Kingstone Companies, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative results are for Q1 2012. Financial statements are unaudited. Kingstone primarily underwrites property and casualty insurance in New York through Kingstone Insurance Company (KICO), distributing policies through independent agents and brokers.
Financial performance and position
- Revenue: Total revenue was $7.52 million, up 1.3%. Net premiums earned rose 16.4% to $4.62 million; ceding commission revenue fell 21.0% to $2.29 million.
- Profit: Operating income before taxes was $303,011, down from $1.16 million. Net income was $191,008, down 75.0%; diluted EPS was $0.05 versus $0.20. Comprehensive income was $485,198, including after-tax unrealized investment gains.
- Underwriting: Net loss ratio improved to 53.4% from 57.4%. Net underwriting expense ratio rose to 41.5% from 12.9%, and net combined ratio rose to 94.9% from 70.2%, reflecting the catastrophe-related reduction in ceding commissions. Underwriting income declined to $234,801 from $1.18 million.
- Cash flow: Operating cash flow was $2.25 million, compared with $194,527 used in Q1 2012. Investing activities used $1.05 million and financing activities used $604,000. Cash increased $588,542 to $2.83 million. Management attributed the operating cash-flow improvement primarily to changes in operating assets and liabilities.
- Balance sheet and liquidity: Total assets were $88.81 million and stockholders’ equity was $16.62 million at March 31, 2013. Investments totaled $33.56 million. Loss and loss adjustment expense liabilities were $28.31 million. Notes payable were $747,000, including $378,000 owed to related parties; the $600,000 bank line had no outstanding balance at quarter-end. Management said expected cash flows were sufficient for company-wide working-capital needs over the next 12 months.
- Dividends: The company paid $153,637, or $0.04 per share, during the quarter and subsequently declared another $0.04-per-share dividend for payment in June 2013.
Material changes and management commentary
- Direct written premiums increased 14.3% to $12.85 million; policies in force grew 19% year over year. Management cited increased demand and more policies with higher premiums. A lower commercial-lines quota-share cession rate also supported net written premiums.
- Management attributed much of the earnings decline to Superstorm Sandy’s effect on contingent ceding commissions. Q1 2013 ceding commissions included a $916,000 reduction related to Sandy; contingent commissions were negative $99,153, versus positive $918,673 in Q1 2012.
- Management expected approximately a further $1 million decline in ceding commission revenue during Q2 from the 2012–2013 treaty, plus approximately $139,000 of additional catastrophe-reinstatement premiums. It said Sandy would materially affect Q2 results but was not expected to materially adversely affect financial condition. No broader earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- KICO was among insurers subject to a New York Department of Financial Services investigation into Sandy claims practices. KICO received an information request and said it was cooperating; management did not expect a material adverse effect on financial position or results.
- Management’s estimates for claim reserves, reinsurance recoverables, and contingent ceding commissions involve judgment and uncertainty; actual outcomes may differ. The company reported $28.31 million of loss and LAE liabilities and noted that reinsurance participation does not release it from obligations to policyholders.
- New York regulations following Sandy restricted cancellation or non-renewal of certain delinquent or existing policies during parts of the quarter, which management said offset premium growth.
- The company reported no material pending litigation expected to adversely affect its financial statements. It stated that there were no material off-balance-sheet arrangements.
- Management said disclosure controls were effective as of March 31, 2013 and reported steps to remediate a material weakness in internal control over financial reporting identified at year-end 2012, relating to recording and reconciling unearned premiums following reinsurance treaty changes.
Key facts for investors to verify
- How Sandy-related claims, reinsurance recoveries, and the New York regulatory investigation develop, including any effect on KICO’s reputation or costs.
- Whether the expected Q2 ceding-commission decline and reinstatement premiums align with actual results.
- Whether premium growth can be sustained while controlling acquisition and underwriting expenses and maintaining favorable loss ratios.
- How management’s claims-reserve and contingent-commission estimates compare with later claims development and treaty settlements.
- Whether the reported control remediation is effective in subsequent filings and whether liquidity remains adequate given the demand bank line and 2014 note maturity.