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KINGSTONE COMPANIES, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Edgar Glimpses
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, 2022 , respectively, 80.5% and 80.3% 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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Table of Contents
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,
2022 and December 31, 2021 , there were no commercial liability policies
in-force. As of September 30, 2022 , these expired policies represent
approximately 18.0% 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.
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Table of Contents
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 .Griffin Highline
Reference is made to Note 13 - Subsequent Events -Griffin Highline to our condensed consolidated financial statements included in this Quarterly Report with regard to discussions between our company andGriffin Highline as to a potential strategic transaction.TigerRisk Capital Markets & Advisory has been engaged to advise our Board of Directors regarding strategic transactions. Our Board of Directors will carefully review any proposals received by our company fromGriffin Highline or others 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 withGriffin 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
Nine Months Ended
2021
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) 2022 2021 Change Percent
Revenues
Direct written premiums $ 147,354 $ 131,610 $ 15,744 12.0 %
Assumed written premiums - - - na %
147,354 131,610 15,744 12.0 %
Ceded written premiums
Ceded to quota share treaties (1) 34,868 374 34,494 9,223.0 %
Ceded to excess of loss treaties 2,937 2,057 880 42.8 %
Ceded to catastrophe treaties 20,939 19,423 1,516 7.8 %
Total ceded written premiums 58,744 21,854 36,890 168.8 %
Net written premiums 88,610 .,756 (21,146 ) (19.3 )%
Change in unearned premiums
Direct and assumed (6,030 ) (2,911 ) (3,119 ) (107.1 )%
Ceded to quota share treaties (1) 1,356 (15 ) 1,371 na %
Change in net unearned premiums (4,674 ) (2,926 ) (1,748 ) (59.7 )%
Premiums earned
Direct and assumed 141,324 128,698 12,626 9.8 %
Ceded to reinsurance treaties (57,388 ) (21,869 ) (35,519 ) (162.4 )%
Net premiums earned 83,936 106,829 (22,893 ) (21.4 )%
Ceding commission revenue (1) 14,283 37 14,246 38,502.7 %
Net investment income 3,412 5,138 (1,726 ) (33.6 )%
Net (losses) gains on investments (9,313 ) 5,480 (14,793 ) na %
Other income 750 577 173 30.0 %
Total revenues 93,068 118,062 (24,993 ) (21.2 )%
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses
excluding the effect of catastrophes 83,346 67,634 15,712 23.2 %
Losses from catastrophes (2) 7,510 12,647 (5,137 ) (40.6 )%
Total direct and assumed loss and loss
adjustment expenses 90,856 80,281 10,575 13.2 %
Ceded loss and loss adjustment
expenses:
Loss and loss adjustment expenses
excluding the effect of catastrophes 23,187 860 22,327 2,596.2 %
Losses from catastrophes (2) 4,044 360 3,684 1,023.3 %
Total ceded loss and loss adjustment
expenses 27,231 1,221
26,011 2,130.2 %
Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 60,159 66,773 (6,614 ) (9.9 )% Losses from catastrophes (2) 3,466 12,287 (8,821 ) (71.8 )% Net loss and loss adjustment expenses 63,625 79,060 (15,435 ) (19.5 )% Commission expense 25,534 24,711 823 3.3 % Other underwriting expenses 20,717 19,723 994 5.0 % Other operating expenses 2,357 3,141 (784 ) (25.0 )% Depreciation and amortization 2,472 2,480 (8 ) (0.3 )% Interest expense 1,370 1,370 - - % Total expenses 116,075 130,485 (14,410 ) (11.0 )% Loss before taxes (23,007 ) (12,423 ) (10,584 ) (85.2 )% Income tax benefit (4,433 ) (2,817 ) (1,616 ) (57.4 )% Net loss$ (18,575 ) $ (9,606 ) $ (8,968 ) (93.4 )% (Columns in the table above may not sum to totals due to rounding)
(1) Effective
treaty.
(2) 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.
