Kingstone Companies, Inc.: Form 10-Q for the period ended Sep 30, 2024

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 September 30, 2024 and 2023 respectively, 96.3% and 88.5% of KICO’s direct written premiums came from the New York policies. For the nine months ended September 30, 2024 and 2023 respectively, 95.6% and 88.1% 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.

In addition, our subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, 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. Cosi-related operating expenses are minimal and are included in other operating expenses.

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.

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. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company.

Product Lines

Our product lines include the following:

Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies.

Commercial liability: Through July 2019, we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan’s liability policies for small independent contractors with smaller sized workforces. In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies.

In May 2019, due to the poor performance of these lines 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, 2024 and December 31, 2023, there were no commercial liability policies in-force. As of September 30, 2024, these expired policies represent approximately 14.9% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.

Other: We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations.

Key GAAP and Non-GAAP Measures

We utilize the following key GAAP and non-GAAP measures in analyzing the results of our insurance underwriting business. See "Non-GAAP Financial Measures" for a reconciliation of the below non-GAAP measures to the most directly comparable GAAP measure:

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.

Underlying loss ratio: The underlying loss ratio is a non-GAAP ratio, which is computed as the difference between GAAP net loss ratio and the effect of prior year loss reserve development and catastrophes losses. Management believes that this ratio is useful to investors, and it is used by management to reveal the trends in our business that may be obscured by prior year loss reserve development and catastrophe losses. Catastrophe losses cause our loss ratios to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the net loss ratio. Management believes that this measure is useful for investors to evaluate this component separately when reviewing our underwriting performance. The most directly comparable GAAP measure is the net loss ratio. The underlying loss ratio should not be considered a substitute for the net loss ratio and does not reflect our net loss ratio.

Net loss ratio excluding the effect of catastrophes: Net loss ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP net loss ratio and the effect of catastrophes on the net loss ratio. Management believes that this ratio is useful to investors, and it is used by management to reveal the trends in our business that may be obscured by catastrophe losses. Catastrophe losses cause our net loss ratios to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the net loss ratio. Management believes that this measure is useful for investors to evaluate this component separately when reviewing our underwriting performance. The most directly comparable GAAP measure is the net loss ratio. The net loss ratio excluding the effect of catastrophes should not be considered a substitute for the net loss ratio and does not reflect our net loss ratio.

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 underwriting expense ratio excluding the effect of catastrophes: Net underwriting expense ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP net underwriting expense ratio and the effect of catastrophes on the net underwriting expense ratio. Management believes that this ratio is useful to investors, and it is used by management to reveal the trends in our business that may be obscured by catastrophe losses. Catastrophe losses cause our net underwriting expense ratios to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the underwriting expense ratio. Management believes that this measure is useful for investors to evaluate this component separately when reviewing our underwriting performance. The most directly comparable GAAP measure is the net underwriting expense ratio. The net underwriting expense ratio excluding the effect of catastrophes should not be considered a substitute for the net underwriting expense ratio and does not reflect our net underwriting expense ratio.

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.

Net combined ratio excluding the effect of catastrophes: Net combined ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP combined ratio and the effect of catastrophes on the net combined ratio. Management believes that this ratio is useful to investors, and it is used by management to reveal the trends in our business that may be obscured by catastrophe losses. Catastrophe losses cause our net combined ratios to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the net combined ratio. Management believes that this measure is useful for investors to evaluate this component separately when reviewing our underwriting performance. The most directly comparable GAAP measure is the net combined ratio. The net combined ratio excluding the effect of catastrophes should not be considered a substitute for the net combined ratio and does not reflect our net combined ratio.

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.

Net income (loss) from insurance underwriting business on a standalone basis: Net income (loss) from insurance underwriting business on a standalone basis is a non-GAAP measure, which is computed as GAAP net income (loss) without the effect of holding company operations on GAAP net income (loss). Management believes that this measure is useful to investors, and it is used by management to reveal the trends in our insurance underwriting business that may be obscured by holding company operations. Holding company operations cause our GAAP net income (loss) to vary significantly between periods as a result of their magnitude and can have a significant impact on GAAP net income (loss). Management believes that this measure is useful for investors to evaluate this component separately when reviewing our underwriting performance. The most directly comparable GAAP measure is GAAP net income (loss). Net income (loss) from insurance underwriting business on a standalone basis should not be considered a substitute for GAAP net income (loss) and does not reflect our GAAP net income (loss).

Critical Accounting Estimates

Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our condensed consolidated financial statements and related notes. In preparing these condensed consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize.

Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of similar companies.

See below a description of these critical accounting estimates. Also see Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023.

Loss and Loss Adjustment Expense Reserves

Property and casualty loss and loss adjustment expense (“LAE”) reserves are established to provide for the estimated cost of settling both reported (“case”) and incurred but not reported (“IBNR”) claims and claims adjusting expenses. The liability for these reserves is estimated on an undiscounted basis, using individual case-basis valuations and paid claims, pending claims, statistical analyses and various actuarial reserving methodologies. Due to the inherent uncertainty of the reserve process, actual loss costs could vary significantly compared to estimated loss costs. The below table provides detail of our reserves as of September 30, 2024 and December 31, 2023:

($ in thousands)

(Components may not sum due to rounding)

Case Reserves – Reserves for reported losses are based on an estimate of ultimate loss costs of an individual claim derived from individual case-basis valuations, actual claims paid, pending claims, statistical analyses and various actuarial reserving methodologies.

IBNR Reserves – IBNR reserves are estimates of claims that have occurred but as to which we have not yet been notified to establish the case reserve. IBNR is determined using historical information aggregated by line of insurance and adjusted to current conditions.

Reinsurance

We purchase reinsurance to manage our underwriting risk on certain policies. Reinsurance receivables represent management’s best estimate of loss and LAE recoverable from reinsurers. Reinsurance receivables are estimated using the same methodologies as loss and LAE reserves. Changes in the methods and assumptions used could result in significant variances between actual and estimated losses.

