KINGSTONE COMPANIES, INC.
10-Ks and 10-Qs
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United
States Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2016
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO
__________.
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Commission File
Number
0-1665
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KINGSTONE
COMPANIES, INC.
(Exact name of
registrant as specified in its charter)
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Delaware
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36-2476480
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(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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15 Joys Lane, Kingston, New York
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12401
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(Address of
principal executive offices)
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(Zip
Code)
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(845)
802-7900
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common
Stock
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NASDAQ
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No
☒
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
☒ No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
☒
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer”” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer ☐
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Accelerated filer
☐
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Non-accelerated
☐ (Do not check if a smaller reporting company)
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Smaller reporting
company ☒
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30,
2016, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $54,758,366
based on the closing sale price as reported on the NASDAQ Capital
Market. As of March 13, 2017, there were 10,621,367 shares of
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
INDEX
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Page
No.
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Forward-Looking
Statements
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2
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PART
I
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Item
1.
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Business.
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3
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Item
1A.
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Risk
Factors.
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21
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Item
1B.
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Unresolved Staff
Comments.
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21
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Item
2.
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Properties.
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21
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Item
3.
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Legal
Proceedings.
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21
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Item
4.
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Mine Safety
Disclosures.
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21
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PART
II
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Item
5.
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Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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22
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Item
6.
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Selected Financial
Data.
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23
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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23
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Item
7A.
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Quantitative and
Qualitative Disclosures About Market Risk.
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63
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Item
8.
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Financial
Statements and Supplementary Data.
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63
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Item
9.
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Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure.
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63
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Item
9A.
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Controls and
Procedures.
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63
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Item
9B.
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Other
Information.
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64
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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65
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Item
11.
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Executive
Compensation.
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69
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Item
12.
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Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters.
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72
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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75
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Item
14.
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Principal
Accountant Fees and Services.
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75
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PART
IV
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Item
15.
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Exhibits and
Financial Statement Schedules.
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76
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Item
16.
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Form 10-K
Summary.
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77
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Signatures
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78
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1
Forward-Looking Statements
This Annual Report
contains forward-looking statements as that term is defined in the
federal securities laws. The events described in forward-looking
statements contained in this Annual Report may not occur. Generally
these statements relate to business plans or strategies, projected
or anticipated benefits or other consequences of our plans or
strategies, projected or anticipated benefits from acquisitions to
be made by us, or projections involving anticipated revenues,
earnings or other aspects of our operating results. The words
“may,” “will,” “expect,”
“believe,” “anticipate,”
“project,” “plan,” “intend,”
“estimate,” and “continue,” and their
opposites and similar expressions are intended to identify
forward-looking statements. We caution you that these statements
are not guarantees of future performance or events and are subject
to a number of uncertainties, risks and other influences, many of
which are beyond our control, which may influence the accuracy of
the statements and the projections upon which the statements are
based. Factors which may affect our results include, but are not
limited to, the risks and uncertainties discussed in Item 7 of this
Annual Report under “Factors That May Affect Future Results
and Financial Condition”.
Any one or more of
these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual
results, performance and achievements could differ materially from
those expressed or implied in these forward-looking statements. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future
events or otherwise.
2
(a)
Business
Development
General
As used in this
Annual Report on Form 10-K (the “Annual Report”),
references to the “Company”, “we”,
“us”, or “our” refer to Kingstone
Companies, Inc. (“Kingstone”) and its
subsidiaries.
We offer property
and casualty insurance products to individuals and small businesses
in New York State through our wholly owned subsidiary, Kingstone
Insurance Company (“KICO”). KICO is a licensed property
and casualty insurance company in New York, New Jersey,
Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO
writes substantially all of its business in New York.
Recent
Developments
Developments During 2017
●
Public
Offering of Common Stock
In January and
February 2017, we sold a total of 2,692,500 newly issued shares of
common stock in a public offering at a public offering price of
$12.00 per share. We received net proceeds from the public offering
of approximately $30,230,000 after deducting underwriting discounts
and commissions, and other offering expenses. Concurrently, selling
shareholders sold a total of 700,000 shares of our common stock. On
March 1, 2017, we used $23,000,000 of the net proceeds from the
offering to contribute capital to KICO in support of our ratings
upgrade plan and anticipated growth, including geographic and
product expansion. A registration statement relating to the shares
that were sold was filed with the Securities and Exchange
Commission and became effective in January 2017.
Developments During 2016
●
Expanded
Licensing to Additional State; New Jersey Rate
Approval
In 2016, KICO
expanded its ability to write property and casualty insurance by
obtaining a license to write insurance policies in Rhode Island.
Also in 2016, KICO’s Homeowners insurance rate, rule, and
policy form filing was approved by the New Jersey Department of
Banking and Insurance. We anticipate to start writing business in
New Jersey in the first half of 2017.
●
A.M.
Best Rating
In 2016, A.M. Best
revised the outlook to positive from stable for the issuer credit
rating (“ICR”) of KICO. A.M. Best also affirmed
KICO’s financial strength rating of B++ (Good) and ICR of
“bbb”, and affirmed our ICR of
“bb”.
3
●
Increased Catastrophe Reinsurance
Coverage
Effective July 1,
2016, KICO increased the top limit of its catastrophe reinsurance
coverage to $252,000,000, which equates to more than a 1-in-250
year storm event according to the primary industry catastrophe
model that we follow.
●
Continued
Quarterly Dividends
Dividends of $.0625
per share were declared on each of February 8, 2016, May 12, 2016,
August 11, 2016 and November 10, 2016 and were paid on March 15,
2016, June 15, 2016, September 15, 2016, and December 15, 2016,
respectively.
●
Private
Placement of Common Stock
In April 2016,
we sold
595,238 newly issued shares of common stock to RenaissanceRe
Ventures Ltd., a subsidiary of RenaissanceRe Holdings Ltd.
(“RenaissanceRe”), for a purchase price of $8.40 per
share. We received $4,808,000 in net proceeds from the sale.
RenaissanceRe is a global provider of catastrophe and specialty
reinsurance and insurance.
Developments During 2015
●
Reduced
Reliance on Quota Share Reinsurance
Effective July 1,
2015, KICO reduced the ceding percentage for its personal lines
quota share reinsurance treaty from 55% to 40%. In addition, the
treaty structure was changed from a ‘gross’ to a
‘net’ basis meaning that KICO now pays the entire cost
of catastrophe reinsurance instead of sharing the cost and benefit
of this reinsurance with quota share reinsurers. The reduction of
the quota share ceding percentage allows KICO to retain a higher
portion of its premiums.
●
Implemented
Electronic Content Management and Workflow System
In July 2015, KICO
implemented Vertafore’s ImageRight® software, an
insurance industry leading electronic content management and
workflow system. The new software enhancement has streamlined
underwriting and claims processes and created a less
paper-intensive environment, allowing for greater efficiency and
increased production to support KICO’s continued
growth.
●
Expanded
Licensing to Additional States
In 2015, KICO
expanded its ability to write property and casualty insurance by
obtaining licenses to write insurance policies in New Jersey,
Connecticut and Texas.
●
A.M.
Best Rating
In 2015, the A.M.
Best financial strength rating for KICO was upgraded from B+ (Good)
to B++ (Good).
●
Increased
Rate of Dividends Declared
4
In November 2015,
we increased the quarterly dividends on our common stock from $.05
per share to $.0625 per share. Dividends of $.05 per share were
declared on each of February 6, 2015, May 12, 2015 and August 11,
2015 and were paid on March 13, 2015 and June 15, 2015 and
September 14, 2015, respectively. A dividend of $.0625 per share
was declared on November 10, 2015 and was paid on December 14,
2015.
(b)
Business
Property
and Casualty Insurance
Overview
Generally, property
and casualty insurance companies write insurance policies in
exchange for premiums paid by their customers (the
“insureds”). An insurance policy is a contract between
the insurance company and its insureds where the insurance company
agrees to pay for losses suffered by the insured that are covered
under the contract. Such contracts are subject to legal
interpretation by courts, sometimes involving legislative rulings
and/or arbitration. Property insurance generally covers the
financial consequences of accidental losses to the insured’s
property, such as a home and the personal property in it, or a
business’ building, inventory and equipment. Casualty
insurance (often referred to as liability insurance) generally
covers the financial consequences related to the legal liability of
an individual or an organization resulting from negligent acts and
omissions causing bodily injury and/or property damage to a third
party. Claims for property coverage generally are reported and
settled in a relatively short period of time, whereas those for
casualty coverage can take many years to settle.
We generate
revenues from earned premiums, ceding commissions from quota share
reinsurance, net investment income generated from our investment
portfolio, and net realized gains and losses on investment
securities. We also receive installment fee income and fees charged
to reinstate a policy after it has been cancelled for non-payment.
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 life of the policy). A
significant period of time can elapse between the receipt of
insurance premiums and 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.
Insurance companies
incur a significant amount of their total expenses from
policyholder losses, which are commonly referred to as claims. In
settling policyholder losses, various loss adjustment expenses
(“LAE”) are incurred such as insurance adjusters’
fees and legal expenses. In addition, insurance companies incur
policy acquisition expenses, such as commissions paid to producers
and premium taxes, and other expenses related to the underwriting
process, including their employees’ compensation and
benefits.
The key measure of
relative underwriting performance for an insurance company is the
combined ratio. An insurance company’s combined ratio is
calculated by adding the ratio of incurred loss and LAE to earned
premiums (the “loss and LAE ratio”) to the ratio of
policy acquisition and other underwriting expenses to earned
premiums (the “expense ratio”). A combined ratio under
100% indicates that an insurance company is generating an
underwriting profit prior to the impact of investment income. After
considering investment income and investment gains or losses,
insurance companies operating at a combined ratio of greater than
100% can also be profitable.
5
General;
Strategy
We are a
property and casualty insurance holding company whose principal
operating subsidiary is Kingstone Insurance Company
(“KICO”), domiciled in the State of New York. We are a
multi-line regional property and casualty insurance company writing
business exclusively through independent retail and wholesale
agents and brokers (“producers”). We are licensed to
write insurance policies in New York, New Jersey, Connecticut,
Pennsylvania, Rhode Island and Texas.
We seek to deliver
an attractive return on capital and to provide consistent earnings
growth through underwriting profits and income from our investment
portfolio. Our goal is to allocate capital efficiently to those
lines of business that generate sustainable underwriting profits
and to avoid lines of business for which an underwriting profit is
not likely. Our strategy is to be the preferred multi-line property
and casualty insurance company for selected producers in the
geographic markets in which we operate. We believe producers place
profitable business with us because we provide excellent,
consistent service to policyholders and claimants and provide a
consistent market with stable and competitive rate and commission
structures. We offer a wide array of personal and commercial lines
policies, which further differentiates us from other insurance
companies that also distribute through our selected
producers.
Our principal
objectives are to increase the volume of profitable business that
we write while managing risk through prudent use of reinsurance in
order to preserve and grow our capital base. We seek to generate
underwriting income by writing profitable insurance policies and by
effectively managing our other underwriting and operating expenses.
We are pursuing profitable growth by selectively expanding the
geographic regions in which we operate, increasing the volume of
business that we write with existing producers, developing new
selected producer relationships, and introducing niche insurance
products that are relevant to our producers and
policyholders.
For
the year ended December 31, 2016, our gross written premiums
totaled $103.2 million, an increase of 13.4% from the $91.0 million
in gross written premium for the year ended December 31, 2015. For
the year ended December 31, 2016, our gross written premiums from
our continuing lines of business grew by 14.0% compared to the year
ended December 31, 2015.
Product Lines
Our product lines
include the following:
Personal lines -
Our largest line of
business is personal lines, consisting of homeowners, dwelling
fire, 3-4 family dwelling package, cooperatives and condominiums,
renters, equipment breakdown, service line and personal umbrella
policies. Personal lines policies accounted for 76.8% of our gross
written premiums for the year ended December 31, 2016.
Commercial liability -
We offer
businessowners policies which consist primarily of small business
retail, service and office risks without a residential exposure. We
also write artisan’s liability policies for small independent
contractors with seven or fewer employees. In addition, we
write special multi-peril policies for larger and more specialized
businessowners risks, including those with limited residential
exposures. In the fourth quarter of 2016, we began offering
commercial umbrella policies written above our supporting
commercial lines policies. Commercial lines policies accounted for
12.4% of our gross written premiums for the year ended December 31,
2016.
6
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. These policies accounted for 10.6% of
our gross written premiums for the year ended December 31,
2016.
Other -
We write canine legal liability
policies and also have a small participation in mandatory state
joint underwriting associations. These policies accounted for 0.2%
of our gross written premiums for the year ended December 31,
2016.
Our Competitive Strengths
History of Growing Our Profitable Operations
Our insurance
company subsidiary, KICO, has been in operation in the State of New
York for 130 years. We have consistently increased the volume of
profitable business that we write by introducing new insurance
products, increasing the volume of business that we write with our
selected producers and developing new producer relationships. KICO
has earned an underwriting profit in each of the past ten years,
including in 2012 and 2013 when our financial results were
adversely impacted by Superstorm Sandy. The extensive heritage of
our insurance company subsidiary and our commitment to the markets
in which we operate is a competitive advantage with producers and
policyholders.
Strong Producer Relationships
Within our selected
producers’ offices, we compete with other property and
casualty insurance carriers available to those producers. We
carefully select the producers that distribute our insurance
policies and continuously monitor and evaluate their performance.
We believe our insurance producers value their relationships with
us because we provide excellent, consistent personal service
coupled with competitive rates and commission levels. We have
consistently been rated by insurance producers as above average in
the important areas of underwriting, claims handling and service.
In the biennial performance surveys conducted by the Professional
Insurance Agents of New York and New Jersey of its membership since
2010, KICO was rated as one of the top performing insurance
companies in New York, twice ranking as the top rated carrier among
all those surveyed.
We offer our
selected producers the ability to write a wide array of personal
lines and commercial lines policies, including some which are
unique to us. Many of our producers write multiple lines of
business with us which provides an advantage over those competitors
who are focused on a single product. We provide a multi-policy
discount on homeowners policies in order to attract and retain more
of this multi-line business. We have had a consistent presence in
the New York market and we believe that producers value the
longevity of our relationship with them. We believe that the
excellent service we provide to our selected producers, our broad
product offerings, and our consistent market presence provide a
strong foundation for continued profitable growth.
Sophisticated Underwriting and Risk Management
Practices
We believe that we
have a significant underwriting advantage due to our local market
presence and expertise. Our underwriting process evaluates and
screens out certain risks based on property reports, individual
insurance scoring, information collected from physical property
inspections, and driving records. We maintain certain policy
exclusions that reduce our exposure to risks that can create severe
losses. We target a more preferred risk profile in order to reduce
adverse selection from risks seeking the lowest premiums by
selecting only minimal coverage levels.
7
Our underwriting
procedures, premium rates and policy terms support the underwriting
profitability of our personal lines policies. We apply premium
surcharges for certain coastal properties and maintain deductibles
for hurricane-prone exposures in order to provide an appropriate
premium rate for the risk of loss. We manage coastal risk exposure
through the use of individual catastrophe risk scoring and through
prudent use of reinsurance.
Our underwriting
expertise and risk management practices enable us to profitably
write personal and commercial lines business in our markets without
the need for frequent rate adjustments, in contrast to many of our
competitors. We believe that the consistency in rates and the
reliable availability of our insurance products are important
factors in maintaining our selected producer
relationships.
Effective Utilization of Reinsurance
Our reinsurance
treaties allow us to limit our exposure to the financial impact of
catastrophe losses and to reduce our net liability on individual
risks. Our reinsurance program is structured to enable us to grow
our premium volume while maintaining regulatory capital and other
financial ratios within thresholds used for regulatory oversight
purposes.
Our reinsurance
program also provides income as a result of ceding commissions
earned pursuant to the quota share reinsurance contracts. The
income we earn from ceding commissions typically exceeds our fixed
operating costs, which consist of other underwriting expenses.
Quota share reinsurance treaties transfer a portion of the profit
(or loss) associated with the subject insurance policies to the
reinsurers. We believe that a prudent reduction in our reliance on
quota share reinsurance could increase our overall net underwriting
profits
and
improve our ability to obtain an upgrade to our financial strength
rating from A.M. Best.
Experienced Management Team
Our management team
has significant expertise in underwriting, agency management and
claims management. Barry Goldstein, our Chairman and Chief
Executive Officer, has extensive experience in the insurance
industry and managing public companies, serving in his current
capacity since 2001. Benjamin Walden, Executive Vice President and
Chief Actuary of KICO, has 27 years of experience with both large
and small insurance carriers and has also worked for actuarial
consulting firms. Throughout his career, he has specialized in many
of the markets that are a primary focus for KICO. Our underwriting
and claims managers have extensive experience in the insurance
industry with an average of 27 years of experience.
Scalable, Low-Cost Operations
We focus on
keeping expenses low, but invest in tools and processes that
improve the efficiency and effectiveness of underwriting risks and
processing claims. We evaluate the costs and benefits of each new
tool or process in order to achieve optimal results. While the
majority of our policies are written for risks in downstate New
York, our Kingston, New York location provides a significantly
lower cost operating environment. We also take a proactive approach
to settling outstanding claims rather than engaging in protracted
litigation, which results in more favorable claim outcomes and
reduced reserve uncertainty.
8
We have made
investments to develop online application and quoting systems for
many of our personal lines and commercial products. Currently, 98%
of the business submitted to KICO comes from online raters. This
has resulted in increased business submissions from our producers
due to the greater ease of placing business with us. We plan to
expand these online capabilities to all lines of business. We have
also leveraged a paperless workflow management and document storage
tool in order to further improve efficiency and reduce costs. Our
ability to control the growth of our operating and other expenses
while expanding our operations and growing revenue at a higher rate
is a key component of our business model and is important to our
future financial success.
Underwriting and Claims Management Philosophy
Our underwriting
philosophy is to target niche risk segments for which we have
detailed expertise and can take advantage of market conditions. We
monitor results on a regular basis and all of our selected
producers are reviewed by management on a quarterly
basis.
We believe that our
rates are competitive with other carriers’ rates in our
markets. We believe that rate consistency and the reliable
availability of our insurance products is important to our
producers. We do not seek to grow by competing based solely
upon price. We seek to develop long-term relationships with
our selected producers who understand and appreciate the consistent
path we have chosen. We carefully underwrite our business
utilizing the CLUE industry claims database, insurance scoring
reports, physical inspection of risks and other individual risk
underwriting tools. In the event that a material misrepresentation
is discovered in the underwriting application, the policy is
voided. If a material misrepresentation is discovered after a claim
is presented, we deny the claim. We write homeowners and dwelling
fire business in New York City and Long Island and are cognizant of
our exposure to hurricanes. We have mitigated this risk through
application of mandatory hurricane deductibles in these areas. Our
claim and underwriting expertise enables us to profitably write
personal lines business in all areas of New York City and Long
Island.
Distribution
We generate
business through our relationships with over 350 independent
producers. We carefully select our producers by evaluating several
factors such as their need for our products, premium production
potential, loss history with other insurance companies that they
represent, product and market knowledge, and the size of the
agency. We only distribute through independent agents and have
never sought to distribute our products direct to the consumer. We
will not appoint any agency owned or controlled by another carrier
which distributes its products direct to the consumer. We monitor
and evaluate the performance of our producers through periodic
reviews of volume and profitability. Our senior executives are
actively involved in managing our producer
relationships.
Each producer is
assigned to a personal and commercial lines underwriter and the
producer can call that underwriter directly on any matter. We
believe that the close relationship with their underwriters is a
principal reason producers place their business with us. Our online
application and quoting systems have streamlined the process of
placing business with KICO. Our producers have access to a KICO
website portal that contains links to our policy applications,
quoting screens, policy forms and underwriting guidelines for all
lines of business. We send out frequent electronic “Producer
Grams” in order to inform our producers of updates at KICO.
In addition, we have an active Producer Council and have at least
one annual meeting with all of our producers.
9
Competition; Market
The insurance
industry is highly competitive. We constantly assess and project
the market conditions and prices for our products, but we cannot
fully know our profitability until all claims have been reported
and settled.
Our policyholders
are located primarily in New York State. Our market primarily
consists of New York City, Long Island and Westchester County,
which we collectively define as downstate New York. We also offer
property and casualty insurance products in other areas of New York
State and in the Commonwealth of Pennsylvania. In addition, we are
licensed to write insurance policies in New Jersey, Connecticut,
Rhode Island and Texas. KICO’s Homeowners insurance rate,
rule and policy form filing was approved by the New Jersey
Department of Banking and Insurance in October 2016. We anticipate
we will start writing business in New Jersey in the first half of
2017
.
New Jersey is
the eleventh largest state in the country with a current estimated
population of approximately 8.9 million, according to the U.S.
Census Bureau. New Jersey is the seventh largest property and
casualty insurance market in the U.S., and also the tenth largest
homeowners and dwelling fire insurance market in the U.S. The New
Jersey homeowners market aligns well with the niche markets that
have generated profitable results in New York, and we believe that
our market expertise can be effectively transferred to this new
market.
New York State is
the fourth largest property and casualty insurance market in the
U.S. and also the fourth largest homeowners and dwelling fire
insurance market in the U.S. In 2015, KICO was the 16th largest
writer of homeowners and dwelling fire insurance in the State of
New York, according to data compiled by SNL Financial LC. Based on
the same data, in 2015, we had a 1.0% market share for this
combined group of personal lines property business. We compete with
large national carriers as well as regional and local carriers in
the property and casualty marketplace in New York. We believe that
many national and regional carriers have chosen to limit their rate
of premium growth or to decrease their presence in the downstate
New York property insurance market and other similar property
insurance markets in northeastern states due to the relatively high
coastal population and associated catastrophe risk that exists in
the region.
Given present
market conditions, we believe that we have the opportunity to
significantly expand the size of our personal and commercial lines
business in both New York and in the other northeastern states in
which we are licensed, beginning with New Jersey.
Loss and Loss Adjustment Expense Reserves
We are required to
establish reserves for incurred losses that are unpaid, including
reserves for claims and loss adjustment expenses
(“LAE”), which represent the expenses of settling and
adjusting those claims. These reserves are balance sheet
liabilities representing estimates of future amounts required to
pay losses and loss expenses for claims that have occurred at or
before the balance sheet date, whether already known to us or not
yet reported. We establish these reserves after considering all
information known to us as of the date they are
recorded.
Loss reserves fall
into two categories: case reserves for reported losses and LAE
associated with specific reported claims, and reserves for losses
and LAE that are incurred but not reported (“IBNR”). We
establish these two categories of loss reserves as
follows:
10
Reserves for reported losses
- When a
claim is received, we establish a case reserve for the estimated
amount of its ultimate settlement and its estimated loss expenses.
We establish case reserves based upon the known facts about each
claim at the time the claim is reported and we may subsequently
increase or reduce the case reserves as additional facts and
information about each claim develops.
IBNR reserves
- We also estimate and
establish reserves for loss and LAE amounts incurred but not yet
reported. IBNR reserves are calculated in bulk as an estimate of
ultimate losses and LAE less reported losses and LAE. There are two
types of IBNR. One type includes a provision for claims that have
occurred but are not yet reported or known. Another type of IBNR
provides a provision for expected future development on known
claims from the evaluation date until the time claims are settled
and closed. Ultimate losses driving the determination of
appropriate IBNR levels are projected by using generally accepted
actuarial techniques.
The
liability for loss and LAE represents our best estimate of the
ultimate cost of all reported and unreported losses that are unpaid
as of the balance sheet date. The liability for loss and LAE is
estimated on an undiscounted basis, using individual case-basis
valuations, statistical analyses and various actuarial procedures.
The projection of future claim payment and reporting is based on an
analysis of our historical experience, supplemented by analyses of
industry loss data. We believe that the reserves for loss and LAE
are adequate to cover the ultimate cost of losses and claims to
date; however, because of the uncertainty from various sources,
including changes in reporting patterns, claims settlement
patterns, judicial decisions, legislation, and economic conditions,
actual loss experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the balance
sheet date. As adjustments to these estimates become necessary,
such adjustments are reflected in expense for the period in which
the estimates are changed. Because of the nature of the business
historically written, we believe that we have limited exposure to
asbestos and environmental claim liabilities.
We engage an
independent external actuarial specialist (the ‘Appointed
Actuary’) to opine on our recorded statutory reserves. The
Appointed Actuary estimates a range of ultimate losses, along with
a range and recommended central estimate of IBNR reserve amounts.
Our carried IBNR reserves are based on an internal actuarial
analysis and reflect management’s best estimate of unpaid
loss and LAE liabilities.
11
Reconciliation of Loss and Loss Adjustment Expenses
The
table below shows the reconciliation of loss and LAE on a gross and
net basis, reflecting changes in losses incurred and paid
losses:
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Balance
at beginning of period
|
$
39,876,500
|
$
39,912,683
|
|
Less
reinsurance recoverables
|
(16,706,364
)
|
(18,249,526
)
|
|
Net
balance, beginning of period
|
23,170,136
|
21,663,157
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
Current
year
|
27,853,010
|
23,642,998
|
|
Prior
years
|
(63,349
)
|
(462,998
)
|
|
Total
incurred
|
27,789,661
|
23,180,000
|
|
|
|
|
|
Paid
related to:
|
|
|
|
Current
year
|
16,496,648
|
13,172,870
|
|
Prior
years
|
8,503,310
|
8,500,151
|
|
Total
paid
|
24,999,958
|
21,673,021
|
|
|
|
|
|
Net
balance at end of period
|
25,959,839
|
23,170,136
|
|
Add
reinsurance recoverables
|
15,776,880
|
16,706,364
|
|
Balance
at end of period
|
$
41,736,719
|
$
39,876,500
|
Our
claims reserving practices are designed to set reserves that, in
the aggregate, are adequate to pay all claims at their ultimate
settlement value.
Loss and Loss Adjustment Expenses Development
The
table below shows the net loss development for business written
each year from 2006 through 2016. The table reflects the changes in
our loss and loss adjustment expense reserves in subsequent years
from the prior loss estimates based on experience as of the end of
each succeeding year.
The
next section of the table sets forth the re-estimates in later
years of incurred losses, including payments for the years
indicated. The following section of the table shows by year, the
cumulative amounts of loss and loss adjustment expense payments,
net of amounts recoverable from reinsurers, as of the end of each
succeeding year. For example, with respect to the net loss reserves
of $4,370,000 as of December 31, 2006, by December 31, 2008 (two
years later), $3,303,000 had actually been paid in settlement of
the claims that relate to liabilities as of December 31,
2006.
The
“cumulative redundancy (deficiency)” represents, as of
December 31, 2016, the difference between the latest re-estimated
liability and the amounts as originally estimated. A redundancy
means that the original estimate was higher than the current
estimate. A deficiency means that the current estimate is higher
than the original estimate. Estimates for the liabilities in place
as of December 31, 2014 and December 31, 2015 have both developed
favorably relative to initial estimates.
12
|
(in thousands of $)
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
Reserve
for loss and loss adjustment expenses, net of reinsurance
recoverables
|
4,370
|
4,799
|
5,823
|
6,001
|
7,280
|
8,520
|
12,065
|
17,139
|
21,663
|
23,170
|
25,960
|
|
Net
reserve estimated as of One year later
|
4,844
|
5,430
|
6,119
|
6,235
|
7,483
|
9,261
|
13,886
|
18,903
|
21,200
|
23,107
|
|
|
Two
years later
|
5,591
|
5,867
|
6,609
|
6,393
|
8,289
|
11,022
|
16,875
|
18,332
|
21,501
|
|
|
|
Three
years later
|
5,792
|
6,433
|
6,729
|
6,486
|
9,170
|
12,968
|
16,624
|
18,687
|
|
|
|
|
Four
years later
|
6,260
|
6,569
|
6,711
|
7,182
|
10,128
|
12,552
|
16,767
|
|
|
|
|
|
Five
years later
|
6,343
|
6,683
|
7,261
|
7,766
|
9,925
|
12,440
|
|
|
|
|
|
|
Six
years later
|
6,429
|
7,245
|
7,727
|
7,602
|
9,932
|
|
|
|
|
|
|
|
Seven
years later
|
6,886
|
7,721
|
7,554
|
7,615
|
|
|
|
|
|
|
|
|
Eight
years later
|
7,318
|
7,568
|
7,511
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
7,160
|
7,527
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
7,069
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative redundancy (deficiency)
|
(2,699
)
|
(2,728
)
|
(1,688
)
|
(1,614
)
|
(2,652
)
|
(3,920
)
|
(4,702
)
|
(1,548
)
|
162
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of $)
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
Cumulative
amount of reserve paid, net of reinsurance recoverable
through
|
|
|
|
|
|
||||||
|
One
year later
|
2,018
|
1,855
|
2,533
|
2,307
|
3,201
|
3,237
|
4,804
|
6,156
|
8,500
|
8,503
|
|
|
Two
years later
|
3,303
|
3,339
|
3,974
|
3,992
|
4,947
|
5,661
|
8,833
|
10,629
|
12,853
|
|
|
|
Three
years later
|
4,036
|
4,339
|
5,054
|
4,659
|
6,199
|
8,221
|
11,873
|
13,571
|
|
|
|
|
Four
years later
|
4,471
|
5,146
|
5,373
|
5,238
|
7,737
|
10,100
|
13,785
|
|
|
|
|
|
Five
years later
|
5,079
|
5,424
|
5,717
|
5,997
|
8,585
|
10,903
|
|
|
|
|
|
|
Six
years later
|
5,305
|
5,738
|
6,224
|
6,562
|
8,941
|
|
|
|
|
|
|
|
Seven
years later
|
5,594
|
6,247
|
6,718
|
6,749
|
|
|
|
|
|
|
|
|
Eight
years later
|
5,966
|
6,740
|
6,853
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
6,377
|
6,875
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
6,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserve -
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
4,370
|
4,799
|
5,823
|
6,001
|
7,280
|
8,520
|
12,065
|
17,139
|
21,663
|
23,170
|
25,960
|
|
*
Reinsurance Recoverable
|
6,523
|
6,693
|
9,766
|
10,512
|
10,432
|
9,960
|
18,420
|
17,364
|
18,250
|
16,707
|
15,777
|
|
*
Gross reserves -
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
10,893
|
11,492
|
15,589
|
16,513
|
17,712
|
18,480
|
30,485
|
34,503
|
39,913
|
39,877
|
41,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
re-estimated reserve
|
7,069
|
7,527
|
7,511
|
7,615
|
9,932
|
12,440
|
16,767
|
18,687
|
21,501
|
23,107
|
|
|
Re-estimated
reinsurance recoverable
|
11,183
|
11,151
|
12,849
|
12,833
|
13,486
|
13,884
|
27,970
|
20,218
|
19,450
|
16,674
|
|
|
Gross
re-estimated reserve
|
18,252
|
18,678
|
20,360
|
20,448
|
23,418
|
26,324
|
44,737
|
38,905
|
40,951
|
39,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
cumulative redundancy (deficiency)
|
(7,359
)
|
(7,186
)
|
(4,771
)
|
(3,935
)
|
(5,706
)
|
(7,844
)
|
(14,252
)
|
(4,402
)
|
(1,038
)
|
96
|
|
See “
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
–
Factors That May Affect
Future Results and Financial Condition” in Item 7 of this
Annual Report.
13
Reinsurance
We
purchase reinsurance to reduce our net liability on individual
risks, to protect against possible catastrophes, to remain within a
target ratio of net premiums written to policyholders’
surplus, and to expand our underwriting capacity. Participation in
reinsurance arrangements does not relieve us from our obligations
to policyholders. Our reinsurance program is structured to reflect
our obligations and goals.
Reinsurance
via quota share allows for a carrier to write business without
increasing its underwriting leverage above a ratio determined by
management. The business written under a quota share
reinsurance structure obligates a reinsurer to assume some portion
of the risks involved, and gives the reinsurer the profit (or loss)
associated with such in exchange for a ceding commission. We
have determined it to be in the best interests of our shareholders
to prudently reduce our reliance on quota share reinsurance.
This will result in higher earned premiums and a reduction in
ceding commission revenue in future years, but will allow us to
retain more net income from our profitable business.
Our
quota share reinsurance treaties in effect for the year ended
December 31, 2016 for our personal lines business, which primarily
consists of homeowners’ policies, were covered under the July
1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”)
and July 1, 2016/June 30, 2017 treaty year (“2016/2017
Treaty”). The expired 2015/2016 Treaty was at a 40% quota
share percentage and the current 2016/2017 Treaty remains at a 40%
quota share percentage.
Excess
of loss contracts provide coverage for individual loss occurrences
exceeding a certain threshold. The quota share reinsurance treaties
inure to the benefit of our excess of loss treaties, as the maximum
net retention on any single risk occurrence is first limited
through the excess of loss treaty, and then that loss is shared
again through the quota share reinsurance treaty. Our maximum net
retention under the quota share and excess of loss treaties for any
one personal lines occurrence for dates of loss on or after July 1,
2016 is $500,000. Commercial lines policies are not subject to a
quota share reinsurance treaty. Our maximum net retention under the
excess of loss treaties for any one commercial general liability
occurrence for dates of loss on or after July 1, 2016 is
$500,000.
We
earn ceding commission revenue under the quota share reinsurance
treaties based on a provisional commission rate on all premiums
ceded to the reinsurers as adjusted by a sliding scale based on the
ultimate treaty year loss ratios on the policies reinsured under
each agreement. The sliding scale provides minimum and maximum
ceding commission rates in relation to specified ultimate loss
ratios.
Under
the 2016/2017 Treaty and 2015/2016 Treaty, KICO is receiving a
higher upfront fixed provisional rate than in prior years’
treaties. In exchange for the higher provisional rate, KICO has a
reduced opportunity to earn sliding scale contingent
commissions.
The
2016/2017 Treaty and the 2015/2016 Treaty are on a
“net” of catastrophe reinsurance basis, as opposed to
the “gross” arrangement that existed in prior treaties.
Under a “net” arrangement, all catastrophe reinsurance
coverage is purchased directly by us. Since we pay for all of the
catastrophe coverage, none of the losses covered under a
catastrophic event will be included in the quota share ceded
amounts, drastically reducing the adverse impact that a
catastrophic event can have on ceding commissions.
In
2016, we purchased catastrophe reinsurance to provide coverage of
up to $252,000,000 for losses associated with a single event. One
of the most commonly used catastrophe forecasting models prepared
for us indicates that the catastrophe reinsurance treaties provide
coverage in excess of our estimated probable maximum loss
associated with a single more than one-in-250 year storm event. The
direct retention for any single catastrophe event is $5,000,000.
