grepcent public filings, reorganized for comparison

KINGSTONE COMPANIES, INC. (KINS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from KINGSTONE COMPANIES, INC.'s 10-K for fiscal year 2023. Filing date: 2024-04-01. Report date: 2023-12-31. Accession: 0001654954-24-004054.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: KINS · All MD&A years: index · Previous year: FY 2022 · Next year: FY 2024

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

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 years ended December 31, 2023 and 2022, respectively, 88.3% and 80.6% 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. Cosi-related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, Cosi’s expenses are not included in the calculation of our combined ratio as described below.

We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings.

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.

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Principal Revenue and Expense Items

Net premiums earned: Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written on July 1, 2022, we would earn half of the premiums in 2022 and the other half in 2023.

Ceding commission revenue: Commissions on reinsurance premiums ceded to quota share treaties are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.

Net investment income and net gains (losses) on investments: We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities, and other investments. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive (loss) income on our balance sheet while our equity securities and other investments report changes in fair value through earnings. See Note 2 in the accompanying consolidated financial statements for a further discussion of our accounting policies following Item 16 of this Annual Report.

Other income: We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment.

Loss and loss adjustment expenses incurred: Loss and LAE incurred represent our largest expense item, and for any given reporting period include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.

Commission expenses and other underwriting expenses: Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.

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Other operating expenses: Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc., and operating expenses of Cosi. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment costs, occupancy costs and consulting costs.

Stock-based compensation: Non-cash equity compensation includes the fair value of stock grants issued to our directors, officers and employees, and amortization of stock options issued to the same.

Depreciation and amortization: Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of capital expenditures for information technology projects, office equipment and furniture.

Interest expense: Interest expense represents amounts we incur on our outstanding indebtedness at the applicable interest rates. Interest expense also includes amortization of debt discount and issuance costs.

Income tax expense: We incur federal income tax expense on our consolidated statement of operations as well as state income tax expense for our non-insurance underwriting subsidiaries.

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 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 December 31, 2023 and 2022, there were no commercial liability policies in-force. As of December 31, 2023, these expired policies represent approximately 15.8% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

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

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

Key Measures

We utilize the following key measures in analyzing the results of our insurance underwriting business:

Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.

Net underwriting expense ratio: The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.

Net combined ratio: The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.

Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.

Critical Accounting Estimates

Our 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 consolidated financial statements and related notes. In preparing these 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 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.

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See below a description of these critical accounting estimates. Also, see Note 2 to the consolidated financial statements following Item 16 of this Annual Report.

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 December 31, 2023 and 2022:

As ofAs of
December 31, 2023December 31, 2022
($ in thousands)GrossCededNetGrossCededNet
Case loss$67,108$19,538$47,570$62,745$16,619$46,126
Case LAE5,7261,1214,6055,5438984,645
IBNR loss37,26210,66526,59742,68710,02332,664
IBNR LAE11,7221,9659,7577,3641207,244
Total$121,818$33,289$88,529$118,340$27,660$90,679

(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 income statement could result in significant changes to our deferred tax asset or liability.

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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 income statement, 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 to the fair values recognized in the income statement.

Kingstone 2.0 (completed) and Kingstone 3.0 (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.Strengthen the management team by adding highly qualified professionals with deep domain experience and diverse backgrounds;
2.Reduce expenses and increase 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.Develop and implement 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 manage 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 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 new strategy entail:

Column 1Column 2Column 3
1.Aggressively reducing the non-Core book of business, which has had a disproportionately negative impact on underwriting results, by slowing new business, re-underwriting the book, culling the agent base, reducing commissions, or other means, subject to regulatory constraints. We stopped writing all new non-Core business and have been aggressively reducing policy count. As of December 31, 2023, our non-Core policy count was down by 48% compared to December 31, 2022;
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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. Overall average written premium for our legacy Core homeowners policies for the last 12 months, reflecting both rate and replacement cost changes, increased by 24.4%;
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. The combination of stricter new business underwriting and increased non-renewals gave rise to the 5.8% decline in policy count for our Core business. We have now reverted most of our new business underwriting standards back to what they were previously so Core new business growth should increase going forward; and
4.Continuing expense reduction focus with a goal of reducing the net expense ratio to 33% by year-end 2024. For the year ended December 31, 2023, we achieved our goal, with a net underwriting expense ratio of 32.9%, a reduction of 3.1 points compared to the year ended December 31, 2022.

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 September 30, 2022 through December 31, 2023. For the three months ended December 31, 2023, our Core direct written premiums increased by 7.0% compared to the three months ended September 30, 2022, while Core policies in force decreased by 5.8% as of December 31, 2023. For the same periods, our non-Core policies in force decreased by 50.8% and non-Core direct written premiums decreased by 44.5%. We believe that the above actions taken will continue to have the intended effect and will result in a return to annual profitability.

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For the Three Months Ended
September 30,2022December 31,2022March 31,2023June 30,2023September 30,2023December 31,2023
(000’s except percentages and Policies in Force)
Policies In Force, as of end of Three Month Period
Core71,70571,35972,08170,13268,49867,575
Non-Core22,00720,69518,94516,22413,45710,823
Total policies in force93,71292,05491,02686,35681,95578,398
Direct written premiums
Core$43,949$43,923$41,427$42,211$46,025$47,027
Non-Core10,6429,9786,1705,4355,9665,911
Total direct written premiums$54,592$53,901$47,597$47,647$51,992$52,938
Change from September 30, 2022
Core
Policies In Force
$ changena$(346)$376$(1,573)$(3,207)$(4,130)
% changena-0.5%0.5%-2.2%-4.5%-5.8%
Direct written premiums
$ changena$(26)$(2,522)$(1,738)$2,076$3,078
% changena-0.1%-5.7%-4.0%4.7%7.0%
Non- Core
Policies In Force
$ changena$(1,312)$(3,062)$(5,783)$(8,550)$(11,184)
% changena-6.0%-13.9%-26.3%-38.9%-50.8%
Direct written premiums
$ changena$(664)$(4,472)$(5,207)$(4,676)$(4,731)
% changena-6.2%-42.0%-48.9%-43.9%-44.5%
(Components may not sum due to rounding)
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Consolidated Results of Operations

