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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 six months endedJune 30, 2022 , respectively, 79.8% and 80.2% 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.
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 ofJune 30, 2022 andDecember 31, 2021 , there were no commercial liability policies in-force. As ofJune 30, 2022 , these expired policies represent approximately 18.6% of loss and LAE reserves net of reinsurance recoverables. See discussion below under "Additional Financial Information". 43 Table of Contents 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. 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 endedDecember 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 endedDecember 31, 2021 .
Non-binding Indication of Interest
OnMay 4, 2022 , our Board of Directors received a preliminary non-binding indication of interest fromGriffin Highline Capital LLC ("Griffin Highline") with regard to an acquisition of all of the outstanding equity of our company. OnAugust 5, 2022 , Griffin Highline filed Amendment No. 3 to Schedule 13D with theSEC which indicates that, following substantial completion of Griffin Highline's due diligence and after discussions with management of our company, Griffin Highline submitted a final non-binding indication of interest to our Board of Directors proposing a transaction whereby an entity formed by Griffin Highline would acquire all of the outstanding equity of our company. Following delivery of the non-binding proposal, we agreed to extend the period of exclusivity with Griffin Highline under its previously executed exclusivity agreement for a limited time period to further pursue the proposal.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. 44 Table of Contents
Consolidated Results of Operations
Six Months Ended
The following table summarizes the changes in the results of our
operations (in thousands) for the periods indicated:
Six months ended June 30,
($ in thousands) 2022 2021 Change Percent
Revenues
Direct written premiums $ 92,762 $ 82,745 $ 10,017 12.1 %
Assumed written premiums - - - na %
92,762 82,745 10,017 12.1 %
Ceded written premiums
Ceded to quota share treaties (1) 21,949 236
21,713 9,200.4 %
Ceded to excess of loss treaties 1,743 1,059
684 64.6 %
Ceded to catastrophe treaties 14,126 13,336 790 5.9 % Total ceded written premiums 37,818 14,631 23,187 158.5 % Net written premiums 54,944 68,114 (13,170 ) (19.3 )%
Change in unearned premiums
Direct and assumed (393 ) 1,937
(2,330 ) 120.3 %
Ceded to quota share treaties (1) 25 (25 ) 50 na % Change in net unearned premiums (368 ) 1,912 (2,280 ) 119.2 % Premiums earned Direct and assumed 92,369 84,681 7,688 9.1 % Ceded to reinsurance treaties (37,794 ) (14,655 )
(23,139 ) (157.9 )%
Net premiums earned 54,575 70,026
(15,451 ) (22.1 )%
Ceding commission revenue (1) 9,397 45 9,352 na % Net investment income 1,993 3,461
(1,468 ) (42.4 )%
Net (losses) gains on investments (8,916 ) 5,276 (14,192 ) na % Other income 480 296 184 62.2 % Total revenues 57,530 79,104 (21,575 ) (27.3 )% Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses
excluding the effect of catastrophes 52,832 44,096 8,736 19.8 %
Losses from catastrophes (2) 7,032 106
6,926 6,534.0 %
Total direct and assumed loss and loss adjustment expenses 59,864 44,202
15,662 35.4 %
Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 14,367 882
13,485 1,528.9 %
Losses from catastrophes (2) 3,901 - 3,901 na % Total ceded loss and loss adjustment expenses 18,268 882
17,386 1,971.2 %
Net loss and loss adjustment expenses:
Loss and loss adjustment expenses
excluding the effect of catastrophes 38,465 43,214 (4,749 ) (11.0 )%
Losses from catastrophes (2) 3,132 106
3,026 2,854.7 %
Net loss and loss adjustment expenses 41,597 43,320 (1,723 ) (4.0 )%
Commission expense 16,832 16,509 323 2.0 % Other underwriting expenses 13,441 13,160 281 2.1 % Other operating expenses 1,548 2,286
(738 ) (32.3 )%
Depreciation and amortization 1,647 1,660
(13 ) (0.8 )% Interest expense 913 913 - - % Total expenses 75,978 77,848 (1,870 ) (2.4 )% (Loss) income before taxes (18,448 ) 1,256 (19,704 ) na % Income tax (benefit) expense (3,871 ) 244 (4,115 ) na % Net (loss) income$ (14,577 ) $ 1,012 $ (15,589 ) na % (Columns in the table above may not sum to totals due to rounding) 45 Table of Contents
(1) Effective
treaty.
(2) The six months ended
are defined as losses from an event for which a catastrophe bulletin and
related serial number has been issued by the Property Claims Services (PCS)
unit of the
issued for events that cause more than
and affect a significant number of policyholders and insurers.