45
Table of Contents
Nine months ended September 30,
Percentage Percent
2022 2021 Point Change Change
Key ratios:
Net loss ratio 75.8 % 74.0 % (22.1 ) (22.8 )%
Net underwriting expense ratio 37.2 % 41.0 % (2.4 ) (6.1 )%
Net combined ratio 113.0 % 115.0 % (24.5 ) (18.0 )%
Direct Written Premiums
Direct written premiums during the nine months ended September 30, 2022 ("Nine
Months 2022") were $147,354,000 compared to $131,610,000 during the nine months
ended September 30, 2021 ("Nine Months 2021"). The increase of $15,744,000 , or
12.0%, was primarily due an increase in premiums from our personal lines
business. Direct written premiums from our personal lines business for Nine
Months 2022 were $138,198,000 , an increase of $13,605,000 , or 10.9%, from
$124,593,000 in Nine 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 Nine Months 2022 were $9,037,000 , an increase of $2,200,000 ,
or 32.2%, from $6,837,000 in Nine 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 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 Core
business were $118,332,000 in Nine Months 2022 compared to $101,990,000 in Nine
Months 2021. Direct written premiums from our Expansion business were
$29,022,000 in Nine Months 2022 compared to $29,620,000 in Nine 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 Nine Months 2021. Net written premiums decreased$21,146,000 , or 19.3%, to$88,610,000 in Nine Months 2022 from$109,756,000 in Nine 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 Nine Months 2022, our premiums ceded under quota share treaties increased by$34,494,000 in comparison to ceded premiums in Nine Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Nine Months 2022, compared to no personal lines quota share treaty in Nine 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 Nine Months 2022, our ceded excess of loss reinsurance premiums increased by$880,000 over the comparable ceded premiums for Nine 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 Nine Months 2022, our premiums ceded under catastrophe treaties increased by$1,516,000 over the comparable ceded premiums in Nine 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$22,893,000 , or 21.4%, to$83,936,000 in Nine Months 2022 from$106,829,000 in Nine Months 2021. The decrease was due to the inception of the 2021/2023 Treaty onDecember 31, 2021 . The decrease resulting from the 2021/2023 Treaty in Nine Months 2022 was partially offset by an increase in direct written premium. Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Nine months ended September 30,
($ in thousands) 2022 2021 Change Percent
Provisional ceding commissions earned
10,279.4 % Contingent ceding commissions earned 167 (99 ) 266
n/a %
Total ceding commission revenue
38,502.7 % Ceding commission revenue was$14,283,000 in Nine Months 2022 compared to$37,000 in Nine Months 2021. The increase of$14,246,000 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 Nine 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 Nine 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$3,412,000 in Nine Months 2022 compared to$5,138,000 in Nine Months 2021, a decrease of$1,726,000 , or 33.6%. 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 3.48% as ofSeptember 30, 2022 compared to 3.42% as of September
30, 2021. Cash and invested assets were$192,229,000 as ofSeptember 30, 2022 compared to$246,004,000 as ofSeptember 30, 2021 . The$53,775,000 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$9,313,000 in Nine Months 2022 compared to net gains of$5,480,000 in Nine Months 2021. Unrealized losses on our equity securities and other investments in Nine Months 2022 were$10,502,000 , compared to net gains of$2,603,000 in Nine Months 2021. Realized gains on sales of investments were$1,189,000 in Nine Months 2022 compared to$2,877,000 in Nine Months 2021. Other Income
Other income was
Nine Months 2021, an increase of
Net Loss and LAE Net loss and LAE was$63,625,000 for Nine Months 2022 compared to$79,060,000 for Nine Months 2021. The net loss ratio was 75.8% in Nine Months 2022 compared to 74.0% in Nine Months 2021, an increase of 1.8 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_10qimg49.jpg]]
(Components may not sum to totals due to rounding)
For Nine Months 2022, the loss ratio was higher than Nine Months 2021 due to
water damage property claims which were primarily driven by winter-related water
damage claims resulting from freezing temperature earlier during the year and
the impact from climbing inflation leading to higher severity.
The estimated net catastrophe losses were $3,466,000 for Nine Months 2022, which
contributed 4.1 points to the loss ratio. This is mostly driven by two winter
events in the first quarter. There were also seven other minor wind catastrophe
events during Nine Months 2022, but the impact was not significant. As a
comparison, catastrophe events had a loss ratio impact of 11.5 points for Nine
Months 2021 due to a more active hurricane season, including the named storm
Ida.
Prior years in total have unfavorable development of $714,000 for Nine Months
2022, driven by large fire losses which occurred in 2021 and the volatility of
liability claim settlements from the discontinued Commercial lines. This
contributed 0.9 point to the loss ratio.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
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Table of Contents
Commission Expense
Commission expense was $25,534,000 in Nine Months 2022 or 18.1% of direct earned
premiums. Commission expense was $24,711,000 in Nine Months 2021 or 19.2% of
direct earned premiums. The increase of $823,000 was primarily due to an
increase in direct earned premiums of $12,626,000 to $141,324,000 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$20,717,000 , or 14.7% of direct earned premiums, in Nine Months 2022 compared to$19,723,000 , or 15.3% of direct earned premiums, in Nine Months 2021. The increase of$994,000 , or 5.0%, 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$8,027,000 in Nine Months 2022 compared to$7,592,000 in Nine Months 2021. The increase of$435,000 , or 5.7%, compares favorably with the 12.0% increase in direct written premiums. In the periods following Nine Months 2021, we invested in the hiring of higher-level managers and staff to implement our goals of modernization and efficiency, which we
refer
to as Kingstone 2.0.
Our net underwriting expense ratio in Nine Months 2022 was 37.2% compared to
41.0% in Nine Months 2021. The following table shows the individual components
of our net underwriting expense ratio for the periods indicated:
Nine months ended
September 30, Percentage
2022 2021 Point Change
Other underwriting expenses
Employment costs 9.6 % 7.1 % 2.5
Underwriting fees (inspections/surveys) 1.7 1.4
0.3 IT expenses 4.2 3.0 1.2 Profesional fees 1.4 1.3 0.1 Other expenses 7.7 5.7 2.0
Total other underwriting expenses 24.6 18.5
6.1 Commission expense 30.4 23.1 7.3 Ceding commission revenue Provisional (16.8 ) (0.1 ) (16.7 ) Contingent (0.2 ) 0.1 (0.3 )
Total ceding commission revenue (17.0 ) -
(17.0 ) Other income (0.9 ) (0.6 ) (0.3 )
Net underwriting expense ratio 37.2 % 41.0 %
(3.8 )
(Components may not sum to totals due to rounding)
The overall 17.0 percentage point increase in the benefit from ceding
commissions in Nine 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 Nine Months 2022 being ceded due to the inception
of the 2021/2023 Treaty.