Deferred Income Taxes

Our effective tax rate is based on GAAP income at statutory tax rates, adjusted for non-taxable and non-deductible items, and tax credits. Changes in estimates used in preparing the condensed consolidated statements of operations and comprehensive income (loss) could result in significant changes to our deferred tax asset or liability.

Deferred tax assets or liabilities are recognized for estimated future tax consequences which result in differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. These assets and liabilities are carried at the enacted tax rates expected to apply when the asset or liability is expected to be recovered or settled. Changes in estimates and assumptions in the condensed consolidated statements of operations and comprehensive income (loss), or changes in the enacted tax rate, could result in significant variances between our carried deferred tax and tax recognized on the recovery or settlement of the asset or liability.

Investments

Bonds are classified as held-to-maturity (“HTM”) or available-for-sale (“AFS”), and stocks are generally classified as AFS. Investments classified as HTM are carried at amortized cost, which requires very little judgement. Investments classified as AFS are generally carried at fair value with an unrealized gain/loss recorded in income. Actual results could vary significantly from the fair values recognized in the condensed consolidated statements of operations and comprehensive income (loss).

Kingstone 2.0 (completed), Kingstone 3.0 (underway), and Change in Market Dynamics (underway)

Beginning in the fourth quarter of 2019, a series of strategic initiatives, coined “Kingstone 2.0”, were commenced to modernize our company. The pillars of the new strategy were as follows:

1. Strengthened the management team by adding highly qualified professionals with deep domain experience and diverse backgrounds;

2. Reduced expenses and increased efficiency by embracing technology, including converting to a new policy management system, retiring multiple legacy systems and starting up a new claims system, among other technology initiatives;

3. Developed and implemented a new, more highly segmented product suite (Kingstone Select) which better matches rate to risk using advanced analytics and an abundance of data; and

4. Better managed our catastrophe exposure in order to reduce loss cost and the growth rate of our probable maximum loss (“PML”) in order to mitigate the impact of the then emerging “hard market” in catastrophe reinsurance.

We announced the substantive completion of Kingstone 2.0 in late 2022 and embarked on a new strategy to optimize our in-force business, which we coined as “Kingstone 3.0”. The four pillars of this strategy entail:

1. Aggressively reducing the non-Core book of business, which has had a disproportionately negative impact on underwriting results, by stopping new business, culling the agent base, reducing commissions, or other means, subject to regulatory constraints. We have been aggressively reducing policy count. Our request to withdraw from the state of New Jersey was acknowledged in October 2023 and all remaining policies will be non-renewed over a two year period starting January 1, 2024. As of September 30, 2024, our non-Core policy count was down by 58.8% compared to September 30, 2023;

2. Adjusting pricing to stay ahead of loss trends, including inflation, by filing the maximum annual rate change that can be supported in each state and product and ensuring all policyholders are insured to value. Inflation has been a dominant headwind that is showing signs of stabilizing. We have been cognizant that inflation’s impact on loss costs places added pressure on premiums and, as such, we have been more frequent and aggressive with our rate change requests. Similarly, home replacement values reflect that same inflationary pressure. In September 2023, we completed our first cycle of valuation adjustments, making sure that all homes were insured to value. As a result, we have seen a rise in premiums attributable to the heightened replacement costs. All policies are renewed at the most current replacement cost. Overall average written premium for our legacy Core homeowners policies for the last 12 months, reflecting both rate and replacement cost changes, increased by 24.5%;

3. Tightly managing reinsurance requirements and costs, using risk selection and other underwriting capabilities to manage the growth rate of our PML. We needed to contain our exposure to spiking reinsurance pricing. We did so and were able to reduce the required limit to be purchased while maintaining our same risk tolerance. We used all the tools available to us to limit new business that was deemed to be too expensive and at the same time re-underwrote the book to cull those risks which presented the greatest risk; and

4. Continuing expense reduction focus with a goal of reducing the net underwriting expense ratio to 29% by year-end 2024. For the year ended December 31, 2023, we achieved our goal of 33%, with a net underwriting expense ratio of 32.9%. For the nine months ended September 30, 2024, the net underwriting expense ratio was 31.9%, a reduction of 1.1 points compared to the nine months ended September 30, 2023 but higher than our goal due to a higher accrual for employee bonuses and contingent commissions for producers to reflect greater profitability than originally projected.

We believe that the above actions taken resulted in our return to profitability for the three months and nine months ended September 30, 2024, will continue to have the intended effect and will continue through the remainder 2024 to result in a return to annual profitability.

On August 2, 2024, two large competitors announced a plan to wind down their personal lines operations in New York State and to non-renew or mid-term cancel their entire book of business before year end 2024. The policyholders of such competitors will need to find alternative coverage. In the quarter ended September 30, 2024, we are seeing a sizable increase in our policies in force and direct written premiums from these non-renewed and cancelled policies. We refer to this new business as a Change in Market Dynamics.

See the tables below for our Core and non-Core business for policies in force as of September 30, 2024 and 2023 and direct written premiums for the three months and nine months ended September 30, 2024 and 2023. For the three months ended September 30, 2024, our Core direct written premiums increased by 39.4% compared to the three months ended September 30, 2023, while Core policies in force increased by 1.2% as of September 30, 2024 as compared to September 30, 2023. For the same periods, our non-Core policies in force decreased by 58.8% and non-Core direct written premiums also decreased by 58.8%.

For the nine months ended September 30, 2024, our Core direct written premiums increased by 25.0% compared to the nine months ended September 30, 2023, while Core policies in force increased by 1.2% as of September 30, 2024 as compared to September 30, 2023. For the same periods, our non-Core policies in force decreased by 58.8% and non-Core direct written premiums decreased by 58.0%.

