KINGSTONE COMPANIES INC

Previous wording

We offer property and casualty insurance products through our wholly-owned subsidiary, Kingstone Insurance Company (“KICO”). KICO is a New York domiciled carrier writing business through retail and wholesale agents and brokers. KICO is actively writing personal lines and commercial auto insurance in New York, and in 2023 was the 15th largest writer of homeowners insurance in New York. KICO is also licensed in the states of New Jersey, Rhode Island, Massachusetts, Connecticut, Pennsylvania, New Hampshire, and Maine. For the three months ended March 31, 2024 and 2023, respectively, 94.4% and 87.0% of KICO’s direct written premiums came from the New York policies. We refer to our New York business as our “Core” business and the business outside of New York as our “non-Core” business.

Current wording

We offer property and casualty insurance products through our wholly-owned subsidiary, Kingstone Insurance Company (“KICO”). KICO is a New York domiciled carrier writing business through retail and wholesale agents and brokers. KICO is actively writing personal lines and commercial auto insurance in New York, and in 2023 was the 15th largest writer of homeowners insurance in New York. KICO is also licensed in the states of New Jersey, Rhode Island, Massachusetts, Connecticut, Pennsylvania, New Hampshire, and Maine. For the three months ended June 30, 2024 and 2023, respectively, 95.9% and 88.6% of KICO’s direct written premiums came from the New York policies. For the six months ended June 30, 2024 and 2023, respectively, 95.2% and 87.8% of KICO’s direct written premiums came from the New York policies. We refer to our New York business as our “Core” business and the business outside of New York as our “non-Core” business.

Previous wording

In May 2019, due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business. In July 2019, due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks. In-force policies as of July 31, 2019 for these lines were non-renewed at the end of their annual terms. As of March 31, 2024 and December 31, 2023, there were no commercial liability policies in-force. As of March 31, 2024, these expired policies represent approximately 15.1% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

Current wording

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 June 30, 2024 and December 31, 2023, there were no commercial liability policies in-force. As of June 30, 2024, these expired policies represent approximately 15.2% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

Previous wording

See the tables for our Core and non-Core business for policies in force and direct written premiums as of and for the three months ended March 31, 2024 and 2023. For the three months ended March 31, 2024, our Core direct written premiums increased by 12.5% compared to the three months ended March 31, 2023, while Core policies in force decreased by 7.1% as of March 31, 2024. For the same periods, our non-Core policies in force decreased by 52.1% and non-Core direct written premiums decreased by 55.6%. We believe that the above actions taken resulted in our return to profitability for the three months ended March 31, 2024, will continue to have the intended effect and will continue through the remainder 2024 to result in a return to annual profitability.

Current wording

See the tables below for our Core and non-Core business for policies in force as of June 30, 2024 and 2023 and direct written premiums for the three months and six months ended June 30, 2024 and 2023. For the three months ended June 30, 2024, our Core direct written premiums increased by 21.5% compared to the three months ended June 30, 2023, while Core policies in force decreased by 4.6% as of June 30, 2024 as compared to June 30, 2023. For the same periods, our non-Core policies in force decreased by 55.0% and non-Core direct written premiums decreased by 59.7%.

Previous wording

(Percent components may not sum to totals due to rounding)

Current wording

(Columns in the table above may not sum to totals due to rounding)

Previous wording

On January 1, 2023, we entered into a new 30% quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2023 through January 1, 2024 (“2023/2024 Treaty”). Upon expiration of the 2023/2024 Treaty on January 1, 2024, we entered into a new 27% quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2024 through January 1, 2025 (“2024/2025 Treaty”). In Three Months 2024, our premiums ceded under quota share treaties decreased by $5,757,000 in comparison to premiums ceded under quota share treaties in Three Months 2023 (see table above). The decrease in Three Months 2024 was attributable to the decrease in quota share rates and by the runoff in Three Months 2023 of an 8.5% portion of a 30% quota share treaty that was in effect through January 1, 2024 (“2021-2023 Treaty”). Our personal lines business was subject to the 2024/2025 Treaty in Three Months 2024, and the 2023/2024 Treaty in Three Months 2023.

