Newswires
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, 2022 , 80.6% of KICO's direct written premiums came from theNew York policies. In addition, our subsidiary,Cosi Agency, Inc. ("Cosi"), a multi-state licensed general agency, 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, 2022 , we would earn half of the premiums in 2022 and the other half in 2023. 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 (loss) 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 a further discussion of 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.
32
Table of Contents
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.
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, 2022 and 2021, there were no commercial liability policies in-force. As ofDecember 31, 2022 , these expired policies represent approximately 17.9% 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:
33
Table of Contents
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. 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 warrants. 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) 2022 2021 Change Percent
Revenues
Direct written premiums $ 201,255 $ 181,665 $ 19,590 10.8 %
Assumed written premiums - - - na %
201,255 181,665 19,590 10.8 %
Ceded written premiums
Ceded to quota share treaties (1) 47,409 23,510 23,899 101.7 %
Ceded to excess of loss treaties 3,880 2,613 1,267 48.5 %
Ceded to catastrophe treaties 27,906 26,787 1,119 4.2 %
Total ceded written premiums 79,195 52,910 26,285 49.7 %
Net written premiums 122,060 128,755 (6,695 ) (5.2 )%
Change in unearned premiums
Direct and assumed (9,733 ) (7,750 ) (1,983 ) (25.6 )%
Ceded to quota share treaties (1) 2,058 22,877 (20,819 ) (91.0 )%
Change in net unearned premiums (7,675 ) 15,127 (22,802 ) 150.7 %
Premiums earned
Direct and assumed 191,522 173,915 17,607 10.1 %
Ceded to reinsurance treaties (77,137 ) (30,033 ) (47,104 ) (156.8 )%
Net premiums earned 114,385 143,882 (29,497 ) (20.5 )%
Ceding commission revenue (1) 19,319 90 19,229 21,365.6 %
Net investment income 4,937 6,621 (1,684 ) (25.4 )%
Net (losses) gains on investments (9,392 ) 9,787 (19,179 ) na %
Other income 910 851 59 6.9 %
Total revenues 130,159 161,231 (31,072 ) (19.3 )%
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses
excluding the effect of catastrophes 114,943 87,308 27,635 31.7 %
Losses from catastrophes (2) 13,106 15,632 (2,526 ) (16.2 )%
Total direct and assumed loss and loss
adjustment expenses 128,048 102,940 25,109 24.4 %
Ceded loss and loss adjustment
expenses:
Loss and loss adjustment expenses
excluding the effect of catastrophes 34,185 155 34,030 21,954.8 %
Losses from catastrophes (2) 5,474 813 4,661 573.3 %
Total ceded loss and loss adjustment
expenses 39,658 968
38,691 3,996.9 %
Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 80,758 87,153 (6,395 ) (7.3 )% Losses from catastrophes (2) 7,632 14,819
(7,187 ) (48.5 )%
Net loss and loss adjustment expenses 88,390 101,973 (13,582 ) (13.3 )%
Commission expense 34,582 33,114 1,468 4.4 % Other underwriting expenses 26,697 26,254 443 1.7 % Other operating expenses 3,113 4,183 (1,070 ) (25.6 )% Depreciation and amortization 3,300 3,290
10 0.3 % Interest expense 2,019 1,826 193 10.6 % Total expenses 158,102 170,640 (12,538 ) (7.3 )% Loss before taxes (27,942 ) (9,409 ) (18,533 ) (197.0 )% Income tax benefit (5,418 ) (2,031 ) (3,387 ) (166.8 )% Net loss$ (22,525 ) $ (7,378 ) $ (15,147 ) (205.3 )% (Columns in the table above may not sum to totals due to rounding)
(1) Effective
share treaty.
(2) The years ended
which 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 Insurance Services Office (ISO). PCS catastrophe
bulletins are issued for events that cause more than $25 million in total
insured losses and affect a significant number of policyholders and
insurers.
35
Table of Contents
Years ended December 31,
Percentage
Point Percent
2022 2021 Change Change
Key ratios:
Net loss ratio 77.3 % 70.9 % 6.4 9.0 %
Net underwriting expense ratio 36.0 % 40.6 % (4.6 )
(11.3 )% Net combined ratio 113.3 % 111.5 % 1.8 1.6 % Direct Written Premiums Direct written premiums during the year endedDecember 31, 2022 ("Year Ended 2022") were$201,255,000 compared to$181,665,000 during the year endedDecember 31, 2021 ("Year Ended 2021"). The increase of$19,590,000 , or 10.8%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Year Ended 2022 were$188,105,000 , an increase of$16,385,000 , or 9.5%, from$171,720,000 in Year Ended 2021. The increase in premiums from our personal lines business was primarily due to rate increases, offset by a modest decrease in policies in force as ofDecember 31, 2022 compared toDecember 31, 2021 . Direct written premiums from our livery physical damage business for Year Ended 2022 were$12,993,000 , an increase of$3,276,000 , or 33.7%, from$9,717,000 in Year Ended 2021. 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 inNew Jersey . Through 2019 we expanded toRhode Island ,Massachusetts andConnecticut . We refer to ourNew York business as our "Core" business and the business outside ofNew York as our "Expansion" business. Direct written premiums from our Core business were$162,255,000 in Year Ended 2022 compared to$144,449,000 in Year Ended 2021. Direct written premiums from our Expansion business were$39,000,000 in Year Ended 2022 compared to$37,216,000 in Year Ended 2021.