Six months ended June 30,
Percentage Percent
2022 2021 Point Change Change
Key ratios:
Net loss ratio 76.2 % 61.9 % 14.3 23.1 %
Net underwriting expense ratio 37.4 % 41.9 %
(4.5 ) (10.7 )% Net combined ratio 113.6 % 103.8 % 9.8 9.4 % Direct Written Premiums Direct written premiums during the six months endedJune 30, 2022 ("Six Months 2022") were$92,762,000 compared to$82,745,000 during the six months endedJune 30, 2021 ("Six Months 2021"). The increase of$10,017,000 , or 12.1%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Six Months 2022 were$86,955,000 , an increase of$8,347,000 , or 10.6%, from$78,608,000 in Six Months 2021. The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force. Direct written premiums from our livery physical damage business for Six Months 2022 were$5,727,000 , an increase of$1,704,000 , or 42.3%, from$4,023,000 in Six Months 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$74,382,000 in Six Months 2022 compared to$66,531,000 in Six Months 2021. Direct written premiums from our Expansion business were$18,380,000 in Six Months 2022 compared to$16,214,000 in Six Months 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 Six Months 2021. Net written premiums decreased$13,170,000 , or 19.3%, to$54,944,000 in Six Months 2022 from$68,114,000 in Six Months 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 Six Months 2022, our premiums ceded under quota share treaties increased by$23,187,000 in comparison to ceded premiums in Six Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Six Months 2022, compared to no personal lines quota share treaty in Six Months 2021. 46 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 Six Months 2022, our ceded excess of loss reinsurance premiums increased by$684,000 over the comparable ceded premiums for Six Months 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 Six Months 2022, our premiums ceded under catastrophe treaties increased by$790,000 over the comparable ceded premiums in Six Months 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$15,451,000 , or 22.1%, to$54,575,000 in Six Months 2022 from$70,026,000 in Six Months 2021. The decrease was due to the inception of the 2021/2023 Treaty onDecember 31, 2021 . The decrease resulting from the 2021/2023 Treaty in Six Months 2022 was partially offset by an increase in direct written premium. Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Six months ended June 30,
($ in thousands) 2022 2021 Change Percent
Provisional ceding commissions earned
9,620.0 %
Contingent ceding commissions earned 163 (50 ) 213
n/a%
Total ceding commission revenue
20,782.2 % Ceding commission revenue was$9,397,000 in Six Months 2022 compared to$45,000 in Six Months 2021. The increase of$9,352,000 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. 47 Table of Contents
Provisional Ceding Commissions Earned
In Six Months 2022 we earned provisional ceding commissions from personal lines
earned premiums ceded under the 2021/2023 Treaty which was effective as of
Months 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$1,993,000 in Six Months 2022 compared to$3,461,000 in Six Months 2021, a decrease of$1,468,000 , or 42.4%. The decrease in investment income is 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 3.51% as ofJune 30, 2022 compared to 3.45% as ofJune 30, 2021 . Cash and invested assets were$193,784,000 as ofJune 30, 2022 compared to$234,100,000 as ofJune 30, 2021 . The$40,316,000 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 on investments were$8,916,000 in Six Months 2022 compared to net gains of$5,276,000 in Six Months 2021. Unrealized losses on our equity securities and other investments in Six Months 2022 were$8,705,000 , compared to net gains of$3,431,000 in Six Months 2021. Realized losses on sales of investments were$210,900 in Six Months 2022 compared to realized gains of$1,844,000 in Six Months 2021. Other Income
Other income was
Six Months 2021, an increase of
Net Loss and LAE Net loss and LAE was$41,597,000 for Six Months 2022 compared to$43,320,000 for Six Months 2021. The net loss ratio was 76.2% in Six Months 2022 compared to 61.9% in Six Months 2021, an increase of 14.3 percentage points. 48 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_10qimg72.jpg]]
(Components may not sum to totals due to rounding)
For Six Months 2022, the loss ratio was higher than Six Months 2021 due to
water damage property claims, which were primarily driven by winter-related
water damage claims resulting from freezing temperature.
The estimated net catastrophe losses were$3,132,000 for Six Months 2022, which contributed 5.7 points to the loss ratio. This is mostly driven by two winter events in the first quarter. There were also five minor wind catastrophe events during Six Months 2022, but the impact was not significant. As a comparison, catastrophe events had a loss ratio impact of only 0.2 point for Six Months 2021 due to a very mild winter season last year. Prior years in total have unfavorable development of$270,000 for Six Months 2022, driven by large fire losses, which occurred in 2021. This contributed
0.5 point to the loss ratio.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
49
Table of Contents
Commission Expense
Commission expense was $16,832,000 in Six Months 2022 or 18.2% of direct earned
premiums. Commission expense was $16,509,000 in Six Months 2021 or 19.5% of
direct earned premiums. The increase of $323,000 was primarily due to an
increase in direct earned premiums of $7,688,000 to $92,369,000 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$13,441,000 , or 14.6% of direct earned premiums, in Six Months 2022 compared to$13,160,000 , or 15.5% of direct earned premiums, in Six Months 2021. The increase of$281,000 , or 2.1%, was primarily due to increases in expenses related to our growth in direct earned premiums, and the reduction as a percentage of direct earned premiums is due to our continuing 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 12.1% increase in direct written premiums.
50
Table of Contents
Our net underwriting expense ratio in Six Months 2022 was 37.4% compared to
41.9% in Six Months 2021. The following table shows the individual components of
our net underwriting expense ratio for the periods indicated:
Six months ended Percentage
June 30, Point Changes
2022 2021
Other underwriting expenses
Employment costs 9.3 % 7.3 % 2.0
Underwriting fees (inspections/surveys) 1.8 1.4
0.4 IT expenses 4.2 3.1 1.1 Profesional fees 1.6 1.4 0.2 Other expenses 7.7 5.5 2.2
Total other underwriting expenses 24.6 18.7
5.9 Commission expense 30.8 23.6 7.2 Ceding commission revenue Provisional (16.9 ) (0.1 ) (16.8 ) Contingent (0.3 ) 0.1 (0.4 )
Total ceding commission revenue (17.2 ) -
(17.2 ) Other income (0.9 ) (0.4 ) (0.5 )
Net underwriting expense ratio 37.4 % 41.9 %
(4.5 )
(Components may not sum to totals due to rounding)
The overall 17.2 percentage point increase in the benefit from ceding
commissions in Six Months 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 Six Months 2022 being ceded due to the inception
of the 2021/2023 Treaty.