Current wording

On January 1, 2023, we entered into a new 30% quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2023 through January 1, 2024 (“2023/2024 Treaty”). Upon expiration of the 2023/2024 Treaty on January 1, 2024, we entered into a new 27% quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2024 through January 1, 2025 (“2024/2025 Treaty”). Our personal lines business was subject to the 2024/2025 Treaty in Six Months 2024, and the 2023/2024 Treaty in Six Months 2023. In Six Months 2024, our premiums ceded under quota share treaties decreased by $5,581,000 in comparison to premiums ceded under quota share treaties in Six Months 2023 (see table above). The decrease in Six Months 2024 was attributable to the decrease in quota share ceding percentage rates, offset by an increase in direct written premiums subject to the 2024/2025 Treaty compared to direct written premiums subject to the 2023/2024 Treaty.

Previous wording

Cash and invested assets were $189,109,000 as of March 31, 2024 compared to $190,665,000 as of March 31, 2023, a decrease of $1,556,000.

Current wording

Cash and invested assets were $195,789,000 as of June 30, 2024 compared to $175,407,000 as of June 30, 2023, an increase of $20,382,000.

Previous wording

There were six newly designated catastrophe events for Three Months 2024. The estimated total net catastrophe losses for the calendar quarter were $1,486,000, which contributed 5.2 points to the loss ratio. By comparison, the catastrophe impact for Three Months 2023 was 13.2 points. Losses from winter-related catastrophe claims were minimal during Three Months 2024, whereas the previous year was impacted by a major winter event in February 2023.

Current wording

There were ten newly designated catastrophe events for Six Months 2024. The estimated total net catastrophe impact for Six Months 2024 was $1,872,000, which contributed 3.2 points to the loss ratio. By comparison, the catastrophe impact for Six Months 2023 was 8.9 points. Losses from winter-related catastrophe claims were minimal during Six Months 2024, whereas the previous year was impacted by a major winter event in February 2023.

Previous wording

The increase in Three Months 2024 of $115,000, or 17.3%, as compared to Three Months 2023 was primarily due to increases in employment costs and equity compensation. The increase in employment costs was due to fluctuations in deferred compensation liability related to changes in the underlying invested portfolio.

Current wording

The increase in Six Months 2024 of $153,000, or 10.7%, as compared to Six Months 2023 was primarily due to increases in executive bonus, employment costs, and equity compensation. The executive bonus is due to a $117,000 accrual pursuant to the employment agreement of our Chief Executive Officer. The accrual is a result of the profitable operations before taxes in Six Months 2024 compared to a loss in Six Months 2023.The increase in employment costs was due to fluctuations in deferred compensation liability related to changes in the underlying invested portfolio.

Previous wording

Direct written premiums during the three months ended March 31, 2024 (“Three Months 2024”) were $49,325,000 compared to $47,597,000 during the three months ended March 31, 2023 (“Three Months 2023”). The increase of $1,728,000, or 3.6%, was primarily due to an increase in premiums from our personal lines business.

Current wording

Direct written premiums during the three months ended June 30, 2024 (“Three Months 2024”) were $53,495,000 compared to $47,647,000 during the three months ended June 30, 2023 (“Three Months 2023”). The increase of $5,848,000, or 12.3%, was primarily due to an increase in premiums from our personal lines business.

Previous wording

Direct written premiums from our personal lines business for Three Months 2024 were $45,740,000, an increase of $1,569,000, or 3.5%, from $44,171,000 in Three Months 2023. The 3.5% increase in premiums from our personal lines business was primarily due to the increase in premiums associated with our Core business of 13.2% offsetting a 55.6% decrease in our non-Core business. The increase in our Core business premiums and the decrease in our non-Core business premiums is in accordance with both our Kingstone 2.0 and Kingstone 3.0 strategic plans.

Current wording

Direct written premiums from our personal lines business for Three Months 2024 were $50,137,000, an increase of $6,126,000, or 13.9%, from $44,011,000 in Three Months 2023. The 13.9% increase in premiums from our personal lines business was primarily due to the increase in premiums associated with our Core business of 24.3% offsetting a 59.7% decrease in our non-Core business. The increase in our Core business premiums and the decrease in our non-Core business premiums is in accordance with both our Kingstone 2.0 and Kingstone 3.0 strategic plans.

