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KINGSTONE COMPANIES, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 three months and nine months endedSeptember 30, 2021 , respectively, 79.4% and 77.5% 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. 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.
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Commercial liability: Through July 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.
In May 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. In July 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 of July 31, 2019 for these lines
were non-renewed at the end of their annual terms. As of September 30, 2021 ,
there are no commercial liability policies in-force. As of September 30, 2021 ,
these expired policies represent approximately 20.3% 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. 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 condensed 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 condensed consolidated financial statements and related notes. In preparing these condensed 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 condensed 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. 41 Table of Contents 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 ceding commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets and the valuation of stock-based compensation. See Note 2 to the condensed consolidated financial statements.
Consolidated Results of Operations
Nine Months Ended
2020
The following table summarizes the changes in the results of our operations (in
thousands) for the periods indicated:
Nine months ended September 30,
($ in thousands) 2021 2020 Change Percent
Revenues
Direct written premiums $ 131,610 $ 125,090 $ 6,520 5.2 %
Assumed written premiums - - - na %
131,610 125,090 6,520 5.2 %
Ceded written premiums
Ceded to quota share treaties 374 24,562 (24,188 ) (98.5 )%
Ceded to excess of loss treaties 2,057 1,482
575 38.8 % Ceded to catastrophe treaties 19,423 17,770 1,653 9.3 % Total ceded written premiums 21,854 43,814 (21,960 ) (50.1 )% Net written premiums 109,756 81,276 28,480 35.0 % Change in unearned premiums Direct and assumed (2,911 ) 2,216 (5,127 ) na Ceded to quota share treaties (15 ) (2,392 ) 2,377 99.4 % Change in net unearned premiums (2,926 ) (176 ) (2,750 ) (1,562.5 )% Premiums earned Direct and assumed 128,698 127,305 1,393 1.1 % Ceded to reinsurance treaties (21,869 ) (46,206 ) 24,337 52.7 % Net premiums earned 106,829 81,099 25,730 31.7 % Ceding commission revenue 37 10,760 (10,723 ) (99.7 )% Net investment income 5,138 4,772 366 7.7 % Net gains (losses) on investments 5,480 (1,639 ) 7,119 na % Other income 577 773 (196 ) (25.4 )% Total revenues 118,062 95,765 22,296 23.3 % Expenses Loss and loss adjustment expenses Direct and assumed: Loss and loss adjustment expenses excluding the effect of catastrophes 67,739 52,737 15,002 28.4 % Losses from catastrophes (1) 12,541 20,407 (7,866 ) (38.5 )% Total direct and assumed loss and loss adjustment expenses 80,280 73,144 7,136 9.8 % Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 860 13,794 (12,934 ) (93.8 )% Losses from catastrophes (1) 360 10,033 (9,673 ) (96.4 )% Total ceded loss and loss adjustment expenses 1,220 23,827
(22,607 ) (94.9 )%
Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 66,879 38,943 27,936 71.7 % Losses from catastrophes (1) 12,181 10,374 1,807 17.4 % Net loss and loss adjustment expenses 79,060 49,317 29,743 60.3 % Commission expense 24,711 23,653 1,058 4.5 % Other underwriting expenses 19,723 19,434 289 1.5 % Other operating expenses 3,141 3,364 (223 ) (6.6 )% Depreciation and amortization 2,480 2,070 410 19.8 % Interest expense 1,370 1,370 - - % Total expenses 130,485 99,209 31,277 31.5 % Loss before taxes (12,423 ) (3,443 ) (8,980 ) (260.8 )% Income tax benefit (2,817 ) (1,379 ) (1,438 ) (104.3 )% Net loss$ (9,606 ) $ (2,064 ) $ (7,542 ) (365.4 )%
(1) The nine months 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
are issued for events that cause more than $25 million in total insured
losses and affect a significant number of policyholders and insurers.
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Nine months ended September 30,
Percentage
2021 2020 Point Change Percent Change
Key ratios:
Net loss ratio 74.0 % 60.8 % 13.2 21.7 %
Net underwriting expense
ratio 41.0 % 38.9 % 2.1 5.4 %
Net combined ratio 115.0 % 99.7 % 15.3 15.3 %
Direct Written Premiums
Direct written premiums during the nine months ended September 30, 2021 ("Nine
Months 2021") were $131,610,000 compared to $125,090,000 during the nine months
ended September 30, 2020 ("Nine Months 2020"). The increase of $6,520,000 , or
5.2%, was primarily due an increase in premiums from our personal lines
business. Direct written premiums from our personal lines business for Nine
Months 2021 were $124,593,000 , an increase of $4,995,000 , or 4.2%, from
$119,598,000 in Nine Months 2020. Direct written premiums from our livery
physical damage business for Nine Months 2021 were $6,837,000 , an increase of
$1,370,000 , or 25.1%, from $5,467,000 in Nine Months 2020. The increase in
livery physical damage direct written premiums is 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 $29,620,000 in Nine Months 2021 compared to $24,293,000 in Nine Months
2020. Direct written premiums from our Core business were $101,990,000 in Nine
Months 2021 compared to $100,796,000 in Nine Months 2020.
Net Written Premiums and Net Premiums Earned
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 Nine Months 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 Nine Months 2021 and Nine Months 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.
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Nine months ended September 30,
2021 2020
Quota share reinsurance rates
Personal lines
2019/2020 Treaty n/a 25% (1)
2018/2019 Treaty n/a 10% (2)
(1) The 2019/2020 Treaty was effective from
30, 2020 with a quota share reinsurance rate of 25%.
