Kingstone Companies, Inc. — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Kingstone primarily underwrites property and casualty insurance in New York through Kingstone Insurance Company, principally for individuals and small businesses, using independent agents and brokers.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net premiums earned | $10.87m | $6.43m | $21.25m | $12.36m |
| Total revenue | $15.54m | $10.97m | $30.16m | $21.08m |
| Net income | $2.38m | $1.35m | $2.76m | $1.68m |
| Diluted EPS | $0.32 | $0.18 | $0.38 | $0.23 |
| Net loss ratio | 43.9% | 46.8% | 55.7% | 59.3% |
| Net underwriting expense ratio | 24.6% | 24.0% | 27.2% | 23.3% |
| Net combined ratio | 68.5% | 70.8% | 82.9% | 82.6% |
Cash flow and balance sheet. First-half operating cash flow was $3.36m, versus $4.39m a year earlier. Investing activities used $8.37m and financing activities used $0.96m; cash declined $5.97m to $3.93m. At June 30, total assets were $142.46m, total liabilities $100.44m, and reported stockholders’ equity $41.72m. Investments totaled $71.26m. Loss and LAE reserves were $41.25m; unearned premiums were $44.11m. No borrowings were outstanding under the $600,000 bank line, which is payable on demand and secured by company assets. The filing does not report other material debt.
Dividends paid were $0.10 per share in the first half, up from $0.08 in 2014. The board approved another $0.05-per-share quarterly dividend in August 2015.
Changes versus prior comparable periods
- Q2 total revenue rose 41.6% and net income rose 75.6%; for the first half, revenue increased 43.1% and net income increased 64.3%.
- Direct written premiums increased 16.6% in the first half, and policies in force were up 18.3% year over year. Management attributed earned-premium growth primarily to retaining more business after reducing personal-lines quota-share cessions from 75% to 55% and ending the commercial-lines quota-share treaty in July 2014.
- The first-half net loss ratio improved 3.6 percentage points, but the underwriting expense ratio rose 3.9 points; the combined ratio was nearly unchanged at 82.9%. Q2 combined ratio improved to 68.5% from 70.8%.
- Net investment income increased 44.4% in the first half, while realized investment results moved from a $323,000 gain to a $65,000 loss.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management cautions that interim results may not indicate full-year results and that actual outcomes may differ materially from forward-looking statements.
- Severe winter weather increased first-half net catastrophe losses to $2.01m, versus $0.94m in 2014, and reduced contingent ceding commissions by about $1.28m. Management reported that the winter-weather reinsurance provision was not triggered in 2015. Q2 included $0.17m of net catastrophe losses.
- Effective July 1, 2015, personal-lines quota-share cession declined to 40% from 55%; the company also reported revised excess-of-loss and catastrophe protection. Catastrophe coverage per occurrence increased to $180m from $137m, while retained catastrophe risk rose to $2.4m from $1.8m. Reinsurance does not relieve Kingstone of its obligations to policyholders.
- Kingstone stopped writing new commercial-auto policies in October 2014 and ceased renewals beginning with policies expiring May 1, 2015, citing unsuccessful efforts to improve profitability. Policies in force fell to 390 from 730 at year-end 2014.
- Investment considerations include $4.18m of available-for-sale residential mortgage-backed securities rated CCC or D in the filing. Management classified portfolio unrealized losses as temporary and reported no other-than-temporary impairment; this judgment depends on management’s intent and ability to hold securities through recovery.
- Loss reserves, reinsurance recoverables and contingent ceding commissions require significant estimates and may differ from ultimate amounts. The filing describes a prior New York DFS inquiry into KICO’s Superstorm Sandy claims practices; KICO cooperated, had received no response since its 2013 meeting, and management did not expect a financial impact. Ordinary-course litigation is considered in reserves; management identified no other pending proceeding likely to materially affect the financial statements.
- A new seven-and-a-half-year Valley Stream office lease commenced July 1, 2015, with rent beginning January 1, 2016; minimum commitments total $783,774. The premium-finance placement-fee arrangement ended, and the company recorded a $350,000 early-termination payment in the first half.
Important facts to verify
- Reported income inconsistencies: The statements list income before taxes as $3.13m for Q2 and $3.70m for the first half, while MD&A reports $3.59m and $4.16m, respectively; revenue less expenses and net income plus tax expense also imply the MD&A amounts. Reconcile to the filed statements/XBRL.
- Equity discrepancy: The balance-sheet total reports stockholders’ equity of $41.72m, while the listed equity components calculate to $42.02m and the equity statement ends at $42.02m. Confirm the correct figure.
- Review reserve adequacy, catastrophe exposure, and recoverability and credit quality of reinsurance receivables, which totaled $38.74m.
- Assess the new July 2015 reinsurance terms, including lower personal-lines cessions, increased retained catastrophe risk, and the effect on net premiums and contingent commissions.
- Monitor investment portfolio credit quality and interest-rate sensitivity, as well as liquidity following the first-half cash decline.