Kingstone Companies, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The interim financial statements are unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO); 88.1% of KICO’s direct written premiums for the nine months came from New York.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $34.2 million | $35.5 million | $107.6 million | $93.1 million |
| Net premiums earned | $27.9 million | $29.4 million | $85.7 million | $83.9 million |
| Net loss | $(3.5) million | $(4.0) million | $(9.1) million | $(18.6) million |
| Net loss per share, diluted | $(0.33) | $(0.38) | $(0.85) | $(1.75) |
| Net loss ratio | 78.5% | 75.0% | 77.7% | 75.8% |
| Net underwriting expense ratio | 31.7% | 36.9% | 33.0% | 37.2% |
| Net combined ratio | 110.2% | 111.9% | 110.7% | 113.0% |
A combined ratio above 100% indicates underwriting losses before investment income. Nine-month net investment income was $4.4 million, up 30.0%, while net investment gains were $0.6 million versus losses of $9.3 million in 2022. The improved year-over-year net loss therefore reflects, in part, the reversal of prior-year investment losses; underwriting remained unprofitable.
For the nine months, catastrophe losses net of reinsurance were $7.3 million, compared with $3.5 million in 2022. The underlying loss ratio excluding catastrophe losses and prior-year development improved to 69.2% from 70.8%, but the reported loss ratio rose. Management attributed the underlying improvement to lower claim frequency, offset by inflation-driven severity and large losses.
Balance sheet, cash flow and debt
- At September 30, cash and cash equivalents were $15.1 million and total investments were $157.0 million. Management reported cash and invested assets of $172.1 million, down $20.1 million from September 30, 2022.
- Total assets were $317.0 million, total liabilities $290.5 million, and stockholders’ equity $26.5 million, down from $36.2 million at December 31, 2022. Accumulated other comprehensive loss was $17.1 million.
- Operating cash flow was negative $15.8 million for the nine months, versus negative $7.9 million in 2022. Investing activities provided $19.8 million; cash ended the period at $15.1 million.
- Debt, net, was $25.2 million: $18.1 million of 12% senior notes and $7.1 million of equipment financing. The notes mature December 30, 2024 and have a mandatory redemption provision for December 30, 2023. Interest expense rose to $3.0 million from $1.4 million.
- The notes’ leverage maintenance test limit is 30%; the reported ratio was 31.4% at September 30, 2023. On November 7, noteholders waived compliance for that quarter. KICO had negative unassigned surplus and could not pay ordinary distributions to the parent without regulatory approval; it paid a $1.25 million dividend and, following approval, a $2.7 million distribution from paid-in capital during the nine months.
Material changes, outlook and risks
- Direct written premiums were nearly flat year to date at $147.2 million, but net written premiums fell 14.9% to $56.2 million as ceded premiums increased, including higher catastrophe reinsurance costs. Net premiums earned rose 2.1% year to date but fell 4.8% in Q3.
- Kingstone’s “Kingstone 3.0” strategy prioritizes profitability over growth: it is reducing non-Core business, repricing and adjusting insured home values, managing catastrophe exposure, and cutting expenses. Non-Core policies in force fell 38.9% year over year; Core policies fell 4.5%, while Core Q3 direct written premiums increased 4.7%. Management said it had achieved its 33% net underwriting expense ratio goal for the first nine months and targets 33% by year-end 2024.
- Management expects the strategy to support a return to profitability, but provided no quantified earnings or revenue guidance. It expects slower premium growth may continue as it culls risks and emphasizes underwriting returns. Inflation, claim severity, large losses, catastrophe activity, investment-market volatility and reinsurance pricing remain important risks.
- The 30% personal-lines quota-share treaty runs through January 1, 2024; catastrophe and excess-of-loss coverage is subject to treaty limits, retentions and exclusions. Reinsurance does not relieve KICO of its obligations to policyholders.
- Regular quarterly dividends remain suspended. Meryl Golden became CEO effective October 1, 2023, succeeding Barry Goldstein; Goldstein’s salary was reduced and his bonus eligibility ended. Management reported disclosure controls effective at quarter-end. The filing reported no material changes to previously disclosed risk factors and no legal proceedings requiring separate disclosure.
Important facts for investors to verify
- Whether the December 2023 mandatory note redemption was made, its amount, and the company’s resulting liquidity and leverage-test status.
- Renewal terms, pricing and capacity for quota-share, catastrophe and excess-of-loss reinsurance after the disclosed treaty expirations.
- Subsequent loss development, catastrophe experience and whether the improved underlying loss ratio persists as claims mature.
- Progress toward underwriting profitability and the stated expense-ratio target, including the effects of ongoing non-Core reductions and rate increases.
- Changes in KICO’s statutory capital and restrictions on distributions to the holding company, alongside the parent’s debt service and cash needs.