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

Years ended December 31,
($ in thousands)20232022ChangePercent
Revenues
Direct written premiums$200,175$201,255$(1,080)(0.5) %
Assumed written premiums---na%
200,175201,255(1,080)(0.5)%
Ceded written premiums
Ceded to quota share treaties (1)51,12547,4093,7167.8%
Ceded to excess of loss treaties7,1223,8803,24283.6%
Ceded to catastrophe treaties48,31742,9525,36512.5%
Total ceded written premiums106,56494,24112,32313.1%
Net written premiums93,611107,014(13,403)(12.5)%
Change in unearned premiums
Direct and assumed1,871(9,733)11,604na%
Ceded to quota share treaties (1)18,90317,1041,79910.5%
Change in net unearned premiums20,7747,37113,403181.8%
Premiums earned
Direct and assumed202,046191,52210,5245.5%
Ceded to reinsurance treaties(87,661)(77,137)(10,524)(13.6)%
Net premiums earned114,384114,385(1)-%
Ceding commission revenue (1)21,05319,3191,7349.0%
Net investment income6,0094,9371,07221.7%
Net gains (losses) on investments2,135(9,392)11,527na%
Other income610910(300)(33.0)%
Total revenues144,191130,15914,03210.8%
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses excluding the effect of catastrophes111,997114,943(2,946)(2.6)%
Losses from catastrophes (2)11,94413,106(1,162)(8.9)%
Total direct and assumed loss and loss adjustment expenses123,940128,048(4,108)(3.2)%
Ceded loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of catastrophes37,30234,1853,1179.1%
Losses from catastrophes (2)3,7895,474(1,685)(30.8)%
Total ceded loss and loss adjustment expenses41,09139,6581,4323.6%
Net loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of catastrophes74,69480,758(6,064)(7.5)%
Losses from catastrophes (2)8,1557,6325236.9%
Net loss and loss adjustment expenses82,84988,390(5,541)(6.3)%
Commission expense33,36534,582(1,217)(3.5)%
Other underwriting expenses25,91026,697(787)(2.9)%
Other operating expenses2,4563,113(657)(21.1)%
Depreciation and amortization2,9733,300(327)(9.9)%
Interest expense4,0032,0191,98498.3%
Total expenses151,556158,102(6,545)(4.1)%
Loss before taxes(7,365)(27,942)20,57773.6%
Income tax benefit(1,197)(5,418)4,22177.9%
Net loss$(6,168)$(22,525)$16,35672.6%
(Columns in the table above may not sum to totals due to rounding)
(1)Effective December 31, 2021, we entered into a 30% personal lines quota share treaty.
(2)The years ended December 31, 2023 and 2022 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.
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Years Ended December 31,
20232022Percentage Point DifferencePercent Change
Key ratios:
Net loss ratio72.4%77.3%(4.9)(6.3)%
Net underwriting expense ratio32.9%36.0%(3.1)(8.6)%
Net combined ratio105.3%113.3%(8.0)(7.1)%

Direct Written Premiums

Direct written premiums during the year ended December 31, 2023 (“Year Ended 2023”) were $200,175,000 compared to $201,255,000 during the year ended December 31, 2022 (“Year Ended 2022”). The decrease of $1,080,000, or 0.5%, was primarily due to a decrease in premiums from our personal lines business.

Direct written premiums from our personal lines business for Year Ended 2023 were $185,426,000, a decrease of $2,679,000, or 1.4%, from $188,105,000 in Year Ended 2022. The 1.4% decrease in premiums from our personal lines business was primarily due to the decrease in premiums associated with our non-Core business of 39.8% offsetting a 8.6% increase in our Core business. The decrease in our non-Core business premiums and the increase in our Core business premiums is in accordance with both our Kingstone 2.0 and Kingstone 3.0 strategic plans.

Direct written premiums from our livery physical damage business for Year Ended 2023 were $14,648,000, an increase of $1,655,000, or 12.7%, from $12,993,000 in Year Ended 2022. 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.

Direct written premiums from our Core business were $176,692,000 in Year Ended 2023 compared to $162,255,000 in Year Ended 2022, an increase of $14,437,000, or 8.9%. Policies in force from our Core business decreased by 5.3% in Year Ended 2023 compared to Year Ended 2022. Beginning in 2017, we commenced our non-Core business and started writing personal lines policies in New Jersey. Through 2019 we expanded our non-Core business to Rhode Island, Massachusetts and Connecticut. Direct written premiums from our non-Core business were $23,482,000 in Year Ended 2023 down from $39,000,000 in Year Ended 2022, a decrease of $15,518,000, or 39.8%. 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 47.7% in Year Ended 2023 compared to Year Ended 2022. 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.

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Net Written Premiums and Net Premiums Earned

Net written premiums decreased $13,403,000, or 12.5%, to $93,611,000 in Year Ended 2023 from $107,014,000 in Year Ended 2022. 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 decrease in Year Ended 2023 is primarily due to a decrease in direct written premiums and an increase in catastrophe premiums rates.

Quota share reinsurance treaties

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business 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 30% quota share reinsurance treaty for our personal lines business, covering the period from January 1, 2023 through January 1, 2024 (“2023/2024 Treaty”). In Year Ended 2023, our premiums ceded under quota share treaties increased by $3,716,000 in comparison to ceded premiums in Year Ended 2022 (see table above). The increase in Year Ended 2023 was attributable to the runoff of an 8.5% portion of the 30% 2021/2023 Treaty. The remainder of the 2021/2023 Treaty was on a cutoff basis and the new 2023/2024 Treaty was placed for 30% on January 1, 2023. Our personal lines business was subject to the 2023/2024 Treaty in Year Ended 2023, and the 2021-2023 Treaty in Year Ended 2022.