51
Table of Contents
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company and
Cosi, were $1,548,000 for Six Months 2022 compared to $2,286,000 for Six Months
2021. The following table shows a breakdown of the significant components of
other operating expenses for the periods indicated:
Six months ended
June 30,
($ in thousands) 2022 2021 Change Percent
Other operating expenses
Employement costs $ (96 ) $ 597 $ (692 ) na%
Bonuses - - - na
Equity compensation 1,016 981 35 3.6
Professional 147 157 (10 ) (6.4 )
Directors fees 164 164 - -
Insurance 77 120 (43 ) (35.8 )
Other expenses 240 267 (28 ) (10.4 )
Total other operating expenses
(32.3 )%
(Components may not sum to totals due to rounding)
The decrease in Six Months 2022 of
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.
Depreciation and Amortization
Depreciation and amortization was$1,647,000 in Six Months 2022 compared to$1,660,000 in Six Months 2021. The decrease of$13,000 , or 0.8%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. 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 was
incurred interest expense in connection with our
long-term debt in
Income Tax (Benefit) Expense
Income tax benefit in Six Months 2022 was$3,871,000 , which resulted in an effective tax benefit rate of 21.0%. Income tax expense in Six Months 2021 was$244,000 , which resulted in an effective tax rate of 19.4%. Loss before taxes was$18,448,000 in Six Months 2022 compared to income before taxes of$1,256,000 in Six Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Six Months 2022 compared to Six Months 2021. Net (Loss) Income
Net loss was
in Six Months 2021. The increase in net loss of
circumstances described above.
52
Table of Contents
Three Months Ended
The following table summarizes the changes in the results of our
operations (in thousands) for the periods indicated:
Three months ended June 30,
($ in thousands) 2022 2021 Change Percent
Revenues
Direct written premiums $ 49,778 $ 44,616 $ 5,162 11.6 %
Assumed written premiums - - - na%
49,778 44,616 5,162 11.6 %
Ceded written premiums
Ceded to quota share treaties (1) 11,803 98
11,705 11,943.9 %
Ceded to excess of loss treaties 886 535 351 65.6 % Ceded to catastrophe treaties 7,063 6,669 394 5.9 % Total ceded written premiums 19,752 7,302 12,450 170.5 % Net written premiums 30,026 37,314 (7,288 ) (19.5 )%
Change in unearned premiums
Direct and assumed (2,786 ) (1,852 )
(934 ) (50.4 )%
Ceded to quota share treaties (1) 663 (25 ) 688 na% Change in net unearned premiums (2,123 ) (1,877 )
(246 ) (13.1 )% Premiums earned Direct and assumed 46,993 42,762 4,231 9.9 % Ceded to reinsurance treaties (19,091 ) (7,326 )
(11,765 ) (160.6 )%
Net premiums earned 27,902 35,436
(7,534 ) (21.3 )%
Ceding commission revenue (1) 4,716 46 4,670 na% Net investment income 634 1,678
(1,044 ) (62.2 )%
Net (losses) gains on investments (4,517 ) 2,315 (6,832 ) na% Other income 245 125 120 96.0 % Total revenues 28,979 39,600 (10,621 ) (26.8 )% Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses
excluding the effect of catastrophes 26,323 20,940 5,383
25.7 % Losses from catastrophes (2) 195 (123 ) 318 na% Total direct and assumed loss and loss adjustment expenses 26,519 20,817 5,701 27.4 % Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 7,780 58
7,722 13,313.8 %
Losses from catastrophes (2) 83 - 83 na% Total ceded loss and loss adjustment expenses 7,863 58 7,805 13,456.9 % Net loss and loss adjustment expenses:
Loss and loss adjustment expenses
excluding the effect of catastrophes 18,544 20,882 (2,338 ) (11.2 )%
Losses from catastrophes (2) 112 (123 ) 235 na% Net loss and loss adjustment expenses 18,656 20,759 (2,103 ) (10.1 )% Commission expense 8,481 8,286 195 2.4 %
Other underwriting expenses 6,625 6,693
(68 ) (1.0 )%
Other operating expenses 666 933
(267 ) (28.6 )%
Depreciation and amortization 877 837
40 4.8 % Interest expense 457 457 - -% Total expenses 35,762 37,965 (2,203 ) (5.8 )% (Loss) income before taxes (6,782 ) 1,635 (8,418 ) na% Income tax (benefit) expense (1,403 ) 312
(1,715 ) na%
Net (loss) income$ (5,380 ) $ 1,323 $ (6,703 ) na% (Columns in the table above may not sum to totals due to rounding) 53 Table of Contents
(1) Effective
treaty.
(2) The three 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.
