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KINGSTONE COMPANIES, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We offer property and casualty insurance products to individuals through our wholly owned subsidiary,Kingstone Insurance Company ("KICO"). KICO's insureds are located primarily in downstateNew York , consisting ofNew York City ,Long Island andWestchester County , although we are actively writing business inNew Jersey ,Rhode Island ,Connecticut andMassachusetts . We are licensed in the States ofNew York ,New Jersey ,Rhode Island ,Connecticut ,Massachusetts ,Pennsylvania ,Maine , andNew Hampshire . For the year endedDecember 31, 2021 , 79.5% of KICO's direct written premiums came from theNew York policies. In addition, through our subsidiary,Cosi Agency, Inc. ("Cosi"), a multi-state licensed general agency, we access alternative distribution channels. Cosi receives commission revenue from KICO for the policies it places with others and pays commissions to these agencies. Cosi retains the profit between the commission revenue received and the commission expense paid ("Net Cosi Revenue"). Commission expense is reduced by Net Cosi Revenue and Cosi-related operating expenses are included in other operating expenses. Cosi-related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, Cosi's expenses are not included in the calculation of our combined ratio as described below. We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO's insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings and may also generate net realized and unrealized investment gains and losses on future investments. Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are referred to as claims. In settling these claims, various loss adjustment expenses ("LAE") are incurred such as insurance adjusters' fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees' compensation and benefits. Other operating expenses include our corporate expenses as a holding company and operating expenses of Cosi. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment, occupancy and consulting costs.
Principal Revenue and Expense Items
Net premiums earned: Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written onJuly 1, 2021 , we would earn half of the premiums in 2021 and the other half in 2022. 31 Table of Contents Ceding commission revenue: Commissions on reinsurance premiums ceded to quota share treaties are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured. Net investment income and net gains (losses) on investments: We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities, and other investments. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet while our equity securities and other investments report changes in fair value through earnings. See Note 2 in the accompanying consolidated financial statements for further discussion over our accounting policies following Item 16 of this Annual Report.
Other income: We recognize installment fee income and fees charged to reinstate
a policy after it has been cancelled for non-payment.
Loss and loss adjustment expenses incurred: Loss and LAE incurred represent our largest expense item, and for any given reporting period include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability. Commission expenses and other underwriting expenses: Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees. Other operating expenses: Other operating expenses include the corporate expenses of our holding company,Kingstone Companies, Inc. , and operating expenses of Cosi. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment costs, occupancy costs
and consulting costs.
Stock-based compensation: Non-cash equity compensation includes the fair value
of stock grants issued to our directors, officers and employees, and
amortization of stock options issued to the same.
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Depreciation and amortization: Depreciation and amortization includes the
amortization of intangibles related to the acquisition of KICO, depreciation of
the real estate used in KICO's operations, as well as depreciation of capital
expenditures for information technology projects, office equipment and
furniture.
Interest expense: Interest expense represents amounts we incur on our
outstanding indebtedness at the applicable interest rates. Interest expense also
includes amortization of debt discount and issuance costs.
Income tax expense: We incur federal income tax expense on our consolidated
statement of operations as well as state income tax expense for our
non-insurance underwriting subsidiaries.
Product Lines
Our product lines include the following:
Personal lines: Our largest line of business is personal lines, consisting of
homeowners, dwelling fire, cooperative/condominium, renters, and personal
umbrella policies.
Commercial liability: ThroughJuly 2019 , we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan's liability policies for small independent contractors with smaller sized workforces. In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies. InMay 2019 , due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business. InJuly 2019 , due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks. In-force policies as ofJuly 31, 2019 for these lines were non-renewed at the end of their annual terms. As ofDecember 31, 2021 and 2020, there were no commercial liability policies in-force. As ofDecember 31, 2021 , these expired policies represent approximately 20.2% of loss and LAE reserves net of reinsurance recoverables. See discussion below under "Additional Financial Information". Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.
Other: We write canine legal liability policies and have a small participation
in mandatory state joint underwriting associations.
Key Measures
We utilize the following key measures in analyzing the results of our insurance
underwriting business:
Net loss ratio: The net loss ratio is a measure of the underwriting
profitability of an insurance company's business. Expressed as a percentage,
this is the ratio of net losses and LAE incurred to net premiums earned.
Net underwriting expense ratio: The net underwriting expense ratio is a measure
of an insurance company's operational efficiency in administering its business.
Expressed as a percentage, this is the ratio of the sum of acquisition costs
(the most significant being commissions paid to our producers) and other
underwriting expenses less ceding commission revenue less other income to net
premiums earned.
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Net combined ratio: The net combined ratio is a measure of an insurance
company's overall underwriting profit. This is the sum of the net loss and net
underwriting expense ratios. If the net combined ratio is at or above 100
percent, an insurance company cannot be profitable without investment income,
and may not be profitable if investment income is insufficient.
Underwriting income: Underwriting income is net pre-tax income attributable to
our insurance underwriting business before investment activity. It excludes net
investment income, net realized gains from investments, and depreciation and
amortization (net premiums earned less expenses included in combined ratio).
Underwriting income is a measure of an insurance company's overall operating
profitability before items such as investment income, depreciation and
amortization, interest expense and income taxes.
