Business context and reporting period
Kingstone Companies, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2012. Through Kingstone Insurance Company (KICO), it underwrites property and casualty insurance primarily to individuals and small businesses in downstate New York, principally through independent agents and brokers. The company reports that approximately 99% of revenue is derived from KICO. Results are interim and may not indicate full-year performance.
Financial performance and key metrics
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Total revenue | $8.52 million | $6.84 million | $23.48 million | $19.73 million |
| Net premiums earned | $5.28 million | $3.94 million | $13.42 million | $10.82 million |
| Ceding commission revenue | $2.71 million | $2.31 million | $8.53 million | $7.35 million |
| Net income | $0.91 million | $0.22 million | $2.24 million | $1.12 million |
| Diluted earnings per share | $0.23 | $0.06 | $0.59 | $0.29 |
| Net loss ratio | 51.0% | 74.5% | 55.0% | 67.5% |
| Net combined ratio | 74.5% | 97.7% | 73.8% | 84.7% |
| Underwriting income | $1.34 million | $0.09 million | $3.52 million | $1.65 million |
For the nine months, operating cash flow was $2.95 million, down from $5.79 million; investing activities used $0.39 million and financing activities used $0.29 million. Cash and cash equivalents increased to $2.45 million from $0.17 million at December 31, 2011. At September 30, total assets were $80.53 million, total liabilities $62.43 million, and stockholders’ equity $18.10 million.
Total investments were $28.94 million. Notes payable were $747,000, including $378,000 owed to related parties, and the line of credit had $350,000 outstanding under a $500,000 facility. The notes bear 9.5% interest and mature July 10, 2014; the line is payable on demand and secured by company assets. The board approved a $0.04-per-share dividend for payment in December 2012. Nine-month dividends paid were $380,046.
Changes versus the prior comparable period
- Revenue rose 19% for the nine months and 24.5% in the third quarter; net income doubled for the nine months and increased about 316% in the quarter.
- Management attributed premium growth chiefly to increased demand, higher policies in force (up 18.9% year over year), and writing more higher-premium policies. Direct and assumed written premiums increased 19.5% for the nine months.
- From July 1, 2012, KICO reduced its commercial-lines quota-share cession from 60% to 40%, retaining more premium and contributing to net written premium growth.
- The nine-month net loss ratio improved to 55.0% from 67.5%, and the combined ratio to 73.8% from 84.7%. The prior-year comparison included $422,000 of net Tropical Storm Irene losses, adding 3.9 percentage points to the prior-period loss ratio. Management also cited lower personal- and commercial-lines loss ratios.
- Net investment income increased 45% for the nine months, while net realized investment gains fell 69%, partly because the prior-year period included a $133,000 FDIC recovery related to a failed bank.
- Operating cash flow declined despite higher net income, primarily reflecting changes in operating assets and liabilities as the insurance business grew.
Outlook, risks, contingencies and unusual items
- Superstorm Sandy: The storm struck KICO’s principal market on October 29, 2012, after quarter-end. The company estimated $750,000 of net personal-lines losses, the stated retention under its quota-share and catastrophe reinsurance, but anticipated additional commercial-auto and livery physical-damage losses. It warned that Sandy would materially affect post-quarter operating results.
- The company said $755,000 of contingent ceding commission revenue was included in third-quarter revenue and could be adjusted downward, potentially below zero, based on Sandy-related reinsurance losses. It expected a significant decline in ceding commission revenue over the remaining treaty period, but could not reasonably estimate the amount. Catastrophe-reinsurance reinstatement premiums are also expected.
- Management expected the storm’s effects not to have a material adverse impact on financial condition based on results through September 30, but noted uncertainty and possible effects on the terms and conditions of reinsurance after June 30, 2013.
- KICO’s catastrophe program provides coverage up to $73 million; under the stated structure, KICO retains 25% of the first $3 million of personal-lines catastrophe losses, or $750,000, with reinsurance covering the next $70 million. Reinsurance does not relieve KICO of its obligations to policyholders.
- Loss reserves, reinsurance recoverables and contingent ceding commissions depend on estimates and judgment; actual claims and recoveries may differ materially. At September 30, management reported no investment impairments considered other-than-temporary.
- The filing states that management believed cash flows would fund company-wide working-capital needs over the next 12 months. It reported effective disclosure controls, no material off-balance-sheet arrangements, and no other pending legal proceedings believed likely to materially affect the financial statements.
Important facts for investors to verify
- Actual Sandy claim development, including commercial-auto and livery losses, and whether personal-lines losses remain within the estimated $750,000 retention.
- Any downward revisions to contingent ceding commissions, the magnitude and timing of future commission declines, and catastrophe-reinsurance reinstatement costs.
- Renewal availability, pricing, and terms of reinsurance after June 30, 2013.
- Whether premium growth and the change in commercial-lines quota share continue to support underwriting profitability without weakening reserve adequacy or liquidity.
- Operating cash flow conversion, collection of reinsurance receivables, and compliance with the line-of-credit demand and annual zero-balance requirements.