Three months ended June 30,
Percentage Percent
2022 2021 Point Change Change
Key ratios:
Net loss ratio 66.9 % 58.6 % 8.3 14.2 %
Net underwriting expense ratio 36.4 % 41.8 %
(5.4 ) (12.9 )% Net combined ratio 103.3 % 100.4 % 2.9 2.9 % Direct Written Premiums
Direct written premiums during the three months endedJune 30, 2022 ("Three Months 2022") were$49,778,000 compared to$44,616,000 during the three months endedJune 30, 2021 ("Three Months 2021"). The increase of$5,162,000 , or 11.6%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Three Months 2022 were$46,792,000 , an increase of$4,342,000 , or 10.2%, from$42,450,000 in Three Months 2021. The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force. Direct written premiums from our livery physical damage business for Three Months 2022 were$2,954,000 , an increase of$835,000 , or 39.4%, from$2,119,000 in Three Months 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$39,734,000 in Three Months 2022 compared to$35,614,000 in Three Months 2021. Direct written premiums from our Expansion business were$10,044,000 in Three Months 2022 compared to$9,002,000 in Three Months 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 Three Months 2021. Net written premiums decreased$7,288,000 , or 19.5%, to$30,026,000 in Three Months 2022 from$37,314,000 in Three Months 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 Three Months 2022, our premiums ceded under quota share treaties increased by$12,450,000 in comparison to ceded premiums in Three Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Three Months 2022, compared to no personal lines quota share treaty in Three Months 2021. 54 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 Three Months 2022, our ceded excess of loss reinsurance premiums increased by$351,000 over the comparable ceded premiums for Three Months 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 Three Months 2022, our premiums ceded under catastrophe treaties increased by$394,000 over the comparable ceded premiums in Three Months 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$7,534,000 , or 21.3%, to$27,902,000 in Three Months 2022 from$35,436,000 in Three Months 2021. The decrease was due to the inception of the 2021/2023 Treaty onDecember 31, 2021 . The decrease resulting from the 2021/2023 Treaty in Three Months 2022 was partially offset by an increase in direct written premium. Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Three months ended June 30,
($ in thousands) 2022 2021 Change Percent
Provisional ceding commissions earned
9,286.0 % Contingent ceding commissions earned 23 (4 ) 27
n/a %
Total ceding commission revenue
Ceding commission revenue was$4,716,000 in Three Months 2022 compared to$46,000 in Three Months 2021. The increase of$4,670,000 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. 55 Table of Contents
Provisional Ceding Commissions Earned
In Three Months 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 Three Months 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$634,000 in Three Months 2022 compared to$1,678,000 in Three Months 2021, a decrease of$1,044,000 , or 62.2%. The decrease in investment income is 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 3.51% as ofJune 30, 2022 compared to 3.45% as ofJune 30, 2021 . Cash and invested assets were$193,784,000 as ofJune 30, 2022 compared to$234,100,000 as ofJune 30, 2021 The$40,316,000 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 on investments were$4,517,000 in Three Months 2022 compared to net gains of$2,315,000 in Three Months 2021. Unrealized losses on our equity securities and other investments in Three Months 2022 were$4,229,000 , compared to net gains of$1,598,000 in Three Months 2021. Realized losses on sales of investments were$289,000 in Three Months 2022 compared to realized gains of$717,000 in Three Months 2021. Other Income
Other income was
Three Months 2021, an increase of
Net Loss and LAE
Net loss and LAE was
for Three Months 2021. The net loss ratio was 66.9% in Three Months 2022
compared to 58.6% in Three Months 2021, an increase of 8.3 percentage points.
56
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_10qimg73.jpg]]
(Components may not sum to totals due to rounding)
For Three Months 2022, the loss ratio was higher than Three Months 2021 mainly
due to water damage property claims and fire severity. Although the water
experience for Three Months 2022 was a bit worse than historical average, it is
reasonably within the historical range. For fire losses, there were more large
loss activities during Three Months 2022, but the year-to-date experience has
been in line with the past.
The impact of catastrophe losses was low for Three Months 2022. There were only three minor wind events classified as a catastrophe for Three Months 2022. There was also favorable development on catastrophe losses occurring for Three Months 2022. The estimated total net catastrophe losses were$112,000 , which contributed 0.4 point to the loss ratio. This compares to a -0.3 point impact from catastrophe events from the corresponding period from prior year, which also had minimal catastrophe activities.
Prior years in total have unfavorable development of
2022, driven by an emergence of large fire losses, which occurred in 2021.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
57
Table of Contents
Commission Expense
Commission expense increased $195,000 to $8,481,000 , or 18.0% of direct
earned premiums, in Three Months 2022. The increase was due to an increase in
direct earned premiums of $4,231,000 to $46,993,000 , offset in part by a
reduction in the commission rate on our Select Products and the reduction in
contingent commissions, which producers now earn only if KICO has an
underwriting profit.
Other Underwriting Expenses
Other underwriting expenses were$6,625,000 , or 14.1% of direct earned premiums, in Three Months 2022 compared to$6,693,000 , or 15.7% of direct earned premiums, in Three Months 2021. The decrease of$68,000 , or 1.0%, was primarily due to decreases in professional fees and state insurance department fees, partially offset by increases in expenses related to our growth in direct earned premiums and our continuing 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
compares favorably with the 11.6% increase in direct written premiums.