Critical Accounting Policies and Estimates
Our consolidated financial statements include the accounts ofKingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of similar companies. We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred income taxes, the impairment of investment securities, and the valuation of stock-based compensation. See Note 2 to the Consolidated Financial Statements following Item 16 of this Annual Report. 34 Table of Contents
Consolidated Results of Operations
The following table summarizes the changes in the results of our operations for
the periods indicated:
Years ended December 31,
($ in thousands) 2021 2020 Change Percent
Revenues
Direct written premiums $ 181,665 $ 169,318 $ 12,347 7.3 %
Assumed written premiums - - - na %
181,665 169,318 12,347 7.3 %
Ceded written premiums
Ceded to quota share treaties in force
during the period 578 33,250 (32,672 ) (98.3 )%
Unearned premiums ceded to new quota na %
share treaty (1) 22,932 -
22,932
Return of premiums previously ceded to na % prior quota share treaties (1) - (17,440 )
17,440
Ceded to quota share treaties 23,510 15,810 7,700 48.7 % Ceded to excess of loss treaties 2,613 2,007 606 30.2 % Ceded to catastrophe treaties 26,787 24,438 2,349 9.6 % Total ceded written premiums 52,910 42,255 10,655 25.2 % Net written premiums 128,755 127,063 1,692 1.3 % Change in unearned premiums Direct and assumed (7,750 ) 374 (8,124 ) na % Ceded to quota share treaties 22,877 (19,356 ) 42,233 na % Change in net unearned premiums 15,127 (18,982 ) 34,109 na % Premiums earned Direct and assumed 173,915 169,692 4,223 2.5 % Ceded to reinsurance treaties (30,033 ) (61,611 ) 31,578 51.3 % Net premiums earned 143,882 108,081 35,801 33.1 % Ceding commission revenue 90 14,202 (14,112 ) (99.4 )% Net investment income 6,621 6,506 115 1.8 % Net gains on investments 9,787 1,591 8,196 515.1 % Other income 851 990 (139 ) (14.0 )% Total revenues 161,231 131,370 29,861 22.7 % Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses
excluding the effect of catastrophes 87,308 72,842 14,466
19.9 % Losses from catastrophes (2) 15,632 4,683
10,949 233.8 %
Total direct and assumed loss and loss adjustment expenses 102,940 77,525 25,415 32.8 % Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 155 18,013
(17,858 ) (99.1 )%
Losses from catastrophes (2) 813 1,206
(393 ) (32.6 )%
Total ceded loss and loss adjustment expenses 968 19,219 (18,251 ) (95.0 )% Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 87,153 54,829 32,324 59.0 % Losses from catastrophes (2) 14,819 3,477 11,342 326.2 % Net loss and loss adjustment expenses 101,973 58,306 43,666 74.9 % Commission expense 33,114 31,828 1,286 4.0 % Other underwriting expenses 26,254 25,425 829 3.3 % Other operating expenses 4,183 4,283 (100 ) (2.3 )% Depreciation and amortization 3,290 2,865 425 14.8 % Interest expense 1,826 1,826 - - % Total expenses 170,640 124,533 46,106 37.0 % Loss before taxes (9,409 ) 6,837 (16,246 ) 237.6 % Income tax benefit (2,031 ) (2,260 ) 229 10.1 % Net (loss) income$ (7,378 ) $ 9,097 $ (16,475 ) na % (Columns in the table above may not sum to totals due to rounding)
(1) Effective
expired on a cut-off basis. Effective
30% quota share treaty.
(2) The years ended
are defined as losses from an event for which a catastrophe bulletin and
related serial number has been issued by the Property Claims Services (PCS)
unit of the
issued for events that cause more than
and affect a significant number of policyholders and insurers.
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Years ended December 31,
Percentage
2021 2020 Point Change Percent Change
Key ratios:
Net loss ratio 70.9 % 61.5 % 9.4 15.3 %
Net underwriting expense
ratio 40.6 % 38.9 % 1.7 4.4 %
Net combined ratio 111.5 % 100.4 % 11.1 11.1 %
Direct Written Premiums
Direct written premiums during the year ended December 31, 2021 ("Year Ended
2021") were $181,665,000 compared to $169,318,000 during the year ended December
31, 2020 ("Year Ended 2020"). The increase of $12,347,000 , or 7.3%, was
primarily due an increase in premiums from our personal lines business. Direct
written premiums from our personal lines business for Year Ended 2021 were
$171,720,000 , an increase of $9,536,000 , or 5.9%, from $162,184,000 in Year
Ended 2020. Direct written premiums from our livery physical damage business for
Year Ended 2021 were $9,717,000 , an increase of $2,661,000 , or 37.7%, from
$7,056,000 in Year Ended 2020. The increase in livery physical damage direct
written premiums was due to the declining effect of the COVID-19 pandemic in our
geographic area.
Beginning in 2017 we started writing homeowners policies in New Jersey . Through
2019 we expanded to Rhode Island , Massachusetts and Connecticut . We refer to our
New York business as our "Core" business and the business outside of New York as
our "Expansion" business. Direct written premiums from our Expansion business
were $37,276,000 in Year Ended 2021 compared to $33,914,000 in Year Ended 2020.
Direct written premiums from our Core business were $144,385,000 in Year Ended
2021 compared to $135,455,000 in Year Ended 2020.
Net Written Premiums and Net Premiums Earned
EffectiveDecember 31, 2021 , we entered into a quota share reinsurance treaty for our personal lines business covering the period fromDecember 31, 2021 throughJanuary 1, 2023 ("2021/2023 Treaty").EffectiveDecember 15, 2019 , we entered into a quota share reinsurance treaty for our personal lines business covering the period fromDecember 15, 2019 throughDecember 30, 2020 ("2019/2020 Treaty"). EffectiveDecember 31, 2020 , the 2019/2020 Treaty expired on a cut off basis; this treaty was not renewed. In addition to the 2019/2020 Treaty, our personal lines quota share reinsurance treaty in effect for Year Ended 2020 also included the run-off of the personal lines quota share treaty ("2018/2019 Treaty") that expired onJune 30, 2019 . The run-off covered the period fromJuly 1, 2019 throughJune 30, 2020 ("2019/2020 Run-Off"). The following table describes the quota share reinsurance ceding rates in effect during Year Ended 2021 and Year Ended 2020. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow. 36 Table of Contents Years ended December 31, 2021 2020 Quota share reinsurance rates Personal lines 2021/2023 Treaty 30% (1 ) n/a 2019/2020 Treaty n/a 25% (2 ) 2018/2019 Treaty n/a 10% (3 )
(1) The 2021/2023 Treaty is effective
reinsurance rate of 30%.
(2) The 2019/2020 Treaty was effective from
30, 2020 with a quota share reinsurance rate of 25%.
(3) The 2018/2019 Treaty expired on a run-off basis from
June 30, 2020 .
Net written premiums increased$1,692,000 , or 1.3%, to$128,755,000 in Year Ended 2021 from$127,063,000 in Year Ended 2020. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). In Year Ended 2021, our premiums ceded under quota share treaties decreased by$32,672,000 in comparison to ceded premiums in Year Ended 2020 (see table above). Our personal lines business was subject to the 2019/2020 Treaty fromDecember 15, 2019 throughDecember 30, 2020 . Our personal lines business was subject to the 2018/2019 Treaty throughJune 30, 2019 . FollowingJune 30, 2019 , any earned premium and associated claims for policies still in force continued to be ceded under the 10% quota share rate until such policies expired (run-off) over the next year. The 2019/2020 run-off period was fromJuly 1, 2019 throughJune 30, 2020 and there was no return of unearned premiums under this arrangement.
Excess of loss reinsurance treaties
An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Year Ended 2021, our ceded excess of loss reinsurance premiums increased by$606,000 over the comparable ceded premiums for Year Ended 2020. The increase was due to an increase in subject premiums and increase in rate.