(000’s except percentages)

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

See the tables below comparing the quarterly trends and changes from our Core and non-Core business for policies in force and direct written premiums from December 31, 2023 through September 30, 2024. For the three months ended September 30, 2024, our Core direct written premiums increased by 25.1% compared to the three months ended June 30, 2024, while Core policies in force increased by 3.6% as of September 30, 2024. For the same period, our non-Core direct written premiums increased by 12.2% compared to the three months ended June 30, 2024, while non-Core policies in force decreased by 24.2% as of September 30, 2024.

(000’s except percentages)

(000’s except percentages)

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

Consolidated Results of Operations

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:

($ in thousands)

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

(1) For the nine months ended September 30, 2023, our personal lines business was subject to a 30% quota share treaty, expiring on January 1, 2024, which included a runoff of an 8.5% portion through the remainder of 2023. Effective January 1, 2024, we entered into a 27% personal lines quota share treaty, which includes a runoff of a 3.0% portion through the end of 2024.

(2) The nine months ended September 30, 2024 and 2023 include catastrophe 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 Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.

Direct Written Premiums

Direct written premiums during the nine months ended September 30, 2024 (“Nine Months 2024”) were $169,447,000 compared to $147,237,000 during the nine months ended September 30, 2023 (“Nine Months 2023”). The increase of $22,210,000, or 15.1%, was primarily due to an increase in premiums from our personal lines business.

Direct written premiums from our personal lines business for Nine Months 2024 were $159,213,000, an increase of $22,612,000, or 16.6%, from $136,601,000 in Nine Months 2023. The 16.6% increase in premiums from our personal lines business was primarily due to the increase in premiums associated with our Core business of 25.0% offsetting a 58.0% 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. Beginning in the quarter ended September 30, 2024, the Change in Market Dynamics became a major factor to the increase in direct written premiums from our personal line business.

Direct written premiums from our livery physical damage business for Nine Months 2024 were $10,166,000, a decrease of $393,000, or 3.7%, from $10,559,000 in Nine 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.

Direct written premiums from our Core business were $162,063,000 in Nine Months 2024 compared to $129,665,000 in Nine Months 2023, an increase of $32,398,000, or 25.0%. The increase in direct written premiums from our Core business was due to rate increases and an increase in policies in force. Policies in force from our Core business increased by 1.2% in Nine Months 2024 compared to Nine Months 2023. Direct written premiums from our non-Core business were $7,384,000 in Nine Months 2024, as compared to $17,572,000 in Nine Months 2023, a decrease of $10,188,000, or 58.0%. 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 58.8% in Nine Months 2024 compared to Nine 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.

Net Written Premiums and Net Premiums Earned

Net written premiums increased $28,792,000, or 40.4%, to $100,065,000 in Nine Months 2024 from $71,273,000 in Nine 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 Nine Months 2024 is primarily due to the additional premiums from the Change in Market Dynamics, changes to our personal lines quota share reinsurance treaty, and a decrease in catastrophe reinsurance premiums. See quota share reinsurance treaties discussion below.

Quota share reinsurance treaties

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 Nine Months 2024, and the 2023/2024 Treaty in Nine Months 2023. In Nine Months 2024, our premiums ceded under quota share treaties decreased by $3,623,000 in comparison to premiums ceded under quota share treaties in Nine Months 2023 (see table above). The decrease in Nine 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.

Excess of loss reinsurance treaties

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Nine Months 2024, our ceded excess of loss reinsurance premiums increased by $630,000 over the comparable ceded excess of loss premiums for Nine 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.

Catastrophe reinsurance treaties

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 historically gave rise to more property exposure, which increased our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties would increase. An increase in our personal lines business historically resulted in an increase in premiums ceded under our catastrophe treaties if reinsurance rates are stable or are increasing. Under Kingstone 2.0 and 3.0 we had a decrease in policies in force, resulting in a decrease in catastrophe exposure, and a decrease in catastrophe premiums. On July 1, 2024 and 2023, 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. Our catastrophe premiums were $29,682,000 in Nine Months 2024, compared to $33,271,000 in Nine Months 2023, a decrease of $3,589,000, or 10.8%.

Net premiums earned

Net premiums earned increased $6,830,000, or 8.0%, to $92,531,000 in Nine Months 2024 from $85,701,000 in Nine 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 Nine Months 2023, the increase in premiums from the Change in Market Dynamics in Nine Months 2024, and a decrease in catastrophe premium rates after June 30, 2024 reflected in ceded catastrophe premiums earned, which increased the amount of growth in net premiums earned. offset by an increase in catastrophe premium rates through June 30, 2024, reflected in ceded catastrophe premiums earned, which reduced the amount of growth in net premiums earned during the first six months of 2024.

Ceding Commission Revenue

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

($ in thousands)

Ceding commission revenue was $13,871,000 in Nine Months 2024 compared to $16,394,000 in Nine Months 2023. The decrease of $2,523,000 is explained below in the discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Provisional Ceding Commissions Earned

In Nine Months 2024, we earned provisional ceding commissions of $13,860,000 from personal lines earned premiums ceded under the 2024/2025 Treaty, and in Nine Months 2023, we earned provisional ceding commissions of $15,733,000 from personal lines earned premiums ceded under the 2023/2024 Treaty. The decrease of $1,873,000 in provisional ceding commissions earned was due to the decrease in premiums ceded under these treaties during Nine Months 2024 compared to Nine Months 2023, offset by an increase in ceding commission rates under the 2024/2025 Treaty.

Contingent Ceding Commissions Earned

The structure of the 2024/2025 Treaty and the 2023/2024 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 $4,917,000 in Nine Months 2024 compared to $4,437,000 in Nine Months 2023, an increase of $480,000, or 10.8%. The average yield on non-cash invested assets was 3.50% as of September 30, 2024 compared to 3.73% as of September 30, 2023.

Cash and invested assets were $221,847,000 as of September 30, 2024 compared to $172,095,000 as of September 30, 2023, an increase of $49,752,000.

Net Gains on Investments

Net gains on investments were $1,319,000 in Nine Months 2024 compared to net gains of $598,000 in Nine Months 2023. Unrealized gains on our equity securities and other investments in Nine Months 2024 were $1,379,000, compared to unrealized gains of $615,000 in Nine Months 2023. Net realized (losses) on sales of investments were $(60,000) in Nine Months 2024 compared to net realized (losses) of $(17,000) in Nine Months 2023.