Our net underwriting expense ratio in Three Months 2022 was 36.4% compared to
41.8% in Three Months 2021. The following table shows the individual components
of our net underwriting expense ratio for the periods indicated:
Three months ended Percentage
June 30, Point Change
2022 2021
Other underwriting expenses
Employment costs 9.0 % 7.2 % 1.8
Underwriting fees (inspections/surveys) 1.7 1.4
0.3 IT expenses 4.2 3.1 1.1 Profesional fees 1.3 1.4 (0.1 ) Other expenses 7.6 5.8 1.8
Total other underwriting expenses 23.8 18.9
4.9 Commission expense 30.4 23.4 7.0 Ceding commission revenue Provisional (16.8 ) (0.1 ) (16.7 ) Contingent (0.1 ) - (0.1 )
Total ceding commission revenue (16.9 ) (0.1 )
(16.8 ) Other income (0.9 ) (0.4 ) (0.5 )
Net underwriting expense ratio 36.4 % 41.8 %
(5.4 ) The overall 16.8 percentage point increase in the benefit from ceding commissions in Three Months 2022 was driven by the increase in provisional ceding commission revenue due to the inception of the 2021/2023 Treaty onDecember 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 Three Months 2022 being ceded due to the inception of the 2021/2023 Treaty. 58 Table of Contents Other Operating Expenses Other operating expenses, related to the expenses of our holding company and Cosi, were$666,000 for Three Months 2022 compared to$933,000 for Three Months 2021. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated: Three months ended June 30, ($ in thousands) 2022 2021 Change Percent Other operating expenses Employement costs$ (101 ) $ 153 $ (254 ) na % Bonuses - - - na Equity compensation 486 486 - - Professional 97 46 51 110.9 Directors fees 82 82 - - Insurance 37 44 (7 ) (15.9 ) Other expenses 65 122 (57 ) (46.4 ) Total other operating expenses$ 666 $ 933 $ (267 ) (28.6 )% (Components may not sum to totals due to rounding) The decrease in Three Months 2022 of$267,000 , or 28.6%, as compared to Three Months 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.
Depreciation and Amortization
Depreciation and amortization was$877,000 in Three Months 2022 compared to$837,000 in Three Months 2021. The decrease of$40,000 , or 4.8%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. 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 was$457,000 for both Three Months 2022 and Three Months 2021. We incurred interest expense in connection with our$30.0 million issuance of long-term debt inDecember 2017 . Income Tax (Benefit) Expense Income tax benefit in Three Months 2022 was$1,403,000 , which resulted in an effective tax benefit rate of 20.7%. Income tax expense in Three Months 2021 was$312,000 , which resulted in an effective tax rate of 19.1%. Loss before taxes was$6,782,000 in Three Months 2022 compared to income before taxes of$1,635,000 in Three Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Three Months 2022 compared to Three
Months 2021. Net (Loss) Income
Net loss was
to the circumstances 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 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.
59
Table of Contents
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Gross premiums written:
Personal lines(3) $ 46,792,267 $ 42,449,870 $ 86,955,416 $ 78,608,363
Livery physical damage 2,953,588 2,119,436 5,726,868 4,023,428
Other(1) 32,608 46,719 80,076 113,826
Total without commercial
lines 49,778,463 44,616,025 92,762,360 82,745,617
Commercial lines (in
run-off effective July
2019)(2) - (381 ) - (856 )
Total gross premiums
written $ 49,778,463 $ 44,615,644 $ 92,762,360 $ 82,744,761
Net premiums written:
Personal lines(3) $ 27,048,585 $ 35,149,321 $ 49,159,250 $ 63,979,133
Livery physical damage 2,953,588 2,119,436 5,726,868 4,023,428
Other(1) 23,607 45,903 57,850 112,184
Total without commercial
lines 30,025,780 37,314,660 54,943,968 68,114,745
Commercial lines (in
run-off effective July
2019)(2) - (381 ) - (856 )
Total net premiums written $ 30,025,780 $ 37,314,279 $ 54,943,968 $ 68,113,889
Net premiums earned:
Personal lines(3) $ 25,178,854 $ 33,573,620 $ 49,339,070 $ 66,338,707
Livery physical damage 2,687,273 1,804,543 5,161,838 3,569,819
Other(1) 35,941 58,644 74,540 117,974
Total without commercial
lines 27,902,068 35,436,807 54,575,448 70,026,500
Commercial lines (in
run-off effective July
2019)(2) - (381 ) - (856 )
Total net premiums earned $ 27,902,068 $ 35,436,426 $ 54,575,448 $ 70,025,644
Net loss and loss
adjustment expenses(4):
Personal lines $ 16,356,939 $ 18,638,287 $ 36,783,580 $ 39,394,940
Livery physical damage 1,180,223 1,015,064 2,010,792 1,702,476
Other(1) (967 ) 223,472 (24,367 ) 253,821
Unallocated loss adjustment
expenses 1,164,649 909,591 2,743,555 1,915,872
Total without commercial
lines 18,700,844 20,786,414 41,513,560 43,267,109
Commercial lines (in
run-off effective July
2019)(2) (44,803 ) (27,204 ) 83,679 52,773
Total net loss and loss
adjustment expenses $ 18,656,041 $ 20,759,210 $ 41,597,239 $ 43,319,882
Net loss ratio(4):
Personal lines 65.0 % 55.5 % 74.6 % 59.4 %
Livery physical damage 43.9 % 56.3 % 39.0 % 47.7 %
Other(1) -2.7 % 381.1 % -32.7 % 215.1 %
Total without commercial
lines 67.0 % 58.7 % 76.1 % 61.8 %
Commercial lines (in
run-off effective July na na na na
2019)(2)
Total 66.9 % 58.6 % 76.2 % 61.9 %
(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 discussion above with regard to "Net Written Premiums and Net Premiums
Earned", as to change in quota share ceding rate, effective
2021.
