Business context and reporting period
Kingstone Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Through Kingstone Insurance Company (KICO), it underwrites property and casualty insurance, primarily personal lines. New York represented 79.8% of direct written premiums in the quarter and 80.2% for the six-month period.
Financial performance and condition
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total revenue | $29.0 million | $57.5 million |
| Net premiums earned | $27.9 million | $54.6 million |
| Net loss | $5.4 million | $14.6 million |
| Diluted loss per share | $0.51 | $1.37 |
| Net loss ratio | 66.9% | 76.2% |
| Net underwriting expense ratio | 36.4% | 37.4% |
| Net combined ratio | 103.3% | 113.6% |
For the six months, operating cash flow was negative $13.7 million, investing cash flow was positive $3.9 million, and financing cash flow was negative $1.2 million. Cash and cash equivalents were $13.2 million at June 30, down from $24.3 million at year-end 2021. Total investments were $180.6 million, versus $213.6 million at year-end; total assets were $306.6 million and stockholders’ equity was $47.1 million, down from $75.7 million.
Debt, net of issuance costs and discount, was $29.9 million. The underlying $30 million, 5.5% senior unsecured notes mature December 30, 2022. Consolidated loss and LAE reserves were $98.9 million. Dividends declared and paid were $0.04 per share in the quarter and $0.08 per share for the six months.
Material changes versus prior periods
- Compared with Q2 2021, revenue fell 26.8% and results shifted from $1.3 million net income to a $5.4 million net loss. For the six months, revenue fell 27.3% and results shifted from $1.0 million net income to a $14.6 million net loss.
- Direct written premiums increased 11.6% in Q2 and 12.1% for the six months, primarily from personal-lines rate increases and, to a lesser extent, more policies in force. However, net premiums earned fell 21.3% and 22.1%, respectively, largely because a 30% personal-lines quota-share treaty began December 31, 2021. The treaty also generated $4.7 million of Q2 and $9.4 million of six-month ceding commission revenue.
- The six-month combined ratio increased to 113.6% from 103.8%; management attributed higher losses mainly to winter water-damage claims, catastrophe losses and some unfavorable prior-year development. Q2’s ratio was 103.3%, versus 100.4%.
- Six-month net investment results changed from $5.3 million of gains to $8.9 million of losses, including $8.7 million in unrealized losses on equity and other investments. Available-for-sale fixed-maturity securities also had $15.2 million of net unrealized losses at June 30, contributing to a sharp decline in accumulated other comprehensive income.
Outlook, risks and unusual items
- Going concern and refinancing: The filing states that continuation as a going concern depends on obtaining financing or other funds to meet the notes’ December 2022 maturity. Management planned a refinancing or securities offering expected to generate at least $30 million and said it believed the plan probable; however, it remains dependent on successful execution. At June 30, Kingstone holding-company invested assets and cash were approximately $2.78 million. KICO had negative unassigned surplus and could not pay dividends to the parent without regulatory approval.
- Credit ratings: After quarter-end, KBRA downgraded KICO’s financial strength rating and the company’s debt ratings, then withdrew its ratings at the company’s request. A.M. Best also downgraded KICO and company ratings, including the notes to “ccc+,” and revised outlooks to negative; it subsequently withdrew the company’s public rating.
- Strategic proposal: Griffin Highline submitted a final non-binding indication of interest to acquire all outstanding equity. Kingstone extended exclusivity for a limited period to pursue the proposal; there is no assurance a transaction will be completed.
- Other liquidity developments: KICO pledged FNMA bonds in August to establish an FHLBNY facility with a maximum advance of approximately $12 million. The board also approved a $0.04-per-share dividend payable in September 2022.
- Management cited elevated inflation and interest rates, widening credit spreads, market volatility, catastrophe exposure, reserve-estimation uncertainty, reinsurance recoverability and COVID-19 effects as risks. Named storms are excluded from the 2022 underlying excess-of-loss treaty described in the filing. Management provided no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether Kingstone secured sufficient financing to repay or refinance the $30 million notes at maturity, and the terms and timing of any financing.
- Whether the Griffin Highline proposal advanced, changed or resulted in a transaction.
- Subsequent insurer and issuer rating developments and their effects on policyholders, reinsurance access, financing and business volumes.
- Claims trends, catastrophe losses, prior-year reserve development and the adequacy and collectability of reinsurance recoverables.
- Investment-portfolio valuation and subsequent recovery or further losses, including the impact on equity and liquidity.