Kingstone Companies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The interim financial statements are unaudited. Kingstone underwrites property and casualty insurance primarily through Kingstone Insurance Company (KICO); 87% of KICO direct written premiums came from New York.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 or comparison |
|---|---|---|
| Total revenue | $36.63 million | $28.55 million; up 28.3% |
| Net premiums earned | $28.25 million | $26.67 million; up 5.9% |
| Net income (loss) | ($5.05 million) | ($9.20 million) |
| Basic and diluted loss per share | ($0.47) | ($0.87) |
| Net loss ratio | 88.6% | 86.0% |
| Net underwriting expense ratio | 34.7% | 38.5% |
| Net combined ratio | 123.3% | 124.5% |
| Operating cash flow | ($3.37 million) | ($17.39 million) |
- Revenue improvement mainly reflected investment results: net investment gains were $1.22 million versus losses of $4.40 million a year earlier. Net investment income increased 13.4% to $1.54 million.
- Underwriting remained unprofitable: the combined ratio exceeded 100%. Management cited more large fire and water losses; catastrophe losses net of reinsurance were $3.74 million, or 13.2 percentage points of the loss ratio. The underlying loss ratio, excluding catastrophe losses and prior-year development, was 75.4% versus 74.7%.
- Direct written premiums rose 10.7% to $47.60 million, while net written premiums fell 3.8% to $23.97 million as ceded premiums increased. New York direct written premiums increased; expansion-state premiums declined in line with the plan to reduce business outside New York.
- At March 31, total assets were $330.40 million, total investments $180.16 million, cash and equivalents $10.50 million, and stockholders’ equity $33.28 million. Cash was $11.96 million at year-end 2022; equity was $36.17 million.
- Total liabilities were $297.12 million, including $124.12 million of loss and LAE reserves. Debt, net, was $25.18 million, comprising 12% senior notes and equipment financing. The notes mature December 30, 2024; a mandatory redemption is due December 30, 2023 under a formula tied to KICO’s dividend capacity and holding-company expenses.
- The notes’ leverage covenant limit is 30%; the reported ratio was 29.7% at March 31, versus 26.7% at December 31, 2022. KICO had no FHLBNY borrowings; collateralized borrowing capacity was subject to collateral and regulatory limits.
- Investing activities provided $2.19 million and financing activities used $0.28 million. No common dividends were paid in Q1 2023; the board suspended regular quarterly dividends in November 2022.
Changes, outlook, and risks
- Compared with Q1 2022, net loss narrowed, but loss performance weakened: the loss ratio rose 2.6 percentage points. Expense ratio improvement partly offset this, leaving the combined ratio at 123.3%.
- Management’s Kingstone 3.0 plan emphasizes reducing less profitable expansion-state business, pricing for loss trends and inflation, managing catastrophe exposure and reinsurance costs, and expense reduction. The stated goal is a 33% net expense ratio by year-end 2024; management said it expects a return to profitability beginning in 2023. The filing does not provide specific quarterly or full-year earnings guidance.
- Reinsurance remains material to premiums, losses, and liquidity. The 30% personal-lines quota-share treaty runs through January 1, 2024. Excess-of-loss and catastrophe treaties were scheduled to expire June 30, 2023; the filing describes coverage thereafter as limited to quota-share and underlying excess-of-loss protection through January 1, 2024. Confirm replacement coverage and terms.
- KICO had negative unassigned surplus and, as of March 31, could not pay further distributions to the parent without prior regulatory approval. The filing also reports a $1.25 million KICO dividend to the parent during Q1; investors should clarify the timing and regulatory context.
- On May 4, 2023, after quarter-end, A.M. Best downgraded KICO’s financial strength rating from B to B- and issuer credit rating from bb to bb-, with a negative outlook.
- Other key uncertainties include inflation-driven claim severity, catastrophe losses, reserve estimation and reinsurance recoverability, interest-rate and credit-spread effects on investments, and the concentration of premiums in New York. Management said it found no credit losses in the fixed-maturity portfolio and considered unrealized losses temporary. The filing identifies no material change to previously disclosed risk factors.
Important facts for investors to verify
- Progress toward underwriting profitability, especially the underlying loss ratio and large-loss frequency.
- Renewal terms, cost, and protection limits for catastrophe and excess-of-loss reinsurance after June 30, 2023.
- Capacity to meet the December 2023 notes’ mandatory redemption and maintain covenant headroom below the 30% leverage limit.
- KICO’s statutory capital position, ability to remit dividends, and implications of the A.M. Best downgrade.
- Development of loss reserves, reinsurance receivables, and the company’s substantial unrealized fixed-income losses.