Kingstone Companies, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The unaudited consolidated results principally reflect Kingstone Insurance Company, a New York-focused property and casualty insurer. New York generated 94.4% of direct written premiums, versus 87.0% a year earlier.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $35.8 million | $36.6 million; down 2.4% |
| Net premiums earned | $28.8 million | $28.3 million; up 2.0% |
| Net written premiums | $38.1 million | $31.5 million; up 21.0% |
| Net income (loss) | $1.4 million | $(5.1) million |
| Basic / diluted EPS | $0.13 / $0.12 | $(0.47) / $(0.47) |
| Net underwriting income (loss) | $1.9 million | $(6.6) million |
| Net loss ratio | 62.0% | 88.6% |
| Net underwriting expense ratio | 31.3% | 34.7% |
| Net combined ratio | 93.3% | 123.3% |
| Operating cash flow | $6.1 million provided | $3.4 million used |
| Cash and cash equivalents | $3.2 million at March 31 | $9.0 million at December 31, 2023 |
| Total investments | $185.9 million | $174.6 million at December 31, 2023 |
| Total debt, net | $25.3 million | $25.2 million at December 31, 2023 |
| Total stockholders’ equity | $35.7 million | $34.5 million at December 31, 2023 |
Comprehensive income was $1.0 million, including a $0.4 million after-tax other comprehensive loss. The company reported $0.7 million of net investment gains and $1.5 million of net investment income. Interest expense was $1.0 million.
Material changes and management commentary
- Profitability rebounded as net losses and loss-adjustment expenses fell 28.7% to $17.9 million. Management cited fewer catastrophe losses, lower underlying losses and $0.6 million of favorable prior-year reserve development. Catastrophe losses were $1.5 million, or 5.2 loss-ratio points, versus $3.7 million and 13.2 points in Q1 2023.
- Direct written premiums rose 3.6% to $49.3 million. Core premiums increased 12.5% to $46.6 million, while non-Core premiums declined 55.6% to $2.7 million as the company continued reducing business it considers less profitable. Policies in force fell 7.1% in Core and 52.1% in non-Core.
- Net written premiums benefited from a lower personal-lines quota-share cession rate: 27% under the 2024–2025 treaty, versus 30% under the prior treaty. Ceding commission revenue consequently decreased 16.1% to $4.6 million.
- Management says rate increases and home replacement-cost adjustments supported premiums; average written premium for legacy Core homeowners policies increased 24.2% over the last 12 months. It reports the 2024 expense ratio at 31.3%, below its 33% year-end 2024 target, and expects the strategy to support annual profitability in 2024. This is management’s outlook, not formal earnings guidance.
- Cash decreased by $5.8 million during the quarter, primarily alongside investment activity. Consolidated cash and investments were substantial, but holding-company resources available for debt repayment were about $1.789 million at quarter-end, according to the filing.
Debt, liquidity, risks and unusual items
- Going-concern financing need: The $19.95 million principal amount of 12% unsecured 2022 Notes is due December 30, 2024. Management plans to refinance using equity and/or debt offerings, potentially supplemented by permitted subsidiary distributions and available assets. The filing states that continued going-concern status depends on successfully executing this plan; management believes it is probable, but success is not assured.
- Leverage covenant: The defined leverage ratio was 29.2% at March 31, 2024 against a 30% maximum, leaving limited headroom. A majority of noteholders waived a breach at September 30, 2023, when the ratio was 31.4%.
- Subsidiary liquidity constraints: KICO had negative unassigned surplus and could not distribute funds to the parent without prior regulatory approval. A previously approved $2.3 million distribution was expected in Q2 2024. KICO’s FHLBNY borrowing capacity is collateralized and, following withdrawal of its A.M. Best rating, available only on an overnight basis; there were no borrowings at quarter-end.
- Reinsurance renewal exposure: Excess-of-loss, facultative and catastrophe treaties were due to expire June 30, 2024. The filing says those coverages would not be in effect from July 1, 2024 through January 1, 2025 unless renewed; during that interval, specified coverage was limited to the quota-share and underlying excess-of-loss treaties. Renewal terms and costs are important uncertainties.
- Insurance and investment risks: Loss reserves depend on uncertain actuarial estimates; actual claims may differ materially. Inflation could increase claim and operating costs. Available-for-sale fixed maturities had approximately $16.1 million of net unrealized losses, which management deemed temporary and not credit-related. The filing also reports $2.6 million of unrealized losses on equity securities.
- Regular quarterly dividends remain suspended. A $50 million shelf registration statement became effective April 22, 2024, subject to Form S-3 offering limits. The filing reports no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Progress, pricing and terms of the refinancing or securities offering needed to address the December 2024 note maturity.
- Whether the approved $2.3 million KICO distribution was made and whether additional distributions require regulatory approval.
- Renewal status, cost, limits and exclusions for catastrophe and excess-of-loss reinsurance after June 30, 2024, including the interim coverage period.
- Whether the improved loss ratio and favorable reserve development persist, and how catastrophe experience and loss-reserve estimates evolve.
- Compliance with the 30% leverage covenant and the effect of any new debt or equity issuance on dilution, interest expense and liquidity.