Losses on personal lines policies are subject to the 40% quota
share treaty, which results in a net retention by us of $3,000,000
of exposure per catastrophe occurrence. Effective July 1, 2016, we
have reinstatement premium protection on the first $20,000,000
layer of catastrophe coverage in excess of $5,000,000. This
protects us from having to pay an additional premium to reinstate
catastrophe coverage for an event up to this level.
14
Investments
Our
investment portfolio, including cash and cash equivalents, and
short term investments, as of December 31, 2016 and 2015, is
summarized in the table below by type of investment.
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
Carrying
|
% of
|
Carrying
|
% of
|
|
Categor
y
|
Value
|
Portfolio
|
Value
|
Portfolio
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
12,044,520
|
11.2
%
|
$
13,551,372
|
15.0
%
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
corporations
and agencies
|
606,427
|
0.6
%
|
606,389
|
0.7
%
|
|
|
|
|
|
|
|
Political
subdivisions of states,
|
|
|
|
|
|
territories
and possessions
|
1,349,916
|
1.3
%
|
1,417,679
|
1.6
%
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
Industrial
and miscellaneous
|
3,138,559
|
2.9
%
|
3,114,804
|
3.4
%
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
Political
subdivisions of states,
|
|
|
|
|
|
territories
and possessions
|
8,205,888
|
7.6
%
|
12,555,098
|
13.9
%
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
Industrial
and miscellaneous
|
53,685,189
|
49.9
%
|
44,956,468
|
49.7
%
|
|
|
|
|
|
|
|
Residential
backed mortgage securities
|
18,537,751
|
17.2
%
|
4,990,498
|
5.5
%
|
|
|
|
|
|
|
|
Preferred
stocks
|
5,685,001
|
5.3
%
|
2,915,650
|
3.2
%
|
|
|
|
|
|
|
|
Common
stocks
|
4,302,685
|
4.0
%
|
6,288,620
|
7.0
%
|
|
Total
|
$
107,555,936
|
100.0
%
|
$
90,396,578
|
100.0
%
|
15
The
table below summarizes the credit quality of our fixed-maturity
securities available-for-sale as of December 31, 2016 and 2015 as
rated by Standard and Poor’s (or if unavailable from Standard
and Poor’s, then Moody’s or Fitch):
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
|
Percentage of
|
|
Percentage of
|
|
|
Fair Market
|
Fair Market
|
Fair Market
|
Fair Market
|
|
|
Value
|
Value
|
Value
|
Value
|
|
|
|
|
|
|
|
Rating
|
|
|
|
|
|
U.S.
Treasury securities
|
$
-
|
0.0
%
|
$
-
|
0.0
%
|
|
|
|
|
|
|
|
Corporate
and municipal bonds
|
|
|
|
|
|
AAA
|
1,801,106
|
2.2
%
|
2,218,147
|
3.5
%
|
|
AA
|
7,236,457
|
9.0
%
|
9,060,781
|
14.5
%
|
|
A
|
13,944,784
|
17.3
%
|
10,639,888
|
17.0
%
|
|
BBB
|
38,908,731
|
48.4
%
|
35,592,750
|
57.1
%
|
|
Total
corporate and municipal bonds
|
61,891,078
|
76.9
%
|
57,511,566
|
92.1
%
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
|
|
|
|
|
AA
|
14,143,828
|
17.7
%
|
-
|
0.0
%
|
|
A
|
173,973
|
0.2
%
|
216,077
|
0.3
%
|
|
CCC
|
513,369
|
0.6
%
|
457,889
|
0.7
%
|
|
CC
|
-
|
0.0
%
|
402,558
|
0.6
%
|
|
C
|
112,136
|
0.1
%
|
-
|
0.0
%
|
|
D
|
3,594,444
|
4.5
%
|
3,913,974
|
6.3
%
|
|
Total
residential mortgage backed securities
|
18,537,750
|
23.1
%
|
4,990,498
|
7.9
%
|
|
|
|
|
|
|
|
Total
|
$
80,428,828
|
100.0
%
|
$
62,502,064
|
100.0
%
|
Additional
financial information regarding our investments is presented under
the subheading “Investments” in Item 7 of this Annual
Report.
Ratings
Many insurance
buyers, agents, brokers and secured lenders use the ratings
assigned by A.M. Best and other agencies to assist them in
assessing the financial strength and overall quality of the
companies with which they do business and from which they are
considering purchasing insurance or in determining the financial
strength of the company that provides insurance with respect to the
collateral they hold. A.M. Best financial strength ratings are
derived from an in-depth evaluation of an insurance company’s
balance sheet strengths, operating performances and business
profiles. A.M. Best evaluates, among other factors, the
company’s capitalization, underwriting leverage, financial
leverage, asset leverage, capital structure, quality and
appropriateness of reinsurance, adequacy of reserves, quality and
diversification of assets, liquidity, profitability, spread of
risk, revenue composition, market position, management, market risk
and event risk. A.M. Best financial strength ratings are intended
to provide an independent opinion of an insurer’s ability to
meet its obligations to policyholders and are not an evaluation
directed at investors.
In 2009, KICO, our
operating subsidiary, applied for its initial A.M. Best rating, and
was assigned a letter rating of B (Fair) by A.M. Best in 2010.
KICO’s financial strength rating was upgraded to B+ (Good) in
2011 and B++ (Good) in 2015. KICO’s current A.M. Best issuer
credit rating is “bbb” with a positive
outlook.
16
In March, 2017, we
contributed $23,000,000 in capital to KICO in connection with our
recently completed public offering. We also have been considering
taking certain other actions, including modifying KICO’s
personal lines net quota share treaty and enhancing its catastrophe
excess of loss reinsurance treaties. We believe that such completed
and contemplated actions could lead to an upgrade of KICO’s
financial strength rating to “A- (Excellent)”. An A.M.
Best financial strength rating of A- (Excellent) or better could
create additional demand from new producers and policyholders. No
assurances can be given, however, that we will be able to satisfy
all of the conditions necessary to achieve a ratings upgrade. KICO
also has a Demotech financial stability rating of A (Exceptional)
which generally makes its policies acceptable to mortgage lenders
that require homeowners to purchase insurance from highly rated
carriers.
Severe Winter Weather
Our predominant
market, downstate New York, suffered severe weather during the
winters of 2016 and 2015
. We include
severe winter weather in our definition of catastrophe. The
catastrophe component of the 2016 and 2015 severe winter was
determined by the number of claims in excess of our threshold of
average claims from severe winter weather. These claims were
primarily from losses due to frozen pipes, weight of snow and ice,
and other water-related structural damage as a result of excess
snow and below normal temperatures for an extended period.
The effects of severe winter weather increased our net loss ratio
by 2.3 and 4.3 percentage points in 2016 and 2015,
respectively.
The computation to
determine contingent ceding commission revenue includes direct
catastrophe losses and loss adjustment expenses incurred from
severe winter weather. Such losses increased our ceded loss ratio
in our
July 1, 2014/June 30, 2015
personal lines
quota share treaties which reduced our
contingent ceding commission revenue by $1,300,000 million for the
year ended December 31, 2015. Catastrophe losses for 2016 had no
impact on our contingent ceding commission revenue since the
ultimate loss ratio used to determine these commissions was not
affected by the 2016 severe winter weather. Due to these impacts on
ceding commission levels, the effects of severe winter weather
increased our net underwriting expense ratio by 0.0 and 2.7
percentage points in 2016 and 2015, respectively.
Government Regulation
Holding Company Regulation
We,
as the parent of KICO, are subject to the insurance holding company
laws of the state of New York. These laws generally require an
insurance company to register with the New York State Department of
Financial Services (the “DFS”) and to furnish annually
financial and other information about the operations of companies
within our holding company system. Generally under these laws, all
material transactions among companies in the holding company system
to which KICO is a party must be fair and reasonable and, if
material or of a specified category, require prior notice and
approval or acknowledgement (absence of disapproval) by the
DFS.
17
Change of Control
The
insurance holding company laws of the state of New York require
approval by the DFS for any change of control of an insurer.
“Control” is generally defined as the possession,
direct or indirect, of the power to direct or cause the direction
of the management and policies of the company, whether through the
ownership of voting securities, by contract or otherwise. Control
is generally presumed to exist through the direct or indirect
ownership of 10% or more of the voting securities of a domestic
insurance company or any entity that controls a domestic insurance
company. Any future transactions that would constitute a change of
control of KICO, including a change of control of Kingstone
Companies, Inc., would generally require the party acquiring
control to obtain the approval of the DFS (and in any other state
in which KICO may operate). Obtaining these approvals may result in
the material delay of, or deter, any such transaction. These laws
may discourage potential acquisition proposals and may delay, deter
or prevent a change of control of Kingstone Companies, Inc.,
including through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might consider
to be desirable.
State Insurance Regulation
Insurance
companies are subject to regulation and supervision by the
department of insurance in the state in which they are domiciled
and, to a lesser extent, other states in which they conduct
business. The primary purpose of such regulatory powers is to
protect individual policyholders. State insurance authorities have
broad regulatory, supervisory and administrative powers, including,
among other things, the power to grant and revoke licenses to
transact business, set the standards of solvency to be met and
maintained, determine the nature of, and limitations on,
investments and dividends, approve policy forms and rates, and in
some instances to regulate unfair trade and claims
practices.
KICO
is required to file detailed financial statements and other reports
with the insurance regulatory authorities in the states in which it
is licensed to transact business. These financial statements are
subject to periodic examination by the insurance
regulators.
In
addition, many states have laws and regulations that limit an
insurer’s ability to withdraw from a particular market. For
example, states may limit an insurer’s ability to cancel or
not renew policies. Furthermore, certain states prohibit an insurer
from withdrawing from one or more lines of business written in the
state, except pursuant to a plan that is approved by the insurance
regulatory authority. The state regulator may disapprove a plan
that may lead to market disruption. Laws and regulations, including
those in New York, that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict the ability of KICO to exit unprofitable markets. Such
laws did not affect KICO’s ability to withdraw from the
commercial auto market in New York State.
Federal and State Legislative and Regulatory Changes
From
time to time, various regulatory and legislative changes have been
proposed in the insurance industry. Among the proposals that have
in the past been or at the present being considered are the
possible introduction of Federal regulation in addition to, or in
lieu of, the current system of state regulation of insurers, and
proposals in various state legislatures (some of which proposals
have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the National
Association of Insurance Commissioners (the
“NAIC”).
In
2016, the DFS proposed new comprehensive cybersecurity regulations.
In 2017, the regulations were finalized and became effective on
March 1, 2017 with transitional implementation periods. When fully
implemented, the regulations require covered entities, including
KICO, to establish a cybersecurity policy, a chief information
security officer, oversight over third party service providers,
penetration and vulnerability assessments, secure systems to
maintain an audit trail, risk assessments to include access
privileges to nonpublic information, use of multi-factor
authentication, and an incident response plan, among other
provisions. KICO has until August 28, 2017 to become compliant with
many of the provisions. Commencing February 15, 2018, and annually
thereafter, KICO must certify compliance to the DFS with the
applicable cybersecurity regulatory provisions.
18
In
2010, President Obama signed into law the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”) that established a Federal Insurance Office (the
“FIO”) within the U.S. Department of the Treasury. The
FIO is initially charged with monitoring all aspects of the
insurance industry (other than health insurance, certain long-term
care insurance and crop insurance), gathering data, and conducting
a study on methods to modernize and improve the insurance
regulatory system in the United States. In December 2013, the FIO
issued a report (as required under the Dodd-Frank Act) entitled
“How to Modernize and Improve the System of Insurance
Regulation in the United States” (the “Report”),
which stated that, given the “uneven” progress the
states have made with several near-term state reforms, should the
states fail to accomplish the necessary modernization reforms in
the near term, “Congress should strongly consider direct
federal involvement.” The FIO continues to support the
current state-based regulatory regime, but will consider federal
regulation should the states fail to take steps to greater
uniformity (e.g., federal licensing of insurers). In 2017, the new
President indicated that the provisions of this law should be
reviewed.
State Regulatory Examinations
As
part of their regulatory oversight process, state regulatory
authorities conduct periodic detailed examinations of the financial
reporting of insurance companies domiciled in their states,
generally once every three to five years. Examinations are
generally carried out in cooperation with the insurance regulators
of other states under guidelines promulgated by the NAIC. The New
York DFS commenced its examination of KICO in 2016. As of the date
of this Annual Report, the examination is still in
progress.
Risk-Based Capital Regulations
State
regulatory authorities impose risk-based capital
(“RBC”) requirements on insurance enterprises. The RBC
Model serves as a benchmark for the regulation of insurance
companies. RBC provides for targeted surplus levels based on
formulas, which specify various weighting factors that are applied
to financial balances or various levels of activity based on the
perceived degree of risk, and are set forth in the RBC
requirements. Such formulas focus on four general types of risk:
(a) the risk with respect to the company’s assets (asset
or default risk); (b) the risk of default on amounts due from
reinsurers, policyholders, or other creditors (credit risk);
(c) the risk of underestimating liabilities from business
already written or inadequately pricing business to be written in
the coming year (underwriting risk); and (d) the risk
associated with items such as excessive premium growth, contingent
liabilities, and other items not reflected on the balance sheet
(off-balance sheet risk). The amount determined under such formulas
is called the authorized control level RBC
(“ACL”).
The
RBC guidelines define specific capital levels based on a
company’s ACL that are determined by the ratio of the
company’s total adjusted capital (“TAC”) to its
ACL. TAC is equal to statutory capital, plus or minus certain other
specified adjustments. KICO’s TAC is far above the ACL and is
in compliance with New York’s RBC requirements as of December
31, 2016.
Dividend Limitations
Our ability to receive dividends from KICO is
restricted by the state laws and insurance regulations of New York.
These restrictions are related to surplus and net investment
income.
Dividends are restricted to the lesser of 10% of
surplus or 100% of investment income (on a statutory accounting
basis) for the trailing 36 months, less dividends by KICO paid
during such period.
19
Insurance Regulatory Information System Ratios
The
Insurance Regulatory Information System (“IRIS”) was
developed by the NAIC and is intended primarily to assist state
insurance regulators in meeting their statutory mandates to oversee
the financial condition of insurance companies operating in their
respective states. IRIS identifies thirteen industry ratios and
specifies “usual values” for each ratio. Departure from
the usual values on four or more of the ratios can lead to
inquiries from individual state insurance commissioners as to
certain aspects of an insurer’s business.
As
of December 31, 2016, KICO was within the usual range for all IRIS
ratios.
Accounting Principles
Statutory
accounting principles (“SAP”) are a basis of accounting
developed by the NAIC. They are used to prepare the statutory
financial statements of insurance companies and to assist insurance
regulators in monitoring and regulating the solvency of insurance
companies. SAP is primarily concerned with measuring an
insurer’s policyholder surplus. Accordingly, statutory
accounting focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with appropriate insurance
law and regulatory provisions applicable in each insurer’s
domiciliary state.
Generally
accepted accounting principles (“GAAP”) is concerned
with a company’s solvency, but is also concerned with other
financial measurements, principally income and cash flows.
Accordingly, GAAP gives more consideration to appropriate matching
of revenue and expenses and accounting for management’s
stewardship of assets than does SAP. As a direct result, different
types and amounts of assets and liabilities will be reflected in
financial statements prepared in accordance with GAAP as compared
to SAP.
Statutory
accounting practices established by the NAIC and adopted in part by
New York insurance regulators determine, among other things, the
amount of statutory surplus and statutory net income of KICO and
thus determine, in part, the amount of funds that are available to
Kingstone Companies, Inc. from which to pay dividends.
Legal
Structure
We
were incorporated in 1961 and assumed the name DCAP Group, Inc. in
1999. On July 1, 2009, we changed our name to Kingstone Companies,
Inc.
Offices
Our principal executive offices are located at 15
Joys Lane, Kingston, New York 12401, and our telephone number is
(845) 802-7900.
Our insurance underwriting business is
located principally at 15 Joys Lane, Kingston, New York 12401. Our
insurance underwriting business maintains an executive office
located at 70 East Sunrise Highway, Valley Stream, New York 11581.
Our website is
www.kingstonecompanies.com. Our internet website and the
information contained therein or connected thereto are not intended
to be incorporated by reference into this Annual
Report.
Employees
As
of December 31, 2016, we had 80 employees all of whom are located
in New York. None of our employees are covered by a collective
bargaining agreement. We believe that our relationship with our
employees is good.
20
Not applicable.
See, however, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors
That May Affect Future Results and Financial Condition” in
Item 7 of this Annual Report.
Not
applicable.
Our principal
executive offices are currently located at
15 Joys Lane, Kingston, New York 12401
. Our
insurance underwriting business is located principally at 15 Joys
Lane, Kingston, New York 12401. Our insurance underwriting business
also maintains an executive office located at 70 East Sunrise
Highway, Valley Stream, New York 11581, at which we lease 4,985
square feet of space.
We own the building
at which our insurance underwriting business principally operates,
free of mortgage.
None.
Not
applicable.
21
Market
Information
Our common stock is
quoted on The NASDAQ Capital Market under the symbol
“KINS.”
Set forth below are
the high and low sales prices for our common stock for the periods
indicated, as reported on The NASDAQ Capital Market.
|
|
High
|
Low
|
|
2016
Calendar Year
|
|
|
|
First
Quarter
|
$
9.25
|
$
7.21
|
|
Second
Quarter
|
9.62
|
8.21
|
|
Third
Quarter
|
9.39
|
8.45
|
|
Fourth
Quarter
|
14.15
|
9.25
|
|
|
High
|
Low
|
|
2015
Calendar Year
|
|
|
|
First
Quarter
|
$
8.22
|
$
7.50
|
|
Second
Quarter
|
7.79
|
6.11
|
|
Third
Quarter
|
9.47
|
7.49
|
|
Fourth
Quarter
|
10.00
|
8.47
|
Holders
As of March 13, 2017, there were
approximately
263 record holders
of our common stock.
Dividends
Holders of
our common stock are entitled to dividends when, as and if declared
by our Board of Directors out of funds legally available. Since
September 2011 and through December 31, 2016, we have paid
quarterly dividends as follows:
|
Payment
Date
|
|
|
|
|
|
September 2011
-
June
2012
|
$
.03
|
|
September 2012
-
June
2014
|
$
.04
|
|
September 2014
-
September
2015
|
$
.05
|
|
December 2015
-
December
2016
|
$
.0625
|
Future dividend
policy will be subject to the discretion of our Board of Directors
and will be contingent upon future earnings, if any, our financial
condition, capital requirements, general business conditions, and
other factors. Therefore, we can give no assurance that future
dividends of any kind will continue to be paid to holders of our
common stock.
22
Our ability to pay
dividends depends, in part, upon on the ability of KICO to pay
dividends to us. KICO, as an insurance subsidiary, is subject to
significant regulatory restrictions limiting its ability to declare
and pay dividends.
These restrictions
are related to surplus and net investment income. Without the prior
approval of the DFS, d
ividends are restricted to the lesser
of 10% of surplus or 100% of investment income (on a statutory
accounting basis) for the trailing 36 months, less dividends paid
by KICO
during such period.
As of December 31, 2016, the maximum
distribution that KICO could pay without prior regulatory approval
was approximately $4,385,000, which is based on investment income
for the trailing 36 months, net of dividends paid by KICO during
such period.
See “Business – Government
Regulation” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operation –
Liquidity” in Items 1 and 7, respectively, of this Annual
Report.
We declared and
paid dividends on our common stock as follows:
|
|
2016
|
2015
|
|
|
|
|
|
Common
stock dividends declared and paid
|
$
1,941,271
|
$
1,557,398
|
Recent
Sales of Unregistered Securities
None.
Issuer
Purchases of Equity Securities
There were no
purchases of common stock made by us or any “affiliated
purchaser” during the quarter ended December 31,
2016.
Not
applicable.
Overview
We offer property
and casualty insurance products to individuals and small businesses
in New York State through our wholly owned subsidiary, Kingstone
Insurance Company (“KICO”). KICO’s insureds are
located primarily in downstate New York, consisting of New York
City, Long Island and Westchester County. We are also licensed in
the States of New Jersey, Connecticut, Pennsylvania, Rhode Island
and Texas. In October 2016, a homeowners rate, rule, and form
filing was approved for use by the State of New Jersey. We
anticipate writing business there in the first half of
2017.
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 for a one year period. 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 normally elapses between the
receipt of insurance premiums and 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.
23
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 commonly 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
expenses include legal and auditing fees, executive employment
costs, and other costs directly associated with being a public
company.
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,
2016, we would earn half of the premiums in 2016 and the other half
in 2017.
Ceding commission
revenue
. Commissions on reinsurance premiums
ceded 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 realized gains (losses) on investments
. We
invest in cash and cash equivalents, short-term investments,
fixed-maturity and equity securities. 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 equity securities as available-for-sale and 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 income on our balance
sheet.
Other
income
. We recognize installment fee income and
fees charged to reinstate a policy after it has been cancelled for
non-payment. Through March 31, 2015, we also recognized premium
finance fee income on loans financed by a third party finance
company.
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.
24
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.
Other operating
expenses
. Other operating expenses include the corporate
expenses of our holding company, Kingstone Companies, Inc. These
expenses include executive employment costs, legal and auditing
fees, and other costs directly associated with being a public
company.
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.
Income tax
expense
. We incur federal income tax expense on
our consolidated 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, 3-4 family dwelling package, cooperative
and condominium, renters, equipment breakdown and service line
endorsements, and personal umbrella policies.
Commercial
liability:
We
offer businessowners policies, which consist primarily of small
business retail, service, and office risks without a residential
exposure. We also write artisan’s liability policies for
small independent contractors with seven or fewer employees.
In addition, we write special multi-peril policies for larger and
more specialized businessowners’ risks, including those with
limited residential exposures. In the fourth quarter of 2016, we
began offering commercial umbrella policies written above our
supporting commercial lines policies.
Commercial
automobile:
Until recently we provided
liability and physical damage coverage for light commercial
vehicles. However, due to the poor performance of this line,
effective October 1, 2014, we decided to no longer accept new
commercial auto policies. In February 2015, we decided to no longer
offer renewals to our existing commercial auto policies beginning
with those that expired on or after May 1, 2015. As of April 30,
2016 we had no commercial auto policies in force and we have 34
open claims remaining as of December 31, 2016.
25
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 also 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 loss adjustment expenses
(“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 Policies and 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 accounting
principles generally accepted in the United States 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, among 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 estimates inherent in
these financial statements might not materialize. However,
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 companies in similar
businesses.
We believe that the
most critical accounting policies relate to the reporting of
reserves for loss and LAE, including losses that have occurred but
have not been reported prior to the reporting date, amounts
recoverable from third party reinsurers, deferred ceding commission
revenue, deferred policy acquisition costs, deferred income taxes,
the impairment of investment securities, intangible assets and the
valuation of stock-based compensation. See Note 2 (Accounting
Policies and Basis of Presentation) of the Notes to Consolidated
Financial Statements following Item 15 of this Annual
Report.
Consolidated
Results of Operations
The
following table summarizes the changes in the results of our
operations for the periods indicated:
26
|
|
Year
ended December 31,
|
|||
|
($
in thousands)
|
2016
|
2015
|
Change
|
Percent
|
|
Revenue
s
|
|
|
|
|
|
Direct
written premiums
|
$
103,192
|
$
91,004
|
$
12,188
|
13.4
%
|
|
Assumed
written premiums
|
29
|
41
|
(12
)
|
(29.3
) %
|
|
|
103,221
|
91,045
|
12,176
|
13.4
%
|
|
Ceded
written premiums
|
|
|
|
|
|
Ceded
to quota share treaties in force during the period
|
26,377
|
28,701
|
(2,324
)
|
(8.1
) %
|
|
Return
of premiums previously ceded to prior quota share treaties
(1)
|
-
|
(5,866
)
|
5,866
|
(100.0
) %
|
|
Ceded
to quota share treaties
|
26,377
|
22,835
|
3,542
|
15.5
%
|
|
Ceded
to excess of loss treaties
|
1,389
|
1,277
|
112
|
8.8
%
|
|
Ceded
to catastrophe treaties
|
|
|
|
|
|
January
1 - June 30 (Net basis in 2016, Gross basis in 2015)
(2)
|
4,575
|
2,079
|
2,496
|
120.1
%
|
|
July
1 - December 31 (Net basis in 2016 and 2015) (2)
|
4,954
|
4,469
|
485
|
10.9
%
|
|
Total
ceded to catastrophe treaties
|
9,529
|
6,548
|
2,981
|
45.5
%
|
|
|
|
|
|
|
|
Total
ceded written premiums
|
37,295
|
30,660
|
6,635
|
21.6
%
|
|
|
|
|
|
|
|
Net
written premiums
|
65,926
|
60,385
|
5,541
|
9.2
%
|
|
|
|
|
|
|
|
Change
in unearned premiums
|
|
|
|
|
|
Direct
and assumed
|
(6,104
)
|
(8,433
)
|
2,329
|
(27.6
) %
|
|
Ceded
to quota share treaties (1)
|
1,586
|
(3,340
)
|
4,926
|
(147.5
) %
|
|
Change
in net unearned premiums
|
(4,518
)
|
(11,773
)
|
7,255
|
(61.6
) %
|
|
|
|
|
|
|
|
Premiums
earned
|
|
|
|
|
|
Direct
and assumed
|
97,116
|
82,613
|
14,503
|
17.6
%
|
|
Ceded
to quota share treaties (1)
|
(35,708
)
|
(34,001
)
|
(1,707
)
|
5.0
%
|
|
Net
premiums earned
|
61,408
|
48,612
|
12,796
|
26.3
%
|
|
|
|
|
|
|
|
Ceding
commission revenue
|
|
|
|
|
|
Excluding
the effect of catastrophes
|
11,268
|
12,754
|
(1,486
)
|
(11.7
) %
|
|
Effect
of catastrophes (3)
|
-
|
(1,281
)
|
1,281
|
(100.0
) %
|
|
Total
ceding commission revenue
|
11,268
|
11,473
|
(205
)
|
(1.8
) %
|
|
Net
investment income
|
3,116
|
2,564
|
552
|
21.5
%
|
|
Net
realized gain (loss) on investments
|
529
|
(50
)
|
579
|
(1,158.0
) %
|
|
Other
income
|
1,115
|
1,577
|
(462
)
|
(29.3
) %
|
|
Total
revenues
|
77,436
|
64,176
|
13,260
|
20.7
%
|
(1)
Effective July 1, 2015, we decreased the quota share ceding rate in
our personal lines quota share treaty from 55% to 40% (the
“Cut-off”). The Cut-off on July 1, 2015 resulted in a
$5,866,000 return of unearned premiums from our reinsurers that
were previously ceded under the personal lines quota share treaty
that expired on June 30, 2015. The $5,866,000 return of premiums
previously ceded reduced earned premiums under our quota share,
which, in turn, increased our net premiums earned during the twelve
month period after the Cut-off.
(2)
Under a “gross” basis catastrophe reinsurance treaty,
catastrophe reinsurance coverage is purchased by us only on the net
written premiums after the quota share. Under a “gross”
basis, catastrophe losses affect the ceded loss ratio and
contingent ceding commissions from quota share reinsurance. Under a
“net” basis catastrophe reinsurance treaty, all
catastrophe reinsurance coverage is purchased by us directly,
eliminating the impact of a catastrophe on quota share results. The
“net” basis increases our ceded premium for catastrophe
reinsurance. See discussion below for Net Written Premiums, Net
Premiums Earned and Contingent Ceding Commissions
Earned.
27
|
|
Year
ended December 31,
|
|||
|
($
in thousands)
|
2016
|
2015
|
Change
|
Percent
|
|
|
|
|
|
|
|
Total revenues
|
77,436
|
64,176
|
13,260
|
20.7
%
|
|
|
|
|
|
|
|
Expense
s
|
|
|
|
|
|
Loss
and loss adjustment expenses
|
|
|
|
|
|
Direct
and assumed:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
37,249
|
32,962
|
4,287
|
13.0
%
|
|
Losses
from catastrophes (3)
|
2,337
|
4,646
|
(2,309
)
|
(49.7
) %
|
|
Total
direct and assumed loss and loss adjustment expenses
|
39,586
|
37,608
|
1,978
|
5.3
%
|
|
|
|
|
|
|
|
Ceded
loss and loss adjustment expenses:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
10,862
|
11,873
|
(1,011
)
|
(8.5
) %
|
|
Losses
from catastrophes (3)
|
935
|
2,555
|
(1,620
)
|
(63.4
) %
|
|
Total
ceded loss and loss adjustment expenses
|
11,797
|
14,428
|
(2,631
)
|
(18.2
) %
|
|
|
|
|
|
|
|
Net
loss and loss adjustment expenses:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
26,387
|
21,089
|
5,298
|
25.1
%
|
|
Losses
from catastrophes (3)
|
1,402
|
2,091
|
(689
)
|
(33.0
) %
|
|
Net
loss and loss adjustment expenses
|
27,789
|
23,180
|
4,609
|
19.9
%
|
|
|
|
|
|
|
|
Commission
expense
|
18,327
|
15,317
|
3,010
|
19.7
%
|
|
Other
underwriting expenses
|
14,867
|
12,833
|
2,034
|
15.8
%
|
|
Other
operating expenses
|
1,910
|
1,504
|
406
|
27.0
%
|
|
Depreciation
and amortization
|
1,125
|
1,032
|
93
|
9.0
%
|
|
Total
expenses
|
64,018
|
53,867
|
10,152
|
18.8
%
|
|
|
|
|
|
|
|
Income
from operations before taxes
|
13,418
|
10,309
|
3,109
|
30.2
%
|
|
Provision
for income tax
|
4,518
|
3,349
|
1,169
|
34.9
%
|
|
Net income
|
$
8,900
|
$
6,960
|
$
1,940
|
27.9
%
|
(3)
For the year ended December 31, 2016 and 2015, includes the effects
of severe winter weather (which we define as a catastrophe). We
define a “catastrophe” as an event or series of related
events that involve multiple first party policyholders, or an event
or series of events that produce a number of claims in excess of a
preset, per-event threshold of average claims in a specific area,
occurring within a certain amount of time constituting the event or
series of events. Catastrophes are caused by various natural
events including high winds, excessive rain, winter storms, severe
winter weather, tornadoes, hailstorms, wildfires, tropical storms,
and hurricanes.
|
|
Year ended December 31,
|
|||
|
|
2016
|
2015
|
Percentage
Point Change
|
Percent
Change
|
|
|
|
|
|
|
|
Key ratios:
|
|
|
|
|
|
Net
loss ratio
|
45.3
%
|
47.7
%
|
(2.4
)
|
(5.0
) %
|
|
Net
underwriting expense ratio
|
33.9
%
|
32.3
%
|
1.6
|
5.0
%
|
|
Net
combined ratio
|
79.2
%
|
80.0
%
|
(0.8
)
|
(1.0
) %
|
Direct Written Premiums
Direct
written premiums during the year ended December 31, 2016
(“2016”) were $103,192,000 compared to $91,004,000
during the year ended December 31, 2015 (“2015”). The
increase of $12,188,000, or 13.4%, was primarily due to an increase
in policies in-force during 2016 as compared to 2015. We wrote more
new policies as a result of continued demand for our products in
the markets that we serve. Policies in-force increased by 11.7% as
of December 31, 2016 compared to December 31, 2015.
28
Our
growth rate in direct written premiums was dampened somewhat due to
the: (1) slowing of growth in our livery physical damage line of
business, and (2) suspension, effective October 1, 2014, of the
writing of new policies in our commercial auto line of business due
to a history of poor underwriting results. In February 2015, we
made the decision to no longer offer renewals on our existing
commercial auto policies beginning with those that expired on or
after May 1, 2015. Our direct written premiums in our continuing
lines of business grew by 14.0% in 2016 compared to 2015.
Policies-in-force in our continuing lines of business increased by
12.0% as of December 31, 2016 compared to December 31,
2015.
Net Written Premiums and Net Premiums Earned
The
following table details the quota share reinsurance ceding rates in
effect during 2016 and 2015. For purposes of the discussion herein,
the change in quota share ceding rates on July 1 of each year will
be referred to as “the Cut-off”. This table should be
referred to in conjunction with the discussions for net written
premiums, net premiums earned, ceding commission revenue and net
loss and loss adjustment expenses that follow.
|
|
Year ended December 31, 2016
|
Year ended December 31, 2015
|
||
|
|
January 1,
|
July 1,
|
January 1,
|
July 1,
|
|
|
to
|
to
|
to
|
to
|
|
|
June 30,
|
December 31,
|
June 30,
|
December 31,
|
|
|
("2015/2016 Treaty")
|
("2016/2017 Treaty")
|
("2014/2015 Treaty")
|
("2015/2016 Treaty")
|
|
|
|
|
|
|
|
Quota share reinsurance rates
|
|
|
|
|
|
Personal
lines
|
40%
|
40%
|
55%
|
40%
|
See
“Reinsurance” below for changes to our personal lines
quota share treaty effective July 1, 2016.
Net written premiums increased
$5,541,000
, or 9.2%, to
$65,926,000
in 2016 from
$60,385,000
in 2015. Net written
premiums include direct and assumed premiums, less the amount of
written premiums ceded under our reinsurance treaties (quota share,
excess of loss, and catastrophe). Our personal lines business is
currently subject to a quota share treaty. A reduction to the quota
share percentage or elimination of a quota share treaty will reduce
our ceded written premiums, which will result in a corresponding
increase to our net written premiums.
Change in quota share ceding rate
Effective
July 1, 2015, we decreased the quota share ceding rate in our
personal lines quota share treaty from 55% to 40%. The Cut-off of
this treaty on July 1, 2015 resulted in a $5,866,000 return of
unearned premiums from our reinsurers that were previously ceded
under the expiring personal lines quota share treaty. We did not
change our quota share ceding rates on July 1, 2016, and
accordingly, there was no return of unearned premiums from our
reinsurers (in contrast with what occurred on July 1, 2015), thus
diminishing the increase in net written premiums in 2016. The table
below shows the effect of the $5,866,000 return of ceded premiums
on net written premiums for 2015:
29
|
|
Year ended December 31,
|
|||
|
($ in thousands)
|
2016
|
2015
|
Change
|
Percent
|
|
|
|
|
|
|
|
Net
written premiums
|
$
65,926
|
$
60,385
|
$
5,541
|
9.2
%
|
|
Return
of premiums previously ceded to prior quota share
treaties
|
-
|
5,866
|
(5,866
)
|
na
|
|
Net
written premiums without the effect of the July 1, 2015
Cut-off
|
$
65,926
|
$
54,519
|
$
11,407
|
20.9
%
|
Without
the $5,866,000 effect of the Cut-off in 2015, net written premiums
increased by $11,407,000, or 20.9%, in 2016 compared to
2015.