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"). There was no quota share reinsurance treaty in effect in Year Ended 2021. Net written premiums decreased$6,695,000 , or 5.2%, to$122,060,000 in Year Ended 2022 from$128,755,000 in Year Ended 2021. 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 2022, our premiums ceded under quota share treaties increased by$23,899,000 in comparison to ceded premiums in Year Ended 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Year Ended 2022, compared to no personal lines quota share treaty in Year Ended 2021. 36 Table of Contents
Excess of loss reinsurance treaties
An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Year Ended 2022, our ceded excess of loss reinsurance premiums increased by$1,267,000 over the comparable ceded premiums for Year Ended 2021. The increase was due to an increase in subject premiums and additional coverage obtained. EffectiveJanuary 1, 2022 , we entered into an underlying excess of loss reinsurance treaty covering the period fromJanuary 1, 2022 throughJanuary 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.
Catastrophe reinsurance treaties
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 2022, our premiums ceded under catastrophe treaties increased by$1,119,000 over the comparable ceded premiums in Year Ended 2021. 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 were paid based on the total insured value of our risks as ofAugust 31, 2021 . EffectiveJuly 1, 2022 , and continuing throughJune 30, 2023 , our ceded catastrophe premiums will be paid based on the total insured value of our risks as ofAugust 31, 2022 . Net premiums earned Net premiums earned decreased$29,497,000 , or 20.5%, to$114,385,000 in Year Ended 2022 from$143,882,000 in Year Ended 2021. The decrease was due to the inception of the 2021/2023 Treaty onDecember 31, 2021 . The decrease resulting from the 2021/2023 Treaty in Year Ended 2022 was partially offset by an increase in direct written premiums. Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Years ended December 31,
($ in thousands) 2022 2021 Change Percent
Provisional ceding commissions earned
8,065.0 % Contingent ceding commissions earned 214 (144 ) 358
n/a %
Total ceding commission revenue
21,365.6 %
(Columns in the table above may not sum to totals due to rounding)
Ceding commission revenue was $19,319,000 in Year Ended 2022 compared to $90,000
in Year Ended 2021. The increase of $19,229,000 was due to an increase 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.
37
Table of Contents
Provisional Ceding Commissions Earned
In Year Ended 2022 we earned provisional ceding commissions from personal lines earned premiums ceded under the 2021/2023 Treaty which was effective as ofDecember 31, 2021 . There was no personal lines quota share in effect in Year Ended 2021.
Contingent Ceding Commissions Earned
The structure of the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. 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 received. Net Investment Income Net investment income was$4,937,000 in Year Ended 2022 compared to$6,621,000 in Year Ended 2021, a decrease of$1,684,000 , or 25.4%. The decrease in investment income is partially attributable to a$766,000 reversal of prior years' estimated accrued interest income stemming from an error in third party investment reporting. The decline of investment income is also attributable to the disposal of income bearing equity securities. The average yield on invested assets was 3.42% as ofDecember 31, 2022 compared to 3.25% as ofDecember 31, 2021 .
Cash and invested assets were$191,046,000 as ofDecember 31, 2022 compared to$237,885,000 as ofDecember 31, 2021 . The$46,839,000 decrease in cash and invested assets was primarily attributable to cash paid to reinsurers at the inception of the 2021/2023 Treaty, losses paid in connection with catastrophe losses incurred in 2021 and 2022 and unrealized losses on our investment portfolio.
Net (Losses) Gains on Investments
Net losses on investments were$(9,392,000) in Year Ended 2022 compared to net gains of$9,787,000 in Year Ended 2021. Unrealized losses on our equity securities and other investments in Year Ended 2022 were$(9,252,000) , compared to net unrealized gains of$2,469,000 in Year Ended 2021. Realized losses on sales of investments were$(140,000) in Year Ended 2022 compared to realized gains of$7,318,000 in Year Ended 2021. Other Income
Other income was
2021, an increase of
Net Loss and LAE Net loss and LAE was$88,390,000 for Year Ended 2022 compared to$101,973,000 for Year Ended 2021. The net loss ratio was 77.3% in Year Ended 2022 compared to 70.9% in Year Ended 2021, an increase of 6.4 percentage points. 38 Table of Contents
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_10kimg7.jpg]]
(Percent components may not sum to totals due to rounding)
The loss ratio for Year Ended 2022 was higher than Year Ended 2021 due to two
factors. The predominant reason was the impact from climbing inflation leading
to higher severity of claim settlements. A slightly elevated frequency of water
damage claims was also observed, partially driven by winter-related claims
resulting from freezing temperatures.
The estimated net catastrophe losses were $7,632,000 for Year Ended 2022, which
contributed 6.7 points to the loss ratio. This was mostly driven by two winter
events in the first quarter and one winter event (Winter Storm Elliott) in the
fourth quarter. There were also another seven minor wind catastrophe events for
Year Ended 2022, but the impact was not significant. As a comparison,
catastrophe events had a loss ratio impact of 10.3 points for Year Ended 2021
due to a more active hurricane season including the named storm, Ida.
Prior years in total have unfavorable development of
2022, driven mostly by large fire losses which occurred in 2021 and the
volatility of liability claim settlements from the discontinued commercial
multi-peril line. This contributed 2.4 points to the loss ratio.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
39
Table of Contents
Commission Expense
Commission expense was $34,582,000 in Year Ended 2022 or 18.1% of direct earned
premiums. Commission expense was $33,114,000 in Year Ended 2021 or 19.0% of
direct earned premiums. The increase of $1,468,000 was primarily due to an
increase in direct earned premiums of $17,607,000 to $191,522,000 offset in part
by a reduction of commission rate on our Select products and the reduction to
contingent commissions, which the producers now earn only if KICO has an
operating profit.