(2) The 2018/2019 Treaty expired on a run-off basis from
June 30, 2020 . Net written premiums increased$28,480,000 , or 35.0%, to$109,756,000 in Nine Months 2021 from$81,276,000 in Nine Months 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). The increase in net written premiums in Nine Months 2021 was attributable to the expiration of the 2019/2020 Treaty onDecember 30, 2020 on a cut-off basis (see table above). In Nine Months 2021, our premiums ceded under quota share treaties decreased by$24,188,000 in comparison to ceded premiums in Nine Months 2020. 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 Nine Months 2021, our ceded excess of loss reinsurance premiums increased by$575,000 over the comparable ceded premiums for Nine Months 2020. The increase was due to an increase in premiums subject to excess of loss reinsurance.
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 Nine Months 2021, our premiums ceded under catastrophe treaties increased by$1,653,000 over the comparable ceded premiums in Nine Months 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 . ThroughSeptember 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 throughSeptember 30, 2021 , our ceded catastrophe premiums were paid based on the total insured value of our risks projected as ofAugust 31, 2021 . 44 Table of Contents Net premiums earned Net premiums earned increased$25,730,000 , or 31.7%, to$106,829,000 in Nine Months 2021 from$81,099,000 in Nine Months 2020. The increase was due to the expiration of both the 2019/2020 Treaty onDecember 30, 2020 on a cut-off basis and the 2019/2020 Run-Off as ofJune 30, 2020 . Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Nine Months ended September 30,
($ in thousands) 2021 2020 Change Percent
Provisional ceding commissions earned
(98.7 )% Contingent ceding commissions earned (99 ) 138 (237 )
n/a
Total ceding commission revenue
(99.7 )% Ceding commission revenue was$37,000 in Nine Months 2021 compared to$10,760,000 in Nine Months 2020. The decrease of$10,723,000 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$10,486,000 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 higher upfront 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
in Nine Months 2020, an increase of
invested assets was 3.42% as of
Cash and invested assets were$246,004,000 as ofSeptember 30, 2021 compared to$220,749,000 as ofSeptember 30, 2020 . The$25,255,000 increase in cash and invested assets was primarily attributable to the return of premiums ceded, net of ceding commissions, at the expiration of the 2019/2020 Treaty and by an increase in unrealized gains during the periods afterSeptember 30, 2020 . 45 Table of Contents
Net gains on investments were$5,480,000 in Nine Months 2021 compared to net losses of$1,639,000 in Nine Months 2020. Unrealized gains on our equity securities and other investments in Nine Months 2021 were$2,603,000 , compared to unrealized losses of$2,394,000 in Nine Months 2020. Realized gains on sales of investments were$2,877,000 in Nine Months 2021 compared to a gain of$755,000 in Nine Months 2020. Other Income
Other income was$577,000 in Nine Months 2021 compared to$773,000 in Nine Months 2020. The decrease of$196,000 , or 25.4%, was primarily due to the elimination of fees in our commercial lines business that was in run-off in Nine Months 2020, a result of our decision inJuly 2019 to no longer underwrite
this line of business. Net Loss and LAE Net loss and LAE was$79,060,000 for Nine Months 2021 compared to$49,317,000 for Nine Months 2020. The net loss ratio was 74.0% in Nine Months 2021 compared to 60.8% in Nine Months 2020, an increase of 13.2 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: kins_10qimg58.jpg]]
(Components may not sum to totals due to rounding)
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The loss ratio during Nine Months 2021 was higher than Nine Months 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 sinceJune 2021 for Homeowners, our largest line of business, but remains elevated for Dwelling Fire. This 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 Nine Months 2021 was higher than the prior year period but was in line with the long-term average. The impact of catastrophe losses was high for Nine Months 2021. The winter was mild, but there were five catastrophe events during the three months endedSeptember 30, 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$9,600,000 , or a 9.0-point impact on the year-to-date loss ratio. The total impact of all catastrophe events on the loss ratio is 11.5 points for Nine Months 2021. This compares to a 12.8 points impact from catastrophe events for Nine Months 2020, which also had a mild winter but was heavily impacted by Tropical Storm Isaias in the three months endedSeptember 30, 2020 . Prior year development continued to be stable for Nine Months 2021. There was an overall favorable development of$11,000 , which had a marginal impact on the loss ratio.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
Commission Expense Commission expense was$24,711,000 in Nine Months 2021 or 19.2% of direct earned premiums. Commission expense was$23,653,000 in Nine Months 2020 or 18.6% of direct earned premiums. The increase in the rate is due to an increase in the estimate for annual contingent commissions for Nine Months 2021 as compared
to Nine Months 2020. Other Underwriting Expenses Other underwriting expenses were$19,723,000 in Nine Months 2021 compared to$19,434,000 in Nine Months 2020. The modest increase of$289,000 , or 1.5%, 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
favorably with the 4.2% increase in personal lines direct written premiums. The
decrease in employment costs was attributable to staff reductions.