Catastrophe reinsurance treaty
Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Year Ended 2021, our premiums ceded under catastrophe treaties increased by$2,349,000 over the comparable ceded premiums in Year Ended 2020. The change was due to an increase in reinsurance rates effectiveJuly 1, 2020 , partially offset by a decrease in our limit effectiveJuly 1, 2020 . ThroughJune 30, 2020 , our ceded catastrophe premiums were paid based on the total direct written premiums subject to the catastrophe reinsurance treaty. EffectiveJuly 1, 2020 , and continuing throughJune 30, 2021 , our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as ofAugust 31, 2020 . EffectiveJuly 1, 2021 , and continuing throughJune 30, 2022 , our ceded catastrophe premiums will be paid based on the total insured value of our risks as ofAugust 31, 2021 . 37 Table of Contents Net premiums earned Net premiums earned increased$35,801,000 , or 33.1%, to$143,882,000 in Year Ended 2021 from$108,081,000 in Year Ended 2020. The increase was due to the expiration of both the 2019/2020 Treaty onDecember 30, 2020 on a cut-off basis and the 2019/2020 Run-Off as ofJune 30, 2020 . Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Years ended December 31,
($ in thousands) 2021 2020 Change Percent
Provisional ceding commissions earned
(98.3 )% Contingent ceding commissions earned (144 ) 83 (227 )
n/a %
Total ceding commission revenue
(99.4 )% Ceding commission revenue was$90,000 in Year Ended 2021 compared to$14,202,000 in Year Ended 2020. The decrease of$14,112,000 was due to a decrease in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.
Provisional Ceding Commissions Earned
ThroughDecember 30, 2020 , we received a provisional ceding commission based on ceded written premiums. The$13,885,000 decrease in provisional ceding commissions earned was due to the expiration of both the 2019/2020 Treaty onDecember 30, 2020 on a cut-off basis and the 2019/2020 Run-Off as ofJune 30, 2020 .
Contingent Ceding Commissions Earned
The structure of the 2019/2020 Treaty and 2019/2020 Run-Off called for a fixed provisional ceding commission and there was not an opportunity to earn additional contingent ceding commissions under those treaties. The amount of contingent ceding commissions we are eligible to receive under our prior years' quota share treaties is subject to change based on losses incurred related to claims with accident dates beforeJuly 1, 2017 . Under our prior years' quota share treaties, we received a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive. Net Investment Income Net investment income was$6,621,000 in Year Ended 2021compared to$6,506,000 in Year Ended 2020, an increase of$115,000 , or 1.8%. The average yield on invested assets was 3.25% as ofDecember 31, 2021 compared to 3.39% as ofDecember 31, 2020 .
Cash and invested assets were
invested assets was primarily attributable to an increase in operating cash
flows for the Year Ended 2021.
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Net Gains on Investments
Net gains on investments were $9,787,000 in Year Ended 2021 compared to
$1,591,000 in Year Ended 2020. Unrealized gains on our equity securities and
other investments in Year Ended 2021 were $2,469,000 , compared to $758,000 in
Year Ended 2020. Realized gains on sales of investments were $7,317,000 in Year
Ended 2021 compared to $832,000 in Year Ended 2020.
Other Income
Other income was $851,000 in Year Ended 2021 compared to $990,000 in Year Ended
2020. The decrease of $139,000 , or 14.0%, was primarily due to not having any
active commercial lines policies in 2021 to generate fees.
Net Loss and LAE
Net loss and LAE was $101,973,000 in Year Ended 2021 compared to $66,431,000 in
Year Ended 2020. The net loss ratio was 70.9% in Year Ended 2021 compared to
61.5% in Year Ended 2020, an increase of 9.4 percentage points.
The following graph summarizes the changes in the components of net loss ratio
for the periods indicated, along with the comparable components excluding
commercial lines business:
[[Image Removed: king_10kimg766.jpg]]
(Percent components may not sum to totals due to rounding)
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The loss ratio during Year Ended 2021 was higher than Year Ended 2020 due to an
elevated frequency of liability claims, as well as a higher impact from large
fire losses and water damage claims. The elevated reported liability claim
frequency began in early 2021 for both Homeowners and Dwelling Fire lines.
Liability frequency has improved since June 2021 for Homeowners, our largest
line of business. Dwelling Fire Liability frequency was still higher than the
historical average in the fourth quarter but has improved compared to the first
three quarters of the year. The high liability frequency is suspected to be
related to the COVID-19 pandemic and is expected to return to a more typical
level as people return to work. The impact of water damage claims during Year
Ended 2021 was higher than the prior year, driven by a few large losses that
emerged in the fourth quarter.
The impact of catastrophe losses was high for Year Ended 2021. The winter was
mild, but there were seven catastrophe events during the second half of 2021,
including three named storms, Elsa, Henri and Ida. Ida was one of the largest
catastrophe events in the company's history, resulting in over 1,500 reported
claims. The estimated net impact of Ida is $10,300,000 , or a 7.1-point impact on
the Year Ended 2021 loss ratio. The total impact of all catastrophe events on
the loss ratio was 10.3 points for Year Ended 2021. This compares to a
10.7-point impact from catastrophe events for Year Ended 2020, which also had a
mild winter but was heavily impacted by Tropical Storm Isaias in the third
quarter.
Prior year development was stable during Year Ended 2021. There was an overall
favorable development of
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
Commission Expense
Commission expense was $33,114,000 in Year Ended 2021 or 19.0% of
direct earned premiums. Commission expense was $31,828,000 in Year Ended 2020 or
18.8% of direct earned premiums. The increase of $1,286,000 was primarily due to
increases in both the annual contingent commissions and direct earned premiums
in Year Ended 2021 as compared to Year Ended 2020.
Other Underwriting Expenses
Other underwriting expenses were
compared to
3.3%, was primarily due to an initiative to reduce expenses with the use of
technology.
Our largest single component of other underwriting expenses is salaries
and employment costs, with costs of $10,189,000 in Year Ended 2021 compared to
$10,830,000 in Year Ended 2020. The decrease of $641,000 , or 5.9%, compares
favorably with the 7.3% increase in direct written premiums. The decrease in
employment costs was attributable to staff reductions.
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Our net underwriting expense ratio in Year Ended 2021 was 40.6%
compared to 38.9% in Year Ended 2020. The following table shows the individual
components of our net underwriting expense ratio for the periods indicated:
Years ended
December 31, Percentage
2021 2020 Point Change
Other underwriting expenses
Employment costs 7.1 % 10.0 % (2.9 )
Underwriting fees (inspections/surveys) 1.3 2.6
(1.3 ) IT expenses 3.2 2.6 0.6 Profesional fees 1.2 1.0 0.2 Other expenses 5.5 7.4 (1.9 )
Total other underwriting expenses 18.3 23.6
(5.3 ) Commission expense 23.0 29.4 (6.4 ) Ceding commission revenue Provisional (0.2 ) (13.1 ) 12.9 Contingent 0.1 (0.1 ) 0.2
Total ceding commission revenue (0.1 ) (13.2 )
13.1 Other income (0.6 ) (0.9 ) 0.3
Net underwriting expense ratio 40.6 % 38.9 %
1.7
The overall 13.1 percentage point decrease in the benefit from ceding
commissions in Year Ended 2021 was driven by the reduction in provisional ceding
commission revenue due to the expiration of the 2019/2020 Treaty on December 30,
2020 . The components of our net underwriting expense ratio related to other
underwriting expenses and commissions decreased in all categories except for IT
expenses and professional fees. The components that decreased, did so due to
more retention, given the reduction of ceded premiums after the expiration of
the 2019/2020 Treaty on December 30, 2020 . IT expenses and professional fees
increased in Year Ended 2021 due to our Kingstone 2.0 effort to modernize
systems and create a more sophisticated suite of products for our customers.