Other Income

Other income was $401,000 in Nine Months 2024 compared to $454,000 in Nine Months 2023, a decrease of $53,000, or 11.7%.

Net Loss and LAE

Net loss and LAE was $45,125,000 for Nine Months 2024 compared to $66,553,000 for Nine Months 2023. The net loss ratio was 48.8% in Nine Months 2024 compared to 77.7% in Nine Months 2023, a decrease of 28.9 percentage points.

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:

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

The net loss ratio for Nine Months 2024 improved significantly compared to Nine Months 2023. For Nine Months 2024, the catastrophe impact, prior year development, and underlying loss ratio(1) (loss ratio excluding the impact of catastrophe and prior year development) were all lower than for Nine Months 2023.

There were sixteen newly designated catastrophe events for Nine Months 2024. The estimated total net catastrophe impact for Nine Months 2024 was $2,454,000, which contributed 2.7 points to the loss ratio. By comparison, the catastrophe impact for Nine Months 2023 was 8.5 points. Losses from winter-related catastrophe claims were minimal during Nine Months 2024, whereas the previous year was impacted by a major winter event in February 2023.

The underlying loss ratio(1) was 47.9% for Nine Months 2024, a decrease of 21.3 points from the 69.2% underlying loss ratio(1) recorded for Nine Months 2023. Overall personal lines non-catastrophe frequency for Nine Months 2024 was lower than the same period in 2023, which is believed to be the result of better risk selection in the Company’s Select product as well as the Company’s active efforts to manage less profitable segments. Overall non-catastrophe severity for Nine Months 2024 also improved compared to Nine Months 2023, primarily driven by the reduction in the non-Core business and a reduced impact from large losses.

There was favorable prior year development of $1,637,000 during Nine Months 2024, which translates to a 1.8 point decrease to the net loss ratio. By comparison, the impact of prior year development for Nine Months 2023 was a decrease of less than 0.1 points.

(1) Underlying loss ratio is a non-GAAP ratio, which is computed as the difference between GAAP net loss ratio and the effect of prior year loss reserve development and catastrophes losses. See "Non-GAAP Financial Measures" for the reconciliation of underlying loss ratio to the GAAP measure of net loss ratio.

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

Commission Expense

Commission expense was $25,089,000 in Nine Months 2024 or 16.2% of direct earned premiums. Commission expense was $25,221,000 in Nine Months 2023 or 16.6% of direct earned premiums. The decrease of $132,000 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 $2,126,000 for estimated contingent commissions based on the profitability of the business.

Other Underwriting Expenses

Other underwriting expenses were $18,676,000, or 12.0% of direct earned premiums, in Nine Months 2024 compared to $19,874,000, or 13.1% of direct earned premiums, in Nine Months 2023. The decrease of $1,198,000, or 6.0%, 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 as described below, and a decrease in policy management system fees. The decreases were partially offset by the impact of high inflation.

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $9,595,000 in Nine Months 2024 compared to $8,692,000 in Nine Months 2023. The increase of $903,000, or 10.4%, is favorable when compared to the 15.1% increase in direct written premiums. The increase in salaries and employment costs was due to $1,125,000 accrued under our employee bonus plans due to the profitable underwriting insurance operations in Nine Months 2024 compared to a loss in Nine Months 2023, and $290,000 accrued under our executive bonus plan pursuant to the employment agreement of our Chief Executive Officer. The increases related to bonuses were offset by 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 Nine 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, we are now hiring additional staff to handle the new business from the Change in Market Dynamics.

Our net underwriting expense ratio in Nine Months 2024 was 31.9% compared to 33.0% in Nine Months 2023. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

(Components may not sum to totals due to rounding)

Other Operating Expenses

Other operating expenses, related to the expenses of our holding company and Cosi, were $2,821,000 for Nine Months 2024 compared to $1,868,000 for Nine Months 2023. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

($ in thousands)

57

(Components may not sum to totals due to rounding)

The increase in Nine Months 2024 of $953,000, or 51.0%, as compared to Nine Months 2023 was primarily due to an increase in equity compensation and loss on extinguishment of debt. The increase in equity compensation is due to accelerated vesting in September 2024 as a result of the retirement of our executive chairman, and an equity compensation liability accrual for our senior leadership team pursuant to our employee bonus plan. The $297,000 loss on extinguishment of debt loss is due to writing off the balance of unamortized debt issue costs from the 2022 Notes at the time of the 2024 Exchange Agreement as disclosed in Note 7 to the condensed consolidated financial statements.

Depreciation and Amortization

Depreciation and amortization was $1,836,000 in Nine Months 2024 compared to $2,328,000 in Nine Months 2023. The decrease of $492,000, or 21.1%, 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, which allowed 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.

Interest Expense

Interest expense in Nine Months 2024 was $2,884,000 compared to $3,005,000 in Nine Months 2023, a decrease of $121,000 or 4.0%. In Nine Months 2024 and Nine Months 2023, as disclosed in Note 7 to the condensed consolidated financial statements, we incurred interest expense in connection with the 2022 Notes and 2024 Notes. The 2022 Notes provided for interest at the rate of 12% per annum. In September 2024, in accordance with the 2024 Exchange Agreement, we paid $5,000,000 of principal on the 2022 Notes, reducing the principal balance to $14,950,000 from $19,950,000. Under the 2024 Exchange Agreement, the balance of the 2022 Notes were exchanged for the 2024 Notes, which provide for interest at the rate of 13.75% per annum. In September 2024 we paid an additional principal amount of $3,000,000 reducing the balance of the 2024 Notes to $11,950,000 at September 30, 2024. On November 13, 2024, we made an optional prepayment of $2,000,000 on the 2024 Notes, further reducing the balance to $9,950,000. In addition, we also incur interest expense on the 2022 equipment financing.

