Kingstone Companies, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY 2011. The filing provides annual results, not standalone fourth-quarter results.
Business context
Kingstone primarily underwrites property and casualty insurance through Kingstone Insurance Company (KICO), serving individuals and small businesses mainly in New York through independent agents and brokers. Pennsylvania operations remained nominal. The company also earns premium-finance placement fees. Substantially all revenue is tied to KICO.
Financial performance and position
| Metric | FY 2012 / year-end | FY 2011 / comparison |
|---|---|---|
| Total revenue | $29.08 million | $27.69 million; up 5.0% |
| Direct written premiums | $49.25 million | $40.73 million; up 20.9% |
| Net written premiums | $19.56 million | $16.30 million; up 20.0% |
| Net premiums earned | $17.22 million | $14.87 million; up 15.8% |
| Net income | $0.77 million | $2.50 million; down 69.4% |
| Basic / diluted EPS | $0.20 / $0.20 | $0.65 / $0.64 |
| Net combined ratio | 93.9% | 74.8% |
| Underwriting income | $1.05 million | $3.75 million |
| Operating cash flow | $6.38 million | $7.25 million |
| Cash and cash equivalents | $2.24 million | $0.17 million |
| Total investments | $32.08 million | $27.24 million |
| Total assets / stockholders’ equity | $93.50 million / $16.28 million | $69.70 million / $15.31 million |
| Debt, including line of credit | $1.20 million | $1.05 million |
Net loss and loss adjustment expenses were $11.23 million, up 31.1%. The net loss ratio increased to 65.3% from 57.6%; excluding catastrophe losses, it was 58.6% versus 54.6%. The net underwriting expense ratio was 28.6% versus 17.1%. Despite deterioration, the combined ratio remained below 100%.
Net cash used in investing activities was $3.96 million and net cash used in financing activities was $0.35 million. The year-end balance sheet included $30.49 million of gross loss and LAE reserves and $38.90 million of reinsurance receivables. Notes payable of $747,000 bore 9.5% interest and matured July 10, 2014; the $450,000 year-end line-of-credit balance was payable on demand. The line limit increased to $600,000 in January 2013; the company reported paying off a $550,000 outstanding balance on March 6, 2013.
Material changes and unusual items
- Superstorm Sandy drove $13.26 million of direct catastrophe losses and LAE, offset by $12.12 million of ceded recoveries, leaving $1.14 million net catastrophe losses. The storm added 6.7 percentage points to the 2012 net loss ratio.
- Sandy reduced contingent ceding commission revenue by approximately $1.92 million. Total ceding commission revenue fell 8.8% to $9.69 million, despite higher provisional commissions.
- Direct written premiums grew 20.9%, reflecting more policies in force and higher-premium policies. Effective July 1, 2012, the commercial-lines quota-share percentage decreased from 60% to 40%, increasing premiums retained by Kingstone.
- Investment income increased 34.6% to $1.02 million, while realized investment gains declined to $0.29 million from $0.52 million. BBB-rated securities represented 49.3% of available-for-sale fixed-maturity investments.
- Kingstone raised its quarterly dividend from $0.03 to $0.04 per share in August 2012. FY 2012 dividends declared totaled $533,763, versus $230,303 in 2011.
Outlook, risks and contingencies
- Management said the Sandy-related effects would be material to post-2012 operating results, including an expected decline of approximately $2 million in ceding commission revenue during the first half of 2013 and reinstatement-premium costs. It did not expect these effects to materially adversely affect financial condition.
- Reinsurance treaties were due for renewal after June 30, 2013; management warned that Sandy losses could materially affect availability, terms or pricing. Reducing quota-share reliance may raise earned premiums and reduce ceding commissions, but increases Kingstone’s retained loss exposure.
- In February 2013, New York regulators disclosed an investigation into Sandy claims practices at three insurers, including KICO, and sought information from KICO. KICO was cooperating; management said it did not expect a material adverse effect. Regulatory changes after Sandy also included accelerated claims handling requirements, insurer-funded mediation and a temporary policy termination/non-renewal moratorium.
- Management stated that current cash flows should fund working-capital needs for the next 12 months. KICO paid $700,000 in dividends to the parent during 2012 and a further $175,000 in March 2013. Insurance-regulatory limits restrict upstream dividends; the filing gives a no-prior-approval limit of approximately $1.0 million at year-end.
- KICO reported statutory net income of $1.14 million and policyholders’ surplus of $14.35 million for 2012 and was in compliance with risk-based capital requirements. Its A.M. Best rating was B+ (Good), and its Demotech rating was A (Excellent); ratings remained subject to review.
- Management identified a material weakness in financial reporting controls concerning the recording of ceded unearned premiums after the quota-share change. It concluded internal control over financial reporting and disclosure controls were not effective at December 31, 2012, and described remediation steps. Management stated the annual financial statements fairly presented the results and position.
- Loss reserves are estimates and are subject to adverse development. FY 2012 included $774,713 of prior-year incurred loss and LAE development. Reinsurance recoverables also expose the company to reinsurer credit and collection risk; two reinsurers represented 70.6% of disclosed recoverables.
- The company changed its independent auditor in January 2013, engaging Marcum LLP and dismissing EisnerAmper LLP. The filing reported no disagreements or reportable events related to the former auditor.
Important facts for investors to verify
- Subsequent Sandy claim development, reinsurance collections, reinstatement costs and the actual 2013 impact on contingent ceding commissions.
- Renewal terms, pricing and capacity for reinsurance treaties, and the extent of any planned reduction in quota-share coverage.
- Progress in remediating the ceded-unearned-premium control weakness and whether controls are subsequently found effective.
- Loss-reserve adequacy, prior-year development and concentration/credit quality of reinsurance recoverables.
- Liquidity after the reported March 2013 line-of-credit repayment, debt maturities, and KICO’s capacity to pay future dividends subject to regulatory limits.
- Outcome of the New York DFS Sandy claims-practices investigation and any related regulatory or financial consequences.