The
2016/2017 Treaty and 2015/2016 Treaty are on a “net” of
catastrophe reinsurance basis, as opposed to the
“gross” arrangement that existed in periods before July
1, 2015.
Change in catastrophe reinsurance from “gross” basis to
“net” basis
Most
of the premiums written under our personal lines are also subject
to our catastrophe treaty. An increase in our personal lines
business gives rise to more property exposure, which increases our
exposure to catastrophe risk; therefore, our premiums for
catastrophe insurance will increase. This results in an increase in
premiums ceded under our catastrophe treaty, which reduces net
written premiums. With the inception of our personal lines quota
share treaty being on a “net” basis effective July 1,
2015, our catastrophe premiums are paid based on all of our direct
written premiums subject to the quota share, compared to
catastrophe premiums being paid only on the amount of written
premiums that we retained under the “gross” basis that
expired on June 30, 2015.
For
the year ended December 31, 2016, catastrophe reinsurance was on a
“net” basis. For the year ended December 31, 2015,
catastrophe reinsurance was on a “gross” basis through
June 30, 2015, and on a “net” basis from July 1, 2015
through December 31, 2015. As a result of the 2015 mid-year change
from “gross” to “net”, comparison between
periods in 2016 and 2015 are separated between the six month
periods ended June 30 and the six month periods ended December 31.
Ceded catastrophe premiums from January 1, 2016 through June 30,
2016 increased by $2,496,000, or 120.1%, to $4,575,000 for the six
months ended June 30, 2016 from $2,079,000 for the six months ended
June 30, 2015. The increase was primarily due the change from
“gross” to “net”. Ceded catastrophe
premiums from July 1, 2016 through December 31, 2016 increased by
$485,000, or 10.9%, to $4,954,000 for the six months ended December
31, 2016 from $4,469,000 for the six months ended December 31,
2015. The increase was primarily due to an increase in premiums
subject to catastrophe reinsurance.
Excess of loss reinsurance treaty
In
general, barring reductions in rates charged for reinsurance, an
increase in written premiums will also increase the premiums ceded
under our excess of loss treaties. This will incrementally reduce
our net written premiums. In 2016, our ceded premiums related to
excess of loss reinsurance treaties increased by $112,000 over the
ceded premiums for 2015.
Net premiums earned
Net premiums earned increased
$12,796,000
, or 26.3%, to
$61,408,000
in 2016 from
$48,612,000
in 2015. The increase was
primarily due to us retaining more earned premiums effective July
1, 2015, as a result of the reduction of the quota share percentage
in our personal lines quota share treaty. The decrease in our quota
share ceding percentage from the July 1, 2015 Cut-off gave us a
$5,866,000 return of premiums previously ceded, which increased our
net premiums earned during the twelve month periods after the
Cut-off. In addition, as premiums written earn ratably over a
twelve month period, net premiums earned in 2016 increased due to
the higher net written premiums generated for the twelve month
period ended December 31, 2016 compared to the twelve month period
ended
December 31, 2015
.
30
Ceding Commission Revenue
The
following table details the quota share provisional ceding
commission rates in effect during 2016 and 2015. This table should
be referred to in conjunction with the discussion for ceding
commission revenue that follows.
|
|
Year ended December 31, 2016
|
Year
ended December 31, 2015
|
||
|
|
January 1,
to
June 30,
|
July 1,
to
December 31,
|
January 1,
to
June 30,
|
July 1,
to
December 31,
|
|
|
("2015/2016 Treaty")
|
("2016/2017 Treaty")
|
("2014/2015 Treaty")
|
("2015/2016 Treaty")
|
|
Quota share previsional ceding commission rate
|
|
|
|
|
|
Personal
lines
|
55%
|
52%
|
40%
|
55%
|
The
following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods
indicated:
|
|
Year
ended December 31,
|
|||
|
($
in thousands)
|
2016
|
2015
|
Change
|
Percent
|
|
|
|
|
|
|
|
Provisional
ceding commissions earned
|
$
12,769
|
$
11,692
|
$
1,077
|
9.2
%
|
|
|
|
|
|
|
|
Contingent
ceding commissions earned
|
|
|
|
|
|
Contingent
ceding commissions earned excluding
|
|
|
|
|
|
the
effect of catastrophes
|
(1,501
)
|
1,062
|
(2,563
)
|
(241.3
)%
|
|
Effect
of catastrophes on ceding commissions earned
|
-
|
(1,281
)
|
1,281
|
(100.0
)%
|
|
Contingent
ceding commissions earned
|
(1,501
)
|
(219
)
|
(1,282
)
|
585.4
%
|
|
|
|
|
|
|
|
Total
ceding commission revenue
|
$
11,268
|
$
11,473
|
$
(205
)
|
(1.8
) %
|
Ceding commission revenue was
$11,268,000
in 2016 compared to
$11,473,000
in 2015. The decrease of
$205,000,
or 1.8%, was due to a
decrease in contingent ceding commissions earned, partially offset
by an increase in provisional ceding commissions
earned.
Provisional Ceding Commissions
Earned
We receive a provisional ceding commission based
on ceded written premiums. In 2016 our provisional ceding rate was
55% from January 1 through June 30 under the 2015/2016 Treaty and
was reduced to 52% effective July 1, 2016 under the 2016/2017
Treaty. In 2015 our provisional ceding rate was 40% from January 1
through June 30 under the 2014/2015 Treaty and was increased to 55%
effective July 1, 2015 under the 2015/2016 Treaty. The variations
in the ceding commission rate resulted in weighted average rates
during 2016 and 2015 of 53.5% and 47.5%,
respectively.
31
The
$1,077,000 increase in provisional ceding commissions earned is due
to: (1) an increase in personal lines direct written premiums
subject to the quota share and (2) an increase in the weighted
average provisional ceding commission rates as discussed above,
partially offset by (1) a decrease in the amount of premiums
subject to provisional ceding commissions due to the reduction in
quota share rates to 40% beginning July 1, 2015 and (2) a decrease
in the percentage of ceded premiums subject to quota share under
the “net” quota share treaties in effect beginning July
1, 2015 compared to the “gross” 2014/2015 Treaty that
expired on June 30, 2015.
Contingent Ceding Commissions Earned
As
a result of the increase in the provisional ceding commission rates
to 52% under the 2016/2017 Treaty and 55% under the 2015/2016
Treaty beginning July 1, 2015, from 40% under the 2014/2015 Treaty,
we do not have an opportunity to earn as much contingent ceding
commissions. Under the “net” treaty in effect as of
July 1, 2015, catastrophe losses in excess of the $4,000,000
retention will fall outside of the quota share treaty and such
losses will not have an impact on contingent ceding commissions, as
was the case under previous “gross” treaties. The new
“net” structure eliminates the adverse impact that
catastrophe losses can have on contingent ceding
commissions.
We
receive 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
receive. The amount of contingent ceding commissions we are
eligible to receive under the personal lines quota share treaties
detailed in the table above that were in effect during 2016 are
subject to change based on losses incurred from claims with
accident dates beginning July 1, 2015. The amount of contingent
ceding commissions we are eligible to receive under our prior
years’ quota share treaties is subject to change based on
losses incurred related to claims with accident dates before July
1, 2015 under those treaties.
In
2015, in addition to the 2015/2016 Treaty, which was effective as
of July 1, 2015, our personal lines reinsurance quota share treaty
that expired on June 30, 2015 covered the period from July 1, 2013
to June 30, 2015 (“2013/2015 Treaty”). The computation
to arrive at contingent ceding commission revenue under the
2013/2015 Treaty included catastrophe losses and LAE incurred from
severe winter weather during 2015 (see discussion of “Net
Loss and LAE” below). Such losses increased our ceded loss
ratio in our 2013/2015 Treaty, which reduced our contingent ceding
commission revenue in accordance with the sliding scale discussed
above in 2015 by $1,281,000. Catastrophe losses for 2016 have no
impact on our contingent ceding commission revenue since the
ultimate loss ratio used to determine these commissions was not
affected by the 2016 severe winter weather. See
“Reinsurance” below for changes to our personal lines
quota share treaty effective July 1, 2016.
Net Investment Income
Net investment income was
$3,116,000
in 2016 compared to
$2,564,000
in 2015. The increase of
$552,000
, or 21.5%, was due to an
increase in average invested assets in 2016. The increase in cash
and invested assets resulted primarily from increased operating
cash flows for the period after
June 30, 2015
. The increase in operating cash flows is due in
part from the reduction in quota share rates on July 1, 2015. The
reduction in quota share rates results in a decline in ceded
premiums, which leads to more cash flow and more invested funds.
The pre-tax equivalent investment yield on estimated annual income,
excluding cash, was 4.26% and 4.77% as of December 31, 2016 and
2015, respectively. The decrease in the pre-tax equivalent
investment yield is due to a shift toward shorter duration
investments, which inherently have a lower yield. A reduction in
interest rates resulted in an increase to unrealized gains on our
portfolio, which in turn reduced the pre-tax equivalent investment
yield.
32
Other Income
Other income was
$1,115,000 in 2016 compared to $1,577,000 in 2015. The decrease of
$462,000, or 29.3%, was primarily due to: (1) the $350,000 we
received in 2015 as early settlement of the termination agreement
that generated placement fees in our premium finance business (see
Note 18 to the Consolidated Financial Statements), and (2) $154,000
we earned in 2015 in connection with the settlement of a liability,
partially offset by an increase in installment and finance fees
earned in our insurance underwriting business.
Net Loss and LAE
Net loss and LAE was
$27,789,000
in 2016 compared to
$23,180,000
in 2015. The net loss ratio was 45.3%
in 2016 compared to 47.7% in 2015, a decrease of 2.4 percentage
points.
The following graphs summarize
the changes in the components of net loss ratio for the periods
indicated:
33
During 2016, the
net loss ratio decreased compared to 2015 due to a combination of
several factors. First, there was a reduction in the impact of
severe winter weather, defined as the losses incurred above those
expected in an average winter. In 2016 we recorded 2.3 points of
impact from severe winter weather, compared to 4.3 points in 2015,
or a decrease of 2.0 points. In addition, the core loss ratio
excluding the impact of severe winter weather and prior year
development decreased to 43.1% in 2016 from 44.4% in 2015, or a
decrease of 1.3 points. Partially offsetting these declines, we
recorded 0.1 points of favorable prior year loss development in
2016 compared to 1.0 point of favorable prior year development in
2015, or a decrease in the favorable impact of 0.9 points
year-over-year. The decrease in the core net loss ratio is driven
by reduced claim frequency in both our personal and commercial
lines business. See table below under “Additional Financial
Information” summarizing net loss ratios by line of
business.
Commercial Auto Line of Business
Effective October
1, 2014 we decided to no longer accept applications for new
commercial auto coverage. The action was taken following a series
of underwriting and pricing measures which were intended to improve
the profitability of this line of business. The actions taken did
not yield the hoped for results. In February 2015, we decided to no
longer offer renewals to our existing commercial auto policies
beginning with those that expired on or after May 1, 2015. As of
December 31, 2016
, we had no
commercial auto policies in force, compared to 134 policies in
force as of December 31, 2015.
The
decision to exit this line of business has significantly reduced
the adverse impact that associated commercial auto liability claims
will have on our overall results. The following table
displays the impact that this decision has had on our loss and LAE
reserves over time:
|
|
Commercial Auto
|
|
Commercial Auto as a
|
|
|
As of
|
Number of Open Claims
|
Loss and LAE Reserves
|
Total Loss and LAE Reserves
|
Percentage of Total Loss and LAE Reserves
|
|
(in
thousands except number of open claims)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2013
|
170
|
$
9,185
|
$
34,503
|
26.6
%
|
|
December
31, 2014
|
114
|
$
8,126
|
$
39,613
|
20.5
%
|
|
December
31, 2015
|
68
|
$
4,971
|
$
39,877
|
12.5
%
|
|
December
31, 2016
|
34
|
$
2,434
|
$
41,737
|
5.8
%
|
Commercial
auto liability loss and LAE reserves account for a rapidly
decreasing percentage of our total loss and LAE reserves, and as of
December 31, 2016 comprise 5.8% of our total loss and LAE
reserves. This line of business was historically subject to a
high level of uncertainty and volatility in claim emergence and
loss development. The exit from this line therefore
significantly decreases the uncertainty surrounding our overall
reserve levels and reduces the associated volatility in financial
results.
Commission Expense
Commission expense was
$18,327,000
in 2016 or 18.9 % of direct earned
premiums. Commission expense was
$15,317,000
in 2015 or 18.6% of direct earned premiums. The
increase of
$3,010,000
is due
to the increase in direct written premiums in 2016 as compared to
2015 and an increase in bonus commissions as a result of the
decrease in net loss ratio in 2016 as compared to 2015. The
increase in the percentage of commission expense to direct earned
premiums to 18.9% in 2016 from 18.6% in 2015 is due the additional
bonus commission described above and a change in the mix of
business to lines of business with higher commission
rates.
34
Other Underwriting Expenses
Other underwriting expenses were
$14,867,000
in 2016 compared to
$12,833,000
in 2015. The increase
of
$2,034,000
, or 15.8%, in
other underwriting expenses was primarily due to expenses directly
and indirectly related to growth in direct written premiums. We are
also incurring expenses related to our efforts to expand into the
other states in which we recently obtained licensing
(“Expansion Expenses”). Expenses directly related to
the increase in direct written premiums primarily consist of
underwriting expenses, software usage fees and state premium taxes.
Expenses indirectly related to the increase in direct written
premiums primarily consist of salaries along with related other
employment costs. Expansion Expenses include salaries and
employment costs, professional fees, IT and data services. Salaries
and employment costs were $7,036,000 in 2016 compared to $5,857,000
in 2015. The increase of $1,179,000, or 20.1%, was due to hiring of
additional staff to service our current level of business and
anticipated growth in volume. In addition, there were annual rate
increases in both salaries and the cost of employee benefits. Other
underwriting expenses as a percentage of direct written premiums
increased to 14.4% in 2016 from 14.1% in 2015. Other underwriting
expenses as a percentage of direct earned premiums decreased to
15.3% in 2016 from 15.5% in 2015. Salaries and employment costs,
which accounted for 47.3% of other underwriting expenses in 2016,
and 45.6% of other underwriting expenses in 2015, were 7.2% of
direct earned premiums in 2016 and 7.1% of direct earned premiums
in 2015.
Our
net underwriting expense ratio in 2016 was 33.9% compared with
32.3% in 2015. The following table shows the individual components
of our net underwriting expense ratio for the periods
indicated:
|
|
Years
ended
|
|
|
|
|
December
31,
|
Percentage
|
|
|
|
2016
|
2015
|
Point
Change
|
|
|
|
|
|
|
Ceding
commission revenue - provisional
|
(20.8
)%
|
(24.1
)%
|
3.3
|
|
Ceding
commission revenue - contingent
|
2.4
|
0.5
|
1.9
|
|
Other
income
|
(1.8
)
|
(2.0
)
|
0.2
|
|
Acquistion
costs and other underwriting expenses:
|
|
|
|
|
Commission
expense
|
29.9
|
31.5
|
(1.6
)
|
|
Other
underwriting expenses
|
24.2
|
26.4
|
(2.2
)
|
|
Net
underwriting expense ratio
|
33.9
%
|
32.3
%
|
1.6
|
The
increase of 1.6 percentage points was due to the individual
components of provisional ceding commission revenue, commission
expense and other underwriting expenses and their relation to the
increase in net premiums earned as a result of the additional
retention resulting from the Cut-off to our quota share treaties on
July 1, 2015. The increase to the net underwriting expense ratio
was impacted more by reductions in the reinsurance ceding
commission revenue components than it was to changes in the
acquisition costs and other underwriting expense
components.
Other Operating Expenses
Other operating expenses, related to the expenses
of our holding company, were
$1,910,000
in 2016 compared to
$1,504,000
in 2015. The increase in 2016 of
$406,000
, or 27.0%, was primarily due
to an increase in executive bonus compensation.
35
Depreciation and Amortization
Depreciation and amortization was
$1,125,000
in 2016 compared to
$1,032,000 in 2015. The increase of
$93,000
, or 9.0%, in depreciation and amortization was
primarily due to depreciation on newly purchased assets used to
upgrade our systems infrastructure and the Kingston, New York home
office building from which we operate.
Income Tax Expense
Income tax expense in 2016 was
$4,518,000
, which resulted in an
effective tax rate of 33.7%. Income tax expense in 2015 was
$3,349,000
, which resulted in an
effective tax rate of 32.5%. Income before taxes was
$13,418,000
in 2016 compared to
$10,309,000 in 2015. The increase in the effective tax rate by 1.2
percentage points in 2016 is primarily a result of permanent tax
true ups from 2015.
Net Income
Net income was
$8,900,000
in 2016 compared to
$6,960,000
in 2015. The increase in net income of
$1,940,000, or 27.9%,
was due to the
circumstances described above that caused the increase in our net
premiums earned, net investment income, and a decrease in our net
loss ratio, partially offset by a decrease in ceding commission
revenue and other income, and by increases in other underwriting
expenses related to premium growth and other operating
expenses.
Additional Financial Information
We
operate our business as one segment, property and casualty
insurance. Within this segment, we offer a wide 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.
36
|
|
Year
ended
|
|
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Gross
written premiums:
|
|
|
|
Personal
lines
|
$
79,256,251
|
$
69,227,233
|
|
Commercial
lines
|
12,759,351
|
12,010,892
|
|
Commercial
auto(2)
|
(5,023
)
|
519,920
|
|
Livery
physical damage
|
10,955,785
|
9,032,957
|
|
Other(3)
|
254,153
|
253,937
|
|
Total
|
$
103,220,517
|
$
91,044,939
|
|
|
|
|
|
Net
written premiums:
|
|
|
|
Personal
lines
|
|
|
|
Excluding
the effect of quota share adjustments on July 1
|
$
43,485,866
|
$
33,899,714
|
|
Return
of premiums previously ceded to prior quota share
treaties
|
-
|
5,866,300
|
|
Personal
lines(1)
|
43,485,866
|
39,766,014
|
|
Commercial
lines
|
11,413,717
|
10,922,649
|
|
Commercial
auto(2)
|
(110,311
)
|
471,135
|
|
Livery
physical damage
|
10,955,785
|
9,032,957
|
|
Other(3)
|
181,130
|
192,023
|
|
Total
|
$
65,926,187
|
$
60,384,778
|
|
|
|
|
|
Net
premiums earned:
|
|
|
|
Personal
lines(1)
|
$
40,325,585
|
$
29,498,110
|
|
Commercial
lines
|
11,120,890
|
10,133,600
|
|
Commercial
auto(2)
|
(10,567
)
|
1,722,381
|
|
Livery
physical damage
|
9,783,792
|
7,082,843
|
|
Other(3)
|
188,206
|
175,148
|
|
Total
|
$
61,407,906
|
$
48,612,082
|
|
|
|
|
|
Net
loss and loss adjustment expenses:
|
|
|
|
Personal
lines
|
$
16,116,325
|
$
12,513,907
|
|
Commercial
lines
|
5,408,168
|
5,931,699
|
|
Commercial
auto(2)
|
(553,450
)
|
653,898
|
|
Livery
physical damage
|
4,777,308
|
2,444,555
|
|
Other(3)
|
249,046
|
147,789
|
|
Unallocated
loss adjustment expenses
|
1,792,264
|
1,488,152
|
|
Total
|
$
27,789,661
|
$
23,180,000
|
|
|
|
|
|
Net
loss ratio:
|
|
|
|
Personal
lines
|
40.0
%
|
42.4
%
|
|
Commercial
lines
|
48.6
%
|
58.5
%
|
|
Commercial
auto(2)
|
na
|
38.0
%
|
|
Livery
physical damage
|
48.8
%
|
34.5
%
|
|
Other(3)
|
132.3
%
|
84.4
%
|
|
Total
|
45.3
%
|
47.7
%
|
__________________________________
(1) See discussions
above for Net Written Premiums and Net Premiums Earned, related to
change in quota share ceding rate and change in catastrophe
reinsurance from “gross” basis to “net”
basis.
(2) Effective
October 1, 2014 we decided to no longer accept applications for new
commercial auto coverage. In February 2015, we decided to no
longer offer renewals to our existing commercial auto policies
beginning with those that expired on or after May 1,
2015.
(3)
“Other” includes, among other things, premiums and loss
and loss adjustment expenses from our participation in a mandatory
state joint underwriting association.
37
Insurance
Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a
standalone basis for the years ended December 31, 2016 and 2015
follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Revenue
s
|
|
|
|
Net
premiums earned
|
$
61,407,906
|
$
48,612,082
|
|
Ceding
commission revenue
|
11,268,241
|
11,473,117
|
|
Net
investment income
|
3,115,583
|
2,563,890
|
|
Net
realized gain (loss) on investments
|
529,448
|
(50,546
)
|
|
Other
income
|
1,102,352
|
992,270
|
|
Total
revenues
|
77,423,530
|
63,590,813
|
|
|
|
|
|
Expense
s
|
|
|
|
Loss
and loss adjustment expenses
|
27,789,661
|
23,180,000
|
|
Commission
expense
|
18,327,190
|
15,317,140
|
|
Other
underwriting expenses
|
14,866,646
|
12,833,391
|
|
Depreciation
and amortization
|
1,123,763
|
1,028,622
|
|
Total
expenses
|
62,107,260
|
52,359,153
|
|
|
|
|
|
Income
from operations
|
15,316,270
|
11,231,660
|
|
Income
tax expense
|
5,208,772
|
3,601,935
|
|
Net
incom
e
|
$
10,107,498
|
$
7,629,725
|
|
|
|
|
|
Key Measures:
|
|
|
|
Net
loss ratio
|
45.3
%
|
47.7
%
|
|
Net
underwriting expense ratio
|
33.9
%
|
32.3
%
|
|
Net
combined ratio
|
79.2
%
|
80.0
%
|
|
|
|
|
|
Reconciliation
of net underwriting expense ratio:
|
|
|
|
Acquisition
costs and other
|
|
|
|
underwriting
expenses
|
$
33,193,836
|
$
28,150,531
|
|
Less:
Ceding commission revenue
|
(11,268,241
)
|
(11,473,117
)
|
|
Less:
Other income
|
(1,102,352
)
|
(992,270
)
|
|
Net
underwriting expenses
|
$
20,823,243
|
$
15,685,144
|
|
|
|
|
|
Net
premiums earned
|
$
61,407,906
|
$
48,612,082
|
|
|
|
|
|
Net
Underwriting Expense Ratio
|
33.9
%
|
32.3
%
|
38
An analysis of our
direct, assumed and ceded earned premiums, loss and loss adjustment
expenses, and loss ratios is shown below:
|
|
Direct
|
Assumed
|
Ceded
|
Net
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
Written
premiums
|
$
103,191,995
|
$
28,522
|
$
(37,294,330
)
|
$
65,926,187
|
|
Change
in unearned premiums
|
(6,110,225
)
|
6,091
|
1,585,853
|
(4,518,281
)
|
|
Earned
premiums
|
$
97,081,770
|
$
34,613
|
$
(35,708,477
)
|
$
61,407,906
|
|
|
|
|
|
|
|
Loss
and loss adjustment expenses exluding
|
|
|
|
|
|
the
effect of catastrophes
|
$
37,193,657
|
$
55,257
|
$
(10,861,730
)
|
$
26,387,184
|
|
Catastrophe
loss
|
2,337,461
|
-
|
(934,984
)
|
1,402,477
|
|
Loss
and loss adjustment expenses
|
$
39,531,118
|
$
55,257
|
$
(11,796,714
)
|
$
27,789,661
|
|
|
|
|
|
|
|
Loss
ratio excluding the effect of catastrophes
|
38.3
%
|
159.6
%
|
30.4
%
|
43.0
%
|
|
Catastrophe
loss
|
2.4
%
|
0.0
%
|
2.5
%
|
2.3
%
|
|
Loss
ratio
|
40.7
%
|
159.6
%
|
32.9
%
|
45.3
%
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
Written
premiums
|
$
91,003,968
|
$
40,971
|
$
(30,660,161
)
|
$
60,384,778
|
|
Change
in unearned premiums
|
(8,436,456
)
|
4,255
|
(3,340,495
)
|
(11,772,696
)
|
|
Earned
premiums
|
$
82,567,512
|
$
45,226
|
$
(34,000,656
)
|
$
48,612,082
|
|
|
|
|
|
|
|
Loss
and loss adjustment expenses exluding
|
|
|
|
|
|
the
effect of catastrophes
|
$
32,850,817
|
$
111,618
|
$
(11,873,028
)
|
$
21,089,407
|
|
Catastrophe
loss
|
4,645,762
|
-
|
(2,555,169
)
|
2,090,593
|
|
Loss
and loss adjustment expenses
|
$
37,496,579
|
$
111,618
|
$
(14,428,197
)
|
$
23,180,000
|
|
|
|
|
|
|
|
Loss
ratio excluding the effect of catastrophes
|
39.8
%
|
246.8
%
|
34.9
%
|
43.4
%
|
|
Catastrophe
loss
|
5.6
%
|
0.0
%
|
7.5
%
|
4.3
%
|
|
Loss
ratio
|
45.4
%
|
246.8
%
|
42.4
%
|
47.7
%
|
39
The key measures
for our insurance underwriting business for the years ended
December 31, 2016 and 2015 are as follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Net
premiums earned
|
$
61,407,906
|
$
48,612,082
|
|
Ceding
commission revenue (1)
|
11,268,241
|
11,473,117
|
|
Other
income
|
1,102,352
|
992,270
|
|
|
|
|
|
Loss
and loss adjustment expenses (2)
|
27,789,661
|
23,180,000
|
|
|
|
|
|
Acquistion
costs and other underwriting expenses:
|
|
|
|
Commission
expense
|
18,327,190
|
15,317,140
|
|
Other
underwriting expenses
|
14,866,646
|
12,833,391
|
|
Total
acquistion costs and other
|
|
|
|
underwriting
expenses
|
33,193,836
|
28,150,531
|
|
|
|
|
|
Underwriting
income
|
$
12,795,002
|
$
9,746,938
|
|
|
|
|
|
Key
Measures:
|
|
|
|
Net
loss ratio excluding the effect of catastrophes
|
43.0
%
|
43.4
%
|
|
Effect
of catastrophe loss on net loss ratio (2) (3)
|
2.3
%
|
4.3
%
|
|
Net
loss ratio
|
45.3
%
|
47.7
%
|
|
|
|
|
|
Net
underwriting expense ratio excluding the
|
|
|
|
effect
of catastrophes
|
33.9
%
|
29.6
%
|
|
Effect
of catastrophe loss on net underwriting
|
|
|
|
expense
ratio (1) (2) (3)
|
0.0
%
|
2.7
%
|
|
Net
underwriting expense ratio
|
33.9
%
|
32.3
%
|
|
|
|
|
|
Net
combined ratio excluding the effect
|
|
|
|
of
catastrophes
|
76.9
%
|
73.0
%
|
|
Effect
of catastrophe loss on net combined
|
|
|
|
ratio
(1) (2) (3)
|
2.3
%
|
7.0
%
|
|
Net
combined ratio
|
79.2
%
|
80.0
%
|
|
|
|
|
|
Reconciliation
of net underwriting expense ratio:
|
|
|
|
Acquisition
costs and other
|
|
|
|
underwriting
expenses
|
$
33,193,836
|
$
28,150,531
|
|
Less:
Ceding commission revenue (1)
|
(11,268,241
)
|
(11,473,117
)
|
|
Less:
Other income
|
(1,102,352
)
|
(992,270
)
|
|
|
$
20,823,243
|
$
15,685,144
|
|
|
|
|
|
Net
earned premium
|
$
61,407,906
|
$
48,612,082
|
|
|
|
|
|
Net
Underwriting Expense Ratio
|
33.9
%
|
32.3
%
|
_________________________________________________
(1) For the years
ended December 31, 2016 and 2015, the effect of severe winter
weather, defined as a catastrophe, reduced contingent ceding
commission revenue by $-0- and $1,280,521,
respectively.
40
(2) For the years
ended December 31, 2016 and 2015, includes the sum of net
catastrophe losses and loss adjustment expenses of $1,402,477 and
$2,090,593, respectively, resulting from severe winter
weather.
(3) For the years
ended December 31, 2016 and 2015, the effect of catastrophe loss
from severe winter weather on our net combined ratio only includes
the direct effects of loss and loss adjustment expenses and ceding
commission revenue and does not include the indirect effects of a
$84,149 and $324,906, respectively, decrease in other underwriting
expenses.
Investments
Portfolio Summary
The following table
presents a breakdown of the amortized cost, aggregate fair value
and unrealized gains and losses by investment type as of
December 31, 2016 and 2015:
Available-for-Sale Securities
|
|
December 31, 2016
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
% of
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than
|
Fair
|
Fair
|
|
Categor
y
|
Cos
t
|
Gains
|
Months
|
12 Months
|
Value
|
Value
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
$
8,053,449
|
$
199,028
|
$
(46,589
)
|
$
-
|
$
8,205,888
|
9.1
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
53,728,395
|
600,519
|
(638,113
)
|
(5,612
)
|
53,685,189
|
59.4
%
|
|
|
|
|
|
|
|
|
|
Residential
mortgage backed
|
|
|
|
|
|
|
|
securities
|
18,814,784
|
70,682
|
(309,273
)
|
(38,442
)
|
18,537,751
|
20.5
%
|
|
Total
fixed-maturity securities
|
80,596,628
|
870,229
|
(993,975
)
|
(44,054
)
|
80,428,828
|
89.0
%
|
|
Equity
Securities
|
9,709,385
|
701,641
|
(255,301
)
|
(168,039
)
|
9,987,686
|
11.0
%
|
|
Total
|
$
90,306,013
|
$
1,571,870
|
$
(1,249,276
)
|
$
(212,093
)
|
$
90,416,514
|
100.0
%
|
41
|
|
December 31, 2015
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
% of
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than
|
Fair
|
Fair
|
|
Categor
y
|
Cos
t
|
Gains
|
Months
|
12 Months
|
Value
|
Value
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
$
12,139,793
|
$
431,194
|
$
(15,889
)
|
$
-
|
$
12,555,098
|
17.5
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
45,078,044
|
490,444
|
(512,427
)
|
(99,593
)
|
44,956,468
|
62.7
%
|
|
|
|
|
|
|
|
|
|
Residential
mortgage backed
|
|
|
|
|
|
|
|
securities
|
5,003,292
|
48,375
|
(61,169
)
|
-
|
4,990,498
|
7.0
%
|
|
Total
fixed-maturity securities
|
62,221,129
|
970,013
|
(589,485
)
|
(99,593
)
|
62,502,064
|
87.2
%
|
|
Equity
Securities
|
8,751,537
|
585,776
|
(103,721
)
|
(29,322
)
|
9,204,270
|
12.8
%
|
|
Total
|
$
70,972,666
|
$
1,555,789
|
$
(693,206
)
|
$
(128,915
)
|
$
71,706,334
|
100.0
%
|
42
Held-to-Maturity Securities
|
|
December
31, 2016
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost
or
|
Gross
|
Gross
Unrealized Losses
|
|
%
of
|
|
|
|
Amortized
|
Unrealized
|
Less
than 12
|
More
than
|
Fair
|
Fair
|
|
Category
|
Cos
t
|
Gains
|
Months
|
12
Months
|
Value
|
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
606,427
|
$
147,612
|
$
-
|
$
-
|
$
754,039
|
14.2
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
1,349,916
|
37,321
|
-
|
-
|
1,387,237
|
26.2
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
3,138,559
|
72,784
|
(7,619
)
|
(46,881
)
|
3,156,843
|
59.6
%
|
|
|
|
|
|
|
|
|
|
Total
|
$
5,094,902
|
$
257,717
|
$
(7,619
)
|
$
(46,881
)
|
$
5,298,119
|
100.0
%
|
|
|
December 31, 2015
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
% of
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than
|
Fair
|
Fair
|
|
Category
|
Cos
t
|
Gains
|
Months
|
12 Months
|
Value
|
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
606,389
|
$
147,650
|
$
-
|
$
-
|
$
754,039
|
14.4
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
1,417,679
|
70,284
|
-
|
(54,189
)
|
1,433,774
|
27.4
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
3,114,804
|
82,265
|
(17,980
)
|
(125,807
)
|
3,053,282
|
58.2
%
|
|
|
|
|
|
|
|
|
|
Total
|
$
5,138,872
|
$
300,199
|
$
(17,980
)
|
$
(179,996
)
|
$
5,241,095
|
100.0
%
|
U.S.
Treasury securities included in held-to-maturity securities are
held in trust pursuant to the New York State Department of
Financial Services’ minimum funds requirement.
A
summary of the amortized cost and fair value of the Company’s
investments in held-to-maturity securities by contractual maturity
as of December 31, 2016 and 2015 is shown below:
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
Amortized
|
|
Amortized
|
|
|
Remaining Time to
Maturity
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|
|
|
|
|
|
|
Less
than one year
|
$
-
|
$
-
|
$
-
|
$
-
|
|
One
to five years
|
650,000
|
642,455
|
500,000
|
496,245
|
|
Five
to ten years
|
3,838,475
|
3,901,625
|
4,032,483
|
3,990,811
|
|
More
than 10 years
|
606,427
|
754,039
|
606,389
|
754,039
|
|
Total
|
$
5,094,902
|
$
5,298,119
|
$
5,138,872
|
$
5,241,095
|
43
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, 2016 and 2015 as rated
by Standard and Poor’s (or, if unavailable from Standard and
Poor’s, then Moody’s or Fitch):
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
|
Percentage of
|
|
Percentage of
|
|
|
Fair Market
|
Fair Market
|
Fair Market
|
Fair Market
|
|
|
Value
|
Value
|
Value
|
Value
|
|
|
|
|
|
|
|
Rating
|
|
|
|
|
|
U.S.