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Table of Contents
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company and
Cosi, were $2,357,000 for Nine Months 2022 compared to $3,141,000 for Nine
Months 2021. The following table shows a breakdown of the significant components
of other operating expenses for the periods indicated:
Nine months ended
September 30,
($ in thousands) 2022 2021 Change Percent
Other operating expenses
Employement costs $ (101 ) $ 647 $ (748 ) na %
Bonuses - - - na
Equity compensation 1,205 1,448 (243 ) (16.8 )
Professional 208 226 (18 ) (8.0 )
Griffin Highline fees 316 - 316 na
Directors fees 245 245 - -
Insurance 115 166 (51 ) (30.7 )
Other expenses 369 409 (40 ) (9.8 )
Total other operating expenses$ 2,357 $ 3,141 $ (784 )
(25.0 )%
(Components may not sum to totals due to rounding)
The decrease in Nine Months 2022 of$784,000 , or 25.0%, as compared to Nine 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. The decrease in employment costs was partially offset by an increase in professional fees attributable to the non-binding indication of interest fromGriffin Highline , disclosed above as "Griffin Highline fees" incurred, related to a then contemplated acquisition of all of the outstanding equity of our company.
Depreciation and Amortization
Depreciation and amortization was$2,472,000 in Nine Months 2022 compared to$2,480,000 in Nine Months 2021. The decrease of$8,000 , or 0.3%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. The decrease was partially offset by the completion of customized policy management software, now allowing us to consolidate multiple legacy systems into one efficient system. In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years. Interest Expense Interest expense was$1,370,000 for both Nine Months 2022 and Nine Months 2021. We incurred interest expense in connection with our$30.0 million issuance of long-term debt inDecember 2017 . Income Tax Benefit
Income tax benefit in Nine Months 2022 was$4,433,000 , which resulted in an effective tax benefit rate of 19.3%. Income tax benefit in Nine Months 2021 was$2,817,000 , which resulted in an effective tax rate of 22.7%. Loss before taxes was$23,007,000 in Nine Months 2022 compared to$12,423,000 in Nine Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Nine Months 2022 compared to Nine Months 2021. 51 Table of Contents Net Loss
Net loss was
Months 2021. The increase in net loss of
described above.
Three Months Ended
30, 2021
The following table summarizes the changes in the results of our
operations (in thousands) for the periods indicated:
Three months ended September 30,
($ in thousands) 2022 2021 Change Percent
Revenues
Direct written premiums $ 54,592 $ 48,865 $ 5,727 11.7 %
Assumed written premiums - - - na %
54,592 48,865 5,727 11.7 %
Ceded written premiums
Ceded to quota share treaties (1) 12,919 138 12,781 9,261.6 %
Ceded to excess of loss treaties 1,194 998 196 19.6 %
Ceded to catastrophe treaties 6,813 6,087 726 11.9 %
Total ceded written premiums 20,925 7,224 13,703 189.7 %
Net written premiums 33,666 41,642 (7,976 ) (19.2 )%
Change in unearned premiums
Direct and assumed (5,636 ) (4,848 ) (788 ) (16.3 )%
Ceded to quota share treaties (1) 1,331 10 1,321 13,210.0 %
Change in net unearned premiums (4,305 ) (4,838 )
533 11.0 % Premiums earned Direct and assumed 48,955 44,017 4,938 11.2 % Ceded to reinsurance treaties (19,594 ) (7,214 ) (12,380 ) (171.6 )% Net premiums earned 29,361 36,803 (7,442 ) (20.2 )% Ceding commission revenue (1) 4,886 (7 ) 4,893 na % Net investment income 1,419 1,677 (258 ) (15.4 )% Net (losses) gains on investments (397 ) 205 (602 ) na % Other income 270 281 (11 ) (3.9 )% Total revenues 35,538 38,958 (3,421 ) (8.8 )% Expenses Loss and loss adjustment expenses Direct and assumed: Loss and loss adjustment expenses excluding the effect of catastrophes 30,514 23,538 6,976 29.6 % Losses from catastrophes (2) 477 12,542 (12,065 ) (96.2 )% Total direct and assumed loss and loss adjustment expenses 30,991 36,079
(5,089 ) (14.1 )%
Ceded loss and loss adjustment expenses: Loss and loss adjustment expenses na excluding the effect of catastrophes 8,820 (21 ) 8,841 % Losses from catastrophes (2) 143 360 (217 ) (60.3 )% Total ceded loss and loss adjustment expenses 8,963 339
8,624 2,544.0 %
Net loss and loss adjustment expenses: Loss and loss adjustment expenses excluding the effect of catastrophes 21,694 23,559 (1,865 ) (7.9 )% Losses from catastrophes (2) 334 12,181 (11,847 ) (97.3 )% Net loss and loss adjustment expenses 22,028 35,740 (13,712 ) (38.4 )% Commission expense 8,702 8,202 500 6.1 % Other underwriting expenses 7,276 6,563 713 10.9 % Other operating expenses 810 855 (45 ) (5.3 )% Depreciation and amortization 825 820 5 0.6 % Interest expense 457 457 - - % Total expenses 40,097 52,637 (12,539 ) (23.8 )% Loss before taxes (4,559 ) (13,679 ) 9,118 66.7 % Income tax benefit (562 ) (3,061 ) 2,499 81.6 % Net loss$ (3,998 ) $ (10,618 ) $ 6,619 62.3 % (Columns in the table above may not sum to totals due to rounding)
(1) Effective
treaty.
