Kingstone Companies, Inc. — Q2 2014 Form 10-Q
Business and period: Kingstone underwrites property and casualty insurance, primarily in New York, through Kingstone Insurance Company and independent agents. The report covers the quarter and six months ended June 30, 2014; financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $10.97 million | $7.78 million | $21.08 million | $15.30 million |
| Net premiums earned | $6.43 million | $4.68 million | $12.36 million | $9.30 million |
| Net income | $1.35 million | $68,101 | $1.68 million | $259,109 |
| Diluted EPS | $0.18 | $0.02 | $0.23 | $0.07 |
| Net combined ratio | 70.8% | 101.9% | 82.6% | 98.4% |
- Six-month direct written premiums rose 27.4% to $36.60 million; net written premiums rose 37.6% to $15.09 million. Management attributed growth to more policies in force (up 23.7% year over year), continued demand, and higher average premiums.
- Six-month operating income before tax was $2.46 million versus $430,273. Underwriting income was $2.14 million versus $145,133. Net investment income increased 48.9% to $831,000; ceding commission revenue increased 53.1% to $7.09 million.
- The six-month net loss ratio improved to 59.3% from 61.4%, and the underwriting expense ratio fell to 23.3% from 37.0%. Management cited improved commercial auto results and higher ceding commissions; severe winter weather added $941,000 of net catastrophe losses and 7.6 percentage points to the six-month loss ratio.
- Six-month operating cash flow was $4.39 million, up from $1.71 million. Investing activities used $16.89 million, primarily reflecting purchases of securities; cash fell to $6.82 million from $19.92 million at year-end. Financing activities used $601,000, including $582,000 of dividends.
- At June 30, total assets were $131.27 million, total liabilities $93.52 million, and stockholders’ equity $37.75 million. Investments totaled $55.62 million. Loss and loss adjustment reserves were $39.70 million, including $21.06 million of reinsurance recoverables in the reserve reconciliation.
- No line-of-credit balance was outstanding; the company had a $600,000 demand credit facility. Interest expense was zero for the first half. The filing does not provide a conventional current ratio or other single liquidity measure.
Material changes, outlook and risks
- Compared with 2013, earnings improved substantially and the combined ratio moved below 100%. The prior-year comparison included adverse commercial auto loss development and, in Q2 2013, Superstorm Sandy impacts. Q2 2014 had no catastrophe losses reported, while the first half included severe winter weather losses.
- Effective July 1, 2014, Kingstone reduced its personal-lines quota-share cession from 75% to 55% and terminated its commercial-lines quota-share treaty. The new catastrophe treaty increased stated coverage to $137 million from $86 million, while the retained amount per catastrophe occurrence rose from $1.0 million to $1.8 million. These changes affect retained risk, net premiums and ceding commissions.
- Management gave no specific earnings or revenue guidance and cautioned that first-half results may not indicate full-year performance. Results depend on premium growth, claims and reserve estimates, reinsurance recoveries and commissions, investment performance, and catastrophe experience. Management says loss reserves are estimates subject to substantial uncertainty and possible adverse development.
- Kingstone reported that the New York Department of Financial Services was investigating KICO’s claims practices related to Superstorm Sandy. KICO supplied requested information and was cooperating; management believed the matter would not affect financial position or results, but had received no response from the regulator.
- A third-party purchaser terminated the premium-finance placement agreement effective February 1, 2015. Payments Inc. may continue receiving certain fees for two years on contracts tied to Kingstone producers. First-half placement-fee revenue was $129,160; related pretax income was $100,124.
- The filing reports no other pending legal proceeding believed likely to materially affect the financial statements and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at June 30, 2014.
Important facts for investors to verify
- Whether premium growth and improved combined ratios persist, especially after the July 2014 reinsurance changes and with a greater share of personal-lines risk retained.
- Subsequent development of loss reserves and the collectability and timing of reinsurance recoverables and contingent ceding commissions.
- Catastrophe exposure under the new treaty, including the higher retained catastrophe amount and the treaty’s coverage limits and terms.
- Any outcome or further developments in the DFS investigation, and any consequences from the premium-finance agreement termination.
- The balance-sheet share count was 7,290,868 at June 30, while the cover page reported 7,294,917 shares outstanding as of August 12, 2014; verify current shares and dilution. The board also approved a $0.05-per-share dividend for payment in September 2014.