Business Context and Reporting Period
Company: Kingstone Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Following the July 1, 2009 acquisition of Kingstone Insurance Company (KICO), the Company operates as a property and casualty insurer in New York State. Prior retail brokerage and franchise operations were sold in 2009 and are reported as discontinued operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2010)
| Metric | 2010 (9 Months) | 2009 (9 Months) |
|---|---|---|
| Total Revenues | $15,647,900 | $4,479,869 |
| Net Premiums Earned | $7,905,350 | $2,262,819 |
| Net Income | $822,861 | $5,175,462 |
| Net Income from Continuing Ops | $782,779 | $5,415,785 |
| Operating Cash Flow | $2,100,557 | $582,174 |
| Total Assets | $57,834,426 | $52,643,753 |
| Total Liabilities | $44,632,463 | $42,260,277 |
| Stockholders' Equity | $13,201,963 | $10,383,476 |
| Notes Payable (Debt) | $1,467,369 | $1,085,637 |
Key Ratios (9 Months 2010):
- Net Loss Ratio: 57.2%
- Net Underwriting Expense Ratio: 13.9%
- Net Combined Ratio: 71.1%
- Investment Yield (Tax Equivalent): 5.77%
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 249.4% year-over-year, driven by the full nine-month inclusion of KICO underwriting operations compared to only three months in 2009.
- Net Income Decline: Net income decreased 84.1% to $822,861. This decline is primarily due to the absence of the $5.4 million "Gain on Acquisition of Kingstone Insurance Company" recorded in 2009, which was a one-time bargain purchase gain.
- Underwriting Performance: The Net Loss Ratio increased from 48.0% in Q3 2009 to 62.2% in Q3 2010. Management attributed a 4.1 percentage point increase to a single fire loss incurred in Q3 2010.
- Discontinued Operations: Revenue from discontinued retail and franchise operations dropped to zero in 2010 following the sales completed in 2009.
Guidance, Outlook, Risks, and Unusual Items
- Capital Structure Change: On June 30, 2010, all mandatorily redeemable Series E Preferred Stock ($1.3 million) was exchanged for 787,409 shares of Common Stock. This eliminated the associated interest expense for the remainder of the year.
- Debt Obligations: The Company holds $1.47 million in notes payable, including $785,000 from related parties. These notes bear interest at 12.625% and mature on July 10, 2011.
- Internal Control Weaknesses: Management concluded that internal controls over financial reporting were not effective as of September 30, 2010. Material weaknesses were identified, including a lack of segregation of duties, reliance on multiple un-integrated databases, and manual spreadsheet processes.
- Regulatory Restrictions: KICO is subject to a two-year moratorium on paying dividends to the parent company without New York State Insurance Department approval.
- Investment Portfolio: The portfolio consists primarily of fixed-maturity securities (82.8%) and equity securities (17.2%). Gross unrealized losses totaled $40,478, which management deems temporary.
Investor Verification Checklist
- Internal Controls: Verify the remediation plan for the identified material weaknesses in financial reporting and IT systems.
- Loss Development: Monitor the impact of the Q3 2010 fire loss on future loss ratios and reserve adequacy.
- Debt Maturity: Confirm the Company's ability to refinance or repay the $1.47 million in notes due in July 2011.
- Dividend Policy: Assess the impact of the regulatory dividend moratorium on the parent company's liquidity.
- Related Party Transactions: Review the terms and interest rates of the $785,000 in debt held by directors and related parties.