Kingstone Companies, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; the fourth-quarter figures below are unaudited quarterly data included in the filing. Kingstone writes property and casualty insurance through Kingstone Insurance Company, primarily in New York and through independent agents and brokers.
Financial results and condition
- Revenue: Total revenue was $92.8 million, up 19.8% from $77.4 million. Net premiums earned rose 26.0% to $77.4 million; direct written premiums increased 17.8% to $121.6 million.
- Profit: Net income was $10.0 million, up 12.2% from $8.9 million. Diluted EPS declined to $0.94 from $1.14, reflecting the larger share count after the 2017 stock offering. Pretax income was $14.3 million.
- Underwriting and margins: Net loss ratio improved to 44.2% from 45.3%, while the net underwriting expense ratio rose to 36.4% from 33.9%. The net combined ratio increased to 80.6% from 79.2%; below 100% indicates underwriting profit before investment income. Underwriting income was $15.0 million versus $12.8 million.
- Investment income and portfolio: Net investment income grew 32.6% to $4.1 million, primarily with higher average invested assets. Average yield was 3.66%, down from 3.99%. Cash and invested assets totaled $187.5 million at year-end, versus $107.6 million.
- Cash flow: Operating cash flow was $28.0 million, compared with $15.2 million in 2016. Investing activities used $47.6 million; financing activities provided $55.9 million. Year-end cash and cash equivalents were $48.4 million.
- Debt and equity: The company issued $30 million of 5.50% senior unsecured notes due December 30, 2022; net proceeds were approximately $29.1 million. Year-end debt, net of issuance costs and discount, was $29.1 million. Stockholders’ equity was $94.6 million.
- Reserves and liquidity: Loss and loss adjustment expense reserves were $48.8 million gross and $32.1 million net of reinsurance. KICO reported statutory surplus of $101.3 million and was in compliance with risk-based capital requirements. KICO had no FHLBNY advances outstanding; available collateral supported approximately $6.7 million of advances at year-end.
Material changes versus 2016
- Net written premiums increased 40.9% to $92.9 million. The change includes a $7.14 million return of previously ceded unearned premiums following the July 2017 quota-share reduction; excluding that effect, net written premiums rose 30.0%.
- Effective July 1, 2017, personal-lines quota-share ceding fell from 40% to 20%. This increased retained premiums but reduced ceding commission revenue, which fell 11.8% to $9.9 million.
- Net income rose, but diluted EPS declined as weighted-average diluted shares increased to 10.6 million from 7.8 million following the 2.69 million-share offering.
- The 2017 net loss ratio benefited from no catastrophe impact, compared with a 2.3 percentage-point impact from severe winter weather in 2016. However, management reported a higher underlying core loss ratio, citing increased claim severity and more large fire claims in personal lines.
- Cash and investments expanded substantially, supported by the equity offering, debt offering, and operating cash flow. The company contributed $23 million and $25 million to KICO from the equity and debt proceeds, respectively.
Outlook, commentary, risks and unusual items
- Growth plans: KICO began writing homeowners insurance in New Jersey in May and Rhode Island in December 2017; management anticipated launching in Massachusetts during 2018, following a February 2018 rate, rule and form filing. Expansion-state direct written premiums were $1.8 million in 2017; 98.5% of direct written premiums remained in New York.
- Rating and reinsurance: A.M. Best upgraded KICO to A- (Excellent) in April 2017. Catastrophe coverage increased to $320 million per event, with $4 million retained for the initial catastrophe layer; coverage is capped at twice the per-event amount annually. Reinsurance does not remove KICO’s obligations to policyholders.
- Capital returns: The quarterly dividend increased from $0.0625 to $0.08 per share in 2017. In February 2018, the board declared $0.10 per share, payable March 15, 2018. Future dividends are discretionary and constrained in part by insurance regulation; KICO’s maximum distribution without prior regulatory approval was approximately $3.324 million at year-end.
- Tax and investment items: The 2017 Tax Cuts and Jobs Act reduced the corporate rate to 21%; remeasurement of deferred taxes reduced the liability by approximately $405,000. A $50,000 additional other-than-temporary impairment was recorded in 2017 on a Puerto Rico bond, which the company sold in December. Other portfolio unrealized losses were considered temporary by management.
- Costs and compensation: Other operating expenses increased 83.9%, including $945,000 accrued for the CEO’s long-term incentive plan, payable in 2020 only if stated profitability conditions are met. The 2017 net combined ratio remained below 100%, but rose year over year.
- Key risks: Catastrophes and severe weather, claim severity and reserve estimation, reinsurance availability and collectability, investment-market risk, New York concentration, dependence on a limited number of brokers, regulatory constraints on rates and dividends, cybersecurity, and the ability to service parent-company debt. Twenty brokers generated 36.5% of 2017 gross written premiums.
- Legal and controls: The filing reports no material pending legal proceeding expected to adversely affect the financial statements. The New York DFS examination completed in 2017 had no material adverse findings. Management and the auditor concluded internal control over financial reporting was effective; the financial statement audit opinion was unqualified.
Fourth-quarter snapshot
For Q4 2017, net premiums earned were $22.5 million and net income was $1.9 million, or $0.18 diluted EPS. Q4 2016 net premiums earned were $16.2 million and net income was $2.1 million, or $0.26 diluted EPS.
Important facts for investors to verify
- Whether premium growth and expansion beyond New York translate into durable underwriting profit, particularly as the reduced quota-share arrangement changes retained risk and commission income.
- Claim severity, large-fire frequency, reserve adequacy, and the development of the $48.8 million gross loss reserve.
- Catastrophe exposure above the $320 million limit, annual coverage limits, reinsurance renewal pricing, and reinsurer credit quality.
- Investment portfolio credit quality and sensitivity to interest rates; corporate and municipal bonds were predominantly BBB-rated, and some mortgage-backed securities carried low ratings.
- Parent-company debt-service capacity, including reliance on regulated KICO dividends, and the sustainability of the increased common dividend.
- Execution and expenses of state expansion, the Massachusetts launch, and whether the A.M. Best A- rating is maintained.
- The filing provides no formal earnings or revenue guidance; assess management’s stated growth plans as expectations, not guarantees.