Kingstone Companies, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are with FY2013. The filing also reports unaudited quarterly results. Kingstone is a property and casualty insurance holding company operating primarily through Kingstone Insurance Company (KICO), which writes nearly all its business in New York through independent agents and brokers.
Financial and operating performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $50.05 million | $36.57 million |
| Net premiums earned | $32.63 million | $22.23 million |
| Net income | $5.33 million | $2.01 million |
| Basic / diluted EPS | $0.73 / $0.72 | $0.51 / $0.50 |
| Net loss ratio | 52.2% | 61.1% |
| Net underwriting expense ratio | 24.9% | 27.5% |
| Net combined ratio | 77.1% | 88.6% |
| Operating cash flow | $17.33 million | $7.38 million |
Gross written premiums increased 26.1% to $76.30 million, with policies in force up 22.0%. Net written premiums rose 74.3% to $43.29 million, reflecting increased retention after reinsurance changes. Underwriting income was $7.47 million, versus $2.52 million in 2013. Net investment income was $1.80 million, up from $1.17 million; realized investment gains were $0.71 million.
Q4, unaudited: Revenue was $14.96 million and net income was $1.76 million, compared with $10.93 million and $0.09 million, respectively, in Q4 2013. Net premiums earned were $10.38 million versus $6.80 million; diluted EPS was $0.24 versus $0.02.
Financial position and liquidity
At December 31, 2014, total assets were $135.00 million, liabilities $94.50 million, and stockholders’ equity $40.50 million. Cash and cash equivalents were $9.91 million, down from $19.92 million; investments totaled $64.27 million, up from $37.63 million. Operating cash flow was more than offset by investment purchases, resulting in a $10.02 million decrease in cash. The company reported no outstanding borrowings at year-end and had a $600,000 bank line of credit with no balance drawn.
Loss and loss adjustment expense reserves were $39.91 million, up from $34.50 million; reinsurance recoverables on paid and unpaid losses were approximately $19.72 million. KICO reported statutory surplus of $34.43 million and statutory net income of $3.62 million, and was in compliance with risk-based capital requirements. KICO paid $1.50 million in dividends to the parent during 2014; insurance regulation limits future distributions.
Material changes and management commentary
- Effective July 1, 2014, KICO reduced its personal-lines quota-share cession from 75% to 55% and did not renew its 25% commercial-lines quota-share treaty. Management expects lower quota-share dependence to increase retained premiums and potential underwriting profit, while reducing ceding commission revenue and increasing net exposure to losses.
- FY2014’s lower combined ratio reflected favorable personal-lines results, a shift away from higher-loss-ratio business, and lower catastrophe impact than the prior-year comparison. The net loss ratio improved 8.9 percentage points; the combined ratio remained below 100%, indicating underwriting profit.
- Severe winter weather in January and February 2014 caused $0.94 million of net catastrophe losses, increased the net loss ratio by 2.9 percentage points, and reduced contingent ceding commission revenue by about $0.52 million.
- After unsuccessful efforts to improve commercial-auto results, KICO stopped accepting new commercial-auto applications effective October 1, 2014. In February 2015, it decided not to renew existing policies expiring on or after May 1, 2015. Commercial auto’s FY2014 net loss ratio was 87.5%; the filing cites adverse prior-year development in this and commercial lines.
- Quarterly common dividends increased from $0.04 to $0.05 per share in August 2014. FY2014 dividends declared were $1.31 million. The board approved a further $0.05-per-share dividend in February 2015.
Outlook, risks, contingencies, and unusual items
The filing provides no quantified earnings or revenue guidance. Management describes a strategy of profitable growth, principally in New York, through selected producers, additional business, and possible product or geographic expansion. It also notes that reduced quota-share reinsurance increases the company’s retained underwriting risk.
- Catastrophe exposure is a major risk. The 2014 catastrophe program provided up to $141 million of coverage per event, subject to an annual limit of twice the per-occurrence amount; losses beyond coverage limits remain with KICO. Coverage terms and availability may change.
- Reserve estimates are inherently uncertain. The loss-development disclosures show cumulative deficiencies for multiple historical accident years; actual ultimate claims may differ materially from recorded reserves.
- Reinsurance recoverables expose KICO to reinsurer credit and collection risk. Maiden Re represented 43.3% of reported reinsurance recoverables at year-end. Reinsurance does not release KICO from obligations to policyholders.
- KICO’s A.M. Best rating was B+ (Good), and its Demotech rating was A (Excellent). The filing notes ratings are subject to review and may affect competitiveness and business growth.
- New York DFS rules, including post-Superstorm Sandy claims requirements, may affect operations. KICO was included in a DFS investigation of insurers’ Sandy claims practices; it had supplied requested information and reported no response after a May 2013 meeting. Management believed the matter would not affect financial position or results.
- The filing identifies concentration in New York and reliance on a limited number of brokers; three brokers generated 31.8% of FY2014 gross written premiums. Other risks include weather and climate exposure, investment-market and interest-rate risk, competition, regulation, and possible reserve deterioration.
- The premium-finance contract purchaser terminated its agreement effective February 1, 2015. Payments Inc. may continue earning fees for two additional years on eligible contracts from company producers.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether growth and underwriting profitability persist as the reduced quota-share arrangements flow through results, and how ceding commissions change.
- Commercial-auto run-off results, including the adequacy of reserves and adverse development in commercial-auto and commercial-lines claims.
- Loss-reserve development, catastrophe exposure, reinsurance recoverability, and reinsurer credit quality.
- New York DFS investigation status and any resulting regulatory, claims-handling, or financial consequences.
- Liquidity and statutory capital after growth, dividends, and potential catastrophe losses; confirm limits on dividends from KICO.
- Broker concentration, insurer financial-strength ratings, investment portfolio credit quality and interest-rate sensitivity, and the status of the premium-finance agreement termination.