Kingstone Companies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY2019. Kingstone is a regional property and casualty insurer operating through Kingstone Insurance Company (KICO), with most business in New York. Personal lines accounted for 95.7% of gross written premiums; 80% of KICO direct written premiums came from New York.
Financial performance and condition
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $131.4 million | $145.1 million |
| Net premiums earned | $108.1 million | $127.6 million |
| Net income (loss) | $1.0 million | $(6.0) million |
| Pre-tax income (loss) | $(1.3) million | $(7.8) million |
| Net loss ratio | 61.5% | 70.7% |
| Net underwriting expense ratio | 38.9% | 38.0% |
| Net combined ratio | 100.4% | 108.7% |
| Operating cash flow | $(10.2) million | $29.9 million |
- Gross written premiums were $169.3 million, down 1.1%. Personal-lines direct written premiums grew 8.2% to $162.2 million, while commercial premiums declined following the company’s exit from commercial liability underwriting.
- The combined ratio remained above 100%, corresponding to a reported underwriting loss of $0.4 million, before investment activity and other items.
- Net income included a $2.3 million income tax benefit; the company reported a $1.3 million pre-tax loss. The benefit reflected, among other items, CARES Act net operating loss carrybacks.
- Net investment income was $6.5 million, down 5.3%; investment gains were $1.6 million, versus $4.6 million in 2019.
- Cash and cash equivalents were $19.5 million at year-end, down from $32.4 million. Total investments were $202.9 million; cash plus investments were approximately $222.3 million. Operating cash flow was negative, while investing activities provided $0.6 million.
- Total assets were $317.6 million and stockholders’ equity was $92.8 million at December 31, 2020. Long-term debt was $30 million face value ($29.6 million net carrying value), consisting of 5.50% senior unsecured notes due December 30, 2022.
- Loss and LAE reserves were $82.8 million gross, with $20.2 million of reinsurance recoverables on unpaid losses. KICO reported statutory policyholders’ surplus of $85.6 million, down from $93.8 million; it remained compliant with risk-based capital requirements.
Material changes versus FY2019
- Net income improved by $6.9 million, principally as net losses and LAE fell by $23.8 million and ceding commission revenue rose by $9.6 million. Net premiums earned fell by $19.5 million, partly reflecting quota-share reinsurance and the commercial-line run-off.
- The net loss ratio improved 9.2 percentage points. Prior-year loss development was nearly neutral in 2020, compared with $11.1 million of unfavorable development in 2019. Catastrophe losses were higher: they added 10.8 points to the 2020 net loss ratio, including Tropical Storm Isaias losses of $8.1 million net of reinsurance.
- Operating cash flow shifted from $29.9 million provided to $10.2 million used. Year-end cash and cash equivalents declined by $12.9 million.
- On December 30, 2020, the 25% personal-lines quota-share treaty expired and was not renewed. Effective July 1, 2020, the catastrophe reinsurance limit was reduced from $610 million to $485 million.
- A.M. Best downgraded KICO’s financial strength rating from A- to B++ in July 2020, citing the revised catastrophe reinsurance program. The filing also reports a negative outlook on relevant A.M. Best issuer and debt ratings.
Outlook, risks and unusual items
- The filing provides no quantified earnings, premium or combined-ratio guidance. Management describes a strategy of profitable growth in personal lines and expansion in selected Northeastern markets, while noting continued concentration in New York.
- Management identifies COVID-19 uncertainty, potential effects on premiums and investment values, cybersecurity and remote-work disruption, regulatory changes, catastrophe severity, reserve estimation, reinsurance availability and cost, and reinsurer credit risk as material risks.
- Reinsurance exposure warrants attention: catastrophe coverage was reduced, the quota-share treaty ended, and the filing describes a $2.5 million coverage gap for part of the July–December 2020 period between the quota-share limit and the first catastrophe layer. Reinsurance does not eliminate KICO’s obligations to policyholders.
- KICO paid $6.0 million in dividends to the parent during 2020. Its ability to upstream funds is regulated; approximately $2.56 million was the maximum distribution permitted without prior approval at year-end. The parent’s debt service depends in part on funds available from KICO.
- Management reported that a material weakness in claims-reserve controls identified at year-end 2019 was remediated by December 31, 2020 after additional claims oversight, staffing, procedures and testing. The auditor identified loss and LAE reserves as a critical audit matter; the financial-statement audit opinion was unqualified.
- Quarterly results were uneven: reported net income was $(5.4) million in Q1, $4.6 million in Q2, $(1.2) million in Q3 and $3.0 million in Q4. The 2020 first quarter included $6.4 million of investment losses.
Key facts for investors to verify
- Whether the lower loss ratio persists, and how reserve development—especially commercial-line run-off claims—affects future results.
- The terms, price and adequacy of post-2020 catastrophe and excess-of-loss reinsurance, including the impact of higher retained exposure and any coverage gaps.
- Whether KICO’s B++ rating and negative outlook affect policy growth, producer relationships, Cosi’s alternative-distribution business or access to reinsurance.
- Whether operating cash flow, statutory surplus and parent-company liquidity can support claims, dividends and repayment or refinancing of the $30 million notes due in 2022.
- The realization and timing of tax benefits, and the valuation and credit quality of the investment portfolio, including its corporate bond and mortgage-backed holdings.