Previous wording

Direct written premiums from our livery physical damage business for Three Months 2024 were $3,562,000, an increase of $156,000, or 4.6%, from $3,406,000 in Three Months 2023. The increase in livery physical damage direct written premiums was due to an increasing number of policies and an increase in the values of the autos insured.

Current wording

Direct written premiums from our livery physical damage business for Three Months 2024 were $3,338,000, a decrease of $272,000, or 7.5%, from $3,610,000 in Three Months 2023. The decrease in livery physical damage direct written premiums was due to an underwriting restriction in place to exclude certain electric vehicles until the approval of adequate rate for the risk was received, which happened in July 2024. The decrease was offset by an increase in the values of the autos insured.

Previous wording

Direct written premiums from our Core business were $46,587,000 in Three Months 2024 compared to $41,427,000 in Three Months 2023, an increase of $5,160,000, or 12.5%. The increase in direct written premiums from our Core business was due to rate increases, offset by a decrease in policies in force. Policies in force from our Core business decreased by 7.1% in Three Months 2024 compared to Three Months 2023. Direct written premiums from our non-Core business were $2,738,000 in Three Months 2024 down from $6,170,000 in Three Months 2023, a decrease of $3,432,000, or 55.6%. The decrease in direct written premiums from our non-Core business is a result of our decision to aggressively reduce the book of business in these states. Policies in force from our non-Core business decreased by 52.1% in Three Months 2024 compared to Three Months 2023. The increase in our Core business and the decrease in our non-Core business is consistent with a key pillar of our Kingstone 3.0 strategy to reduce our non-Core business due to profitability concerns.

Current wording

Direct written premiums from our Core business were $51,306,000 in Three Months 2024 compared to $42,212,000 in Three Months 2023, an increase of $9,094,000, or 21.5%. The increase in direct written premiums from our Core business was due to rate increases, offset by a decrease in policies in force. Policies in force from our Core business decreased by 4.6% in Three Months 2024 compared to Three Months 2023. Direct written premiums from our non-Core business were $2,190,000 in Three Months 2024 down from $5,435,000 in Three Months 2023, a decrease of $3,245,000, or 59.7%. The decrease in direct written premiums from our non-Core business is a result of our decision to aggressively reduce the book of business in these states. Policies in force from our non-Core business decreased by 55.0% in Three Months 2024 compared to Three Months 2023. The increase in our Core business and the decrease in our non-Core business is consistent with a key pillar of our Kingstone 3.0 strategy to reduce our non-Core business due to profitability concerns.

Previous wording

Net written premiums increased $6,603,000, or 21.0%, to $38,095,000 in Three Months 2024 from $31,492,000 in Three Months 2023. Net written premiums include direct premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). The increase in Three Months 2024 is primarily due to changes to our personal lines quota share reinsurance treaty. See quota share reinsurance treaties discussion below.

Current wording

Net written premiums increased $5,319,000, or 14.7%, to $41,425,000 in Three Months 2024 from $36,106,000 in Three Months 2023. Net written premiums include direct premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). The increase in Three Months 2024 is primarily due to changes to our personal lines quota share reinsurance treaty. See quota share reinsurance treaties discussion below.

Previous wording

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2024, our ceded excess of loss reinsurance premiums increased by $326,000 over the comparable ceded excess of loss premiums for Three Months 2023. The increase was due to an increase in subject premiums and the heightened cost of coverage obtained. Effective January 1, 2023, we entered into an underlying excess of loss reinsurance treaty (the “Underlying XOL Treaty”) covering the period from January 1, 2023 through January 1, 2024. The treaty provided 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms were excluded from the treaty. Effective January 1, 2024, the Underlying XOL Treaty was renewed covering the period from January 1, 2024 through January 1, 2025.

