KINGSTONE COMPANIES, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - Insurance News

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 downstate New York, consisting of New York City, Long
Island and Westchester County, although we are actively writing business in New
Jersey, Rhode Island, Connecticut and Massachusetts. We are licensed in the
States of New York, New Jersey, Rhode Island, Connecticut, Massachusetts,
Pennsylvania, Maine, and New Hampshire. For the three months ended March 31,
2022, 80.6% of KICO's direct written premiums came from the New 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.




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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: 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 March 31, 2022 and
December 31, 2021, there were no commercial liability policies in-force. As of
March 31, 2022, these expired policies represent approximately 19.9% 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:

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.




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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 of
Kingstone 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. See the Critical Accounting
Estimates section within Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the year ended December 31, 2021 for further information.

We believe that the most critical accounting policies relate to the reporting of
reserves for loss and LAE, including losses that have occurred but have not been
reported prior to the reporting date, amounts recoverable from third party
reinsurers, deferred income taxes, the impairment of investment securities, and
the valuation of stock-based compensation. See Note 2 to the consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2021.

Preliminary Non-binding Indication of Interest

On May 4, 2022, our Board of Directors received a preliminary non-binding
indication of interest from Griffin Highline Capital LLC ("Griffin Highline")
with regard to an acquisition of all of the outstanding equity of our
company. TigerRisk Capital Markets & Advisory has been engaged to advise our
Board of Directors regarding strategic transactions. Our Board of Directors will
carefully review the proposal to determine the course of action that it believes
is in the best interest of our company and all of our stockholders. Due to the
uncertainty as to the consummation of a transaction of the type sought by
Griffin Highline, nothing in this Quarterly Report, including the financial
statements comprising a portion hereof, include any adjustments to reflect the
possible effects of the consummation of such a transaction.