Kingstone Companies, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Kingstone underwrites property and casualty insurance, primarily in New York, through Kingstone Insurance Company (KICO), selling through independent agents and brokers. The unaudited quarter ended March 31, 2017; comparisons are with the quarter ended March 31, 2016 unless noted.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable / reference |
|---|---|---|
| Total revenue | $20.65 million | $18.44 million; up 11.9% |
| Net premiums earned | $16.37 million | $14.53 million; up 12.6% |
| Net income | $1.47 million; diluted EPS $0.15 | $0.54 million; diluted EPS $0.07 |
| Underwriting ratios | Net loss ratio 50.7%; expense ratio 34.5%; combined ratio 85.2% | 65.3%; 31.6%; 96.9%, respectively |
| Operating cash flow | $2.06 million | $2.67 million |
| Cash and cash equivalents | $23.24 million | $12.04 million at December 31, 2016 |
| Total investments | $115.69 million | $95.51 million at December 31, 2016 |
| Total assets / liabilities / equity | $202.69 million / $114.59 million / $88.10 million | At December 31, 2016: $169.45 million / $112.77 million / $56.68 million |
Cash plus investments totaled approximately $138.92 million. The balance sheet reports no separate borrowing or debt balance; liabilities principally include loss reserves, unearned premiums, and reinsurance-related balances. The filing does not provide a conventional current-liquidity ratio. Dividends declared and paid were $0.0625 per share during the quarter.
Changes versus the prior period
- Direct written premiums increased 13.4%, to $26.13 million, supported by more policies in force (up 10.8% year over year) and higher average premiums. Net written premiums rose 14.1% to $16.73 million.
- Net income rose 171.7%. The combined ratio improved by 11.7 percentage points, mainly reflecting no severe-winter-weather catastrophe losses in Q1 2017 versus a 9.7-point impact in Q1 2016, and a lower core loss ratio. Q1 2016 also had more favorable prior-year reserve development.
- Underwriting expense ratio increased 2.9 points as commissions and other underwriting expenses grew; expansion expenses were $228,000 versus $25,000. Holding-company operating expenses rose 129.8%, primarily from executive bonus and equity compensation.
- Net investment income increased 5.5% to $858,000, but realized investment results moved from an $80,000 gain to a $55,000 loss. Management reported average investment yield of 3.77% versus 4.51% a year earlier.
- Equity increased substantially following a public offering: Kingstone sold 2,692,500 shares at $12.00 each and received approximately $30.14 million net. It contributed $23 million to KICO on March 1, 2017.
Outlook, commentary, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management cited demand and premium growth and said the April 2017 upgrade of KICO’s A.M. Best Financial Strength Rating to A- from B++ may create growth opportunities. Kingstone began writing business in New Jersey on May 4, 2017.
- A personal-lines quota-share treaty bound in March takes effect July 1, 2017, reducing the ceded share from 40% to 20% and increasing the provisional ceding commission rate from 52.0% to 52.5%. The two-year treaty includes specified options for either side to modify or terminate it effective July 1, 2018. Lower cessions can increase retained premiums and exposure.
- Loss reserves depend on estimates of ultimate claims and reinsurance recoverables; actual outcomes may differ materially. Gross loss and LAE reserves were $44.61 million, including $16.72 million of reinsurance recoverables. Management reported $4,586 of favorable prior-year development in Q1 2017.
- Catastrophe exposure, reinsurance availability and recoverability, and investment-market and credit risks are material considerations. The portfolio included a Puerto Rico bond after the Commonwealth’s 2016 interest-payment default; a $69,911 credit impairment had been recognized in 2016. Management said other portfolio unrealized losses were considered temporary.
- The quarter’s cash increase was supported by offering proceeds; operating cash flow was lower year over year, while investing cash outflow rose as the company purchased securities. Management cautioned that quarterly results may not indicate full-year results. No material pending legal proceedings, material off-balance-sheet arrangements, or new risk factors were reported. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether premium growth and the lower loss ratio persist after accounting for catastrophe variability, business mix, and the prior-year comparison.
- Reserve adequacy and subsequent claims development, including the impact of reinsurance recoverables and the run-off of commercial auto claims.
- Implementation and economics of the 20% quota-share treaty, including its commission terms, termination options, and effect on retained risk and capital.
- Progress toward the A.M. Best upgrade plan, expansion into New Jersey, and the returns expected from the $23 million capital contribution to KICO.
- Investment portfolio credit quality, unrealized losses, and sensitivity of investment income to yields and market conditions.