Other Underwriting Expenses
Other underwriting expenses were$26,697,000 , or 13.9% of direct earned premiums, in Year Ended 2022 compared to$26,254,000 , or 15.1% of direct earned premiums, in Year Ended 2021. The increase of$443,000 , or 1.7%, was primarily due to increases in expenses related to our growth in direct earned premiums, salaries, and our continuing initiative to reduce expenses with the use of technology, partially offset by decreases in professional fees, state insurance department fees, and policy management system fees as result of the completion of customized efficient policy management software which allowed us to eliminate multiple legacy systems.
Our largest single component of other underwriting expenses is salaries and employment costs, with costs of$10,799,000 in Year Ended 2022 compared to$10,189,000 in Year Ended 2021. The increase of$610,000 , or 6.0%, compares favorably with the 10.8% increase in direct written premiums. In the periods following Year Ended 2021, we invested in the hiring of higher-level managers and staff to implement our goals of modernization and efficiency, which we
refer to as Kingstone 2.0.
Our net underwriting expense ratio in Year Ended 2022 was 36.0% compared to
40.6% in Year Ended 2021. The following table shows the individual components of
our net underwriting expense ratio for the periods indicated:
Years ended December 31, Percentage
2022 2021 Point Change
Other underwriting expenses
Employment costs 9.4 % 7.1 % 2.3
Underwriting fees
(inspections/surveys) 1.7 1.3 0.4
IT expenses 3.9 3.2 0.7
Professional fees 1.3 1.2 0.1
Other expenses 7.0 5.5 1.5
Total other underwriting expenses 23.3 18.3
5.0 Commission expense 30.2 23.0 7.2 Ceding commission revenue Provisional (16.7 ) (0.2 ) (16.5 ) Contingent (0.2 ) 0.1 (0.3 )
Total ceding commission revenue (16.9 ) (0.1 )
(16.8 ) Other income (0.7 ) (0.6 ) (0.1 )
Net underwriting expense ratio 36.0 % 40.6 %
(4.6 )
(Components may not sum to totals due to rounding)
40
Table of Contents
The overall 16.8 percentage point increase in the benefit from ceding
commissions in Year Ended 2022 was driven by the increase in provisional ceding
commission revenue due to the inception of the 2021/2023 Treaty on December 31,
2021 . The components of our net underwriting expense ratio related to other
underwriting expenses and commissions increased due to a higher percentage of
our direct earned premiums in Year Ended 2022 being ceded due to the inception
of the 2021/2023 Treaty.
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company and
Cosi, were $3,113,000 for Year Ended 2022 compared to $4,183,000 for Year Ended
2021. The following table shows a breakdown of the significant components of
other operating expenses for the periods indicated:
Years ended
December 31,
($ in thousands) 2022 2021 Change Percent
Other operating expenses
Employment costs $ (24 ) $ 795 $ (819 ) na %
Bonuses - - - na
Equity compensation 1,393 1,905 (512 ) (26.9 )
Professional 411 348 63 18.1
Professional fees related to a
previously contemplated acquisition of na
all of the outstanding equity of
Kingstone 354 - 354
Directors fees 327 327 - -
Insurance 154 212 (58 ) (27.4 )
Other expenses 499 597 (98 ) (16.4 )
Total other operating expenses $ 3,114 $ 4,183 $ (1,069 ) (25.6 )%
(Components may not sum to totals due to rounding)
41
Table of Contents
The decrease in Year Ended 2022 of $1,069,000 , or 25.6%, as compared to Year
Ended 2021 was primarily due to a decrease in employment costs. The decrease in
employment costs was due to staff reductions and fluctuations in deferred
compensation liability related to changes in the underlying invested portfolio.
The decrease in employment costs was partially offset by an increase in
professional fees attributable to a non-binding indication of interest from a
third party related to a then contemplated acquisition of all of the outstanding
equity of our company.
Depreciation and Amortization
Depreciation and amortization was$3,300,000 in Year Ended 2022 compared to$3,290,000 in Year Ended 2021. The increase of$10,000 , or 0.3%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. The increase was partially offset by the completion of customized policy management software, now allowing us to consolidate multiple legacy systems into one efficient system. In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years. Interest Expense Interest expense in Year Ended 2022 was$2,019,000 compared to$1,826,000 in Year Ended 2021, an increase of$193,000 or 10.6%. In Years Ended 2022 and 2021 we incurred interest expense in connection with the 2017 Notes, our$30.0 million issuance of long-term debt inDecember 2017 . In Year Ended 2022, as disclosed in Note 9 to the consolidated financial statements, we also incurred debt in the fourth quarter of 2022 with respect to the 2022 Notes and an equipment financing. Income Tax Benefit
Income tax benefit in Year Ended 2022 was$5,418,000 , which resulted in an effective tax benefit rate of 19.4%. Income tax benefit in Year Ended 2021 was$2,031,000 , which resulted in an effective tax rate of 21.6%. Loss before taxes was$27,942,000 in Year Ended 2022 compared to$9,409,000 in Year Ended 2021. The difference in effective tax rate is due to the effect of permanent differences in Year Ended 2022 compared to Year Ended 2021. 42 Table of Contents Net Loss
Net loss was
2021. The increase in net loss of
described above.
