Kingstone Companies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 11, 2020. The interim financial statements are unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company (KICO), principally in New York. New York accounted for 82.7% of KICO direct written premiums in the quarter.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Total revenue | $26.6 million | $34.9 million; down 23.7% |
| Net premiums earned | $26.9 million | $29.6 million; down 9.0% |
| Ceding commission revenue | $3.8 million | $1.3 million |
| Net investment income | $1.7 million | $1.6 million |
| Net investment losses | $6.4 million | Compared with $2.0 million gains |
| Net loss / loss per diluted share | $5.4 million / $0.50 | $7.3 million / $0.68 |
| Net loss ratio | 60.8% | 98.4% |
| Net underwriting expense ratio | 39.3% | 38.5% |
| Net combined ratio | 100.1% | 136.9% |
| Operating cash flow | $(15.3) million | $2.7 million provided |
- Direct written premiums were $36.7 million, down 2.1%; personal-lines direct written premiums rose 14.4% to $34.4 million. Net written premiums fell 23.6% to $23.2 million, reflecting higher ceded premiums and the commercial-lines runoff.
- Net loss improved year over year, principally as catastrophe losses fell to $0.2 million from $5.1 million and prior-year loss development was favorable by $0.1 million versus $4.5 million unfavorable in Q1 2019. The combined ratio remained slightly above 100%, indicating an underwriting loss before investment results.
- Comprehensive loss was $10.8 million, including $5.4 million of after-tax other comprehensive losses, largely reflecting declines in available-for-sale securities.
- At March 31, 2020, total assets were $292.5 million, down from $321.2 million at December 31, 2019; total investments were $176.1 million versus $199.3 million. Cash and equivalents were $25.6 million versus $32.4 million. Stockholders’ equity was $76.9 million versus $88.2 million.
- Long-term debt, net, was $29.5 million: $30 million of 5.50% senior unsecured notes due December 2022. Interest expense was $0.5 million for the quarter. No FHLBNY advances were outstanding; collateral-limited borrowing capacity was approximately $6.6 million.
- Cash declined by $6.8 million during the quarter. Investing activities provided $9.5 million, while financing activities used $1.0 million. KICO paid $1.5 million in dividends to the holding company during the quarter, subject to statutory restrictions.
Material changes and management commentary
- The company stopped underwriting commercial liability and commercial umbrella risks in July 2019; these policies are running off. Commercial lines represented 6.3% of Q1 2020 net premiums earned and 44.1% of net loss and LAE reserves.
- A personal-lines quota-share treaty effective December 15, 2019 ceded 25% of covered premiums, compared with a 10% rate in the comparable 2019 period. Higher quota-share and catastrophe reinsurance costs reduced net written premiums, while ceding commission revenue increased.
- Management attributed improved claims results to a mild winter, lower catastrophe losses, favorable prior-year development, reduced personal-lines and auto physical-damage claim frequency, and the shift away from commercial lines. The underlying loss ratio, excluding catastrophes and prior-year development, was 60.6%, versus 66.1% a year earlier.
- Equity and other investment market declines during the COVID-19 disruption drove $6.7 million of net unrealized investment losses. Management reported no investment impairments deemed other-than-temporary in the quarter.
- Management expected COVID-19-related economic contraction to reduce premium volumes, with a more significant impact anticipated in Q2 2020 and a continuing, though potentially lesser, effect for the rest of 2020. The extent and duration were uncertain; the filing provides no quantified earnings or premium guidance.
- The catastrophe reinsurance treaty was due to expire June 30, 2020. Management expected catastrophe reinsurance rates to rise from July 1, 2020, reflecting portfolio growth, coastal exposure, and anticipated market effects related to COVID-19.
- The board approved a $0.04-per-share dividend payable June 15, 2020. Q1 dividends paid were $0.0625 per share, compared with $0.10 in Q1 2019.
Risks, contingencies, and controls
- COVID-19 risks include lower premiums, investment valuation and credit deterioration, possible legislation or regulation affecting coverage obligations, operational and cybersecurity disruption, and higher or less available reinsurance. The filing states that the financial impact could be material but could not yet be determined; no COVID-19 adjustment was recorded in the March 31 statements.
- A putative securities class action alleges that Kingstone and certain current or former officers and directors made misleading statements concerning claims handling and reserves. The company considers the suit without merit and had not accrued a loss; the plaintiff opposed the company’s motion to dismiss on April 20, 2020.
- Management concluded disclosure controls and internal control over financial reporting were not effective as of March 31, 2020 because of a material weakness in oversight of liability case reserves. No misstatements had been identified as of the report date. Remediation efforts include external claims review, a new Chief Claims Officer, additional claims personnel, and enhanced controls and testing; management expected remediation before fiscal year-end 2020, subject to effective operation and testing.
- Loss reserves depend on actuarial estimates and may differ materially from ultimate claim costs. Reinsurance does not relieve Kingstone of its obligations to policyholders.
Most important facts for investors to verify
- Whether the improved loss ratio and favorable reserve development persist, particularly as commercial-line reserves run off and claims mature.
- COVID-19’s actual effect on new and renewal premiums, investment values and credit quality, operations, and statutory or regulatory requirements.
- The renewal terms and cost of catastrophe reinsurance after June 30, 2020, and resulting net catastrophe exposure and profitability.
- Progress and independent evidence that the material weakness in liability case-reserve oversight has been remediated.
- Developments in the securities class action and any resulting financial exposure.
- Cash generation, holding-company liquidity, and ability to meet debt service and dividends amid operating cash outflow and investment-market volatility.