Kingstone Companies, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Kingstone primarily underwrites property and casualty insurance in New York through Kingstone Insurance Company (KICO); management said KICO generated 98% of company revenue. The quarter’s results may not indicate full-year performance.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $7.42 million | $6.18 million | +20.2% |
| Net premiums earned | $3.97 million | $3.37 million | +18.0% |
| Ceding commission revenue | $2.90 million | $2.31 million | +25.6% |
| Net investment income | $268,000 | $178,000 | +50.0% |
| Income before taxes | $1.16 million | $168,000 | +590.8% |
| Net income | $765,000 | $127,000 | +507.5% |
| Basic and diluted EPS | $0.20 | $0.03 | Up $0.17 |
| Net operating cash flow | $(195,000) | $1.25 million | Changed to cash use |
The net loss ratio improved to 57.4% from 75.7%; the net underwriting expense ratio was 12.9% versus 16.0%, and the net combined ratio improved to 70.2% from 91.7%. Underwriting income was $1.18 million, compared with $279,000. No catastrophe losses were incurred in either period. Net income benefited from higher earned premiums and ceding commissions and lower net losses.
Balance sheet, liquidity and capital
- At March 31, 2012, total assets were $72.66 million, total liabilities $56.34 million, and stockholders’ equity $16.32 million.
- Cash and cash equivalents were $312,000, compared with $173,000 at year-end 2011. Total investments were $27.29 million.
- Notes payable totaled $997,000: $747,000 of notes due July 2014 bearing 9.5% interest, and $250,000 drawn on a $500,000 bank line. The line is payable on demand, secured by company assets, and requires a 30-day zero-balance period annually. Related-party notes included $378,000.
- Operating cash use was offset by $456,000 of investing cash inflow; financing used $123,000, including $113,000 of dividends. Cash increased $139,000 during the quarter.
- Loss and loss adjustment expense reserves were $19.93 million; reinsurance recoverables were $25.18 million. The filing reports a maximum KICO distribution without prior regulatory approval of approximately $617,000 as of March 31.
Material changes, outlook and risks
- Direct written premiums increased 17.9% to $11.24 million, and policies in force grew 19.2% year over year. Net written premiums rose more slowly, 8.5%, partly because more business was in lines subject to quota-share reinsurance.
- Ceding commission revenue included $919,000 of contingent commissions. Management attributed growth partly to more ceded premiums, more favorable rates under the treaty renewed in July 2011, and a $169,000 carryover benefit from the prior treaty. These amounts depend on estimates of ultimate loss ratios and may change.
- Management cited lower commercial-auto losses as the primary reason for the improved loss ratio. Prior-year reserve development reduced incurred losses by $7,000 in Q1 2012; reserve estimates remain inherently uncertain.
- The reinsurance program includes quota-share and excess-of-loss coverage, including $54 million of catastrophe coverage with a $500,000 company retention per occurrence. Reinsurance does not release KICO from its obligations to policyholders.
- Available-for-sale investments had $177,000 of gross unrealized losses; management deemed them temporary and recorded no other-than-temporary impairment. BBB-rated securities were 35.3% of available-for-sale fixed maturities. The reported tax-equivalent investment yield, excluding cash, was 5.26%, down from 5.61% a year earlier.
- Management said current cash flows should fund company-wide working-capital needs over the next 12 months, but noted it could seek additional financing if holding-company resources prove insufficient. No numerical earnings or premium guidance was provided.
- Subsequent events included a $0.03-per-share dividend approved May 14 for payment June 15; KICO also approved a $175,000 dividend to Kingstone, paid May 15. The CEO’s annual base salary was increased from $375,000 to $450,000, effective January 1, 2012. The filing also notes an ongoing IRS examination of the 2009 federal tax return; results were unknown.
- The company reported no other pending legal proceedings management believed likely to materially affect the financial statements, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2012.
Important facts for investors to verify
- Whether claims reserves and the substantial reinsurance recoverables remain adequate and collectible as claims develop.
- The sustainability and treaty assumptions behind contingent ceding commissions, including the carryover benefit and related receivables.
- Why reported operating cash flow was negative despite higher earnings, and whether the on-demand credit line and cash resources are sufficient.
- Investment credit and valuation exposure, especially the BBB allocation and securities in unrealized-loss positions.
- The timing and amount of KICO dividends: the filing describes a $175,000 dividend during Q1 and separately reports another $175,000 approved and paid in May. Also verify the dividend record date, shown in one passage as May 31, 2011 despite the 2012 payment date.
- The effect of the CEO salary increase and the outcome of the IRS audit.