KINGSTONE COMPANIES, INC. annual report, FY2022

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Kingstone Companies, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; comparative period is FY2021. The filing also reports unaudited Q4 2022 results. Kingstone is a regional property-and-casualty insurer operating principally through Kingstone Insurance Company (KICO), with most business in New York.

Business context and financial performance

  • Premiums: Gross written premiums rose 10.8% to $201.3 million, led by rate increases in personal lines and recovery in livery physical-damage business. Personal lines were 93.5% of gross written premiums. Net written premiums fell 5.2% to $122.1 million, while net premiums earned decreased 20.5% to $114.4 million, chiefly because of the 30% personal-lines quota-share treaty that began at year-end 2021.
  • Revenue and earnings: Total revenue declined 19.3% to $130.2 million. Net loss was $22.5 million, or $2.12 per diluted share, versus a $7.4 million loss, or $0.70 per share, in FY2021. The FY2022 pretax loss was $27.9 million. Net investment losses were $9.4 million, compared with $9.8 million of gains in 2021.
  • Underwriting: Net loss and loss-adjustment expenses were $88.4 million. The net loss ratio increased to 77.3% from 70.9%; the net expense ratio improved to 36.0% from 40.6%; and the combined ratio worsened to 113.3% from 111.5%. A ratio above 100% indicates an underwriting loss before investment results. Management cited claims inflation, somewhat higher water-damage frequency, and $2.7 million of unfavorable prior-year reserve development. Catastrophes added 6.7 percentage points to the 2022 loss ratio, versus 10.3 points in 2021.
  • Q4 2022: Unaudited quarterly net premiums earned were $30.4 million, total revenue was $37.1 million, net loss was $4.0 million, and diluted loss per share was $0.37. The filing does not provide a clear standalone quarterly cash-flow or margin value.
  • Cash flow and liquidity: Operating cash flow was negative $0.9 million, versus positive $24.3 million in 2021. Cash and cash equivalents fell to $12.0 million from $24.3 million; total investments were $179.1 million versus $213.6 million. Cash plus invested assets were $191.0 million, down $46.8 million. Management attributed the reduction primarily to reinsurance-related cash payments, catastrophe claims payments, and investment valuation declines.
  • Balance sheet and capital: Total assets were $320.3 million, liabilities $284.2 million, and stockholders’ equity $36.2 million at year-end, compared with $331.3 million, $255.6 million, and $75.7 million, respectively, in 2021. Loss and LAE reserves increased to $118.3 million from $94.9 million. Statutory policyholder surplus at KICO declined to $68.0 million from $84.6 million. KICO remained above the required risk-based-capital control level, but its unassigned surplus was negative $5.1 million.

Debt, dividends, and material changes

  • In December 2022, Kingstone exchanged $21.5 million of its maturing 5.5% notes for $19.95 million principal of new 12.0% senior notes due December 30, 2024, plus cash and warrants to purchase 969,525 shares at $1.00 per share. It repaid the remaining $8.455 million of the old notes at maturity. Year-end debt carrying value was $25.2 million, including $17.3 million net carrying value for the new notes and $7.9 million of equipment financing.
  • The new notes include financial covenants, a 30% leverage-maintenance limit (reported year-end ratio: 26.7%), and a mandatory redemption on December 30, 2023 tied to KICO’s ordinary dividend capacity and holding-company expenses. Failure to comply with covenants could trigger default or acceleration.
  • KICO paid $5.25 million in dividends to the holding company during 2022, but its negative unassigned surplus means further distributions require regulatory approval. Kingstone suspended its regular quarterly common-stock dividend in November 2022; future dividends are not assured.
  • Kingstone completed its “Kingstone 2.0” modernization program, including new claims and policy systems. It also began reducing its non-New York footprint amid profitability concerns, including new-business moratoria in Massachusetts, New Jersey, and Rhode Island, non-renewals, and lower producer commissions.

Outlook, risks, and unusual items

  • No quantified earnings, premium, or combined-ratio guidance is provided. Management emphasizes profitability over growth and says inflation and claims severity remain pressures; the filing cautions that actual results may differ materially from forward-looking statements.
  • KICO’s A.M. Best financial-strength rating was downgraded in July 2022 from B+ (Good) to B (Fair), with a negative outlook, citing weaker risk-adjusted capitalization, weather losses, dividends, and reinsurance-related PML changes. The catastrophe-reinsurance limit was reduced from $500 million to $345 million effective July 1, 2022. The company reported compliance with statutory RBC requirements, but the rating and capital trends warrant attention.
  • Investment-market declines materially affected results and equity: FY2022 other comprehensive loss was $17.8 million, and year-end accumulated other comprehensive loss was $16.0 million. Management did not consider unrealized fixed-income losses other-than-temporary at year-end. Net investment income also included a $766,000 reversal of previously accrued interest stemming from an error in third-party investment reporting.
  • Other key risks include catastrophe exposure and reinsurance availability/collectability, reserve-estimation uncertainty, inflation, concentration in New York and among producers, regulatory limits on rates and market exits, and debt-service capacity. Reinsurance recoverables were $66.5 million; two reinsurers represented 62.2% of specified recoverables on paid and unpaid losses.
  • The auditor issued an unmodified opinion on the financial statements and identified loss and LAE reserves as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor was not engaged to provide an internal-control opinion. The filing reports no legal proceedings and no material off-balance-sheet arrangements.

Important facts for investors to verify

  1. Whether KICO’s statutory surplus, unassigned surplus, and A.M. Best rating stabilize, and what capital actions or dividend restrictions may follow.
  2. Whether the 2023 quota-share and catastrophe-reinsurance arrangements provide adequate protection at sustainable cost, including after the catastrophe-limit reduction.
  3. Whether claims inflation, prior-year reserve development, and the $118.3 million reserve balance lead to further deterioration or reserve strengthening.
  4. Whether operating cash generation and holding-company liquidity can support interest, the 2023 mandatory redemption provisions, and the 2024 note maturity without relying on restricted KICO dividends.
  5. Whether the reduced non-New York business footprint and underwriting actions improve the combined ratio, and whether premium growth can remain profitable.
  6. The potential dilution and market impact of the 969,525 warrants, outstanding equity awards, and other share-issuance capacity.