(2) 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.
52
Table of Contents
Three months ended September 30,
Percentage Percent
2022 2021 Point Change Change
Key ratios:
Net loss ratio 75.0 % 97.1 % (22.1 ) (22.8 )%
Net underwriting expense ratio 36.9 % 39.3 % (2.4 )
(6.1 )% Net combined ratio 111.9 % 136.4 % (24.5 ) (18.0 )% Direct Written Premiums Direct written premiums during the three months endedSeptember 30, 2022 ("Three Months 2022") were$54,592,000 compared to$48,865,000 during the three months endedSeptember 30, 2021 ("Three Months 2021"). The increase of$5,727,000 , or 11.7%, 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$51,242,000 , an increase of$5,258,000 , or 11.4%, from$45,984,000 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$3,310,000 , an increase of$496,000 , or 17.6%, from$2,814,000 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$43,949,000 in Three Months 2022 compared to$35,459,000 in Three Months 2021. Direct written premiums from our Expansion business were$10,642,000 in Three Months 2022 compared to$13,406,000 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$7,976,000 , or 19.2%, to$33,666,000 in Three Months 2022 from$41,642,000 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$12,781,000 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. 53 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$196,000 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$726,000 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$7,442,000 , or 20.2%, to$29,361,000 in Three Months 2022 from$36,803,000 in Three Months 2021. The decrease was due to the inception of the 2021/2023 Treaty onDecember 31, 2021 . The decrease resulting from the 2021/2023 Treaty in Three Months 2022 was partially offset by an increase in direct written premium. Ceding Commission Revenue
The following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods indicated:
Three months ended September 30,
($ in thousands) 2022 2021 Change Percent
Provisional ceding commissions earned
11,807.3 % Contingent ceding commissions earned 4 (48 ) 53
n/a %
Total ceding commission revenue
Ceding commission revenue was$4,886,000 in Three Months 2022 compared to$(7,000) in Three Months 2021. The increase of$4,893,000 was due to an increase in provisional ceding commissions earned resulting from the 2021/2023 Treaty. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned. 54 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$1,419,000 in Three Months 2022 compared to$1,677,000 in Three Months 2021, a decrease of$258,000 , or 15.4%. The decrease in investment income is attributable to the disposal of income bearing equity securities. The average yield on invested assets was 3.48% as ofSeptember 30, 2022 compared to 3.42% as ofSeptember 30, 2021 . Cash and invested assets were$192,229,000 as ofSeptember 30, 2022 compared to$246,004,000 as ofSeptember 30, 2021 The$53,775,000 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$398,000 in Three Months 2022 compared to net gains of$205,000 in Three Months 2021. Unrealized losses on our equity securities and other investments in Three Months 2022 were$1,798,000 , compared to$829,000 in Three Months 2021. Realized gains on sales of investments were$1,400,000 in Three Months 2022 compared to$1,033,000 in Three Months 2021. Other Income
Other income was
Three Months 2021, a decrease of
Net Loss and LAE
Net loss and LAE was
for Three Months 2021. The net loss ratio was 75.0% in Three Months 2022
compared to 97.1% in Three Months 2021, a decrease of 22.1 percentage points.
55
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_10qimg50.jpg]]
(Components may not sum to totals due to rounding)
For Three Months 2022, the loss ratio was lower than Three Months 2021 mainly
due to a lower impact of catastrophe losses. There were only two minor wind
events classified as catastrophe for Three Months 2022. The estimated total net
catastrophe losses for the calendar quarter were $334,000 , which contributed 1.1
points to the loss ratio. This compares to a 33.1-point impact from catastrophe
events from the corresponding period from the prior year, which had more
significant named storms, including Ida.
The underlying loss ratio (loss ratio excluding the impact of catastrophe and
prior year development) was 72.4% for Three Months 2022, an increase of 8.4
points from the 64.0% underlying loss ratio recorded for Three Months 2021. The
higher 2022 loss ratio was primarily due to a general increase in property
claims severity, which is likely a result of recent increased inflation.
Prior years in total have unfavorable development of
2022, driven by the volatility of liability claim settlements from the
discontinued Commercial lines.
See table below under "Additional Financial Information" summarizing net loss
ratios by line of business.
56
Table of Contents
Commission Expense
Commission expense increased $500,000 to $8,702,000 , or 17.8% of direct earned
premiums in Three Months 2022. Commission expense was $8,202,000 in Three Months
2021 or 18.6% of direct earned premiums. The increase was due to an increase in
direct earned premiums of $5,727,000 to $54,592,000 , 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$7,276,000 , or 14.9% of direct earned premiums, in Three Months 2022 compared to$6,563,000 , or 14.9% of direct earned premiums, in Three Months 2021. The increase of$713,000 , or 10.9%, was primarily due to increases in expenses related to our growth in direct earned premiums, salaries, and our continuing initiative to reduce expenses with the use of technology, partially offset by decreases in professional fees and state insurance department fees. Our largest single component of other underwriting expenses is salaries and employment costs, with costs of$2,961,000 in Three Months 2022 compared to$2,513,000 in Three Months 2021. The increase of$448,000 , or 17.8%, is greater than the 11.7% increase in direct written premiums. In the periods following Three Months 2021, we invested in the hiring of higher-level managers and staff to implement our goals of modernization and efficiency, which we refer to as Kingstone 2.0.