Excess of loss reinsurance treaties

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Year Ended 2023, our ceded excess of loss (“XOL”) reinsurance premiums increased by $3,242,000 over the comparable ceded premiums for Year Ended 2022. The increase was due to an increase in subject premiums and the heightened cost of coverage obtained. Effective January 1, 2022, we entered into an underlying XOL reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Effective January 1, 2023, the underlying XOL treaty was renewed covering the period from January 1, 2023 through January 1, 2024.

Catastrophe reinsurance treaties

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. 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. Catastrophe premiums increased $5,365,000, or 12.5%, to $48,317,000 in Year Ended 2023 from $42,952,000 in Year Ended 2022. The increase was primarily due to an increase in catastrophe reinsurance rates. In accordance with our Kingstone 2.0 and Kingstone 3.0 goals, we have reduced our PML in Year Ended 2023, which partially offset the increase in premiums effective July 1, 2023.

Net premiums earned

Net premiums earned remained flat at $114,384,000 in Year Ended 2023 compared to $114,385,000 in Year Ended 2022.

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Ceding Commission Revenue

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

Years ended December 31,
($ in thousands)20232022ChangePercent
Provisional ceding commissions earned$20,397$19,106$1,2916.8%
Contingent ceding commissions earned656214442206.5%
Total ceding commission revenue$21,053$19,319$1,7349.0%
(Columns in the table above may not sum to totals due to rounding)

Ceding commission revenue was $21,053,000 in Year Ended 2023 compared to $19,319,000 in Year Ended 2022. The increase of $1,734,000 was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

Provisional Ceding Commissions Earned

In Year Ended 2023, we earned provisional ceding commissions of $20,397,000 from personal lines earned premiums ceded under the 2023/2024 Treaty, and in Year Ended 2022, we earned provisional ceding commissions of $19,106,000 from personal lines earned premiums ceded under the 2021/2023 Treaty. The increase of $1,291,000 in provisional ceding commissions earned was due to the increase in premiums ceded under these treaties during Year Ended 2023 compared to Year Ended 2022.

Contingent Ceding Commissions Earned

The structure of the 2023/2024 Treaty and the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. Under our prior years’ quota share treaties, we received a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we received. The increase in Year Ended 2023 was primarily attributable to a one time true up from a prior year treaty.

Net Investment Income

Net investment income was $6,009,000 in Year Ended 2023 compared to $4,937,000 in Year Ended 2022, an increase of $1,072,000, or 21.7%. The increase in investment income was attributable to a $766,000 reversal in Year Ended 2022 of prior years’ estimated accrued interest income stemming from an error in third party investment reporting. The increase was also due to higher interest rates earned on cash balances. The average yield on non-cash invested assets was 3.75% as of December 31, 2023 compared to 3.42% as of December 31, 2022.

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Cash and invested assets were $183,610,000 as of December 31, 2023 compared to $191,046,000 as of December 31, 2022. The $7,436,000 decrease in cash and invested assets was primarily attributable to the cash used to fund disbursements of claims resulting from higher severity losses and inflation’s impact on losses, along with catastrophe losses incurred in Year Ended 2023 and prior periods. The increase in disbursement of losses was partially offset by an increase in unrealized gains on our investment portfolio.

Net Gains (Losses) on Investments

Net gains on investments were $2,135,000 in Year Ended 2023 compared to net (losses) of $(9,392,000) in Year Ended 2022. Unrealized gains on our equity securities and other investments in Year Ended 2023 were $2,153,000, compared to unrealized (losses) of $(9,252,000) in Year Ended 2022. Net realized (losses) on sales of investments were $(19,000) in Year Ended 2023 compared to net realized (losses) of $(140,000) in Year Ended 2022.

Other Income

Other income was $610,000 in Year Ended 2023 compared to $910,000 in Year Ended 2022, a decrease of $300,000, or 33.0%.

Net Loss and LAE

Net loss and LAE was $82,849,000 for Year Ended 2023 compared to $88,390,000 for Year Ended 2022. The net loss ratio was 72.4% in Year Ended 2023 compared to 77.3% in Year Ended 2022, a decrease of 4.9 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:

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

For Year Ended 2023, the 4.9 point reduction in the loss ratio compared to Year Ended 2022 was mainly due to a lower underlying loss ratio (loss ratio excluding the impact of catastrophe and prior year development) and reduced impact from prior year development.

The estimated net catastrophe losses were $8,155,000 for Year Ended 2023, which contributed 7.1 points to the loss ratio. There were two winter storm events including a major freezing event at the beginning of February, ten wind and thunderstorm events, and one tropical storm classified as catastrophe for Year Ended 2023. By comparison, catastrophe events had a loss ratio impact of 6.7 points for Year Ended 2022.

The underlying loss ratio was 65.3% for Year Ended 2023, a decrease of 2.9 points from the 68.2% underlying loss ratio recorded for Year Ended 2022. The loss experience in Year Ended 2023 was improved due to lower frequency but was offset by increasing severity resulting from inflation and an elevated number of large losses.

Prior year development was stable for Year Ended 2023. There was an overall favorable development of $7,000, which had minimal impact on the loss ratio.

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

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Commission Expense

Commission expense was $33,365,000 in Year Ended 2023 or 16.5% of direct earned premiums. Commission expense was $34,582,000 in Year Ended 2022 or 18.1% of direct earned premiums. The decrease of $1,217,000 was primarily due to a reduction of 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, but offset in part by an increase in direct earned premiums of $10,524,000 to $202,046,000.