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Other Operating Expenses
Other operating expenses, related to the expenses of our holding
company and Cosi, were
Year Ended 2020. The following table shows a breakdown of the significant
components of other operating expenses for the periods indicated:
Years ended
December 31,
($ in thousands) 2021 2020 Change Percent
Other operating expenses
Employement costs $ 795 $ 757 $ 38 5.0 %
Bonuses - 15 (15 ) (100.0 )
Equity compensation 1,905 1,770 135 7.6
Professional 348 629 (281 ) (44.7 )
Directors fees 327 365 (38 ) (10.4 )
Insurance 212 240 (28 ) (11.7 )
Other expenses 597 507 89 17.6
Total other operating expenses
(Columns in the table above may not sum to totals due to rounding)
The decrease in Year Ended 2021 of $100,000 , or 2.3%, as compared to
Year Ended 2020 was primarily due to a decrease in professional fees. This aforementioned decrease was partially offset by an increase in employment costs due to an increase in equity compensation, and compensation paid pursuant to a relinquishment agreement withDale A. Thatcher , our former Chef Executive Officer (see Note 17 to the consolidated financial statements).
Depreciation and Amortization
Depreciation and amortization was$3,290,000 in Year Ended 2021 compared to$2,865,000 in Year Ended 2020. The increase of$425,000 , or 14.8%, in depreciation and amortization was primarily due to depreciation of new system platforms for policy and claims management and newly purchased assets used
to upgrade our other systems. Interest Expense
Interest expense in Year Ended 2021 and Year Ended 2020 was
incurred interest expense in connection with our
long-term debt in
Income Tax Benefit
Income tax benefit in Year Ended 2021 was$2,031,000 , which resulted in an effective tax expense rate of 21.6%. Income tax benefit in Year Ended 2020 was$2,260,000 , which resulted in an effective tax expense rate of 175.5%. Loss before taxes was$9,409,000 in Year Ended 2021 compared to loss before taxes of$1,288,000 in Year Ended 2020. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2020 and 2019 NOLs. We elected on our 2020 and 2019 federal income tax returns to carry back the entire annual 2020 NOL of$5,715,000 to tax year 2015 and to carry back the 2019 NOL of$9,737,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019 and 2020. The$2,029,000 tax benefit of carrying back these NOLs to 2014 and 2015 was recognized in Year Ended 2020. Net (Loss) Income
Net loss was
Year Ended 2020. The decrease in net income of
circumstances described above.
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Additional Financial Information
We operate our business as one segment, property and casualty insurance. Within
this segment, we offer a wide array of property and casualty policies to our
producers. The following table summarizes gross and net premiums written, net
premiums earned, and loss and loss adjustment expenses by major product type,
which were determined based primarily on similar economic characteristics and
risks of loss.
Years ended December 31,
2021 2020
Gross premiums written:
Personal lines $ 171,719,993 $ 162,184,437
Livery physical damage 9,716,658 7,055,668
Other(1) 229,383 245,842
Total without commercial lines 181,666,034
169,485,947
Commercial lines (in run-off effective July 2019)(2) (856 ) (168,043 ) Total gross premiums written$ 181,665,178 $
169,317,904 Net premiums written: Personal lines(3)$ 118,842,870 $ 120,362,688 Livery physical damage 9,716,658 7,055,668 Other(1) 196,812 218,853
Total without commercial lines 128,756,340
127,637,209
Commercial lines (in run-off effective July 2019)(2) (856 )
(574,688 ) Total net premiums written$ 128,755,484 $ 127,062,521 Net premiums earned: Personal lines(3)$ 135,738,484 $ 96,463,184 Livery physical damage 7,909,791 8,706,984 Other(1) 234,300 198,853
Total without commercial lines 143,882,575
105,369,021
Commercial lines (in run-off effective July 2019)(2) (856 )
2,711,608
Total net premiums earned$ 143,881,719 $
108,080,629
Net loss and loss adjustment expenses(4): Personal lines$ 92,475,850 $ 56,312,702 Livery physical damage 4,235,255 2,641,801 Other(1) 1,368,343 27,425
Unallocated loss adjustment expenses 3,696,380
4,304,095
Total without commercial lines 101,775,828
63,286,023
Commercial lines (in run-off effective July 2019)(2) 196,768
3,145,049
Total net loss and loss adjustment expenses$ 101,972,596 $
66,431,072 Net loss ratio(4): Personal lines 68.1 % 58.4 % Livery physical damage 53.5 % 30.3 % Other(1) 584.0 % 13.8 %
Total without commercial lines 70.7 %
60.1 %
Commercial lines (in run-off effective July 2019)(2) -22986.9 %
116.0 % Total 70.9 % 61.5 %
(1) "Other" includes, among other things, premiums and loss and loss adjustment
expenses from our participation in a mandatory state joint underwriting
association and loss and loss adjustment expenses from commercial auto.
(2) In
Liability risks. See discussions above regarding the discontinuation of this
line of business.