Our net underwriting expense ratio in Three Months 2022 was 36.9% compared to
39.3% in Three Months 2021. The following table shows the individual components
of our net underwriting expense ratio for the periods indicated:
Three months ended September 30, Percentage
2022 2021 Point Change
Other underwriting expenses
Employment costs 10.1 % 6.8 % 3.3
Underwriting fees
(inspections/surveys) 1.6 1.3 0.3
IT expenses 4.2 2.9 1.3
Profesional fees 1.1 1.3 (0.2 )
Other expenses 7.8 5.6 2.2
Total other underwriting expenses 24.8 17.9
6.9 Commission expense 29.6 22.3 7.3 Ceding commission revenue Provisional (16.6 ) (0.1 ) (16.5 ) Contingent - 0.1 (0.1 )
Total ceding commission revenue (16.6 ) -
(16.6 ) Other income (0.9 ) (0.9 ) -
Net underwriting expense ratio 36.9 % 39.3 %
(2.4 )
57
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The overall 16.6 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 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 Three Months 2022 being ceded due to
the inception of the 2021/2023 Treaty.
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company and
Cosi, were $810,000 for Three Months 2022 compared to $855,000 for Three Months
2021. The following table shows a breakdown of the significant components of
other operating expenses for the periods indicated:
Three months ended
September 30,
($ in thousands) 2022 2021 Change Percent
Other operating expenses
Employement costs $ (5 ) $ 50 $ (55 ) na %
Bonuses - - - na
Equity compensation 188 467 (279 ) (59.7 )
Professional 110 69 41 59.4
Griffin Highline fees 268 - 268 na
Directors fees 82 82 - -
Insurance 38 46 (8 ) (17.4 )
Other expenses 129 141 (12 ) (8.5 )
Total other operating expenses$ 810 $ 855 $ (45 )
(5.3 )%
(Components may not sum to totals due to rounding)
The decrease in Three Months 2022 of$45,000 , or 5.3%, 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. The decrease in employment costs was partially offset by an increase in professional fees attributable to the non-binding indication of interest fromGriffin Highline , disclosed above as "Griffin Highline fees" incurred, related to a then contemplated acquisition of all of the outstanding equity of our company.
Depreciation and Amortization
Depreciation and amortization was$825,000 in Three Months 2022 compared to$820,000 in Three Months 2021. The increase of$5,000 , or 0.6%, in depreciation and amortization was primarily due to the completion of customized policy management software, now allowing us to consolidate multiple legacy systems into one efficient system. The increase from the assets currently placed in service in Three Months 2022 was partially offset by a decrease in depreciation and amortization from 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. 58 Table of Contents 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
Income tax benefit in Three Months 2022 was$562,000 , 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 13.3%. Loss before taxes was$4,559,000 in Three Months 2022 compared to$13,679,000 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 Net loss was$3,998,000 in Three Months 2022 compared to$10,618,000 in Three Months 2021. The decrease in net loss of$6,619,000 was due 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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Gross premiums written:
Personal lines(3) $ 51,242,544 $ 45,984,939 $ 138,197,960 $ 124,593,302
Livery physical damage 3,309,845 2,813,571 9,036,713 6,836,999
Other(1) 39,162 66,659 119,238 180,485
Total without commercial
lines 54,591,551 48,865,169 147,353,911 131,610,786
Commercial lines (in
run-off effective July
2019)(2) - - - (856 )
Total gross premiums
written $ 54,591,551 $ 48,865,169 $
147,353,911
Net premiums written: Personal lines(3)$ 30,327,951 $ 38,762,235 $ 79,487,201 $ 102,741,368 Livery physical damage 3,309,845 2,813,571 9,036,713 6,836,999 Other(1) 28,374 65,837 86,224 178,021 Total without commercial lines 33,666,170 41,641,643 88,610,138 109,756,388 Commercial lines (in run-off effective July 2019)(2) - - - (856 )
Total net premiums written
Net premiums earned: Personal lines(3)$ 26,407,939 $ 34,715,708 $ 75,747,009 $ 101,054,415 Livery physical damage 2,920,335 2,028,786 8,082,173 5,598,605 Other(1) 32,702 58,757 107,242 176,731 Total without commercial lines 29,360,976 36,803,251 83,936,424 106,829,751 Commercial lines (in run-off effective July 2019)(2) - - - (856 )
Total net premiums earned
Net loss and loss adjustment expenses(4): Personal lines$ 19,512,893 $ 32,958,728 $ 56,296,473 $ 72,353,668 Livery physical damage 1,716,383 1,766,989 3,727,175 3,469,465 Other(1) 9,494 180,995 (14,873 ) 434,816 Unallocated loss adjustment expenses 126,560 867,675 2,870,115 2,783,547 Total without commercial lines 21,365,330 35,774,387 62,878,890 79,041,496 Commercial lines (in run-off effective July 2019)(2) 662,186 (34,152 ) 745,865 18,621
Total net loss and loss
adjustment expenses
Net loss ratio(4): Personal lines 73.9 % 94.9 % 74.3 % 71.6 % Livery physical damage 58.8 % 87.1 % 46.1 % 62.0 % Other(1) 29.0 % 308.0 % -13.9 % 246.0 % Total without commercial lines 72.8 % 97.2 % 74.9 % 74.0 % Commercial lines (in run-off effective July na na na na 2019)(2) Total 75.0 % 97.1 % 75.8 % 74.0 %
