Kingstone Companies, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 9, 2017. Financial statements are unaudited. Kingstone, through Kingstone Insurance Company (KICO), underwrites property and casualty insurance, principally in New York, through independent agents and brokers.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $24.6 million | $19.8 million | $67.0 million | $57.2 million |
| Net premiums earned | $21.5 million | $15.6 million | $54.8 million | $45.2 million |
| Net income | $4.1 million | $3.5 million | $8.1 million | $6.8 million |
| Diluted EPS | $0.38 | $0.43 | $0.77 | $0.89 |
| Net combined ratio | 69.8% | 67.4% | 76.8% | 79.0% |
- For the nine-month period, direct written premiums rose 17.1% to $89.4 million; net written premiums rose 40.7% to $68.7 million. Excluding the $7.14 million return of previously ceded premiums following the July treaty change, net written premium growth was 26.1%.
- Nine-month net investment income increased 27.6% to $2.9 million, while net realized investment gains fell to $97,000 from $605,000. Average investment yield was 3.63%, down from 3.90%.
- Nine-month loss ratio improved to 41.6% from 45.2%, in part because 2017 had no severe-winter-weather catastrophe impact versus 3.1 percentage points in 2016. The expense ratio increased to 35.2% from 33.8%; the combined ratio nevertheless improved to 76.8% from 79.0%. In Q3, the combined ratio worsened to 69.8% from 67.4%, primarily reflecting lower ceding commission revenue as the company retained more premiums.
- Operating cash flow was $20.9 million for the first nine months, versus $13.5 million. Investing activities used $34.7 million; financing activities provided $27.6 million, including public-offering proceeds. Cash and equivalents ended at $25.9 million, up from $12.0 million at year-end 2016.
- At September 30, total assets were $215.4 million, investments $129.9 million, total liabilities $121.6 million, and stockholders’ equity $93.8 million. The filing reports no outstanding FHLB borrowings; the facility’s stated maximum advance was approximately $6.2 million and requires collateral.
Material changes and notable items
- Kingstone raised approximately $30.1 million net in a January–February 2017 public offering of 2,692,500 shares at $12 per share. It contributed $23 million to KICO to support its rating-upgrade plan and growth. Increased share count contributed to lower reported EPS despite higher net income.
- KICO’s A.M. Best Financial Strength Rating was upgraded to A- (Excellent) from B++ in April 2017. Management said the upgrade supported new growth opportunities; policies in force increased 14.6% year over year.
- Effective July 1, 2017, personal-lines quota-share ceding fell from 40% to 20%, while the provisional ceding commission rate rose from 52% to 53%. The new treaty runs through June 2019, with specified options for either side to reduce the ceding rate or terminate effective July 2018. Lower ceding increases retained premiums and exposure to losses, while reducing ceding-commission revenue.
- Expansion continued: homeowners coverage began in New Jersey in May. Rhode Island approved a homeowners filing in October, with business anticipated in Q4 2017. KICO had tentative Massachusetts licensing approval and expected final approval and a rate filing in Q4. These are expectations, not completed launches as of the reporting date.
- Other operating expenses rose 111.4% year over year for the nine months, including $709,000 of accrued long-term CEO bonus compensation under a three-year employment agreement. Q3 included $236,000 of that accrual. Expansion expenses were $710,000 year to date, versus $272,000.
- Hurricane Maria contributed to a $50,000 additional impairment charge on a Puerto Rico bond in Q3; cumulative credit impairment on that investment was $119,911. Management considered other portfolio unrealized losses temporary.
Outlook, risks and contingencies
- The filing gives no quantified earnings or premium guidance. Management anticipated Rhode Island business and further Massachusetts licensing and filing activity in Q4 2017. It cautioned that interim results may not indicate full-year results and that forward-looking statements are subject to uncertainty.
- Key risks include catastrophe losses, insurance-claim severity and frequency, uncertainty in loss and LAE reserves, and recoverability of reinsurance and contingent ceding commissions. Management noted that reserve estimates may differ materially from ultimate claims; nine-month prior-year loss development was favorable by $250,225.
- Reinsurance does not release KICO from obligations to policyholders. Catastrophe coverage is subject to limits, including an annual cap of twice per-occurrence coverage; losses above treaty limits remain with the company. The new personal-lines treaty also has midterm change/termination provisions.
- Management reported no other pending legal proceedings believed likely to materially affect the financial statements, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2017. The filing’s risk-factor discussion refers investors to the 2016 Form 10-K.
- The board approved a quarterly cash dividend of $0.08 per share on November 8, 2017, payable December 15 to holders of record November 30.
Important facts for investors to verify
- How much of premium growth reflects underlying policy growth versus the $7.14 million treaty cut-off effect and reduced quota-share cession.
- Whether the improved year-to-date loss ratio persists absent the favorable catastrophe comparison, and how claim development affects reserves.
- Reinsurer credit quality and the terms, capacity and renewal options of quota-share and catastrophe coverage.
- Execution, costs and profitability of expansion in New Jersey, Rhode Island and Massachusetts, including any final Massachusetts approvals.
- The effect of the higher share count, elevated holding-company compensation and investment yields on future per-share earnings and cash available for dividends.
- Portfolio exposure to lower-rated and impaired securities, including the Puerto Rico bond, and the impact of market-value changes on capital.