Our net underwriting expense ratio in Nine Months 2021 was 41.0% compared to
38.9% in Nine Months 2020. The following table shows the individual components
of our net underwriting expense ratio for the periods indicated:
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Nine months ended
September 30, Percentage
2021 2020 Point Change
Other underwriting expenses
Employment costs 7.1 % 10.1 % (3.0 )
Underwriting fees (inspections/data services) 1.4 2.8
(1.4 ) IT expenses 3.0 2.6 0.4 Other expenses 7.0 8.4 (1.4 )
Total other underwriting expenses 18.5 23.9
(5.4 ) Commission expense 23.1 29.2 (6.1 ) Ceding commission revenue Provisional (0.1 ) (13.1 ) 13.0 Contingent 0.1 (0.2 ) 0.3
Total ceding commission revenue - (13.3 )
13.3 Other income (0.6 ) (0.9 ) 0.3
Net underwriting expense ratio 41.0 % 38.9 %
2.1 The overall 13.3 percentage point decrease in the benefit from ceding commissions in Nine Months 2020 was driven by the reduction in provisional ceding commission revenue due to the expiration of the 2019/2020 Treaty onDecember 30, 2020 . The components of our net underwriting expense ratio related to other underwriting expenses and commissions decreased in all categories due to more retention, given the reduction of ceded premiums after the expiration of the 2019/2020 Treaty onDecember 30, 2020 , resulting in an 11.5 percentage point decrease in these components of the net underwriting expense ratio. Other Operating Expenses Other operating expenses, related to the expenses of our holding company and Cosi, were$3,141,000 for Nine Months 2021 compared to$3,364,000 for Nine Months 2020. The decrease in Nine Months 2021 of$223,000 , or 6.6%, as compared to Nine Months 2020 was primarily due to a decrease in professional fees. This aforementioned decrease was partially offset by an increase in employment costs due to fluctuations in deferred compensation liability related to changes in the underlying invested portfolio and compensation paid pursuant to a relinquishment agreement withDale A. Thatcher , our former Chef Executive Officer (see Note 11 to the condensed consolidated financial statements).
Depreciation and Amortization
Depreciation and amortization was$2,480,000 in Nine Months 2021 compared to$2,070,000 in Nine Months 2020. The increase of$410,000 , or 19.8%, 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 was$1,370,000 for both Nine Months 2021 and Nine Months 2020. We incurred interest expense in connection with our$30.0 million issuance of long-term debt inDecember 2017 . 48 Table of Contents Income Tax Expense
Income tax benefit in Nine Months 2021 was$2,817,000 , which resulted in an effective tax expense rate of 22.7%. Income tax benefit in Nine Months 2020 was$1,379,000 , which resulted in an effective tax expense rate of 40.1%. Loss before taxes was$12,423,000 in Nine Months 2021 compared to loss before taxes of$3,443,000 in Nine Months 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 NOLs. We elected on our 2020 federal income tax return to carry back the entire annual 2020 NOL of$5,715,000 to tax year 2015. The corporate tax rate in 2015 was 34%, compared to the corporate tax rate
of 21% in 2020. Net Loss Net loss was$9,606,000 in Nine Months 2021 compared to net loss of$2,064,000 in Nine Months 2020. The increase in net loss of$7,542,000 was due to the circumstances described above, which caused the increases in net loss ratio, commission expense, other underwriting expenses, depreciation and amortization, and decrease in ceding commission revenue and other income, partially offset by the increases in our net premiums earned, net investment income, net gains on investments, and income tax benefit, and decreases in other operating expenses.
Three Months Ended
30, 2020
The following table summarizes the changes in the results of our operations (in
thousands) for the periods indicated:
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Three months ended September 30,
($ in thousands) 2021 2020 Change Percent
Revenues
Direct written premiums $ 48,865 $ 45,743 $ 3,122 6.8 %
Assumed written premiums - - - na %
48,865 45,743 3,122 6.8 %
Ceded written premiums
Ceded to quota share treaties 139 8,962 (8,823 ) (98.4 )%
Ceded to excess of loss treaties 998 535
463 86.5 % Ceded to catastrophe treaties 6,086 6,251 (165 ) (2.6 )% Total ceded written premiums 7,223 15,748 (8,525 ) (54.1 )% Net written premiums 41,642 29,995 11,647 38.8 % Change in unearned premiums Direct and assumed (4,848 ) (3,161 ) (1,687 ) (53.4 )% Ceded to quota share treaties 10 688 (678 ) (98.5 )% Change in net unearned premiums (4,838 ) (2,473 ) (2,365 ) (95.6 )% Premiums earned Direct and assumed 44,017 42,581 1,436 3.4 % Ceded to reinsurance treaties (7,214 ) (15,060 ) 7,846 52.1 % Net premiums earned 36,803 27,521 9,282 33.7 % Ceding commission revenue (7 ) 3,449 (3,456 ) na % Net investment income 1,677 1,494 183 12.2 % Net gains on investments 204 2,107 (1,903 ) (90.3 )% Other income 281 251 30 12.0 % Total revenues 38,958 34,822 4,136 11.9 % Expenses Loss and loss adjustment expenses Direct and assumed: Loss and loss adjustment expenses excluding the effect of catastrophes 23,643 15,656 7,987 51.0 % Losses from catastrophes (1) 12,435 18,069 (5,634 ) na % Total direct and assumed loss and loss adjustment expenses 36,078 33,725 2,353 7.0 % Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses na excluding the effect of catastrophes (22 ) 4,202 (4,224 ) % Losses from catastrophes (1) 360 9,405 (9,045 ) (96.2 )% Total ceded loss and loss adjustment expenses 338 13,607
(13,269 ) (97.5 )%
Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 23,665 11,454 12,211 106.6 % Losses from catastrophes (1) 12,075 8,664 3,411 39.4 % Net loss and loss adjustment expenses 35,740 20,118 15,622 77.7 % Commission expense 8,202 8,036 166 2.1 % Other underwriting expenses 6,563 6,347 216 3.4 % Other operating expenses 855 1,038 (183 ) (17.6 )% Depreciation and amortization 820 710 110 15.5 % Interest expense 457 457 - - % Total expenses 52,637 36,706 15,931 43.4 % Loss before taxes (13,679 ) (1,884 ) (11,795 ) (626.1 )% Income tax benefit (3,061 ) (656 ) (2,405 ) (366.6 )% Net loss$ (10,618 ) $ (1,228 ) $ (9,390 ) (764.7 )%
(1) The three months ended
losses, 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
bulletins are issued for events that cause more than
insured losses and affect a significant number of policyholders and insurers.
