Kingstone Companies, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; comparisons are with FY 2012. Kingstone is a property-and-casualty insurance holding company whose principal subsidiary, Kingstone Insurance Company (KICO), writes mainly personal and small-business insurance in New York. Pennsylvania operations were nominal. The filing was signed March 31, 2014.
Financial performance and key metrics
| Metric | FY 2013 | FY 2012 | Change or context |
|---|---|---|---|
| Total revenue | $36.57 million | $29.08 million | Up 25.8% |
| Net premiums earned | $22.23 million | $17.22 million | Up 29.1% |
| Gross written premiums | $60.50 million | $49.27 million | Up 22.8%; policies in force increased 21.1% |
| Net income | $2.01 million | $0.77 million | Up 162.3% |
| Basic / diluted EPS | $0.51 / $0.50 | $0.20 / $0.20 | Share count increased materially after the December offering |
| Net loss ratio | 61.1% | 65.3% | Improved 4.2 percentage points |
| Net underwriting expense ratio | 27.5% | 28.6% | Improved 1.1 percentage points |
| Net combined ratio | 88.6% | 93.9% | Below 100% in both years, indicating underwriting profit |
| Operating cash flow | $7.38 million | $6.38 million | Positive in both years |
| Cash and cash equivalents | $19.92 million | $2.24 million | Year-end balance; increase largely reflected equity proceeds |
| Total investments | $37.63 million | $32.08 million | At December 31 |
| Total assets / stockholders’ equity | $116.78 million / $35.71 million | $93.50 million / $16.28 million | At December 31 |
| Debt | $0 | $1.20 million | Notes and credit-line balance repaid during 2013 |
Net investment income was $1.17 million, up 15.3%; net realized investment gains were $0.58 million, versus $0.29 million. The effective tax rate was 27.5%, compared with 28.3%. The filing does not provide a conventional operating or net profit margin; underwriting ratios are the principal profitability measures disclosed.
Material changes versus FY 2012
- Growth in written premiums and earned premiums reflected higher demand, more policies in force, and higher-premium policies. Personal lines represented 72.2% of gross written premiums.
- Net income rose substantially, helped by a lower net loss ratio and higher premium and provisional ceding commission revenue. FY 2012 results included substantial Superstorm Sandy losses; the reported FY 2013 net catastrophe loss was much lower.
- Despite the overall loss-ratio improvement, losses and LAE incurred for prior accident years increased by $1.82 million in 2013, including reserve strengthening for commercial auto and higher LAE reserves as the business mix shifted toward longer-tailed commercial lines.
- The commercial-auto net loss ratio rose to 111.0% from 91.4%. Management said it was reducing business from certain higher-loss producers, increasing minimum coverage levels, and requiring proof of private-passenger coverage.
- On December 13, 2013, Kingstone issued 3.45 million shares at $5.95 per share, receiving approximately $18.80 million net. Proceeds supported KICO’s capital and growth and repaid $747,000 of notes and $210,000 drawn on the credit line. The offering materially increased outstanding shares.
- Quarterly dividends were $0.04 per share in 2013, versus $0.03 in the first two quarters and $0.04 in the last two quarters of 2012. The board approved another $0.04-per-share dividend for March 2014.
Outlook, management commentary, risks, and unusual items
- Outlook: No numerical earnings or premium guidance was provided. Management’s stated strategy is profitable growth through producer relationships, geographic expansion, product development, expense management, and underwriting discipline. Pennsylvania business remained nominal.
- Reinsurance: New treaties took effect July 1, 2013. Personal lines were subject to a 75% quota share treaty, with an option from July 2014 to adjust the share between 55% and 85%; commercial general liability quota share fell from 40% to 25%. Catastrophe coverage was up to $90 million per event, subject to an annual limit of twice the per-occurrence amount. Kingstone remains responsible to policyholders if reinsurers fail to pay.
- Reinsurance economics: Management intends to prudently reduce reliance on quota-share reinsurance. It expects this to raise net earned premiums and reduce ceding commission revenue, while increasing retained loss exposure.
- Superstorm Sandy and regulation: Sandy reduced contingent ceding commissions by $1.85 million in 2013 and $1.92 million in 2012 under the relevant treaty calculations. New York DFS investigated KICO’s Sandy claims practices, including claim-handling timeliness and customer access. KICO supplied requested information and was cooperating; the investigation’s outcome was not disclosed. The company said it expected no financial effect.
- Reserving uncertainty: Loss and LAE reserves were $34.50 million gross, with $17.36 million of reinsurance recoverables against unpaid losses. Reserve estimates are actuarial and may change; prior-year development was adverse in 2013.
- Concentrations and financial risks: New York accounted for substantially all revenue; three brokers generated 33.5% of 2013 gross premiums. Reinsurance recoverables were concentrated among several counterparties, with Maiden representing 40.0% of recoverables listed in MD&A. The investment portfolio carries interest-rate, credit, and market-value risk; 49.6% of available-for-sale fixed maturities were rated BBB.
- Capital and liquidity: KICO reported statutory surplus of $31.83 million and statutory net income of $3.06 million for 2013 and was in compliance with risk-based capital requirements. Three IRIS ratios were outside usual ranges, attributed to quota-share reliance, investment yield, and gross change in surplus. KICO dividends without prior approval were limited to approximately $1.19 million at year-end.
- Other matters: An IRS examination of the 2011 and 2012 federal tax returns was announced in March 2014; management expected no material effect, but results were unknown. The independent auditor issued an unqualified opinion on the financial statements. Management said disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control.
Important facts for investors to verify
- Whether commercial-auto underwriting actions reduce its 111.0% net loss ratio and whether further reserve strengthening is needed.
- Development of prior-year claims reserves, including LAE and longer-tailed commercial claims, and the adequacy and collectability of reinsurance recoverables.
- Final outcome of the New York DFS investigation into Sandy claims handling, and any financial or regulatory consequences.
- Renewal terms, cost, and counterparty security for catastrophe and quota-share reinsurance, particularly if Kingstone reduces quota-share protection.
- How the substantial 2013 premium growth translates into sustained underwriting profitability, given New York concentration and broker dependence.
- Capital deployment after the equity offering, future dilution and dividends, and KICO’s statutory capacity to distribute funds to the parent.