Additional Financial Information
We operate our business as one segment, property and casualty insurance. Within
this segment, we offer an 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,
2022 2021
Gross premiums written:
Personal lines(3) $ 188,104,883 $ 171,719,993
Livery physical damage 12,992,905 9,716,658
Other(1) 157,049 229,383
Total without commercial lines 201,254,837
181,666,034
Commercial lines (in run-off effective July 2019)(2) - (856 ) Total gross premiums written$ 201,254,837 $
181,665,178 Net premiums written: Personal lines(3)$ 108,953,413 $ 118,842,870 Livery physical damage 12,992,905 9,716,658 Other(1) 113,503 196,812
Total without commercial lines 122,059,821
128,756,340
Commercial lines (in run-off effective July 2019)(2) -
(856 ) Total net premiums written$ 122,059,821 $ 128,755,484 Net premiums earned: Personal lines(3)$ 103,019,573 $ 135,738,484 Livery physical damage 11,226,975 7,909,791 Other(1) 137,983 234,300
Total without commercial lines 114,384,531
143,882,575
Commercial lines (in run-off effective July 2019)(2) - (856 ) Total net premiums earned$ 114,384,531 $
143,881,719
Net loss and loss adjustment expenses(4): Personal lines$ 76,906,768 $ 93,849,714 Livery physical damage 5,056,461 4,235,255 Other(1) 18,083 (5,521 )
Unallocated loss adjustment expenses 3,701,131
3,696,380
Total without commercial lines 85,682,443
101,775,828
Commercial lines (in run-off effective July 2019)(2) 2,707,599
196,768
Total net loss and loss adjustment expenses$ 88,390,042 $
101,972,596 Net loss ratio(4): Personal lines 74.7 % 69.1 % Livery physical damage 45.0 % 53.5 % Other(1) 13.1 % -2.4 %
Total without commercial lines 74.9 % 70.7 % Commercial lines (in run-off effective July 2019)(2) na
na
Total 77.3 % 70.9 %
(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 change in quota share ceding rate effective
December 31, 2021 .
(4) See discussions above with regard to "Net Loss and LAE", as to catastrophe
losses in the years endedDecember 31, 2022 and 2021. 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,
2022 2021
Revenues
Net premiums earned $ 114,384,531 $ 143,881,719
Ceding commission revenue 19,319,391 89,681
Net investment income 4,936,778 6,621,392
Net (losses) gains on investments (9,231,170 ) 9,627,948
Other income 815,952 849,155
Total revenues 130,225,482 161,069,895
Expenses
Loss and loss adjustment expenses 88,390,042 101,972,596
Commission expense 34,581,617 33,114,103
Other underwriting expenses 26,697,006 26,254,143
Depreciation and amortization 3,252,134 3,150,489
Total expenses 152,920,799 164,491,331
Loss from operations (22,695,317 ) (3,421,436 )
Income tax benefit (4,588,283 ) (877,002 )
Net loss $ (18,107,034 ) $ (2,544,434 )
Key Measures:
Net loss ratio 77.3 % 70.9 %
Net underwriting expense ratio 36.0 % 40.6 % Net combined ratio 113.3 %
111.5 %
Reconciliation of net underwriting expense ratio: Acquisition costs and other underwriting expenses$ 61,278,623 $ 59,368,246 Less: Ceding commission revenue (19,319,391 )
(89,681 ) Less: Other income (815,952 ) (849,155 ) Net underwriting expenses$ 41,143,280 $ 58,429,410 Net premiums earned$ 114,384,531 $ 143,881,719
Net Underwriting Expense Ratio 36.0 %
40.6 %
44
Table of Contents
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 ended December
31, 2022
Written premiums $ 201,254,837 $ - $ (79,195,016 ) $ 122,059,821
Change in unearned premiums (9,733,170 ) - 2,057,880 (7,675,290 )
Earned premiums $ 191,521,667 $ - $
(77,137,136 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 114,942,807 $ -$ (34,184,616 ) $ 80,758,191 Catastrophe loss 13,105,600 - (5,473,749 ) 7,631,851 Loss and loss adjustment expenses$ 128,048,407 $ - $
(39,658,365 )
Loss ratio excluding the effect of catastrophes 60.0 % 0.0 % 44.3 % 70.6 % Catastrophe loss 6.8 % 0.0 % 7.1 % 6.7 % Loss ratio 66.9 % 0.0 % 51.4 % 77.3 % Year ended 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 % (Percentage components may not sum to totals due to rounding) 45 Table of Contents
The key measures for our insurance underwriting business for the years ended
Years ended
December 31,
2022 2021
Net premiums earned $ 114,384,531 $ 143,881,719
Ceding commission revenue 19,319,391 89,681
Other income 815,952 849,155
Loss and loss adjustment expenses (1) 88,390,042
101,972,596
Acquisition costs and other underwriting expenses: Commission expense 34,581,617
33,114,103
Other underwriting expenses 26,697,006
26,254,143
Total acquisition costs and other underwriting expenses 61,278,623 59,368,246 Underwriting loss$ (15,148,791 ) $ (16,520,287 ) Key Measures :
Net loss ratio excluding the effect of catastrophes 70.6 % 60.6 % Effect of catastrophe loss on net loss ratio (1) 6.7 % 10.3 % Net loss ratio 77.3 %
70.9 %
Net underwriting expense ratio excluding the effect of catastrophes 36.0 % 40.6 % Effect of catastrophe loss on net underwriting expense ratio 0.0 % 0.0 % Net underwriting expense ratio 36.0 %
40.6 %
Net combined ratio excluding the effect of catastrophes 106.6 % 101.2 % Effect of catastrophe loss on net combined ratio (1) 6.7 % 10.3 % Net combined ratio 113.3 %
111.5 %
Reconciliation of net underwriting expense ratio:
Acquisition costs and other underwriting expenses
Less: Ceding commission revenue
(19,319,391 ) (89,681 )
Less: Other income (815,952 ) (849,155 )
$ 41,143,280 $ 58,429,410
Net earned premium $ 114,384,531 $ 143,881,719
Net Underwriting Expense Ratio 36.0 %
40.6 %
(1) For the years ended December 31, 2022 and 2021, includes the sum of net
catastrophe losses and loss adjustment expenses of $7,631,851 and
$14,819,546 , respectively.