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[[Image Removed: kins_10qimg119.jpg]]
Direct Written Premiums
Direct written premiums during the three months ended September 30, 2021 ("Three
Months 2021") were $48,865,000 compared to $45,743,000 during the three months
ended September 30, 2020 ("Three Months 2020"). The increase of $3,122,000 , or
6.8%, was primarily due an increase in premiums from our personal lines
business. Direct written premiums from our personal lines business for Three
Months 2021 were $45,985,000 , an increase of $2,344,000 , or 5.4%, from
$43,641,000 in Three Months 2020. Direct written premiums from our livery
physical damage business for Three Months 2021 were $2,814,000 , an increase of
$768,000 , or 37.5%, from $2,046,000 in Three Months 2020. The increase in livery
physical damage direct written premiums is 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 $10,049,000 in Three Months 2021 compared to $9,197,000 in Three Months
2020. Direct written premiums from our Core business were $38,816,000 in Three
Months 2021 compared to $36,545,000 in Three Months 2020.
Net Written Premiums and Net Premiums Earned
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. The following table describes the quota share reinsurance ceding rates in effect during Three Months 2021 and Three Months 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.
Three months ended September 30,
2021 2020
Quota share reinsurance rates
Personal lines
2019/2020 Treaty n/a 25% (1)
(1) The 2019/2020 Treaty was effective from
30, 2020 with a quota share reinsurance rate of 25%.
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Net written premiums increased $11,647,000 , or 38.8%, to $41,642,000 in Three
Months 2021 from $29,995,000 in Three Months 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). The
increase in net written premiums in Three Months 2021 was attributable to the
expiration of the 2019/2020 Treaty on December 30, 2020 on a cut-off basis (see
table above). In Three Months 2021, our premiums ceded under quota share
treaties decreased by $8,823,000 in comparison to ceded premiums in Three Months
2020. Our personal lines business was subject to the 2019/2020 Treaty from
December 15, 2019 through December 30, 2020 .
Excess of loss reinsurance treaties
An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2021, our ceded excess of loss reinsurance premiums increased by$463,000 over the comparable ceded premiums for Three Months 2020. The increase was due to an increase in premiums subject to excess of loss reinsurance.
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 Three Months 2021, our premiums ceded under catastrophe treaties decreased by$165,000 over the comparable ceded premiums in Three Months 2020. The change was due to a decrease in reinsurance rates effectiveJuly 1, 2021 , partially offset by an increase in our limit effectiveJuly 1, 2021 . EffectiveJuly 1, 2020 , and continuing throughJune 30, 2021 , our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as ofAugust 31, 2020 . EffectiveJuly 1, 2021 , and continuing throughSeptember 30, 2021 , our ceded catastrophe premiums were paid based on the total insured value of our risks projected as ofAugust 31, 2021 . Net premiums earned
Net premiums earned increased
Months 2021 from
expiration of the 2019/2020 Treaty on
Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Three Months ended September 30,
($ in thousands) 2021 2020 Change Percent
Provisional ceding commissions earned
(98.8 )% Contingent ceding commissions earned (48 ) (12 ) (36 )
(300.0 )%
Total ceding commission revenue
na
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Ceding commission revenue was $(7,000) in Three Months 2021 compared to
$3,449,000 in Three Months 2020. The decrease of $3,456,000 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$3,420,000 decrease in provisional ceding commissions earned was due to the expiration of the 2019/2020 Treaty onDecember 30, 2020 on a cut-off basis.
Contingent Ceding Commissions Earned
The structure of the 2019/2020 Treaty and 2019/2020 Run-Off called for a higher upfront 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$1,677,000 in Three Months 2021 compared to$1,494,000 in Three Months 2020, an increase of$183,000 , or 12.2%. The average yield on invested assets was 3.42% as ofSeptember 30, 2021 compared to 3.51% as ofSeptember 30, 2020 . Cash and invested assets were$246,004,000 as ofSeptember 30, 2021 compared to$220,749,000 as ofSeptember 30, 2020 . The$25,255,000 increase in cash and invested assets was primarily attributable to the return of premiums ceded, net of ceding commissions, at the expiration of the 2019/2020 Treaty and by an increase in unrealized gains during the periods afterSeptember 30, 2020 .
Net gains on investments were$204,000 in Three Months 2021 compared to$2,107,000 in Three Months 2020. Unrealized losses on our equity securities and other investments in Three Months 2021 were$829,000 , compared to a gain of$1,501,000 in Three Months 2020. Realized gains on sales of investments were$1,033,000 in Three Months 2021 compared to$597,000 in Three Months 2020.
Other Income Other income was$281,000 in Three Months 2021 compared to$251,000 in Three Months 2020. The increase of$30,000 , or 12.0%, was primarily due to additional fees income related to the growth in direct written premiums. Net Loss and LAE
Net loss and LAE was
for Three Months 2020. The net loss ratio was 97.1% in Three Months 2021
compared to 73.1% in Three Months 2020, an increase of 24.0 percentage points.
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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: kins_10qimg120.jpg]]
(Components may not sum to totals due to rounding)
During Three Months 2021, the loss ratio was higher than Three Months 2020
mainly due to the impact of catastrophe events, an elevated frequency of
liability claims from the Dwelling Fire line, and a higher frequency of large
fire losses.
The impact of catastrophe losses was significant for Three Months 2021. There were five catastrophe events during Three Months 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$9.6 million , or a 26.1 point impact on the quarterly loss ratio. The total impact of all catastrophe events on the loss ratio is 33.1 points for the quarter. This compares to a 31.5-point impact from catastrophe events in Three Months 2020, which was heavily impacted by Tropical Storm Isaias.
Prior year development continued to be stable for Three Months 2021. The loss
estimates from all prior years were adjusted down by
marginal impact on the loss ratio.
