Kingstone Companies, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Financial statements are unaudited. Kingstone underwrites property and casualty insurance primarily in New York through Kingstone Insurance Company, selling through independent agents and brokers.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $10.10 million | $7.52 million; up 34.4% |
| Net premiums earned | $5.93 million | $4.62 million; up 28.2% |
| Ceding commission revenue | $3.38 million | $2.29 million; up 47.4% |
| Net investment income | $379,000 | $283,000 |
| Pre-tax income | $480,000 | $303,000 |
| Net income | $327,000 | $191,000; up 71.2% |
| Basic / diluted EPS | $0.05 / $0.04 | $0.05 / $0.05 |
| Operating cash flow | $405,000 | $2.25 million |
| Cash and cash equivalents | $8.56 million | $19.92 million at Dec. 31, 2013 |
| Total assets / liabilities | $124.15 million / $87.94 million | $116.78 million / $81.07 million at Dec. 31, 2013 |
| Stockholders’ equity | $36.21 million | $35.71 million at Dec. 31, 2013 |
Net loss ratio was 73.0%, versus 53.4%; net underwriting expense ratio improved to 22.5% from 41.5%. The resulting net combined ratio was 95.5%, compared with 94.9%. A ratio below 100% indicates underwriting income before investment income and certain other items.
Investing activities used $11.47 million, principally reflecting purchases of securities; financing activities used $291,000, including dividends. Cash declined by $11.36 million during the quarter. The company reported no outstanding borrowings on its $600,000 bank line at March 31, 2014; no interest expense was recorded in Q1 2014.
Investments totaled $49.57 million at March 31, including $45.60 million in available-for-sale securities at fair value and $3.97 million in held-to-maturity securities at amortized cost. The company reported $1.14 million of net unrealized gains on available-for-sale securities before tax. Management considered portfolio unrealized losses temporary and recorded no other-than-temporary impairment.
Material changes and drivers
- Direct written premiums rose 27.3% to $16.35 million; management attributed growth to more policies in force (up 23.5% year over year), continuing product demand, and higher average premium per policy. The prior-year period was affected by post-Superstorm Sandy restrictions on cancellations and non-renewals.
- Severe winter weather in January and February 2014 produced $941,000 of net catastrophe losses and contributed to the higher net loss ratio. Catastrophe losses reduced ceding commissions by approximately $517,000.
- Despite catastrophe claims, higher premiums and ceding commissions supported higher revenue and earnings. The combined ratio increased modestly, as the improved expense ratio largely offset the higher loss ratio.
- Operating cash flow was lower year over year, while cash declined primarily as the company invested in securities. The investment portfolio expanded substantially from year-end.
- The company paid $290,664 in Q1 dividends, or $0.04 per share. The board approved another $0.04-per-share dividend on May 13, 2014, payable June 13.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management cautions that quarterly results may not indicate full-year results and that forward-looking statements are subject to risks, including those described in the 2013 Form 10-K.
- On May 12, 2014, Kingstone elected to reduce its personal-lines quota-share cession from 75% to 55%, effective July 1, 2014. This may increase premiums retained and exposure to losses; the filing provides no quantified estimate of the resulting financial effect. The company’s catastrophe program covers up to $90 million per occurrence, subject to stated limits, including an annual limit of twice the per-occurrence amounts.
- Loss reserves and reinsurance recoverables require significant estimates; ultimate claim costs and collection timing may differ from recorded amounts. Loss and LAE reserves rose to $40.04 million from $34.50 million at year-end, while reinsurance receivables rose to $43.53 million from $37.56 million.
- The New York Department of Financial Services investigation into KICO’s handling of Superstorm Sandy claims remained unresolved in the filing. KICO had provided requested information and was cooperating; management believed the matter would not affect financial position or results. The company also noted ordinary-course insurance litigation but no other pending proceedings believed likely to have a material adverse effect.
- The company’s reinsurance arrangements do not release it from obligations to policyholders. Reinsurer collectability, catastrophe losses, reserve development, investment-market changes, and state insurance regulation remain relevant risks.
Investor verification points
- Track whether the reduced personal-lines cession beginning July 1, 2014 changes net premium growth, retained risk, catastrophe exposure, and ceding commission revenue.
- Monitor catastrophe claims and subsequent reserve development, particularly given the increase in reserves and the quarter’s winter-weather losses.
- Assess the quality and collectability of reinsurance recoverables and their relationship to gross loss reserves.
- Reconcile the cash decline with investment purchases and monitor operating cash flow and available liquidity.
- Check for updates or outcomes in the DFS investigation concerning Superstorm Sandy claims.
- Review reported share counts and dilution: 7,266,573 common shares were outstanding at March 31, while 7,282,444 were reported outstanding as of May 15, 2014.