46
Table of Contents
Investments
Portfolio Summary
The following table presents a breakdown of the amortized cost, estimated fair
value, and unrealized gains and losses of our investments in fixed-maturity
securities classified as available-for-sale as of
Available-for-Sale Securities December 31, 2022 Cost or Gross Gross Unrealized Losses Estimated % of Amortized Unrealized Less than 12 More than 12 Fair Estimated Category Cost Gains Months Months Value Fair Value U.S. Treasury securities and obligations ofU.S. government corporations and agencies (1)$ 23,874,545 $ 1,479 $ (6,928 ) $ -$ 23,869,096 15.4 % Political subdivisions of States, Territories and Possessions 17,108,154 - (2,195,273 ) (1,771,494 ) 13,141,387 8.5 % Corporate and other bonds Industrial and miscellaneous 80,338,464 - (5,796,994 ) (2,458,985 ) 72,082,485 46.6 % Residential mortgage and other asset backed securities (2) 53,597,264 58,398 (882,664 ) (7,150,803 ) 45,622,195 29.5 % Total fixed-maturity securities$ 174,918,427 $ 59,877 $ (8,881,859 ) $ (11,381,282 ) $ 154,715,163 100.0 % 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 (2) 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 %
(1) In
collateral for a sale leaseback transaction in a designated custodian
account (see Note 9 - Debt - "Equipment Financing"). As ofDecember 31, 2022 , the estimated fair value of the eligible collateral was approximately$8,691,000 .
(2) KICO has placed certain residential mortgage-backed securities as eligible
collateral in a designated custodian account related to its membership in
theFederal Home Loan Bank of New York ("FHLBNY") (see Note 9 - Debt - "Federal Home Loan Bank "). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of
was approximately
securities if pledged as collateral. As ofDecember 31, 2022 and 2021 there was no outstanding balance on the FHLBNY credit line. 47 Table of ContentsEquity Securities The following table presents a breakdown of the cost and estimated fair value of, and gross gains and losses on, investments in equity securities as ofDecember 31, 2022 and 2021: December 31, 2022 % of Gross Gross Estimated Estimated Category Cost Gains Losses Fair Value Fair Value
Equity Securities : Preferred stocks$ 13,583,942 $ -$ (3,589,313 ) $ 9,994,629 72.2 % Common stocks and exchange traded funds 4,502,758 158,635 (821,632 ) 3,839,761 27.8 % Total$ 18,086,700 $ 158,635 $ (4,410,945 ) $ 13,834,390 100.0 % December 31, 2021 % of Gross Gross Estimated Estimated Category Cost Gains Losses Fair
Value Fair Value
Equity Securities : Preferred stocks$ 22,019,509 $ 1,007,009 $ (184,617 ) $ 22,841,901 57.6 % Common stocks and exchange traded 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 % Other Investments The following table presents a breakdown of the cost and
estimated
fair value of, and gross gains on, our other investments as ofDecember 31, 2022 and 2021: December 31, 2022 December 31, 2021 Gross Estimated Gross Estimated Category Cost Gains Fair Value Cost Gains Fair Value Other Investments: Hedge fund$ 1,987,040 $ 784,612 $ 2,771,652 $ 3,999,381 $ 3,562,034 $ 7,561,415 48 Table of Contents
The following table presents a breakdown of the amortized cost and estimated
fair value of, and gross unrealized gains and losses on, investments in
held-to-maturity securities as of
December 31, 2022
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 $ 1,228,560 $ 28,400 $ (34,077 ) $ - $ 1,222,883 18.5 %
Political
subdivisions of
States, Territories
and Possessions 498,638 2,092 - - 500,730 7.6 %
Exchange traded
debt 304,111 - (29,111 ) - 275,000 4.2 %
Corporate and other
bonds Industrial
and miscellaneous 5,734,831 36,968 (809,746 ) (360,278 ) 4,601,775 69.7 %
Total $ 7,766,140 $ 67,460 $ (872,934 ) $ (360,278 ) $ 6,600,388 100.0 %
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 %
Held-to-maturity
states' minimum fund requirements.
