Business context and reporting period
Kingstone Companies, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Through Kingstone Insurance Company (KICO), it writes property and casualty insurance, primarily in downstate New York, to individuals and small businesses through independent agents and brokers. KICO generates approximately 99% of company revenue.
Financial performance and position
Amounts are in U.S. dollars. Comparisons are with the corresponding 2012 period unless otherwise noted.
| Metric | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2013 |
|---|---|---|
| Total revenue | $10.34 million, up 35.1% | $25.64 million, up 13.4% |
| Net premiums earned | $6.13 million, up 38.7% | $15.43 million, up 22.9% |
| Ceding commission revenue | $3.61 million, up 33.2% | $8.24 million, down 3.4% |
| Net income | $1.66 million, versus $0.45 million | $1.92 million, up 8.3% |
| Diluted earnings per share | $0.43, versus $0.11 | $0.49, versus $0.47 |
| Net loss ratio | 39.8%, versus 60.9% | 52.8%, versus 58.8% |
| Net combined ratio | 63.0%, versus 86.2% | 84.3%, versus 77.8% |
| Operating cash flow | Not separately provided | $5.18 million, versus $2.95 million |
The Q3 improvement in the combined ratio reflected a lower loss ratio. For the nine-month period, the combined ratio worsened despite a lower loss ratio, as the net underwriting expense ratio rose to 31.5% from 19.1%. A combined ratio below 100% indicates underwriting profit under the company’s measure.
At September 30, 2013, total assets were $94.54 million, total liabilities $77.51 million, and stockholders’ equity $17.03 million. Cash and cash equivalents were $4.19 million; investments totaled $33.59 million. Reinsurance receivables were $36.12 million and loss and loss adjustment expense reserves were $29.52 million. Total debt was $0.96 million, comprising $0.75 million of notes and $0.21 million outstanding on the bank line of credit; all was classified as current. The notes bear 9.5% interest and mature July 10, 2014. The line is payable on demand and had a 3.75% weighted-average rate.
For the nine months, investing activities used $2.40 million and financing activities used $0.83 million. Cash increased by $1.95 million from year-end 2012. The company paid $0.46 million in dividends and repurchased $0.13 million of treasury stock. The board approved a further $0.04-per-share dividend payable in December 2013.
Material changes versus the prior comparable period
- Direct written premiums rose 22.5% for the first nine months; policies in force were up 19.8% year over year at September 30. Management attributed growth to demand, more policies and higher-premium policies.
- Nine-month ceding commission revenue fell because Superstorm Sandy increased the estimated loss ratio under the 2012/2013 treaty, reducing contingent commissions by approximately $1.85 million. Higher provisional commissions partly offset the reduction.
- The July 2013 reinsurance renewal reduced the commercial-lines quota-share percentage from 40% to 25%, while the personal-lines provisional commission rate increased from 35% to 40%. The catastrophe program’s stated coverage limit increased from $73 million to $90 million per occurrence.
- Net premiums earned included one-time third-quarter adjustments of $444,000 for catastrophe reinsurance premiums and $138,000 for excess-of-loss premiums. These are not recurring quarterly items.
- Cash from operations increased, while investment purchases and sales resulted in greater investing cash outflow. Accumulated other comprehensive income declined to $0.40 million from $1.02 million at year-end, mainly reflecting unrealized investment losses.
Outlook, risks, contingencies and unusual items
- Management stated that available cash flows should fund company-wide working capital needs over the next 12 months. No quantified earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results.
- On October 15, 2013, the company filed an S-1 for a proposed $15 million common-stock offering, with a possible 15% underwriter over-allotment option. The filing was not yet effective. Intended uses include capital for KICO, subject to New York regulatory approval, debt repayment and general corporate purposes, potentially including acquisitions.
- New York’s Department of Financial Services is investigating KICO’s handling of Superstorm Sandy claims, including claim timeliness and accessibility. KICO is cooperating and management said it did not expect a material adverse effect. The company also disclosed regulatory requirements affecting Sandy claims.
- Loss reserves and reinsurance-related receivables and commissions require significant estimates; actual claim outcomes may differ materially. Reinsurance does not release KICO from its obligations to policyholders. The company reported no material pending litigation beyond ordinary-course matters.
- Management identified dependence on a limited number of brokers as a risk; those brokers supplied 31.4% of 2012 gross written premiums. A loss of significant broker relationships could adversely affect results.
- Management concluded disclosure controls were effective as of September 30, 2013 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed offering became effective, its final size and terms, and how proceeds were used, including any required regulatory approval for KICO capital contributions.
- Subsequent development of Sandy claims, the DFS investigation, and the potential effects on loss reserves and contingent ceding commissions.
- Whether premium growth and improved quarterly loss ratios persist, particularly given the weaker nine-month combined ratio and the one-time premium-reconciliation benefits.
- Collectability and timing of the $36.12 million in reinsurance receivables, and the adequacy of loss reserves.
- Repayment or refinancing of the $747,000 notes due July 2014 and continued access to the demand line of credit.
- Broker concentration, investment portfolio exposure and unrealized losses; management said none of the reported unrealized losses were considered other-than-temporary.