The underlying loss ratio (loss ratio excluding the impact of catastrophe and
prior year development) was 64.0% for Three Months 2021, an increase of 22.0
points from the 42.0% underlying loss ratio recorded for Three Months 2020. The
higher 2021 loss ratio was primarily due to large fire claims and an increase in
liability claims frequency for the Dwelling Fire line, which is suspected to be
related to the COVID-19 pandemic.
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See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
Commission Expense Commission expense was$8,202,000 in Three Months 2021 or 18.6% of direct earned premiums. Commission expense was$8,036,000 in Three Months 2020 or 18.9% of direct earned premiums. The increase in the rate is due to an increase in the estimate for annual contingent commissions for Three Months 2021 as compared to Three Months 2020. Other Underwriting Expenses
Other underwriting expenses were
primarily due an increase in consulting fees and IT expense as part of an
initiative to reduce overall expenses with the use of technology. This
initiative resulted in a decrease or modest increase in the remaining other
underwriting expenses.
Our largest single component of other underwriting expenses is salaries and employment costs, with costs of$2,513,000 in Three Months 2021 compared to$2,835,000 in Three Months 2020. The decrease of$322,000 , or 11.4%, compares favorably with the 5.4% increase in personal lines direct written premiums. The decrease in employment costs was attributable to staff reductions. Our net underwriting expense ratio in Three Months 2021 was 39.3% compared to 38.8% in Three Months 2020. The following table shows the individual components of our net underwriting expense ratio for the periods indicated: Three months ended September 30, Percentage 2021 2020 Point Change Other underwriting expenses Employment costs 6.8 % 10.3 % (3.5 ) Underwriting fees (inspections/data services) 1.3 2.4 (1.1 ) IT expenses 2.9 2.7 0.2 Other expenses 6.9 7.7 (0.8 )
Total other underwriting expenses 17.9 23.1
(5.2 ) Commission expense 22.3 29.2 (6.9 ) Ceding commission revenue Provisional (0.1 ) (12.6 ) 12.5 Contingent 0.1 - 0.1
Total ceding commission revenue - (12.6 )
12.6 Other income (0.9 ) (0.9 ) -
Net underwriting expense ratio 39.3 % 38.8 %
0.5
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The overall 12.6 percentage point decrease in the benefit from ceding
commissions in Three Months 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 due
to more retention after the expiration of the 2019/2020 Treaty on December 30,
2020 , resulting in a 12.1 percentage point decrease in these components of the
net underwriting expense ratio.
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company and
Cosi, were $855,000 for Three Months 2021 compared to $1,038,000 for Three
Months 2020. The decrease in Three Months 2021 of $183,000 , or 17.6%, as
compared to Three Months 2020 was primarily due to a decrease in professional
fees and employment costs.
Depreciation and Amortization
Depreciation and amortization was$820,000 in Three Months 2021 compared to$710,000 in Three Months 2020. The increase of$110,000 , or 15.5%, 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 was$457,000 for both Three Months 2021 and Three Months 2020. We incurred interest expense in connection with our$30.0 million issuance of long-term debt inDecember 2017 . Income Tax Expense Income tax benefit in Three Months 2021 was$3,061,000 , which resulted in an effective tax expense rate of 22.4%. Income tax benefit in Three Months 2020 was$656,000 , which resulted in an effective tax expense rate of 34.8%. Loss before taxes was$13,679,000 in Three Months 2021 compared to loss before taxes of$1,884,000 in Three Months 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 NOLs. We elected on our 2020 federal income tax return to carry back the entire annual 2020 NOL of$5,715,000 to tax year 2015. The corporate tax rate in 2015 was 34%, compared to the corporate tax rate of 21% in 2020. Net Loss Net loss was$10,618,000 in Three Months 2021 compared to net loss of$1,228,000 in Three Months 2020. The increase in net loss of$9,390,000 was due to the circumstances described above, which caused the increases in net loss ratio, commission expense, other underwriting expenses, depreciation and amortization, and decreases in ceding commission revenue and net gains on investments, partially offset by increases in our net premiums earned, net investment income, other income and income tax benefit and a decrease in other operating expenses.
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 written premiums, net
premiums earned, and net loss and loss adjustment expenses by major product
type, which were determined based primarily on similar economic characteristics
and risks of loss.
