KINS

Business Context and Reporting Period

Company: Kingstone Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2012
Business Overview: Kingstone operates primarily through its subsidiary, Kingstone Insurance Company (KICO), underwriting property and casualty insurance for small businesses and individuals in New York State. The company utilizes a quota share reinsurance program to manage risk and generate ceding commission revenue.

Key Financial Metrics (Six Months Ended June 30, 2012)

Key Insurance Ratios (Six Months Ended June 30, 2012)

• Net Loss Ratio: 57.6% (Improved from 63.5% in 2011)
• Net Underwriting Expense Ratio: 15.7% (Increased from 13.8% in 2011)
• Net Combined Ratio: 73.3% (Improved from 77.3% in 2011)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.0% year-over-year, driven by an 18.2% increase in net premiums earned and a 15.4% increase in ceding commission revenue. Direct written premiums grew 17.7% due to increased demand and higher policy counts.
• Profitability: Net income increased 47.3% to $1.33 million. This was primarily due to improved underwriting results (lower net loss ratio) and higher investment income, partially offset by increased underwriting expenses.
• Investment Income: Net investment income rose 47.0% to $497,396, attributed to a larger average invested asset base. However, net realized gains on investments dropped 71.3% to $45,560.
• Cash Flow: Net cash provided by operating activities decreased significantly by $1.56 million to $464,409. This decline was due to fluctuations in operating assets and liabilities related to business growth, despite higher net income.
• Debt Reduction: Interest expense decreased 51.8% due to the partial redemption of notes payable in 2011 and a reduction in the interest rate on remaining debt from 12.625% to 9.5%.

Guidance, Outlook, and Risks

• Dividends: The Board declared a quarterly dividend of $0.04 per share on August 13, 2012, payable September 18, 2012. This is an increase of $0.01 per share over the previous quarter.
• Reinsurance: Reinsurance treaties for Personal and Commercial Lines were renewed as of July 1, 2012. The company maintains $73 million in catastrophe reinsurance coverage.
• Investment Portfolio: The company holds $27.4 million in total investments. Management determined that unrealized losses on 18 securities were temporary and not other-than-temporarily impaired (OTTI).
• Risks: The filing includes standard forward-looking statement disclaimers regarding uncertainties in loss reserves, reinsurance recoveries, and investment valuations. The company notes that ultimate claim liabilities may differ substantially from estimates.
• Related Party Transactions: The company has outstanding notes payable to related parties (directors and officers) totaling $378,000.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the stability of the net loss ratio improvement (57.6%) and monitor for adverse development in prior year reserves, particularly in the commercial auto line.
• Operating Cash Flow: Investigate the significant decline in operating cash flow ($2.0M to $0.5M) despite revenue growth to ensure liquidity is not constrained by receivables collection timing.
• Reinsurance Dependency: Assess the impact of the quota share reinsurance treaties on profitability, specifically the sensitivity of ceding commission revenue to loss ratio fluctuations.
• Investment Yield: Confirm the sustainability of the 5.27% tax-equivalent investment yield in the current interest rate environment.
• Related Party Debt: Review the terms and repayment schedule of the $378,000 in related party notes payable.