Treasury securities
|
$
-
|
0.0
%
|
$
-
|
0.0
%
|
|
|
|
|
|
|
|
Corporate
and municipal bonds
|
|
|
|
|
|
AAA
|
1,801,106
|
2.2
%
|
2,218,147
|
3.5
%
|
|
AA
|
7,236,457
|
9.0
%
|
9,060,781
|
14.5
%
|
|
A
|
13,944,784
|
17.3
%
|
10,639,888
|
17.0
%
|
|
BBB
|
38,908,731
|
48.4
%
|
35,592,750
|
57.1
%
|
|
Total
corporate and municipal bonds
|
61,891,078
|
76.9
%
|
57,511,566
|
92.1
%
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
|
|
|
|
|
AA
|
14,143,828
|
17.7
%
|
-
|
0.0
%
|
|
A
|
173,973
|
0.2
%
|
216,077
|
0.3
%
|
|
CCC
|
513,369
|
0.6
%
|
457,889
|
0.7
%
|
|
CC
|
-
|
0.0
%
|
402,558
|
0.6
%
|
|
C
|
112,136
|
0.1
%
|
-
|
0.0
%
|
|
D
|
3,594,444
|
4.5
%
|
3,913,974
|
6.3
%
|
|
Total
residential mortgage backed securities
|
18,537,750
|
23.1
%
|
4,990,498
|
7.9
%
|
|
|
|
|
|
|
|
Total
|
$
80,428,828
|
100.0
%
|
$
62,502,064
|
100.0
%
|
The table below
details the average yield by type of fixed-maturity security as of
December 31, 2016 and 2015:
|
Category
|
December 31, 2016
|
December 31, 2015
|
|
U.S.
Treasury securities and
|
|
|
|
obligations
of U.S. government
|
|
|
|
corporations
and agencies
|
3.44
%
|
3.44
%
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
Territories
and Possessions
|
3.87
%
|
3.55
%
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
Industrial
and miscellaneous
|
3.86
%
|
4.28
%
|
|
|
|
|
|
Residential
mortgage backed securities
|
3.83
%
|
6.24
%
|
|
|
|
|
|
Total
|
3.85
%
|
4.26
%
|
44
The table below
lists the weighted average maturity and effective duration in years
on our fixed-maturity securities as of December 31, 2016 and
2015:
|
|
December 31, 2016
|
December 31, 2015
|
|
Weighted
average effective maturity
|
5.0
|
5.5
|
|
|
|
|
|
Weighted
average final maturity
|
8.3
|
7.3
|
|
|
|
|
|
Effective
duration
|
4.4
|
4.9
|
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
, 2016
and December 31, 2015,
65% and 66%, respectively, of the investment portfolio recorded at
fair value was priced based upon quoted market prices.
As more fully
described in Note 3 to our Consolidated Financial Statements,
“Investments—Impairment Review,” we completed a
detailed review of all our securities in a continuous loss position
as of December 31
, 2016
and
December 31, 2015.
As of December 31,
2016 our held-to-maturity debt securities included an investment in
one bond issued by the Commonwealth of Puerto Rico
(“PR”). In July 2016, PR defaulted on its interest
payment to bondholders. Due to the credit deterioration of PR, we
recorded a credit loss component of other-than-temporary impairment
(“OTTI”) on this investment as of June 30, 2016. For
the year ended December 31, 2016, the full amount of the write-down
was recognized as a credit component of OTTI in the amount of
$69,911 and is included as a reduction to net realized gains in the
consolidated statements of income and comprehensive income.
We concluded that the other unrealized losses in these asset
classes are temporary in nature and the result of a decrease in
value due to technical spread widening and broader market
sentiment, rather than fundamental collateral
deterioration.
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, 2016 and 2015:
45
|
|
December 31, 2016
|
|||||||
|
|
Less than 12 months
|
12 months or more
|
Total
|
|||||
|
|
|
|
No. of
|
|
|
No. of
|
Aggregate
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Categor
y
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
$
1,067,574
|
$
(46,589
)
|
3
|
$
-
|
$
-
|
-
|
$
1,067,574
|
$
(46,589
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
19,859,293
|
(638,113
)
|
34
|
239,970
|
(5,612
)
|
1
|
20,099,263
|
(643,725
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage
|
|
|
|
|
|
|
|
|
|
backed
securities
|
15,918,090
|
(309,273
)
|
30
|
675,316
|
(38,442
)
|
6
|
16,593,406
|
(347,715
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
36,844,957
|
$
(993,975
)
|
67
|
$
915,286
|
$
(44,054
)
|
7
|
$
37,760,243
|
$
(1,038,029
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
Preferred
stocks
|
$
3,759,850
|
$
(241,333
)
|
8
|
$
660,750
|
$
(70,571
)
|
1
|
$
4,420,600
|
$
(311,904
)
|
|
Common
stocks
|
288,075
|
(13,968
)
|
1
|
424,550
|
(97,468
)
|
1
|
712,625
|
(111,436
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
$
4,047,925
|
$
(255,301
)
|
9
|
$
1,085,300
|
$
(168,039
)
|
2
|
$
5,133,225
|
$
(423,340
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
40,892,882
|
$
(1,249,276
)
|
76
|
$
2,000,586
|
$
(212,093
)
|
9
|
$
42,893,468
|
$
(1,461,369
)
|
46
|
|
December 31, 2015
|
|||||||
|
|
Less than 12 months
|
12 months or more
|
Total
|
|||||
|
|
|
|
No. of
|
|
|
No. of
|
Aggregate
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Category
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
$
1,432,005
|
$
(15,889
)
|
4
|
$
-
|
$
-
|
-
|
$
1,432,005
|
$
(15,889
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
18,424,609
|
(512,427
)
|
32
|
636,093
|
(99,593
)
|
2
|
19,060,702
|
(612,020
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage
|
|
|
|
|
|
|
|
|
|
backed
securities
|
2,413,980
|
(61,169
)
|
12
|
-
|
-
|
-
|
2,413,980
|
(61,169
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
22,270,594
|
$
(589,485
)
|
48
|
$
636,093
|
$
(99,593
)
|
2
|
$
22,906,687
|
$
(689,078
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
Preferred
stocks
|
$
-
|
$
-
|
-
|
$
702,000
|
$
(29,322
)
|
1
|
$
702,000
|
$
(29,322
)
|
|
Common
stocks
|
2,538,900
|
(103,721
)
|
6
|
-
|
-
|
-
|
2,538,900
|
(103,721
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
$
2,538,900
|
$
(103,721
)
|
6
|
$
702,000
|
$
(29,322
)
|
1
|
$
3,240,900
|
$
(133,043
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
24,809,494
|
$
(693,206
)
|
54
|
$
1,338,093
|
$
(128,915
)
|
3
|
$
26,147,587
|
$
(822,121
)
|
47
There were 85
securities at December 31
, 2016
that accounted for the gross unrealized loss, none of which were
deemed by us to be other than temporarily impaired. There were 57
securities at December 31, 2015 that accounted for the gross
unrealized loss, none of which were deemed by us to be other than
temporarily impaired. Significant factors influencing our
determination that unrealized losses were temporary included the
magnitude of the unrealized losses in relation to each
security’s cost, the nature of the investment and
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.
In April 2016 we
sold 595,238 newly issued shares of our common stock to
RenaissanceRe Ventures Ltd., a subsidiary of RenaissanceRe Holdings
Ltd. (NYSE:RNR) (“RenaissanceRe”), in a private
placement. RenaissanceRe is a global provider of catastrophe and
specialty reinsurance and insurance. The new common shares were
sold to RenaissanceRe at a price of $8.40 per share. We received
net proceeds of approximately $4,808,000 from the private
placement. In June 2016, we invested $3,000,000 of the proceeds in
KICO as additional surplus to support its continued growth. We
intend to use the remaining net proceeds of the offering to support
the continued growth of KICO, and for general corporate
purposes.
On January 31,
2017, we closed on an underwritten public offering of 2,500,000
shares of our common stock. On February 14, 2017, we closed on the
underwriters’ 30-day purchase option for an additional
192,500 shares our common stock. The public offering price for the
2,692,500 shares sold was $12.00 per share. The aggregate net
proceeds to us was approximately $30,230,000. On March 1, 2017, we
used $23,000,000 of the net proceeds of the offering to contribute
capital to KICO, to support its ratings upgrade plan and additional
growth. The remainder of the net proceeds will be used for general
corporate purposes.
Through December
31, 2016, the primary sources of cash flow for our holding company
are dividends received from KICO, subject to statutory
restrictions. For year ended
December
31, 2016
, KICO paid dividends of $1,950,000 to
us.
If the
aforementioned sources of cash flow currently available are
insufficient to cover our holding company cash requirements, we
will seek to obtain additional financing.
Our reconciliation
of net income to net cash provided 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.
48
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,
|
2016
|
2015
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
Operating
activities
|
$
15,201,025
|
$
20,401,907
|
|
Investing
activities
|
(19,515,843
)
|
(14,902,052
)
|
|
Financing
activities
|
2,807,966
|
(1,855,361
)
|
|
Net (decrease) increase in cash and cash
equivalents
|
(1,506,852
)
|
3,644,494
|
|
Cash
and cash equivalents, beginning of period
|
13,551,372
|
9,906,878
|
|
Cash and cash equivalents, end of period
|
$
12,044,520
|
$
13,551,372
|
Net cash provided
by operating activities was $15,201,000 in 2016 as compared to
$20,402,000 provided in 2015. The $5,201,000 decrease in cash flows
provided by operating activities in 2016 was primarily a result of
an increase in cash arising from net fluctuations in assets and
liabilities relating to operating activities of KICO as affected by
the growth in its operations which are described above, and an
increase in net income (adjusted for non-cash items) of
$1,485,000.
Net cash used in
investing activities was $19,516,000 in 2016 compared to
$14,902,000 used in 2015. The $4,614,000 increase in cash used in
investing activities is the result of a $21,097,000 increase in
acquisitions of invested assets, offset by a $684,000 reduction in
the amount of fixed asset acquisitions in 2016 and collection of a
$250,000 note receivable included in other assets, and a
$15,559,000 increase in sales or maturities of invested
assets.
Net cash provided
by financing activities was $2,808,000 in 2016 compared to
$1,855,000 used in 2015. The $4,663,000 increase in cash provided
by financing activities is the result of the $4,808,000 net
proceeds we received from the private placement of our common stock
in April 2016 and a $164,000 decrease in the purchase of treasury
stock, offset partially by a $384,000 increase in dividends paid
due an increase in the dividend rate and shares
outstanding.
Reinsurance
The following table
provides summary information with respect to each reinsurer that
accounted for more than 10% of our reinsurance recoverables on paid
and unpaid losses and loss adjustment expenses as of December 31,
2016:
|
|
|
Amount
|
|
|
|
|
Recoverable
|
|
|
|
A.M.
|
as of
|
|
|
($ in thousands)
|
Best Rating
|
December 31, 2016
|
%
|
|
Maiden
Reinsurace Company
|
A
|
$
8,625
|
47.7
%
|
|
Swiss
Reinsurance America Corporation
|
A+
|
4,981
|
27.5
%
|
|
|
13,606
|
75.2
%
|
|
|
Others
|
|
4,490
|
24.8
%
|
|
Total
|
|
$
18,096
|
100.0
%
|
Reinsurance
recoverable from Maiden Reinsurance Company and Motors Insurance
Corporation (included in Others) are secured pursuant to
collateralized trust agreements. Assets held in the two trusts are
not included in our invested assets and investment income earned on
these assets is credited to the two reinsurers
respectively.
Our
quota share reinsurance treaties are on a July 1 through June 30
fiscal year basis; therefore, for year to date fiscal periods after
June 30, two separate treaties will be included in such
periods.
Our
quota share reinsurance treaties in effect for the year ended
December 31, 2016 for our personal lines business, which primarily
consists of homeowners’ policies, were covered under the
2015/2016 Treaty and the 2016/2017 Treaty. Our quota share
reinsurance treaties in effect for the year ended December 31, 2015
for our personal lines business, which primarily consists of
homeowners’ policies, were covered under the 2014/2015 Treaty
and the 2015/2016 Treaty.
Our
personal lines quota share treaty that covered the July 1,
2013/June 30, 2014 treaty year was a two year treaty that expired
on June 30, 2015. Effective July 1, 2014, we exercised our
contractual option to reduce the ceding percentage in the personal
lines quota share treaty from 75% to 55%.
Our
2014/2015 Treaty, 2015/2016 Treaty and 2016/2017 Treaty provide for
the following material terms:
49
|
|
Treaty
Year
|
||
|
|
July 1,
2016
|
July 1,
2015
|
July 1,
2014
|
|
|
to
|
to
|
to
|
|
Line
of Busines
|
June 30,
2017
|
June 30,
2016
|
June 30,
2015
|
|
|
|
|
|
|
Personal Lines:
|
|
|
|
|
Homeowners,
dwelling fire and canine legal liability
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded
|
40
%
|
40
%
|
55
%
|
|
Risk
retained
|
$
500,000
|
$
450,000
|
$
360,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
833,333
|
$
750,000
|
$
800,000
|
|
Excess
of loss coverage above quota share coverage
|
$
3,666,667
|
$
3,750,000
|
$
3,200,000
|
|
|
in
excess of
|
in
excess of
|
in
excess of
|
|
|
$
833,333
|
$
750,000
|
$
800,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,000,000
|
$
4,050,000
|
$
3,640,000
|
|
Losses
per occurrence subject to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,000,000
|
|
Expiration
date
|
June
30, 2017
|
June
30, 2016
|
June
30, 2015
|
|
|
|
|
|
|
Personal
Umbrella
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded - first $1,000,000 of coverage
|
90
%
|
90
%
|
90
%
|
|
Percent
ceded - excess of $1,000,000 dollars of coverage
|
100
%
|
100
%
|
100
%
|
|
Risk
retained
|
$
100,000
|
$
100,000
|
$
100,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,900,000
|
$
2,900,000
|
$
2,900,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
5,000,000
|
$
3,000,000
|
$
3,000,000
|
|
Expiration
date
|
June
30, 2017
|
June
30, 2016
|
June
30, 2015
|
|
|
|
|
|
|
Commercial Lines:
|
|
|
|
|
General
liability commercial policies, except for commercial
auto
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded (terminated effective July 1, 2014)
|
None
|
None
|
None
|
|
Risk
retained
|
$
500,000
|
$
425,000
|
$
400,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
None
|
None
|
None
|
|
Excess
of loss coverage above quota share coverage
|
$
4,000,000
|
$
4,075,000
|
$
3,600,000
|
|
|
in
excess of
|
in
excess of
|
in
excess of
|
|
|
$
500,000
|
$
425,000
|
$
400,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,000,000
|
$
4,075,000
|
$
3,600,000
|
|
Losses
per occurrence subject to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,000,000
|
|
|
|
|
|
|
Commercial
Umbrella
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded - first $1,000,000 of coverage
|
90
%
|
|
|
|
Percent
ceded - excess of $1,000,000 of coverage
|
100
%
|
|
|
|
Risk
retained
|
$
100,000
|
|
|
|
Total
reinsurance coverage per occurrence
|
$
4,900,000
|
|
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
5,000,000
|
|
|
|
Expiration
date
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Commercial Auto:
|
|
|
|
|
Risk
retained
|
|
$
300,000
|
$
300,000
|
|
Excess
of loss coverage in excess of risk retained
|
|
$
1,700,000
|
$
1,700,000
|
|
|
|
in
excess of
|
in
excess of
|
|
|
|
$
300,000
|
$
300,000
|
|
Catastrophe Reinsurance:
|
|
|
|
|
Initial
loss subject to personal lines quota share treaty
|
$
5,000,000
|
$
4,000,000
|
$
4,000,000
|
|
Risk
retained per catastrophe occurrence (1)
|
$
3,000,000
|
$
2,400,000
|
$
1,800,000
|
|
Catastrophe
loss coverage in excess of quota share coverage (2)
(3)
|
$
247,000,000
|
$
176,000,000
|
$
137,000,000
|
|
Severe
winter weather aggregate (3)
|
No
|
Yes
|
Yes
|
|
Reinstatement
premium protection (4)
|
Yes
|
Yes
|
No
|
50
1.
Plus
losses in excess of catastrophe coverage.
2.
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts. Effective July 1, 2016, the duration of a
catastrophe occurrence from windstorm, hail, tornado, hurricane and
cyclone was extended to 168 consecutive hours from 120 consecutive
hours.
3.
From
July 1, 2014 through June 30, 2016, catastrophe treaty also covered
losses caused by severe winter weather during any consecutive 28
day period.
4.
Effective
July 1, 2015, reinstatement premium protection for $16,000,000 of
catastrophe coverage in excess of $4,000,000. Effective July 1,
2016, reinstatement premium protection for $20,000,000 of
catastrophe coverage in excess of $5,000,000.
The
single maximum risks per occurrence to which we are subject under
the new treaties effective July 1, 2016 are as
follows:
|
|
|
July 1, 2016 - June 30, 2017
|
||
|
Treaty
|
|
Extent of Loss
|
|
Risk Retained
|
|
Personal Lines
|
|
Initial $833,333
|
|
$500,000
|
|
|
|
$833,333 - $4,500,000
|
|
None(1)
|
|
|
|
Over $4,500,000
|
|
100%
|
|
|
|
|
|
|
|
Personal Umbrella
|
|
Initial $1,000,000
|
|
$100,000
|
|
|
|
$1,000,000 - $5,000,000
|
|
None(1)
|
|
|
|
Over $5,000,000
|
|
100%
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Initial $500,000
|
|
$500,000
|
|
|
|
$500,000 - $4,500,000
|
|
None(1)
|
|
|
|
Over $4,500,000
|
|
100%
|
|
|
|
|
|
|
|
Commercial Umbrella
|
|
Initial $1,000,000
|
|
$100,000
|
|
|
|
$1,000,000 - $5,000,000
|
|
None(1)
|
|
|
|
Over $5,000,000
|
|
100%
|
|
|
|
|
|
|
|
Catastrophe (2)
|
|
Initial $5,000,000
|
|
$3,000,000
|
|
|
|
$5,000,000 - $252,000,000
|
|
None
|
|
|
|
Over $252,000,000
|
|
100%
|
(1)
Covered by excess of loss treaties.
(2)
Catastrophe coverage is limited on an annual basis to two times the
per occurrence amounts.
51
The
single maximum risks per occurrence to which we are subject under
the treaties that expired on June 30, 2016 and 2015 are as
follows:
|
|
July 1, 2015 - June 30, 2016
|
July
1, 2014 - June 30, 2015
|
||
|
Treaty
|
Extent of Loss
|
Risk Retained
|
Extent of Loss
|
Risk Retained
|
|
Personal
Lines
|
Initial
$750,000
|
$
450,000
|
Initial
$800,000
|
$
360,000
|
|
|
$
750,000
- $4,500,000
|
None(1)
|
$
800,000
- $4,000,000
|
None(1)
|
|
|
Over
$4,500,000
|
100
%
|
Over
$4,000,000
|
100
%
|
|
|
|
|
|
|
|
Personal
Umbrella
|
Initial
$1,000,000
|
$
100,000
|
Initial
$1,000,000
|
$
100,000
|
|
|
$
1,000,000
- $3,000,000
|
None(1)
|
$
1,000,000
- $3,000,000
|
None(1)
|
|
|
Over
$3,000,000
|
100
%
|
Over
$3,000,000
|
100
%
|
|
|
|
|
|
|
|
Commercial
Lines
|
Initial
$425,000
|
$
425,000
|
Initial
$400,000
|
$
400,000
|
|
|
$
425,000
- $4,500,000
|
None(1)
|
$
400,000
- $4,000,000
|
None(1)
|
|
|
Over
$4,500,000
|
100
%
|
Over
$4,000,000
|
100
%
|
|
|
|
|
|
|
|
Commercial
Auto
|
Initial
$300,000
|
$
300,000
|
Initial
$300,000
|
$
300,000
|
|
|
$
300,000
- $2,000,000
|
None(1)
|
$
300,000
- $2,000,000
|
None(1)
|
|
|
Over
$2,000,000
|
100
%
|
Over
$2,000,000
|
100
%
|
|
|
|
|
|
|
|
Catastrophe
(2)
|
Initial
$4,000,000
|
$
2,400,000
|
Initial
$4,000,000
|
$
1,800,000
|
|
|
$
4,000,000
- $180,000,000
|
None
|
$
4,000,000
- $141,000,000
|
None
|
|
|
Over
$180,000,000
|
100
%
|
Over
$141,000,000
|
100
%
|
_______________
(1)
Covered by excess of loss treaties.
(2)
Catastrophe coverage is limited on an annual basis to two times the
per occurrence amounts.
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.
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, or liquidity that are material to
investors.
52
Factors
That May Affect Future Results and Financial Condition
Based upon the
following factors, as well as other factors affecting our operating
results and financial condition, past financial performance should
not be considered to be a reliable indicator of future performance,
and investors should not use historical trends to anticipate
results or trends in future periods. These factors, among others,
may affect the accuracy of certain forward-looking statements
contained in this Annual Report.
Risks Related to Our Business
As a property and casualty insurer, we may face significant losses
from catastrophes and severe weather events.
Because of the
exposure of our property and casualty business to catastrophic
events (such as Superstorm Sandy), our operating results and
financial condition may vary significantly from one period to the
next. Catastrophes can be caused by various natural and man-made
disasters, including earthquakes, wildfires, tornadoes, hurricanes,
severe winter weather, storms and certain types of terrorism. We
have catastrophe reinsurance coverage with regard to losses of up
to $252,000,000. The initial $5,000,000 of losses in a catastrophe
are subject to a 40% quota share reinsurance treaty, such that we
retain $3,000,000 of risk per catastrophe occurrence. With respect
to any additional catastrophe losses of up to $247,000,000, we are
100% reinsured under our catastrophe reinsurance program.
Catastrophe coverage is limited on an annual basis to two times the
per occurrence amounts. We may incur catastrophe losses in excess
of: (i) those that we project would be incurred,
(ii) those that external modeling firms estimate would be
incurred, (iii) the average expected level used in pricing or
(iv) our current reinsurance coverage limits. Despite our
catastrophe management programs, we are exposed to catastrophes
that could have a material adverse effect on our operating results
and financial condition. Our liquidity could be constrained by a
catastrophe, or multiple catastrophes, which may result in
extraordinary losses or a downgrade of our financial strength
ratings. In addition, the reinsurance losses that are incurred in
connection with a catastrophe could have an adverse impact on the
terms and conditions of future reinsurance treaties.
In addition, we are
subject to claims arising from non-catastrophic weather events such
as hurricanes, tropical storms, severe winter weather, rain, hail
and high winds. The incidence and severity of weather conditions
are largely unpredictable. There is generally an increase in the
frequency and severity of claims when severe weather conditions
occur.
Unanticipated increases in the severity or frequency of claims may
adversely affect our operating results and financial
condition.
Changes in the
severity or frequency of claims may affect our profitability.
Changes in homeowners claim severity are driven by inflation in the
construction industry, in building materials and home furnishings,
and by other economic and environmental factors, including
increased demand for services and supplies in areas affected by
catastrophes. Changes in bodily injury claim severity are driven
primarily by inflation in the medical sector of the economy and by
litigation costs. Changes in auto physical damage claim severity
are driven primarily by inflation in auto repair costs, prices of
auto parts and used car prices. However, changes in the level of
the severity of claims are not limited to the effects of inflation
and demand surge in these various sectors of the economy. Increases
in claim severity can arise from unexpected events that are
inherently difficult to predict, such as a change in the law or an
inability to enforce exclusions and limitations contained in our
policies. Although we pursue various loss management initiatives to
mitigate future increases in claim severity, there can be no
assurances that these initiatives will successfully identify or
reduce the effect of future increases in claim severity, and a
significant increase in claim frequency could have an adverse
effect on our operating results and financial
condition.
53
The inability to obtain an upgrade to our financial strength rating
from A.M. Best, or a downgrade in our rating, may have a material
adverse effect on our competitive position, the marketability of
our product offerings, and our liquidity, operating results and
financial condition.
Financial strength
ratings are important factors in establishing the competitive
position of insurance companies and generally have an effect on an
insurance company's business.
Many
insurance buyers, agents, brokers and secured lenders use the
ratings assigned by A.M. Best and other agencies to assist them in
assessing the financial strength and overall quality of the
companies with which they do business or from which they are
considering purchasing insurance or in determining the financial
strength of the company that provides insurance with respect to the
collateral they hold.
KICO currently has an A.M. Best
financial strength rating of B++ (Good).
A.M. Best ratings are derived from an in-depth
evaluation of an insurance company’s balance sheet strengths,
operating performances and business profiles. A.M. Best evaluates,
among other factors, the company’s capitalization,
underwriting leverage, financial leverage, asset leverage, capital
structure, quality and appropriateness of reinsurance, adequacy of
reserves, quality and diversification of assets, liquidity,
profitability, spread of risk, revenue composition, market
position, management, market risk and event risk.
On an
ongoing basis, rating agencies such as A.M. Best review the
financial performance and condition of insurers and can downgrade
or change the outlook on an insurer's ratings due to, for example,
a change in an insurer's statutory capital, a reduced confidence in
management or a host of other considerations that may or may not be
under the insurer's control. KICO
currently has a Demotech financial stability
rating of A (Exceptional), which generally makes its policies
acceptable to mortgage lenders that require homeowners to purchase
insurance. A
ll ratings are subject to continuous review;
therefore, the retention of these ratings cannot be assured. The
inability to obtain an upgrade to our financial strength rating
from A.M. Best or a downgrade in any of these ratings could have a
material adverse effect on our competitiveness, the marketability
of our product offerings and our ability to grow in the
marketplace.
Adverse capital and credit market conditions may significantly
affect our ability to meet liquidity needs or our ability to obtain
credit on acceptable terms.
The capital and
credit markets can experience periods of volatility and disruption.
In some cases, markets have exerted downward pressure on the
availability of liquidity and credit capacity. In the event that we
need access to additional capital to support our operating
expenses, make payments on any future indebtedness, pay for capital
expenditures, or increase the amount of insurance that we seek to
underwrite or to otherwise grow our business, our ability to obtain
such capital may be limited and the cost of any such capital may be
significant. Our access to additional financing will depend on a
variety of factors, such as market conditions, the general
availability of credit, the overall availability of credit to our
industry, our credit ratings and credit capacity as well as
lenders' perception of our long or short-term financial prospects.
Similarly, our access to funds may be impaired if regulatory
authorities or rating agencies take negative actions against us. If
a combination of these factors occurs, our internal sources of
liquidity may prove to be insufficient and, in such case, we may
not be able to successfully obtain additional financing on
favorable terms.
54
We are exposed to significant financial and capital markets risk
which may adversely affect our results of operations, financial
condition and liquidity, and our net investment income can vary
from period to period.
We are exposed to
significant financial and capital markets risk, including changes
in interest rates, equity prices, market volatility, general
economic conditions, the performance of the specific obligors
included in our portfolio, and other factors outside our control.
Our exposure to interest rate risk relates primarily to the market
price and cash flow variability associated with changes in interest
rates. Our investment portfolio contains interest rate sensitive
instruments, such as fixed income securities, which may be
adversely affected by changes in interest rates from governmental
monetary policies, domestic and international economic and
political conditions and other factors beyond our control. A rise
in interest rates would increase the net unrealized loss position
of our investment portfolio, which would be offset by our ability
to earn higher rates of return on funds reinvested. Conversely, a
decline in interest rates would decrease the net unrealized loss
position of our investment portfolio, which would be offset by
lower rates of return on funds reinvested.
In addition, market
volatility can make it difficult to value certain of our securities
if trading becomes less frequent. As such, valuations may include
assumptions or estimates that may have significant period to period
changes which could have a material adverse effect on our
consolidated results of operations or financial condition. If
significant, continued volatility, changes in interest rates,
changes in defaults, a lack of pricing transparency, market
liquidity and declines in equity prices, individually or in tandem,
could have a material adverse effect on our results of operations,
financial condition or cash flows through realized losses,
impairments, and changes in unrealized positions.
Reinsurance may be unavailable at current levels and prices, which
may limit our ability to write new business or to obtain and
maintain an upgrade to our financial strength rating from A.M.
Best.
Our personal lines
catastrophe reinsurance program was designed, utilizing our risk
management methodology, to address our exposure to catastrophes.
Market conditions beyond our control impact the availability and
cost of the reinsurance we purchase. No assurances can be given
that reinsurance will remain continuously available to us to the
same extent and on the same terms and rates as currently available.
For example, our ability to afford reinsurance to reduce our
catastrophe risk may be dependent upon our ability to adjust
premium rates for its cost, and there are no assurances that the
terms and rates for our current reinsurance program will continue
to be available in the future. If we are unable to maintain our
current level of reinsurance or purchase new reinsurance protection
in amounts that we consider sufficient and at prices that we
consider acceptable, we will have to either accept an increase in
our exposure risk, reduce our insurance writings or seek other
alternatives. Our ability to obtain and maintain an upgrade to our
financial strength rating from A.M. Best depends, in part, on our
ability to purchase additional catastrophe
reinsurance.
55
We intend to prudently reduce our reliance on quota share
reinsurance, in part to obtain and maintain an upgrade to our
financial strength rating from A.M. Best; this would lead to
greater exposure to net insurance losses.
We have determined
it to be in the best interests of our shareholders to prudently
reduce our reliance on quota share reinsurance. Our ability to
obtain and maintain an upgrade to our financial strength rating
from A.M. Best depends, in part, on reducing the amount of premium
ceded to reinsurers under our quota share reinsurance treaty. Any
such reduction would result in higher earned premiums and a
reduction in ceding commission revenue in future years. Such
reduction would also lead to increased exposure to net insurance
losses.
Reinsurance subjects us to the credit risk of our reinsurers, which
may have a material adverse effect on our operating results and
financial condition.
The collectability
of reinsurance recoverables is subject to uncertainty arising from
a number of factors, including changes in market conditions,
whether insured losses meet the qualifying conditions of the
reinsurance contract and whether reinsurers, or their affiliates,
have the financial capacity and willingness to make payments under
the terms of a reinsurance treaty or contract. Since we are
primarily liable to an insured for the full amount of insurance
coverage, our inability to collect a material recovery from a
reinsurer could have a material adverse effect on our operating
results and financial condition.
Applicable insurance laws regarding the change of control of our
company may impede potential acquisitions that our shareholders
might consider to be desirable.
We are subject to statutes and regulations of the
state of New York which generally require that any person or entity
desiring to acquire direct or indirect control of KICO, our
insurance company subsidiary, obtain prior regulatory approval. In
addition, a change of control of Kingstone Companies, Inc. would
require such approval. These laws may discourage potential
acquisition proposals and may delay, deter or prevent a change of
control of our company, including through transactions, and in
particular unsolicited transactions. Some of our shareholders might
consider such transactions to be desirable. Similar regulations may
apply in other states in which we may operate.
The insurance industry is subject to extensive regulation that may
affect our operating costs and limit the growth of our business,
and changes within this regulatory environment may adversely affect
our operating costs and limit the growth of our
business.
We are subject to
extensive laws and regulations. State insurance regulators are
charged with protecting policyholders and have broad regulatory,
supervisory and administrative powers over our business practices.
These include, among other things, the power to grant and revoke
licenses to transact business and the power to regulate and approve
underwriting practices and rate changes, which may delay the
implementation of premium rate changes or prevent us from making
changes we believe are necessary to match rate to risk. In
addition, many states have laws and regulations that limit an
insurer’s ability to cancel or not renew policies and that
prohibit an insurer from withdrawing from one or more lines of
business written in the state, except pursuant to a plan that is
approved by state regulatory authorities. Laws and regulations that
limit cancellation and non-renewal and that subject program
withdrawals to prior approval requirements may restrict our ability
to exit unprofitable markets.
56
Because the laws
and regulations under which we operate are administered and
enforced by a number of different governmental authorities,
including state insurance regulators, state securities
administrators and the SEC, each of which exercises a degree of
interpretive latitude, we are subject to the risk that compliance
with any particular regulator's or enforcement authority's
interpretation of a legal issue may not result in compliance with
another's interpretation of the same issue, particularly when
compliance is judged in hindsight. In addition, there is risk that
any particular regulator's or enforcement authority's
interpretation of a legal issue may change over time to our
detriment, or that changes in the overall legal and regulatory
environment may, even absent any particular regulator's or
enforcement authority's interpretation of a legal issue changing,
cause us to change our views regarding he actions we need to take
from a legal risk management perspective, thereby necessitating
changes to our practices that may, in some cases, limit our ability
to grow and/or to improve the profitability of our
business.
While the United
States federal government does not directly regulate the insurance
industry, federal legislation and administrative policies can
affect us. Congress and various federal agencies periodically
discuss proposals that would provide for a federal charter for
insurance companies. We cannot predict whether any such laws will
be enacted or the effect that such laws would have on our business.
Moreover, there can be no assurance that changes will not be made
to current laws, rules and regulations, or that any other laws,
rules or regulations will not be adopted in the future, that could
adversely affect our business and financial condition.
We may not be able to maintain the requisite amount of risk-based
capital, which may adversely affect our profitability and our
ability to compete in the property and casualty insurance
markets.
The DFS imposes
risk-based capital requirements on insurance companies to ensure
that insurance companies maintain appropriate levels of surplus to
support their overall business operations and to protect customers
against adverse developments,
after
taking into account default, credit, underwriting, reserve and
off-balance sheet risks. If the amount of our capital falls below
certain thresholds, we may face restrictions with respect to
soliciting new business and/or keeping existing business.
Similar regulations will apply in
other states in which we may operate.
Changing climate conditions may adversely affect our financial
condition, profitability or cash flows.
We recognize the
scientific view that the world is getting warmer. Climate change,
to the extent it produces rising temperatures and changes in
weather patterns, could impact the frequency and/or severity of
weather events and affect the affordability and availability of
homeowners insurance.
Our operating results and financial condition may be adversely
affected by the cyclical nature of the property and casualty
business.
The property and
casualty market is cyclical and has experienced periods
characterized by relatively high levels of price competition, less
restrictive underwriting standards and relatively low premium
rates, followed by periods of relatively lower levels of
competition, more selective underwriting standards and relatively
high premium rates. A downturn in the profitability cycle of the
property and casualty business could have a material adverse effect
on our operating results and financial condition.
57
Because substantially all of our revenue is currently derived from
sources located in New York, our business may be adversely affected
by conditions in such state.
Substantially all
of our revenue is currently derived from sources located in the
state of New York and, accordingly, is affected by the prevailing
regulatory, economic, demographic, competitive and other conditions
in the state. Changes in any of these conditions could make it more
costly or difficult for us to conduct our business. Adverse
regulatory developments in New York, which could include
fundamental changes to the design or implementation of the
insurance regulatory framework, could have a material adverse
effect on our results of operations and financial
condition.