Current wording

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2024, our ceded excess of loss reinsurance premiums increased by $304,000 over the comparable ceded excess of loss premiums for Three Months 2023. The increase was due to an increase in subject premiums and the heightened cost of coverage obtained. Effective January 1, 2023, we entered into an underlying excess of loss reinsurance treaty (the “Underlying XOL Treaty”) covering the period from January 1, 2023 through January 1, 2024. The Underlying XOL Treaty provided 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms were excluded from the Underlying XOL Treaty. Effective January 1, 2024, the Underlying XOL Treaty was renewed covering the period from January 1, 2024 through January 1, 2025.

Previous wording

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. An increase in our personal lines business results in an increase in premiums ceded under our catastrophe treaties if reinsurance rates are stable or are increasing. On July 1, 2023 and 2022, we recorded our catastrophe premiums for the entire treaty period covering July 1 through June 30, resulting in the entire annual premium being recorded in the third quarter. The $556,000 negative catastrophe premium in Three Months 2023 was due to a true-up of premiums originally recorded on July 1, 2022.

Current wording

Most of the premiums written under our personal lines policies are also subject to our catastrophe reinsurance 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. An increase in our personal lines business results in an increase in premiums ceded under our catastrophe treaties if reinsurance rates are stable or are increasing. On July 1, 2023 and 2022, we recorded our catastrophe premiums written for the entire treaty period covering July 1 through June 30, resulting in the entire annual premium written being recorded in the third quarter. The $506,000 negative catastrophe premium in Three Months 2024 was due to a no loss bonus from one of our reinsurers. The $554,000 negative catastrophe premium in Three Months 2023 was due to a true-up of premiums originally recorded on July 1, 2022.

Previous wording

Net premiums earned increased $565,000, or 2.0%, to $28,820,000 in Three Months 2024 from $28,255,000 in Three Months 2023. The increase was due to the three point reduction in quota share rates discussed above, the run-off of a portion of the 2021-2023 Treaty, which increased the premiums ceded and reduced the net premiums earned in Three Months 2023, offset by an increase in catastrophe premium rates, reflected in ceded catastrophe premiums earned, which reduced the amount of growth in net premiums earned.

Current wording

Net premiums earned increased $796,000, or 2.7%, to $30,304,000 in Three Months 2024 from $29,508,000 in Three Months 2023. The increase was due to the three percentage point reduction in quota share rates discussed above, the run-off of a portion of the 2021-2023 Treaty, which increased the premiums ceded and reduced the net premiums earned in Three Months 2023, offset by an increase in catastrophe premium rates, reflected in ceded catastrophe premiums earned, which reduced the amount of growth in net premiums earned.

Previous wording

Ceding commission revenue was $4,567,000 in Three Months 2024 compared to $5,445,000 in Three Months 2023. The decrease of $878,000 is explained below in the discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Current wording

Ceding commission revenue was $4,562,000 in Three Months 2024 compared to $5,412,000 in Three Months 2023. The decrease of $850,000 is explained below in the discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Previous wording

In Three Months 2024, we earned provisional ceding commissions of $4,555,000 from personal lines earned premiums ceded under the 2024/2025 Treaty, and in Three Months 2023, we earned provisional ceding commissions of $5,447,000 from personal lines earned premiums ceded under the 2023/2024 Treaty. The decrease of $892,000 in provisional ceding commissions earned was due to the decrease in premiums ceded under these treaties during Three Months 2024 compared to Three Months 2023, offset by an increase in ceding commission rates under the 2024/2025 Treaty.

Current wording

In Three Months 2024, we earned provisional ceding commissions of $4,562,000 from personal lines earned premiums ceded under the 2024/2025 Treaty, and in Three Months 2023, we earned provisional ceding commissions of 5,294,000 from personal lines earned premiums ceded under the 2023/2024 Treaty. The decrease of $732,000 in provisional ceding commissions earned was due to the decrease in premiums ceded under these treaties during Three Months 2024 compared to Three Months 2023, offset by an increase in ceding commission rates under the 2024/2025 Treaty.

Previous wording

Net investment income was $1,503,000 in Three Months 2024 compared to $1,541,000 in Three Months 2023, a decrease of $38,000, or 2.5%. The average yield on non-cash invested assets was 3.77% as of March 31, 2024 compared to 3.35% as of March 31, 2023.