56
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For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Gross premiums written:
Personal lines(3) $ 45,984,939 $ 43,640,603 $ 124,593,302 $ 119,598,207
Livery physical damage 2,813,571 2,045,746 6,836,999 5,466,552
Other(1) 66,659 62,664 180,485 192,395
Total without commercial
lines 48,865,169 45,749,013 131,610,786 125,257,154
Commercial lines (in
run-off effective July
2019)(2) - (6,848 ) (856 ) (167,583 )
Total gross premiums
written $ 48,865,169 $ 45,742,165 $ 131,609,930 $ 125,089,571
Net premiums written:
Personal lines(3) $ 38,762,235 $ 27,916,850 $ 102,741,368 $ 76,231,996
Livery physical damage 2,813,571 2,045,746 6,836,999 5,466,552
Other(1) 65,837 50,625 178,021 151,783
Total without commercial
lines 41,641,643 30,013,221 109,756,388 81,850,331
Commercial lines (in
run-off effective July
2019)(2) - (18,271 ) (856 ) (574,228 )
Total net premiums
written $ 41,641,643 $ 29,994,950 $ 109,755,532 $ 81,276,103
Net premiums earned:
Personal lines(3) $ 34,715,708 $ 25,220,883 $ 101,054,415 $ 71,434,757
Livery physical damage 2,028,786 2,014,458 5,598,605 6,803,475
Other(1) 58,757 49,939 176,731 149,087
Total without commercial
lines 36,803,251 27,285,280 106,829,751 78,387,319
Commercial lines (in
run-off effective July
2019)(2) - 235,801 (856 ) 2,712,068
Total net premiums
earned $ 36,803,251 $ 27,521,081 $ 106,828,895 $ 81,099,387
Net loss and loss
adjustment expenses(4):
Personal lines $ 32,958,728 $ 18,657,325 $ 72,353,668 $ 41,810,950
Livery physical damage 1,766,989 648,520 3,469,465 1,798,210
Other(1) 180,995 29,104 434,816 5,465
Unallocated loss
adjustment expenses 867,675 827,031 2,783,547 2,839,359
Total without commercial
lines 35,774,387 20,161,980 79,041,496 46,453,984
Commercial lines (in
run-off effective July
2019)(2) (34,152 ) (44,005 ) 18,621 2,863,443
Total net loss and loss
adjustment expenses $ 35,740,235 $ 20,117,975 $ 79,060,117 $ 49,317,427
Net loss ratio(4):
Personal lines 94.9 % 74.0 % 71.6 % 58.5 %
Livery physical damage 87.1 % 32.2 % 62.0 % 26.4 %
Other(1) 308.0 % 58.3 % 246.0 % 3.7 %
Total without commercial
lines 97.2 % 73.9 % 74.0 % 59.3 %
Commercial lines (in
run-off effective July na
2019)(2) -18.7 % 74.0 % 105.6 %
Total 97.1 % 73.1 % 74.0 % 60.8 %
(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 discussion above with regard to "Net Written Premiums and Net Premiums
Earned", as to changes in quota share ceding rates, effective
2020,
(4) See discussion above with regard to "Net Loss and LAE", as to catastrophe
losses in the three months and nine months ended
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Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the
periods indicated is as follows:
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Revenues
Net premiums earned $ 36,803,251 $ 27,521,081 $ 106,828,895 $ 81,099,387
Ceding commission
revenue (7,276 ) 3,448,774 37,400 10,760,087
Net investment income 1,676,596 1,494,086 5,137,867 4,771,316
Net gains (losses) on
investments 214,085 2,073,245 5,380,909 (1,580,398 )
Other income 322,705 248,824 617,257 754,943
Total revenues 39,009,361 34,786,010 118,002,328 95,805,335
Expenses
Loss and loss adjustment
expenses 35,740,235 20,117,975 79,060,117 49,317,427
Commission expense 8,201,935 8,036,298 24,711,115 23,652,765
Other underwriting
expenses 6,562,743 6,346,846 19,722,705 19,434,110
Depreciation and
amortization 780,906 676,989 2,374,203 1,970,859
Total expenses 51,285,819 35,178,108 125,868,140 94,375,161
(Loss) income from
operations (12,276,458 ) (392,098 ) (7,865,812 ) 1,430,174
Income tax benefit (2,633,026 ) (203,922 ) (1,812,195 ) (24,888 )
Net (loss) income $ (9,643,432 ) $ (188,176 ) $ (6,053,617 ) $ 1,455,062
Key Measures:
Net loss ratio 97.1 % 73.1 % 74.0 % 60.8 %
Net underwriting expense
ratio 39.3 % 38.8 % 41.0 % 38.9 %
Net combined ratio 136.4 % 111.9 % 115.0 % 99.7 %
Reconciliation of net
underwriting expense
ratio:
Acquisition costs and
other
underwriting expenses $ 14,764,678 $ 14,383,144 $ 44,433,820 $ 43,086,875
Less: Ceding commission
revenue 7,276 (3,448,774 ) (37,400 ) (10,760,087 )
Less: Other income (322,705 ) (248,824 ) (617,257 ) (754,943 )
Net underwriting
expenses $ 14,449,249 $ 10,685,546 $ 43,779,163 $ 31,571,845
Net premiums earned $ 36,803,251 $ 27,521,081 $ 106,828,895 $ 81,099,387
Net Underwriting Expense
Ratio 39.3 % 38.8 % 41.0 % 38.9 %
An analysis of our direct, assumed and ceded earned premiums, loss and loss
adjustment expenses, and loss ratios is shown below:
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Direct Assumed Ceded Net
Nine months ended September
30, 2021
Written premiums $ 131,609,930 $ - $ (21,854,398 ) $ 109,755,532
Change in unearned premiums (2,911,439 ) - (15,198 ) (2,926,637 )
Earned premiums $ 128,698,491 $ - $
(21,869,596 )
Loss and loss adjustment expenses exluding the effect of catastrophes$ 67,633,915 $ -$ (860,490 ) $ 66,773,425 Catastrophe loss 12,647,172 - (360,480 ) 12,286,692 Loss and loss adjustment expenses$ 80,281,087 $ - $
(1,220,970 )
Loss ratio excluding the effect of catastrophes 52.6 % 0.0 % 3.9 % 62.5 % Catastrophe loss 9.8 % 0.0 % 1.6 % 11.5 % Loss ratio 62.4 % 0.0 % 5.5 % 74.0 % Nine months ended September 30, 2020 Written premiums$ 125,089,571 $ -$ (43,813,468 ) $ 81,276,103 Change in unearned premiums 2,215,602 - (2,392,318 ) (176,716 ) Earned premiums$ 127,305,173 $ - $