(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 nine months ended
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 Nine Months ended
September 30, September 30,
2022 2021 2022 2021
Revenues
Net premiums earned $ 29,360,976 $ 36,803,251 $ 83,936,424 $ 106,828,895
Ceding commission
revenue 4,886,094 (7,276 ) 14,283,077 37,400
Net investment income 1,418,521 1,676,596 3,411,946 5,137,867
Net (losses) gains on
investments (366,411 ) 214,085 (9,098,008 ) 5,380,909
Other income 269,297 322,705 740,424 617,257
Total revenues 35,568,477 39,009,361 93,273,863 118,002,328
Expenses
Loss and loss adjustment
expenses 22,027,516 35,740,235 63,624,755 79,060,117
Commission expense 8,702,190 8,201,935 25,534,307 24,711,115
Other underwriting
expenses 7,276,101 6,562,743 20,717,047 19,722,705
Depreciation and
amortization 803,568 780,906 2,430,769 2,374,203
Total expenses 38,809,375 51,285,819 112,306,878 125,868,140
(Loss) income from
operations (3,240,898 ) (12,276,458 ) (19,033,015 ) (7,865,812 )
Income tax (benefit)
expense (345,080 ) (2,633,026 ) (3,702,374 ) (1,812,195 )
Net (loss) income $ (2,895,818 ) $ (9,643,432 ) $ (15,330,641 ) $ (6,053,617 )
Key Measures:
Net loss ratio 75.0 % 97.1 % 75.8 % 74.0 %
Net underwriting expense
ratio 36.9 % 39.3 % 37.2 % 41.0 %
Net combined ratio 111.9 % 136.4 % 113.0 % 115.0 %
Reconciliation of net
underwriting expense
ratio:
Acquisition costs and
other underwriting
expenses $ 15,978,291 $ 14,764,678 $ 46,251,354 $ 44,433,820
Less: Ceding commission
revenue (4,886,094 ) 7,276 (14,283,077 ) (37,400 )
Less: Other income (269,297 ) (322,705 )
(740,424 ) (617,257 )
Net underwriting expenses
Net premiums earned
Net Underwriting Expense
Ratio 36.9 % 39.3 % 37.2 % 41.0 %
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
Nine months ended September
30, 2022
Written premiums $ 147,353,911 $ - $ (58,743,773 ) $ 88,610,138
Change in unearned premiums (6,029,774 ) - 1,356,060 (4,673,714 )
Earned premiums $ 141,324,137 $ - $
(57,387,713 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 83,345,972 $ -$ (23,186,898 ) $ 60,159,074 Catastrophe loss 7,509,597 - (4,043,916 ) 3,465,681 Loss and loss adjustment expenses$ 90,855,569 $ - $
(27,230,814 )
Loss ratio excluding the effect of catastrophes 59.0 % 0.0 % 40.4 % 71.7 % Catastrophe loss 5.3 % 0.0 % 7.0 % 4.1 % Loss ratio 64.3 % 0.0 % 47.4 % 75.8 % 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 excluding 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 % Three months ended September 30, 2022 Written premiums$ 54,591,551 $ -$ (20,925,381 ) $ 33,666,170 Change in unearned premiums (5,636,421 ) - 1,331,227 (4,305,194 ) Earned premiums$ 48,955,130 $ - $
(19,594,154 )
Loss and loss adjustment expenses excluding the effect of catastrophes$ 30,513,819 $ -$ (8,820,270 ) $ 21,693,549 Catastrophe loss 477,127 - (143,160 ) 333,967 Loss and loss adjustment expenses$ 30,990,946 $ - $
(8,963,430 )
Loss ratio excluding the effect of catastrophes 62.3 % 0.0 % 45.0 % 73.9 % Catastrophe loss 1.0 % 0.0 % 0.7 % 1.1 % Loss ratio 63.3 % 0.0 % 45.7 % 75.0 % 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 excluding 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 % (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 Nine Months ended September 30, September 30, 2022 2021 2022 2021
Net premiums earned
Ceding commission revenue 4,886,094
(7,276 ) 14,283,077 37,400 Other income 269,297 322,705 740,424 617,257 Loss and loss adjustment expenses (1) 22,027,516 35,740,235
63,624,755 79,060,117
Acquisition costs and other underwriting expenses: Commission expense 8,702,190 8,201,935 25,534,307 24,711,115 Other underwriting expenses 7,276,101 6,562,743 20,717,047 19,722,705 Total acquisition costs and other underwriting expenses 15,978,291 14,764,678
46,251,354 44,433,820
Underwriting loss$ (3,489,440 ) $ (13,386,233 ) $
(10,916,184 )
Key Measures : Net loss ratio excluding the effect of catastrophes 73.9 % 64.0 % 71.7 % 62.5 % Effect of catastrophe loss on net loss ratio (1) 1.1 % 33.1 % 4.1 % 11.5 % Net loss ratio 75.0 % 97.1 % 75.8 % 74.0 % Net underwriting expense ratio excluding the effect of catastrophes 36.9 % 39.3 % 37.2 % 41.0 % Effect of catastrophe loss on net underwriting expense ratio 0.0 % 0.0 % 0.0 % 0.0 % Net underwriting expense ratio 36.9 % 39.3 % 37.2 % 41.0 % Net combined ratio excluding the effect of catastrophes 110.8 % 103.3 % 108.9 % 103.5 % Effect of catastrophe loss on net combined ratio (1) 1.1 % 33.1 % 4.1 % 11.5 % Net combined ratio 111.9 % 136.4 % 113.0 % 115.0 % Reconciliation of net underwriting expense ratio: Acquisition costs and other underwriting expenses$ 15,978,291 $ 14,764,678 $ 46,251,354 $ 44,433,820 Less: Ceding commission revenue (4,886,094 ) 7,276 (14,283,077 ) (37,400 ) Less: Other income (269,297 ) (322,705 )
(740,424 ) (617,257 )
$ 10,822,900 $ 14,449,249 $
31,227,853
Net earned premium
Net Underwriting Expense Ratio 36.9 % 39.3 % 37.2 % 41.0 %
(1) For the three months ended
net catastrophe losses and loss adjustment expenses of
2021, includes the sum of net catastrophe losses and loss adjustment expenses
of $3,465,681 and $12,286,692 , respectively.