(4) See discussion above with regard to "Net Loss and LAE", as to catastrophe
losses in the three months and six months endedJune 30, 2022 and 2021. 60 Table of Contents
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 Six Months ended
June 30, June 30,
2022 2021 2022 2021
Revenues
Net premiums earned
Ceding commission revenue 4,715,587 45,741 9,396,983 44,676 Net investment income 634,325 1,678,075
1,993,425 3,461,271
Net (losses) gains on investments (4,379,853 ) 2,254,299 (8,731,597 ) 5,166,824 Other income 242,620 124,243 471,127 294,552 Total revenues 29,114,747 39,538,784 57,705,386 78,992,967 Expenses Loss and loss adjustment expenses 18,656,041 20,759,210
41,597,239 43,319,882
Commission expense 8,481,031 8,285,341
16,832,117 16,509,180
Other underwriting expenses 6,624,997 6,692,920
13,440,946 13,159,962
Depreciation and amortization 867,186 804,462 1,627,201 1,593,297 Total expenses 34,629,255 36,541,933 73,497,503 74,582,321 (Loss) income from operations (5,514,508 ) 2,996,851
(15,792,117 ) 4,410,646
Income tax (benefit) expense (1,170,034 ) 569,266
(3,357,294 ) 820,831
Net (loss) income$ (4,344,474 ) $ 2,427,585 $
(12,434,823 )
Key Measures : Net loss ratio 66.9 % 58.6 % 76.2 % 61.9 % Net underwriting expense ratio 36.4 % 41.8 % 37.4 % 41.9 % Net combined ratio 103.3 % 100.4 % 113.6 % 103.8 % Reconciliation of net underwriting expense ratio: Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue (4,715,587 ) (45,741 )
(9,396,983 ) (44,676 )
Less: Other income (242,620 ) (124,243 )
(471,127 ) (294,552 )
Net underwriting expenses
Net premiums earned
Net Underwriting Expense
Ratio 36.4 % 41.8 % 37.4 % 41.9 %
61
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
Six months ended June 30,
2022
Written premiums $ 92,762,360 $ - $ (37,818,392 ) $ 54,943,968
Change in unearned premiums (393,353 ) - 24,833 (368,520 )
Earned premiums $ 92,369,007 $ - $
(37,793,559 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 52,832,153 $ -$ (14,366,628 ) $ 38,465,525 Catastrophe loss 7,032,470 - (3,900,756 ) 3,131,714 Loss and loss adjustment expenses$ 59,864,623 $ - $
(18,267,384 )
Loss ratio excluding the effect of catastrophes 57.2 % 0.0 % 38.0 % 70.5 % Catastrophe loss 7.6 % 0.0 % 10.3 % 5.7 % Loss ratio 64.8 % 0.0 % 48.3 % 76.2 % Six months ended June 30, 2021 Written premiums$ 82,744,761 $ -$ (14,630,872 ) $ 68,113,889 Change in unearned premiums 1,936,706 - (24,951 ) 1,911,755 Earned premiums$ 84,681,467 $ - $
(14,655,823 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 44,096,040 $ -$ (881,729 ) $ 43,214,311 Catastrophe loss 105,571 - - 105,571 Loss and loss adjustment expenses$ 44,201,611 $ - $
(881,729 )
Loss ratio excluding the effect of catastrophes 52.1 % 0.0 % 6.0 % 61.8 % Catastrophe loss 0.1 % 0.0 % 0.0 % 0.2 % Loss ratio 52.2 % 0.0 % 6.0 % 61.9 % Three months ended June 30, 2022 Written premiums$ 49,778,463 $ -$ (19,752,683 ) $ 30,025,780 Change in unearned premiums (2,786,080 ) - 662,368 (2,123,712 ) Earned premiums$ 46,992,383 $ - $
(19,090,315 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 26,323,489 $ -$ (7,779,738 ) $ 18,543,751 Catastrophe loss 195,070 - (82,780 ) 112,290 Loss and loss adjustment expenses$ 26,518,559 $ - $
(7,862,518 )
Loss ratio excluding the effect of catastrophes 56.0 % 0.0 % 40.8 % 66.5 % Catastrophe loss 0.4 % 0.0 % 0.4 % 0.4 % Loss ratio 56.4 % 0.0 % 41.2 % 66.9 % Three months ended June 30, 2021 Written premiums$ 44,615,644 $ -$ (7,301,365 ) $ 37,314,279 Change in unearned premiums (1,852,772 ) - (25,081 ) (1,877,853 ) Earned premiums$ 42,762,872 $ - $
(7,326,446 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 20,940,307 $ -$ (57,873 ) $ 20,882,434 Catastrophe loss (123,224 ) - - (123,224 ) Loss and loss adjustment expenses$ 20,817,083 $ -$ (57,873 ) $ 20,759,210 Loss ratio excluding the effect of catastrophes 49.0 % 0.0 % 0.8 % 59.0 % Catastrophe loss -0.3 % 0.0 % 0.0 % -0.3 % Loss ratio 48.7 % 0.0 % 0.8 % 58.6 % (Percent components may not sum to totals due to rounding) 62 Table of Contents The key measures for our insurance underwriting business for the periods indicated are as follows: Three Months ended Six Months ended June 30, June 30, 2022 2021 2022 2021 Net premiums earned$ 27,902,068 $ 35,436,426 $ 54,575,448 $ 70,025,644 Ceding commission revenue 4,715,587 45,741 9,396,983 44,676 Other income 242,620 124,243 471,127 294,552 Loss and loss adjustment expenses (1) 18,656,041 20,759,210