(3) See discussions above with regard to "Net Written Premiums and Net Premiums
Earned", as to changes in quota share ceding rates effective
2021 and 2020,
(4) See discussions above with regard to "Net Loss and LAE", as to catastrophe
losses in the years endedDecember 31, 2021 and 2020. 43 Table of Contents
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the years
ended
Years ended
December 31,
2021 2020
Revenues
Net premiums earned $ 143,881,719 $ 108,080,629
Ceding commission revenue 89,681 14,202,353
Net investment income 6,621,392 6,504,983
Net gains on investments 9,627,948 1,549,099
Other income 849,155 970,595
Total revenues 161,069,895 131,307,659
Expenses
Loss and loss adjustment expenses 101,972,596 66,431,072
Commission expense 33,114,103 31,828,174
Other underwriting expenses 26,254,143 25,424,779
Depreciation and amortization 3,150,489
2,732,128
Total expenses 164,491,331
126,416,153
Loss (income) from operations (3,421,436 )
4,891,506
Income tax (benefit) expense (877,002 )
200,339 Net (loss) income$ (2,544,434 ) $ 4,691,167 Key Measures: Net loss ratio 70.9 % 61.5 %
Net underwriting expense ratio 40.6 % 38.9 % Net combined ratio 111.5 %
100.4 %
Reconciliation of net underwriting expense ratio: Acquisition costs and other underwriting expenses$ 59,368,246 $ 57,252,953 Less: Ceding commission revenue (89,681 ) (14,202,353 ) Less: Other income (849,155 ) (970,595 ) Net underwriting expenses$ 58,429,410 $ 42,080,005 Net premiums earned$ 143,881,719 $ 108,080,629
Net Underwriting Expense Ratio 40.6 %
38.9 %
44
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An analysis of our direct, assumed and ceded earned premiums, loss and
loss adjustment expenses, and loss ratios is shown below:
Direct Assumed Ceded Net
Year ended December 31,
2021
Written premiums $ 181,665,178 $ - $ (52,909,694 ) $ 128,755,484
Change in unearned premiums (7,750,334 ) - 22,876,569 15,126,235
Earned premiums $ 173,914,844 $ - $
(30,033,125 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 87,308,372 $ -$ (155,322 ) $ 87,153,050 Catastrophe loss 15,632,444 - (812,898 ) 14,819,546 Loss and loss adjustment expenses$ 102,940,816 $ -$ (968,220 ) $ 101,972,596 Loss ratio excluding the effect of catastrophes 50.2 % 0.0 % 0.5 % 60.6 % Catastrophe loss 9.0 % 0.0 % 2.7 % 10.3 % Loss ratio 59.2 % 0.0 % 3.2 % 70.9 % Year ended December 31, 2020 Written premiums$ 169,317,904 $ -$ (42,255,383 ) $ 127,062,521 Change in unearned premiums 373,966 - (19,355,858 ) (18,981,892 ) Earned premiums$ 169,691,870 $ - $
(61,611,241 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 72,841,957 $ -$ (18,012,645 ) $ 54,829,312 Catastrophe loss 21,540,120 - (9,938,360 ) 11,601,760 Loss and loss adjustment expenses$ 94,382,077 $ - $
(27,951,005 )
Loss ratio excluding the
effect of catastrophes 42.9 % 0.0 % 29.2 % 50.8 %
Catastrophe loss 12.7 % 0.0 % 16.2 % 10.7 %
Loss ratio 55.6 % 0.0 % 45.4 % 61.5 %
45
Table of Contents
The key measures for our insurance underwriting business for the years ended
Years ended
December 31,
2021 2020
Net premiums earned $ 143,881,719 $ 108,080,629
Ceding commission revenue 89,681 14,202,353
Other income 849,155 970,595
Loss and loss adjustment expenses (1) 101,972,596
66,431,072
Acquisition costs and other underwriting expenses: Commission expense 33,114,103
31,828,174
Other underwriting expenses 26,254,143
25,424,779
Total acquisition costs and other underwriting expenses 59,368,246 57,252,953 Underwriting loss$ (16,520,287 ) $ (430,448 ) Key Measures :
Net loss ratio excluding the effect of catastrophes 60.6 % 50.8 % Effect of catastrophe loss on net loss ratio (1) 10.3 % 10.7 % Net loss ratio 70.9 %
61.5 %
Net underwriting expense ratio excluding the effect of catastrophes 40.6 % 38.9 % Effect of catastrophe loss on net underwriting expense ratio 0.0 % 0.0 % Net underwriting expense ratio 40.6 %
38.9 %
Net combined ratio excluding the effect of catastrophes 101.2 % 89.7 % Effect of catastrophe loss on net combined ratio (1) 10.3 % 10.7 % Net combined ratio 111.5 %
100.4 %
Reconciliation of net underwriting expense ratio: Acquisition costs and other underwriting expenses$ 59,368,246 $ 57,252,953 Less: Ceding commission revenue (89,681 )
(14,202,353 )
Less: Other income (849,155 ) (970,595 )
$ 58,429,410 $ 42,080,005
Net earned premium $ 143,881,719 $ 108,080,629
Net Underwriting Expense Ratio 40.6 %
38.9 %
(1) For the years ended
catastrophe losses and loss adjustment expenses of$14,819,546 and$11,601,760 , respectively. 46 Table of Contents Investments Portfolio Summary
The following table presents a breakdown of the amortized cost, aggregate
estimated fair value and unrealized gains and losses by investment type as of
December 31, 2021
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
Political
subdivisions
of States,
Territories
and
Possessions $ 17,236,750 $ 246,748 $ (197,984 ) $ - $ 17,285,514 10.9 %
Corporate and
other bonds
Industrial and
miscellaneous 80,534,769 2,603,411 (126,926 ) - 83,011,254 52.5 %
Residential
mortgage and
other asset
backed
securities (1) 58,036,959 355,985 (489,258 ) (120,344 ) 57,783,342 36.6 %
Total
fixed-maturity
securities$ 155,808,478 $ 3,206,144 $ (814,168 ) $ (120,344 ) $ 158,080,110 100.0 % December 31, 2020 Cost or Gross Gross Unrealized Losses Estimated % of Amortized Unrealized Less than 12 More than 12 Fair Estimated Category Cost Gains Months
Months Value Fair Value U.S. Treasury securities and obligations of U.S. government corporations and
agencies$ 3,020,710 $ 29,190 $ -
$ -$ 3,049,900 1.9 % Political subdivisions of States, Territories and
Possessions 5,287,561 355,541 - - 5,643,102 3.6 % Corporate and other bonds Industrial and miscellaneous 108,573,422 11,634,123 (13,216 ) - 120,194,329 76.3 % Residential mortgage and other asset backed securities (1) 28,163,891 617,368 (7,371 ) (111,947 ) 28,661,941 18.2 %
Total
fixed-maturity
securities
$ (111,947 ) $ 157,549,272 100.0 %
(1) As of
securities as eligible collateral in a designated custodian account related
to its membership in the
Note 9, in the accompanying consolidated financial statements following Item
16 of this Annual Report). As of
securities pledged to FHLBNY. The eligible collateral would be pledged to
FHLBNY if KICO drew an advance from the FHLBNY credit line. As of December
31, 2020, the estimated fair value of the eligible investments was
approximately $11,391,000 . KICO will retain all rights regarding all
securities if pledged as collateral. As of December 31, 2020 , there was no
outstanding balance on the FHLBNY credit line.