We are highly dependent on a small number of insurance brokers for
a large portion of our revenues.
We market our
insurance products primarily through insurance brokers. A large
percentage of our gross premiums written are sourced through a
limited number of brokers. These brokers provided a total of 36.5%
of our gross premiums written for the year ended December 31, 2016.
The nature of our dependency on these brokers relates to the high
volume of business they consistently refer to us. Our relationship
with these brokers is based on the quality of the underwriting and
claims services we provide to our clients and on our financial
strength ratings. Any deterioration in these factors could result
in these brokers advising clients to place their risks with other
insurers rather than with us. A loss of all or a substantial
portion of the business provided by one or more of these brokers
could have a material adverse effect on our financial condition and
results of operations.
Regulatory action taken by the New York State Department of
Financial Services following Superstorm Sandy may affect our
operations and business.
In the aftermath of
Superstorm Sandy, the DFS has adopted various regulations that
affect insurance companies that operate in the state of New York.
Included among the regulations are accelerated claims investigation
and settlement requirements and mandatory participation in
non-binding mediation proceedings funded by the insurer. In
settling insurance claims, including those related to Superstorm
Sandy, if KICO were to pay for losses not covered by the insurance
policy, such as those based on water and sewer back up claims, it
could face disclaimers of coverage from its reinsurers with regard
to the amounts paid.
Actual claims incurred may exceed
current reserves established for claims, which may adversely affect
our operating results and financial condition
.
Recorded claim
reserves for our business are based on our best estimates of losses
after considering known facts and interpretations of circumstances.
Internal and external factors are considered. Internal factors
include, but are not limited to, actual claims paid, pending levels
of unpaid claims, product mix and contractual terms. External
factors include, but are not limited to, changes in the law, court
decisions, changes in regulatory requirements and economic
conditions. Because reserves are estimates of the unpaid portion of
losses that have occurred, the establishment of appropriate
reserves, including reserves for catastrophes, is an inherently
uncertain and complex process. The ultimate cost of losses may vary
materially from recorded reserves, and such variance may adversely
affect our operating results and financial condition.
58
As a holding company, we are dependent on the results of operations
of our subsidiary KICO; there are restrictions on the payment of
dividends by KICO.
We are a holding
company and a legal entity separate and distinct from our operating
subsidiary, KICO. As a holding company with limited operations of
our own, currently the principal sources of our funds are dividends
and other payments from KICO. Consequently, we must rely on KICO
for our ability to repay debts, pay expenses and pay cash dividends
to our shareholders.
Our ability to
receive dividends from KICO is restricted by the state laws and
insurance regulations of New York. These restrictions are related
to surplus and net investment income. Maximum permissible dividends
are restricted to the lesser of 10% of surplus or 100% of net
investment income (on a statutory accounting basis) for the
trailing 36 months, less dividends paid by KICO during such period.
As of December 31, 2016, the maximum permissible distribution
that KICO could pay without prior regulatory approval was
approximately $4,385,000.
Our future results are dependent in part on our ability to
successfully operate in an insurance industry that is highly
competitive.
The insurance
industry is highly competitive. Many of our competitors have
well-established national reputations, substantially more capital
and significantly greater marketing and management resources.
Because of the competitive nature of the insurance industry,
including competition for customers, agents and brokers, there can
be no assurance that we will continue to effectively compete with
our industry rivals, or that competitive pressures will not have a
material adverse effect on our ability to grow our business and to
maintain profitable operating results or financial
condition.
If we lose key personnel or are unable to recruit qualified
personnel, our ability to implement our business strategies could
be delayed or hindered.
Our future success
will depend, in part, upon the efforts of Barry Goldstein, our
President and Chief Executive Officer, and Benjamin Walden,
Executive Vice President and Chief Actuary of KICO. The loss of Mr.
Goldstein, Mr. Walden or other key personnel could prevent us from
fully implementing our business strategies and could materially and
adversely affect our business, financial condition and results of
operations. As we continue to grow, we will need to recruit and
retain additional qualified management personnel, but we may not be
able to do so. Our ability to recruit and retain such personnel
will depend upon a number of factors, such as our results of
operations and prospects and the level of competition then
prevailing in the market for qualified personnel. Mr. Goldstein is
a party to an employment agreement with us that expires on December
31, 2019. Mr. Walden is not a party to an employment agreement with
KICO.
Difficult conditions in the economy generally could adversely
affect our business and operating results.
As with most
businesses, we believe that difficult conditions in the economy
could have an adverse effect on our business and operating results.
General economic conditions also could adversely affect us in the
form of consumer behavior, which may include decreased demand for
our products. As consumers become more cost conscious, they may
choose lower levels of insurance.
59
Changes in accounting standards issued by the Financial Accounting
Standards Board or other standard-setting bodies may adversely
affect our results of operations and financial
condition.
Our financial
statements are subject to the application of generally accepted
accounting principles, which are periodically revised, interpreted
and/or expanded. Accordingly, we are required to adopt new guidance
or interpretations, which may have a material adverse effect on our
results of operations and financial condition that is either
unexpected or has a greater impact than expected.
Our business could be adversely affected by a security breach or
other attack involving our computer systems or those of one or more
of our vendors.
Our business
requires that we develop and maintain computer systems to run our
operations and to store a significant volume of confidential data.
Some of these systems rely on third-party vendors, through either a
connection to, or an integration with, those third-parties’
systems. In the course of our operations, we acquire the personal
confidential information of our customers and employees. We also
store our intellectual property, trade secrets, and other sensitive
business and financial information.
All of these
systems are subject to “cyber attacks” by sophisticated
third parties with substantial computing resources and
capabilities, and to unauthorized or illegitimate actions by
employees, consultants, agents and other persons with legitimate
access to our systems. Such attacks or actions may include attempts
to:
● steal,
corrupt, or destroy data, including our intellectual property,
financial data or the personal information of our customers or
employees
●
misappropriate funds
● disrupt or
shut down our systems
● deny
customers, agents, brokers, or others access to our systems,
or
● infect our
systems with viruses or malware.
While we can take
defensive measures, there can be no assurance that we will be
successful in preventing attacks or detecting and stopping them
once they have begun. Our business could be significantly damaged
by a security breach, data loss or corruption, or cyber attack. In
addition to the potentially high costs of investigating and
stopping such an event and implementing necessary fixes, we could
incur substantial liability if confidential customer or employee
information is stolen. In addition, such an event could cause a
significant disruption of our ability to conduct our insurance
operations. We have a cyber insurance policy to protect against the
monetary impact of some of these risks. However, the occurrence of
a security breach, data loss or corruption, or cyber-attack, if
sufficiently severe, could have a material adverse effect on our
business results.
60
We rely on our information technology and telecommunication
systems, and the failure of these systems could materially and
adversely affect our business.
Our business is
highly dependent upon the successful and uninterrupted functioning
of our information technology and telecommunications systems. We
rely on these systems to support our operations. The failure of
these systems could interrupt our operations and result in a
material adverse effect on our business.
We have incurred, and will continue to incur, increased costs as a
result of being an SEC reporting company.
The Sarbanes-Oxley
Act of 2002, as well as a variety of related rules implemented by
the SEC, have required changes in corporate governance practices
and generally increased the disclosure requirements of public
companies. As a reporting company, we incur significant legal,
accounting and other expenses in connection with our public
disclosure and other obligations. Based upon SEC regulations
currently in effect, we are required to establish, evaluate and
report on our internal control over financial reporting. We believe
that compliance with the myriad of rules and regulations applicable
to reporting companies and related compliance issues will require a
significant amount of time and attention from our
management.
Risks Related to Our Common Stock
Our stock price may fluctuate significantly and be highly volatile
and this may make it difficult for shareholders to resell shares of
our common stock at the volume, prices and times they find
attractive.
The market price of
our common stock could be subject to significant fluctuations and
be highly volatile, which may make it difficult for shareholders to
resell shares of our common stock at the volume, prices and times
they find attractive. There are many factors that will impact our
stock price and trading volume, including, but not limited to, the
factors listed above under “Risks Related to Our
Business.”
Stock markets, in
general, have experienced in recent years, and continue to
experience, significant price and volume volatility, and the market
price of our common stock may continue to be subject to similar
market fluctuations that may be unrelated to our operating
performance and prospects. Increased market volatility and
fluctuations could result in a substantial decline in the market
price of our common stock.
The trading volume in our common stock has been limited. As a
result, shareholders may not experience liquidity in their
investment in our common stock, thereby potentially limiting their
ability to resell their shares at the volume, times and prices they
find attractive.
Our common stock is
currently traded on The NASDAQ Capital Market. Our common stock has
substantially less liquidity than the average trading market for
many other publicly traded insurance and other companies. An active
trading market for our common stock may not develop or, if
developed, may not be sustained. Such stocks can be more volatile
than stocks trading in an active public market. Therefore,
shareholders have reduced liquidity and may not be able to sell
their shares at the volume, prices and times that they
desire.
61
There may be future issuances or resales of our common stock which
may materially and adversely affect the market price of our common
stock.
Subject to any
required state insurance regulatory approvals, we are not
restricted from issuing additional shares of our common stock in
the future, including securities convertible into, or exchangeable
or exercisable for, shares of our common stock. Our issuance of
additional shares of common stock in the future will dilute the
ownership interests of our then existing shareholders.
We have effective
registrations on Form S-3 under the Securities Act registering for
resale an aggregate of 1,254,238 shares of our common stock and
effective registration statements on Form S-8 under the Securities
Act registering an aggregate of 700,000 shares of our common stock
issuable under our 2005 Equity Participation Plan and an aggregate
of 700,000 shares of our common stock issuable under our 2014
Equity Participation Plan. Options to purchase 267,750 shares of
our common stock are outstanding under the 2005 plan. Options to
purchase 90,000 shares of our common stock are outstanding under
the 2014 plan and 578,500 shares are reserved for issuance
thereunder. We have also registered up to $9,290,000 of our
securities pursuant to a registration statement on Form S-3 which
we may sell from time to time in one or more offerings. The shares
subject to the registration statements on Form S-3 will be freely
tradeable in the public market. In addition, the shares issuable
pursuant to the registration statements on Form S-8 will be freely
tradable in the public market, except for shares held by
affiliates.
The sale of a
substantial number of shares of our common stock or securities
convertible into, or exchangeable or exercisable for, shares of our
common stock, whether directly by us or selling shareholders in
future offerings or by our existing shareholders in the secondary
market, the perception that such issuances or resales could occur
or the availability for future issuances or resale of shares of our
common stock or securities convertible into, or exchangeable or
exercisable for, shares of our common stock could materially and
adversely affect the market price of our common stock and our
ability to raise capital through future offerings of equity or
equity-related securities on attractive terms or at
all.
In addition, our
board of directors is authorized to designate and issue preferred
stock without further shareholder approval, and we may issue other
equity and equity-related securities that are senior to our common
stock in the future for a number of reasons, including, without
limitation, to support operations and growth, to maintain our
capital ratios, and to comply with any future changes in regulatory
standards.
Our executive officers and directors own a substantial number of
shares of our common stock. This will enable them to significantly
influence the vote on all matters submitted to a vote of our
shareholders.
As of March 16,
2017, our executive officers and directors beneficially owned
1,266,659 shares of our common stock (including options to purchase
217,500 shares of our common stock), representing 11.7% of the
outstanding shares of our common stock.
62
Accordingly, our
executive officers and directors, through their beneficial
ownership of our common stock, will be able to significantly
influence the vote on all matters submitted to a vote of our
shareholders, including the election of directors, amendments to
our restated certificate of incorporation or amended and restated
bylaws, mergers or other business combination transactions and
certain sales of assets outside the usual and regular course of
business. The interests of our executive officers and directors may
not coincide with the interests of our other shareholders, and they
could take actions that advance their own interests to the
detriment of our other shareholders.
Anti-takeover provisions and the regulations to which we may be
subject may make it more difficult for a third party to acquire
control of us, even if the change in control would be beneficial to
our shareholders.
We are a holding
company incorporated in Delaware. Anti-takeover provisions in
Delaware law and our restated certificate of incorporation and
bylaws, as well as regulatory approvals required under state
insurance laws, could make it more difficult for a third party to
acquire control of us and may prevent shareholders from receiving a
premium for their shares of common stock. Our certificate of
incorporation provides that our board of directors may issue up to
2,500,000 shares of preferred stock, in one or more series, without
shareholder approval and with such terms, preferences, rights and
privileges as the board of directors may deem appropriate. These
provisions, the control of our executive officers and directors
over the election of our directors, and other factors may hinder or
prevent a change in control, even if the change in control would be
beneficial to, or sought by, our shareholders.
Not
applicable.
The financial
statements required by this Item 8 are included in this Annual
Report following Item 16 hereof. As a smaller reporting company, we
are not required to provide supplementary financial
information.
None.
Disclosure
Controls and Procedures
We maintain
disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to
be disclosed in our Exchange Act reports 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.
63
As required by
Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Annual 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 December
31, 2016.
This Annual Report
does not include an attestation report of our independent
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not
subject to attestation by our registered public accounting firm
pursuant to rules of the SEC that permit us to provide only
management’s report in this Annual Report.
Internal
Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial
Reporting
Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act. Internal control over financial reporting
is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief 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.
Management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control –
Integrated Framework (2013)
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the
evaluation of the effectiveness of our internal control over
financial reporting management concluded that our internal control
over financial reporting was effective as of December 31,
2016.
Changes in Internal Control Over Financial Reporting
There
was no change in our internal control over financial reporting
during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
None.
64
Executive Officers and Directors
The
following table sets forth the positions and offices presently held
by each of our current directors and executive officers and their
ages:
|
Name
|
Age
|
Positions and Offices Held
|
|
|
|
|
|
Barry
B. Goldstein
|
64
|
President,
Chairman of the Board, Chief Executive Officer and
Director
|
|
Victor
J. Brodsky
|
59
|
Chief
Financial Officer and Treasurer
|
|
Benjamin
Walden
|
49
|
Executive
Vice President and Chief Actuary, Kingstone Insurance
Company
|
|
Floyd
R. Tupper
|
62
|
Secretary
and Director
|
|
Jay
M. Haft
|
81
|
Director
|
|
Jack
D. Seibald
|
56
|
Director
|
|
William
L. Yankus
|
57
|
Director
|
|
|
|
|
Barry B. Goldstein
Mr.
Goldstein has served as our President, Chief Executive Officer,
Chairman of the Board, and a director since March 2001. He served
as our Chief Financial Officer from March 2001 to November 2007 and
as our Treasurer from May 2001 to August 2013. Since
January 2006, Mr. Goldstein has served as Chairman of the Board of
Kingstone Insurance Company (“KICO”) (formerly known as
Commercial Mutual Insurance Company), a New York property and
casualty insurer, as well as Chairman of its Executive Committee.
Mr. Goldstein has served as Chief Investment Officer of KICO since
August 2008 and as its President and Chief Executive Officer since
January 2012. He was Treasurer of KICO from March 2010 through
September 2010. Effective July 1, 2009, we acquired a 100% equity
interest in KICO. From 1997 to 2004, Mr. Goldstein served as
President of AIA Acquisition Corp., which operated insurance
agencies in Pennsylvania and which sold substantially all of its
assets to us in 2003. Mr. Goldstein received his B.A. and M.B.A.
from State University of New York at Buffalo. We believe that Mr.
Goldstein’s extensive experience in the insurance industry,
including his service as Chairman of the Board of KICO since 2006
and as its Chief Investment Officer since 2008, give him the
qualifications and skills to serve as one of our
directors.
65
Victor J. Brodsky
Mr. Brodsky has
served as our Chief Financial Officer since August 2009 and as our
Treasurer since August 2013. He served as our Chief Accounting
Officer from August 2007 through July 2009, as our Principal
Financial Officer for Securities and Exchange Commission
(“SEC”) reporting purposes from November 2007 through
July 2009 and as our Secretary from December 2008 to August 2013.
In addition, Mr. Brodsky has served as a director of KICO since
February 2008, as Chief Financial Officer of KICO since September
2010 and as Executive Vice President of KICO since February 2017.
He also served as Senior Vice President of KICO from January 2012
to February 2017 and as Treasurer of KICO from September 2010
through December 2011. Mr. Brodsky served from May 2008 through
March 15, 2010 as Vice President of Financial Reporting and
Principal Financial Officer for SEC reporting purposes of Vertical
Branding Inc. Mr. Brodsky served as Chief Financial Officer of
Vertical Branding from March 1998 through May 2008 and as a
director of Vertical Branding from May 2002 through November 2005.
He served as its Secretary from November 2005 through May 2008 and
from April 2009 to March 15, 2010. A receiver was appointed for the
business of Vertical Branding in February 2010. Prior to joining
Vertical Branding, Mr. Brodsky spent 16 years at the CPA firm of
Michael & Adest in New York. Mr. Brodsky earned a Bachelor
of Business Administration degree from Hofstra University, with a
major in accounting, and is a licensed CPA in New
York.
Benjamin Walden
Mr. Walden has
served as Executive Vice President of KICO since February 2017 and
as Chief Actuary of KICO since December 2013. From January 2015 to
February 2017, he served as Senior Vice President of KICO and from
December 2013 to January 2015, he served as Vice President of KICO.
From February 2010 to November 2013, Mr. Walden served as Chief
Actuary for Interboro Insurance Company, a personal lines carrier.
From July 2008 to February 2010, Mr. Walden was President of
Assigned Risk Consulting, Inc., an independent actuarial consulting
firm. From October 2001 to April 2009, he served as Vice President
and Chief Actuary of AutoOne Insurance, an assigned risk automobile
servicing carrier. Mr. Walden was also an actuarial consultant at
Milliman, Inc., an independent provider of actuarial and consulting
services, from January 1998 to October 2001. Mr. Walden has been a
Fellow of the Casualty Actuarial Society since 1999 and holds a
Bachelor of Science Degree in
Mathematics
from Villanova
University.
Floyd R. Tupper
Mr.
Tupper is a certified public accountant in New York City. For over
30 years, Mr. Tupper has counseled high-net worth individuals by
creating tax planning strategies to achieve their goals as well as
those of their families. He has also helped small businesses by
developing business strategies to meet their current and future
needs. He began his career in public accounting with Ernst &
Young LLP prior to becoming self-employed. Mr. Tupper holds an
M.B.A. in Taxation from the New York University Stern School of
Business and a B.S. from New York University. Mr. Tupper has served
as a director of KICO, and Chairman of its Audit Committee, since
2006. He also serves as a member of its Investment Committee.
From 1990 until 2010, Mr. Tupper served as a Trustee of The Acorn
School in New York City. He was also a member of the school’s
Executive Committee and served as its Treasurer from 1990 to 2010.
Mr. Tupper is a member of the American Institute of Certified
Public Accountants and the New York State Society of Certified
Public Accountants. He has served as one of our directors
since June 2014 and as our Secretary since June 2015. We believe
that Mr. Tupper’s accounting experience, as well as his
service on the Board of KICO since 2006 (including his service as
Chairman of its Audit Committee), give him the qualifications and
skills to serve as one of our directors.
66
Jay M. Haft
Mr. Haft served for
more than 15 years as a personal advisor to Victor Vekselberg, a
Russian entrepreneur with considerable interests in oil, aluminum,
utilities and other industries. Mr. Haft is a partner at Columbus
Nova, the U.S.-based investment and operating arm of Mr.
Vekselberg’s Renova Group of companies. Mr. Haft is also a
strategic and financial consultant for growth stage companies. He
is active in international corporate finance and mergers and
acquisitions as well as in the representation of emerging growth
companies. Mr. Haft has extensive experience in the Russian market,
in which he has worked on growth strategies for companies looking
to internationalize their business assets and enter international
capital markets. He has been a founder, consultant and/or director
of numerous public and private corporations, and served as Chairman
of the Board of Dusa Pharmaceuticals, Inc. Mr. Haft serves on the
Board of Neurotrope, Inc., SpA, the United States-Russian Business
Counsel and The Link of Times Foundation and is an advisor to
Montezemolo & Partners. He has been instrumental in strategic
planning and fundraising for a variety of Internet and high-tech,
leading edge medical technology and marketing companies over the
years. Mr. Haft is counsel to Reed Smith, an international law
firm, as well as several other law and accounting firms. Mr. Haft
is a past member of the Florida Commission for Government
Accountability to the People, a past national trustee and Treasurer
of the Miami City Ballet, and a past Board member of the Concert
Association of Florida. He is also a past trustee of Florida
International University Foundation and previously served on the
advisory board of the Wolfsonian Museum and Florida International
University Law School. Mr. Haft served as our Vice Chairman of the
Board from February 1999 until March 2001. From October 1989 to
February 1999, he served as our Chairman of the Board and he has
served as one of our directors since 1989. Mr. Haft received B.A.
and LL.B. degrees from Yale University. We believe that Mr.
Haft’s corporate finance, business consultation, legal and
executive-level experience, as well as his service on the Board of
KICO since 2009, give him the qualifications and skills to serve as
one of our directors.
67
Jack D. Seibald
Mr. Seibald is Managing Director – Global
Co-Head of Prime Brokerage Services of Cowen Prime Services, LLC.
Mr. Seibald co-founded Concept Capital Markets, LLC (“Concept
Capital”) and, until its acquisition by Cowen Group, Inc.,
served as a Managing Member of the firm. During his tenure with
Concept Capital, Mr. Seibald was involved in the management of all
aspects of the firm’s operations, with a particular emphasis
on business and client development and legal matters. Mr. Seibald
also served as a member of the Board of Managers of Concept Capital
Holdings, LLC, the former parent of Concept Capital, Concept
Capital Administration, LLC, which provided administrative services
to Concept Capital and its affiliates, and ConceptONE, LLC, which
provides risk and performance analytic solutions, middle and back
office support services, and regulatory reporting services to
investment managers. Mr. Seibald had been affiliated with Concept
Capital and its predecessors since 1995 and has extensive
experience in prime brokerage, investment management, and
investment research dating back to 1983. From 1997 to 2005, Mr.
Seibald was also a Managing Member of Whiteford Advisors, LLC, an
investment management firm, where as co-founder, he co-managed
several pools of funds. He began his career at Oppenheimer &
Co. as an equity analyst covering the retailing industry and has
also been affiliated with Salomon Brothers and Morgan Stanley &
Co in similar positions. Mr. Seibald also operated The Seibald
Report, Inc., an independent research firm specializing in the
retailing sector. He holds an M.B.A. from Hofstra University and a
B.A. from George Washington University.
Mr. Seibald has
served as one of our directors since 2004. In January 2008, the
Financial Industry Regulatory Authority (“FINRA”)
imposed a $100,000 fine and 20-day suspension on Mr. Seibald in
connection with the settlement of a FINRA action against Sanders
Morris Harris Inc. and Mr. Seibald, among others. FINRA had found
that Mr. Seibald had improperly received compensation from a profit
pool derived, in part, from commissions on trading by a hedge fund
for which he served as a manager. We believe that Mr.
Seibald’s corporate finance and executive-level experience,
as well as his service on the Board of KICO since 2006 (including
his service as Chairman of its Investment Committee), give him the
qualifications and skills to serve as one of our
directors.
William L. Yankus
Mr. Yankus brings to the Board over 30 years’ experience
in the insurance industry. Since December 2015, Mr.
Yankus has served as Managing Director at Stonybrook Capital, a
merchant banker focused on the insurance industry, and since
September 2015 has provided insurance-related consulting services
through Pheasant Hill Advisors, LLC. From 2011 to 2015,
he was Managing Director – Investment Banking at Stern Agee
where he focused on small and mid-sized insurers. Mr.
Yankus served as Managing Director-Insurance Research at Fox-Pitt,
Kelton from 1993 to 2009 and then as Head of Insurance Research at
its successor, Macquerie, from 2009 to 2010. Mr. Yankus
served as Vice President, Insurance Research at Conning &
Company from 1985 to 1993. He is a chartered financial
analyst and a member of The CFA Institute and the American
Institute of Financial Analysts. Mr. Yankus has served
as one of our directors since March 2016. He received
his B.A. degree in Economics and Accounting from The College of the
Holy Cross. We believe that Mr. Yankus’ executive level
experience in the insurance industry gives him the qualifications
and skills to serve as one of our directors.
Family Relationships
There
are no family relationships among any of our executive officers and
directors.
Term of Office
Each
director will hold office until the next annual meeting of
stockholders and until his successor is elected and qualified or
until his earlier resignation or removal. Each executive officer
will hold office until the initial meeting of the Board of
Directors following the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier
resignation or removal.
Audit Committee
The
Audit Committee of the Board of Directors is responsible for
overseeing our accounting and financial reporting processes and the
audits of our financial statements. The members of the Audit
Committee are Messrs. Tupper, Haft, Seibald and
Yankus.
Audit Committee Financial Expert
Our
Board of Directors has determined that Mr. Tupper is an
“audit committee financial expert,” as that is defined
in Item 407(d)(5) of Regulation S-K Mr. Tupper is an
“independent director” based on the definition of
independence in Listing Rule 5605(a)(2) of The NASDAQ Stock
Market.
68
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16 of the Exchange Act requires that reports of beneficial
ownership of common shares and changes in such ownership be filed
with the Securities and Exchange Commission by Section 16
“reporting persons,” including directors, certain
officers, holders of more than 10% of the outstanding common shares
and certain trusts of which reporting persons are trustees. We are
required to disclose in this Annual Report each reporting person
whom we know to have failed to file any required reports under
Section 16 on a timely basis during the fiscal year ended December
31, 2016. To our knowledge, based solely on a review of copies of
Forms 3, 4 and 5 filed with the Securities and Exchange Commission
and written representations that no other reports were required,
during the fiscal year ended December 31, 2016, our officers,
directors and 10% stockholders complied with all Section 16(a)
filing requirements applicable to them.
Code of Ethics; Officer and Director Trading Restrictions
Policy
Our Board of Directors has adopted a Code of
Ethics for our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. Our Board of Directors has also
adopted an Officer and Director Trading Restrictions Policy for our
officers and directors as well as the officers and directors of
KICO. Copies of the Code of Ethics and Officer and Director Trading
Restrictions Policy are posted on our website,
www.kingstonecompanies.com. We intend to satisfy the disclosure
requirement under Item 5.05(c) of Form 8-K regarding an amendment
to, or a waiver from, our Code of Ethics or Officer and Director
Trading Restrictions Policy by posting such information on our
website, www.kingstonecompanies.com.
Summary Compensation Table
The
following table sets forth certain information concerning the
compensation for the fiscal years ended December 31, 2016 and 2015
for certain executive officers, including our Chief Executive
Officer:
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Option Awards (1)
|
Non-Equity
Incentive Plan
Compensation
|
All Other
Compensation
|
Total
|
|
Barry B.
Goldstein
|
2016
|
$
575,000
|
$
200,000
|
$
-
|
$
653,221
(4)
|
$
36,723
|
$
1,464,944
|
|
Chief
Executive Officer
|
2015
|
$
575,000
|
$
|
$
93,719
(2)
|
$
514,970
(5)
|
$
36,723
|
$
1,220,412
|
|
|
|
|
|
|
|
|
|
|
Victor J.
Brodsky
|
2016
|
$
294,420
|
$
34,553
|
$
-
|
$
36,295
(6)
|
$
20,592
|
$
385,860
|
|
Chief
Financial Officer
|
2015
|
$
280,400
|
$
14,377
|
$
-
|
$
33,521
(7)
|
$
20,041
|
$
348,339
|
|
|
|
|
|
|
|
|
|
|
Benjamin
Walden
|
2016
|
$
246,800
|
$
12,000
|
$
28,180
(3)
|
$
42,623
(6)
|
$
12,391
|
$
341,994
|
|
Senior Vice
President and Chief Actuary, Kingstone Insurance
Company
|
2015
|
$
235,000
|
$
-
|
$
-
|
$
40,044
(7)
|
$
13,282
|
$
288,326
|
__________
69
(1) Amounts
reflect the aggregate grant date fair value of grants made in each
respective fiscal year computed in accordance with stock-based
accounting rules (FASB ASC Topic 718-Stock Compensation), excluding
the effect of estimated forfeitures. Assumptions used in the
calculations of these amounts are included in Note 11 to our
Consolidated Financial Statements included in this Annual
Report.
(2) In 2014,
Mr. Goldstein was granted an option under our 2014 Equity
Participation Plan (the “2014 Plan”) for the purchase
of 50,000 common shares at an exercise price of $6.73 per share,
subject to stockholder approval of the 2014 Plan. In 2015,
stockholder approval of the 2014 Plan was obtained. Such option is
exercisable on the third anniversary of the date of
grant.
(3)
During 2016, Mr. Walden was granted an option
under the 2014 Plan for the purchase of 10,000 common shares at an
exercise price of $7.85 per share. Such option is exercisable to
the extent of 2,500 shares as of the date of grant and each of the
first, second and third anniversaries of the date of
grant.
(4)
Represents bonus compensation of $583,127 accrued
pursuant to Mr. Goldstein’s employment agreement and paid in
2017, and $70,094 accrued pursuant to the KICO employee profit
sharing plan and paid in 2017.
(5)
Represents bonus compensation of $445,686 accrued
pursuant to Mr. Goldstein’s employment agreement and paid in
2016, and $69,284 accrued pursuant to the KICO employee profit
sharing plan and paid in 2016.
(6)
Represents amounts accrued pursuant to the KICO
employee profit sharing plan for 2016 and paid in
2017.
(7)
Represents amounts accrued pursuant to the KICO
employee profit sharing plan for 2015 and paid in
2016.
Employment Contract
Mr.
Goldstein is employed as our President, Chairman of the Board and
Chief Executive Officer pursuant to an employment agreement, dated
January 20, 2017 (the “Goldstein Employment
Agreement”), that expires on December 31, 2019. Pursuant to
the Goldstein Employment Agreement, effective January 1, 2017,
Mr.
Goldstein is entitled to receive an annual base salary of $630,000
(an increase from $575,000 per annum in effect through December 31,
2016) and an annual bonus equal to 6% of the Company's consolidated
income from operations before taxes, exclusive of our consolidated
net investment income (loss) and net realized gains (losses) on
investments (consistent with the bonus payable to Mr. Goldstein
through December 31, 2016). In addition, pursuant to the
Goldstein Employment Agreement, Mr. Goldstein is entitled to a
long-term compensation payment ("LTC") of between $945,000 and
$2,835,000 in the event our adjusted book value per share (as
defined in the Goldstein Employment Agreement) has increased by at
least an average of 8% per annum as of December 31, 2019 as
compared to December 31, 2016 (with the maximum LTC payment being
due if the average per annum increase is at least 14%). In
consideration of certain accomplishments during the three year
period ended December 31, 2016, we also paid Mr. Goldstein a bonus
in the amount of $200,000.
See “Termination of
Employment and Change-in-Control Arrangements.”
70
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option Awards
|
|||
|
Name
|
Number of Securities Underlying
Unexercised Options
|
Number of Securities Underlying
Unexercised Options
|
Option Exercise
Price
|
Option Expiration
Date
|
|
|
Exercisable
|
Unexercisable
|
|
|
|
Barry
B. Goldstein
|
187,500
|
62,500
(1)
|
$
6.73
|
08/12/19
|
|
Victor
J. Brodsky
|
20,000
|
-
|
$
5.09
|
08/29/18
|
|
Benjamin
Walden
|
10,000
|
-
|
$
6.60
|
12/16/18
|
|
Benjamin
Walden
|
2,500
|
7,500
(2)
|
$
7.85
|
3/11/2021
|
(1)
Such options are exercisable on August 12, 2017.
(2)
Such options are exercisable to the
extent of 2,500 shares on
each of March 11, 2017, 2018 and 2019
.
Termination of Employment and
Change-in-Control
Arrangements
Pursuant to the Goldstein Employment Agreement, in the event that
Mr. Goldstein's employment is terminated by us without cause or he
resigns for good reason (each as defined in the Goldstein
Employment Agreement), Mr. Goldstein would be entitled to receive
his base salary, the 6% bonus and the LTC payment for the remainder
of the term. In addition, in such event, Mr.
Goldstein’s vested options would remain exercisable until the
first anniversary of the termination date.
Mr. Goldstein would be
entitled, under certain circumstances, to a payment equal to one
and one-half times his then annual salary and the target LTC
payment of $1,890,000 in the event of the termination of his
employment following a change of control of the
Company.
Under such
circumstances, Mr. Goldstein’s outstanding options would
become exercisable and would remain exercisable until the first
anniversary of the termination date.
Compensation of Directors
The
following table sets forth certain information concerning the
compensation of our directors for the fiscal year ended December
31, 2016:
DIRECTOR COMPENSATION
|
Name
|
Fees Earned or
Paid in Cash
|
Stock Awards
|
Option Awards
|
Total
|
|
|
|
|
|
|
|
Jay
M. Haft
|
$
50,000
|
$
-
|
-
|
$
50,000
|
|
|
|
|
|
|
|
Jack
D. Seibald
|
$
51,500
|
$
-
|
-
|
$
51,500
|
|
|
|
|
|
|
|
Floyd
R. Tupper
|
$
52,750
|
$
-
|
-
|
$
52,750
|
|
|
|
|
|
|
|
William
L. Yankus
|
$
37,867
|
$
-
|
-
|
$
37,867
|
____________________
Our
non-employee directors are currently entitled to receive annual
compensation for their services as directors as
follows:
|
●
|
$44,000
(including $6,000 for services as a director of KICO)
|
|
●
|
an
additional $6,000 for services as committee chair (and $1,500 for
services as KICO committee chair)
|
|
●
|
2,000
shares of our common stock which vest in one-third increments over
a three year period. None of the shares were vested as of December
31, 2016.
|
71
Security Ownership
The following table
sets forth certain information as of March 13, 2017 regarding the
beneficial ownership of our shares of common stock by (i) each
person who we believe to be the beneficial owner of more than 5% of
our outstanding shares of common stock, (ii) each present director,
(iii) each person listed in the Summary Compensation Table under
“Executive Compensation,” and (iv) all of our present
executive officers and directors as a group.
|
Name and
Address
of Beneficial
Owner
|
Number of
Shares
Beneficially
Owned
|
Approximate
Percent of
Class
|
|
|
|
|
|
Barry
B. Goldstein
15
Joys Lane
Kingston,
New York
|
873,672
(1)
(2)
|
8.1%
|
|
|
|
|
|
Jack
D. Seibald
1336
Boxwood Drive West
Hewlett
Harbor, New York
|
207,821
(1)
(3)
|
2.0%
|
|
|
|
|
|
Jay
M. Haft
69
Beaver Dam Road
Salisbury,
Connecticut
|
87,090
(1)
|
*
|
|
|
|
|
|
Floyd
R. Tupper
220 East 57
th
Street
New
York, New York
|
50,278
(1)
(4)
|
*
|
|
|
|
|
|
Victor
J. Brodsky
15
Joys Lane
Kingston,
New York
|
31,964
(1)
(5)
|
*
|
|
|
|
|
|
Benjamin
Walden
15
Joys Lane
Kingston,
New York
|
15,334
(1)
(6)
|
*
|
|
|
|
|
|
William
L. Yankus
10
Pheasant Hill Road
Farmington,
Connecticut
|
500
(1)
(7)
|
*
|
|
|
|
|
|
RenaissanceRe
Ventures Ltd.