41,597,239 43,319,882
Acquisition costs and other underwriting expenses: Commission expense 8,481,031 8,285,341 16,832,117 16,509,180 Other underwriting expenses 6,624,997 6,692,920 13,440,946 13,159,962 Total acquisition costs and other underwriting expenses 15,106,028 14,978,261
30,273,063 29,669,142
Underwriting loss$ (901,794 ) $ (131,061 ) $
(7,426,744 )
Key Measures : Net loss ratio excluding the effect of catastrophes 66.5 % 58.9 % 70.5 % 61.7 % Effect of catastrophe loss on net loss ratio (1) 0.4 % -0.3 % 5.7 % 0.2 % Net loss ratio 66.9 % 58.6 % 76.2 % 61.9 % Net underwriting expense ratio excluding the effect of catastrophes 36.4 % 41.8 % 37.4 % 41.9 % Effect of catastrophe loss on net underwriting expense ratio 0.0 % 0.0 % 0.0 % 0.0 % Net underwriting expense ratio 36.4 % 41.8 % 37.4 % 41.9 % Net combined ratio excluding the effect of catastrophes 102.9 % 100.7 % 107.9 % 103.6 % Effect of catastrophe loss on net combined ratio (1) 0.4 % -0.3 % 5.7 % 0.2 % Net combined ratio 103.3 % 100.4 % 113.6 % 103.8 % Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue (4,715,587 ) (45,741 )
(9,396,983 ) (44,676 )
Less: Other income (242,620 ) (124,243 )
(471,127 ) (294,552 )
$ 10,147,821 $ 14,808,277 $
20,404,953
Net earned premium$ 27,902,068 $ 35,436,426 $
54,575,448
Net Underwriting Expense Ratio 36.4 % 41.8 % 37.4 % 41.9 %
(1) For the three months ended
catastrophe losses and loss adjustment expenses of
respectively. For the six months ended
sum of net catastrophe losses and loss adjustment expenses of
$105,571 , respectively.
63
Table of Contents
Investments
Portfolio Summary
Fixed-Maturity Securities
The following table presents a breakdown of the amortized cost, estimated fair
value, and unrealized gains and losses of our investments in fixed-maturity
securities classified as available-for-sale as of June 30, 2022 and December 31,
2021 :
June 30, 2022
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
Political subdivisions of States,
Territories and Possessions$ 17,218,274 $ -$ (3,020,486 ) $ -$ 14,197,788 10.0 % Corporate and other bonds Industrial and miscellaneous 84,235,861 9,782 (6,562,506 ) - 77,683,137 54.9 %
Residential mortgage and other
asset backed securities 55,228,980 114,844 (5,387,294 ) (339,668 ) 49,616,862 35.1 % Total fixed-maturity securities$ 156,683,115 $ 124,626
$ (14,970,286 ) $ (339,668 ) $ 141,497,787 100.0 % 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 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 % 64 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 ofJune 30, 2022 andDecember 31, 2021 : June 30, 2022 % of Gross Gross Estimated Estimated Category Cost Gains Losses Fair Value Fair Value
Equity Securities : Preferred stocks$ 18,430,554 $ 175,745 $ (3,347,910 ) $ 15,258,389 58.5 % Common stocks and exchange traded funds 11,808,966 392,745 (1,395,555 ) 10,806,156 41.5 % Total$ 30,239,520 $ 568,490 $ (4,743,465 ) $ 26,064,545 100.0 % December 31, 2021 % of Gross Gross Estimated Estimated Category Cost Gains Losses Fair
Value Fair Value
Preferred stocks
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 ofJune 30, 2022 andDecember 31, 2021 : June 30, 2022 December 31, 2021 Gross Estimated Gross Estimated Category Cost Gains Fair Value Cost
Gains Fair Value
Other
Investments:
Hedge fund
$ 3,562,034 $ 7,561,415 65 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
June 30, 2022
% of
Cost or Gross Gross Unrealized Losses Estimated Estimated
Less than
Amortized Unrealized 12 More than 12 Fair Fair
Category Cost Gains Months Months Value Value
Held-to-Maturity Securities :
U.S. Treasury securities $ 1,228,410 $ 86,141 $ (10,175 ) $ - $ 1,304,376 18.9 %
Political subdivisions of States,
Territories and Possessions 498,378 4,637
- - 503,015 7.3 % Exchange traded debt 304,111 - (29,111 ) - 275,000 4.0 % Corporate and other bonds Industrial and miscellaneous 5,737,319 39,429 (945,603 ) - 4,831,145 69.9 % Total$ 7,768,218 $ 130,207 $ (984,889 ) $ -$ 6,913,536 100.0 % December 31, 2021 % of Cost or Gross Gross Unrealized Losses Estimated Estimated Less than Amortized Unrealized 12 More than 12 Fair Fair Category Cost Gains Months Months Value ValueHeld-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.
