Kingstone Companies, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2016; financial statements are unaudited. Kingstone underwrites property and casualty insurance through Kingstone Insurance Company, primarily in New York and mainly through independent agents. Results are for one insurance segment.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $18.91m | $15.54m | $37.36m | $30.16m |
| Net premiums earned | $15.01m | $10.87m | $29.54m | $21.25m |
| Net income | $2.84m | $2.38m | $3.38m | $2.76m |
| Diluted EPS | $0.36 | $0.32 | $0.44 | $0.38 |
| Net combined ratio | 73.7% | 68.5% | 85.1% | 82.9% |
- For the first half, direct written premiums rose 15.4% to $49.20m; net written premiums increased 31.7% to $31.61m. Management attributed premium growth primarily to more policies in force and lower personal-lines quota-share cessions.
- First-half net loss ratio improved to 51.7% from 55.7%, while the underwriting expense ratio increased to 33.4% from 27.2%; the combined ratio consequently worsened by 2.2 percentage points. Q2 loss ratio improved to 38.6%, but the expense ratio rose to 35.1%, lifting the combined ratio 5.2 points year over year.
- First-half operating cash flow was $7.81m, versus $3.36m; investing cash outflow was $10.47m and financing cash inflow was $3.75m. Cash increased to $14.64m from $13.55m at year-end.
- At June 30, total assets were $167.93m, including $89.43m of investments at carrying value; total liabilities were $114.14m and stockholders’ equity was $53.79m. Loss and LAE reserves were $44.34m. No conventional borrowings are listed on the balance sheet.
- Net investment income increased to $1.58m for the first half from $1.20m. Management reported a lower estimated investment yield, 4.04% versus 4.85%, citing a shift toward shorter-duration investments and lower interest rates.
Material changes versus prior periods
- First-half net income increased 22.5%; revenue increased 23.9%. Q2 net income rose 19.5% and revenue rose 21.7% year over year.
- Ceding commission revenue fell 20.8% in the first half to $5.34m. The 2015/2016 treaty’s higher provisional commission rate came with a less favorable contingent scale; estimated treaty loss ratios reduced contingent commissions.
- Severe-winter-weather losses were lower: their first-half impact on the net loss ratio was 4.8 points versus 9.5 points in 2015. Management also reported favorable prior-year development for the first half, partly offset by higher core loss ratio from larger personal-lines fire claims.
- In April, Kingstone issued 595,238 shares to RenaissanceRe Ventures at $8.40 per share, receiving net proceeds of about $4.81m. It contributed $3.00m to KICO as surplus; the balance was intended for growth and general corporate purposes.
- Available-for-sale investments had a fair value of $84.36m, up from $71.71m at year-end. The company recorded a $69,911 other-than-temporary credit impairment on a Puerto Rico bond after Puerto Rico defaulted on an interest payment in July 2016.
Outlook, commentary and risks
- The filing provides no quantified earnings or revenue guidance. Management cited continued demand and policy growth, but cautioned that interim results may not indicate full-year results and that historical performance is not a reliable predictor.
- New reinsurance treaties took effect July 1, 2016. Personal-lines quota-share cession remained 40%; catastrophe coverage increased, with stated per-occurrence coverage up to $252m and Kingstone retaining the initial $3m. Reinsurance does not release the insurer from obligations to policyholders.
- Key uncertainties include estimating loss and LAE reserves, reinsurance recoverability and contingent commissions, catastrophe exposure, and investment valuation and credit risk. Commercial auto was exited from new and renewal business; related reserves were $2.96m, or 6.7% of total reserves, at June 30.
- The company reported ordinary-course litigation but no other pending legal proceedings believed likely to materially adversely affect the financial statements. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and retention under revised reinsurance treaties translate into sustainable underwriting returns, given the higher expense ratio and lower contingent ceding commissions.
- Reserve adequacy and subsequent claims development, especially for personal-lines severity, complex liability claims, and the commercial-auto runoff.
- Reinsurance counterparties’ ability to pay, recoverables outstanding, and the financial effect of the July 2016 treaty terms and catastrophe limits.
- The status and recoverability of the Puerto Rico bond impairment, and credit quality and valuation of the investment portfolio, including lower-rated mortgage-backed securities.
- Use of the private-placement proceeds, capital and dividend requirements at the insurance subsidiary, and dilution from the new shares. The board declared a further $0.0625-per-share dividend payable September 15, 2016.