Current wording

Net investment income was $1,765,000 in Three Months 2024 compared to $1,451,000 in Three Months 2023, an increase of $314,000, or 21.6%. The average yield on non-cash invested assets was 3.81% as of June 30, 2024 compared to 3.63% as of June 30, 2023.

Previous wording

Net gains on investments were $726,000 in Three Months 2024 compared to net gains of $1,225,000 in Three Months 2023. Unrealized gains on our equity securities and other investments in Three Months 2024 were $819,000, compared to unrealized gains of $1,228,000 in Three Months 2023. Net realized (losses) on sales of investments were $(92,000) in Three Months 2024 compared to net realized (losses) of $(3,000) in Three Months 2023.

Current wording

Net (losses) on investments were $(234,000) in Three Months 2024 compared to net gains of $197,000 in Three Months 2023. Unrealized gains on our equity securities and other investments in Three Months 2024 were $100,000, compared to unrealized gains of $208,000 in Three Months 2023. Net realized (losses) on sales of investments were $(333,000) in Three Months 2024 compared to net realized (losses) of $(10,000) in Three Months 2023.

Previous wording

The loss ratio for Three Months 2024 improved significantly compared to Three Months 2023. For Three Months 2024, the catastrophe impact, prior year development, and underlying loss ratio (loss ratio excluding the impact of catastrophe and prior year development) were all lower than Three Months 2023.

Current wording

The net loss ratio for Three Months 2024 improved significantly compared to Three Months 2023. For Three Months 2024, the catastrophe impact, prior year development, and underlying loss ratio (loss ratio excluding the impact of catastrophe and prior year development) were all lower than Three Months 2023.

Previous wording

There was favorable prior year development of $566,000 during Three Months 2024, which translates to a 2.0 point decrease to the loss ratio. By comparison, the impact of prior year development for Three Months 2023 was negligible. The favorable development in Three Months 2024 is mainly driven by the re-evaluation of the catastrophe events from the third quarter of 2023.

Current wording

There was favorable prior year development of $430,000 during Three Months 2024, which translates to a 1.4-point decrease to the loss ratio. By comparison, the impact of prior year development for Three Months 2023 was a decrease of 0.1 points.

Previous wording

Commission expense was $7,852,000 in Three Months 2024 or 15.7% of direct earned premiums. Commission expense was $8,540,000 in Three Month 2023 or 17.1% of direct earned premiums. The decrease of $688,000 was primarily due to a reduction in commission rates on our legacy policies in accordance with our Kingstone 3.0 strategy as well as the lower commission rate paid on Select products as compared to legacy products. The decrease was offset by an accrual of $303,000 for an estimated contingent commission to be recalculated quarterly if we continue to be profitable for the remainder of the year.

Current wording

Commission expense was $8,232,000 in Three Months 2024 or 16.1% of direct earned premiums. Commission expense was $8,471,000 in Three Months 2023 or 16.6% of direct earned premiums. The decrease of $239,000 was primarily due to a reduction in commission rates on our legacy policies in accordance with our Kingstone 3.0 strategy as well as the lower commission rate paid on Select products as compared to legacy products. The decrease was offset by an accrual of $545,000 for an estimated contingent commission to be recalculated quarterly if we continue to be profitable for the remainder of the year.

Previous wording

Other underwriting expenses were $5,881,000, or 11.8% of direct earned premiums, in Three Months 2024 compared to $6,872,000, or 13.8% of direct earned premiums, in Three Months 2023. The decrease of $991,000, or 14.4%, was primarily due to decreases in salaries and employment costs as described below, policy management system fees as result of the completion of our policy management system conversion, allowing us to eliminate multiple legacy systems, and other IT costs as a result of the completion of these projects. The decreases were partially offset by the impact of high inflation.