Equity Securities
The following table presents a breakdown of the cost, estimated fair value, and
gross gains and losses of investments in equity securities as of December 31,
2021 and 2020:
December 31, 2021
Estimated % of
Gross Gross Fair Estimated
Category Cost Gains Losses Value Fair Value
Preferred stocks
57.6 % Common stocks and exchange traded mutual funds 15,451,160 1,573,653 (179,712 ) 16,845,101 42.4 % Total$ 37,470,669 $ 2,580,662 $ (364,329 ) $ 39,687,002 100.0 % December 31, 2020 Estimated % of Gross Gross Fair Estimated Category Cost Gains Losses Value Fair Value
Equity Securities : Preferred stocks$ 18,097,942 $ 853,277 $ (426,942 ) $ 18,524,277 53.8 % Common stocks and exchange traded mutual funds 14,473,224 1,820,512 (404,700 ) 15,889,036 46.2 % Total$ 32,571,166 $ 2,673,789 $ (831,642 ) $ 34,413,313 100.0 % Other Investments Pursuant to the definition of "Fair Value Measurement," set forth in the Accounting Standards Codification 820 "Fair Value Measurement" ("ASC 820"), an entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of ASC 820 using the net asset value ("NAV") per share (or its equivalent) of the investment. The following table presents a breakdown of the cost, estimated fair value, and gross gain of our other investments as ofDecember 31, 2021 and 2020: December 31, 2021 December 31, 2020 Gross Estimated Gross Estimated
Category Cost Gains Fair Value Cost
Gains Fair Value
Other
Investments:
Hedge fund
$ 1,369,245 $ 3,368,626 Real estate limited - - partnership - 150,000 - 150,000 Total$ 3,999,381 $ 3,562,034 $ 7,561,415 $ 2,149,381
$ 1,369,245 $ 3,518,626 47 Table of Contents
The following table presents a breakdown of the amortized cost, aggregate
estimated fair value and unrealized gains and losses by investment type as of
December 31, 2021
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12
More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
Held-to-Maturity
Securities:U.S. Treasury securities$ 729,642 $ 209,633 $ - $ -$ 939,275 10.7 % Political subdivisions of States, Territories and Possessions 998,239 22,856 - - 1,021,095 11.7 % Exchange traded debt 304,111 85 (13,921 ) 290,275 3.3 % Corporate and other bonds Industrial and miscellaneous 6,234,342 280,951 (12,779 ) - 6,502,514 74.3 % Total$ 8,266,334 $ 513,525 $ (26,700 ) $ -$ 8,753,159 100.0 % December 31, 2020 Cost or Gross Gross Unrealized Losses Estimated % of Amortized Unrealized Less than 12 More than 12 Fair Estimated Category Cost Gains Months Months Value Fair Value U.S. Treasury securities$ 729,595 $ 319,714 $ - $ -$ 1,049,309 12.8 % Political subdivisions of States, Territories and Possessions 998,428 50,917 - - 1,049,345 12.8 % Corporate and other bonds Industrial and miscellaneous 5,640,792 455,378 - - 6,096,170 74.4 % Total$ 7,368,815 $ 826,009 $ - $ -$ 8,194,824 100.0 %
Held-to-maturity
states' minimum fund requirements.
48
Table of Contents
A summary of the amortized cost and estimated fair value of our investments in held-to-maturity securities by contractual maturity as ofDecember 31, 2021
and
2020 is shown below:
December 31, 2021 December 31, 2020
Amortized Estimated Amortized Estimated
Remaining Time to Maturity Cost Fair Value Cost
Fair Value Less than one year$ 994,712 $ 1,008,180 $ - $ - One to five years 1,205,829 1,290,465 2,598,193 2,777,936 Five to ten years 1,513,942 1,648,808 1,502,603 1,727,316 More than 10 years 4,551,851 4,805,706 3,268,019 3,689,572 Total$ 8,266,334 $ 8,753,159 $ 7,368,815 $ 8,194,824
Credit Rating of
The table below summarizes the credit quality of our available-for-sale
fixed-maturity securities as of
and Poor's (or, if unavailable from Standard and Poor's, then Moody's or Fitch):
December 31, 2021
Estimated Percentage of Estimated Percentage of
Fair Estimated Fair Estimated
Value Fair Value Value Fair Value
Rating
U.S. Treasury
securities $ - 0.0 % $ 3,049,900 1.9 %
Corporate and
municipal bonds
AAA 1,321,809 0.8 % 1,453,924 0.9 %
AA 11,532,572 7.3 % 3,572,164 2.3 %
A 36,693,911 23.2 % 23,989,619 15.2 %
BBB 47,844,195 30.3 % 95,814,824 60.9 %
Non rated 1,026,001 0.6 % 1,006,901 0.6 %
Total corporate
and municipal
bonds 98,418,488 62.2 % 125,837,432 79.9 %
Residential
mortgage backed
securities
AAA 17,350,192 11.0 % 5,467,075 3.5 %
AA 34,241,907 21.7 % 18,865,749 12.0 %
A 4,053,981 2.6 % 2,451,635 1.6 %
BBB 24,254 0.0 % 50,276 0.0 %
CCC 664,628 0.4 % 960,042 0.6 %
CC 125,412 0.1 % 62,029 0.0 %
C - 0.0 % 15,161 0.0 %
D 55,306 0.0 % 119,144 0.1 %
Non rated 3,145,942 2.0 % 670,829 0.4 %
Total residential
mortgage backed
securities 59,661,622 37.8 % 28,661,940 18.2 %
Total $ 158,080,110 100.0 % $ 157,549,272 100.0 %
49
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The table below details the average yield by type of fixed-maturity security as
of
December 31, December 31,
Category 2021 2020
U.S. Treasury securities and obligations of U.S.
government corporations and agencies 3.06 %
2.59 %
Political subdivisions of States, Territories and Possessions 2.77 %
3.05 %
Corporate and other bonds Industrial and miscellaneous 3.23 %
3.52 %
Residential mortgage backed securities 2.77 %
1.18 % Total 2.92 % 3.07 %
The table below lists the weighted average maturity and effective duration in
years on our fixed-maturity securities as of
December 31, 2021 December 31 ,
2020
Weighted average effective maturity 5.7
5.2
Weighted average final maturity 10.2
6.6 Effective duration 4.8 4.7 Fair Value Consideration
As disclosed in Note 4 to the condensed consolidated financial statements, with
respect to "Fair Value Measurements," we define fair value as the price that
would be received to sell an asset or paid to transfer a liability in a
transaction involving identical or comparable assets or liabilities between
market participants (an "exit price"). The fair value hierarchy distinguishes
between inputs based on market data from independent sources ("observable
inputs") and a reporting entity's internal assumptions based upon the best
information available when external market data is limited or unavailable
("unobservable inputs"). The fair value hierarchy prioritizes fair value
measurements into three levels based on the nature of the inputs. Quoted prices
in active markets for identical assets have the highest priority ("Level 1"),
followed by observable inputs other than quoted prices including prices for
similar but not identical assets or liabilities ("Level 2"), and unobservable
inputs, including the reporting entity's estimates of the assumption that market
participants would use, having the lowest priority ("Level 3"). As of December
31, 2021 and December 31, 2020 , 62% and 81%, respectively, of the investment
portfolio recorded at fair value was priced based upon quoted market prices.
