Kingstone Companies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 10, 2017. Interim financial statements are unaudited.
Business context
Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO), primarily in New York and through independent agents and brokers. It began writing homeowners business in New Jersey in May 2017; substantially all business remained in New York. The company operates as one property-and-casualty insurance segment.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $21.72 million | $18.91 million | $42.37 million | $37.36 million |
| Net premiums earned | $16.95 million | $15.01 million | $33.32 million | $29.54 million |
| Net income | $2.51 million | $2.84 million | $3.98 million | $3.38 million |
| Diluted EPS | $0.23 | $0.36 | $0.39 | $0.44 |
| Net loss ratio | 44.0% | 38.6% | 47.3% | 51.7% |
| Net underwriting expense ratio | 33.6% | 35.1% | 34.1% | 33.4% |
| Net combined ratio | 77.6% | 73.7% | 81.4% | 85.1% |
- Six-month growth: Direct written premiums increased 15.0% to $56.58 million; net written premiums rose 15.3% to $36.46 million. Policies in force were up 11.8% year over year. Management attributed growth to demand, higher average premiums, and in part the April upgrade of KICO’s A.M. Best Financial Strength Rating to A-.
- Profitability: First-half net income increased 17.7%, while Q2 net income fell 11.7%. Q2 loss and loss adjustment expenses rose 28.8% to $7.45 million, and the loss ratio increased 5.4 percentage points. Management cited higher fire-claim severity in personal lines versus an unusually low comparison quarter in 2016.
- First-half underwriting comparison: The loss ratio improved partly because 2016 included a 4.8-point severe-winter-weather impact; no catastrophe loss was recorded in the first half of 2017. Management said the underlying core loss ratio, excluding catastrophe effects and prior-year development, increased 0.6 point to 47.9%.
- Other revenue and costs: First-half ceding commission revenue rose 21.6% to $6.49 million and net investment income rose 19.5% to $1.88 million. Other operating expenses increased 118.1% to $1.66 million, including $473,000 of accrued long-term CEO bonus compensation; expansion expenses also increased as the company entered additional markets.
- Cash flow: First-half operating cash flow was $7.37 million, versus $7.81 million. Investing activities used $33.67 million, principally reflecting investment purchases; financing provided $28.61 million, including $30.14 million net public-offering proceeds. Cash and cash equivalents ended at $14.36 million.
- Balance sheet and liquidity: At June 30, total assets were $210.69 million, investments $129.09 million, and stockholders’ equity $90.32 million, compared with $169.45 million, $95.51 million, and $56.68 million, respectively, at December 31, 2016. Loss and LAE reserves were $44.20 million; reinsurance receivables were $34.54 million. The filing presents no separate borrowing balance in the balance-sheet data provided.
Material changes, outlook and risks
- Kingstone raised approximately $30.14 million net through a January–February 2017 common-stock offering of 2,692,500 shares at $12 per share. It contributed $23 million to KICO to support its rating upgrade and growth, increasing shares outstanding and diluting per-share results.
- Effective July 1, 2017, the new personal-lines quota-share treaty reduces the ceding rate from 40% to 20%, raises the provisional ceding commission rate from 52.0% to 52.5%, and runs through June 30, 2019, subject to specified termination or rate-reduction options. Lower cession may increase net premiums retained, but also increases KICO’s retained exposure; reinsurance does not release KICO from obligations to policyholders.
- Management provided no numerical earnings or premium guidance. It expects the A- rating and expansion into licensed markets to support growth, while noting that substantially all business was still in New York. Management cautioned that interim results may not indicate full-year results.
- Reserve estimates are inherently uncertain and depend on loss-ratio and development assumptions; actual ultimate claims may differ materially. First-half prior-year loss development was favorable by $210,102. The company had 23 open commercial-auto claims and $2.29 million of related reserves; it exited new and renewal commercial-auto underwriting.
- Investment risks include interest-rate, credit and market-value exposure. Available-for-sale investments had $910,548 of gross unrealized losses at June 30, which management considered temporary. A Puerto Rico bond had previously been written down for a $69,911 credit impairment. Some mortgage/asset-backed holdings carried low or default ratings.
- Management reported no other pending legal proceeding believed likely to materially affect the financial statements, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30. KICO joined the Federal Home Loan Bank of New York in July; the filing describes access to collateralized advances but does not report borrowing under the facility.
Investor verification priorities
- Review subsequent loss development, claim severity and reserve adequacy, especially personal-lines fire claims and remaining commercial-auto claims.
- Assess the economics and counterparty terms of the reduced-cession reinsurance treaty, including how retained catastrophe exposure and ceding commissions affect earnings and capital.
- Track whether premium growth in New Jersey and other expansion markets offsets higher acquisition, staffing, technology and operating costs.
- Reconcile share-count growth from the public offering with diluted EPS, capital contributed to KICO, dividends and any future financing needs.
- Examine investment credit quality, unrealized losses, duration and any further impairment in lower-rated asset-backed or Puerto Rico-related holdings.