49
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, 2022
and
2021 is shown below:
December 31, 2022 December 31, 2021
Amortized Estimated Amortized Estimated
Remaining Time to Maturity Cost Fair Value Cost
Fair Value Less than one year$ 708,535 $ 743,575 $ 994,712 $ 1,008,180 One to five years 1,120,507 1,088,522 1,205,829 1,290,465 Five to ten years 1,402,704 1,200,720 1,513,942 1,648,808 More than 10 years 4,534,394 3,567,571 4,551,851 4,805,706 Total$ 7,766,140 $ 6,600,388 $ 8,266,334 $ 8,753,159
Credit Rating of
The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as ofDecember 31, 2022 and 2021 as rated by Standard and Poor's (or, if unavailable from Standard and Poor's, then Moody's, Fitch, or Kroll): December 31, 2022 December 31, 2021 Estimated Percentage of Estimated Percentage of Fair Estimated Fair Estimated Value Fair Value Value Fair Value Rating U.S. Treasury securities$ 23,869,096 15.4 % $ - 0.0 % Corporate and municipal bonds AAA 1,824,478 1.2 % 1,321,809 0.8 % AA 9,785,908 6.3 % 11,532,572 7.3 % A 31,099,075 20.2 % 38,272,571 24.2 % BBB+ 16,682,159 10.8 % 17,936,359 11.3 % BBB 19,664,051 12.7 % 25,161,776 15.9 % BBB- 4,516,713 2.9 % 4,193,401 2.7 % Total corporate and municipal bonds 83,572,384 54.1 % 98,418,488 62.2 % Residential mortgage backed, asset backed, and other collateralized obligations AAA 16,497,621 10.7 % 17,350,192 11.0 % AA 23,062,233 14.9 % 34,241,907 21.7 % A 6,722,902 4.3 % 6,306,161 4.0 % BBB 20,067 0.0 % 24,254 0.0 % CCC 457,683 0.3 % 664,628 0.4 % CC 99,600 0.1 % 125,412 0.1 % D 40,474 0.0 % 55,306 0.0 % Non rated 373,103 0.2 % 893,762 0.6 % Total residential mortgage backed, asset backed, and other collateralized obligations 47,273,683 30.5 % 59,661,622 37.8 % Total$ 154,715,163 100.0 %$ 158,080,110 100.0 % 50 Table of Contents
The table below details the average yield by type of fixed-maturity security as
of
Category December 31, 2022 December 31, 2021U.S. Treasury securities and obligations ofU.S. government corporations and agencies 2.58 %
3.06 %
Political subdivisions of States, Territories and Possessions 3.58 %
2.77 %
Corporate and other bonds Industrial and miscellaneous 3.68 %
3.23 %
Residential mortgage backed securities 2.70 %
2.77 % Total 3.20 % 2.92 %
The table below lists the weighted average maturity and effective duration in
years on our fixed-maturity securities as of
December 31, 2022 December 31 ,
2021
Weighted average effective maturity 5.8
8.0
Weighted average final maturity 13.5
13.8
Effective duration 4.5 5.1
Fair Value Consideration
As disclosed in Note 4 to the 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, 2022 and
2021, 65% and 62%, respectively, of the investment portfolio recorded at fair
value was priced based upon quoted market prices.
51
Table of Contents
The table below summarizes the gross unrealized losses of our fixed-maturity
securities available-for-sale and equity securities by length of time the
security has continuously been in an unrealized loss position as of December 31,
2022 and 2021:
December 31, 2022
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$ 18,918,196 $ (6,928 ) 3 $
- - -$ 18,918,196 $ (6,928 ) Political subdivisions of States, Territories and Possessions 7,970,633 (2,195,273 ) 9 5,170,753 (1,771,494 ) 5 13,141,386 (3,966,767 ) Corporate and other bonds industrial and miscellaneous 56,910,104 (5,796,994 ) 75 15,172,381 (2,458,985 ) 15 72,082,485 (8,255,979 ) Residential mortgage and other asset backed securities 10,145,880 (882,664 ) 22 34,753,178 (7,150,803 ) 26 44,899,058
(8,033,467 )
Total
fixed-maturity
securities$ 93,944,813 $ (8,881,859 ) 109$ 55,096,312 $ (11,381,282 ) 46$ 149,041,125 $ (20,263,141 ) 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 ) 52 Table of Contents There were 155 securities atDecember 31, 2022 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed by us to be other than temporarily impaired. There were 48 securities atDecember 31, 2021 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included credit quality considerations, the magnitude of the unrealized losses in relation to each security's cost, the nature of the investment and interest rate environment factors, 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 endedDecember 31, 2022 , the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the year endedDecember 31, 2022 , KICO paid dividends of$5,250,000 to us. OnOctober 27, 2022 , KICO entered a sale-leaseback transaction whereby KICO sold substantially all its information technology assets for approximately$8,100,000 . Subsequent to the closing of the sale-leaseback transaction, KICO paid a dividend of$3,000,000 to us. In addition, onOctober 17, 2022 we entered into a seven year loan agreement with KICO with regard to a loan from KICO to us in the amount of$6,450,000 . As ofDecember 31, 2022 , KICO had a negative unassigned surplus of$5,069,000 and will not be able to pay any distributions to us without prior regulatory approval. 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. See Note 3 - Investments to our consolidated financial statements for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO's net admitted assets as of the end of the previous quarter, which isSeptember 30, 2022 , and are due and payable within 90 days of borrowing. The maximum allowable advance as ofDecember 31, 2022 , based on the net admitted assets as ofSeptember 30, 2022 , was approximately$13,192,000 . Available collateral as ofDecember 31, 2022 was approximately$12,228,000 . Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during the year endedDecember 31, 2022 . 53 Table of Contents OnDecember 15, 2022 , we issued$19,950,000 of our 2022 Notes pursuant to the Exchange Agreement. We are required to make a mandatory redemption of 2022 Notes onDecember 30, 2023 as discussed in Note 9 - Debt of the consolidated financial statements included in this Annual Report. Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.
