Kingstone Companies, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO); most business is personal lines, with substantial concentration in New York.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $36.7 million | $29.0 million | $73.3 million | $57.5 million |
| Net premiums earned | $29.5 million | $27.9 million | $57.8 million | $54.6 million |
| Net investment income | $1.45 million | $0.63 million | $2.99 million | $1.99 million |
| Net investment gains (losses) | $0.20 million | $(4.52) million | $1.42 million | $(8.92) million |
| Net loss | $(0.52) million | $(5.38) million | $(5.58) million | $(14.58) million |
| Loss per share, basic and diluted | $(0.05) | $(0.51) | $(0.52) | $(1.37) |
| Net combined ratio | 98.9% | 103.3% | 110.8% | 113.6% |
Quarterly underwriting results improved: the net combined ratio was below 100%, and the insurance underwriting business reported $0.33 million of underwriting gain. For the first half, it reported a $6.26 million underwriting loss. Consolidated results also include investment activity, holding-company costs and interest expense.
- Premiums and margins: First-half direct written premiums rose 2.7% to $95.2 million, while net written premiums fell 4.4% to $52.6 million as ceded premiums increased. Net premiums earned rose 5.8%. The first-half net loss ratio increased to 77.2% from 76.2%; the expense ratio improved to 33.6% from 37.4%.
- Claims: First-half net catastrophe losses were $5.13 million, versus $3.13 million a year earlier. Management cited winter storms and wind events, inflation-driven severity and an elevated number of large losses. The underlying loss ratio, excluding catastrophe losses and prior-year development, improved to 68.4% from 70.0%.
- Cash flow: Operating cash flow was $(17.0) million, investing cash flow was $17.9 million, and financing cash flow was $(0.6) million. Cash ended the period at $12.3 million, up $0.3 million from year-end 2022. Investment sales and maturities funded investing cash inflows.
- Balance sheet and investments: Total assets were $311.3 million and stockholders’ equity was $32.1 million at June 30, versus $320.3 million and $36.2 million, respectively, at year-end. Total investments were $163.1 million. Available-for-sale fixed maturities had $156.7 million amortized cost and $137.9 million fair value; accumulated other comprehensive loss was $14.9 million.
- Debt and liquidity: Debt, net, was $25.2 million, including 12% senior notes and equipment financing. The notes mature December 30, 2024 and require a mandatory redemption on December 30, 2023 based on KICO’s permitted dividend capacity and holding-company expenses. The notes’ leverage maintenance ratio was 29.8% against a 30% maximum. KICO had no FHLBNY borrowings; available collateral was approximately $11.8 million.
Changes, strategy and outlook
- Compared with the first half of 2022, the net loss narrowed by $9.0 million, reflecting a major improvement in investment gains and a lower underwriting expense ratio; catastrophe losses and interest expense increased. Interest expense more than doubled to $2.02 million, largely due to the 12% notes and equipment financing.
- Business mix continued shifting toward New York: first-half Core (New York) direct written premiums rose 12.4% to $83.6 million, while non-New York premiums fell 36.9% to $11.6 million. Policies in force declined 8.6% overall and 27% outside New York.
- Management’s Kingstone 3.0 strategy prioritizes profitability over growth, including reducing non-New York exposure, pursuing rate increases, managing catastrophe risk and controlling expenses. The stated goal is to reduce the net expense ratio to 33% by year-end 2024. Management believes the actions can return the company to profitability; no quantified earnings or revenue guidance is provided.
- New excess-of-loss and catastrophe reinsurance treaties took effect July 1, 2023. Reinsurance costs, coverage terms and retained catastrophe exposure remain important considerations; named storms are excluded from the underlying excess-of-loss treaty described in the filing.
Risks, contingencies and notable events
- KICO paid a $1.25 million dividend to the holding company during the first half. KICO had negative unassigned surplus at June 30 and could not make further distributions without prior regulatory approval, constraining a key source of holding-company liquidity.
- On July 6, 2023, A.M. Best withdrew KICO’s ratings at KICO’s request because it no longer wished to participate in the interactive rating process.
- Effective October 1, 2023, COO Meryl Golden was appointed President and CEO, succeeding Barry Goldstein, who remains Board Chair.
- Stockholders approved an increase in the 2014 equity plan’s authorized shares to 1.9 million on August 9, 2023. The board suspended regular quarterly dividends in November 2022; no dividends were declared or paid in the first half of 2023.
- Management identifies loss-reserve estimation, reinsurance recoverables, inflation, investment-market volatility and catastrophe exposure as important uncertainties. It reported no material change to previously disclosed risk factors and no legal proceedings in the period. Management concluded disclosure controls were effective as of June 30, 2023.
Most important facts for investors to verify
- Whether KICO’s negative unassigned surplus and dividend restrictions affect the holding company’s ability to meet note interest, expenses and the December 2023 mandatory redemption.
- How close the 29.8% leverage ratio is to the 30% covenant limit under the governing definitions, and the consequences of a breach.
- Whether the July 2023 reinsurance program provides adequate protection at affordable cost, particularly for named storms and other catastrophe losses.
- Whether reserve estimates, claims severity and inflation develop as management expects; first-half reserve development was slightly favorable, but estimates remain uncertain.
- The implications of KICO’s A.M. Best rating withdrawal for policyholders, agents, counterparties and business volumes.
- Progress toward the 33% expense-ratio target and whether the shift away from non-New York business improves underwriting profitability without materially impairing premium generation.