Renaissance
Other Investments
Holding
II Ltd.
RenaissanceRe
Holdings Ltd.
Renaissance
House
12
Crow Lane
Pembrooke
HM19
Bermuda
|
595,238
(8)
|
5.6%
|
|
|
|
|
|
All
executive officers
and
directors as a group
(7
persons)
|
1,266,659
(1)
(2) (3) (4) (5) (6) (7)
|
11.7%
|
____________________
*
Less
than 1%.
72
|
(1)
|
Based upon Schedule
13D filed under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and/or other information that is
publicly available.
|
|
|
|
|
(2)
|
Includes (i)
187,500 shares issuable upon the exercise of options that are
exercisable currently or within 60 days and (ii) 73,168 shares
owned by Mr. Goldstein’s wife. The inclusion of
the shares owned by Mr. Goldstein’s wife shall not be
construed as an admission that Mr. Goldstein is, for purposes of
Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of
such shares.
|
|
|
|
|
(3)
|
Includes (i) 57,353
shares owned jointly by Mr. Seibald and his wife, Stephanie
Seibald; (ii) 88,731 shares held in a retirement trust for the
benefit of Mr. Seibald; and (iii) 50,755 shares owned by SDS
Partners I, Ltd. for which Mr. Seibald serves as a general
partner. Mr. Seibald has sole voting and dispositive
power over 99,713 shares and shared voting and dispositive power
over 108,108 shares. The inclusion of shares that Mr.
Seibald does not directly own shall not be deemed an admission that
Mr. Seibald is, for purposes of Section 13(d) or 13(g) of the
Exchange Act, the beneficial owner of such shares.
|
|
|
|
|
(4)
|
Includes 31,460
shares owned by Mr. Tupper’s wife. The inclusion of the
shares owned by Mr. Tupper’s wife shall not be construed as
an admission that Mr. Tupper is, for purposes of Section 13(d) or
13(g) of the Exchange Act, the beneficial owner of such
shares.
|
|
|
|
|
(5)
|
Includes (i) 20,000
shares issuable upon the exercise of currently exercisable options
and (ii) 556 shares issuable upon the vesting of restricted stock
within 60 days.
|
|
|
|
|
(6)
|
Includes 10,000
shares issuable upon the exercise of options that are exercisable
currently or within 60 days and (ii) 334 shares issuable upon the
vesting of restricted stock within 60 days.
|
|
|
|
|
(7)
|
Represents shares
issuable upon the vesting of restricted stock within 60
days.
|
|
|
|
|
(8)
|
Pursuant to
Schedule 13G, as amended, RenaissanceRe Ventures Ltd.
(“RenaissanceRe Ventures”), a wholly owned subsidiary
of Renaissance Other Investments Holdings II Ltd. (“ROIHL
II”), a wholly owned subsidiary of RenaissanceRe Holdings
Ltd. (“RenaissanceRe Holdings”), have shared voting and
dispositive power over the 595,238 shares. RenaissanceRe Ventures,
ROIHL II and RenaissanceRe Holdings each may be deemed to
beneficially own the 595,238 shares.
|
73
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table
sets forth information as of December 31, 2016 with respect to
compensation plans (including individual compensation arrangements)
under which our common shares are authorized for issuance,
aggregated as follows:
●
All compensation
plans previously approved by security holders; and
●
All compensation
plans not previously approved by security holders.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
362,750
|
$
6.62
|
602,500
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
$
-
|
-
|
|
|
|
|
|
|
Total
|
362,750
|
|
602,500
|
Director Independence
Board of Directors
Our
Board of Directors is currently comprised of Barry B. Goldstein,
Jay M. Haft, Jack D. Seibald, Floyd R. Tupper and William L.
Yankus. Each of Messrs. Haft, Seibald, Tupper and Yankus is
currently an “independent director” based on the
definition of independence in Listing Rule 5605(a)(2) of The NASDAQ
Stock Market.
Audit Committee
The members of our
Board’s Audit Committee currently are Messrs. Tupper, Haft,
Seibald and Yankus, each of whom is an “independent
director” based on the definition of independence in Listing
Rule 5605(a)(2) of The NASDAQ Stock Market and Rule 10A-3(b)(1)
under the Exchange Act.
74
Nominating and Corporate Governance Committee
The members of our
Board’s Nominating and Corporate Governance Committee
currently are Messrs. Haft, Seibald, Tupper and Yankus, each of
whom is an “independent director” based on the
definition of independence in Listing Rule 5605(a)(2) of The NASDAQ
Stock Market.
Compensation Committee
The members of our
Board’s Compensation Committee currently are Messrs. Seibald,
Haft and Tupper, each of whom is an “independent
director” based on the definition of independence in Listing
Rule 5605(a)(2) of The NASDAQ Stock Market.
The following is a
summary of the fees billed to us by Marcum LLP, our independent
auditors, for professional services rendered for the fiscal year
ended December 31, 2016 and 2015.
|
Fee
Category
|
Fiscal 2016
Fees
|
Fiscal 2015
Fees
|
|
Audit
Fees(1)
|
$
210,451
|
$
203,749
|
|
Audit-Related
Fees(2)
|
$
2,060
|
$
-
|
|
Tax
Fees(3)
|
$
-
|
$
5,379
|
|
All Other
Fees(4)
|
$
-
|
$
-
|
|
|
$
212,511
|
$
209,128
|
____________________
|
(1)
|
Audit Fees consist
of fees billed for services rendered for the audit of our
consolidated financial statements and review of our condensed
consolidated financial statements included in our quarterly reports
on Form 10-Q, services rendered in connection with the filing of
Forms S-3 and S-8 and services provided in connection with other
statutory or regulatory filings.
|
|
|
|
|
(2)
|
Audit-Related Fees
consist of aggregate fees billed for assurance and related services
that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under
“Audit Fees.”
|
|
|
|
|
(3)
|
Tax Fees consist of
fees billed by our independent auditors for professional services
related to tax advice.
|
|
|
|
|
(4)
|
All Other Fees
consist of aggregate fees billed for products and services provided
by our independent auditors, other than those disclosed
above.
|
The Audit Committee
is responsible for the appointment, compensation and oversight of
the work of the independent auditors and approves in advance any
services to be performed by the independent auditors, whether
audit-related or not. The Audit Committee reviews each proposed
engagement to determine whether the provision of services is
compatible with maintaining the independence of the independent
auditors. Substantially all of the fees shown above were
pre-approved by the Audit Committee.
75
|
Exhibit
Number
|
Description of Exhibit
|
|
|
|
|
3(a)
|
Restated
Certificate of Incorporation, as amended (1)
|
|
|
|
|
3(b)
|
By-laws,
as amended (2)
|
|
|
|
|
10(a)
|
2005
Equity Participation Plan (3)
|
|
|
|
|
10(b)
|
2014
Equity Participation Plan (4)
|
|
|
|
|
10(c)
|
Employment
Agreement, dated as of January 20, 2017, between Kingstone
Companies, Inc. and Barry B. Goldstein (5)
|
|
|
|
|
10(d)
|
Employment
Agreement, dated as of May 10, 2011, between Kingstone Insurance
Company and Barry B. Goldstein (6)
|
|
|
|
|
10(e)
|
Amendment
No. 1, dated as of May 14, 2012, to Employment Agreement between
Kingstone Insurance Company and Barry B. Goldstein (7)
|
|
|
|
|
10(f)
|
Amendment
No. 2, dated January 1, 2015, between Kingstone Insurance Company
and Barry B. Goldstein
|
|
|
|
|
10(g)
|
Stock
Option Agreement, dated as of August 12, 2014, between Kingstone
Companies, Inc. and Barry B. Goldstein (2005 Equity Participation
Plan) (4)
|
|
|
|
|
10(h)
|
Stock
Option Agreement, dated as of August 12, 2014, between Kingstone
Companies, Inc. and Barry B. Goldstein (2014 Equity Participation
Plan) (4)
|
|
|
|
|
10(i)
|
Purchase
Agreement, dated April 18, 2016, by and between Kingstone
Companies, Inc. and RenaissanceRe Ventures Ltd. (8)
|
|
|
|
|
10(j)
|
Underwriting
Agreement, dated January 25, 2017, among Kingstone Companies, Inc.,
the selling stockholders named therein and Sandler O’Neill
& Partners, L.P., as representative of the underwriters named
therein (9)
|
|
|
|
|
14(a)
|
Code
of Ethics (3)
|
|
|
|
|
14(b)
|
Officer
and Director Trading Restrictions Policy (3)
|
|
|
|
|
21
|
Subsidiaries
|
|
|
|
|
23
|
Consent
of Marcum LLP
|
|
|
|
76
|
31(a)
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive Officer as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
31(b)
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
|
|
101.SCH
|
101.SCH
XBRL Taxonomy Extension Schema.
|
|
|
|
|
101.CAL
|
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
|
|
|
|
|
101.DEF
|
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
|
|
|
|
|
101.LAB
|
101.LAB
XBRL Taxonomy Extension Label Linkbase.
|
|
|
|
|
101.PRE
|
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
|
____________________
|
(1)
|
Denotes
document filed as an exhibit to our Quarterly Report on Form 10-Q
for the period ended March 31, 2014 and incorporated herein by
reference.
|
|
|
|
|
(2)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated November 5, 2009 and incorporated herein by
reference.
|
|
|
|
|
(3)
|
Denotes
document filed as an exhibit to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2014 and incorporated herein by
reference.
|
|
|
|
|
(4)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated August 12, 2014 and incorporated herein by
reference.
|
|
|
|
|
(5)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated January 20, 2017 and incorporated herein by
reference.
|
|
|
|
|
(6)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated May 10, 2011 and incorporated herein by
reference.
|
|
|
|
|
(7)
|
Denotes
document filed as an exhibit to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2012 and incorporated herein by
reference.
|
|
|
|
|
(8)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated April 18, 2016 and incorporated herein by
reference.
|
|
|
|
|
(9)
|
Denotes
document filed as an exhibit to our Current Report on Form 8-K for
an event dated January 25, 2017 and incorporated herein by
reference.
|
Not
applicable.
77
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
KINGSTONE
COMPANIES, INC.
|
|
|
|
|
|
|
|
|
Dated: March 16,
2017
|
By:
|
/s/
Barry
B. Goldstein
|
|
|
|
|
Barry B.
Goldstein
|
|
|
|
|
Chief Executive
Officer
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature
|
Capacity
|
Date
|
|
|
|
|
|
/s/ Barry B.
Goldstein
|
President, Chairman
of the Board,
Chief Executive
Officer,
Treasurer and
Director (Principal Executive Officer)
|
March 16,
2017
|
|
Barry B.
Goldstein
|
|
|
|
|
|
|
|
/s/ Victor J.
Brodsky
|
Chief Financial
Officer and Treasurer
(Principal
Financial and Accounting Officer)
|
March 16,
2017
|
|
Victor J.
Brodsky
|
|
|
|
|
|
|
|
/s/ Jay M.
Haft
|
Director
|
March 16,
2017
|
|
J
ay M.
Haft
|
|
|
|
|
|
|
|
/s/ Floyd R.
Tupper
|
Director
|
March 16,
2017
|
|
Floyd R.
Tupper
|
|
|
|
|
|
|
|
/s/ Jack D.
Seibald
|
Director
|
March 16,
2017
|
|
Jack D.
Seibald
|
|
|
|
|
|
|
|
/s/ William L.
Yankus
|
Director
|
March 16,
2017
|
|
William L.
Yankus
|
|
|
78
Index to Consolidated Financial Statements
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2016 and 2015
|
F-3
|
|
Consolidated
Statements of Income and Comprehensive Income for the years ended
December 31, 2016 and 2015
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2016 and 2015
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2016
and 2015
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Audit Committee of the
Board
of Directors and Shareholders
of
Kingstone Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets
of
Kingstone Companies, Inc. and Subsidiaries
(the “Company”) as
of
December 31, 2016 and 2015, and the related
consolidated statements of income and comprehensive income,
stockholders’ equity and cash flows for the years then ended.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of
Kingstone
Companies, Inc. and Subsidiaries
, as
of
December 31, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America
.
/s/
Marcum LLP
Marcum
llp
Melville,
NY
March
16, 2017
F-2
|
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
|
||
|
|
|
|
|
|
December
31,
|
December
31,
|
|
|
2016
|
2015
|
|
|
|
|
|
Assets
|
|
|
|
Fixed-maturity
securities, held-to-maturity, at amortized cost (fair value
of
|
|
|
|
$5,298,119
at December 31, 2016 and $5,241,095 at December 31,
2015)
|
$
5,094,902
|
$
5,138,872
|
|
Fixed-maturity
securities, available-for-sale, at fair value (amortized cost
of
|
|
|
|
$80,596,628
at December 31, 2016 and $62,221,129 at December 31,
2015)
|
80,428,828
|
62,502,064
|
|
Equity
securities, available-for-sale, at fair value (cost of
$9,709,385
|
|
|
|
at
December 31, 2016 and $8,751,537 at December 31, 2015)
|
9,987,686
|
9,204,270
|
|
Total
investments
|
95,511,416
|
76,845,206
|
|
Cash
and cash equivalents
|
12,044,520
|
13,551,372
|
|
Premiums
receivable, net
|
11,649,398
|
10,621,655
|
|
Reinsurance
receivables, net
|
32,197,765
|
31,270,235
|
|
Deferred
policy acquisition costs
|
12,239,781
|
10,835,306
|
|
Intangible
assets, net
|
1,350,000
|
1,757,816
|
|
Property
and equipment, net
|
3,011,373
|
3,152,266
|
|
Other
assets
|
1,442,209
|
1,095,894
|
|
Total assets
|
$
169,446,462
|
$
149,129,750
|
|
|
|
|
|
Liabilities
|
|
|
|
Loss
and loss adjustment expense reserves
|
$
41,736,719
|
$
39,876,500
|
|
Unearned
premiums
|
54,994,375
|
48,890,241
|
|
Advance
premiums
|
1,421,560
|
1,199,376
|
|
Reinsurance
balances payable
|
2,146,017
|
1,688,922
|
|
Deferred
ceding commission revenue
|
6,851,841
|
6,435,068
|
|
Accounts
payable, accrued expenses and other liabilities
|
5,448,448
|
4,826,603
|
|
Income
taxes payable
|
-
|
263,622
|
|
Deferred
income taxes
|
166,949
|
672,190
|
|
Total liabilities
|
112,765,909
|
103,852,522
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
Preferred
stock, $.01 par value; authorized 2,500,000 shares
|
-
|
-
|
|
Common
stock, $.01 par value; authorized 20,000,000 shares; issued
8,896,335 shares
|
|
|
|
at
December 31, 2016 and 8,289,606 at December 31, 2015;
outstanding
|
|
|
|
7,921,866
shares at December 31, 2016 and 7,328,637 shares at December 31,
2015
|
88,963
|
82,896
|
|
Capital
in excess of par
|
37,950,401
|
32,987,082
|
|
Accumulated
other comprehensive income
|
72,931
|
484,220
|
|
Retained
earnings
|
20,563,720
|
13,605,225
|
|
|
58,676,015
|
47,159,423
|
|
Treasury
stock, at cost, 974,469 shares at December 31, 2016 and 960,969
shares
|
|
|
|
at
December 31, 2015
|
(1,995,462
)
|
(1,882,195
)
|
|
Total stockholders' equity
|
56,680,553
|
45,277,228
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
169,446,462
|
$
149,129,750
|
See accompanying notes to these consolidated financial
statements.
F-3
|
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
||
|
Years ended December 31,
|
2016
|
2015
|
|
|
|
|
|
Revenues
|
|
|
|
Net
premiums earned
|
$
61,407,906
|
$
48,612,082
|
|
Ceding
commission revenue
|
11,268,241
|
11,473,117
|
|
Net
investment income
|
3,115,583
|
2,563,890
|
|
Net
realized gains (losses) on sales of investments
|
529,448
|
(50,546
)
|
|
Other
income
|
1,115,486
|
1,577,191
|
|
Total
revenues
|
77,436,664
|
64,175,734
|
|
|
|
|
|
Expenses
|
|
|
|
Loss
and loss adjustment expenses
|
27,789,661
|
23,180,000
|
|
Commission
expense
|
18,327,190
|
15,317,140
|
|
Other
underwriting expenses
|
14,866,646
|
12,833,391
|
|
Other
operating expenses
|
1,909,779
|
1,504,121
|
|
Depreciation
and amortization
|
1,124,921
|
1,032,009
|
|
Total
expenses
|
64,018,197
|
53,866,661
|
|
|
|
|
|
Income
from operations before taxes
|
13,418,467
|
10,309,073
|
|
Income
tax expense
|
4,518,701
|
3,349,453
|
|
Net income
|
8,899,766
|
6,959,620
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
|
Gross
change in unrealized gains (losses)
|
|
|
|
on
available-for-sale-securities
|
(93,718
)
|
(750,716
)
|
|
|
|
|
|
Reclassification
adjustment for (gains) losses
|
|
|
|
included
in net income
|
(529,448
)
|
50,546
|
|
Net
change in unrealized gains (losses)
|
(623,166
)
|
(700,170
)
|
|
Income
tax benefit related to items
|
|
|
|
of
other comprehensive income (loss)
|
211,877
|
238,058
|
|
Other comprehensive loss, net of tax
|
(411,289
)
|
(462,112
)
|
|
|
|
|
|
Comprehensive income
|
$
8,488,477
|
$
6,497,508
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
Basic
|
$
1.15
|
$
0.95
|
|
Diluted
|
$
1.14
|
$
0.94
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
Basic
|
7,736,594
|
7,331,114
|
|
Diluted
|
7,807,263
|
7,377,880
|
|
|
|
|
|
Dividends declared and paid per common share
|
$
0.2500
|
$
0.2125
|
See accompanying notes to these consolidated financial
statements.
F-4
KINGSTONE COMPANIES, INC. AND
SUBSIDIARIES
Consolidated
Statement of Stockholders' Equity
Years
ended December 31, 2016 and 2015
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Capital
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
Common Stock
|
in Excess
|
Comprehensive
|
Retained
|
Treasury Stock
|
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
of Par
|
Income
|
Earnings
|
Shares
|
Amount
|
Total
|
|
Balance,
January 1, 2015
|
-
|
$
-
|
8,235,095
|
$
82,351
|
$
32,873,383
|
$
946,332
|
$
8,203,003
|
926,338
|
$
(1,604,173
)
|
$
40,500,896
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
134,185
|
-
|
-
|
-
|
-
|
134,185
|
|
Shares
deducted from exercise of stock
|
|
|
|
|
|
|
|
|
|
|
|
options for
payment of withholding taxes
|
-
|
-
|
(30,755
)
|
(308
)
|
(243,354
)
|
-
|
-
|
-
|
-
|
(243,662
)
|
|
Excess tax
benefit from exercise
|
|
|
|
|
|
|
|
|
|
|
|
of stock
options
|
-
|
-
|
-
|
-
|
223,721
|
-
|
-
|
-
|
-
|
223,721
|
|
Exercise of
stock options
|
-
|
-
|
85,266
|
853
|
(853
)
|
-
|
-
|
-
|
-
|
-
|
|
Acquisition of
treasury stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
34,631
|
(278,022
)
|
(278,022
)
|
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,557,398
)
|
-
|
-
|
(1,557,398
)
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
6,959,620
|
-
|
-
|
6,959,620
|
|
Change in
unrealized losses on available-
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities, net of tax
|
-
|
-
|
-
|
-
|
-
|
(462,112
)
|
-
|
-
|
-
|
(462,112
)
|
|
Balance, December 31, 2015
|
-
|
-
|
8,289,606
|
82,896
|
32,987,082
|
484,220
|
13,605,225
|
960,969
|
(1,882,195
)
|
45,277,228
|
|
Proceeds from
private placement, net of
|
|
|
|
|
|
|
|
|
|
|
|
closing costs
of $192,369
|
-
|
-
|
595,238
|
5,952
|
4,801,679
|
-
|
-
|
-
|
-
|
4,807,631
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
106,882
|
-
|
-
|
-
|
-
|
106,882
|
|
Excess tax
benefit from exercise
|
|
|
|
|
|
|
|
|
|
|
|
of stock
options
|
-
|
-
|
-
|
-
|
563
|
-
|
-
|
-
|
-
|
563
|
|
Exercise of
stock options
|
-
|
-
|
11,491
|
115
|
54,195
|
-
|
-
|
-
|
-
|
54,310
|
|
Acquisition of
treasury stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
13,500
|
(113,267
)
|
(113,267
)
|
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,941,271
)
|
-
|
-
|
(1,941,271
)
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
8,899,766
|
-
|
-
|
8,899,766
|
|
Change in
unrealized gains on available-
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities, net of tax
|
-
|
-
|
-
|
-
|
-
|
(411,289
)
|
-
|
-
|
-
|
(411,289
)
|
|
Balance,
December 31, 2016
|
-
|
$
-
|
8,896,335
|
$
88,963
|
$
37,950,401
|
$
72,931
|
$
20,563,720
|
974,469
|
$
(1,995,462
)
|
$
56,680,553
|
See accompanying notes to these consolidated financial
statements.
F-5
|
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
|
||
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
2016
|
2015
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
Net
income
|
$
8,899,766
|
$
6,959,620
|
|
Adjustments
to reconcile net income to net cash flows provided by operating
activities:
|
|
|
|
Net
realized (gains) losses on sale of investments
|
(529,448
)
|
50,546
|
|
Depreciation
and amortization
|
1,124,921
|
1,032,009
|
|
Amortization
of bond premium, net
|
449,632
|
323,773
|
|
Stock-based
compensation
|
106,882
|
134,185
|
|
Excess
tax benefit from exercise of stock options
|
(563
)
|
(223,721
)
|
|
Deferred
income tax expense
|
(293,364
)
|
(226,932
)
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Premiums
receivable, net
|
(1,027,743
)
|
(1,674,756
)
|
|
Receivables
- reinsurance contracts
|
-
|
1,301,549
|
|
Reinsurance
receivables, net
|
(927,530
)
|
4,305,041
|
|
Deferred
policy acquisition costs
|
(1,404,475
)
|
(1,849,325
)
|
|
Other
assets
|
(615,681
)
|
224,211
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Loss
and loss adjustment expense reserves
|
1,860,219
|
(36,183
)
|
|
Unearned
premiums
|
6,104,134
|
8,432,200
|
|
Advance
premiums
|
222,184
|
192,794
|
|
Reinsurance
balances payable
|
457,095
|
(407,441
)
|
|
Deferred
ceding commission revenue
|
416,773
|
478,528
|
|
Accounts
payable, accrued expenses and other liabilities
|
358,223
|
1,385,809
|
|
Net cash flows provided by operating activities
|
15,201,025
|
20,401,907
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
- fixed-maturity securities available-for-sale
|
(36,551,218
)
|
(19,152,457
)
|
|
Purchase
- equity securities available-for-sale
|
(7,464,764
)
|
(3,766,972
)
|
|
Sale
or maturity - fixed-maturity securities
available-for-sale
|
17,752,130
|
6,577,943
|
|
Sale
- equity securities available-for-sale
|
7,073,773
|
2,689,113
|
|
Acquisition
of fixed assets
|
(576,212
)
|
(1,260,519
)
|
|
Other
investing activities
|
250,448
|
10,840
|
|
Net cash flows used in investing activities
|
(19,515,843
)
|
(14,902,052
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Net
proceeds from issuance of common stock
|
4,807,631
|
-
|
|
Proceeds
from exercise of stock options
|
54,310
|
-
|
|
Withholding
taxes paid on net exercise of stock options
|
-
|
(243,662
)
|
|
Excess
tax benefit from exercise of stock options
|
563
|
223,721
|
|
Purchase
of treasury stock
|
(113,267
)
|
(278,022
)
|
|
Dividends
paid
|
(1,941,271
)
|
(1,557,398
)
|
|
Net cash flows provided by (used in) financing
activities
|
2,807,966
|
(1,855,361
)
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
$
(1,506,852
)
|
$
3,644,494
|
|
Cash
and cash equivalents, beginning of period
|
13,551,372
|
9,906,878
|
|
Cash and cash equivalents, end of period
|
$
12,044,520
|
$
13,551,372
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Cash
paid for income taxes
|
$
6,028,671
|
$
3,596,754
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Value
of shares deducted from exercise of stock options for payment of
withholding taxes
|
$
-
|
$
243,662
|
See accompanying notes to these consolidated financial
statements.
F-6
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Kingstone
Companies, Inc. (referred to herein as "Kingstone" or the
“Company”), through its wholly owned subsidiary,
Kingstone Insurance Company (“KICO”), underwrites
property and casualty insurance to small businesses and individuals
exclusively through independent agents and brokers. KICO is a
licensed insurance company in the States of New York, New Jersey,
Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO
writes substantially all of its business in New York. Through March
31, 2015, Kingstone, through its wholly owned subsidiary, Payments
Inc., a licensed premium finance company in the State of New York,
received fees for placing contracts with a third party licensed
premium finance company (see Note 18 – Premium Finance
Placement Fees).
Basis of Presentation
The
accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
Principles of Consolidation
The
consolidated financial statements consist of Kingstone and its
wholly owned subsidiaries; (1) KICO and its wholly owned
subsidiaries, CMIC Properties, Inc. (“Properties”) and
15 Joys Lane, LLC (“15 Joys Lane”), which together own
the land and building from which KICO operates, and (2) Payments
Inc. All significant inter-company transactions have been
eliminated in consolidation.
Revenue Recognition
Net Premiums Earned
Insurance
policies issued by the Company are short-duration contracts.
Accordingly, premium revenues, net of premiums ceded to reinsurers,
are recognized as earned in proportion to the amount of insurance
protection provided, on a pro-rata basis over the terms of the
underlying policies. Unearned premiums represent premiums
applicable to the unexpired portions of in-force insurance
contracts at the end of each year.
Ceding Commission Revenue
Commissions on
reinsurance premiums ceded are earned in a manner consistent with
the recognition of the costs of the reinsurance, generally on a
pro-rata basis over the terms of the policies reinsured. Unearned
amounts are recorded as deferred ceding commission revenue. Certain
reinsurance agreements contain provisions whereby the ceding
commission rates vary based on the loss experience under the
agreements. The Company records ceding commission revenue based on
its current estimate of subject losses. The Company records
adjustments to the ceding commission revenue in the period that
changes in the estimated losses are determined.
Premium Finance Placement Fees
Premium
finance placement fees are earned in the period when the contracts
are placed with the third party premium finance company. Premium
finance placement fees are included in “Other income”
in the accompanying consolidated statements of income and
comprehensive income (see Note 18 – Premium Finance Placement
Fees).
F-7
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Liability for Loss and Loss Adjustment Expenses (“LAE”)
Reserves
The
liability for loss and LAE represents management’s best
estimate of the ultimate cost of all reported and unreported losses
that are unpaid as of the balance sheet date. The liability for
losses and LAE is estimated on an undiscounted basis, using
individual case-basis valuations, statistical analyses and various
actuarial reserving methodologies. The projection of future claim
payment and reporting is based on an analysis of the
Company’s historical experience, supplemented by analyses of
industry loss data. Management believes that the reserves for loss
and LAE are adequate to cover the ultimate cost of losses and
claims to date; however, because of the uncertainty from various
sources, including changes in reporting patterns, claims settlement
patterns, judicial decisions, legislation, and economic conditions,
actual loss experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the balance
sheet date. Adjustments to these estimates are reflected in expense
for the period in which the estimates are changed. Because of the
nature of the business historically written, management believes
that the Company has limited exposure to environmental claim
liabilities.
Reinsurance
In
the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause
unfavorable underwriting results. This is done by reinsuring
certain levels of risk in various areas of exposure with a panel of
financially secure reinsurance carriers.
Reinsurance
receivables represents management’s best estimate of paid and
unpaid loss and LAE recoverable from reinsurers, and ceded losses
receivable and unearned ceded premiums under reinsurance
agreements. Ceded losses receivable are estimated using techniques
and assumptions consistent with those used in estimating the
liability for loss and LAE. Management believes that reinsurance
receivables as recorded represent its best estimate of such
amounts; however, as changes in the estimated ultimate liability
for loss and LAE are determined, the estimated ultimate amount
receivable from the reinsurers will also change. Accordingly, the
ultimate receivable could be significantly in excess of or less
than the amount recorded in the consolidated financial statements.
Adjustments to these estimates are reflected in the period in which
the estimates are changed. Loss and LAE incurred as presented in
the consolidated statement of income and comprehensive income are
net of reinsurance recoveries.
Management
has evaluated its reinsurance arrangements and determined that
significant insurance risk is transferred to the reinsurers.
Reinsurance agreements have been determined to be short-duration
prospective contracts and, accordingly, the costs of the
reinsurance are recognized over the life of the contract in a
manner consistent with the earning of premiums on the underlying
policies subject to the reinsurance contract.
Management
estimates uncollectible amounts receivable from reinsurers based on
an assessment of factors including the creditworthiness of the
reinsurers and the adequacy of collateral obtained, where
applicable. There was no allowance for uncollectible reinsurance as
of December 31, 2016 and 2015. The Company did not expense any
uncollectible reinsurance for the years ended December 31, 2016 and
2015. Significant uncertainties are inherent in the assessment of
the creditworthiness of reinsurers and estimates of any
uncollectible amounts due from reinsurers. Any change in the
ability of the Company’s reinsurers to meet their contractual
obligations could have a material adverse effect on the
consolidated financial statements as well as KICO’s ability
to meet its regulatory capital and surplus
requirements.
F-8
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Cash and Cash Equivalents
Cash and cash equivalents are presented at cost, which approximates
fair value. The Company considers all highly liquid investments
with original maturities of three months or less to be cash
equivalents. The Company maintains its cash balances at several
financial institutions.
Investments
The Company classifies its fixed-maturity securities as either
held-to- maturity or available-for-sale and its equity securities
as available-for-sale. The Company may sell its available-for-sale
securities in response to changes in interest rates, risk/reward
characteristics, liquidity needs or other factors. Fixed-maturity
securities that the Company has the specific intent and ability to
hold until maturity are classified as such and carried at amortized
cost.
Available-for-sale securities are reported at their estimated fair
values based on quoted market prices from a recognized pricing
service, with unrealized gains and losses, net of tax effects,
reported as a separate component of accumulated other comprehensive
income in the consolidated statements of stockholders’
equity. Realized gains and losses are determined on the specific
identification method and recognized in the consolidated statements
of income and comprehensive income.
Investment income is accrued to the date of the consolidated
financial statements and includes amortization of premium and
accretion of discount on fixed-maturities. Interest is recognized
when earned, while dividends are recognized when declared. As of
December 31, 2016 and 2015, due and accrued investment income was
approximately $694,000 for both periods
and is
included in other assets on the accompanying consolidated balance
sheets.
Premiums Receivable
Premiums
receivable are presented net of an allowance for doubtful accounts
of approximately $212,000 and $231,000 as of December 31, 2016 and
2015, respectively. The allowance for uncollectible amounts is
based on an analysis of amounts receivable giving consideration to
historical loss experience and current economic conditions and
reflects an amount that, in management’s judgment, is
adequate. Uncollectible premiums receivable balances of
approximately $98,000 and $72,000 were written off for the years
ended December 31, 2016 and 2015, respectively.
Deferred Policy Acquisition Costs
Deferred policy
acquisition costs represent the costs of writing business that vary
with, and are primarily related to, the successful production of
insurance business (principally commissions, premium taxes and
certain underwriting salaries). Policy acquisition costs are
deferred and recognized as expense as related premiums are
earned.
F-9
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Intangible Assets
The Company has
recorded acquired identifiable intangible assets. The cost of a
group of assets acquired in a transaction is allocated to the
individual assets including identifiable intangible assets based on
their relative fair values. Identifiable intangible assets with a
finite useful life are amortized over the period that the asset is
expected to contribute directly or indirectly to the future cash
flows of the Company. Intangible assets with an indefinite life are
not amortized, but are subject to annual impairment testing. All
identifiable intangible assets are tested for recoverability
whenever events or changes in circumstances indicate that a
carrying amount may not be recoverable. No impairment losses from
intangible assets were recognized for the years ended December 31,
2016 and 2015.
Property and Equipment
Building
and building improvements, furniture, computer equipment, and
software are reported at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. The Company estimates the
useful life for computer equipment, computer software, automobile,
furniture and other equipment is three years, and building and
building improvements is 39 years.
The
Company reviews its real estate assets used as its headquarters to
evaluate the necessity of recording impairment losses for market
changes due to declines in the fair value of the property. In
evaluating potential impairment, management considers the current
estimated fair value compared to the carrying value of the asset.
At December 31, 2016 and 2015, the fair value of the real estate
assets is estimated to be in excess of the carrying
value.
Income Taxes
Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis and for operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. The Company files a consolidated tax
return with its subsidiaries
.
At December 31, 2016, the Company had no material unrecognized tax
benefits and no adjustments to liabilities or operations were
required.
Assessments
Insurance
related assessments are accrued in the period in which they have
been incurred. A typical obligating event would be the issuance of
an insurance policy or the occurrence of a claim. The Company is
subject to a variety of assessments.
Concentration and Credit Risk
Financial
instruments that potentially subject the Company to concentration
of credit risk are primarily cash and cash equivalents,
investments, and premium and reinsurance receivables. Investments
are diversified through many industries and geographic regions
based upon KICO’s Investment Committee’s guidelines,
which employs a variety of investment strategies. The Company
believes that no significant concentration of credit risk exists
with respect to investments. At times, cash may be uninsured or in
deposit accounts that exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance limits. The Company has
not experienced any losses in such accounts and management believes
the Company is not exposed to any significant credit risk. Cash
equivalents are not insured by the FDIC.
