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NY homeowners writer needs capital after error fix triggers 69% drop in surplus

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NY homeowners writer needs capital after error fix triggers 69% drop in surplus

Less than a year ago, one downstate New York homeowners insurer said it was seeking additional growth capital. Now it is apparently seeking funds for survival.

Kensington Insurance Co. reported in a regulatory filing obtained Jan. 10 by S&P Global Market Intelligence that it needs additional funding after its discovery of an error on its statutory balance sheet led it to show a "negative surplus balance" as of Sept. 30, 2018.

The error, according to the filing, pertained to the prior calculation of the contingent commission under a quota-share treaty. Kensington's surplus tumbled to less than $631,000 as of Sept. 30, 2018, from $2 million three months earlier and more than $3.8 million at year-end 2017, with a paid-in surplus of $400,000 only partially offsetting the negative effects of a net loss of nearly $1.5 million for the first nine months of 2018 and the $2.1 million prior-period adjustment related to the contingent commission.

Kensington said in the filing that it "will require additional funding in order to continue as a going concern." The company also said it was uncertain whether it would be able to obtain that funding.

The company's Sept. 30, 2018, statutory balance sheet showed that while total net admitted assets increased to $13.5 million from $13.3 million three months prior, its total liabilities rose to $12.8 million from $11.3 million over the same timeframe as its ceded reinsurance premiums payable net of ceding commissions increased to $3 million from less than $1.1 million.

Four reinsurers assumed a combined total of $7.8 million in premiums from Kensington in 2017: Everest Re Group Ltd.'s Everest Reinsurance Co., AXIS Capital Holdings Ltd.'s AXIS Reinsurance Co., Alleghany Corp.'s Transatlantic Reinsurance Co. and Munich Re Co.'s Hartford Steam Boiler Inspection & Insurance Co.

The filing did not provide additional detail about Kensington's situation, and a message to company president John Scanlan was not returned.

Kensington's total adjusted capital at year-end 2017, which was virtually identical to its reported surplus, constituted 288.1% of its authorized control level risk-based capital. Hypothetically, assuming the latter figure remained constant at just over $1.3 million and that reported surplus at June 30, 2018, and Sept. 30, 2018, approximated total adjusted capital, the resulting ratios on those dates would have been 151.1% and 47.4%, respectively.

New York insurance law considers a ratio of between 150% and 200% of authorized control level RBC to be within the company action level; a ratio of less than 70% is at the mandatory control level. The New York State Department of Financial Services superintendent has the discretion to forgo action for up to 90 days in the event the regulator has a "reasonable expectation that the mandatory control level event may be eliminated within the period."

Circumstances appeared to change materially over the course of the past 10 months. Scanlan indicated in a regulatory filing dated March 30, 2018, that Kensington had been "seeking out additional investors" to boost capital to the point where the company could obtain a Demotech rating and, in turn, appoint retail brokers.

Bringing in retail brokers could cut commissions by 5% to 10% versus wholesale brokers, Scanlan wrote.

"Additional distribution outlets should also increase premium volume, thereby reducing the relative impact of certain fixed costs and the expense ratio," he added in the filing. "Sufficient additional capital would also allow the company to reduce its reliance on quota share reinsurance and diversify its product line and its geographical footprint."

Offering owner-occupied and non-owner-occupied property and casualty products in New York City's five boroughs and on Long Island, Kensington reported gross and net premiums written of $13.8 million and $6 million, respectively, in 2017. It posted net losses in all 12 of the full calendar years in which it has operated as its expense ratio has exceeded 41% in each of those periods.

Kensington listed United Insurance Holdings Corp.'s Interboro Insurance Co. Inc., Kingstone Cos. Inc.'s Kingstone Insurance Co. and Ithaca, N.Y.-based Security Mutual Insurance Co. as its "major competitors" in a 2017 homeowners product filing. The four companies combined to hold share of 2.7% of the $5.32 billion New York State homeowners insurance market in 2017. Allstate Corp. and the group headed by State Farm Mutual Automobile Insurance Co. led the market with respective shares of 14.3% and 13.2%.