(46,205,786 )
Loss and loss adjustment expenses exluding the effect of catastrophes$ 52,736,775 $ -$ (13,794,461 ) $ 38,942,314 Catastrophe loss 20,407,638 - (10,032,525 ) 10,375,113 Loss and loss adjustment expenses$ 73,144,413 $ - $
(23,826,986 )
Loss ratio excluding the effect of catastrophes 41.4 % 0.0 % 29.9 % 48.0 % Catastrophe loss 16.0 % 0.0 % 21.7 % 12.8 % Loss ratio 57.4 % 0.0 % 51.6 % 60.8 % Three months ended September 30, 2021 Written premiums$ 48,865,169 $ -$ (7,223,526 ) $ 41,641,643 Change in unearned premiums (4,848,145 ) - 9,753 (4,838,392 ) Earned premiums$ 44,017,024 $ - $
(7,213,773 )
Loss and loss adjustment expenses exluding the effect of catastrophes$ 23,537,875 $ -$ 21,239 $ 23,559,114 Catastrophe loss 12,541,601 - (360,480 ) 12,181,121 Loss and loss adjustment expenses$ 36,079,476 $ -$ (339,241 ) $ 35,740,235 Loss ratio excluding the effect of catastrophes 53.5 % 0.0 % -0.3 % 64.0 % Catastrophe loss 28.5 % 0.0 % 5.0 % 33.1 % Loss ratio 82.0 % 0.0 % 4.7 % 97.1 % Three months ended September 30, 2020 Written premiums$ 45,742,165 $ -$ (15,747,215 ) $ 29,994,950 Change in unearned premiums (3,161,356 ) - 687,487 (2,473,869 ) Earned premiums$ 42,580,809 $ - $
(15,059,728 )
Loss and loss adjustment expenses exluding the effect of catastrophes$ 15,655,839 $ -$ (4,202,861 ) $ 11,452,978 Catastrophe loss 18,069,690 - (9,404,693 ) 8,664,997 Loss and loss adjustment expenses$ 33,725,529 $ - $
(13,607,554 )
Loss ratio excluding the
effect of catastrophes 36.8 % 0.0 % 27.9 % 91.6 %
Catastrophe loss 42.4 % 0.0 % 62.4 % 31.5 %
Loss ratio 79.2 % 0.0 % 90.3 % 73.1 %
(Percent components may not sum to totals due to rounding)
59
Table of Contents
The key measures for our insurance underwriting business for the periods
indicated are as follows:
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Net premiums earned $ 36,803,251 $ 27,521,081 $ 106,828,895 $ 81,099,387
Ceding commission revenue (7,276 ) 3,448,774 37,400 10,760,087
Other income 322,705 248,824 617,257 754,943
Loss and loss adjustment
expenses (1) 35,740,235 20,117,975
79,060,117 49,317,427
Acquisition costs and other underwriting expenses: Commission expense 8,201,935 8,036,298 24,711,115 23,652,765 Other underwriting expenses 6,562,743 6,346,846 19,722,705 19,434,110 Total acquisition costs and other underwriting expenses 14,764,678 14,383,144 44,433,820 43,086,875 Underwriting (loss) income$ (13,386,233 ) $ (3,282,440 ) $ (16,010,385 ) $ 210,115 Key Measures: Net loss ratio excluding the effect of catastrophes 64.0 % 41.6 % 62.5 % 48.0 % Effect of catastrophe loss on net loss ratio (1) 33.1 % 31.5 % 11.5 % 12.8 % Net loss ratio 97.1 % 73.1 % 74.0 % 60.8 % Net underwriting expense ratio excluding the effect of catastrophes 39.3 % 38.8 % 41.0 % 38.9 % Effect of catastrophe loss on net underwriting expense ratio 0.0 % 0.0 % 0.0 % 0.0 % Net underwriting expense ratio 39.3 % 38.8 % 41.0 % 38.9 % Net combined ratio excluding the effect of catastrophes 103.3 % 80.4 % 103.5 % 86.9 % Effect of catastrophe loss on net combined ratio (1) 33.1 % 31.5 % 11.5 % 12.8 % Net combined ratio 136.4 % 111.9 % 115.0 % 99.7 % Reconciliation of net underwriting expense ratio: Acquisition costs and other underwriting expenses$ 14,764,678 $ 14,383,144 $ 44,433,820 $ 43,086,875 Less: Ceding commission revenue 7,276 (3,448,774 ) (37,400 ) (10,760,087 ) Less: Other income (322,705 ) (248,824 )
(617,257 ) (754,943 )
$ 14,449,249 $ 10,685,546 $
43,779,163
Net earned premium
Net Underwriting Expense Ratio 39.3 % 38.8 % 41.0 % 38.9 %
(1) For the three months ended
net catastrophe losses and loss adjustment expenses of
2020, includes the sum of net catastrophe losses and loss adjustment expenses
of $12,286,692 and $10,375,113 , respectively.
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Investments
Portfolio Summary
Fixed-Maturity Securities
The following table presents a breakdown of the amortized cost, estimated fair
value, and unrealized gains and losses of our investments in fixed-maturity
securities classified as available-for-sale as of
September 30, 2021
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
U.S. Treasury
securities
and
obligations
of U.S.
government
corporations
and agencies$ 2,002,935 $ 3,945 $ - $ -$ 2,006,880 1.3 % Political subdivisions of States, Territories and
Possessions 14,384,428 259,721 (89,844 ) - 14,554,305 9.5 % Corporate and other bonds Industrial and miscellaneous 88,059,505 7,391,053 (27,577 ) - 95,422,981 62.3 %
Residential
mortgage and other asset backed securities 40,988,538 561,035 (243,639 ) (858 ) 41,305,076 26.9 % Total$ 145,435,406 $ 8,215,754 $ (361,060 ) $ (858 )$ 153,289,242 100.0 % 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$ 145,045,584 $ 12,636,222 $ (20,587 ) $ (111,947 ) $ 157,549,272 100.0 %
(1) KICO placed certain residential mortgage backed securities as eligible
collateral in a designated custodian account related to its membership in the
consolidated financial statements). The eligible collateral would be pledged
to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of
approximately
securities if pledged as collateral. As of
outstanding balance on the FHLBNY credit line.
