Kingstone Companies, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The interim financial statements are unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company, primarily in New York; New York generated about 80% of direct written premiums in both periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $35.5 million | $39.0 million | $93.1 million | $118.1 million |
| Net premiums earned | $29.4 million | $36.8 million | $83.9 million | $106.8 million |
| Net loss | $4.0 million | $10.6 million | $18.6 million | $9.6 million |
| Loss per diluted share | $(0.38) | $(1.01) | $(1.75) | $(0.90) |
| Net combined ratio | 111.9% | 136.4% | 113.0% | 115.0% |
- Direct written premiums grew 11.7% in Q3 and 12.0% year to date, supported by personal-lines rate increases and, to a lesser extent, policy growth. Net premiums earned fell because the 30% personal-lines quota-share treaty ceded a larger share of premiums. The treaty also generated $4.9 million of Q3 and $14.3 million of year-to-date ceding commission revenue.
- Q3 net loss narrowed year over year, principally reflecting far lower catastrophe losses than in Q3 2021. Year-to-date net loss widened, despite lower catastrophe losses, as investment losses replaced prior-year investment gains and net investment income declined.
- The nine-month net loss ratio increased to 75.8% from 74.0%; the expense ratio improved to 37.2% from 41.0%. The combined ratio remained above 100%, indicating underwriting losses before investment income. Q3 combined ratio improved to 111.9% from 136.4%, largely due to lower catastrophe impact.
- Operating cash flow was negative $7.9 million, versus positive $29.1 million in the prior-year period. Investing activities provided $0.4 million; financing activities used $1.7 million. Cash and cash equivalents were $15.1 million at September 30, down from $24.3 million at year-end 2021.
- At September 30, total assets were $315.7 million, total liabilities $276.8 million, and stockholders’ equity $38.9 million, compared with $331.3 million, $255.6 million, and $75.7 million, respectively, at December 31, 2021. The equity decline included $17.8 million of after-tax unrealized losses on available-for-sale securities; accumulated deficit also reflected year-to-date net losses and dividends.
- Debt, net of issuance costs, was $30.0 million; the $30 million face amount of 5.5% senior unsecured notes was due December 30, 2022. Net investment losses were $9.3 million year to date, versus gains of $5.5 million in 2021. The company cited a $766,000 reversal of previously accrued investment interest income and disposal of income-bearing equities as factors in lower net investment income.
Material changes, outlook and risks
- Going-concern financing risk: Management stated that repayment or refinancing of the notes was necessary to continue as a going concern and that no assurance could be given it would succeed. At September 30, holding-company cash and invested assets were approximately $2.4 million. Subsequent to quarter-end, Kingstone received a $3.0 million KICO distribution, a $6.45 million KICO loan, and an approximately $1.5 million federal tax refund; management reported total available funds of about $12.0 million including liquid investments and cash. The company said its plan was believed probable, but not assured.
- After quarter-end, KICO completed an $8.1 million sale-leaseback of fixed assets. The transaction carries monthly principal and interest payments of $126,877 for 60 months and requires a pledge of approximately $10.0 million in Treasury bills.
- The quota-share treaty was scheduled to expire January 1, 2023. Reinsurance terms and costs matter to retained risk, net premiums, commissions, and liquidity. The filing describes catastrophe coverage, but the underlying excess-of-loss treaty excludes named storms.
- Management attributed higher underlying claim severity to inflation, including increased property repair costs. It also cited winter water-damage claims and $714,000 of unfavorable prior-year reserve development for the first nine months, partly related to large fires and discontinued commercial-lines liability claims. Reserve estimates are inherently uncertain.
- Rising interest rates, widening credit spreads, and lower equity valuations reduced investment values and stockholders’ equity. At September 30, available-for-sale fixed maturities had $20.2 million of gross unrealized losses; management did not consider them other-than-temporary impairments. The company also cautioned that continued inflation could pressure claims and profitability.
- Griffin Highline’s exclusivity period for a possible acquisition expired, and it was not then pursuing an acquisition of the company. The parties were discussing a possible strategic transaction; no transaction was assured. Kingstone reported $316,000 of Griffin Highline-related fees year to date.
- Management expected COVID-19-related claims to be manageable based on information then available, but said the pandemic’s ultimate effects remained uncertain. No numerical earnings or premium guidance was provided.
Most important facts for investors to verify
- Whether Kingstone repaid, refinanced, exchanged, or otherwise extended the $30 million notes due December 30, 2022, and the final cost and terms of any financing.
- How the post-quarter KICO distribution, loan, tax refund, and sale-leaseback affected holding-company liquidity, KICO’s capital and regulatory position, and pledged assets.
- Renewal terms and economics of the quota-share and catastrophe reinsurance arrangements, including any change in retained exposure after the quota-share treaty’s scheduled expiration.
- Subsequent loss development, particularly inflation-sensitive property claims, catastrophe losses, and runoff commercial-lines reserves.
- Whether investment valuations and unrealized losses recover or lead to realized or credit losses, and whether underwriting results improve enough to bring the combined ratio below 100%.