Kingstone Companies, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company, primarily through independent agents. New York remained highly concentrated at 94.1% of direct written premiums for Q2 and 95.4% year to date. The company was expanding in New Jersey, Rhode Island, Pennsylvania and Massachusetts.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $27.55 million | $21.72 million | $53.25 million | $42.37 million |
| Net premiums earned | $24.10 million | $16.95 million | $46.94 million | $33.32 million |
| Net income | $2.76 million | $2.51 million | $39,000 | $3.98 million |
| Diluted EPS | $0.25 | $0.23 | $0.00 | $0.39 |
| Net loss ratio | 46.4% | 44.0% | 60.6% | 47.3% |
| Net underwriting expense ratio | 37.8% | 33.6% | 38.2% | 34.1% |
| Net combined ratio | 84.2% | 77.6% | 98.8% | 81.4% |
- Growth: Direct written premiums rose 21% in Q2 to $36.86 million and 20.9% year to date to $68.39 million. Net written premiums increased 41.8% in Q2 and 41.7% year to date, partly reflecting the July 2017 reduction in personal-lines quota-share cession from 40% to 20%. Net premiums earned increased 42.2% in Q2 and 40.9% year to date.
- Profitability and drivers: Q2 pretax income was $3.56 million versus $3.74 million. The Q2 net-income increase reflected higher earned premiums and investment income, partly offset by lower ceding commissions, higher claims and underwriting costs, investment losses and new interest expense. Year-to-date pretax income was only $48,000, versus $5.91 million in 2017; net income fell 99%.
- Claims and underwriting: Year-to-date net losses and loss-adjustment expenses were $28.44 million, including $5.73 million of net catastrophe losses; catastrophe losses were $184,000 in Q2. Management attributed most of the year-to-date loss-ratio increase to severe winter-weather events. Excluding catastrophes and prior-year development, the underlying loss ratio was 47.9% year to date, unchanged from 2017. Q2 underlying loss ratio was 44.2%, down from 45.2%.
- Investments: Net investment income rose 56.1% year to date to $2.94 million; management cited higher average invested assets. Net investment losses were $630,000 versus a $76,000 gain in 2017, including $310,000 of unrealized losses on equity and other investments. Adoption of ASU 2016-01 moved changes in equity-security fair value into net income.
- Cash flow and liquidity: Six-month operating cash flow was $5.95 million, compared with $7.37 million. Investing used $31.96 million and financing used $2.99 million. Cash declined $28.99 million to $19.39 million, while investments totaled $166.92 million. Cash plus investments were approximately $186.31 million.
- Balance sheet and debt: At June 30, total assets were $255.39 million, total liabilities $166.66 million and stockholders’ equity $88.73 million. Long-term debt, net, was $29.21 million: $30 million face amount of 5.50% senior unsecured notes due December 2022. The company reported $908,000 of interest expense year to date. No FHLB advances were outstanding; available collateral was approximately $6.08 million.
Material changes, outlook and risks
- Expansion-business direct written premiums were $3.06 million year to date versus $229,000 in 2017; policies in force increased 20.3% year over year. Management cited continued new-business demand and the A.M. Best A- rating received in 2017. New states also add operating costs, and earned-premium growth lags written-premium growth.
- Ceding commission revenue fell 47.8% year to date to $3.39 million. Lower quota-share cession reduced provisional commissions, while higher estimated treaty loss ratios and catastrophe losses produced negative contingent commissions. The company entered new excess-of-loss and catastrophe treaties effective July 1, 2018; catastrophe coverage increased to $445 million, subject to treaty terms and limits.
- Available-for-sale fixed-maturity securities had $3.16 million of net unrealized losses at June 30, versus $866,000 of net unrealized gains at year-end 2017. The resulting investment valuation movement contributed to a $3.18 million six-month other comprehensive loss. Management said it considered unrealized losses temporary and reported no other-than-temporary impairment in the period.
- The company declared a $0.10-per-share quarterly dividend on August 8, payable September 14, 2018. It provided no quantified earnings or revenue guidance. Management cautioned that interim results may not indicate full-year results and that estimates, especially loss and LAE reserves and reinsurance recoverables, involve uncertainty.
- Risk considerations include catastrophe exposure, possible adverse reserve development, reliance on reinsurance (which does not release the insurer from policyholder obligations), and geographic concentration in New York. Management reported no other pending legal proceedings expected to materially affect the financial statements. The IRS selected the 2016 federal return for examination; results were unknown, and management believed the return complied with applicable tax law.
Important facts for investors to verify
- Whether catastrophe claims and unfavorable prior-year development continue to pressure loss ratios and reserves; year-to-date prior-year development was $227,000 unfavorable.
- How the 20% quota-share structure and July 2018 reinsurance renewals affect retained risk, ceded premiums and contingent ceding commissions.
- Whether expansion outside New York can scale profitably, given the company’s substantial New York premium concentration and expansion-related expenses.
- The quality, credit exposure and interest-rate sensitivity of the investment portfolio, including unrealized losses and the 3.74% average yield reported at June 30.
- Cash and holding-company liquidity after the large first-half investment outflow, debt interest and dividends; the filing says additional financing may be sought if available sources do not meet holding-company needs.