Business context and reporting period
Kingstone Companies, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2022, compared with the three months ended March 31, 2021. Through Kingstone Insurance Company (KICO), it writes property and casualty insurance, primarily personal lines; 80.6% of KICO’s direct written premiums came from New York in Q1 2022. Commercial liability has been in run-off since 2019.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $28.55 million | $39.50 million; down 27.7% |
| Net premiums earned | $26.67 million | $34.59 million; down 22.9% |
| Net loss | $9.20 million; $0.87 per diluted share | $0.31 million; $0.03 per diluted share |
| Net investment income | $1.36 million | $1.78 million |
| Net investment gains (losses) | $(4.40) million | $2.96 million |
| Net loss ratio | 86.0% | 65.2% |
| Net underwriting expense ratio | 38.5% | 42.0% |
| Net combined ratio | 124.5% | 107.2% |
| Operating cash flow | $(17.39) million | $1.39 million provided |
Direct written premiums rose 12.7% to $42.98 million, primarily from personal-lines rate increases and, to a lesser extent, more policies in force; livery premiums also increased. Net written premiums fell 19.1% to $24.92 million, and net premiums earned declined, largely because a new 30% personal-lines quota-share treaty ceded more premiums. The treaty generated $4.68 million of ceding commission revenue, versus approximately zero in Q1 2021.
Net catastrophe losses were $3.02 million, compared with $0.23 million a year earlier. Management attributed higher claims primarily to winter-weather water damage and noted four catastrophe events. The underlying loss ratio excluding catastrophe losses and prior-year development was 74.7%, versus 64.6% in Q1 2021. Prior-year development was slightly favorable.
Financial position and liquidity
At March 31, 2022, total assets were $307.90 million, total liabilities $249.44 million, and stockholders’ equity $58.46 million, down from $75.67 million at December 31, 2021. Cash and cash equivalents were $5.83 million, versus $24.29 million at year-end; total investments were $198.05 million. Loss and loss adjustment expense reserves were $98.92 million. The equity decline reflected the quarterly net loss and $7.76 million of after-tax other comprehensive losses, principally unrealized losses on available-for-sale securities.
Debt, net, was $29.87 million. The $30 million, 5.50% senior unsecured notes mature December 30, 2022. Operating cash use and the decrease in cash included a $13.25 million payment to reinsurers associated with the new quota-share treaty. Management reported approximately $3.81 million of invested assets and cash at the holding company; this is distinct from consolidated cash and investments. KICO paid $1.5 million in dividends to the parent during the quarter.
Outlook, risks, and unusual items
- Going concern and refinancing: The filing states that the parent must obtain financing and/or other funds to meet the notes’ December 2022 maturity. Management plans to refinance with debt of similar or longer maturity and has engaged an investment banker for a proposed securities offering targeting at least $30 million in proceeds. It also cites potential KICO dividends and available holding-company assets. Management believes the plan is probable and would alleviate the concern, but continuation as a going concern depends on successful execution.
- Insurance and reinsurance: Certain excess-of-loss and catastrophe treaties expire June 30, 2022. The filing describes coverage changes after that date, including the exclusions and retentions in the underlying excess-of-loss treaty. Reinsurance does not release KICO from obligations to policyholders.
- Markets, inflation, and claims: Management said rising rates, wider credit spreads, lower equity valuations, and market volatility reduced investment values and equity in the quarter. Continued inflation could increase claim costs and reduce profitability. COVID-19 effects remain uncertain; the company said its current claims impact appeared manageable based on information then available.
- Potential acquisition: On May 4, 2022, the board received a preliminary, non-binding indication of interest from Griffin Highline Capital LLC to acquire all outstanding equity. The board said it would review the proposal; no transaction was agreed or reflected in the financial statements.
- Other: No formal financial guidance is provided in the filing. The board approved a $0.04-per-share dividend payable June 15, 2022. Management reported disclosure controls effective as of March 31, 2022; no material change in internal control was reported. The filing reports no legal proceedings.
Most important facts for investors to verify
- Whether Kingstone completes a refinancing or other funding sufficient to repay the $30 million notes at maturity, and the terms and cost of that funding.
- Whether the Griffin Highline indication advances, and whether any definitive transaction terms or required approvals emerge.
- Renewal terms and actual protection under catastrophe and excess-of-loss reinsurance after June 30, 2022, including named-storm exclusions and retained losses.
- Subsequent catastrophe claims, loss-reserve development, and whether elevated winter-water damage and inflation persist.
- Investment portfolio valuation, liquidity, and further effects of interest-rate or credit-spread changes on equity and available funding.
- Premium retention, ceding commissions, and combined-ratio trends under the new quota-share treaty.