Business Context and Reporting Period
Company: Kingstone Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates primarily through its subsidiary, Kingstone Insurance Company (KICO), acquired on July 1, 2009, which offers property and casualty insurance in New York State. Prior retail brokerage and franchise operations were sold in 2009 and are reported as discontinued operations. The Company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $4,415,584 | $112,037 |
| Net Income (Loss) | $232,394 | $(171,514) |
| Net Income from Continuing Ops | $218,546 | $(155,835) |
| Net Cash Used in Operating Activities | $(252,702) | $60,944 |
| Cash and Cash Equivalents (End of Period) | $760,599 | $154,882 |
| Total Assets | $53,320,016 | $52,643,753 |
| Total Liabilities | $42,477,191 | $42,260,277 |
| Stockholders' Equity | $10,842,825 | $10,383,476 |
| Notes Payable (Long-Term Debt) | $1,479,685 | $1,085,637 |
| Net Combined Ratio (Underwriting) | 62.6% | N/A |
Material Changes vs. Prior Period
- Revenue Surge: Total revenues increased by 3,842% to $4.4 million. This is primarily due to the inclusion of KICO's insurance underwriting operations (Net Premiums Earned: $2.2M; Ceding Commission Revenue: $1.8M), which were not present in the comparable 2009 period.
- Profitability Turnaround: The Company reported a net income of $232,394 compared to a net loss of $171,514 in Q1 2009. This shift is driven by the profitability of the new insurance subsidiary.
- Discontinued Operations: Q1 2009 included losses from retail and franchise businesses that were sold in 2009. Q1 2010 discontinued operations showed a small gain of $13,848 from additional consideration on prior sales.
- Debt Increase: Notes payable increased by approximately $394,000 due to new borrowings ($400,000) in Q1 2010, including $200,000 from related parties.
- Operating Cash Flow: Operating cash flow turned negative ($252,702 used) compared to positive in 2009, largely due to increases in premiums receivable and deferred acquisition costs associated with the growth of the insurance book.
Outlook, Risks, and Unusual Items
- Unusual Item (Weather Event): The Company recognized a pre-tax loss of approximately $250,000 (net of $751,000 reinsurance recoverable) related to the Northeast U.S. Storm (March 13-15, 2010). This event added 11.3 percentage points to the Q1 2010 loss ratio.
- Underwriting Performance: The standalone insurance underwriting business reported a Net Combined Ratio of 62.6%, indicating strong underwriting profitability before investment income.
- Investment Portfolio: The portfolio consists primarily of fixed-maturity securities (84.3%) and equity securities (13.2%). Gross unrealized losses totaled $54,966, but management determined these were temporary and no other-than-temporary impairment (OTTI) was recorded.
- Liquidity: Management believes current cash flows are sufficient to fund working capital requirements for the next 12 months. However, KICO is restricted from paying dividends to the parent company for two years following the July 2009 conversion without regulatory approval.
- Related Party Transactions: Significant debt ($785,000) and preferred stock holdings are held by directors, officers, and their families. Interest expense on related party borrowings was approximately $23,000 for the quarter.
Investor Verification Checklist
- Comparability: Verify that year-over-year comparisons are understood to be non-comparable due to the July 1, 2009 acquisition of KICO and the cessation of prior retail operations.
- Reinsurance Recoveries: Confirm the collectability of the $751,000 reinsurance recovery related to the March 2010 storm loss.
- Debt Covenants: Review the terms of the "2009 Notes" (12.625% interest, due July 2011) and the impact of related-party lending on financial flexibility.
- Dividend Restrictions: Note the two-year regulatory restriction on dividends from KICO to the parent company.
- Investment Impairment: Monitor the $54,966 in unrealized investment losses to ensure they remain classified as temporary.