Current wording

Other underwriting expenses were $5,901,000, or 11.6% of direct earned premiums, in Three Months 2024 compared to $6,684,000, or 13.1% of direct earned premiums, in Three Months 2023. The decrease of $783,000, or 11.7%, was primarily due to a $365,000 gain on the commutations of prior years’ quota share reinsurance treaties from a group of reinsurers, decreases in salaries and employment costs excluding employee bonuses as described below, policy management system fees as result of the completion of our policy management system conversion, allowing us to eliminate multiple legacy systems, and other IT costs as a result of the completion of these projects. The decreases were partially offset by the impact of high inflation.

Previous wording

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $2,601,000 in Three Months 2024 compared to $2,933,000 in Three Months Ended 2023. The decrease of $332,000, or 11.3%, is favorable when compared to the 3.6% increase in direct written premiums. The decrease in salaries and employment costs was due to a reduction in our staff in June and July of 2023 as we have been reducing our non-Core business. The decrease from the reduction in staff was partially offset in the periods following Three Months 2023, as we began to strengthen our professional team by investing in the hiring of higher-level and higher compensated managers and staff needed to manage the business consistent with our Kingstone 2.0 and Kingstone 3.0 strategies.

Current wording

Our largest single component of other underwriting expenses is salaries and employment costs, with costs excluding employee bonuses of $2,748,000 in Three Months 2024 compared to $2,942,000 in Three Months Ended 2023. The decrease of $194,000, or 6.6%, is favorable when compared to the 12.0% increase in direct written premiums. The decrease in salaries and employment costs was due to a reduction in our staff in June and July of 2023 as we have been reducing our non-Core business. The decrease from the reduction in staff was partially offset in the periods following Three Months 2023, as we began to strengthen our professional team by investing in the hiring of higher-level and higher compensated managers and staff needed to manage the business consistent with our Kingstone 2.0 and Kingstone 3.0 strategies. In addition, the decrease in salaries and employment costs excluding employee bonuses was offset by $388,000 accrued under our employee bonus plan due to the profitable underwriting insurance operations in Three Months 2024 compared to a loss in Three Months 2023.

Previous wording

Our net underwriting expense ratio in Three Months 2024 was 31.3% compared to 34.7% in Three Months 2023. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

Current wording

Our net underwriting expense ratio in Three Months 2024 was 31.2% compared to 32.5% in Three Months 2023. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

Previous wording

Other operating expenses, related to the expenses of our holding company and Cosi, were $778,000 for Three Months 2024 compared to $663,000 for Three Months 2023. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

Current wording

Other operating expenses, related to the expenses of our holding company and Cosi, were $801,000 for Three Months 2024 compared to $763,000 for Three Months 2023. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

Previous wording

Depreciation and amortization was $597,000 in Three Months 2024 compared to $808,000 in Three Months 2023. The decrease of $211,000, or 26.1%, in depreciation and amortization was primarily due to the completion and deployment of our customized policy management software as planned for in Kingstone 2.0, now allowing us to consolidate multiple legacy systems into one efficient system and retire those older more costly and less reliable systems. Depreciation on older assets that were retired, which had a shorter useful life, is greater than the depreciation on newly acquired assets which have a longer useful life.

Current wording

Depreciation and amortization was $620,000 in Three Months 2024 compared to $779,000 in Three Months 2023. The decrease of $159,000, or 20.4%, in depreciation and amortization was primarily due to the completion and deployment of our customized policy management software as planned for in Kingstone 2.0, now allowing us to consolidate multiple legacy systems into one efficient system and retire those older more costly and less reliable systems. Depreciation on older assets that were retired, which had a shorter useful life, is greater than the depreciation on newly acquired assets which have a longer useful life.

Previous wording

Interest expense in Three Months 2024 was $994,000 compared to $1,010,000 in Three Months 2023, a decrease of $16,000 or 1.6%. In Three Months 2024 and Three Months 2023, as disclosed in Note 7 to the condensed consolidated financial statements, we incurred interest expense in connection with the 2022 Notes, which provide for interest at the rate of 12% per annum, and the 2022 equipment financing.

Current wording

Interest expense in Three Months 2024 was $990,000 compared to $1,006,000 in Three Months 2023, a decrease of $16,000 or 1.6%. In Three Months 2024 and Three Months 2023, as disclosed in Note 7 to the condensed consolidated financial statements, we incurred interest expense in connection with the 2022 Notes, which provide for interest at the rate of 12% per annum, and the 2022 equipment financing.

