Kingstone Companies, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The interim financial statements are unaudited. Kingstone underwrites property and casualty insurance mainly in New York through Kingstone Insurance Company; substantially all business is written in New York.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $16.66 million | $14.02 million | $46.81 million | $35.09 million |
| Net premiums earned | $13.13 million | $9.90 million | $34.38 million | $22.25 million |
| Net income | $2.35 million | $1.88 million | $5.11 million | $3.57 million |
| Diluted earnings per share | $0.32 | $0.26 | $0.69 | $0.48 |
| Net loss ratio | 38.5% | 45.9% | 49.1% | 53.4% |
| Net underwriting expense ratio | 34.3% | 25.0% | 29.9% | 24.0% |
| Net combined ratio | 72.8% | 70.9% | 79.0% | 77.4% |
For the first nine months, direct written premiums rose 18.5%, net written premiums rose 38.4%, and net premiums earned rose 54.5%. Management attributed premium growth mainly to more policies in force and lower quota-share cessions. Net investment income increased 43.0% to $1.85 million; net realized investment results shifted to a $106,000 loss from a $438,000 gain. Nine-month underwriting income, as defined by the company, was $7.22 million versus $5.03 million.
Q3 revenue increased 18.8% and net income increased 24.5%. The Q3 loss ratio improved, but the underwriting expense ratio rose, leaving the combined ratio 1.9 percentage points higher. The nine-month combined ratio also increased by 1.6 points. Both combined ratios remained below 100%.
Balance sheet, cash flow and capital
- At September 30, total assets were $144.64 million, total liabilities $100.62 million, and stockholders’ equity $44.02 million, compared with $134.996 million, $94.496 million and $40.501 million, respectively, at December 31, 2014.
- Cash and cash equivalents were $6.73 million, down from $9.91 million at year-end. Investments totaled $76.73 million, up from $64.27 million. Loss and loss adjustment expense reserves were $38.90 million; unearned premiums were $47.44 million.
- Operating cash flow for the nine months was $12.72 million, compared with $10.31 million in 2014. Investing activities used $14.58 million and financing activities used $1.32 million; cash declined by $3.18 million.
- No line-of-credit borrowings were outstanding. The company had a $600,000 demand line, secured by specified company assets and subject to annual renewal. The filing reports no other debt balance.
- Dividends paid were $1.10 million for the nine months. A $0.0625-per-share quarterly dividend was declared November 10, payable December 14, 2015.
Material changes and management commentary
- Effective July 1, 2015, personal-lines quota-share cession decreased from 55% to 40%; the new treaty is on a net-of-catastrophe basis. This increased premiums retained by Kingstone, while catastrophe premiums ceded rose. Management said the change supports premium growth while maintaining regulatory capital and financial ratios within expected oversight ranges.
- Commercial auto had underperformed. Kingstone stopped accepting new policies in October 2014 and stopped offering renewals beginning with policies expiring May 1, 2015. Policies in force fell to 238 from 730 at December 31, 2014.
- Management attributed the lower year-to-date loss ratio primarily to favorable prior-year reserve development: $469,000 favorable in 2015 versus $827,000 adverse in 2014. Severe winter weather increased net catastrophe losses to $2.09 million from $941,000 and reduced year-to-date ceding commission revenue by approximately $1.28 million.
- The company recorded a $350,000 one-time early-termination payment related to premium-finance placement fees. The placement-fee arrangement ended in March 2015; management identified the payment as a principal reason other income increased.
- Available-for-sale investments had $800,000 of gross unrealized losses at September 30; management considered the losses temporary and recorded no other-than-temporary impairment. Year-to-date other comprehensive loss was $392,000.
Outlook, risks and contingencies
The filing provides no quantified earnings, premium-growth or other forward guidance. Management cautions that nine-month results may not indicate full-year results and that actual outcomes may differ materially from forward-looking statements.
- Claims reserves and reinsurance recoverables involve significant estimates; ultimate claim costs may differ substantially from recorded estimates. Reinsurance does not relieve Kingstone of obligations to policyholders, and recoverability from reinsurers is a key consideration.
- Catastrophe exposure remains significant. The July 2015 catastrophe treaty provides coverage up to $180 million per occurrence, subject to treaty terms and annual limits; Kingstone retains the initial $2.4 million per occurrence and losses above coverage limits.
- Management said the New York DFS had not responded since its 2013 meeting concerning an investigation into Superstorm Sandy claims practices. Kingstone stated it had cooperated and believed the matter would not affect financial position or results. Management reported no other pending legal proceedings expected to have a material adverse effect.
- A new Valley Stream office lease has future minimum payments of $783,774 over its term. Management reported no material off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of September 30, 2015; no material change in internal control was reported for the quarter.
Important facts for investors to verify
- Whether premium growth and the reduced quota-share retention translate into sustainable underwriting results, including the effect on capital and catastrophe exposure.
- Whether favorable reserve development persists; compare subsequent claims development with the $469,000 favorable prior-year adjustment and assess current-year loss trends.
- The quality and collectability of reinsurance recoverables, and the terms, limits and renewal economics of catastrophe and quota-share treaties.
- Investment portfolio credit and market risks, including the portfolio’s BBB concentration and the unrealized losses management judged temporary.
- The status and any eventual outcome of the DFS Superstorm Sandy claims-practices inquiry, along with the effect of the commercial-auto runoff and the end of premium-finance fees.