Income Tax Expense (Benefit)

Income tax expense in Nine Months 2024 was $3,689,000, which resulted in an effective tax rate of 22.2%. Income tax (benefit) in Nine Months 2023 was $(2,149,000), which resulted in an effective tax rate of 19.1%. Income before taxes was $16,609,000 in Nine Months 2024 compared to a (loss) before taxes of $(11,264,000) in Nine Months 2023. The difference in effective tax rate is due to the effect of permanent differences in Nine Months 2024 compared to Nine Months 2023.

Net Income (Loss)

Net income was $12,920,000 in Nine Months 2024 compared to a net (loss) of $(9,114,000) in Nine Months 2023. The increase from net loss to net income of $23,034,000 was due to the circumstances described above.

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:

($ in thousands)

59

(1) For the three months ended September 30, 2023, our personal lines business was subject to a 30% quota share treaty, expiring on January 1, 2024, which included a runoff of an 8.5% portion through the remainder of 2023. Effective January 1, 2024, we entered into a 27% personal lines quota share treaty, which includes a runoff of a 3.0% portion through the end of 2024.

(2) The three months ended September 30, 2024 and 2023 include catastrophe 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 Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.

Direct Written Premiums

Direct written premiums during the three months ended September 30, 2024 (“Three Months 2024”) were $66,627,000 compared to $51,992,000 during the three months ended September 30, 2023 (“Three Months 2023”). The increase of $14,635,000, or 28.1%, was primarily due to an increase in premiums from our personal lines business.

Direct written premiums from our personal lines business for Three Months 2024 were $63,336,000, an increase of $14,917,000, or 30.8%, from $48,419,000 in Three Months 2023. The 30.8% increase in premiums from our personal lines business was primarily due to the increase in premiums associated with our Core business of 39.4% offsetting a 58.8% 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. Beginning in Three Months 2024, the Change in Market Dynamics became a major factor to the increase in direct written premiums from our personal line business.

Direct written premiums from our livery physical damage business for Three Months 2024 were $3,266,000, a decrease of $278,000, or 7.8%, from $3,544,000 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.

Direct written premiums from our Core business were $64,170,000 in Three Months 2024 compared to $46,026,000 in Three Months 2023, an increase of $18,144,000, or 39.4%. The increase in direct written premiums from our Core business was due to rate increases and an increase in policies in force. Policies in force from our Core business increased by 1.2% in Three Months 2024 compared to Three Months 2023. Direct written premiums from our non-Core business were $2,457,000 in Three Months 2024 as compared to $5,966,000 in Three Months 2023, a decrease of $3,509,000, or 58.8%. 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 58.8% 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.

Net Written Premiums and Net Premiums Earned

Net written premiums increased $16,870,000, or 459.0%, to $20,545,000 in Three Months 2024 from $3,675,000 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 the additional premiums from the Change in Market Dynamics, changes to our personal lines quota share reinsurance treaty, and a decrease in catastrophe reinsurance premiums. See quota share reinsurance treaties discussion below.

Quota share reinsurance treaties

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 Three Months 2024, and the 2023/2024 Treaty in Three Months 2023. In Three Months 2024, our premiums ceded under quota share treaties increased by $1,958,000 in comparison to premiums ceded under quota share treaties in Three Months 2023 (see table above). The increase in Three Months 2024 was attributable to the increase in direct written premiums subject to the 2024/2025 Treaty compared to direct written premiums subject to the 2023/2024 Treaty. The increase in ceded premiums related to the increase in direct written premiums was offset by the decrease in quota share ceding percentage rates.

Excess of loss reinsurance treaties

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 remained flat over the comparable ceded excess of loss premiums for Three Months 2023. 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.

Catastrophe reinsurance treaties

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 historically gave rise to more property exposure, which increased our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties would increase. An increase in our personal lines business historically resulted in an increase in premiums ceded under our catastrophe treaties if reinsurance rates are stable or are increasing. Under Kingstone 2.0 and 3.0 we had a decrease in policies in force, resulting in a decrease in catastrophe exposure, and a decrease in catastrophe premiums. On July 1, 2024 and 2023, 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. Our catastrophe premiums were $30,188,000 in Three Months 2024, compared to $34,381,000 in Three Months 2023, a decrease of $4,193,000, or 12.2%.

Net premiums earned

Net premiums earned increased $5,469,000, or 19.6%, to $33,407,000 in Three Months 2024 from $27,938,000 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, the increase in premiums from the Change in Market Dynamics in Three Months 2024, and a decrease in catastrophe premium rates, reflected in ceded catastrophe premiums earned, which increased the amount of growth in net premiums earned.

Ceding Commission Revenue

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

($ in thousands)

61

Ceding commission revenue was $4,742,000 in Three Months 2024 compared to $5,536,000 in Three Months 2023. The decrease of $794,000 is explained below in the discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Provisional Ceding Commissions Earned

In Three Months 2024, we earned provisional ceding commissions of $4,743,000 from personal lines earned premiums ceded under the 2024/2025 Treaty, and in Three Months 2023, we earned provisional ceding commissions of 4,992,000 from personal lines earned premiums ceded under the 2023/2024 Treaty. The decrease of $249,000 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.

Contingent Ceding Commissions Earned

The structure of the 2024/2025 Treaty and the 2023/2024 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 $4,917,000 in Three Months 2024 compared to $4,437,000 in Three Months 2023, an increase of $480,000, or 10.8%. The average yield on non-cash invested assets was 3.50% as of September 30, 2024 compared to 3.73% as of September 30, 2023.

Cash and invested assets were $221,847,000 as of September 30, 2024 compared to $172,095,000 as of September 30, 2023, an increase of $49,752,000.

Net Gains on Investments

Net gains on investments were $827,000 in Three Months 2024 compared to net (losses) of $(824,000) in Three Months 2023. Unrealized gains on our equity securities and other investments in Three Months 2024 were $461,000, compared to unrealized (losses) of $(820,000) in Three Months 2023. Net realized gains on sales of investments were $366,000 in Three Months 2024 compared to net realized (losses) of $(4,000) in Three Months 2023.