Cash flow and liquidity are categorized into three sources: (1) operating
activities; (2) investing activities; and (3) financing activities, which are
shown in the following table:
Years ended December 31, 2022 2021 Cash flows (used in) provided by: Operating activities$ (915,521 ) $ 24,346,237 Investing activities (5,905,779 ) (15,947,862 ) Financing activities (5,511,070 ) (3,571,519 )
Net (decrease) increase in cash and cash equivalents (12,332,370 )
4,826,856
Cash and cash equivalents, beginning of period 24,290,598
19,463,742
Cash and cash equivalents, end of period$ 11,958,228 $
24,290,598 Net cash used in operating activities was$916,000 in Year Ended 2022 as compared to$24,346,000 provided by operating activities in Year Ended 2021. The$25,262,000 decrease in cash flows provided by operating activities in Year Ended 2022 as compared to Year Ended 2021 was primarily the result of a decrease in cash arising from net fluctuations in operating assets and liabilities, partially offset by net loss (adjusted for non-cash items) of$4,073,000 . The increase in cash used in operating activities is also attributable to the payment of$13,245,000 to reinsurers in Year Ended 2022 pursuant to the inception of our quota share reinsurance treaty, effectiveDecember 31, 2021 . In addition, the increase of reinsurance recoverables by$26,173,000 also contributed to the increase in cash used during Year Ended 2022. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and other changes, which are described above. Net cash used investing activities was$5,906,000 in Year Ended 2022 compared to$15,948,000 used in investing activities in Year Ended 2021. In Year Ended 2022, we had net investing activity used in our investment portfolio of$1,355,000 , compared to$11,449,000 used in Year Ended 2021 resulting in a$10,094,000 decrease in net cash used investing activities. Net cash used in financing activities was$5,511,000 in Year Ended 2022 compared to$3,572,000 used in Year Ended 2021. The$1,939,000 increase in net cash used in financing activities was attributable to a$10,050,000 principal payment on the 2017 Notes and$1,758,000 of bond issue costs, both paid in connection with the Exchange Agreement. In addition, we paid$192,000 of principal payments on our equipment financing in connection with KICO's sale-leaseback transaction and there was a$186,000 increase in the amount of withholding taxes paid on the vesting of restricted stock awards. The increases in cash used in financing activities were partially offset by$8,097,000 of proceeds from equipment financing in connection with KICO's sale-leaseback transaction and a decrease of$1,672,000 in the purchase of treasury stock. 54 Table of Contents Reinsurance The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as ofDecember 31, 2022 : Amount Recoverable A.M. as of ($ in thousands) Best Rating December 31, 2022 %
Swiss Reinsurance America Corporation A+ $ 14,292
34.6 %
Hannover Rueck SE A+ 11,379 27.6 %
25,671 62.2 %
Others (1) 15,577 37.8 %
Total $ 41,248 100.0 %
(1) Of the
31, 2022,
agreement and
held in the trust are not included in our invested assets, and investment
income earned on this asset is credited to the reinsurer. EffectiveDecember 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 fromDecember 31, 2021 throughJanuary 1, 2023 ("2021/2023 Treaty"). Upon the expiration of the 2021/2023 Treaty onJanuary 1, 2023 , we entered into a new quota share reinsurance treaty for our personal lines business, covering the period fromJanuary 1, 2023 throughJanuary 1, 2024 ("2023/2024 Treaty"). 55 Table of Contents We entered into new excess of loss and catastrophe reinsurance treaties effectiveJuly 1, 2022 . EffectiveOctober 18, 2021 , we entered into a stub catastrophe reinsurance treaty covering the period fromOctober 18, 2021 throughDecember 31, 2021 . The treaty provided reinsurance coverage for catastrophe losses of$5,000,000 in excess of$5,000,000 . EffectiveJanuary 1, 2022 , we entered into an underlying excess of loss reinsurance treaty ("Underlying XOL Treaty") covering the period fromJanuary 1, 2022 throughJanuary 1, 2023 . The Underlying XOL Treaty provides 50% reinsurance coverage for losses of$400,000 in excess of$600,000 . Losses from named storms are excluded from the Underlying XOL Treaty. EffectiveJanuary 1, 2023 , the Underlying XOL Treaty was renewed covering the period fromJanuary 1, 2023 throughJanuary 1, 2024 . Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows: Treaty Period 2023/2024 Treaty 2021/2023 Treaty July 1, January 1, July 1, December 31, July 1, December 31, 2023 2023 2022 2021 2021 2020 to to to to to to January 1, June 30, January 1, June 30, December 30, June 30, Line of Business 2024 2023 2023 2022 2021 2021 Personal Lines: Homeowners, dwelling fire and and canine legal liability Quota share treaty: Percent None (5) None (5) ceded (9) 30 % 30 % 30 % 30 % Risk retained on intial$1,000,000 of losses (5) (7) (8) (9) $ 700,000 $ 700,000 $ 700,000 $ 700,000$ 1,000,000 $ 1,000,000 Losses per occurrence subject to None (5) None (5) quota share reinsurance coverage$ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 Expiration January 1, 2024 January 1, 2024 January 1, 2023 January 1, 2023 NA (5) NA (5) date Excess of loss coverage and facultative facility coverage (1) (7) (8 )$ 8,400,000 $ 8,400,000 $ 8,400,000 $ 8,000,000 $ 8,000,000 in excess of in excess of in excess of in excess of in excess of $ 600,000 $ 600,000 $ 600,000$ 1,000,000 $ 1,000,000 Total reinsurance coverage per occurrence (5) (7) (8) $ 500,000$ 8,500,000 $ 8,500,000 $ 8,500,000 $ 8,000,000 $ 8,000,000 Losses per occurrence subject to reinsurance coverage (5) (8 )$ 8,000,000 $ 9,000,000 $ 9,000,000 $ 9,000,000 $ 9,000,000 Expiration June 30, 2023 June 30, 2023 June 30, 2022 June 30, 2022 June 30, 2021 date (8 ) Catastrophe Reinsurance: Initial loss subject to personal lines quota share treaty (8)$ 10,000,000 $ 10,000,000 $ 10,000,000 $ 10,000,000 None (5) None (5) Risk retained per catastrophe occurrence (5) (9) (10) (8 )$ 8,750,000 $ 7,400,000 $ 7,400,000 $ 10,000,000 $ 10,000,000 Catastrophe loss coverage in excess of quota share coverage (2) (5) (8 )$ 335,000,000 $ 335,000,000 $ 490,000,000 $ 490,000,000 $ 475,000,000 Catastrophe stub coverage for the period from October 18, 2021 through December 31, 2021 (6) NA NA NA NA$ 5,000,000 NA in excess of$ 5,000,000 Reinstatement premium Yes Yes Yes Yes Yes protection (3) (4) (8 )
(1) For personal lines, includes the addition of an automatic facultative
facility allowing KICO to obtain homeowners single risk coverage up to
(2) 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.