Other Underwriting Expenses

Other underwriting expenses were $25,910,000, or 12.8% of direct earned premiums, in Year Ended 2023 compared to $26,697,000, or 13.9% of direct earned premiums, in Year Ended 2022. The decrease of $787,000, or 2.9%, was primarily due to decreases in professional fees, credit card fees and policy management system fees as result of the completion of our policy management system conversion, allowing us to eliminate multiple legacy systems. The decreases were partially offset by a net increase in salaries and employment costs as described below, an increase in insurance department fees, and the impact from high inflation.

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $11,335,000 in Year Ended 2023 compared to $10,799,000 in Year Ended 2022. The increase of $536,000, or 5.0%, is compared unfavorably to the 0.5% decrease in direct written premiums. In the periods following Year Ended 2022, we continued 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. The increase in salaries was partially offset by a reduction in our staff in June and July 2023 as we have been reducing our non-Core business.

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Our net underwriting expense ratio in Year Ended 2023 was 32.9% compared to 36.0% in Year Ended 2022. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

Years ended December 31,Percentage
20232022Point Change
Other underwriting expenses
Employment costs9.9%9.4%0.5
Underwriting fees (inspections/surveys)1.61.7(0.1)
IT expenses2.93.9(1.0)
Professional fees1.11.3(0.2)
Other expenses7.17.00.1
Total other underwriting expenses22.623.3(0.7)
Commission expense29.230.2(1.0)
Ceding commission revenue
Provisional(17.8)(16.7)(1.1)
Contingent(0.6)(0.2)(0.4)
Total ceding commission revenue(18.4)(16.9)(1.5)
Other income(0.5)(0.7)0.2
Net underwriting expense ratio32.9%36.0%(3.1)

(Components may not sum to totals due to rounding)

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Other Operating Expenses

Other operating expenses, related to the expenses of our holding company and Cosi, were $2,456,000 for Year Ended 2023 compared to $3,113,000 for Year Ended 2022. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

Years ended
December 31,
($ in thousands)20232022ChangePercent
Other operating expenses
Employement costs$376$(24)$400na%
Equity compensation8331,393(560)(40.2)
Professional276765(489)(63.9)
Directors fees275327(52)(15.9)
Insurance1941544026.0
Other expenses50249840.8
Total other operating expenses$2,456$3,113$(657)(21.1)%

(Components may not sum to totals due to rounding)

The decrease in Year Ended 2023 of $657,000, or 21.1%, as compared to Year Ended 2022 was primarily due to a decrease in equity compensation and professional fees, partially offset by an increase in employment costs. The increase in employment costs was due to the hiring of our new Chief Financial Officer in Year Ended 2023 and fluctuations in deferred compensation liability related to changes in the underlying invested portfolio. The decrease in professional fees is due to $354,000 incurred in Year Ended 2022 related to a then contemplated transaction that would have resulted in a third party acquiring all of the outstanding equity of our company.

Depreciation and Amortization

Depreciation and amortization was $2,973,000 in Year Ended 2023 compared to $3,300,000 in Year Ended 2022. The decrease of $327,000, or 9.9%, 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 Year Ended 2023 was $4,003,000 compared to $2,019,000 in Year Ended 2022, an increase of $1,984,000 or 98.3%. In Year Ended 2023, as disclosed in Note 9 to the consolidated financial statements, we incurred increased interest expense in connection with the 2022 Notes, which provide for interest at the rate of 12% per annum, and the 2022 equipment financing. In Year 2022, we incurred interest expense in connection with the 2017 Notes, our $30.0 million issuance of long-term debt in December 2017, which provided for interest at the rate of 5.5% per annum, and the equipment financing incurred in the fourth quarter of 2022.

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Income Tax Benefit

Income tax benefit in Year Ended 2023 was $1,197,000, which resulted in an effective tax benefit rate of 16.3%. Income tax benefit in Year Ended 2022 was $5,418,000, which resulted in an effective tax rate of 19.4%. Loss before taxes was $7,365,000 in Year Ended 2023 compared to $27,942,000 in Year Ended 2022. The difference in effective tax rate is due to the effect of permanent differences in Year Ended 2023 compared to Year Ended 2022.

Net Loss

Net loss was $6,168,000 in Year Ended 2023 compared to $22,525,000 in Year Ended 2022. The significant decrease in net loss of $16,356,000, or 72.6%, was primarily attributable to net gains on investments of $2,135,000 in Year Ended 2023 versus net losses on investments of $9,392,000 in Year Ended 2022 and a decrease in loss and loss adjustment expenses of $5,541,000.

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 premiums written, net premiums earned, and loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.

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Years Ended
December 31,
20232022
Gross premiums written:
Personal lines$185,425,960$188,104,883
Livery physical damage14,648,33312,992,905
Other(1)100,209157,049
Total gross premiums written$200,174,502$201,254,837
Net premiums written:
Personal lines$78,895,126$93,907,121
Livery physical damage14,648,33312,992,905
Other(1)67,058113,503
Total net premiums written$93,610,517$107,013,529
Net premiums earned:
Personal lines$100,391,726$103,019,573
Livery physical damage13,905,36811,226,975
Other(1)87,169137,983
Total net premiums earned$114,384,263$114,384,531
Net loss and loss adjustment expenses(3):
Personal lines$72,580,057$76,906,768
Livery physical damage5,388,9545,056,461
Other(1)146,28618,083
Unallocated loss adjustment expenses3,128,6143,701,131
Total without commercial lines81,243,91185,682,443
Commercial lines (in run-off effective July 2019)(2)1,605,2992,707,599
Total net loss and loss adjustment expenses$82,849,210$88,390,042
Net loss ratio(3):
Personal lines72.3%74.7%
Livery physical damage38.8%45.0%
Other(1)167.8%13.1%
Total without commercial lines71.0%74.9%
Commercial lines (in run-off effective July 2019)(2)nana
Total72.4%77.3%
(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 discussions above with regard to “Net Loss and LAE”, as to catastrophe losses in the years ended December 31, 2023 and 2022.
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Insurance Underwriting Business on a Standalone Basis

Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2023 and 2022 follows:

Years ended
December 31,
20232022
Revenues
Net premiums earned$114,384,263$114,384,531
Ceding commission revenue21,053,49419,319,391
Net investment income6,008,6824,936,778
Net gains (losses) on investments1,978,373(9,231,170)
Other income600,993815,952
Total revenues144,025,805130,225,482
Expenses
Loss and loss adjustment expenses82,849,21088,390,042
Commission expense33,364,62934,581,617
Other underwriting expenses25,909,96226,697,006
Depreciation and amortization2,973,4403,252,134
Interest expense434,15583,732
Total expenses145,531,396153,004,531
Loss from operations(1,505,591)(22,779,049)
Income tax benefit(17,681)(4,588,283)
Net loss$(1,487,910)$(18,190,766)
Key Measures:
Net loss ratio72.4%77.3%
Net underwriting expense ratio32.9%36.0%
Net combined ratio105.3%113.3%
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses$59,274,591$61,278,623
Less: Ceding commission revenue(21,053,494)(19,319,391)
Less: Other income(600,993)(815,952)
Net underwriting expenses$37,620,104$41,143,280
Net premiums earned$114,384,263$114,384,531
Net Underwriting Expense Ratio32.9%36.0%
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An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:

DirectAssumedCededNet
Year ended ended December 31, 2023
Written premiums$200,174,502$-$(106,563,985)$93,610,517
Change in unearned premiums1,871,239-18,902,50720,773,746
Earned premiums$202,045,741$-$(87,661,478)$114,384,263
Loss and loss adjustment expenses excluding
the effect of catastrophes$111,996,791$-$(37,302,450)$74,694,341
Catastrophe loss11,943,624-(3,788,755)8,154,869
Loss and loss adjustment expenses$123,940,415$-$(41,091,205)$82,849,210
Loss ratio excluding the effect of catastrophes55.4%0.0%42.6%65.3%
Catastrophe loss5.9%0.0%4.3%7.1%
Loss ratio61.3%0.0%47.0%72.4%
Year ended ended December 31, 2022
Written premiums$201,254,837$-$(79,195,016)$122,059,821
Change in unearned premiums(9,733,170)-2,057,880(7,675,290)
Earned premiums$191,521,667$-$(77,137,136)$114,384,531
Loss and loss adjustment expenses excluding
the effect of catastrophes$114,942,807$-$(34,184,616)$80,758,191
Catastrophe loss13,105,600-(5,473,749)7,631,851
Loss and loss adjustment expenses$128,048,407$-$(39,658,365)$88,390,042
Loss ratio excluding the effect of catastrophes60.0%0.0%44.3%70.6%
Catastrophe loss6.8%0.0%7.1%6.7%
Loss ratio66.9%0.0%51.4%77.3%

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

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The key measures for our insurance underwriting business for the years ended December 31, 2023 and 2022 are as follows:

Years ended
December 31,
20232022
Net premiums earned$114,384,263$114,384,531
Ceding commission revenue21,053,49419,319,391
Other income600,993815,952
Loss and loss adjustment expenses (1)82,849,21088,390,042
Acquisition costs and other underwriting expenses:
Commission expense33,364,62934,581,617
Other underwriting expenses25,909,96226,697,006
Total acquisition costs and other
underwriting expenses59,274,59161,278,623
Underwriting loss$(6,085,051)$(15,148,791)
Key Measures:
Net loss ratio excluding the effect of catastrophes65.3%70.6%
Effect of catastrophe loss on net loss ratio (1)7.1%6.7%
Net loss ratio72.4%77.3%
Net underwriting expense ratio excluding the
effect of catastrophes32.9%36.0%
Effect of catastrophe loss on net underwriting
expense ratio0.0%0.0%
Net underwriting expense ratio32.9%36.0%
Net combined ratio excluding the effect
of catastrophes98.2%106.6%
Effect of catastrophe loss on net combined
ratio (1)7.1%6.8%
Net combined ratio105.3%113.3%
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses$59,274,591$61,278,623
Less: Ceding commission revenue(21,053,494)(19,319,391)
Less: Other income(600,993)(815,952)
$37,620,104$41,143,280
Net earned premium$114,384,263$114,384,531
Net Underwriting Expense Ratio32.9%36.0%
Column 1Column 2
(1)For the years ended December 31, 2023 and 2022, includes the sum of net catastrophe losses and loss adjustment expenses of $8,154,869 and $7,631,851, respectively.
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Investments

Portfolio Summary

The following table presents a breakdown of the amortized cost, estimated fair value, and unrealized gains and losses of our investments in fixed-maturity securities classified as available-for-sale as of December 31, 2023 and 2022:

Available-for-Sale Securities

December 31, 2023
Cost orGrossGross Unrealized LossesEstimated% of
AmortizedUnrealizedLess thanMore thanFairEstimated
CategoryCostGains12 Months12 MonthsValueFair Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies (1)$20,954,764$1,799$(17,373)$-$20,939,19014.1%
Political subdivisions of States,
Territories and Possessions16,607,713--(3,209,161)13,398,5529.0%
Corporate and other bonds
Industrial and miscellaneous75,993,042--(5,885,296)70,107,74647.1%
Residential mortgage and other
asset backed securities (2)50,905,423113,761(2,144)(6,541,731)44,475,30929.9%
Total fixed-maturity securities$164,460,942$115,560$(19,517)$(15,636,188)$148,920,797100.0%
December 31, 2022
Cost orGrossGross Unrealized LossesEstimated% of
AmortizedUnrealizedLess thanMore thanFairEstimated
CategoryCostGains12 Months12 MonthsValueFair Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies (1)$23,874,545$1,479$(6,928)$-$23,869,09615.4%
Political subdivisions of States,
Territories and Possessions17,108,154-(2,195,273)(1,771,494)13,141,3878.5%
Corporate and other bonds
Industrial and miscellaneous80,338,464-(5,796,994)(2,458,985)72,082,48546.6%
Residential mortgage and other
asset backed securities (2)53,597,26458,398(882,664)(7,150,803)45,622,19529.5%
Total fixed-maturity securities$174,918,427$59,877$(8,881,859)$(11,381,282)$154,715,163100.0%
(1)In October 2022, KICO placed certain U.S. Treasury Bills as required collateral for a sale leaseback transaction in a designated custodian account (see Note 9 - Debt - “Equipment Financing”). As of December 31, 2023 and 2022, the estimated fair value of the eligible collateral was approximately $6,999,000 and $8,691,000, 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 9 – 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 December 31, 2023 and 2022, the estimated fair value of the eligible investments was approximately $11,412,000 and $12,228,000, respectively. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2023 and 2022 there was no outstanding balance on the FHLBNY credit line.
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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 December 31, 2023 and 2022:

December 31, 2023
% of
GrossGrossEstimatedEstimated
CategoryCostGainsLossesFair ValueFair Value
Equity Securities:
Preferred stocks$13,583,942$-$(2,870,027)$10,713,91572.6%
Fixed income exchange traded funds3,711,232(669,232)3,042,00020.6%
Mutual funds622,209314,816-937,0256.3%
FHLBNY common stock69,400--69,4000.5%
Total$17,986,783$314,816$(3,539,259)$14,762,340100.0%
December 31, 2022
% of
GrossGrossEstimatedEstimated
CategoryCostGainsLossesFair ValueFair Value
Equity Securities:
Preferred stocks$13,583,942$-$(3,589,313)$9,994,62972.2%
Fixed income exchange traded funds3,711,232(821,632)2,889,60020.9%
Mutual funds716,626158,635-875,2616.3%
FHLBNY common stock74,900--74,9000.5%
Total$18,086,700$158,635$(4,410,945)$13,834,390100.0%

Other Investments

The following table presents a breakdown of the cost and estimated fair value of, and gross gains on, our other investments as of December 31, 2023 and 2022:

December 31, 2023December 31, 2022
GrossEstimatedGrossEstimated
CategoryCostGainsFair ValueCostGainsFair Value
Other Investments:
Hedge fund$1,987,040$1,910,110$3,897,150$1,987,040$784,612$2,771,652
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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 December 31, 2023 and 2022:

December 31, 2023
Cost orGrossGross Unrealized LossesEstimated% of
AmortizedUnrealizedLess thanMore thanFairEstimated
CategoryCostGains12 Months12 MonthsValueFair Value
Held-to-Maturity Securities:
U.S. Treasury securities$1,228,860$15,045$(6,914)$(18,163)$1,218,82820.0%
Political subdivisions of States,
Territories and Possessions499,170890--500,0608.2%
Exchange traded debt304,111--(70,111)234,0003.8%
Corporate and other bonds
Industrial and miscellaneous5,020,400--(867,140)4,153,26068.0%
Total$7,052,541$15,935$(6,914)$(955,414)$6,106,148100.0%
December 31, 2022
Cost orGrossGross Unrealized LossesEstimated% of
AmortizedUnrealizedLess thanMore thanFairEstimated
CategoryCostGains12 Months12 MonthsValueFair Value
Held-to-Maturity Securities:
U.S. Treasury securities$1,228,560$28,400$(34,077)$-$1,222,88318.5%
Political subdivisions of States,
Territories and Possessions498,6382,092--500,7307.6%
Exchange traded debt304,111-(29,111)-275,0004.2%
Corporate and other bonds
Industrial and miscellaneous5,734,83136,968(809,746)(360,278)4,601,77569.7%
Total$7,766,140$67,460$(872,934)$(360,278)$6,600,388100.0%

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

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A summary of the amortized cost and estimated fair value of our investments in held-to-maturity securities by contractual maturity as of December 31, 2023 and 2022 is shown below:

December 31, 2023December 31, 2022
AmortizedEstimatedAmortizedEstimated
Remaining Time to MaturityCostFair ValueCostFair Value
Less than one year$-$-$708,535$743,575
One to five years1,121,2881,097,1011,120,5071,088,522
Five to ten years1,414,9111,270,7701,402,7041,200,720
More than 10 years4,516,3423,738,2774,534,3943,567,571
Total$7,052,541$6,106,148$7,766,140$6,600,388
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Credit Rating of Fixed-Maturity Securities

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of December 31, 2023 and 2022 as rated by Standard and Poor’s (or, if unavailable from Standard and Poor’s, then Moody’s, Fitch, or Kroll):

December 31, 2023December 31, 2022
EstimatedPercentage ofEstimatedPercentage of
FairEstimatedFairEstimated
ValueFair ValueValueFair Value
Rating
U.S. Treasury securities$20,939,19014.1%$23,869,09615.4%
Corporate and municipal bonds
AAA1,836,7361.2%1,824,4781.2%
AA9,872,3466.6%9,785,9086.3%
A33,228,32722.4%31,099,07520.2%
BBB+15,042,20010.1%16,682,15910.8%
BBB21,826,12514.7%19,664,05112.7%
BBB--0.0%4,516,7132.9%
Total corporate and municipal bonds81,805,73454.9%83,572,38454.1%
Residential mortgage backed, asset backed, and other collateralized obligations
AAA12,766,4718.6%16,497,62110.7%
AA22,102,16914.8%23,062,23314.9%
A6,390,7524.3%6,722,9024.3%
BBB+15,1680.0%-0.0%
BBB-0.0%20,0670.0%
CCC413,6010.3%457,6830.3%
CC91,3900.1%99,6000.1%
D-0.0%40,4740.0%
Non rated4,396,3223.0%373,1030.2%
Total residential mortgage backed, asset backed,
and other collateralized obligations46,175,87331.0%47,273,68330.5%
Total$148,920,797100.0%$154,715,163100.0%
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The table below details the average yield by type of fixed-maturity security as of December 31, 2023 and 2022:

CategoryDecember 31, 2023December 31, 2022
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies4.95%2.58%
Political subdivisions of States,
Territories and Possessions3.35%3.58%
Corporate and other bonds
Industrial and miscellaneous3.62%3.68%
Residential mortgage backed securities2.90%2.70%
Total3.58%3.20%

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of December 31, 2023 and 2022:

December 31, 2023December 31, 2022
Weighted average effective maturity (1)7.85.8
Weighted average final maturity11.913.5
Effective duration4.14.5

(1) In 2023, we changed the methodology for calculating weighted average effective maturity for prepaying and non-prepaying securities. The previous method used in 2022 was weighted average life (“WAL”) converted to effective maturity. The new method used in 2023 is final cash flow date prior to maturity. The new methodology aims to more accurately reflect the effective maturity of prepaying securities by considering the final cash flow date instead of relying solely on the WAL conversion

Fair Value Consideration

As disclosed in Note 4 to the consolidated financial statements, with respect to “Fair Value Measurements,” we define fair value as 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 December 31, 2023 and 2022, 65% of the investment portfolio recorded at fair value was priced based upon quoted market prices.

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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 December 31, 2023 and 2022:

December 31, 2023
Less than 12 months12 months or moreTotal
EstimatedNo. ofEstimatedNo. ofEstimated
FairUnrealizedPositionsFairUnrealizedPositionsFairUnrealized
CategoryValueLossesHeldValueLossesHeldValueLosses
Fixed-Maturity Securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies$5,974,440$(17,373)1$-$--$5,974,440$(17,373)
Political subdivisions of
States, Territories and
Possessions---13,398,552(3,209,161)1313,398,552(3,209,161)
Corporate and other
bonds industrial and
miscellaneous---70,107,746(5,885,296)8570,107,746(5,885,296)
Residential mortgage and
other asset backed securities88,988(2,144)438,675,604(6,541,731)3738,764,592(6,543,875)
Total fixed-maturity
securities$6,063,428$(19,517)5$122,181,902$(15,636,188)135$128,245,330$(15,655,705)
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December 31, 2022
Less than 12 months12 months or moreTotal
EstimatedNo. ofEstimatedNo. ofEstimated
FairUnrealizedPositionsFairUnrealizedPositionsFairUnrealized
CategoryValueLossesHeldValueLossesHeldValueLosses
Fixed-Maturity Securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies$18,918,196$(6,928)3$-$--$18,918,196$(6,928)
Political subdivisions of
States, Territories and
Possessions7,970,633(2,195,273)95,170,753(1,771,494)513,141,386(3,966,767)
Corporate and other
bonds industrial and
miscellaneous56,910,104(5,796,994)7515,172,381(2,458,985)1572,082,485(8,255,979)
Residential mortgage and
other asset backed securities10,145,880(882,664)2234,753,178(7,150,803)2644,899,058(8,033,467)
Total fixed-maturity
securities$93,944,813$(8,881,859)109$55,096,312$(11,381,282)46$149,041,125$(20,263,141)
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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. There were 155 securities at December 31, 2022 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 year ended December 31, 2023, KICO paid a dividend of $1,250,000 to us. As of December 31, 2023, KICO had a negative unassigned surplus and currently will not be able to pay any distributions to us without prior regulatory approval. In September 2023, KICO received regulatory approval and paid us a $2,700,000 distribution from paid in capital. In December 2023, KICO received regulatory approval to pay us an additional $2,300,000 distribution from paid in capital. KICO intends to pay us the $2,300,000 distribution in 2024.

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 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 September 30, 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 December 31, 2023, based on the net admitted assets as of September 30, 2023, was approximately $12,813,000. Available collateral as of December 31, 2023 was approximately $11,412,000. As a result of the withdrawal of A.M. Best ratings, KICO is currently only able to borrow on an overnight basis. Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during Year Ended 2023.

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On December 15, 2022, we issued $19,950,000 of our 2022 Notes pursuant to the Exchange Agreement. The Exchange Agreement provided for a mandatory redemption payment with regard to the 2022 Notes on December 30, 2023 in an amount discussed in Note 9 – Debt of the consolidated financial statements included in this Annual Report. The mandatory redemption payment was based on the maximum Ordinary Dividend Paying Capacity of KICO as discussed in Note 9, which was a negative amount and, accordingly, the Company was not required to make a mandatory redemption of the 2022 Notes on December 30, 2023.We are also 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.

If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing. See Notes 2 and 9 to our consolidated financial statements included in this Annual Report for a discussion of our plans in this regard.

Our reconciliation of net loss to net cash used by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.

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:

Years ended December 31,20232022
Cash flows (used in) provided by:
Operating activities$(11,326,850)$(915,521)
Investing activities9,461,700(5,905,779)
Financing activities(1,116,080)(5,511,070)
Net decrease in cash and cash equivalents(2,981,230)(12,332,370)
Cash and cash equivalents, beginning of period11,958,22824,290,598
Cash and cash equivalents, end of period$8,976,998$11,958,228

Net cash used in operating activities was $11,327,000 in Year Ended 2023 as compared to $916,000 used in operating activities in Year Ended 2022. The $10,411,000 increase in cash flows used in operating activities in Year Ended 2023 as compared to Year Ended 2022 was primarily the result of an increase in cash used arising from net fluctuations in operating assets and liabilities, partially offset by a decrease in net loss (adjusted for non-cash items) of $5,029,000. The increase in cash used in operating activities is also partially offset by the payment of $13,245,000 to reinsurers in Year Ended 2022 pursuant to the inception of our quota share reinsurance treaty, effective December 31, 2021. 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 provided by investing activities was $9,462,000 in Year Ended 2023 compared to $5,906,000 used in investing activities in Year Ended 2022 resulting in a $15,368,000 increase in net cash provided by investing activities. In Year Ended 2023, we had net cash provided by our investment portfolio of $11,289,000, compared to $1,355,000 used in Year Ended 2022. In addition, we decreased our acquisition of fixed assets by $2,724,000 in Year Ended 2023 compared to Year Ended 2022.

