Kingstone Companies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 9, 2019. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company and operates Cosi, a general agency. New York remained the core market, accounting for 86.0% of direct written premiums in Q2 and 88.4% year to date.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $34.6 million | $27.5 million | $69.5 million | $53.2 million |
| Net premiums earned | $31.2 million | $24.1 million | $60.8 million | $46.9 million |
| Net income (loss) | $1.64 million | $2.76 million | $(5.70) million | $39,000 |
| Diluted EPS | $0.15 | $0.25 | $(0.53) | $0.00 |
| Net loss ratio | 56.6% | 46.4% | 77.0% | 60.6% |
| Net underwriting expense ratio | 37.5% | 37.8% | 38.0% | 38.2% |
| Net combined ratio | 94.1% | 84.2% | 115.0% | 98.8% |
- Q2 pre-tax income was $2.04 million, down from $3.56 million; six-month pre-tax loss was $7.22 million. Six-month results included a $1.52 million income tax benefit.
- Six-month direct written premiums grew 20.4% to $82.3 million; net written premiums rose 29.6% to $67.0 million. Management attributed growth to more in-force policies, up 18.8% year over year, and lower personal-lines quota-share cession.
- Net investment income increased 13.7% to $3.34 million for the half year. Net investment gains were $2.71 million, versus a $630,000 loss a year earlier, largely reflecting unrealized gains on equity and other investments.
- Operating cash flow was $10.8 million for the half year, compared with $6.0 million in 2018. Investing activities used $10.8 million and financing activities used $2.3 million; cash declined $2.2 million to $18.9 million.
- At June 30, total assets were $289.5 million, total liabilities $201.8 million, and stockholders’ equity $87.7 million. Investments totaled $193.2 million. Long-term debt, net, was $29.4 million: $30 million of 5.50% senior unsecured notes due December 2022. The FHLBNY credit line had no outstanding borrowings; collateral-limited available advances were approximately $4.8 million.
- Dividends paid in the first half totaled $2.15 million ($0.20 per share). A subsequent quarterly dividend of $0.0625 per share was approved August 7, payable September 13, 2019.
Material changes and management commentary
- Underwriting deterioration drove the six-month net loss. Net loss and LAE increased 64.6% to $46.8 million, while the combined ratio worsened to 115.0%. For Q2, net income fell 40.6% to $1.64 million despite revenue growth.
- Six-month losses included $6.5 million of net catastrophe losses and $6.1 million of unfavorable prior-year reserve development. Management cited five catastrophe events, including a mid-January freeze event with an estimated $4.3 million impact. The Q2 catastrophe impact was $1.4 million net; a late-June Long Island wind event contributed estimated net ultimate losses of $836,000.
- Management said 72% of the first-half prior-year reserve strengthening related to commercial-lines liability business. It also cited rising severity in non-weather water-damage claims. Commercial lines generated 12% of six-month net premiums earned but represented 43% of loss reserves net of reinsurance at June 30.
- After a six-month moratorium on new commercial submissions, Kingstone decided in July to stop underwriting commercial lines, including commercial umbrella. Existing policies will not be renewed at term and are expected to run off by September 30, 2020. The company withdrew combined-ratio guidance because of uncertainty in the run-off.
- Effective July 1, the personal-lines quota-share treaty expired into run-off and was not renewed; Kingstone entered new excess-of-loss and catastrophe treaties. The new catastrophe program raises the stated retention per occurrence to $7.5 million and provides up to $602.5 million of catastrophe coverage in excess of quota-share coverage. Reinsurance does not relieve the insurer of obligations to policyholders.
- Management described Q2 as disappointing because of commercial-lines performance and weather-related catastrophe losses, while noting continued year-over-year growth. It expected alternative distribution to grow and planned a Maine homeowners launch in Q4 2019. Alternative distribution represented 6.2% of first-half new business direct written premiums, but 1.8% of combined new and renewal business.
- CEO Dale Thatcher retired effective July 19, 2019; former CEO Barry Goldstein was appointed CEO and President. The separation agreement provides $381,111 in salary-related payments, $5,000 for bonus settlement, health coverage through March 2020, continued vesting of existing stock awards, and a $20,000 severance payment.
- A securities class action filed June 12, 2019 alleges inadequate claims handling and reserves related to the company’s April 29 catastrophe-loss announcement. Kingstone says it believes the suit is without merit; it recorded no accrual because a loss was not considered probable and reasonably estimable.
- The company adopted lease accounting in 2019, recognizing an $855,000 right-of-use asset and corresponding liability; management said adoption had no material effect on results or liquidity. A new Cosi office lease signed in July carries a disclosed operating lease liability of approximately $504,000.
Investor verification priorities
- Track reserve development, especially commercial-liability claims, and whether the $6.1 million first-half adverse development proves sufficient as claims mature.
- Assess commercial-lines run-off exposure: remaining policy terms, reserve adequacy, claims concentration, and the effect on future premiums and earnings.
- Review the new reinsurance program’s coverage, retentions, cost, counterparty credit quality, and actual protection against catastrophe losses.
- Separate premium growth from underwriting profitability; monitor loss and combined ratios, water-damage severity, catastrophe frequency, and New York concentration.
- Evaluate investment portfolio risk and the contribution of unrealized gains to reported earnings; corporate and municipal bonds were 82.7% of available-for-sale fixed-maturity fair value, with 54.8% rated BBB.
- Monitor liquidity and holding-company cash needs, including statutory limits on subsidiary dividends, debt service on the 2022 notes, and the effect of dividends and added lease commitments.
- Follow developments in the securities class action and the CEO transition, including any material changes in disclosed exposures or operating plans.
The filing states that interim results may not indicate full-year results. Management’s outlook includes growth initiatives but no replacement combined-ratio guidance.