66
Table of Contents
A summary of the amortized cost and fair value of our investments in
held-to-maturity securities by contractual maturity as of
June 30, 2022 December 31, 2021
Amortized Estimated Amortized Estimated
Remaining Time to Maturity Cost Fair Value Cost Fair Value
Less than one year $ 459,032 $ 497,110 $ 994,712 $ 1,008,180
One to five years 1,246,206 1,246,690 1,205,829 1,290,465
Five to ten years 1,519,749 1,370,950 1,513,942 1,648,808
More than 10 years 4,543,231 3,798,786 4,551,851 4,805,706
Total $ 7,768,218 $ 6,913,536 $ 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 of
Fitch, or Kroll):
June 30, 2022
Estimated Percentage of Estimated Percentage of
Fair Estimated Fair Estimated
Value Fair Value Value Fair Value
Rating
U.S. Treasury
securities $ - 0.0 % $ - 0.0 %
Corporate and
municipal bonds
AAA 2,471,838 1.7 % 1,321,809 0.8 %
AA 11,076,880 7.8 % 11,532,572 7.3 %
A 34,119,838 24.1 % 38,272,571 24.2 %
BBB+ 16,901,741 11.9 % 17,936,359 11.3 %
BBB 23,676,363 16.7 % 25,161,776 15.9 %
BBB- 1,926,040 1.4 % 4,193,401 2.7 %
Total corporate
and municipal
bonds 90,172,700 63.6 % 98,418,488 62.2 %
Residential
mortgage backed,
asset backed, and
other
collateralized
obligations
AAA 18,165,288 12.8 % 17,350,192 11.0 %
AA 25,008,366 17.7 % 34,241,907 21.7 %
A 7,023,595 5.0 % 6,306,161 4.0 %
BBB 21,608 0.0 % 24,254 0.0 %
CCC 520,237 0.4 % 664,628 0.4 %
CC 115,309 0.1 % 125,412 0.1 %
D 63,629 0.0 % 55,306 0.0 %
Non rated 407,055 0.3 % 893,762 0.6 %
Total residential
mortgage backed,
asset backed,
and other
collateralized
obligations 51,325,087 36.3 % 59,661,622 37.8 %
Total $ 141,497,787 99.9 % $ 158,080,110 100.0 %
67
Table of Contents
The table below summarizes the average yield by type of fixed-maturity security
as of
Category June 30, 2022 December 31, 2021U.S. Treasury securities and obligations ofU.S. government corporations and agencies 3.26 %
3.06 %
Political subdivisions of States, Territories and Possessions 3.35 % 2.77 % Corporate and other bonds Industrial and miscellaneous 3.38 % 3.23 % Residential mortgage backed securities 2.74 % 2.77 % Total 3.16 % 2.92 %
The table below lists the weighted average maturity and effective duration in
years on our fixed-maturity securities as of
2021
June 30, 2022 December 31, 2021
Weighted average effective maturity 7.0 8.0
Weighted average final maturity 15.5 13.8
Effective duration 5.5 5.1
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 June 30, 2022 and December 31, 2021 , 62% of the investment
portfolio recorded at fair value was priced based upon quoted market prices.
68
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 June 30,
2022 and December 31, 2021 :
June 30, 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 $ - $ - - $ - - - $ - $ -
Political
subdivisions
of
States,
Territories
and
Possessions 14,197,788 (3,020,486 ) 14 - - - 14,197,788 (3,020,486 )
Corporate and
other
bonds
industrial and
miscellaneous 76,672,772 (6,562,506 ) 92 - - - 76,672,772 (6,562,506 )
Residential
mortgage and
other asset
backed
securities 45,843,567 (5,387,294 ) 37 2,724,188 (339,668 ) 3 48,567,755 (5,726,962 )
Total
fixed-maturity
securities $ 136,714,127 $ (14,970,286 ) 143 $ 2,724,188 $ (339,668 ) 3 $ 139,438,315 $ (15,309,954 )
69
Table of Contents
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 ) 70 Table of Contents There were 146 securities atJune 30, 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, 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, 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 six months endedJune 30, 2022 , the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the six months endedJune 30, 2022 , KICO paid dividends of$1,500,000 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 six months endedJune 30, 2022 and 2021. OnAugust 10, 2022 , KICO transferred and pledged tenFNMA bonds to the FHLBNY. As ofAugust 8, 2022 the book value of these bonds is$15,144,568 and their fair value is$13,567,331 . KICO will have a credit facility with respect to the transferred bonds and the maximum advance KICO will be able to receive is approximately$12,000,000 OnDecember 19, 2017 , we issued$30 million of our 5.50% Senior Unsecured Notes dueDecember 30, 2022 . As ofJune 30, 2022 , invested assets and cash in our holding company was approximately$2,780,000 . If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing. See Notes 2 and 7 to our Condensed Consolidated Financial Statements included in this Quarterly Report for a discussion of our plans in this regard. Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments. 71 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:
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