Kingstone Companies, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 14, 2011. The interim financial statements are unaudited. Kingstone provides New York property and casualty insurance through Kingstone Insurance Company (KICO), which generates approximately 98% of company revenue.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $6.84 million | $5.75 million | $19.73 million | $15.65 million |
| Net premiums earned | $3.94 million | $3.07 million | $10.82 million | $7.91 million |
| Net income | $220,000 | $232,000 | $1.12 million | $823,000 |
| Basic and diluted earnings per share | $0.06 | $0.06 | $0.29 | $0.25 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $5.79 million | $2.10 million |
- Nine-month direct written premiums rose 22.2% to $30.50 million; policies in force increased 19.7% year over year. Net written premiums increased 18.8% to $12.41 million.
- Nine-month loss and loss-adjustment expenses increased 61.7% to $7.31 million. The net loss ratio rose to 67.5% from 57.2%; the net combined ratio was 84.7% versus 71.1%.
- Underwriting income declined to $1.65 million for the first nine months from $2.29 million a year earlier, and to $90,000 in Q3 from $603,000. The Q3 net combined ratio was 97.7%, compared with 80.3%.
- Nine-month ceding commission revenue increased 14.6% to $7.35 million; net investment income rose 17.0% to $510,000. Net realized investment gains were $357,000, including a $133,000 FDIC recovery related to a bank failure.
- At September 30, total assets were $68.95 million, total liabilities $54.81 million, and stockholders’ equity $14.14 million. Cash and cash equivalents were $3.03 million; investments totaled $22.70 million. Reinsurance receivables were $25.64 million.
- Notes payable and capital lease obligations were $747,000, down from $1.46 million at year-end 2010. The remaining notes bear 9.5% interest and mature July 10, 2014. Nine-month financing cash flow was a use of $829,000, including debt principal payments and dividends.
Material changes, outlook, and risks
- Tropical Storm Irene generated $422,000 of net losses and LAE after $1.27 million of reinsurance recoveries. It added 3.9 percentage points to the nine-month loss ratio and 10.7 points to Q3’s ratio, and reduced contingent ceding commission revenue by approximately $493,000.
- Management attributed the higher loss ratio to Irene and increased commercial auto losses; commercial auto was not covered by a quota-share treaty. The commercial-lines quota-share percentage decreased from 75% to 60% effective July 1, 2011.
- Management said cash flows were expected to fund company-wide working-capital needs over the next 12 months. No earnings or revenue guidance was provided. KICO had $54 million of catastrophe reinsurance coverage, with a stated $500,000 per-occurrence retention.
- Management’s estimates of loss reserves and reinsurance recoverables are subject to uncertainty; ultimate claims may differ materially from recorded estimates. Reinsurance does not relieve KICO of its obligations to policyholders.
- The IRS began examining the company’s 2009 federal tax return in September 2011; the outcome was unknown. Management expressed confidence in its tax positions. The company reported no other pending legal proceedings it believed likely to materially affect the financial statements.
- After quarter-end, KICO paid a $175,000 dividend to the parent on November 11. The company also declared a $0.03-per-share dividend payable December 15, 2011. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track loss-reserve development, particularly the $566,000 of prior-year losses and LAE incurred during the nine-month period, and compare subsequent claim experience with recorded reserves.
- Review Irene’s ultimate claims and reinsurance collections, and the impact of catastrophe losses and treaty terms on contingent ceding commissions.
- Assess commercial auto loss trends and the effect of the reduced commercial-lines quota-share percentage on net risk exposure and written premiums.
- Monitor collectability and timing of the $25.64 million in reinsurance receivables, along with liquidity and statutory capital at KICO.
- Check the outcome of the IRS examination and confirm the declared shareholder dividend and KICO’s capacity to make further distributions under regulatory restrictions.