Previous wording

Income tax expense in Three Months 2024 was $378,000, which resulted in an effective tax rate of 20.93%. Income tax (benefit) in Three Months 2023 was $(1,249,000), which resulted in an effective tax rate of 19.8%. Income before taxes was $1,805,000 in Three Months 2024 compared to a loss before taxes of $6,304,000 in Three Months 2023. The difference in effective tax rate is due to the effect of permanent differences in Three Months 2024 compared to Three Months 2023.

Current wording

Income tax expense in Three Months 2024 was $1,205,000, which resulted in an effective tax rate of 21.1%. Income tax (benefit) in Three Months 2023 was $(41,000), which resulted in an effective tax rate of 7.3%. Income before taxes was $5,720,000 in Three Months 2024 compared to a loss before taxes of $564,000 in Three Months 2023. The difference in effective tax rate is due to the effect of permanent differences in Three Months 2024 compared to Three Months 2023.

Previous wording

Net income was $1,427,000 in Three Months 2024 compared to loss of $5,055,000 in Three Months 2023. The increase from net loss to net income of $6,482,000 was due to the circumstances described above.

Current wording

Net income was $4,515,000 in Three Months 2024 compared to a net loss of $523,000 in Three Months 2023. The increase from net loss to net income of $5,038,000 was due to the circumstances described above.

Previous wording

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 March 31, 2024 and December 31, 2023, 67% and 65%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

Current wording

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, 2024 and December 31, 2023, 69% and 65%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

Previous wording

There were 140 securities at both March 31, 2024 and December 31, 2023 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed to be credit losses by us. 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, 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.

Current wording

There were 138 securities at June 30, 2024 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed to be credit losses by us. There were 140 securities at December 31, 2023 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed to be credit losses by us. 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, 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.

Previous wording

The primary source of cash flow for our holding company are dividends and distributions received from KICO, which are subject to statutory restrictions. For the three months ended March 31, 2024, KICO did not pay any dividends to us. As of March 31, 2024, KICO had a negative unassigned surplus and currently will not be able to pay any distributions to us without prior regulatory approval. In December 2023, KICO received regulatory approval to pay us a $2,300,000 distribution from paid in capital. KICO intends to pay us the $2,300,000 distribution in the second quarter of 2024.

Current wording

The primary source of cash flow for our holding company are dividends and distributions received from KICO, which are subject to statutory restrictions. For the six months ended June 30, 2024, KICO did not pay any dividends to us. As of June 30, 2024, KICO had a negative adjusted unassigned surplus. Based on that, KICO currently will not be able to pay any distributions to us without prior regulatory approval. In December 2023, KICO received regulatory approval to pay us a $2,300,000 distribution from paid in capital. KICO paid us the $2,300,000 distribution in the second quarter of 2024.

Previous wording

KICO is a member of the 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 with U.S. Treasury and agency securities. See Note 3 – Investments to our condensed consolidated financial statements 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 is December 31, 2023. On July 6, 2023, A.M. Best withdrew KICO’s ratings as KICO requested to no longer participate in A.M. Best’s interactive rating process. As a result of the withdrawal of A.M. Best ratings, KICO is currently only able to borrow on an overnight basis. The maximum allowable advance as of March 31, 2024, based on the net admitted assets as of December 31, 2023, was approximately $12,512,000. Available collateral as of March 31, 2024 was approximately $10,929,000. Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during Three Months 2024.

Current wording

KICO is a member of the 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 with U.S. Treasury and agency securities. See Note 3 – Investments to our condensed consolidated financial statements 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 is March 31, 2024. On July 6, 2023, A.M. Best withdrew KICO’s ratings as KICO requested to no longer participate in A.M. Best’s interactive rating process. As a result of the withdrawal of A.M. Best ratings, KICO is currently only able to borrow on an overnight basis. The maximum allowable advance as of June 30, 2024, based on the net admitted assets as of March 31, 2024, was approximately $12,692,000. Available collateral as of June 30, 2024 was approximately $10,626,000. Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during Six Months 2024.