50
Table of Contents
The table below summarizes the gross unrealized losses of our fixed-maturity
securities available-for-sale by length of time the security has continuously
been in an unrealized loss position as of December 31, 2021 and 2020:
December 31, 2021
Less than 12 months 12 months or more Total
Estimated No. of Estimated No. of Estimated
Fair Unrealized Positions Fair Unrealized Positions Fair Unrealized
Category Value Losses Held Value Losses Held Value Losses
Fixed-Maturity Securities :
U.S. Treasury
securities and obligations
of U.S. government
corporations and agencies $ - $ - - $ - $ - - $ - $ -
Political subdivisions
of States, Territories and
Possessions 6,768,123 (197,984 ) 5 - - - 6,768,123 (197,984 )
Corporate and other bonds
industrial and
miscellaneous 17,593,707 (126,926 ) 15 - - - 17,593,707 (126,926 )
Residential mortgage and
other asset backed
securities 45,399,451 (489,258 ) 26 2,923,182 (120,344 ) 2 48,322,633 (609,602 )
Total
fixed-maturity securities $ 69,761,281 $ (814,168 ) 46 $ 2,923,182 $ (120,344 ) 2 $ 72,684,463 $ (934,512 )
51
Table of Contents
December 31, 2020
Less than 12 months 12 months or more Total
Estimated No. of Estimated No. of Estimated
Fair Unrealized Positions Fair Unrealized Positions Fair Unrealized
Category Value Losses Held Value Losses Held Value Losses
Fixed-Maturity
Securities:
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ - $ - - $ - $ - - $ - $ -
Political
subdivisions
of States,
Territories and
Possessions - - - - - - - -
Corporate and
other bonds
industrial and
miscellaneous 1,006,901 (13,216 ) 1 - - - 1,006,901 (13,216 )
Residential
mortgage and
other asset
backed
securities 6,137,522 (7,371 ) 5 3,735,732 (111,947 ) 10 9,873,254 (119,318 )
Total
fixed-maturity
securities $ 7,144,423 $ (20,587 ) 6 $ 3,735,732 $ (111,947 ) 10 $ 10,880,155 $ (132,534 )
52
Table of Contents
There were 48 securities atDecember 31, 2021 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 16 securities atDecember 31, 2020 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security's cost, the nature of the investment and management's intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
Liquidity and Capital Resources
Cash Flows The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.
For the year ended
holding company was the dividends received from KICO, subject to statutory
restrictions. For the year ended
KICO is a member of theFederal Home Loan Bank of New York ("FHLBNY"), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY's credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along withU.S. Treasury and agency securities. KICO currently does not have any securities pledged to FHLBNY; as such, there were no borrowings under this facility during the years endedDecember 31, 2021 and 2020. OnDecember 19, 2017 , we issued$30 million of our 5.50% Senior Unsecured Notes dueDecember 30, 2022 . As ofDecember 31, 2021 , invested assets and cash in our holding company was approximately$1,108,000 . If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing.See Notes 2 and 9 to our Consolidated Financial Statements included in this Annual Report for a discussion of our plans in this regard. Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments. 53 Table of Contents
Cash flow and liquidity are categorized into three sources: (1) operating
activities; (2) investing activities; and (3) financing activities, which are
shown in the following table:
Years ended December 31, 2021 2020 Cash flows provided by (used in): Operating activities$ 24,346,237 $ (10,234,626 ) Investing activities (15,947,862 ) 581,293 Financing activities (3,571,519 ) (3,274,410 )
Net increase (decrease) in cash and cash equivalents 4,826,856 (12,927,743 ) Cash and cash equivalents, beginning of period 19,463,742
32,391,485
Cash and cash equivalents, end of period$ 24,290,598 $
19,463,742 Net cash provided by operating activities was$24,346,000 in Year Ended 2021 as compared to$10,235,000 used in operating activities in Year Ended 2020. The$34,581,000 increase in cash flows provided by operating activities in Year Ended 2021 was primarily the result of an increase in cash arising from net fluctuations in assets and liabilities, partially offset by our net loss (adjusted for non-cash items) of$21,618,000 . The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, changes to its personal lines quota share, payments on claims, and other changes, which are described above. Net cash used in investing activities was$15,948,000 in Year Ended 2021 compared to$581,000 provided by investing activities in Year Ended 2020. The$16,529,000 increase in net cash used in investing activities was the result of a$72,048,000 increase in the acquisition of invested assets, partially offset by a$56,691,000 increase in disposals of invested assets in Year Ended 2021. Net cash used in financing activities was$3,572,000 in Year Ended 2021 compared to$3,274,000 used in Year Ended 2020. The$298,000 increase in net cash used in financing activities was attributable to a$488,000 increase in purchases of treasury stock offset by a$263,000 reduction in dividends paid in Year Ended 2021 compared to Year Ended 2020. Reinsurance The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as ofDecember 31, 2021 : Amount Recoverable A.M. as of ($ in thousands) Best Rating December 31, 2021 % Cavello Bay Reinsurance Ltd A- $ 5,379 31.4 %
Swiss Reinsurance America Corporation A+ 4,700
27.4 %
Hannover Rueck SE A+ 3,650 21.3 %
13,729 80.1 %
Others 3,405 19.9 %
Total $ 17,134 100.0 %
Reinsurance recoverable from Cavello Bay Reinsurance Limited is secured pursuant
to a collateralized trust agreement. Assets held in the trust are not included
in our invested assets and investment income earned on this asset is credited to
the reinsurer.
54
Table of Contents
Effective December 31, 2021 , we entered into a quota share reinsurance treaty
for our personal lines business, which primarily consisted of homeowners' and
dwelling fire policies, covering the period from December 31, 2021 through
January 1, 2023 ("2021/2023 Treaty"). Effective December 15, 2019 , we entered
into a quota share reinsurance treaty for our personal lines business covering
the period from December 15, 2019 through December 30, 2020 ("2019/2020
Treaty"). Effective December 31, 2020 , the 2019/2020 Treaty expired on a cut off
basis; this treaty was not renewed. In addition to the 2019/2020 Treaty, our
personal lines quota share reinsurance treaty in effect for Year Ended 2020 also
included the run-off of the personal lines quota share treaty ("2018/2019
Treaty") that expired on June 30, 2019 . The run-off covered the period from July
1, 2019 through June 30, 2020 ("2019/2020 Run-off").
