Kingstone Companies, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. Kingstone primarily writes property and casualty insurance through Kingstone Insurance Company (KICO), with most premiums sourced from New York; its Cosi subsidiary operates as a general agency. Results are affected by underwriting claims, reinsurance, and investment performance.
Financial performance and position
- Second quarter: Total revenue was $35.1 million versus $34.6 million a year earlier. Net premiums earned fell 14.6% to $26.6 million, while ceding commission revenue rose to $3.5 million from $0.7 million. Net income increased to $4.6 million from $1.6 million; diluted EPS was $0.43 versus $0.15.
- First half: Total revenue declined 11.2% to $61.7 million. Net premiums earned were $53.6 million, down 11.9%. The company recorded a net loss of $0.8 million, improved from a $5.7 million loss; diluted loss per share was $0.08 versus $0.53.
- Underwriting: The net combined ratio improved to 87.3% in Q2 from 94.1%, and to 93.7% for the first half from 115.0%. First-half underwriting income was $3.4 million versus a $9.1 million loss. The first-half loss ratio improved to 54.5% from 77.0%; the expense ratio rose to 39.2% from 38.0%.
- Premium trends: First-half direct written premiums decreased 3.6% to $79.3 million, reflecting the exit from commercial lines; personal-lines direct written premiums grew 11.5% to $76.0 million. Net written premiums fell 23.4% to $51.3 million, in part because the personal-lines quota-share cession increased to 25% from 10%.
- Investments: First-half net investment income was $3.3 million, down 1.9%. Net investment losses were $3.7 million versus gains of $2.7 million in the prior-year period, principally reflecting pandemic-related unrealized losses on equity and other investments. Q2 reported net investment gains of $2.7 million.
- Cash flow and liquidity: First-half operating cash flow was negative $10.0 million, compared with positive $10.8 million. Cash and equivalents decreased $12.2 million to $20.2 million. Total investments were $198.6 million; cash plus investments were approximately $218.7 million. KICO had no FHLB borrowings; available advances were constrained by collateral, with approximately $5.9 million of collateral-based capacity noted.
- Balance sheet and debt: At June 30, total assets were $309.3 million, liabilities $219.7 million, and stockholders’ equity $89.6 million. The company had $30.0 million face value of 5.50% senior unsecured notes due December 2022, carried at $29.6 million net. The quarterly dividend was reduced to $0.04 per share from $0.10 a year earlier.
Material changes versus prior comparable periods
- Q2 profitability improved, supported by lower net claims and higher ceding commissions, despite lower earned premiums and higher underwriting and operating expenses.
- First-half claims performance improved substantially: net loss and LAE fell to $29.2 million from $46.8 million. Management attributed the improvement to lower catastrophe impact, favorable prior-year development versus adverse development in 2019, and reduced claim frequency.
- Commercial lines were placed in runoff after the 2019 decision to stop writing them. The runoff business represented 41.7% of net loss reserves at June 30, 2020, according to management.
- Cash declined and operating cash flow turned negative, reflecting changes in operating assets and liabilities, including lower loss reserves, unearned premiums, and reinsurance balances payable.
- Available-for-sale fixed-maturity securities had $10.2 million of net unrealized gains at June 30, compared with $6.0 million at year-end; accumulated other comprehensive income rose to $8.1 million from $4.8 million. Equity securities, by contrast, had $2.5 million of gross unrealized losses.
Outlook, risks, contingencies, and unusual items
- Outlook: No quantified earnings or premium guidance is provided. Management expects COVID-19-related economic weakness to pressure premium volumes, with a more significant effect emerging in Q2 and potentially continuing through 2020. It also says underwriting actions prioritizing profitability over growth are expected to slow premium growth, particularly new business.
- COVID-19 and investments: The company says the ultimate financial impact is uncertain. Risks include lower premium volume, market volatility, credit-rating downgrades and defaults, municipal-bond collectability, and possible adverse effects on mortgage-backed securities. Potential retroactive legislation or regulation requiring coverage for business-interruption losses is also identified as a risk.
- Reinsurance and rating: New excess-of-loss and catastrophe treaties took effect July 1, 2020. Management disclosed reduced protection and a $2.5 million gap between the quota-share limit and the first catastrophe layer under the new structure. On July 10, A.M. Best downgraded KICO’s financial-strength rating from A- to B++ and the company’s long-term issuer rating and note rating to BB. Management expects a material decrease in Cosi business because some carrier partners require an A- rating.
- Tropical Storm Isaias: The August 4 storm generated more than 1,100 claims. The aggregate cost was not yet determined, but management expected a material adverse effect on Q3 2020 results.
- Litigation: A securities class action alleges inadequate claims handling and reserves; no loss accrual was recorded because management considered a loss not probable and reasonably estimable. On August 10, 2020, the court dismissed the amended complaint but permitted another amendment.
- Controls and other items: Management stated disclosure controls were effective and that it believed the previously reported material weakness in claims-reserve controls was remediated by June 30, 2020. Subsequent events also included the CFO’s planned departure effective September 30, 2020 and shareholder approval to increase the equity plan’s share authorization.
Important facts for investors to verify
- Actual Isaias claims, reinsurance recoveries, and the storm’s effect on Q3 earnings and capital.
- Whether the new reinsurance program’s reduced protection and coverage gap increase net catastrophe exposure, and the final terms and cost of subsequent renewals.
- Effects of the A.M. Best downgrade on KICO’s distribution, Cosi partnerships, premium growth, and access to reinsurance.
- Claims-reserve adequacy and whether the stated remediation of the prior material weakness proves effective over time.
- COVID-19-related premium trends, investment credit quality, cash generation, and ability to sustain dividends and service the 2022 notes.