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Net cash used in financing activities was $1,116,000 in Year Ended 2023 compared to $5,511,000 used in Year Ended 2022. The $4,395,000 decrease in net cash used in financing activities was attributable to a $10,050,000 principal payment on the 2017 Notes in 2022 and $1,758,000 of bond issue costs, both paid in connection with the Exchange Agreement with no similar payments in 2023. In addition, no dividends were paid to shareholders in Year Ended 2023 compared to $1,277,000 being paid in Year Ended 2022 and a $378,000 decrease in withholding taxes paid on the vesting of restricted stock awards. The decreases in cash used in financing activities were partially offset by $8,097,000 of proceeds in Year Ended 2022 from equipment financing in connection with KICO’s sale-leaseback transaction and the related $897,000 increase in debt repayments in Year Ended 2023.

Reinsurance

The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2023:

Amount
Recoverable
A.M.as of
($ in thousands)Best RatingDecember 31, 2023%
Swiss Reinsurance America CorporationA+$17,58736.1%
Hanover Rueck SEA+8,66117.8%
Allied World Insurance Company (1)A6,91414.2%
Ace Property and Casualty Insurance CompanyA++5,04510.4%
38,20778.5%
Others (2)10,45921.5%
Total$48,666100.0%
(1)Represents $4,000 guaranteed by irrevocable letters of credit.
(2)Of the $5,673,000 reinsurance recoverables included in Others at December 31, 2023, $2,236,000 was secured pursuant to a collateralized trust agreement and $426,000 guaranteed by irrevocable letters of credit. Assets held in the trust are not included in our invested assets, and investment income earned on this asset is credited to the reinsurer.

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”).

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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 provides 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:

Treaty Period
2024/2025 Treaty2023/2024 Treaty2021/2023 Treaty
July 1,January 1,July 1,January 1,July 1,December 31,
202420242023202320222021
totototototo
January 1,June 30,January 1,June 30,January 1,June 30,
Line of Business202520242024202320232022
Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded (7)27%27%30%30%30%30%
Risk retained on intial
$1,000,000 of losses (5) (6) (7)$730,000$730,000$700,000$700,000$700,000$700,000
Losses per occurrence
subject to quota share
reinsurance coverage$1,000,000$1,000,000$1,000,000$1,000,000$1,000,000$1,000,000
Expiration dateJanuary 1, 2025January 1, 2025January 1, 2024January 1, 2024January 1, 2023January 1, 2023
Excess of loss coverage and
facultative facility
coverage (1) (5) (6)$400,000$8,400,000$8,400,000$8,400,000$8,400,000$8,400,000
in excess ofin excess ofin excess ofin excess ofin excess ofin excess of
$600,000$600,000$600,000$600,000$600,000$600,000
Total reinsurance coverage
per occurrence (5) (6)$470,000$8,470,000$8,500,000$8,500,000$8,500,000$8,500,000
Losses per occurrence
subject to reinsurance
coverage (6)$1,000,000$8,000,000$8,000,000$8,000,000$9,000,000$9,000,000
Expiration date(6)June 30, 2024June 30, 2024June 30, 2023June 30, 2023June 30, 2022
Catastrophe Reinsurance:
Initial loss subject to personal
lines quota share treaty (6)$10,000,000$10,000,000$10,000,000$10,000,000$10,000,000$10,000,000
Risk retained per catastrophe
occurrence (7) (8)(6)$9,500,000$8,750,000$8,750,000$7,400,000$7,400,000
Catastrophe loss coverage
in excess of quota share
coverage (2)(6)$315,000,000$315,000,000$335,000,000$335,000,000$490,000,000
Reinstatement premium
protection (3) (4)(6)YesYesYesYesYes
(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, 2024.
(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 December 31, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.
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(4)For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $9,800,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2023 through June 30, 2024 (expiration date of the catastrophe reinsurance treaty), reinstatement premium protection for $12,500,000 of catastrophe coverage in excess of $10,000,000.
(5)For the period January 1, 2022 through January 1, 2025, underlying excess of loss 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.
(6)Excess of loss coverage and facultative facility and catastrophe reinsurance treaties will expire on June 30,2024, with none of these coverages to be in effect during the period from July 1 2024 through January 1, 2025. If and when these treaties are renewed on July 1, 2024, the excess of loss and facultative facility, and the catastrophe reinsurance treaty, will be as provided for therein. Reinsurance coverage in effect from July 1, 2024 through January 1, 2025 is currently only covered under the 2024/2025 Treaty and underlying excess of loss reinsurance treaty. The 2024/2025 Treaty and underlying excess of loss reinsurance treaty will expire on January 1, 2025.
(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
Treaty Year
July 1, 2023July 1, 2022July 1, 2021
tototo
Line of BusinessJune 30, 2024June 30, 2023June 30, 2022
Personal Lines:
Personal Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of coverage90%90%90%
Percent ceded - excess of $1,000,000 dollars of coverage95%95%95%
Risk retained$300,000$300,000$300,000
Total reinsurance coverage per occurrence$4,700,000$4,700,000$4,700,000
Losses per occurrence subject to quota share reinsurance coverage$5,000,000$5,000,000$5,000,000
Expiration dateJune 30, 2024June 30, 2023June 30, 2022

Commercial Lines (1)

(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.

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Year Ended 2023 included continuing 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 previously reduced the value of our fixed income securities, saw a reversal which had previously lowered our stockholders’ equity materially in prior quarters. For Year Ended 2023, the continuing economic inflation impacted our loss and loss adjustment expenses as well; should these 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. This action has led, and may continue to lead, to a slowdown in premium growth, particularly in new business.

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