Other Income

Other income was $147,000 in Three Months 2024 compared to $142,000 in Three Months 2023, a decrease of $5,000, or 3.5%.

Net Loss and LAE

Net loss and LAE was $13,028,000 for Three Months 2024 compared to $21,932,000 for Three Months 2023. The net loss ratio was 39.0% in Three Months 2024 compared to 78.5% in Three Months 2023, a decrease of 39.5 percentage points.

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:

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

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 (1) (loss ratio excluding the impact of catastrophe and prior year development) were all lower than Three Months 2023.

There were six newly designated catastrophe events for Three Months 2024, and the total loss ratio impact was immaterial. The estimated total net catastrophe impact for the calendar quarter was $582,000, which contributed 1.7 points to the net loss ratio. By comparison, the catastrophe impact for Three Months 2023 was 7.7 points.

The underlying loss ratio(1) was 39.2% for Three Months 2024, a decrease of 31.6 points from the 70.8% underlying loss ratio(1) recorded for Three Months 2023. Overall personal lines non-catastrophe frequency for Three Months 2024 was lower than the same period in 2023, which is believed to be the result of better risk selection in the Company’s Select product rollout as well as the Company’s active efforts to manage less profitable segments. Overall non-catastrophe severity for Three Months 2024 was also improved compared to Three Months 2023, primarily driven by the reduction in non-Core business and a reduced impact from large losses.

There was favorable prior year development of $641,000 during Three Months 2024, which translates to a 1.9-point decrease to the loss ratio. By comparison, the impact of prior year development for Three Months 2023 was an increase of less than 0.1 points.

(1) Underlying loss ratio is a non-GAAP ratio, which is computed as the difference between GAAP net loss ratio and the effect of prior year loss reserve development and catastrophes losses. See "Non-GAAP Financial Measures" for the reconciliation of underlying loss ratio to the GAAP measure of net loss ratio.

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

Commission Expense

Commission expense was $9,004,000 in Three Months 2024 or 16.6% of direct earned premiums. Commission expense was $8,210,000 in Three Months 2023 or 16.2% of direct earned premiums. The increase of $794,000 was primarily due to an accrual of $1,278,000 for an estimated contingent commission based on the profitability of the business. The increase was offset by 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.

Other Underwriting Expenses

Other underwriting expenses were $6,895,000, or 12.7% of direct earned premiums, in Three Months 2024 compared to $6,319,000, or 12.5% of direct earned premiums, in Three Months 2023. The increase of $576,000, or 9.1%, was primarily due to employee and executive bonuses as described below, partially offset by a decrease in policy management system fee, and a decrease in other IT costs. In addition, other operating expenses were impacted by inflation. Our largest single component of other underwriting expenses is salaries and employment costs, with costs excluding employee bonuses of $2,893,000 in Three Months 2024 compared to $2,817,000 in Three Months Ended 2023. The increase of $76,000, or 2.7%, is favorable when compared to the 28.1% increase in direct written premiums. In Three Months 2024, employee bonuses accruals were $674,000 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, and $290,000 accrued under our executive bonus plan pursuant to the employment agreement with our Chief Executive Officer.

Our net underwriting expense ratio in Three Months 2024 was 33.0% compared to 31.7% in Three Months 2023. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

(Components may not sum to totals due to rounding)

Other Operating Expenses

Other operating expenses, related to the expenses of our holding company and Cosi, were $1,242,000 for Three Months 2024 compared to $442,000 for Three Months 2023. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

($ in thousands)

(Components may not sum to totals due to rounding)

The increase in Three Months 2024 of $800,000, or 181.0%, as compared to Three Months 2023 was primarily due to an increase in equity compensation and loss on extinguishment of debt. The increase in equity compensation is due to accelerated vesting in September 2024 as a result of the retirement of our executive chairman, and an equity compensation liability accrual for our senior leadership team pursuant to our employee bonus plan. The $297,000 loss on extinguishment of debt loss is due to writing off the balance of unamortized debt issue costs from the 2022 Notes at the time of the 2024 Exchange Agreement as disclosed in Note 7 to the condensed consolidated financial statements. These increases were partially offset by a decrease in executive bonus. A bonus is accrued pursuant to the employment agreement of our Chief Executive Officer. The negative executive bonus of $85,000 is due to a $117,000 reallocation of the bonus to other underwriting expenses accrued through June 30, 2024. The net accrual of $32,000 is a result of the profitable operations before taxes in Three Months 2024 compared to a loss in Three Months 2023.

Depreciation and Amortization

Depreciation and amortization was $619,000 in Three Months 2024 compared to $741,000 in Three Months 2023. The decrease of $122,000, or 16.5%, 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.

Interest Expense

Interest expense in Three Months 2024 was $900,000 compared to $989,000 in Three Months 2023, a decrease of $89,000 or 9.0%. 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 and the 2024 Notes. The 2022 Notes provided for interest at the rate of 12% per annum. In September 2024, in accordance with 2024 Exchange Agreement, we paid $5,000,000 of principal on the 2022 Notes, reducing the principal balance to $14,950,000 from $19,950,000. Under the 2024 Exchange Agreement, the balance of the 2022 Notes were exchanged for the 2024 Notes, which provide for interest at the rate of 13.75% per annum. In September 2024 we paid an additional principal amount of $3,000,000 reducing the balance of the 2024 Notes to $11,950,000 at September 30, 2024. On November 13, 2024, we made an optional prepayment of $2,000,000 on the 2024 Notes, further reducing the balance to $9,950,000. In addition, we also incur interest expense on the 2022 equipment financing.

Income Tax Expense (Benefit)

Income tax expense in Three Months 2024 was $2,106,000, which resulted in an effective tax rate of 23.2%. Income tax (benefit) in Three Months 2023 was $(859,000), which resulted in an effective tax rate of 19.5%. Income before taxes was $9,084,000 in Three Months 2024 compared to a loss before taxes of $4,397,000 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.

