Kingstone Companies, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Kingstone is a regional property and casualty insurer operating principally through Kingstone Insurance Company (KICO), with agency operations through Cosi. This filing covers the fiscal year ended December 31, 2019; comparisons are with 2018. KICO writes primarily homeowners and other personal lines through agents and brokers. New York generated 85.0% of KICO direct written premiums in 2019.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $145.6 million | $113.8 million |
| Net premiums earned | $127.6 million | $103.4 million |
| Net income (loss) | $(6.0) million | $3.1 million |
| Basic and diluted EPS | $(0.55) | $0.29 |
| Net loss ratio | 70.7% | 56.4% |
| Net underwriting expense ratio | 38.1% | 38.4% |
| Net combined ratio | 108.8% | 94.8% |
| Net cash provided by operating activities | $29.9 million | $22.3 million |
Gross written premiums increased 16.7% to $171.2 million; net written premiums rose 4.8% to $125.6 million. Net investment income was $6.9 million, up 11.0%. Net investment gains were $4.6 million, versus a $2.5 million loss in 2018, largely reflecting unrealized gains on equity and other investments. The underwriting business recorded an $11.2 million underwriting loss, compared with $5.4 million of underwriting income in 2018.
At December 31, 2019, total assets were $321.2 million, total liabilities $233.0 million and stockholders’ equity $88.2 million. Cash and cash equivalents were $32.4 million and total investments were $199.3 million; cash plus investments totaled approximately $231.7 million. Cash flow from investing activities was $(15.0) million and from financing activities $(3.6) million. The company had $30.0 million of 5.50% senior unsecured notes due December 30, 2022, reported net of discount and issuance costs at $29.5 million. Interest expense was $1.8 million.
Material changes versus 2018
- Net loss and LAE increased to $90.2 million from $58.3 million. Unfavorable prior-year loss development was $11.1 million, compared with $1.2 million in 2018; $8.1 million of the 2019 development related to commercial liability claims.
- Catastrophe losses added 6.0 percentage points to the net loss ratio in both years. The company cited nine catastrophe events in 2019, with a mid-January freeze event accounting for 3.4 points of the net loss ratio impact.
- Policies in force increased 14.1%. Expansion-state direct written premiums rose to $25.6 million from $9.1 million; Connecticut homeowners coverage launched in 2019.
- Commercial liability and commercial umbrella underwriting ceased in July 2019 following poor performance. In-force policies are being non-renewed as their annual terms expire. Commercial lines were 5.9% of gross written premiums, but 42.8% of net loss and LAE reserves at year-end.
- The personal-lines quota-share arrangement changed during the year: the prior 10% treaty expired on a run-off basis July 1, 2019, and a new 25% quota-share treaty began December 15, 2019. Catastrophe reinsurance limits increased to $610 million from $450 million, with KICO’s stated catastrophe retention of $7.5 million before quota-share effects.
- Cash and investments increased to $231.7 million from $195.6 million. Total dividends declared and paid fell to $3.5 million from $4.3 million; declared dividends per share were $0.325 versus $0.400.
Outlook, commentary, risks and unusual items
Management’s stated strategy is profitable growth, particularly in personal lines and Northeast expansion, supported by underwriting discipline and reinsurance. Alternative distribution through Cosi was in early development and represented 3.2% of homeowners and dwelling-fire direct written premiums in 2019. The filing does not provide numerical earnings or premium guidance.
Management said underlying loss performance weakened: excluding catastrophes and prior-year development, the net loss ratio was 56.0%, up from 49.2% in 2018. It cited higher severity in non-weather water claims, more large fire claims and higher commercial-line loss expectations. The 2019 combined ratio above 100% indicates an underwriting loss before investment income.
- Reserves and controls: Management identified a material weakness in controls over establishing and monitoring case reserves for losses and LAE. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse opinion on control effectiveness, while issuing an unqualified opinion on the financial statements. Remediation was underway, with completion expected before the end of fiscal 2020.
- Litigation: A putative securities class action alleges inadequate claims handling and reserves related to winter catastrophe losses and the company’s April 2019 disclosures. Kingstone says it believes the suit is without merit; a motion to dismiss was filed February 18, 2020. The company had not accrued a loss because it was not considered probable and reasonably estimable.
- Capital, dividends and liquidity: KICO reported statutory surplus of $93.8 million, down from $98.7 million, and statutory net loss of $4.5 million. It remained above required risk-based capital levels. KICO’s maximum dividend without prior regulatory approval was approximately $2.4 million at year-end, although it paid $7.0 million to the parent during 2019. The parent depends on regulated subsidiary distributions to service debt and other obligations.
- Concentration and reinsurance: New York remains the dominant market, and 27 brokers provided 35.1% of gross written premiums. Reinsurance does not discharge KICO’s policyholder obligations; recoverability and availability or cost of future coverage are risks. Three reinsurers represented 75.3% of reported reinsurance recoverables at year-end.
- Investments and external risks: The portfolio is exposed to interest rates, credit, equity markets and liquidity conditions. The filing also identifies severe weather, climate-related changes, claims inflation, regulation, cybersecurity and public-health events—including COVID-19—as potential risks. The FHLBNY facility had no borrowings at year-end.
Most important facts for an investor to verify
- Whether reserve controls were remediated and whether subsequent claim development supports the year-end loss and LAE reserves.
- How commercial-liability run-off develops, particularly given the 2019 reserve strengthening and high share of year-end reserves attributable to commercial lines.
- The economics and terms of the new 25% quota-share treaty and catastrophe program, including net retention, pricing and reinsurance recoverability.
- KICO’s statutory capital, permitted upstream dividends and the parent’s ability to service the $30 million notes due in 2022.
- Developments in the securities class action, catastrophe experience, broker concentration and the ability to grow outside New York profitably.