F-10
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
As
of December 31, 2016 and 2015, the Company had deposits of cash
equivalents as follows:
|
|
December
31,
|
December
31,
|
|
|
2016
|
2015
|
|
|
|
|
|
Collateralized
bank repurchase agreement (1)
|
$
6,268,647
|
$
3,992,509
|
|
Money
market fund
|
3,121,155
|
7,505,531
|
|
Total
|
$
9,389,802
|
$
11,498,040
|
(1)
The Company has a security interest in certain of the bank's
holdings of direct obligations of the United States or one or more
agencies thereof. The collateral is held in a hold-in-custody
arrangement with a third party who maintains physical possession of
the collateral on behalf of the bank.
At December 31, 2016, the outstanding premiums receivable balance
is generally diversified due to the large number of individual
insureds comprising the Company’s customer base. The
Company’s customer base is largely concentrated in the area
of New York City and adjacent Long Island. The Company also has
receivables from its reinsurers.
Reinsurance contracts do not relieve the Company of its obligations
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company periodically
evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. See
Note 7 for reinsurance recoverables on unpaid and paid losses by
reinsurer. Management’s policy is to review all outstanding
receivables at period end as well as the bad debt write-offs
experienced in the past and establish an allowance for doubtful
accounts, if deemed necessary.
Direct premiums earned from lines of business in excess of 10% of
the total subject the Company to concentration risk for the years
ended December 31, 2016 and 2015 as follows:
|
|
Years ended December 31,
|
|
|
|
2016
|
2015
|
|
Personal
Lines
|
76.8
%
|
75.4
%
|
|
Commercial
Lines
|
12.8
%
|
13.6
%
|
|
Livery
physical damage
|
10.1
%
|
na
|
|
Total
premiums earned subject to concentration
|
99.7
%
|
89.0
%
|
|
Premiums
earned not subject to concentration
|
0.3
%
|
11.0
%
|
|
Total
premiums earned
|
100.0
%
|
100.0
%
|
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Such estimates and
assumptions, which include the reserves for losses and loss
adjustment expenses, are subject to estimation errors due to the
inherent uncertainty in projecting ultimate claim amounts that will
be reported and settled over a period of many years. In addition,
estimates and assumptions associated with receivables under
reinsurance contracts related to contingent ceding commission
revenue require judgments by management. On an on-going basis,
management reevaluates its assumptions and the methods for
calculating these estimates. Actual results may differ
significantly from the estimates and assumptions used in preparing
the consolidated financial statements.
F-11
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Earnings per share
Basic
earnings per common share is computed by dividing income available
to common stockholders by the weighted-average number of common
shares outstanding. Diluted earnings per common share reflect, in
periods in which they have a dilutive effect, the impact of common
shares issuable upon exercise of stock options. The computation of
diluted earnings per share excludes those with an exercise price in
excess of the average market price of the Company’s common
shares during the periods presented.
Advertising Costs
Advertising
costs are charged to operations when the advertising is initiated.
Advertising costs are included in other underwriting expenses in
the accompanying consolidated statements of income and
comprehensive income, and were approximately $169,000 and $75,000
for the years ended December 31, 2016 and 2015,
respectively.
Stock-based Compensation
Stock-based
compensation expense in 2016 and 2015 is the estimated fair value
of options granted amortized on a straight-line basis over the
requisite service period for the entire portion of the award less
an estimate for anticipated forfeitures. The Company uses the
“simplified” method to estimate the expected term of
the options because the Company’s historical share option
exercise experience does not provide a reasonable basis upon which
to estimate expected term.
Comprehensive Income
Comprehensive income refers to revenue, expenses,
gains and losses that are included in comprehensive income but are
excluded from net income as these amounts are recorded directly as
an adjustment to stockholders' equity, primarily from changes in
unrealized gains and losses on available-for-sale
securities
.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09
– Revenue from Contracts with Customers (Topic 606). The core
principle of the new guidance is that an entity should recognize
revenue to reflect the transfer of goods and services to customers
in an amount equal to the consideration the entity receives or
expects to receive. ASU 2014-09, as amended by ASU 2015-14, ASU
2016-08 and ASU 2016-10, is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within
that reporting period. Early adoption is permitted for annual
reporting periods beginning after December 15, 2016. The Company
will apply the guidance using a modified retrospective approach.
The Company does not expect these amendments to have a material
effect on its consolidated financial statements.
F-12
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
In
February 2016, FASB issued ASU 2016-02 – Leases (Topic 842).
Under this ASU, lessees will recognize a right-of-use asset and
corresponding liability on the balance sheet for all leases, except
for leases covering a period of fewer than 12 months. The liability
is to be measured as the present value of the future minimum lease
payments taking into account renewal options if applicable plus
initial incremental direct costs such as commissions. The minimum
payments are discounted using the rate implicit in the lease or, if
not known, the lessee’s incremental borrowing rate. The
lessee’s income statement treatment for leases will vary
depending on the nature of what is being leased. A financing type
lease is present when, among other matters, the asset is being
leased for a substantial portion of its economic life or has an
end-of-term title transfer or a bargain purchase option as in
today’s practice. The payment of the liability set up for
such leases will be apportioned between interest and principal; the
right-of use asset will be generally amortized on a straight-line
basis. If the lease does not qualify as a financing type lease, it
will be accounted for on the income statement as rent on a
straight-line basis. The guidance will be effective for the Company
for reporting periods beginning after December 15, 2018. The
Company will apply the guidance using a modified retrospective
approach. Early application is permitted. The Company does not
expect the adoption of ASU 2016-02 to have a significant impact on
its consolidated results of operations, financial position or cash
flows.
In
March 2016, FASB issued ASU 2016-09 – Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments are intended to improve the
accounting for employee share-based payments. These amendments to
current accounting guidance will require all income tax effects of
awards to be recognized in the income statement when the awards
vest or are settled rather than through additional paid in capital
in the equity section of the balance sheet. The amendments also
permit an employer to repurchase an employee’s shares at the
maximum statutory tax rate in the employee’s applicable
jurisdiction for tax withholding purposes without triggering
liability accounting. Finally, the amendments permit entities to
make a one-time accounting policy election to account for
forfeitures as they occur. Specific adoption methods depend on the
issue being adopted and range from prospective to retrospective
adoption. The amendments are effective for public companies for
annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted;
however all amendments must be adopted in the same period. The
Company is evaluating whether the adoption of ASU 2016-09 will have
a significant impact on its consolidated results of operations,
financial position or cash flows.
In June
2016, FASB issued ASU 2016-13 - Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The revised accounting guidance requires the
measurement of all expected credit losses for financial assets held
at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts and requires
enhanced disclosures related to the significant estimates and
judgments used in estimating credit losses, as well as the credit
quality and underwriting standards of an organization’s
portfolio. In addition, ASU 2016-13 amends the accounting for
credit losses of available-for-sale debt securities and purchased
financial assets with credit deterioration. ASU 2016-13 will be
effective on January 1, 2020. The Company is currently evaluating
the effect the updated guidance will have on its consolidated
financial statements.
F-13
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
In
December 2016, FASB issued ASU 2016-19 – Technical
Corrections and Improvements (Amendment to a Number of Topics in
FASB Accounting Standards Codification). ASU 2016-19 is part of an
ongoing FASB project to facilitate Codification updates for
non-substantive technical corrections, clarifications, and
improvements that are not expected to have a significant effect on
accounting practice or create a significant administrative cost to
most entities. The ASU will apply to all reporting entities within
the scope of the affected accounting guidance. The amendments that
require transition guidance are effective for all entities for
annual and interim reporting periods beginning after December 15,
2016. Early adoption is permitted for the amendments that require
transition guidance. All other amendments were effective on
issuance. The Company does not expect the adoption of ASU 2016-19
to have a significant impact on its consolidated results of
operations, financial position or cash flows.
The
Company has determined that all other recently issued
accounting pronouncements will not have a material impact on its
consolidated financial position, results of operations and cash
flows, or do not apply to its operations.
Available-for-Sale Securities
The
amortized cost and fair value of investments in available-for-sale
fixed-maturity securities and equity securities as of December 31,
2016 and December 31, 2015 are summarized as follows:
F-14
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
|
December 31, 2016
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than 12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
$
8,053,449
|
$
199,028
|
$
(46,589
)
|
$
-
|
$
8,205,888
|
$
152,439
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
53,728,395
|
600,519
|
(638,113
)
|
(5,612
)
|
53,685,189
|
(43,206
)
|
|
|
|
|
|
|
|
|
|
Residential
mortgage backed
|
|
|
|
|
|
|
|
securities
|
18,814,784
|
70,682
|
(309,273
)
|
(38,442
)
|
18,537,751
|
(277,033
)
|
|
Total
fixed-maturity securities
|
80,596,628
|
870,229
|
(993,975
)
|
(44,054
)
|
80,428,828
|
(167,800
)
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
Preferred
stocks
|
5,986,588
|
10,317
|
(241,333
)
|
(70,571
)
|
5,685,001
|
(301,587
)
|
|
Common
stocks
|
3,722,797
|
691,324
|
(13,968
)
|
(97,468
)
|
4,302,685
|
579,888
|
|
Total
equity securities
|
9,709,385
|
701,641
|
(255,301
)
|
(168,039
)
|
9,987,686
|
278,301
|
|
|
|
|
|
|
|
|
|
Total
|
$
90,306,013
|
$
1,571,870
|
$
(1,249,276
)
|
$
(212,093
)
|
$
90,416,514
|
$
110,501
|
|
|
December 31, 2015
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than 12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
$
12,139,793
|
$
431,194
|
$
(15,889
)
|
$
-
|
$
12,555,098
|
$
415,305
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
45,078,044
|
490,444
|
(512,427
)
|
(99,593
)
|
44,956,468
|
(121,576
)
|
|
|
|
|
|
|
|
|
|
Residential
mortgage backed
|
|
|
|
|
|
|
|
securities
|
5,003,292
|
48,375
|
(61,169
)
|
-
|
4,990,498
|
(12,794
)
|
|
Total
fixed-maturity securities
|
62,221,129
|
970,013
|
(589,485
)
|
(99,593
)
|
62,502,064
|
280,935
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
Preferred
stocks
|
2,874,173
|
70,799
|
-
|
(29,322
)
|
2,915,650
|
41,477
|
|
Common
stocks
|
5,877,364
|
514,977
|
(103,721
)
|
-
|
6,288,620
|
411,256
|
|
Total
equity securities
|
8,751,537
|
585,776
|
(103,721
)
|
(29,322
)
|
9,204,270
|
452,733
|
|
|
|
|
|
|
|
|
|
Total
|
$
70,972,666
|
$
1,555,789
|
$
(693,206
)
|
$
(128,915
)
|
$
71,706,334
|
$
733,668
|
F-15
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
A
summary of the amortized cost and fair value of the Company’s
investments in available-for-sale fixed-maturity securities by
contractual maturity as of December 31, 2016 and 2015 is shown
below:
The
actual maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations with
or without penalties.
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
Amortized
|
|
Amortized
|
|
|
Remaining Time to Maturity
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|
|
|
|
||
|
Less
than one year
|
$
1,752,501
|
$
1,765,795
|
$
827,246
|
$
837,918
|
|
One
to five years
|
29,541,568
|
29,913,308
|
17,146,349
|
17,393,571
|
|
Five
to ten years
|
30,487,775
|
30,211,974
|
37,877,726
|
37,884,450
|
|
More
than 10 years
|
-
|
-
|
1,366,516
|
1,395,627
|
|
Residential
mortgage backed securities
|
18,814,784
|
18,537,751
|
5,003,292
|
4,990,498
|
|
Total
|
$
80,596,628
|
$
80,428,828
|
$
62,221,129
|
$
62,502,064
|
Held-to-Maturity Securities
The
amortized cost and fair value of investments in held-to-maturity
fixed-maturity securities as of December 31, 2016 and 2015 are
summarized as follows:
|
|
December 31, 2016
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than 12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
606,427
|
$
147,612
|
$
-
|
$
-
|
$
754,039
|
$
147,612
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
1,349,916
|
37,321
|
-
|
-
|
1,387,237
|
37,321
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
3,138,559
|
72,784
|
(7,619
)
|
(46,881
)
|
3,156,843
|
18,284
|
|
|
|
|
|
|
|
|
|
Total
|
$
5,094,902
|
$
257,717
|
$
(7,619
)
|
$
(46,881
)
|
$
5,298,119
|
$
203,217
|
F-16
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
|
December 31, 2015
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost or
|
Gross
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than 12
|
More than 12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
606,389
|
$
147,650
|
$
-
|
$
-
|
$
754,039
|
$
147,650
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
1,417,679
|
70,284
|
-
|
(54,189
)
|
1,433,774
|
16,095
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
3,114,804
|
82,265
|
(17,980
)
|
(125,807
)
|
3,053,282
|
(61,522
)
|
|
|
|
|
|
|
|
|
|
Total
|
$
5,138,872
|
$
300,199
|
$
(17,980
)
|
$
(179,996
)
|
$
5,241,095
|
$
102,223
|
Held-to-maturity
U.S. Treasury securities are held in trust pursuant to the New York
State Department of Financial Services’ minimum funds
requirement.
A
summary of the amortized cost and fair value of the Company’s
investments in held-to-maturity securities by contractual maturity
as of December 31, 2016 and 2015 is shown below:
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
Amortized
|
|
Amortized
|
|
|
Remaining Time to Maturity
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|
|
|
|
||
|
Less
than one year
|
$
-
|
$
-
|
$
-
|
$
-
|
|
One
to five years
|
650,000
|
642,455
|
500,000
|
496,245
|
|
Five
to ten years
|
3,838,475
|
3,901,625
|
4,032,483
|
3,990,811
|
|
More
than 10 years
|
606,427
|
754,039
|
606,389
|
754,039
|
|
Total
|
$
5,094,902
|
$
5,298,119
|
$
5,138,872
|
$
5,241,095
|
Investment Income
Major
categories of the Company’s net investment income are
summarized as follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Income:
|
|
|
|
Fixed-maturity
securities
|
$
2,668,148
|
$
2,308,993
|
|
Equity
securities
|
557,919
|
503,363
|
|
Cash
and cash equivalents
|
19,047
|
7,314
|
|
Other
|
794
|
1
|
|
Total
|
3,245,908
|
2,819,671
|
|
Expenses:
|
|
|
|
Investment
expenses
|
130,325
|
255,781
|
|
Net
investment income
|
$
3,115,583
|
$
2,563,890
|
F-17
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Proceeds
from the sale and maturity of fixed-maturity securities were
$17,752,130 and $6,577,943 for the years ended December 31, 2016
and 2015, respectively.
Proceeds
from the sale of equity securities were $7,073,773 and $2,689,113
for the years ended December 31, 2016 and 2015,
respectively.
The
Company’s net realized gains and losses on investments are
summarized as follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Fixed-maturity securities:
|
|
|
|
Gross
realized gains
|
$
354,071
|
$
49,412
|
|
Gross
realized losses
|
(302,087
)
|
(152,328
)
|
|
|
51,984
|
(102,916
)
|
|
|
|
|
|
Equity securities:
|
|
|
|
Gross
realized gains
|
637,249
|
153,711
|
|
Gross
realized losses
|
(89,874
)
|
(101,341
)
|
|
|
547,375
|
52,370
|
|
|
|
|
|
Other-than-temporary impairment losses:
|
|
|
|
Fixed-maturity
securities
|
(69,911
)
|
-
|
|
|
(69,911
)
|
-
|
|
|
|
|
|
Net
realized gains (losses)
|
$
529,448
|
$
(50,546
)
|
Impairment Review
Impairment
of investment securities results in a charge to operations when a
market decline below cost is deemed to be other-than-temporary. The
Company regularly reviews its fixed-maturity securities and equity
securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair
value of investments. In evaluating potential impairment, GAAP
specifies (i) if the Company does not have the intent to sell a
debt security prior to recovery and (ii) it is more likely than not
that it will not have to sell the debt security prior to recovery,
the security would not be considered other-than-temporarily
impaired unless there is a credit loss. When the Company does
not intend to sell the security and it is more likely than not that
the Company will not have to sell the security before recovery of
its cost basis, it will recognize the credit component of an
other-than-temporary impairment (“OTTI”) of a debt
security in earnings and the remaining portion in other
comprehensive income. The credit loss component recognized in
earnings is identified as the amount of principal cash flows not
expected to be received over the remaining term of the security as
projected based on cash flow projections. For
held-to-maturity debt securities, the amount of OTTI recorded in
other comprehensive income for the noncredit portion of a previous
OTTI is amortized prospectively over the remaining life of the
security on the basis of timing of future estimated cash flows of
the security.
F-18
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
OTTI
losses are recorded in the consolidated statements of income and
comprehensive income as net realized losses on investments and
result in a permanent reduction of the cost basis of the underlying
investment. The determination of OTTI is a subjective process and
different judgments and assumptions could affect the timing of loss
realization. At December 31, 2016 and 2015, there were 85 and 57
securities, respectively, that accounted for the gross unrealized
loss. As of December 31, 2016, the Company’s held-to-maturity
debt securities included an investment in one bond issued by the
Commonwealth of Puerto Rico (“PR”). In July 2016, PR
defaulted on its interest payment to bondholders. Due to the credit
deterioration of PR, the Company recorded a credit loss component
of OTTI on this investment as of June 30, 2016. For the year ended
December 31, 2016, the full amount of the write-down was recognized
as a credit component of OTTI in the amount of $69,911 and is
included as a reduction to net realized gains in the consolidated
statements of income and comprehensive income. The Company
determined that none of the other unrealized losses were deemed to
be OTTI for its portfolio of fixed-maturity investments and equity
securities for the years ended December 31, 2016 and 2015.
Significant factors influencing the Company’s determination
that unrealized losses were temporary included the magnitude of the
unrealized losses in relation to each security’s cost, the
nature of the investment and management’s intent and ability
to retain the investment for a period of time sufficient to allow
for an anticipated recovery of fair value to the Company’s
cost basis.
F-19
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
Company held securities with unrealized losses representing
declines that were considered temporary at December 31, 2016 and
2015 as follows:
|
|
December 31, 2016
|
|||||||
|
|
Less than 12 months
|
12 months or more
|
Total
|
|||||
|
|
|
|
No. of
|
|
|
No. of
|
Aggregate
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Category
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|||||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
$
1,067,574
|
$
(46,589
)
|
3
|
$
-
|
$
-
|
-
|
$
1,067,574
|
$
(46,589
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
19,859,293
|
(638,113
)
|
34
|
239,970
|
(5,612
)
|
1
|
20,099,263
|
(643,725
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage
|
|
|
|
|
|
|
|
|
|
backed
securities
|
15,918,090
|
(309,273
)
|
30
|
675,316
|
(38,442
)
|
6
|
16,593,406
|
(347,715
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
36,844,957
|
$
(993,975
)
|
67
|
$
915,286
|
$
(44,054
)
|
7
|
$
37,760,243
|
$
(1,038,029
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
Preferred
stocks
|
$
3,759,850
|
$
(241,333
)
|
8
|
$
660,750
|
$
(70,571
)
|
1
|
$
4,420,600
|
$
(311,904
)
|
|
Common
stocks
|
288,075
|
(13,968
)
|
1
|
424,550
|
(97,468
)
|
1
|
712,625
|
(111,436
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
$
4,047,925
|
$
(255,301
)
|
9
|
$
1,085,300
|
$
(168,039
)
|
2
|
$
5,133,225
|
$
(423,340
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
40,892,882
|
$
(1,249,276
)
|
76
|
$
2,000,586
|
$
(212,093
)
|
9
|
$
42,893,468
|
$
(1,461,369
)
|
F-20
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
|
December 31, 2015
|
|||||||
|
|
Less than 12 months
|
12 months or more
|
Total
|
|||||
|
|
|
|
No. of
|
|
|
No. of
|
Aggregate
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Category
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|||||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
$
1,432,005
|
$
(15,889
)
|
4
|
$
-
|
$
-
|
-
|
$
1,432,005
|
$
(15,889
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
18,424,609
|
(512,427
)
|
32
|
636,093
|
(99,593
)
|
2
|
19,060,702
|
(612,020
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage
|
|
|
|
|
|
|
|
|
|
backed
securities
|
2,413,980
|
(61,169
)
|
12
|
-
|
-
|
-
|
2,413,980
|
(61,169
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
22,270,594
|
$
(589,485
)
|
48
|
$
636,093
|
$
(99,593
)
|
2
|
$
22,906,687
|
$
(689,078
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
Preferred
stocks
|
$
-
|
$
-
|
-
|
$
702,000
|
$
(29,322
)
|
1
|
$
702,000
|
$
(29,322
)
|
|
Common
stocks
|
2,538,900
|
(103,721
)
|
6
|
-
|
-
|
-
|
2,538,900
|
(103,721
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
$
2,538,900
|
$
(103,721
)
|
6
|
$
702,000
|
$
(29,322
)
|
1
|
$
3,240,900
|
$
(133,043
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
24,809,494
|
$
(693,206
)
|
54
|
$
1,338,093
|
$
(128,915
)
|
3
|
$
26,147,587
|
$
(822,121
)
|
F-21
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Fair
value is the price that would be received upon sale of an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The valuation
technique used by the Company to fair value its financial
instruments is the market approach which uses prices and other
relevant information generated by market transactions involving
identical or comparable assets.
The
fair value hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs
(Level 3). If the inputs used to measure the assets or
liabilities fall within different levels of the hierarchy, the
classification is based on the lowest level input that is
significant to the fair value measurement of the asset or
liability. Classification of assets and liabilities within the
hierarchy considers the markets in which the assets and liabilities
are traded, including during period of market disruption, and the
reliability and transparency of the assumptions used to determine
fair value. The hierarchy requires the use of observable market
data when available. The levels of the hierarchy and those
investments included in each are as follows:
Level 1
—Inputs
to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities traded in active markets. Included
are those investments traded on an active exchange, such as the
NASDAQ Global Select Market, U.S. Treasury securities and
obligations of U.S. government agencies, together with
corporate debt securities that are generally investment
grade.
Level 2
—Inputs
to the valuation methodology include quoted prices for similar
assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the
asset or liability and market-corroborated inputs. Municipal
and corporate bonds, and residential mortgage-backed securities,
that are traded in less active markets are classified as Level
2. These securities are valued using market price quotations
for recently executed transactions.
Level 3
—Inputs
to the valuation methodology are unobservable for the asset or
liability and are significant to the fair value measurement.
Material assumptions and factors considered in pricing investment
securities and other assets may include appraisals, projected cash
flows, market clearing activity or liquidity circumstances in the
security or similar securities that may have occurred since the
prior pricing period.
The
availability of observable inputs varies and is affected by a wide
variety of factors. When the valuation is based on models or inputs
that are less observable or unobservable in the market, the
determination of fair value requires significantly more judgment.
The degree of judgment exercised by management in determining fair
value is greatest for investments categorized as Level 3. For
investments in this category, the Company considers prices and
inputs that are current as of the measurement date. In periods of
market dislocation, as characterized by current market conditions,
the ability to observe prices and inputs may be reduced for many
instruments. This condition could cause a security to be
reclassified between levels.
F-22
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
Company’s investments are allocated among pricing input
levels at December 31, 2016 and 2015 as follows:
|
|
December 31, 2016
|
|||
|
($ in
thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
|
|
|||
|
Fixed-maturity securities available-for-sale
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
Possessions
|
$
-
|
$
8,205,888
|
$
-
|
$
8,205,888
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
miscellaneous
|
48,356,317
|
5,328,872
|
-
|
53,685,189
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
-
|
18,537,751
|
-
|
18,537,751
|
|
Total
fixed maturities
|
48,356,317
|
32,072,511
|
-
|
80,428,828
|
|
Equity securities
|
9,987,686
|
-
|
-
|
9,987,686
|
|
Total
investments
|
$
58,344,003
|
$
32,072,511
|
$
-
|
$
90,416,514
|
|
|
December 31, 2015
|
|||
|
($ in
thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
|
|
|||
|
Fixed-maturity securities available-for-sale
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
Possessions
|
$
-
|
$
12,555,098
|
$
-
|
$
12,555,098
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
miscellaneous
|
37,964,006
|
6,992,462
|
-
|
44,956,468
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
-
|
4,990,498
|
-
|
4,990,498
|
|
Total
fixed maturities
|
37,964,006
|
24,538,058
|
-
|
62,502,064
|
|
Equity securities
|
9,204,270
|
-
|
-
|
9,204,270
|
|
Total
investments
|
$
47,168,276
|
$
24,538,058
|
$
-
|
$
71,706,334
|
The
Company uses the following methods and assumptions in estimating
its fair value disclosures for financial instruments:
Equity
securities and fixed income securities
available-for-sale:
Fair value disclosures for these investments are
included in “Note 3 -
Investments.”
Cash and cash
equivalents:
The carrying values of cash and cash
equivalents approximate their fair values because of the short-term
nature of these instruments.
F-23
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Premiums
receivable and reinsurance receivables:
The carrying values reported in the
accompanying consolidated balance sheets for these financial
instruments approximate their fair values due to the short-term
nature of the assets.
Real estate:
The
fair value of the land and building included in property and
equipment, which is used in the Company’s operations,
approximates the carrying value. The fair value was based on an
appraisal prepared using the sales comparison approach and income
approach, and accordingly the real estate is a Level 3 asset under
the fair value hierarchy.
Reinsurance
balances payable:
The carrying value reported in the
consolidated balance sheets for these financial instruments
approximates fair value.
The
estimated fair values of the Company’s financial instruments
as of December 31, 2016 and 2015 are as follows:
|
|
December 31, 2016
|
December 31, 2015
|
||
|
|
Carrying Value
|
Fair Value
|
Carrying Value
|
Fair Value
|
|
|
|
|
|
|
|
Fixed-maturity
securities held-to-maturity
|
$
5,094,902
|
$
5,298,119
|
$
5,138,872
|
$
5,241,095
|
|
Cash
and cash equivalents
|
$
12,044,520
|
$
12,044,520
|
$
13,551,372
|
$
13,551,372
|
|
Premiums
receivable
|
$
11,649,398
|
$
11,649,398
|
$
10,621,655
|
$
10,621,655
|
|
Reinsurance
receivables
|
$
32,197,765
|
$
32,197,765
|
$
31,270,235
|
$
31,270,235
|
|
Real
estate, net of accumulated depreciation
|
$
1,659,405
|
$
1,925,000
|
$
1,727,068
|
$
1,925,000
|
|
Reinsurance
balances payable
|
$
2,146,017
|
$
2,146,017
|
$
1,688,922
|
$
1,688,922
|
Intangible assets
consist of finite and indefinite life assets. Finite life
intangible assets include customer and producer relationships and
other identifiable intangibles. The insurance company license is
considered an indefinite life intangible asset subject to annual
impairment testing. The weighted average amortization period of
identified intangible assets of finite useful life is approximately
2.5 years as of December 31, 2016.
The
components of intangible assets and their useful lives, accumulated
amortization, and net carrying value as of December 31, 2016
and 2015 are summarized as follows:
|
|
|
December 31, 2016
|
December 31, 2015
|
||||
|
|
Useful
|
Gross
|
|
Net
|
Gross
|
|
Net
|
|
|
Life
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|
|
(in yrs)
|
Value
|
Amortization
|
Amount
|
Value
|
Amortization
|
Amount
|
|
Insurance
license
|
-
|
$
500,000
|
$
-
|
$
500,000
|
$
500,000
|
$
-
|
$
500,000
|
|
Customer
relationships
|
10
|
3,400,000
|
2,550,000
|
850,000
|
3,400,000
|
2,210,000
|
1,190,000
|
|
Other
identifiable
|
|
|
|
|
|
|
|
|
intangibles
|
7
|
950,000
|
950,000
|
-
|
950,000
|
882,184
|
67,816
|
|
Total
|
|
$
4,850,000
|
$
3,500,000
|
$
1,350,000
|
$
4,850,000
|
$
3,092,184
|
$
1,757,816
|
F-24
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Intangible asset impairment testing and amortization
The
Company performs an analysis annually as of December 31, or sooner
if there are indicators that the asset may be impaired, to identify
potential impairment of intangible assets with both finite and
indefinite lives and measures the amount of any impairment loss
that may need to be recognized. Intangible asset impairment testing
requires an evaluation of the estimated fair value of each
identified intangible asset to its carrying value. An impairment
charge would be recorded if the estimated fair value is less than
the carrying amount of the intangible asset. No impairments have
been identified in the years ended December 31, 2016 and
2015.
The
Company recorded amortization expense related to intangibles of
$407,816 and $475,714, respectively, for the years ended December
31, 2016 and 2015. The estimated aggregate amortization expense for
the remaining life of finite life intangibles is as
follows:
|
2017
|
$
340,000
|
|
2018
|
340,000
|
|
2019
|
170,000
|
|
|
$
850,000
|
The
Company’s quota share reinsurance treaties are on a July 1
through June 30 fiscal year basis; therefore, for year to date
fiscal periods after June 30, two separate treaties will be
included in such periods.
The
Company’s quota share reinsurance treaties in effect for the
year ended December 31
, 2016
for its personal lines business, which primarily consists of
homeowners’ policies, were covered under the July 1,
2015/June 30, 2016 treaty year (“2015/2016 Treaty”) and
the
July 1, 2016/June 30, 2017
treaty year (“2016/2017 Treaty”). The Company’s
quota share reinsurance treaties in effect for the year ended
December 31, 2015 were covered under the July 1, 2014/June 30, 2015
treaty year (“2014/2015 Treaty”) and the 2015/2016
Treaty.
The
Company’s personal lines quota share treaty that covered the
July 1, 2013/June 30, 201
5
treaty year
s
was a two year
treaty that expired on June 30, 2015. Effective July 1, 2014, the
Company exercised its contractual option to reduce the ceding
percentage in the personal lines quota share treaty from 75% to 55%
for the second year of the two year
treaty
.
The
Company’s 2014/2015 Treaty, 2015/2016 Treaty and 2016/2017
Treaty provide for the following material terms:
F-25
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
|
Treaty Year
|
||
|
|
July 1, 2016
|
July 1, 2015
|
July 1, 2014
|
|
|
to
|
to
|
to
|
|
Line of Busines
|
June 30, 2017
|
June 30, 2016
|
June 30, 2015
|
|
|
|
|
|
|
Personal Lines:
|
|
|
|
|
Homeowners,
dwelling fire and canine legal liability
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded
|
40
%
|
40
%
|
55
%
|
|
Risk
retained
|
$
500,000
|
$
450,000
|
$
360,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
833,333
|
$
750,000
|
$
800,000
|
|
Excess
of loss coverage above quota share coverage
|
$
3,666,667
|
$
3,750,000
|
$
3,200,000
|
|
|
in
excess of
|
in
excess of
|
in
excess of
|
|
|
$
833,333
|
$
750,000
|
$
800,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,000,000
|
$
4,050,000
|
$
3,640,000
|
|
Losses
per occurrence subject to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,000,000
|
|
Expiration
date
|
June
30, 2017
|
June
30, 2016
|
June
30, 2015
|
|
|
|
|
|
|
Personal
Umbrella
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded - first $1,000,000 of coverage
|
90
%
|
90
%
|
90
%
|
|
Percent
ceded - excess of $1,000,000 of coverage
|
100
%
|
100
%
|
100
%
|
|
Risk
retained
|
$
100,000
|
$
100,000
|
$
100,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,900,000
|
$
2,900,000
|
$
2,900,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
5,000,000
|
$
3,000,000
|
$
3,000,000
|
|
Expiration
date
|
June
30, 2017
|
June
30, 2016
|
June
30, 2015
|
|
|
|
|
|
|
Commercial Lines:
|
|
|
|
|
General
liability commercial policies, except for commercial
auto
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded (terminated effective July 1, 2014)
|
None
|
None
|
None
|
|
Risk
retained
|
$
500,000
|
$
425,000
|
$
400,000
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
None
|
None
|
None
|
|
Excess
of loss coverage above quota share coverage
|
$
4,000,000
|
$
4,075,000
|
$
3,600,000
|
|
|
in
excess of
|
in
excess of
|
in
excess of
|
|
|
$
500,000
|
$
425,000
|
$
400,000
|
|
Total
reinsurance coverage per occurrence
|
$
4,000,000
|
$
4,075,000
|
$
3,600,000
|
|
Losses
per occurrence subject to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,000,000
|
|
|
|
|
|
|
Commercial
Umbrella
|
|
|
|
|
Quota
share treaty:
|
|
|
|
|
Percent
ceded - first $1,000,000 of coverage
|
90
%
|
|
|
|
Percent
ceded - excess of $1,000,000 of coverage
|
100
%
|
|
|
|
Risk
retained
|
$
100,000
|
|
|
|
Total
reinsurance coverage per occurrence
|
$
4,900,000
|
|
|
|
Losses
per occurrence subject to quota share reinsurance
coverage
|
$
5,000,000
|
|
|
|
Expiration
date
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Commercial Auto:
|
|
|
|
|
Risk
retained
|
|
$
300,000
|
$
300,000
|
|
Excess
of loss coverage in excess of risk retained
|
|
$
1,700,000
|
$
1,700,000
|
|
|
|
in
excess of
|
in
excess of
|
|
|
|
$
300,000
|
$
300,000
|
|
Catastrophe Reinsurance:
|
|
|
|
|
Initial
loss subject to personal lines quota share treaty
|
$
5,000,000
|
$
4,000,000
|
$
4,000,000
|
|
Risk
retained per catastrophe occurrence (1)
|
$
3,000,000
|
$
2,400,000
|
$
1,800,000
|
|
Catastrophe
loss coverage in excess of quota share coverage (2)
(3)
|
$
247,000,000
|
$
176,000,000
|
$
137,000,000
|
|
Severe
winter weather aggregate (3)
|
No
|
Yes
|
Yes
|
|
Reinstatement
premium protection (4)
|
Yes
|
Yes
|
No
|
F-26
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
1.
Plus
losses in excess of catastrophe coverage.
2.
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts.
Effective July 1,
2016, the duration of a catastrophe occurrence from windstorm,
hail, tornado, hurricane and cyclone was extended to 168
consecutive hours from 120 consecutive hours.
3.
From
July 1, 2014 through June 30, 2016, catastrophe treaty also covered
losses caused by severe winter weather during any consecutive 28
day period.
4.
Effective July 1,
2015, reinstatement premium protection for $16,000,000 of
catastrophe coverage in excess of $4,000,000. Effective July 1,
2016, reinstatement premium protection for $20,000,000 of
catastrophe coverage in excess of $5,000,000.