Net Income (Loss)

Net income was $6,978,000 in Three Months 2024 compared to a net loss of $3,538,000 in Three Months 2023. The increase from net loss to net income of $10,516,000 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.

(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 July 2019, we decided that we will no longer underwrite Commercial Liability risks. See discussions above regarding the discontinuation of this line of business.

(3) See discussion above with regard to “Net Loss and LAE”, as to catastrophe losses in the three months and nine months ended September 30, 2024 and 2023.

Insurance Underwriting Business on a Standalone Basis(1)

Our insurance underwriting business reported on a standalone basis(1) for the periods indicated is as follows:

(1) Net income (loss) from insurance underwriting business on a standalone basis is a non-GAAP measure, which is computed as GAAP net income (loss) without the effect of holding company operations on GAAP net income (loss). See "Non-GAAP Financial Measures" for the reconciliation of net income (loss) from insurance underwriting business on a standalone basis to the GAAP measure of net income (loss).

An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:

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

The key measures for our insurance underwriting business for the periods indicated are as follows:

71

(1) For the three months ended September 30, 2024 and 2023, includes the sum of net catastrophe losses and loss adjustment expenses of $582,124 and $2,159,455, respectively. For the nine months ended September 30, 2024 and 2023, includes the sum of net catastrophe losses and loss adjustment expenses of $2,454,159 and $7,284,917, respectively.

(2) Net loss ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP net loss ratio and the effect of catastrophes on the net loss ratio. See "Non-GAAP Financial Measures" for the reconciliation of net loss ratio excluding the effect of catastrophes to the GAAP measure of net loss ratio. Net underwriting expense ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP net underwriting expense ratio and the effect of catastrophes on the net underwriting expense ratio. See "Non-GAAP Financial Measures" for the reconciliation of net underwriting expense ratio excluding the effect of catastrophes to the GAAP measure of net underwriting expense ratio. Net combined ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between GAAP net combined ratio and the effect of catastrophes on the net combined ratio. See "Non-GAAP Financial Measures" for the reconciliation of net combined ratio excluding the effect of catastrophes to the GAAP measure of net combined ratio.

Investments

Portfolio Summary

Fixed-Maturity Securities

The following table presents a breakdown of the amortized cost, estimated fair value, and gross unrealized gains and losses of our investments in fixed-maturity securities classified as available-for-sale for which an allowance for credit loss has not been recorded, as of September 30, 2024 and December 31, 2023:

72

(1) In October 2022, KICO placed certain U.S. Treasury securities to fulfill the required collateral for a sale leaseback transaction in a designated custodian account (see Note 9 – Debt - “Equipment Financing”). As of September 30, 2024 and December 31, 2023, the amount of required collateral was approximately $5,731,000 and $6,999,000, respectively. As of September 30, 2024 and December 31, 2023, the estimated fair value of the U.S. Treasury securities used as eligible collateral was approximately $5,997,000 and $11,960,000, respectively.

(2) KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7 – Debt – “Federal Home Loan Bank”). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of September 30, 2024, the estimated fair value of the eligible investments was approximately $10,944,000. KICO will retain all rights regarding all securities if pledged as collateral. As of September 30, 2024 and December 31, 2023 there was no outstanding balance on the FHLBNY credit line.

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, 2024 and December 31, 2023:

Other Investments

The following table presents a breakdown of the cost and estimated fair value of, and gross gains on our other investments as of September 30, 2024 and December 31, 2023:

74

Held-to-Maturity Securities

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, 2024 and December 31, 2023:

75

Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund requirements.

A summary of the amortized cost and fair value of our investments in held-to-maturity securities by contractual maturity as of September 30, 2024 and December 31, 2023 is shown below:

76

Credit Rating of Fixed-Maturity Securities

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of September 30, 2024 and December 31, 2023 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s, Fitch, or Kroll):

77

The table below summarizes the average yield by type of fixed-maturity security as of September 30, 2024 and December 31, 2023:

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of September 30, 2024 and December 31, 2023:

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, 2024 and December 31, 2023, 68% and 65%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

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, 2024 and December 31, 2023:

There were 142 securities at September 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.

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.

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 nine months ended September 30, 2024, KICO did not pay any dividends to us. Through June 30, 2024, the end of the previous quarter, KICO had a negative adjusted unassigned surplus. Based on that, KICO was 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. In August 2024, KICO received regulatory approval to pay us a $5,000,000 distribution from paid in capital. KICO paid us the $5,000,000 distribution in the third quarter of 2024. As of September 30, 2024, KICO has eligible unassigned surplus of $6,221,687 and is able to pay dividends.

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 June 30, 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 September 30, 2024, based on the net admitted assets as of June 30, 2024, was approximately $12,907,000. Available collateral as of September 30, 2024 was approximately $10,944,000. Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during Nine Months 2024.

On April 5, 2024, we filed a shelf registration (the “Shelf Registration”) statement on Form S-3 with the SEC under the Securities Act of 1933, as amended, with regard to the registration of $50,000,000 of our equity and debt securities (the “Shelf Registration Statement”). The Shelf Registration Statement was declared effective by the SEC on April 22, 2024. Any offering made pursuant to the Shelf Registration Statement may only be made by means of a prospectus, including a prospectus supplement, forming a part of the effective Shelf Registration Statement, relating to the offering.

In May 2024, we entered into a Sales Agreement with Janney Montgomery Scott LLC (the “Sales Agent”) under which we currently have the ability to issue and sell shares of our Common Stock, from time to time, through the Sales Agent, pursuant to the Shelf Registration Statement, up to an aggregate offering price of approximately $16,400,000 in what is commonly referred to as an “at-the-market” (“ATM”) program. During the three months ended September 30, 2024, we sold 1,079,601 shares of our Common Stock at a weighted average price of $8.48 per share and raised $8,897,908 in net proceeds under the ATM program. As of September 30, 2024, we had remaining capacity to sell up to an additional $6,973,231 of our Common Stock under the ATM program.

