Kingstone Companies, Inc. — Q3 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. Kingstone primarily underwrites property and casualty insurance through Kingstone Insurance Company, with most business in New York and distribution through independent agents and brokers.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $19.83 million | $16.66 million | $57.19 million | $46.81 million |
| Net premiums earned | $15.65 million | $13.13 million | $45.19 million | $34.38 million |
| Net income | $3.46 million | $2.35 million | $6.84 million | $5.11 million |
| Diluted EPS | $0.43 | $0.32 | $0.89 | $0.69 |
| Net loss ratio | 32.8% | 38.5% | 45.2% | 49.1% |
| Net underwriting expense ratio | 34.6% | 34.3% | 33.8% | 29.9% |
| Net combined ratio | 67.4% | 72.8% | 79.0% | 79.0% |
- Q3 revenue rose 19.0% and net income rose 47.5% year over year. For the nine-month period, revenue increased 22.2% and net income increased 34.0%.
- Nine-month direct written premiums grew 13.6% to $76.38 million; policies in force increased 13.7% year over year. Net premiums earned rose 31.4%, reflecting growth and the prior-year reduction in the personal-lines quota-share cession rate.
- Nine-month underwriting income was $9.50 million, versus $7.22 million. The combined ratio was unchanged at 79.0%: the lower loss ratio was offset by a higher underwriting expense ratio.
- Net investment income increased 23.6% to $2.29 million for nine months. The reported pre-tax equivalent investment yield, excluding cash, was 4.17% at September 30, down from 4.81% a year earlier.
Financial position, cash flow and capital
- At September 30, 2016, total assets were $169.48 million, total liabilities $112.81 million and stockholders’ equity $56.67 million. Cash and cash equivalents were $12.43 million; total investments were $96.54 million.
- Insurance liabilities included $39.80 million of loss and loss-adjustment reserves and $53.76 million of unearned premiums. The filing lists no borrowings or other funded debt.
- Nine-month operating cash flow was $13.47 million, investing cash flow was negative $17.86 million, and financing cash flow was positive $3.26 million. Cash declined $1.12 million from year-end 2015.
- In April, the company issued 595,238 shares to RenaissanceRe for net proceeds of approximately $4.80 million; $3.00 million was contributed to KICO as additional surplus. The company paid $1.45 million in dividends during the nine months. A quarterly dividend of $0.0625 per share was approved for payment in December 2016.
Material changes, outlook and risks
- Management attributed premium growth to continued demand and more new policies. Growth in continuing lines was 14.5% in direct written premiums for the nine-month period; management also cited expansion expenses and hiring to support growth.
- The personal-lines quota-share treaty effective July 1, 2016 ceded 40% of covered premiums, unchanged from the preceding treaty year. Catastrophe coverage increased, with coverage limits and terms revised; the treaty runs through June 30, 2017.
- The company stopped writing new commercial auto policies in 2014 and renewals in 2015. There were no policies in force at September 30, 2016, but 41 open claims and $2.47 million of related reserves remained.
- Management reported lower claim frequency and fewer large claims in Q3, while noting that loss reserves depend on estimates and actual outcomes may differ. Favorable prior-year reserve development was $0.17 million for the nine months, less favorable than the $0.47 million in the prior-year period.
- Puerto Rico defaulted on an interest payment in July 2016. Kingstone recorded a $69,911 credit impairment on a held-to-maturity Puerto Rico bond. Other unrealized investment losses were assessed as temporary.
- Management submitted a New Jersey rate filing in October 2016 and anticipated beginning to write business there in early 2017; no quantified financial guidance was provided. The filing cautions that forward-looking statements are subject to risks and actual results may differ.
- The filing reports 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, 2016.
Most important facts for investors to verify
- Whether growth and underwriting profitability persist as the prior-year quota-share adjustment rolls off, and how the 2016–2017 reinsurance terms affect retained risk and commissions.
- Loss-reserve adequacy, particularly remaining commercial auto claims, catastrophe exposure and the assumptions behind current-year loss estimates.
- Investment portfolio credit quality and interest-rate sensitivity, including the Puerto Rico bond impairment and mortgage-backed securities exposure.
- Expansion costs, the timing and economics of New Jersey entry, and whether operating cash generation can support growth and dividends.
- The reported ceding-commission figures: the financial statements show $8.274 million for the nine months, while one MD&A passage states $8.724 million; confirm the intended amount against the original filing.