63
Table of Contents
Investments
Portfolio Summary
Fixed-Maturity Securities
The following table presents a breakdown of the amortized cost, estimated fair
value, and unrealized gains and losses of our investments in fixed-maturity
securities classified as available-for-sale as of September 30, 2022 and
December 31, 2021 :
September 30, 2022
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
U.S. Treasury
securities and
obligations of
U.S.
government
corporations
and agencies$ 9,946,032 $ 930$ (123 ) $ -$ 9,946,839 6.8 % Political subdivisions of States, Territories and Possessions 17,117,473 - (3,250,196 )
(590,936 ) 13,276,341 9.1 % Corporate and other bonds Industrial and
miscellaneous 84,163,055 - (9,154,182 ) (269,694 ) 74,739,179 51.4 % Residential mortgage and other asset backed securities (1) 54,307,907 68,159 (4,333,707 ) (2,699,011 ) 47,343,348 32.7 %
Total
fixed-maturity
securities
100.0 %
(1) KICO has placed certain residential mortgage backed securities as eligible
collateral in a designated custodian account related to its membership in
the
condensed consolidated financial statements). The eligible collateral
would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit
line. As of
investments was approximately$12,393,000 . KICO will retain all rights regarding all securities if pledged as collateral. As ofSeptember 30, 2022 , there was no outstanding balance on the FHLBNY credit line. December 31, 2021 Cost or Gross Gross Unrealized Losses Estimated % of Amortized Unrealized Less than 12
More than 12 Fair Estimated Category Cost Gains Months Months Value Fair Value Political subdivisions of States, Territories and
Possessions$ 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 of
September 30, 2022
% of
Gross Gross Estimated Estimated
Category Cost Gains Losses Fair
Value Fair Value
Equity Securities : Preferred stocks$ 16,047,207 $ -$ (3,488,481 ) $ 12,558,726 58.5 % Common stocks and exchange traded funds 10,728,809 103,902 (1,922,991 ) 8,909,720 41.5 % Total$ 26,776,016 $ 103,902 $ (5,411,472 ) $ 21,468,446 100.0 % 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 ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 Gross Estimated Gross Estimated Category Cost Gains Fair Value Cost Gains Fair Value Other Investments: Hedge fund$ 1,987,040 $ 589,232 $ 2,576,272 $ 3,999,381 $ 3,562,034 $ 7,561,415 65 Table of Contents After providing notice, we redeemed 50% of our investment in the hedge fund as ofSeptember 30, 2022 for a realized gain of$589,000 , which is recorded in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
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, 2022
Cost or Gross Gross Unrealized Losses Estimated % of
Amortized Unrealized Less than 12 More than 12 Fair Estimated
Category Cost Gains Months Months Value Fair Value
Held-to-Maturity
Securities:
U.S. Treasury
securities $ 1,228,485 $ 73,468 $ (36,802 ) $ - $ 1,265,151 19.1 %
Political
subdivisions of
States,
Territories and
Possessions 498,508 - (1,498 ) - 497,010 7.5 %
Exchange traded
debt 304,111 - (43,361 ) - 260,750 3.9 %
Corporate and
other bonds
Industrial and
miscellaneous 5,736,079 35,503 (1,182,635 )
- 4,588,947 69.4 % Total$ 7,767,183 $ 108,971 $ (1,264,296 ) $ -$ 6,611,858 100.0 % December 31, 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 Held-to-Maturity Securities: U.S. Treasury securities$ 729,642 $ 209,633 $ - $ -$ 939,275 10.7 % Political subdivisions of States, Territories and Possessions 998,239 22,856 - - 1,021,095 11.7 % Exchange traded debt 304,111 85 (13,921 )
290,275 3.3 % Corporate and other bonds Industrial and
miscellaneous 6,234,342 280,951 (12,779 )
- 6,502,514 74.3 % Total$ 8,266,334 $ 513,525 $ (26,700 ) $ -$ 8,753,159 100.0 %
Held-to-maturity
states' minimum fund requirements.
