, up 30.6%. Diluted EPS was $0.94 versus $0.72.
- Underwriting: Underwriting income was $9.75 million versus $7.47 million. Net loss ratio improved to 47.7% from 52.2%, while the net underwriting expense ratio increased to 32.3% from 24.9%. The net combined ratio rose to 80.0% from 77.1%; it remained below 100%, indicating an underwriting profit.
- Investment income: Net investment income increased 42.4% to $2.56 million. Net realized investment results shifted to a $50,546 loss from a $707,027 gain.
- Cash flow: Operating cash flow was $20.40 million, compared with $17.33 million. Cash and cash equivalents ended the year at $13.55 million, up from $9.91 million.
- Financial position: Total assets were $149.13 million, liabilities $103.85 million, and stockholders’ equity $45.28 million. Investments totaled $76.85 million. No debt was outstanding; the unused $600,000 bank line was canceled effective December 31, 2015.
- Dividends: Dividends declared were $1.56 million, or $0.2125 per share for the year. The quarterly rate increased to $0.0625 per share in November 2015.
Material changes versus 2014
- KICO reduced personal-lines quota-share cession from 55% to 40% effective July 1, 2015, retaining more premiums and risk. It had reduced the rate from 75% to 55% in July 2014 and ended its commercial-lines quota-share treaty at that time.
- Net premiums earned grew substantially as Kingstone retained more business. Ceding commission revenue fell 17.5% to $11.47 million, partly offsetting the premium growth.
- Net loss and LAE increased to $23.18 million from $17.03 million as the business expanded. Prior-year reserve development improved: favorable $0.46 million in 2015 versus unfavorable $1.76 million in 2014.
- Severe winter weather increased the net loss ratio by 4.3 percentage points in 2015, compared with 2.9 points in 2014, and reduced contingent ceding commissions by about $1.28 million in 2015.
- Commercial auto, a poorly performing line, was closed to new business in October 2014 and non-renewed beginning in 2015. KICO added licenses in New Jersey, Connecticut, and Texas, and its A.M. Best rating improved from B+ to B++.
Outlook, risks, and unusual items
- Management described a strategy of profitable growth through selected producers, expanded markets and products, and lower reliance on quota-share reinsurance. The filing gives no specific earnings or revenue guidance.
- Lower quota-share cession can increase retained premiums and potential underwriting profit, but also increases Kingstone’s exposure to losses. The catastrophe program provided up to $180 million per event, with Kingstone retaining $2.4 million of catastrophe exposure; annual coverage was limited to twice the per-event amount.
- Key risks include catastrophe and severe-weather losses, reserve-estimation uncertainty, reinsurance availability and counterparty collectability, investment-market volatility, and concentration in New York. Three brokers accounted for 33.5% of 2015 gross premiums written.
- At year-end, KICO was RBC-compliant but had two IRIS ratios outside usual ranges, related to premium growth and estimated reserve deficiency to surplus. KICO’s statutory surplus was $39.07 million. The maximum dividend it could pay without prior regulatory approval was approximately $3.36 million.
- The investment portfolio included $4.99 million of available-for-sale residential mortgage-backed securities; the filing’s ratings table classifies $3.91 million of these securities as D. Management judged unrealized investment losses to be temporary and reported no other-than-temporary impairment.
- Other unusual items included a $350,000 one-time payment for ending premium-finance placement-fee arrangements; Kingstone agreed not to conduct premium financing in New York, New Jersey, and Pennsylvania for 18 months after March 31, 2015.
- The filing reports no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether premium growth and reduced quota-share cession continue to produce profitable underwriting after allowing for increased retained catastrophe and other loss exposure.
- How the net combined ratio, severe-winter losses, and contingent ceding commissions develop under the newer reinsurance treaty.
- Whether reserve estimates remain adequate, particularly given historical reserve development and the two IRIS ratios outside usual ranges.
- The credit quality, valuation, and potential impairment exposure of the D-rated mortgage-backed securities, and the collectability and concentration of reinsurance recoverables.
- KICO’s statutory capital and dividend capacity, and whether the parent’s increased dividend rate remains supportable from subsidiary distributions.