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Table of Contents
Equity 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 of
September 30, 2021
Estimated % of
Gross Gross Fair Estimated
Category Cost Gains Losses Value Fair Value
Preferred stocks
57.2 % Common stocks and exchange traded funds 15,610,331 1,620,343 (70,591 ) 17,160,083 42.8 % Total$ 37,545,241 $ 2,743,653 $ (228,022 ) $ 40,060,872 100.0 % December 31, 2020 Estimated % of Gross Gross Fair Estimated Category Cost Gains Losses Value Fair Value
Preferred stocks
53.8 % Common stocks and exchange traded 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 The following table presents a breakdown of the cost and estimated fair value of, and gross gains on, our other investments as ofSeptember 30, 2021 andDecember 31, 2020 : September 30, 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 $ 3,379,730 $ 7,379,111 $ 2,149,381
$ 1,369,245 $ 3,518,626 62 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
September 30, 2021
Cost or Gross Gross Unrealized Losses Estimated % of
Less than
Amortized Unrealized 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
U.S. Treasury
securities $ 729,630 $ 210,466 $ - $ - $ 940,096 9.7 %
Political
subdivisions
of States,
Territories
and
Possessions 998,296 29,744 - - 1,028,040 10.6 %
Exchange
traded debt 304,111 - (16,611 ) - 287,500 3.0 %
Corporate and
other bonds
Industrial
and
miscellaneous 7,134,946 315,285 (6,363 ) - 7,443,868 76.7 %
Total $ 9,166,983 $ 555,495 $ (22,974 ) $ - $ 9,699,504 100.0 %
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.
A summary of the amortized cost and fair value of our investments in
held-to-maturity securities by contractual maturity as of
63
Table of Contents
September 30, 2021 December 31, 2020
Amortized Estimated Amortized Estimated
Remaining Time to Maturity Cost Fair Value Cost Fair Value
Less than one year $ 1,394,102 $ 1,420,414 $ - $ -
One to five years 1,205,500 1,301,973 2,598,193 2,777,936
Five to ten years 1,511,072 1,686,289 1,502,603 1,727,316
More than 10 years 5,056,309 5,290,828 3,268,019 3,689,572
Total $ 9,166,983 $ 9,699,504 $ 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 ofSeptember 30, 2021 andDecember 31, 2020 as rated byStandard & Poor's (or, if unavailable fromStandard & Poor's , then Moody's or Fitch): September 30, 2021 December 31, 2020 Estimated Percentage of Estimated Percentage of Fair Market Fair Market Fair Market Fair Market Value Value Value Value Rating U.S. Treasury securities$ 2,006,880 1.3 %$ 3,049,900 1.9 % Corporate and municipal bonds AAA 2,417,351 1.6 % 1,453,924 0.9 % AA 10,258,737 6.7 % 3,572,164 2.3 % A 23,227,866 15.2 % 23,989,619 15.2 % BBB 73,042,960 47.7 % 95,814,824 60.9 % Non rated 1,030,372 0.7 % 1,006,901 0.6 % Total corporate and municipal bonds 109,977,286 71.9 % 125,837,432 79.9 % Residential mortgage backed securities AAA 2,000,580 1.3 % 5,467,075 3.5 % AA 36,854,164 23.9 % 18,865,749 12.0 % A 996,406 0.7 % 2,451,635 1.6 % BBB 30,927 0.0 % 50,276 0.0 % CCC 824,310 0.5 % 960,042 0.6 % CC - 0.0 % 62,029 0.0 % C - 0.0 % 15,161 0.0 % D 58,117 0.0 % 119,144 0.1 % Non rated 540,572 0.4 % 670,829 0.4 % Total residential mortgage backed securities 41,305,076 26.8 % 28,661,940 18.2 % Total$ 153,289,242 100.0 %$ 157,549,272 100.0 %
The table below summarizes the average yield by type of fixed-maturity security
as of
64
Table of Contents
Category September 30, 2021 December 31, 2020
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 3.60 %
2.59 %
Political subdivisions of States, Territories and Possessions 2.99 % 3.05 % Corporate and other bonds Industrial and miscellaneous 3.58 % 3.52 %
Residential mortgage backed securities 2.18 %
1.18 % Total 3.17 % 3.07 %
The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as ofSeptember 30, 2021 andDecember 31, 2020 :September 30, 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
Fair value is 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 September 30, 2021 and December 31, 2020 , 81% of the
investment portfolio recorded at fair value was priced based upon quoted market
prices.
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 September
30, 2021 and December 31, 2020 :
65
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September 30, 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 9,106,494 (89,844 ) 6
- - - 9,106,494 (89,844 ) Corporate and other bonds industrial and
miscellaneous 1,071,100 (27,577 ) 1
- - - 1,071,100 (27,577 ) Residential mortgage and other asset backed securities 27,039,698 (243,639 ) 17 12,436 (858 ) 1 27,052,134 (244,497 )
Total
fixed-maturity
securities$ 37,217,292 $ (361,060 ) 24$ 12,436 $ (858 ) 1$ 37,229,728 $ (361,918 ) 66 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 ) 67 Table of Contents
There were 25 securities atSeptember 30, 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. 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 nine months endedSeptember 30, 2021 , the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the nine months endedSeptember 30, 2021 , KICO paid dividends of$3,500,000 to us. 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 nine months endedSeptember 30, 2021 and 2020.
As of
totaled approximately
currently available are insufficient to cover our holding company cash
requirements, we will seek to obtain additional financing.
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.
68
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:
BIOCEPT INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Chubb Limited Announces Pricing of $1.6 Billion Senior Notes Offering by Subsidiary
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