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
September 30, 2022 December 31, 2021
Amortized Estimated Amortized Estimated
Remaining Time to Maturity Cost Fair Value Cost Fair Value
Less than one year $ 708,325 $ 742,533 $ 994,712 $ 1,008,180
One to five years 1,120,315 1,082,015 1,205,829 1,290,465
Five to ten years 1,399,725 1,177,545 1,513,942 1,648,808
More than 10 years 4,538,818 3,609,765 4,551,851 4,805,706
Total $ 7,767,183 $ 6,611,858 $ 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
rated by
Moody's, Fitch, or Kroll):
September 30, 2022
Estimated Percentage of Estimated Percentage of
Fair Estimated Fair Estimated
Value Fair Value Value Fair Value
Rating
U.S. Treasury
securities $ 9,946,840 6.8 % $ - 0.0 %
Corporate and
municipal bonds
AAA 990,819 0.7 % 1,321,809 0.8 %
AA 16,410,900 11.3 % 11,532,572 7.3 %
A 32,163,411 22.2 % 38,272,571 24.2 %
BBB+ 11,938,310 8.2 % 17,936,359 11.3 %
BBB 20,414,670 14.0 % 25,161,776 15.9 %
BBB- 4,461,056 3.1 % 4,193,401 2.7 %
Total corporate
and municipal
bonds 86,379,166 59.4 % 98,418,488 62.2 %
Residential
mortgage backed,
asset backed, and
other
collateralized
obligations
AAA 16,860,463 11.6 % 17,350,192 11.0 %
AA 24,290,742 16.7 % 34,241,907 21.7 %
A 6,793,094 4.7 % 6,306,161 4.0 %
BBB 20,763 0.0 % 24,254 0.0 %
CCC 495,227 0.3 % 664,628 0.4 %
CC 105,761 0.1 % 125,412 0.1 %
D 42,159 0.0 % 55,306 0.0 %
Non rated 371,492 0.3 % 893,762 0.6 %
Total residential
mortgage backed,
asset backed, and
other
collateralized
obligations 48,979,701 33.7 % 59,661,622 37.8 %
Total $ 145,305,707 100.0 % $ 158,080,110 100.0 %
67
Table of Contents
The table below summarizes the average yield by type of fixed-maturity security
as of
September 30, December 31,
Category 2022 2021
U.S. Treasury securities and obligations of U.S.
government corporations and agencies 2.40 %
3.06 %
Political subdivisions of States, Territories and Possessions 3.54 % 2.77 % Corporate and other bonds Industrial and miscellaneous 3.64 % 3.23 %
Residential mortgage backed securities 2.43 %
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 ofSeptember 30, 2022 andDecember 31, 2021 :September 30, 2022 December 31, 2021
Weighted average effective maturity 6.2
8.0
Weighted average final maturity 14.5
13.8 Effective duration 4.8 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 September 30, 2022 and December 31, 2021 , 63% and 84%,
respectively, 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 September
30, 2022 and December 31, 2021 :
September 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$ 5,975,160 $ (123 ) 1 $
- $ - -$ 5,975,160 $ (123 ) Political subdivisions of States, Territories and Possessions 11,461,126 (3,250,196 ) 12 1,815,216 (590,936 ) 2 13,276,342 (3,841,132 ) Corporate and other bonds industrial and miscellaneous 73,921,209 (9,154,182 ) 93 817,970 (269,694 ) 1 74,739,179 (9,423,876 ) Residential mortgage and other asset backed securities 27,985,270 (4,333,707 ) 31 18,593,599 (2,699,011 ) 15 46,578,869
(7,032,718 )
Total
fixed-maturity
securities$ 119,342,765 $ (16,738,208 ) 137$ 21,226,785 $ (3,559,641 ) 18$ 140,569,550 $ (20,297,849 ) 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 ) There were 155 securities atSeptember 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. 70 Table of Contents
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, 2022 , 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, 2022 , KICO paid dividends of$1,500,000 to us. OnOctober 27, 2022 , KICO entered a sale-leaseback transaction whereby KICO sold substantially all its fixed assets for approximately$8,100,000 . Subsequent to the closing of the sale-leaseback transaction, KICO paid a dividend of$3,000,000 to us. In addition, onOctober 17, 2022 we entered into a seven year loan agreement with KICO with regard to a loan from KICO to us in the amount of$6,450,000 . KICO is a member of theFederal Home Loan Bank of New York ("FHLBNY"), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY's credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along withU.S. Treasury and agency securities. See Note 3 to our condensed consolidated financial statements - Investments, for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO's net admitted assets as of the end of the previous quarter, which isJune 30, 2022 , and are due and payable within 90 days of borrowing. The maximum allowable advance as ofSeptember 30, 2022 , based on the net admitted assets as ofJune 30, 2022 , was approximately$12,414,000 . Advances are limited to 85% of the amount of available collateral, which was approximately$10,534,000 as ofSeptember 30, 2022 . There were no borrowings under this facility during the nine months endedSeptember 30, 2022 . OnDecember 19, 2017 , we issued$30 million of our 5.50% Senior Unsecured Notes dueDecember 30, 2022 . As ofSeptember 30, 2022 , invested assets and cash in our holding company was approximately$2,416,000 . See Notes 2 and 7 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our plans with regard to the satisfaction of the debt. 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:
HG HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
US ALLIANCE CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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