Kingstone Companies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO); New York represented 76.3% of KICO direct written premiums in the first half.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $39.6 million | $34.7 million | $79.1 million | $60.9 million |
| Net premiums earned | $35.4 million | $26.6 million | $70.0 million | $53.6 million |
| Net income (loss) | $1.32 million | $4.61 million | $1.01 million | $(0.84) million |
| Diluted earnings (loss) per share | $0.12 | $0.43 | $0.09 | $(0.08) |
| Net combined ratio | 100.4% | 86.9% | 103.8% | 93.5% |
- First-half direct written premiums increased 4.3% to $82.7 million. Net written premiums rose 32.8% to $68.1 million, largely because the 25% personal-lines quota-share treaty expired at year-end 2020, leaving more premiums retained by Kingstone.
- First-half net loss and loss-adjustment expenses increased 48.4% to $43.3 million. Management cited higher personal-lines liability claim frequency and water-damage losses. Catastrophe losses were modest; prior-year reserve development was slightly favorable.
- First-half underwriting results were a $2.6 million loss, versus $3.5 million of underwriting income a year earlier. The combined ratio above 100% indicates underwriting losses before investment income. Q2 underwriting loss was $0.13 million.
- First-half net investment income was $3.46 million, up 5.6%; net investment gains were $5.28 million versus a $3.75 million loss in 2020, reflecting realized and unrealized gains. Investment results contributed meaningfully to the year-over-year earnings improvement.
Cash, liquidity and debt
- Cash and cash equivalents were $43.1 million at June 30, 2021, compared with $19.5 million at year-end 2020. Total investments were $191.0 million; cash plus investments were approximately $234.1 million.
- First-half operating cash flow was $14.4 million, compared with $10.0 million used in the prior-year period. Investing activities provided $11.3 million; financing activities used $2.1 million, including dividends and treasury-stock purchases.
- Total assets were $312.7 million and stockholders’ equity was $90.0 million. Loss and LAE reserves were $85.0 million; unearned premiums were $88.1 million.
- Long-term debt, net, was $29.7 million, representing $30 million of 5.50% senior unsecured notes due December 2022. KICO had no FHLB borrowings; the facility’s collateral-based available advance was approximately $9.2 million at quarter-end.
Changes, outlook and risks
- The quota-share treaty expiration sharply reduced ceding-commission revenue: $45,000 in the first half versus $7.31 million in 2020. It also increased retained premiums and reduced reinsurance recoveries, changing the comparison of premium and loss trends between periods.
- Effective July 1, 2021, Kingstone entered new excess-of-loss and catastrophe reinsurance treaties. Personal-lines catastrophe coverage was stated at $490 million in excess of a $10 million retention, subject to treaty terms and limits.
- Management gave no quantified earnings or premium guidance. It said COVID-19’s effects remain uncertain and may continue to weigh on new business, though to a lesser extent during the remainder of 2021. Management is emphasizing underwriting profitability over growth and screening out risks that do not meet return expectations.
- Key exposures include claim frequency and severity, reserve-estimation uncertainty, catastrophe losses, inflation, reinsurance availability and cost, and investment-market fluctuations. COVID-19 may affect claims and business activity; management said the financial impact could not be determined.
- Subsequent to quarter-end, on August 6, A.M. Best downgraded KICO’s financial-strength rating from B++ to B+ and its issuer rating; Kingstone’s issuer rating and the notes’ issue rating were also downgraded.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no legal proceedings in Part II and no material changes to the risk factors in its 2020 Form 10-K.
Investor verification priorities
- Track whether the higher personal-lines liability and water-damage claim frequency persists, and whether reserves develop adversely.
- Assess underwriting performance after the quota-share treaty ended, including combined ratio, retained losses, reinsurance costs and catastrophe protection.
- Review the A.M. Best downgrades, their implications for policyholder confidence, regulatory capital and financing, and the 2022 notes maturity/refinancing plan.
- Separate recurring underwriting and investment income from realized and unrealized investment gains when evaluating earnings quality.
- Monitor New York concentration, COVID-19-related premium trends, and the effect of management’s profitability-first underwriting changes.