(3) For the period
protection for
reinstatement premium protection for
in excess of
(4) For the period
protection for$9,800,000 of catastrophe coverage in excess of$10,000,000 . 56 Table of Contents
(5) The personal lines quota share (homeowners, dwelling fire and canine
legal liability) expired on
and catastrophe reinsurance.
(6) Excludes freeze and freeze related claims.
(7) For the period
of loss treaty provides 50% reinsurance coverage for losses of
in excess of$600,000 . Reduces retention to$500,000 from$700,000 under the 2021/2023 Treaty and 2022/2023 Treaty. Excludes losses from named storms.
(8) Excess of loss and facultative facility, and catastrophe treaties will
expire on
through
(homeowners, dwelling fire and canine liability) and underlying excess of
loss reinsurance.
(9) For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this
treaty are excluded from a named catastrophe event. For the 2023/2024
Treaty, 17.5% of the 30% total of losses ceded under this treaty are
excluded from a named catastrophe event.
(10) Plus losses in excess of catastrophe coverage
Treaty Year
July 1, 2022 July 1, 2021 July 1, 2020
to to to
Line of Business June 30, 2023 June 30, 2022 June 30, 2021
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 % 95 %
Risk retained $ 300,000 $ 300,000 $ 300,000
Total reinsurance coverage per
occurrence $ 4,700,000 $ 4,700,000 $ 4,700,000
Losses per occurrence subject to
quota share reinsurance coverage $ 5,000,000 $ 5,000,000
$ 5,000,000 Expiration date June 30, 2023 June 30, 2022 June 30, 2021 Commercial Lines (1): General liability commercial policies Quota share treaty None Risk retained$ 750,000 Excess of loss coverage above risk retained$ 3,750,000 in excess of$ 750,000 Total reinsurance coverage per occurrence$ 3,750,000 Losses per occurrence subject to reinsurance coverage$ 4,500,000 Commercial Umbrella Quota share treaty 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. Year Ended 2022 included elevated economic inflation, which resulted in a significant increase in interest rates, a widening of credit spreads, lower public equity valuations, and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the value of our fixed income securities, which lowered our stockholders' equity materially for Year Ended 2022. The higher economic inflation impacted our loss and loss adjustment expenses as well; should these trends continue in the near-term, it would in all likelihood negatively impact our profitability.
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 COVID-19 pandemic caused significant financial market volatility, economic uncertainty, and interruptions to normal business activities. As of the date of this Annual Report, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity and capital position, the value of investments we hold in our investment portfolio, the premiums we charge, the demand for our products, our ability to collect premiums or any requirement to return premiums to our policyholders will ultimately be impacted. The impact of COVID-19 on our results for the year endedDecember 31, 2022 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 pandemics and other public health issues (like 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 negatively impacted 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. 58 Table of Contents
LETTER: Insurance companies walk a financial tightrope
AMERINST INSURANCE GROUP LTD – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Advisor News
- IRS CEO FRANK J. BISIGNANO VISITS OHIO TO TOUT WORKING FAMILIES TAX CUTS PROVISIONS ON NO TAX ON CAR LOAN INTEREST, NO TAX ON OVERTIME, ENHANCED DEDUCTION FOR SENIOR CITIZENS
- The hidden flaw in insurance AI adoption for advisors and carriers
- Rising healthcare costs impact 401(k) accounts
- What advisors think about pooled employer plans, alternative investments
- AI, stablecoins and private market expansion may reshape financial services by 2030
More Advisor NewsAnnuity News
- MetLife Inc. (NYSE: MET) Climbs to New 52-Week High
- The Standard and Pacific Guardian Life Announce Entry into Agreement to Transition Individual Annuities Business
- AuguStar Retirement launches StarStream Variable Annuity
- Prismic Life Announces Completion of Oversubscribed Capital Raise
- Guaranteed income streams help preserve assets later in retirement
More Annuity NewsHealth/Employee Benefits News
- Mom blames Florida Blue, Broward Health dispute for daughter’s $11,500 ER bill
- ASHLEY HINSON FAILS TO FOOL IOWANS WITH HER MISLEADING SENATE CAMPAIGN TV AD
- NEW: "ASHLEY HINSON AD MISLEADS VOTERS ABOUT HER RECORD"
- Idaho farmers can band together to buy cheaper health insurance through Farm Bureau deal
- Reed: Can these assets be saved?
More Health/Employee Benefits NewsLife Insurance News
- Kansas official running for governor received $300K in donations before key decision
- Investigators say C.R. man's life insurance claims for 3 children were fraudulent
- Shocking death of Kyle Busch renews debate over IUL plan
- WoodmenLife launches final expense life insurance offering
- The Standard and Pacific Guardian Life Announce Entry into Agreement to Transition Individual Annuities Business
More Life Insurance News