Kingstone Companies, Inc. — Q3 2014 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2014, compared with the same 2013 periods. Kingstone primarily writes property and casualty insurance through Kingstone Insurance Company in New York, chiefly via independent agents and brokers.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $14.02 million | $10.34 million | $35.09 million | $25.64 million |
| Net premiums earned | $9.90 million | $6.13 million | $22.25 million | $15.43 million |
| Net income | $1.88 million | $1.66 million | $3.57 million | $1.92 million |
| Basic EPS | $0.26 | $0.44 | $0.49 | $0.50 |
| Diluted EPS | $0.26 | $0.43 | $0.48 | $0.49 |
| Net combined ratio | 70.9% | 63.0% | 77.4% | 84.3% |
For the nine months, revenue grew 36.9% and net income 85.6%. Q3 revenue increased 35.6%, while net income rose 13.4%. EPS was lower in Q3 despite higher net income; weighted-average shares were approximately 7.29 million versus 3.81 million in Q3 2013, following the 2013 equity offering.
Nine-month net investment income was $1.29 million, up 51.7%; realized investment gains were $438,000, slightly below the prior-year $449,000. Income before tax was $5.25 million for nine months and $2.79 million for Q3. Effective tax rates were 32.1% and 32.5%, respectively.
Cash, investments, debt and capital
- At September 30, 2014, total assets were $128.93 million, liabilities $89.93 million and stockholders’ equity $39.00 million.
- Cash and cash equivalents fell to $5.03 million from $19.92 million at December 31, 2013. Investments rose to $62.28 million from $37.63 million.
- Nine-month operating cash flow was $10.31 million; investing activities used $24.23 million and financing activities used $0.98 million. Ending cash declined by $14.89 million.
- No line-of-credit balance was outstanding. The available bank line is $600,000, payable on demand; the company also reported no interest expense in the 2014 periods.
- Quarterly dividends were $0.05 per share in Q3. The board subsequently approved another $0.05 dividend, payable December 12, 2014.
Material changes and management commentary
- Direct written premiums increased 27.0% for the first nine months; policies in force were up 23.5% year over year. Management attributed growth to demand, more policies and higher average premiums.
- Effective July 1, Kingstone reduced the personal-lines quota-share cession from 75% to 55% and ended the commercial-lines quota-share treaty. These changes increased retained premiums and contributed to higher net premiums earned and written, while reducing ceding commissions in Q3. Reinsurance changes increase the company’s retained underwriting exposure.
- The nine-month net loss ratio edged up to 53.4% from 52.8%; the combined ratio improved to 77.4% from 84.3%, primarily as the underwriting expense ratio declined. Severe winter weather in January and February contributed $941,000 of net catastrophe losses and reduced contingent ceding commissions by about $517,000.
- Q3’s net loss ratio increased to 45.9% from 39.8%, and its combined ratio rose to 70.9% from 63.0%. Management cited adverse prior-year loss development in commercial auto and increased commercial-lines losses, partly offset by favorable personal-lines experience. Commercial auto’s Q3 net loss ratio was 159.6%.
- Effective October 1, 2014, the company stopped accepting new commercial auto policies after underwriting and pricing actions failed to deliver expected profitability; it is selectively renewing existing policies.
- The investment portfolio expanded substantially. Available-for-sale fixed maturities were 47.1% BBB-rated; the portfolio’s reported average fixed-maturity yield declined to 4.14% from 4.59% at year-end 2013. Management identified no investment impairments as other-than-temporary.
Outlook, risks and other notable items
- The filing provides no specific financial guidance. Management cautions that interim results may not indicate full-year results and that actual outcomes may differ materially from forward-looking statements.
- Key estimation risks include loss and LAE reserves, reinsurance recoverables and contingent ceding commissions. Management states reserve estimates are uncertain and actual claim liabilities may differ substantially.
- KICO was cooperating with a New York Department of Financial Services investigation concerning handling of Superstorm Sandy claims. The company said it had provided requested information and believed the matter would not affect its financial position or results; no resolution is reported here.
- The company reported no other pending legal proceedings management believed likely to have a material adverse financial effect. It also reported no material off-balance-sheet arrangements and effective disclosure controls as of September 30.
- The premium-finance contract purchaser terminated its agreement effective February 1, 2015. Payments, Inc. may continue receiving fees for two additional years on qualifying contracts from company producers.
- The CEO’s employment agreement was extended through 2016, with annual base salary increased to $575,000 effective July 1, 2014, a revised bonus formula, a $62,500 amendment-related bonus, and options covering 250,000 shares, including 50,000 subject to shareholder approval of the 2014 plan.
Important facts for investors to verify
- Whether the reduced personal-lines quota share and discontinued commercial-lines quota share improve underwriting returns while leaving catastrophe and retained-loss exposure within acceptable limits.
- Subsequent development of commercial auto and commercial-lines claims, including the adequacy of reserves and the financial effect of stopping new commercial auto business.
- Whether premium growth and the improved nine-month combined ratio persist, particularly given Q3’s higher loss and combined ratios.
- Liquidity and investment portfolio sensitivity: cash declined materially as investments increased; review asset quality, duration, rate risk and insurer liquidity needs.
- Updates on the DFS Sandy-claims investigation and the premium-finance agreement termination, including any operational or revenue effects.