Previous wording

On December 15, 2022, we issued $19,950,000 of our 2022 Notes pursuant to the Exchange Agreement. We are required to make semi-annual interest payments in arrears on June 30 and December 30 of each year. The maturity date of the 2022 Notes is December 30, 2024.

Current wording

On December 15, 2022, we issued 2022 Notes in the aggregate principal amount of $19,950,000 pursuant to the Exchange Agreement. We are required to make semi-annual interest payments in arrears on June 30 and December 30 of each year. The maturity date of the 2022 Notes is December 30, 2024.

Previous wording

Net cash provided by operating activities was $6,098,000 in Three Months 2024 as compared to $3,367,000 used in operating activities in Three Months 2023. The $9,645,000 increase in cash flows provided by operating activities in Three Months 2024 as compared to Three Months 2023 was primarily the result of an increase in net income from net loss (adjusted for non-cash items) of $8,410,000 and in cash provided arising from net fluctuations in operating assets and liabilities. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and other changes, which are described above.

Current wording

Net cash provided by operating activities was $13,215,000 in Six Months 2024 as compared to $17,010,000 used in operating activities in Six Months 2023. The $30,225,000 increase in cash flows provided by operating activities in Six Months 2024 as compared to Six Months 2023 was primarily the result of an increase in net income from net loss (adjusted for non-cash items) of $14,768,000 and in cash provided arising from net fluctuations in operating assets and liabilities. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and other changes, which are described above.

Previous wording

Net cash used by investing activities was $11,587,000 in Three Months 2024 compared to $2,190,000 provided by investing activities in Three Months 2023 resulting in a $13,777,000 increase in net cash used by investing activities. In Three Months 2024, we had net cash provided by our investment portfolio of $34,579,000, compared to $13,630,000 used in Three Months 2023.

Current wording

Net cash used by investing activities was $9,612,000 in Six Months 2024 compared to $17,890,000 provided by investing activities in Six Months 2023 resulting in a $27,502,000 increase in net cash used by investing activities. In Six Months 2024, we had net cash used by our investment portfolio of $8,574,000, compared to $18,789,000 provided in Six Months 2023.

Previous wording

Net cash used in financing activities was $289,000 in Three Months 2024 compared to $280,000 used in Three Months 2023. Net cash used in financing activities are primarily principal payments on equipment financing debt in connection with KICO’s sale-leaseback transaction.

Current wording

Net cash used in financing activities was $409,000 in Six Months 2024 compared to $552,000 used in Six Months 2023. Net cash used in financing activities are primarily principal payments on equipment financing debt in connection with KICO’s sale-leaseback transaction.

Previous wording

We entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2023. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty (“Underlying XOL Treaty”) covering the period from January 1, 2022 through January 1, 2023. The Underlying XOL Treaty provided 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the Underlying XOL Treaty. Effective January 1, 2023, the Underlying XOL Treaty was renewed covering the period from January 1, 2023 through January 1, 2024. Effective January 1, 2024, the Underlying XOL Treaty was renewed covering the period from January 1, 2024 through January 1, 2025. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:

Current wording

Our excess of loss and catastrophe reinsurance treaties expired on June 30, 2024 and we entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2024 (as discussed below). Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty (“Underlying XOL Treaty”) covering the period from January 1, 2022 through January 1, 2023. The Underlying XOL Treaty provided 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the Underlying XOL Treaty. Effective January 1, 2023, the Underlying XOL Treaty was renewed covering the period from January 1, 2023 through January 1, 2024. Effective January 1, 2024, the Underlying XOL Treaty was renewed covering the period from January 1, 2024 through January 1, 2025. Effective July 1, 2024, we purchased $275,000,000 of catastrophe reinsurance in excess of $5,000,000, compared to $315,000,000 of catastrophe reinsurance in excess of $10,000,000 in the expiring treaty. Our ability to be able to reduce our catastrophe reinsurance was due to our tightened underwriting as discussed above and curtailing new business growth through June 30, 2024, which reduced our probable maximum loss. Effective July 1, 2024, we renewed our excess of loss treaty with the same terms as the expiring treaty. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows: