Kingstone(KINS) - 2022 Q3 - Quarterly Report

Part I — Financial Information Financial Statements The company reported a significant net loss and declining equity for the nine months ended September 30, 2022, facing going concern doubt due to maturing senior notes Condensed Consolidated Balance Sheets The balance sheet shows a significant decrease in total assets and stockholders' equity as of September 30, 2022, primarily due to investment declines and net loss Balance Sheet Summary (as of September 30, 2022 vs. December 31, 2021) (USD) | Metric | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Investments | $177,117,608 | $213,594,861 | | Cash and cash equivalents | $15,111,206 | $24,290,598 | | Total Assets | $315,707,946 | $331,312,275 | | Total Liabilities | $276,837,833 | $255,640,081 | | Total Stockholders' Equity | $38,870,113 | $75,672,194 | - Total stockholders' equity decreased significantly by 48.6% to $38.9 million as of September 30, 2022, from $75.7 million at the end of 2021, primarily driven by a net loss and a large increase in accumulated other comprehensive loss from $(16.0) million compared to $1.8 million[14] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The company reported a substantial increase in net loss for the nine months ended September 30, 2022, primarily driven by net investment losses Statement of Operations Summary (Unaudited) (USD) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $35,537,635 | $38,957,974 | $93,068,180 | $118,061,625 | | Net Premiums Earned | $29,360,976 | $36,803,251 | $83,936,424 | $106,828,895 | | Net (Losses) Gains on Investments | $(397,658) | $204,534 | $(9,313,436) | $5,480,202 | | Net Loss | $(3,997,621) | $(10,618,265) | $(18,574,772) | $(9,606,001) | | Comprehensive Loss | $(7,981,933) | $(11,538,588) | $(36,350,081) | $(13,279,383) | | Diluted Loss Per Share | $(0.38) | $(1.01) | $(1.75) | $(0.90) | - For the nine months ended Sep 30, 2022, the company's net loss nearly doubled to $18.6 million from $9.6 million in the prior year period, largely due to a significant swing from a $5.5 million net gain on investments in 2021 to a $9.3 million net loss in 2022[16][18] Condensed Consolidated Statements of Cash Flows Cash flow from operating activities experienced a significant negative swing for the nine months ended September 30, 2022, leading to a net decrease in cash Cash Flow Summary (Nine Months Ended Sep 30, Unaudited) (USD) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(7,921,438) | $29,079,787 | | Net Cash Provided by (Used in) Investing Activities | $398,911 | $(9,297,954) | | Net Cash Used in Financing Activities | $(1,656,865) | $(3,137,487) | | Net (Decrease) Increase in Cash | $(9,179,392) | $16,644,346 | - Cash from operating activities saw a significant negative swing, from a $29.1 million inflow in 2021 to a $7.9 million outflow in 2022 for the nine-month period, primarily driven by an increase in reinsurance receivables and a decrease in reinsurance payables[26] Notes to Condensed Consolidated Financial Statements Key notes highlight going concern doubt due to maturing debt, significant unrealized investment losses, impacts of a new reinsurance treaty, and subsequent liquidity actions and strategic discussions - The company's continuation as a going concern is in doubt due to $30 million in Senior Unsecured Notes maturing on December 30, 2022, with management's plan including refinancing, exchanging notes, and utilizing funds from its subsidiary, KICO[33][34][36] - The company's investment portfolio has significant unrealized losses, with available-for-sale fixed-maturity securities having gross unrealized losses of $20.3 million as of September 30, 2022, a sharp increase from $0.9 million at year-end 2021, primarily due to interest rate changes[43][56][57] - Effective December 31, 2021, the company entered into a 30% quota share reinsurance treaty for its personal lines business (2021/2023 Treaty), which significantly impacted ceded premiums and ceding commission revenue in 2022[85][93] - Subsequent to the quarter end, on October 27, 2022, KICO entered into a sale-leaseback transaction, selling $8.1 million of fixed assets to a bank[101][149] - The company is in discussions with Griffin Highline Capital LLC regarding a potential strategic transaction, although an acquisition of the entire company is not currently being pursued, and the period of exclusivity has expired[147][148] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights increased direct written premiums offset by reinsurance, a widened nine-month net loss due to investment swings, improved Q3 net loss due to lower catastrophe impact, and significant liquidity challenges from maturing debt Business Overview and Product Lines The company primarily offers property and casualty insurance in downstate New York, with product lines including personal and livery physical damage insurance - The company offers property and casualty insurance primarily in downstate New York, which accounted for over 80% of direct written premiums for the nine months ended September 30, 2022, with operations also active in NJ, RI, MA, and CT[28][151] - Product lines consist of personal lines (homeowners, dwelling fire, etc.), livery physical damage, and other minor lines, with the commercial liability line discontinued in July 2019 and in run-off[157][159][160] Results of Operations Nine-month net loss increased due to investment swings and inflation, while Q3 net loss improved due to lower catastrophe impact, and a new reinsurance treaty impacted premiums and expense ratios Key Ratios Comparison (Nine Months Ended Sep 30) (%) | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Net Loss Ratio | 75.8% | 74.0% | | Net Underwriting Expense Ratio | 37.2% | 41.0% | | Net Combined Ratio | 113.0% | 115.0% | Key Ratios Comparison (Three Months Ended Sep 30) (%) | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Net Loss Ratio | 75.0% | 97.1% | | Net Underwriting Expense Ratio | 36.9% | 39.3% | | Net Combined Ratio | 111.9% | 136.4% | - Direct written premiums for the nine months of 2022 increased 12.0% to $147.4 million, primarily due to rate increases in personal lines, while net written premiums decreased 19.3% due to the new 30% personal lines quota share treaty[171][176][178] - The Q3 2022 net loss ratio improved to 75.0% from 97.1% in Q3 2021, mainly due to lower catastrophe losses (1.1 point impact) compared to the prior year (33.1 point impact from storms including Ida)[229][231] - The underlying loss ratio for Q3 2022 (excluding catastrophes and prior year development) was 72.4%, an increase of 8.4 points from Q3 2021, attributed to increased property claim severity from inflation[232] Investments Analysis The investment portfolio, primarily fixed-maturity securities, experienced significant unrealized losses due to rising interest rates, while a hedge fund redemption yielded a realized gain - The fair value of the available-for-sale fixed-maturity portfolio was $145.3 million, which is $20.2 million below its amortized cost of $165.5 million as of September 30, 2022[259] - The equity securities portfolio had a fair value of $21.5 million against a cost of $26.8 million, representing an unrealized loss of $5.3 million[262] - The company redeemed 50% of its hedge fund investment as of September 30, 2022, recognizing a realized gain of $0.6 million[264] Liquidity and Capital Resources The company faces significant liquidity challenges with $30 million in debt maturing, addressed by subsequent sale-leaseback, intercompany loans, and a negative swing in operating cash flow - The company must satisfy $30 million of Senior Unsecured Notes due December 30, 2022, with the holding company's cash and investments only $2.4 million at quarter-end[276] - Subsequent to quarter-end, the company took several actions to improve liquidity: KICO completed an $8.1 million sale-leaseback, paid a $3.0 million dividend to the parent company, and provided a $6.45 million loan to the parent company[274] - KICO has access to additional liquidity through the Federal Home Loan Bank of New York (FHLBNY), with a maximum borrowing capacity of approximately $10.5 million as of September 30, 2022, though no borrowings have been made[275] Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required as the company qualifies as a smaller reporting company - This item is not applicable as the company qualifies as a smaller reporting company[295] Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[296][297] - No material changes to the company's internal control over financial reporting occurred during the most recently completed fiscal quarter[299] Part II — Other Information Other Information and Disclosures The company reported no legal proceedings, defaults, or other material information, with risk factors unchanged except for the Griffin Highline indication of interest - The company reports no legal proceedings[303] - There have been no material changes to the risk factors disclosed in the company's 2021 Annual Report, except as related to the non-binding indication of interest from Griffin Highline[304] - The company reported no unregistered sales of equity securities, defaults upon senior securities, or other information for Items 2, 3, 4, and 5[305][308][309][310]