Kingstone Companies, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited consolidated results cover Kingstone and its subsidiaries, principally property-and-casualty insurer Kingstone Insurance Company (KICO). Business is concentrated in New York: 86.8% of KICO’s direct written premiums for the first nine months came from New York.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $34.2 million | $27.5 million | $95.0 million | $74.5 million |
| Total revenues | $38.6 million | $30.9 million | $108.1 million | $84.1 million |
| Net income (loss) | $(1.7) million | $3.9 million | $(7.4) million | $4.0 million |
| Basic EPS | $(0.16) | $0.37 | $(0.69) | $0.37 |
| Net loss ratio | 72.4% | 48.3% | 75.3% | 56.0% |
| Net underwriting expense ratio | 37.5% | 37.7% | 37.8% | 38.1% |
| Net combined ratio | 109.9% | 86.0% | 113.1% | 94.1% |
- Premium growth was strong: nine-month direct written premiums rose 19.7% to $128.3 million and net written premiums rose 22.4% to $107.4 million. Management attributed growth to higher in-force policies and expansion into additional northeastern states.
- Profitability deteriorated as losses grew faster than premiums. Nine-month net loss and loss-adjustment expenses increased 71.5% to $71.6 million. Net underwriting income was a loss of $12.5 million for the period, compared with income of $4.4 million in 2018.
- Operating cash flow was $19.5 million for the nine months, versus $18.2 million a year earlier. Investing activities used $12.1 million; financing activities used $3.0 million. Cash and equivalents ended at $25.6 million, up from $21.1 million at year-end 2018.
- At September 30, total assets were $298.4 million, total liabilities $211.7 million, and stockholders’ equity $86.7 million. Investments totaled $196.0 million. Long-term debt, net, was $29.4 million; the underlying $30 million senior unsecured notes bear 5.50% interest and mature in 2022.
Material changes and management commentary
- Reserve strengthening and claims: The company recorded $11.2 million of unfavorable prior-year loss development in the first nine months, including $5.0 million in Q3. Management said a review of older liability claims led to higher case reserves and additional IBNR/ultimate-loss estimates; $8.8 million of the year-to-date case-reserve adjustments related to commercial-lines liability claims. The nine-month underlying loss ratio, excluding catastrophes and prior-year development, rose to 56.3% from 47.7%, reflecting higher non-weather water-claim severity, increased large-fire activity, and commercial-lines expectations.
- Commercial-lines exit: After a May moratorium on new submissions, Kingstone decided in July to stop underwriting commercial-lines and commercial-umbrella risks because of poor performance. Policies will not be renewed as they expire; all existing policies are expected to expire by September 30, 2020. These lines represented about 12% of nine-month net premiums earned and approximately 46%–47% of loss reserves net of reinsurance at September 30.
- Reinsurance transition: The personal-lines quota-share treaty expired on a run-off basis effective July 1, 2019 and was not renewed; new excess-of-loss and catastrophe treaties took effect. The reduced ceding of premiums increases Kingstone’s retention of earned premiums but also changes risk transfer and ceding-commission income. Catastrophe reinsurance retention increased to $7.5 million per occurrence, with stated coverage above that level up to $610 million per occurrence, subject to treaty limits and terms. Ceded catastrophe premiums rose, partly due to higher limits, growth, and rate increases.
- Catastrophe exposure: Seven PCS catastrophe events affected the company in the first nine months. Catastrophe losses net of reinsurance were $6.9 million, a 7.3-point loss-ratio impact, versus an 8.2-point impact in 2018; management noted both periods were above the cited five-year average impact of 3.8 points. The January freeze accounted for 64% of 2019 net catastrophe losses.
- Investment and other items: Nine-month net investment income increased 14.5% to $5.2 million; net investment gains were $3.7 million, compared with a $0.3 million loss in 2018, mainly reflecting unrealized gains on equity and other investments. The filing states no fixed-maturity security impairment was considered other-than-temporary. The company reversed $698,000 of previously accrued executive bonus compensation after the performance terms were not met.
- Leadership and capital: CEO and President Dale Thatcher retired in July; Barry Goldstein returned to those roles. A new COO was appointed. The board approved a $3.0 million capital contribution to KICO on November 11, subject to New York regulatory approval, and approved a $0.0625-per-share dividend payable in December.
Outlook, risks and contingencies
The filing provides no specific earnings or premium guidance. Management cautions that nine-month results may not indicate full-year results. Key risks include the uncertainty of loss-reserve estimates and claim development, catastrophe losses, New York business concentration, reinsurance availability and recoverability, and investment-market changes. A putative securities class action alleges misleading statements related to claims handling and reserves; the company considers it without merit and recorded no accrual because a loss was not considered probable and reasonably estimable. Management stated it did not believe the litigation would have a material adverse impact based on information then available.
Disclosure controls and internal control over financial reporting were reported as ineffective at September 30, 2019 due to a material weakness in oversight of liability case-reserve setting. Management reported no identified misstatements and said remediation would be initiated, but the weakness was not yet remediated. Lease adoption resulted in recognition of a right-of-use asset and lease liability; management said it did not materially affect results or liquidity.
Important facts for investors to verify
- Whether reserve reviews and remediation controls are effective, and whether further adverse development emerges—especially in older commercial liability claims.
- How the commercial-lines runoff affects future premium volume, reserve releases or deterioration, and underwriting results as policies expire.
- The performance and cost of the new reinsurance program, including coverage limits, retained catastrophe exposure, and reinsurer collectability.
- Whether premium growth can translate into improved loss and combined ratios given Q3’s 109.9% combined ratio and higher underlying loss ratio.
- Approval and completion of the proposed $3.0 million KICO capital contribution, alongside holding-company liquidity and the 2022 debt maturity.
- The status and potential financial exposure of the securities litigation and the company’s control-remediation efforts.