On September 12, 2024, we issued the 2024 Notes in the aggregate principal amount of $14,950,000 pursuant to the 2024 Exchange Agreement. Interest is payable semi-annually in arrears on June 30 and December 30 of each year at the rate of 13.75% per annum. The maturity date of the 2024 Notes is June 30, 2026. As of September 30, 2024, the balance of the 2024 Notes was $11,950,000. On November 13, 2024, we made an optional prepayment of $2,000,000 on the 2024 Notes reducing the outstanding balance to $9,950,000.

If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing.

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:

Net cash provided by operating activities was $34,960,000 in Nine Months 2024 as compared to $15,754,000 used in operating activities in Nine Months 2023. The $50,714,000 increase in cash flows provided by operating activities in Nine Months 2024 as compared to Nine Months 2023 was primarily the result of an increase in net income from net loss (adjusted for non-cash items) of $26,502,000 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.

Net cash used in investing activities was $9,218,000 in Nine Months 2024 compared to $19,755,000 provided by investing activities in Nine Months 2023 resulting in a $28,973,000 increase in net cash used in investing activities. In Nine Months 2024, we had net cash used by our investment portfolio of $7,479,000, compared to $21,135,000 provided in Nine Months 2023.

Net cash used in financing activities was $957,000 in Nine Months 2024 compared to $826,000 used in Nine Months 2023. Net cash used in financing activities are primarily principal payments of $5,000,000 on our 2022 Notes, $3,000,000 on our 2024 Notes, and $859,000 on our equipment financing debt in connection with KICO’s sale-leaseback transaction. In addition, we paid $961,000 for withholding taxes on vested restricted stock awards. The principal payments on the 2024 Notes were made by using a portion of the $9,066,000 net proceeds from our ATM offering.

Reinsurance

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business, which primarily consisted of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). Upon the expiration of the 2021/2023 Treaty on January 1, 2023, we entered into a new quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2023 through January 1, 2024 (“2023/2024 Treaty”). Upon the 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 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 reduce the top limit of 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:

(1) For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $9,000,000 in total insured value, which covers direct losses from $3,500,000 to $9,000,000 through June 30, 2025.

(2) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.

(3) For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $12,500,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2023 through June 30, 2024, reinstatement premium protection for $50,000,000 of catastrophe coverage in excess of $10,000,000.

(4) For the period July 1, 2024 through June 30, 2025 (expiration date of the catastrophe reinsurance treaty), reinstatement premium protection for $10,500,000 of catastrophe coverage in excess of $10,000,000.

(5) For the period January 1, 2022 through January 1, 2025, Underlying XOL Treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Excludes losses from named storms. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty and 2023/2024 Treaty. Reduces retention to $530,000 from $730,000 under the 2024/2025 Treaty. After the expiration of the Underlying XOL Treaty and 2024/2025 Treaty on January 1, 2025, retention will be $1,000,000.

(6) Personal lines quota share (homeowners, dwelling fire and canine liability) and underlying excess of loss reinsurance will expire on January 1, 2025, with none of these coverages to be in effect during the period from January 2, 2025 through June 30, 2025. Reinsurance coverage in effect from January 2, 2025 through June 30, 2025 is only for excess of loss and catastrophe reinsurance treaties.

(7) For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event. For the 2023/2024 Treaty, 17.5% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event. For the 2024/2025 Treaty, 22% of the 27% total of losses ceded under this treaty are excluded from a named catastrophe event.

(8) Plus losses in excess of catastrophe coverage

(9) For the period October 1, 2024 through April 30, 2025, additional catastrophe reinsurance treaty will provide coverage for winter storm losses of $4,500,000 in excess of $5,500,000. Retention for winter storms under this treaty is $4,800,000.

(1) Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

Inflation

Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.

Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.

While the rate of inflation has moderated in 2024, Three Months 2024 and Nine Months 2024 still include the continuing effects of prior years’ economic inflation, which resulted in a sustained increase in interest rates, a widening of credit spreads, lower public equity valuations, and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the value of our fixed income securities in prior quarters. In Three Months 2024 and Nine Months 2024, the volatility surrounding lowered interest rates and inflation increased our stockholders’ equity. For Three Months 2024 and Nine Months 2024, the continuing effects of prior economic inflation impacted our loss and loss adjustment expenses as well; should these inflationary trends continue in the near-term, it would in all likelihood negatively impact our results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Outlook

Our net premiums earned may be impacted by a number of factors. Net premiums earned are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions. We have made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return.

On August 2, 2024, two large competitors announced a plan to wind down their personal lines operations in New York State and to non-renew or mid-term cancel their entire book of business before year end 2024. The policyholders of such competitors will need to find alternative coverage. Our producers have been placing a sizable number of these policies with KICO. As such, we anticipate the sizeable increase in our policies in force and direct written premium to continue for the remainder of the year. See “Forward-Looking Statements” before Part I, Item 1.

Non-GAAP Financial Measures

Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures presented in accordance with GAAP.

The following table reconciles the underlying loss ratio, the net loss ratio excluding the effect of catastrophes and the catastrophe loss ratio to the net loss ratio for the periods presented:

The following table reconciles net income (loss) from insurance underwriting business on a standalone basis to GAAP net income (loss) for the periods presented:

The following table reconciles the net loss ratio excluding the effect of catastrophes, net underwriting expense ratio excluding the effect of catastrophes, and net combined ratio excluding the effect of catastrophes to GAAP net loss ratio, GAAP net underwriting expense ratio, and GAAP net combined ratio for the periods presented:

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to assure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, our disclosure controls and procedures were: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act, and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 20244.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on Effectiveness of Controls

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Principal Financial Officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

For a discussion of the Company’s potential risks and uncertainties, see Part I, Item 1A— “Risk Factors” and Part II, Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2023 Annual Report filed with the SEC, and Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company's periodic filings with the SEC. There have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s 2023 Annual Report.