We entered into new excess of loss and catastrophe reinsurance treaties
effective July 1, 2021 . Effective October 18, 2021 , we entered into a stub
catastrophe reinsurance treaty covering the period from October 18, 2021 through
December 31, 2021 . The treaty provides reinsurance coverage for catastrophe
losses of $5,000,000 in excess of $5,000,000 . Effective January 1, 2022 , we
entered into an underlying excess of loss reinsurance treaty covering the period
from January 1, 2022 through January 1, 2023 . The treaty provides 50%
reinsurance coverage for losses of $400,000 in excess of $600,000 . Losses from
named storms are excluded from the treaty. Material terms for our reinsurance
treaties in effect for the treaty years shown below are as follows:
55
Table of Contents
Treaty Year
(2021/2023 Treaty) (2019/2020 Treaty)
July 1, December 31, July 1, December 31, July 1, December 15,
2022 2021 2021 2020 2020 2019
to to to to to to
January 1, June 30, December 30, June 30, December 30, June 30,
Line of Business 2023 2022 2021 2021 2020 2020
Personal Lines:
Homeowners,
dwelling fire and
and canine legal
liability
Quota share
treaty:
Percent ceded 30 % 30 % None (7) None (7) 25 % 25 %
Risk retained on
intial $1,000,000
of losses (7) (9) $ 700,000 $ 700,000 $ 1,000,000 $ 1,000,000 $ 750,000 $ 750,000
Losses per
occurrence subject
to quota share
reinsurance
coverage $ 1,000,000 $ 1,000,000 None (7) None (7) $ 1,000,000 $ 1,000,000
Expiration date January 1, 2023 January 1, 2023 December December
NA (7) NA (7) 30, 2020 30, 2020
Excess of loss
coverage
and facultative
facility coverage
(1) (9) (10) $ 400,000 $ 8,400,000 $ 8,000,000 $ 8,000,000 $ 8,000,000 $ 9,000,000
in excess of in excess of in excess of in excess of in excess in excess
of of
$ 600,000 $ 600,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
Total reinsurance
coverage per
occurrence (7) (9)
(10) $ 500,000 $ 8,500,000 $ 8,000,000 $ 8,000,000 $ 8,250,000 $ 9,250,000
Losses per
occurrence subject
to reinsurance
coverage (7) (10) $ 1,000,000 $ 9,000,000 $ 9,000,000 $ 9,000,000 $ 9,000,000 $ 10,000,000
Expiration date June 30, 2022 June 30, 2022 June 30, 2021 June 30, June 30,
(10) 2021 2020
Catastrophe
Reinsurance:
Initial loss
subject to None (7) None (7)
personal lines
quota share treaty 10,000,000 10,000,000 7,500,000 7,500,000
Risk retained per
catastrophe None (10)
occurrence (2) (7)
(11) $ 7,400,000 $ 10,000,000 $ 10,000,000 $ 8,125,000 $ 5,625,000
Catastrophe loss
coverage in excess
of quota share
coverage (3) (7) None (10) $ 490,000,000 $ 490,000,000 $ 475,000,000 $ 475,000,000 $ 602,500,000
Catastrophe stub
coverage for the
period from
October 18, 2021
through December
31, 2021 (8) NA NA $ 5,000,000 NA NA NA
in excess of
$ 5,000,000
Reinstatement
premium protection Yes Yes Yes Yes Yes Yes
(4) (5) (6) (10)
(1) For personal lines, includes the addition of an automatic facultative
facility ("Facultative Facility") allowing KICO to obtain homeowners
single risk coverage up to
covers direct losses from
For the period
Facility covers direct losses from
(2) Plus losses in excess of catastrophe coverage. For the period
throughDecember 30, 2020 , there was no reinsurance coverage for the$2,500,000 gap between quota share limit of$7,500,000 and first$10,000,000 layer of catastrophe coverage (see note (7) below).
(3) Catastrophe coverage is limited on an annual basis to two times the per
occurrence amounts. Duration of 168 consecutive hours for a catastrophe
occurrence from windstorm, hail, tornado, hurricane and cyclone.
(4) For the period
protection for$292,500,000 of catastrophe coverage in excess of$7,500,000 . 56 Table of Contents
(5) For the period
protection for
(6) For the period
protection for
(7) The personal lines quota share (homeowners, dwelling fire and canine
legal liability) expired on
and catastrophe reinsurance.
(8) Excludes freeze and freeze related claims.
(9) For the period
of loss treaty provides 50% reinsurance coverage for losses of
in excess of
the 2021/2023 Treaty. Excludes losses from named storms.
(10) Excess of loss and catastrophe reinsurance treaties will expire on June
30, 2022; reinsurance coverage in effect from
dwelling fire and canine legal liability) and underlying excess of loss
reinsurance.
(11) For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this
treaty are excluded from a named catastrophe event.
Treaty Year
July 1, 2021 July 1, 2020 July 1, 2019
to to to
Line of Business June 30, 2022 June 30, 2021 June 30, 2020
Personal Lines:
Personal Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of
coverage 90 % 90 % 90 %
Percent ceded - excess of
$1,000,000 dollars of coverage 95 % 95 % 100 %
Risk retained $ 300,000 $ 300,000 $ 100,000
Total reinsurance coverage per
occurrence $ 4,700,000 $ 4,700,000 $ 4,900,000
Losses per occurrence subject to
quota share reinsurance coverage $ 5,000,000 $ 5,000,000
$ 5,000,000 Expiration date June 30, 2022 June 30, 2021 June 30, 2020 Commercial Lines (1): General liability commercial policies Quota share treaty None None Risk retained$ 750,000 $ 750,000 Excess of loss coverage above risk retained$ 3,750,000 $ 3,750,000 in excess of in excess of$ 750,000 $ 750,000 Total reinsurance coverage per occurrence$ 3,750,000 $ 3,750,000 Losses per occurrence subject to reinsurance coverage$ 4,500,000 $ 4,500,000 Commercial Umbrella Quota share treaty None None (1) Coverage on all commercial lines policies expired inSeptember 2020 ; reinsurance coverage is based on treaties in effect on the date of loss. Inflation Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings. 57 Table of Contents
Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally
are impacted by inflation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, or liquidity that are material to investors. Outlook
The impacts of COVID-19 and related economic conditions on our results are highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. The impact of COVID-19 on our results for the year endedDecember 31, 2021 may not be indicative of its impact on our future results. For additional information on the risks posed by COVID-19, see "The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity" included in Part I, Item 1A- "Risk Factors" in this Annual Report. Our net premiums earned may be impacted by a number of factors. Net premiums earned are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions. As a result of COVID-19, economic conditions inthe United States rapidly deteriorated. The decreased levels of economic activity have negatively impacted, and may continue to negatively impact, premium volumes generated by new business. We began to experience this impact inMarch 2020 and it became more significant in the second and third quarters of 2020. While we are now seeing a reversal of this impact, it may resume in the future, but the degree of any new impact will depend on the extent and duration of any economic contraction and could be material. We have also made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return. This action has led, and may continue to lead, to a slowdown in premium growth, particularly in new business.
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