Kingstone Companies, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. Kingstone underwrites property and casualty insurance, primarily in downstate New York, through Kingstone Insurance Company and independent agents and brokers. This unaudited quarterly report covers the three and six months ended June 30, 2013, compared with the same periods in 2012. Results are GAAP interim results and may not indicate full-year performance.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $7.78 million | $7.53 million | $15.30 million | $14.96 million |
| Net premiums earned | $4.68 million | $4.16 million | $9.30 million | $8.14 million |
| Ceding commission revenue | $2.33 million | $2.91 million | $4.63 million | $5.81 million |
| Pre-tax income | $127,262 | $867,244 | $430,273 | $2.03 million |
| Net income | $68,101 | $560,316 | $259,109 | $1.33 million |
| Diluted EPS | $0.02 | $0.15 | $0.07 | $0.35 |
- Direct written premiums grew 27.7% in Q2 and 21.3% in the six-month period. Policies in force rose 21% year over year at June 30, 2013; management cited demand and growth in higher-premium policies.
- Net loss ratios were 69.3% for Q2 and 61.4% for six months, versus 57.8% and 57.6%, respectively, in 2012. Net combined ratios were 101.9% and 98.4%, versus 76.2% and 73.3%. Q2 underwriting income was a loss of $89,668; six-month underwriting income was $145,133.
- Net investment income increased to $275,031 for Q2 and $558,318 for six months. Net realized investment gains were $249,893 and $355,018, respectively. The tax-equivalent investment yield, excluding cash, was 5.56% at June 30, 2013, versus 5.27% a year earlier.
- Six-month operating cash flow was $1.71 million, investing cash flow $1.19 million, and financing cash outflow $757,174. Cash and cash equivalents ended at $4.38 million, up from $2.24 million at year-end 2012.
- At June 30, total assets were $89.78 million, total liabilities $74.20 million, and stockholders’ equity $15.58 million. Investments totaled $30.19 million. Reinsurance receivables were $34.53 million; loss and LAE reserves were $28.36 million.
- Notes payable totaled $877,000, including a $130,000 bank line balance and $747,000 of notes bearing 9.5% interest and maturing July 10, 2014. The line’s $600,000 limit is payable on demand and secured by company assets. The filing says existing cash flows should meet working-capital needs over the next 12 months; additional financing may be sought if holding-company cash needs exceed available sources.
Material changes and management commentary
- Net income fell 87.9% in Q2 and 80.5% for the first half, despite premium growth. Management attributed the decline chiefly to lower contingent ceding commissions, higher net loss ratios, and growth-related expenses.
- Superstorm Sandy increased losses and reduced contingent ceding commissions under the 2012/2013 treaty by approximately $931,000 in Q2 and $1.85 million for six months. Net catastrophe losses and LAE were $156,641 in the first half. Ceding commission revenue fell 19.8% in Q2 and 20.4% for six months.
- Management attributed higher loss ratios mainly to commercial auto and underwriting pools where Kingstone retains more of the premiums and losses. Losses incurred for prior years were $536,209 in the first half, compared with $327,603 in 2012.
- Investment portfolio fair value declined: available-for-sale securities had net unrealized gains of $736,243 at June 30, versus $1.55 million at December 31, 2012. Accumulated other comprehensive income fell to $485,919 from $1.02 million. Management classified the portfolio’s unrealized losses as temporary and reported no other-than-temporary impairments.
- Effective July 1, 2013, reinsurance treaties were renewed. Personal-lines quota share remained 75%, with catastrophe coverage increased to losses up to $90 million; commercial general-liability quota share decreased from 40% to 25%. Reinsurance does not relieve Kingstone of obligations to policyholders.
- The company paid $0.08 per common share in dividends for the first half. After quarter-end, the board approved a $0.04-per-share dividend payable September 13, 2013. Shareholders also approved increases in authorized common shares, preferred shares, and shares available under the equity plan.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expressed the view that available cash flows would fund company-wide working-capital requirements on a short-term basis and over the following 12 months.
- Key uncertainties include estimation of loss and LAE reserves, reinsurance recoverability and contingent ceding commissions, catastrophe exposure, and investment fair values. The filing notes that actual reserve outcomes may differ substantially from estimates.
- New York’s Department of Financial Services was investigating KICO’s handling of Superstorm Sandy claims, including claim-adjustment timeliness and customer access. KICO was cooperating and management did not expect a material adverse effect. The filing also describes post-Sandy state claims rules and mediation requirements.
- The company reported no other pending legal proceedings believed likely to have a material adverse financial effect, no material off-balance-sheet arrangements, and no material change in internal control over financial reporting. Management concluded disclosure controls were effective at June 30, 2013.
Important facts for investors to verify
- Whether commercial auto and retained-pool loss experience improves, and how reserve development affects future earnings.
- How Sandy claims, the state regulatory inquiry, and the renewed reinsurance terms affect recoveries, ceding commissions, and retained catastrophe exposure.
- Whether premium growth translates into profitable underwriting, given the Q2 combined ratio above 100% and lower contingent commissions.
- Reinsurance receivable collectability, liquidity needs, and the demand-repayable bank line and July 2014 note maturity.
- Changes in investment values and unrealized losses; management’s temporary-impairment assessment relies on estimates and its intent and ability to hold securities.