Kingstone Companies, Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Kingstone underwrites property and casualty insurance primarily in New York through Kingstone Insurance Company, distributing through independent agents and brokers.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $14.61 million | $10.10 million; up 44.7% |
| Net premiums earned | $10.39 million | $5.93 million; up 75.3% |
| Net income | $382,499 | $327,133; up 17.1% |
| Diluted EPS | $0.05 | $0.04 |
| Net loss ratio | 68.0% | 73.0% |
| Net underwriting expense ratio | 29.9% | 22.5% |
| Net combined ratio | 97.9% | 95.5% |
| Operating cash flow | $834,077 | $404,628 |
- Direct written premiums increased 19.2% to $19.49 million; policies in force rose 20.6% year over year. Net written premiums increased 65.2% to $10.88 million.
- Investment income rose 51.5% to $575,000, attributed mainly to higher average invested assets. Net realized investment results shifted to a $67,494 loss from a $188,348 gain.
- At March 31, total assets were $137.39 million, total investments $68.67 million, cash and equivalents $6.28 million, and stockholders’ equity $40.92 million. Cash was $9.91 million at December 31, 2014.
- Loss and LAE reserves were $42.15 million; reinsurance receivables were $36.55 million. The company had no balance outstanding on its $600,000 bank line of credit.
- Cash used in investing activities was $3.94 million and cash used in financing activities was $517,000, including $366,000 of dividends and $129,000 of treasury-stock purchases.
Material changes and management commentary
- Premium growth and higher earned premiums primarily reflected greater retention after the July 2014 reinsurance changes: personal-lines quota-share cession fell from 75% to 55%, and the commercial-lines quota-share treaty was not renewed. These changes also reduced provisional ceding commissions.
- Severe winter weather increased net catastrophe losses to $1.84 million from $941,000 and reduced contingent ceding commissions by approximately $1.12 million, versus $517,000. Management reported that the winter-weather catastrophe reinsurance provision was not triggered.
- Management said the core net loss ratio, excluding catastrophe impacts and prior-year development, improved to 49.3% from 53.7%, citing commercial-lines results and a shift in earned-premium mix. The overall combined ratio nevertheless increased, principally as the underwriting expense ratio rose.
- Kingstone stopped accepting new commercial-auto policies in October 2014 and decided in February 2015 not to renew existing policies expiring on or after May 1, 2015, citing continued poor underwriting performance. Commercial-auto policies in force fell to 599 from 730 at year-end.
- Other income included a one-time $350,000 early termination payment related to premium-finance placement fees. The related agreement ended March 31, 2015.
- The board approved a $0.05-per-share dividend payable June 15, 2015. The company also entered a seven-and-a-half-year Valley Stream office lease, with disclosed future minimum rent commitments of $783,774.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results and that actual results may differ from forward-looking statements.
- Key risks include uncertainty in loss and LAE reserve estimates, catastrophe exposure, and recovery of amounts due from reinsurers. Reinsurance does not relieve Kingstone of obligations to policyholders.
- The filing describes a New York DFS investigation concerning KICO’s Superstorm Sandy claims practices; KICO had provided requested information and cooperated, but reported receiving no further response since a 2013 meeting. Management believed the matter would not affect financial position or results.
- Management reported no other pending legal proceeding it believed likely to have a material adverse financial effect. The filing reports no material off-balance-sheet arrangements and says disclosure controls were effective at March 31, 2015.
Important facts for investors to verify
- Whether the higher premium retention after the reinsurance changes produces sustainable underwriting returns, particularly as treaties approach renewal.
- Whether catastrophe losses, contingent ceding commissions and reserve estimates develop as expected; confirm the company’s gross reserves and reinsurance recoverability.
- How much reported earnings growth depended on the nonrecurring $350,000 premium-finance termination payment and investment results.
- Whether the expense ratio and combined ratio improve as the portfolio grows and commercial-auto exposure runs off.
- The status of the DFS Sandy-claims inquiry, the new office lease commitments, and the company’s liquidity after investment purchases and dividends.