The
single maximum risks per occurrence to which the Company is subject
under the new treaties effective July 1, 2016 are as
follows:
|
|
|
July 1, 2016 - June 30, 2017
|
||
|
Treaty
|
|
Extent of Loss
|
|
Risk Retained
|
|
Personal
Lines
|
|
Initial
$833,333
|
|
$500,000
|
|
|
|
$833,333
- $4,500,000
|
|
None(1)
|
|
|
|
Over
$4,500,000
|
|
100%
|
|
|
|
|
|
|
|
Personal
Umbrella
|
|
Initial
$1,000,000
|
|
$100,000
|
|
|
|
$1,000,000
- $5,000,000
|
|
None(1)
|
|
|
|
Over
$5,000,000
|
|
100%
|
|
|
|
|
|
|
|
Commercial
Lines
|
|
Initial
$500,000
|
|
$500,000
|
|
|
|
$500,000
- $4,500,000
|
|
None(1)
|
|
|
|
Over
$4,500,000
|
|
100%
|
|
|
|
|
|
|
|
Commercial
Umbrella
|
|
Initial
$1,000,000
|
|
$100,000
|
|
|
|
$1,000,000
- $5,000,000
|
|
None(1)
|
|
|
|
Over
$5,000,000
|
|
100%
|
|
|
|
|
|
|
|
Catastrophe
(2)
|
|
Initial
$5,000,000
|
|
$3,000,000
|
|
|
|
$5,000,000
- $252,000,000
|
|
None
|
|
|
|
Over
$252,000,000
|
|
100%
|
________________
(1)
Covered by excess
of loss treaties.
(2)
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts.
F-27
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
single maximum risks per occurrence to which the Company is subject
under the treaties that expired on June 30, 2016 and 2015 are as
follows:
|
|
|
July 1, 2015 - June 30, 2016
|
|
July 1, 2014 - June 30, 2015
|
|||||
|
Treaty
|
|
Extent of Loss
|
|
Risk Retained
|
|
Extent of Loss
|
|
Risk Retained
|
|
|
Personal
Lines
|
|
Initial
$750,000
|
|
$450,000
|
|
Initial
$800,000
|
|
$360,000
|
|
|
|
|
$750,000
- $4,500,000
|
|
None(1)
|
|
$800,000
- $4,000,000
|
|
None(1)
|
|
|
|
|
Over
$4,500,000
|
|
100%
|
|
Over
$4,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Umbrella
|
|
Initial
$1,000,000
|
|
$100,000
|
|
Initial
$1,000,000
|
|
$100,000
|
|
|
|
|
$1,000,000
- $3,000,000
|
|
None(1)
|
|
$1,000,000
- $3,000,000
|
|
None(1)
|
|
|
|
|
Over
$3,000,000
|
|
100%
|
|
Over
$3,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Lines
|
|
Initial
$425,000
|
|
$425,000
|
|
Initial
$400,000
|
|
$400,000
|
|
|
|
|
$425,000
- $4,500,000
|
|
None(1)
|
|
$400,000
- $4,000,000
|
|
None(1)
|
|
|
|
|
Over
$4,500,000
|
|
100%
|
|
Over
$4,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Auto
|
|
Initial
$300,000
|
|
$300,000
|
|
Initial
$300,000
|
|
$300,000
|
|
|
|
|
$300,000
- $2,000,000
|
|
None(1)
|
|
$300,000
- $2,000,000
|
|
None(1)
|
|
|
|
|
Over
$2,000,000
|
|
100%
|
|
Over
$2,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe
(2)
|
|
Initial
$4,000,000
|
|
$2,400,000
|
|
Initial
$4,000,000
|
|
$1,800,000
|
|
|
|
|
$4,000,000
- $180,000,000
|
|
None
|
|
$4,000,000
- $141,000,000
|
|
None
|
|
|
|
|
Over
$180,000,000
|
|
100%
|
|
Over
$141,000,000
|
|
100%
|
|
________________
(1)
Covered by excess
of loss treaties.
(2)
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts.
The
Company’s reinsurance program is structured to enable the
Company to significantly grow its premium volume while maintaining
regulatory capital and other financial ratios generally within or
below the expected ranges used for regulatory oversight purposes.
The reinsurance program also provides income as a result of ceding
commissions earned pursuant to the quota share reinsurance
contracts. The Company’s participation in reinsurance
arrangements does not relieve the Company of its obligations to
policyholders.
F-28
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Approximate
reinsurance recoverables on unpaid and paid losses by reinsurer at
December 31, 2016 and 2015 are as follows:
|
|
Unpaid
|
Paid
|
|
|
|
|
($ in thousands)
|
Losses
|
Losses
|
Total
|
Security
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Maiden
Reinsurace Company
|
$
7,640
|
$
985
|
$
8,625
|
$
13,113
|
(1
)
|
|
Swiss
Reinsurance America Corporation
|
4,310
|
671
|
4,981
|
-
|
|
|
SCOR
Reinsurance Company
|
1,440
|
152
|
1,592
|
-
|
|
|
Allied
World Assurance Company
|
392
|
300
|
692
|
-
|
|
|
Others
|
1,995
|
211
|
2,206
|
164
|
(2
)
|
|
Total
|
$
15,777
|
$
2,319
|
$
18,096
|
$
13,277
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Maiden
Reinsurace Company
|
$
7,979
|
$
631
|
$
8,610
|
$
12,201
|
(1
)
|
|
Swiss
Reinsurance America Corporation
|
3,662
|
377
|
4,039
|
-
|
|
|
SCOR
Reinsurance Company
|
1,982
|
114
|
2,096
|
-
|
|
|
Hannover
Rueck
|
853
|
524
|
1,377
|
-
|
|
|
Allied
World Assurance Company
|
940
|
285
|
1,225
|
-
|
|
|
Others
|
1,290
|
117
|
1,407
|
293
|
(3
)
|
|
Total
|
$
16,706
|
$
2,048
|
$
18,754
|
$
12,494
|
|
|
|
|
|
|
|
|
(1) Secured pursuant to collateralized trust agreements.
(2) Represents $161,000 secured pursuant to collateralized trust
agreement and $3,000 guaranteed by an irrevocable letter of
credit.
(3) Represents $248,000 secured pursuant to collateralized trust
agreement and $45,000 guaranteed by an irrevocable letter of
credit.
Assets
held in the two trusts referred to in footnote (1) in the table
above are not included in the Company’s invested assets and
investment income earned on these assets is credited to the two
reinsurers respectively. In addition to reinsurance recoverables on
unpaid and paid losses, reinsurance receivables as of December 31,
2016 and 2015 include unearned ceded premiums of $14,101,745 and
$12,515,892, respectively.
Ceding Commission
Revenue
The
Company earns ceding commission revenue under its quota share
reinsurance agreements based on: (i) a fixed provisional commission
rate at which provisional ceding commissions are earned, and (ii) a
sliding scale of commission rates and ultimate treaty year loss
ratios on the policies reinsured under each of these agreements
based upon which contingent ceding commissions are earned. The
sliding scale includes minimum and maximum commission rates in
relation to specified ultimate loss ratios. The commission rate and
contingent ceding commissions earned increase when the estimated
ultimate loss ratio decreases and, conversely, the commission rate
and contingent ceding commissions earned decrease when the
estimated ultimate loss ratio increases.
The
Company’s estimated ultimate treaty year loss ratios
(“Loss Ratio(s)”) for treaties in effect for the year
ended December 31, 2016 are attributable to contracts for the
2016/2017 Treaty and the 2015/2016 Treaty. The Company’s Loss
Ratios for treaties in effect for the year ended December 31, 2015
are attributable to contracts for the 2015/2016 Treaty and the
2014/2015 Treaty.
F-29
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Treaties in effect for the year ended December 31,
2016
Under
the 2016/2017 Treaty and 2015/2016 Treaty, the Company is receiving
a higher upfront fixed provisional rate than in prior years'
treaties. In exchange for the higher provisional rate, the Company
has a reduced opportunity to earn sliding scale contingent
commissions. The Company’s Loss Ratios for the period from
July 1, 2016 through December 31, 2016 (attributable to the
2016/2017 Treaty) were consistent with the contractual Loss Ratio
at which provisional ceding commissions are earned and therefore no
contingent commission was recorded. The Company’s Loss Ratios
for the period July 1, 2015 through June 30, 2016 (attributable to
the 2015/2016 Treaty) were higher than the contractual Loss Ratio
at which provisional ceding commissions are earned and therefore
the contingent commission was reduced.
Treaties in effect for the year ended December 31,
2015
The
Company’s Loss Ratio for the period July 1, 2015 through
December 31, 2015, which is attributable to the 2015/2016 Treaty,
was higher than the contractual Loss Ratio at which provisional
ceding commissions are earned. Accordingly, for the six month
period ended December 31, 2015, the Company’s contingent
ceding commission earned was reduced as a result of the estimated
Loss Ratio for the 2015/2016 Treaty.
The
Company’s Loss Ratio for the period July 1, 2014 through June
30, 2015, which is attributable to the 2014/2015 Treaty, was lower
than the contractual Loss Ratio at which the provisional ceding
commissions are earned. As a result of severe winter weather during
the six months ended June 30, 2015, the Loss Ratio attributable to
this treaty as of June 30, 2015 was greater than the Loss Ratio as
of December 31, 2014. Accordingly, for the six months ended June
30, 2015, the Company’s contingent ceding commission earned
was reduced as a result of the increase in the estimated Loss Ratio
for the 2014/2015 Treaty.
In
addition to the treaties that were in effect for the years ended
December 31, 2016 and 2015, the Loss Ratios from prior years’
treaties are subject to change as loss reserves from those periods
increase or decrease, resulting in an increase or decrease in the
commission rate and contingent ceding commissions
earned.
Ceding
commissions earned consists of the following:
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Provisional
ceding commissions earned
|
$
12,769,404
|
$
11,692,458
|
|
Contingent
ceding commissions earned
|
(1,501,163
)
|
(219,341
)
|
|
|
$
11,268,241
|
$
11,473,117
|
Provisional ceding commissions are settled
monthly. Balances due from reinsurers for contingent ceding
commissions on quota share treaties are settled annually based on
the Loss Ratio of each treaty year that ends on June 30.
As
discussed above,
the Loss Ratios from
prior years’ treaties are subject to change as incurred
losses from those periods develop, resulting in an increase or
decrease in the commission rate and contingent ceding commissions
earned. As of December 31, 2016 and 2015, net contingent ceding
commissions payable to reinsurers under all treaties was
approximately $773,000 and $1,277,000,
respectively.
F-30
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Policy
acquisition costs incurred and policy-related ceding commission
revenue are deferred, and amortized to income on property and
casualty insurance business as follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Net
deferred policy acquisition costs net of ceding
|
|
|
|
commission
revenue, beginning of year
|
$
4,400,238
|
$
3,029,441
|
|
|
|
|
|
Cost
incurred and deferred:
|
|
|
|
Commissions
and brokerage
|
19,566,982
|
16,963,843
|
|
Other
underwriting and policy acquisition costs
|
5,470,285
|
4,904,350
|
|
Ceding
commission revenue
|
(13,186,177
)
|
(12,170,986
)
|
|
Net
deferred policy acquisition costs
|
11,851,090
|
9,697,207
|
|
Amortization
|
(10,863,388
)
|
(8,326,410
)
|
|
|
987,702
|
1,370,797
|
|
|
|
|
|
Net
deferred policy acquisition costs net of ceding
|
|
|
|
commission
revenue, end of year
|
$
5,387,940
|
$
4,400,238
|
Ending
balances for deferred policy acquisition costs and deferred ceding
commission revenue as of December 31, 2016 and 2015
follows:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Deferred
policy acquisition costs
|
$
12,239,781
|
$
10,835,306
|
|
Deferred
ceding commission revenue
|
(6,851,841
)
|
(6,435,068
)
|
|
Balance
at end of period
|
$
5,387,940
|
$
4,400,238
|
F-31
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
components of property and equipment are summarized as
follows:
|
|
|
Accumulated
|
|
|
|
Cost
|
Depreciation
|
Net
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Building
|
$
1,887,347
|
$
(381,039
)
|
$
1,506,308
|
|
Land
|
153,097
|
-
|
153,097
|
|
Furniture
office equipment
|
620,440
|
(388,853
)
|
231,587
|
|
Computer
equipment and software
|
2,602,330
|
(1,481,949
)
|
1,120,381
|
|
Automobile
|
81,394
|
(81,394
)
|
-
|
|
Total
|
$
5,344,608
|
$
(2,333,235
)
|
$
3,011,373
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Building
|
$
1,887,347
|
$
(313,376
)
|
$
1,573,971
|
|
Land
|
153,097
|
-
|
153,097
|
|
Furniture
office equipment
|
518,495
|
(257,485
)
|
261,010
|
|
Computer
equipment and software
|
2,128,063
|
(963,875
)
|
1,164,188
|
|
Automobile
|
81,394
|
(81,394
)
|
-
|
|
Total
|
$
4,768,396
|
$
(1,616,130
)
|
$
3,152,266
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $717,105
and $556,295, respectively.
Premiums
written, ceded and earned are as follows:
|
|
Direct
|
Assumed
|
Ceded
|
Net
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
Premiums
written
|
$
103,191,995
|
$
28,522
|
$
(37,294,330
)
|
$
65,926,187
|
|
Change
in unearned premiums
|
(6,110,225
)
|
6,091
|
1,585,853
|
(4,518,281
)
|
|
Premiums
earned
|
$
97,081,770
|
$
34,613
|
$
(35,708,477
)
|
$
61,407,906
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
Premiums
written
|
$
91,003,968
|
$
40,971
|
$
(30,660,161
)
|
$
60,384,778
|
|
Change
in unearned premiums
|
(8,436,456
)
|
4,255
|
(3,340,495
)
|
(11,772,696
)
|
|
Premiums
earned
|
$
82,567,512
|
$
45,226
|
$
(34,000,656
)
|
$
48,612,082
|
Premium
receipts in advance of the policy effective date are recorded as
advance premiums. The balance of advance premiums as of December
31, 2016 and 2015 was $1,421,560 and $1,199,376,
respectively.
F-32
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
components of the liability for loss and LAE expenses and related
reinsurance receivables as of December 31, 2016 and 2015 are as
follows:
|
|
Gross
|
Reinsurance
|
|
|
Liability
|
Receivables
|
|
December 31, 2016
|
|
|
|
Case-basis
reserves
|
$
25,000,733
|
$
10,804,341
|
|
Loss
adjustment expenses
|
7,752,617
|
1,893,094
|
|
IBNR
reserves
|
8,983,369
|
3,079,445
|
|
Recoverable
on unpaid losses
|
|
15,776,880
|
|
Recoverable
on paid losses
|
-
|
2,319,140
|
|
Total
loss and loss adjustment expenses
|
$
41,736,719
|
18,096,020
|
|
Unearned
premiums
|
|
14,101,745
|
|
Total
reinsurance receivables
|
|
$
32,197,765
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Case-basis
reserves
|
$
24,730,463
|
$
11,264,279
|
|
Loss
adjustment expenses
|
5,429,221
|
1,720,522
|
|
IBNR
reserves
|
9,716,816
|
3,721,563
|
|
Recoverable
on unpaid losses
|
|
16,706,364
|
|
Recoverable
on paid losses
|
-
|
2,047,979
|
|
Total
loss and loss adjustment expenses
|
$
39,876,500
|
18,754,343
|
|
Unearned
premiums
|
|
12,515,892
|
|
Total
reinsurance receivables
|
|
$
31,270,235
|
The following table provides a reconciliation of
the beginning and ending balances for unpaid losses and
LAE:
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Balance
at beginning of period
|
$
39,876,500
|
$
39,912,683
|
|
Less
reinsurance recoverables
|
(16,706,364
)
|
(18,249,526
)
|
|
Net
balance, beginning of period
|
23,170,136
|
21,663,157
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
Current
year
|
27,853,010
|
23,642,998
|
|
Prior
years
|
(63,349
)
|
(462,998
)
|
|
Total
incurred
|
27,789,661
|
23,180,000
|
|
|
|
|
|
Paid
related to:
|
|
|
|
Current
year
|
16,496,648
|
13,172,870
|
|
Prior
years
|
8,503,310
|
8,500,151
|
|
Total
paid
|
24,999,958
|
21,673,021
|
|
|
|
|
|
Net
balance at end of period
|
25,959,839
|
23,170,136
|
|
Add
reinsurance recoverables
|
15,776,880
|
16,706,364
|
|
Balance
at end of period
|
$
41,736,719
|
$
39,876,500
|
Incurred
losses and LAE are net of reinsurance recoveries under reinsurance
contracts of $11,796,714 and $14,428,197 for the years ended
December 31, 2016 and 2015, respectively.
F-33
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Prior
year incurred loss and LAE development results from changes in
ultimate loss and LAE estimates by line of business and accident
year. Prior year loss and LAE development incurred during the years
ended December 31, 2016 and 2015 was favorable $(63,349) and
favorable $(462,998), respectively. The Company’s management
continually monitors claims activity to assess the appropriateness
of carried case and incurred but not reported (“IBNR”)
reserves, giving
consideration to
Company and industry trends.
Loss and LAE reserves
The reserving process for loss and LAE reserves provides for the
Company’s best estimate at a particular point in time of the
ultimate unpaid cost of all losses and LAE incurred, including
settlement and administration of losses, and is based on facts and
circumstances then known including losses that have occurred but
that have not yet been reported. The process relies on standard
actuarial reserving methodologies, judgments relative to estimates
of ultimate claims severity and frequency, the length of time
before losses will develop to their ultimate level
(‘tail’ factors), and the likelihood of changes in the
law or other external factors that are beyond the Company’s
control. Several actuarial reserving methodologies are used to
estimate required loss reserves. The process produces carried
reserves set by management based upon the actuaries’ best
estimate and is the cumulative combination of the best estimates
made by line of business, accident year, and loss and LAE. The
amount of loss and LAE reserves for individual reported claims (the
“case reserve”) is determined by the claims department
and changes over time as new information is gathered. Such
information includes a review of coverage applicability,
comparative liability on the part of the insured, injury severity,
property damage, replacement cost estimates, and any other
information considered pertinent to estimating the exposure
presented by the claim. The amounts of loss and LAE reserves for
unreported claims and development on known claims (IBNR reserves)
are determined using historical information aggregated by line of
insurance as adjusted to current conditions. Since this process
produces loss reserves set by management based upon the
actuaries’ best estimate, there is no explicit or implicit
provision for uncertainty in the carried loss
reserves.
Due to the inherent uncertainty associated with the reserving
process, the ultimate liability may differ, perhaps substantially,
from the original estimate. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the
current year’s results. Reserves are closely monitored and
are recomputed periodically using the most recent information on
reported claims and a variety of statistical techniques. On at
least a quarterly basis, the Company reviews by line of business
existing reserves, new claims, changes to existing case reserves
and paid losses with respect to the current and prior years.
Several methods are used, varying by line of business and accident
year, in order to select the estimated year-end loss reserves.
These methods include the following:
Paid Loss Development
– historical patterns of paid
loss development are used to project future paid loss emergence in
order to estimate required reserves.
Incurred Loss
Development
– historical
patterns of incurred loss development, reflecting both paid losses
and changes in case reserves, are used to project future incurred
loss emergence in order to estimate required
reserves.
Paid Bornhuetter-Ferguson
(“BF”)
– an
estimated loss ratio for a particular accident year is determined,
and is weighted against the portion of the accident year claims
that have been paid, based on historical paid loss development
patterns. The estimate of required reserves assumes that the
remaining unpaid portion of a particular accident year will pay out
at a rate consistent with the estimated loss ratio for that year.
This method can be useful for situations where an unusually high or
low amount of paid losses exists at the early stages of the claims
development process.
F-34
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Incurred Bornhuetter-Ferguson
(“BF”)
- an
estimated loss ratio for a particular accident year is determined,
and is weighted against the portion of the accident year claims
that have been reported, based on historical incurred loss
development patterns. The estimate of required reserves assumes
that the remaining unreported portion of a particular accident year
will pay out at a rate consistent with the estimated loss ratio for
that year. This method can be useful for situations where an
unusually high or low amount of reported losses exists at the early
stages of the claims development process.
Incremental Claim-Based
Methods
– historical
patterns of incremental incurred losses and paid LAE during various
stages of development are reviewed and assumptions are made
regarding average loss and LAE development applied to remaining
claims inventory. Such methods more properly reflect changes in the
speed of claims closure and the relative adequacy of case reserve
levels at various stages of development. These methods also provide
a more accurate estimate of IBNR for lines of business with
relatively few remaining open claims but for which significant
recent settlement activity has occurred.
Management’s best estimate of required reserves is generally
based on an average of the methods above, with appropriate
weighting of the various methods based on the line of business and
accident year being projected. In some cases, additional methods or
historical data from industry sources are employed to supplement
the projections derived from the methods listed above.
Two key assumptions that materially affect the estimate of loss
reserves are the loss ratio estimate for the current accident year
used in the BF methods described above, and the loss development
factor selections used in the loss development methods described
above. The loss ratio estimates used in the BF methods are selected
after reviewing historical accident year loss ratios adjusted for
rate changes, trend, and mix of business.
The Company is not aware of any claims trends that have emerged or
that would cause future adverse development that have not already
been considered in existing case reserves and in its current loss
development factors.
In New York State, lawsuits for negligence are subject to certain
limitations and must be commenced within three years from the date
of the accident or are otherwise barred. Accordingly, the
Company’s exposure to unreported claims (‘pure’
IBNR) for accident dates of December 31, 2013 and prior is limited
although there remains the possibility of adverse development on
reported claims (‘case development’ IBNR).
The
following is information about incurred and paid claims development
as of December 31, 2016, net of reinsurance, as well as the
cumulative reported claims by accident year and total IBNR reserves
as of December 31, 2016 included in the net incurred loss and
allocated expense amounts. The historical information regarding
incurred and paid claims development for the years ended December
31, 2007 to December 31, 2015 is presented as supplementary
unaudited information.
F-35
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
All Lines of Business
(in thousands, except reported claims data)
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of
Reinsurance
|
|
As of
December 31, 2016
|
||||||||||
|
|
|
|
|
Cumulative
Number of
Reported Claims by
|
|||||||||
|
|
For the Years Ended December 31,
|
|
|
Accident
|
|||||||||
|
Accident Year
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
IBNR
|
Year
|
|
|
(Unaudited 2007 - 2015)
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
$
3,572
|
$
3,414
|
$
3,655
|
$
3,710
|
$
3,744
|
$
3,770
|
$
3,877
|
$
3,913
|
$
3,916
|
$
3,941
|
|
$
6
|
1,067
|
|
2008
|
|
4,505
|
4,329
|
4,223
|
4,189
|
4,068
|
4,055
|
4,056
|
4,040
|
4,038
|
|
3
|
1,133
|
|
2009
|
|
|
4,403
|
4,254
|
4,287
|
4,384
|
4,511
|
4,609
|
4,616
|
4,667
|
|
8
|
1,136
|
|
2010
|
|
|
|
5,598
|
5,707
|
6,429
|
6,623
|
6,912
|
6,853
|
6,838
|
|
20
|
1,616
|
|
2011
|
|
|
|
|
7,603
|
7,678
|
8,618
|
9,440
|
9,198
|
9,066
|
|
69
|
1,913
|
|
2012
|
|
|
|
|
|
9,539
|
9,344
|
10,278
|
10,382
|
10,582
|
|
168
|
4,701
(1)
|
|
2013
|
|
|
|
|
|
|
10,728
|
9,745
|
9,424
|
9,621
|
|
507
|
1,551
|
|
2014
|
|
|
|
|
|
|
|
14,193
|
14,260
|
14,218
|
|
1,009
|
2,117
|
|
2015
|
|
|
|
|
|
|
|
|
22,340
|
21,994
|
|
2,452
|
2,508
|
|
2016
|
|
|
|
|
|
|
|
|
|
26,062
|
|
5,593
|
2,688
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
111,027
|
|
|
|
(1)
Reported claims for
accident year 2012 includes 3,406 claims from Superstorm
Sandy.
All Lines of Business
(in thousands)
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net
of Reinsurance
|
|
|
|||||||||
|
|
For the Years Ended December
31,
|
|
|
|||||||||
|
Accident
Year
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
|
|
|
(Unaudited 2007 -
2015)
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
$
1,790
|
$
2,233
|
$
2,924
|
$
3,428
|
$
3,603
|
$
3,649
|
$
3,670
|
$
3,797
|
$
3,873
|
$
3,892
|
|
|
|
2008
|
|
2,406
|
3,346
|
3,730
|
3,969
|
4,003
|
4,029
|
4,028
|
4,031
|
4,031
|
|
|
|
2009
|
|
|
2,298
|
3,068
|
3,607
|
3,920
|
4,134
|
4,362
|
4,424
|
4,468
|
|
|
|
2010
|
|
|
|
2,566
|
3,947
|
4,972
|
5,602
|
6,323
|
6,576
|
6,720
|
|
|
|
2011
|
|
|
|
|
3,740
|
5,117
|
6,228
|
7,170
|
8,139
|
8,540
|
|
|
|
2012
|
|
|
|
|
|
3,950
|
5,770
|
7,127
|
8,196
|
9,187
|
|
|
|
2013
|
|
|
|
|
|
|
3,405
|
5,303
|
6,633
|
7,591
|
|
|
|
2014
|
|
|
|
|
|
|
|
5,710
|
9,429
|
10,738
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
12,295
|
16,181
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
15,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
86,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
liability for unpaid claim and allocated claim adjustment expenses
for the accident years presented
|
$
24,315
|
|
|
|||||||||
|
All
outstanding liabilities before 2007, net of
reinsurance
|
602
|
|
|
|||||||||
|
Liabilities
for claims and claim adjustment expenses, net of
reinsurance
|
$
24,917
|
|
|
|||||||||
F-36
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Reported claim
counts are measured on an occurrence or per event basis. A
single claim occurrence could result in more than one loss type or
claimant; however the Company counts claims at the occurrence level
as a single claim regardless of the number of claimants or claim
features involved.
The
reconciliation of the net incurred and paid claims development
tables to the liability for loss and LAE reserves in the
consolidated balance sheet is as follows:
|
|
As
of
|
|
(in thousands)
|
December
31, 2016
|
|
Liabilities
for claims and claim adjustment expenses, net of
reinsurance
|
$
24,917
|
|
Total
reinsurance recoverable on unpaid claims
|
15,777
|
|
Unallocated
claims adjustment expenses
|
1,043
|
|
Total
gross liability for loss and LAE reserves
|
$
41,737
|
The
following is supplementary unaudited information about average
historical claims duration as of December 31, 2016:
|
Average Annual Percentage Payout of
Incurred Claims by Age, Net of Reinsurance
|
||||||||||
|
Years
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Lines of Business
|
46.1
%
|
18.6
%
|
12.7
%
|
9.3
%
|
6.7
%
|
3.0
%
|
1.0
%
|
1.4
%
|
1.0
%
|
0.5
%
|
The
percentages in the above table do not add up to 100% because the
percentages represent averages across all accident years at each
development stage.
Private Placement of Common Stock
In
April 2016, the Company sold 595,238 newly issued shares of its
Common Stock to RenaissanceRe Ventures Ltd., a subsidiary of
RenaissanceRe Holdings Ltd. (NYSE:RNR)
(“RenaissanceRe”), in a private placement.
RenaissanceRe is a global provider of catastrophe and specialty
reinsurance and insurance.
The new
shares of Common Stock were sold to RenaissanceRe at a price of
$8.40 per share. The Company received net proceeds of approximately
$4,808,000 from the private placement. In June 2016, the Company
invested $3,000,000 of the proceeds in KICO as additional surplus
to support its continued growth. The Company intends to use the
remaining net proceeds of the offering for general corporate
purposes.
Public Offering of Common Stock
See
Note 19 Subsequent Events.
Dividend Declared
Dividends declared
and paid on Common Stock were $1,941,271 and $1,557,398 for the
years ended December 31, 2016 and 2015, respectively. The
Company’s Board of Directors approved a quarterly dividend on
February 7, 2017 of $.0625 per share payable in cash on March 15,
2017 to stockholders of record as of February 28, 2017 (see Note 19
Subsequent Events).
F-37
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Stock Options
Pursuant to the
Company’s 2005 Equity Participation Plan (the “2005
Plan”), which provides for the issuance of incentive stock
options, non-statutory stock options and restricted stock, a
maximum of 700,000 shares of the Company’s Common Stock are
permitted to be issued pursuant to options granted and restricted
stock issued. Effective August 12, 2014, the Company adopted the
2014 Equity Participation Plan (the “2014 Plan”)
pursuant to which, subject to stockholder approval on or before
August 12, 2015, a maximum of 700,000 shares of Common Stock of the
Company are authorized to be issued pursuant to the grant of
incentive stock options, non-statutory stock options, stock
appreciation rights, restricted stock and stock bonuses. The
stockholders approved the 2014 Plan on August 11, 2015. Incentive
stock options granted under the 2014 Plan and 2005 Plan expire no
later than ten years from the date of grant (except no later than
five years for a grant to a 10% stockholder). The Board of
Directors or the Stock Option Committee determines the expiration
date with respect to non-statutory stock options and the vesting
provisions for restricted stock granted under the 2014 Plan and
2005 Plan.
The
results of operations for the years ended December 31, 2016 and
2015 include stock-based compensation expense totaling $106,882 and
$134,185, respectively. Stock-based compensation expense related to
stock options is net of estimated forfeitures of 17% for the years
ended December 31, 2016 and 2015. Such amounts have been included
in the consolidated statements of income and comprehensive income
within other operating expenses.
Stock-based
compensation expense in 2016 and 2015 is the estimated fair value
of options granted amortized on a straight-line basis over the
requisite service period for the entire portion of the award less
an estimate for anticipated forfeitures. The Company uses the
“simplified” method to estimate the expected term of
the options because the Company’s historical share option
exercise experience does not provide a reasonable basis upon which
to estimate expected term. The weighted average estimated fair
value of stock options granted during the year ended December
31
, 2016 and 2015
was $1.87 per
share. The fair value of stock options at the grant date was
estimated using the Black-Scholes option-pricing
model.
The
following weighted average assumptions were used for grants during
the following periods:
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Dividend Yield
|
2.74% - 3.18%
|
2.62%
|
|
Volatility
|
31.61% -
31.81%
|
34.54%
|
|
Risk-Free Interest Rate
|
1.01% -
1.11%
|
1.03%
|
|
Expected Life
|
3.25 years
|
3.0 years
|
The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because our stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our stock
options.
F-38
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
A
summary of stock option activity under the Company’s 2014
Plan and 2005 Plan for the year ended December 31, 2016 is as
follows:
|
Stock Options
|
Number of Shares
|
Weighted Average Exercise Price per Share
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2016
|
339,750
|
$
6.34
|
3.36
|
$
904,775
|
|
|
|
|
|
|
|
Granted
|
40,000
|
$
8.33
|
|
$
216,950
|
|
Exercised
|
(12,000
)
|
$
4.96
|
|
$
80,985
|
|
Forfeited
|
(5,000
)
|
$
5.09
|
|
$
17,600
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
362,750
|
$
6.62
|
2.61
|
$
2,586,748
|
|
|
|
|
|
|
|
Vested
and Exercisable at December 31, 2016
|
270,250
|
$
6.40
|
2.39
|
$
1,985,285
|
The
aggregate intrinsic value of options outstanding and options
exercisable at December 31, 2016 is calculated as the difference
between the exercise price of the underlying options and the market
price of the Company’s Common Stock for the options that had
exercise prices that were lower than the $13.75 closing price of
the Company’s Common Stock on December 31, 2016.
The total intrinsic value of options exercised in
the year ended December 31, 2016 was $80,985, determined as of the
date of exercise.
Participants in the 2005 Plan and 2014 Plan may
exercise
their outstanding vested options, in whole or in
part, by having the Company reduce the number of shares otherwise
issuable by a number of shares having a fair market value equal to
the exercise price of the option being exercised (“Net
Exercise”). The Company received cash proceeds of $54,310
from the exercise of options for the purchase of 11,000 shares of
Common Stock during the year ended December 31, 2016. The remaining
1,000
options exercised during the
year ended December 31, 2016 were Net Exercises.
All of the
127,750
options exercised during the
year ended December 31, 2015 were Net Exercises.
As of
December 31, 2016, the fair value of unamortized compensation cost
related to unvested stock option awards was approximately $45,000.
Unamortized compensation cost as of December 31, 2016 is expected
to be recognized over a remaining weighted-average vesting period
of 1.04 years.
As of
December 31, 2016, there were 602,500 shares reserved under the
2014 Plan.
Other Equity Compensation
In January 2016, the Company granted a total of 6,000 shares of
restricted Common Stock under the 2014 Plan to its three then
non-employee directors. In March 2016, the Company granted 1,500
shares of restricted Common Stock under the 2014 Plan to a newly
elected non-employee director. One-third of the shares granted will
vest on each of the three following anniversaries following the
grant date. The fair value of the shares are determined at grant
date.
F-39
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
For
regulatory purposes, KICO prepares its statutory basis financial
statements in accordance with Statements of Statutory Accounting
Principles (“statutory basis” or “SAP”) as
promulgated by the National Association of Insurance Commissioners
(the “NAIC”) and the prescribed or permitted practices
of the New York State Department of Financial Services (the
“DFS”). The more significant SAP variances from GAAP
are as follows:
|
|
|
|
●
|
Policy
acquisition costs are charged to operations in the year such costs
are incurred, rather than being deferred and amortized as premiums
are earned over the terms of the policies.
|
|
|
|
|
●
|
Ceding
commission revenues are earned when ceded premiums are written
except for ceding commission revenues in excess of anticipated
acquisition costs, which are deferred and amortized as ceded
premiums are earned. GAAP requires that all ceding commission
revenues be earned as the underlying ceded premiums are earned over
the term of the reinsurance agreements.
|
|
|
|
|
●
|
Certain
assets including certain receivables, a portion of the net deferred
tax asset, prepaid expenses and furniture and equipment are not
admitted.
|
|
|
|
|
●
|
Investments in
fixed-maturity securities are valued at NAIC value for statutory
financial purposes, which is primarily amortized cost. GAAP
requires certain investments in fixed-maturity securities
classified as available for sale, to be reported at fair
value.
|
|
|
|
|
●
|
Certain
amounts related to ceded reinsurance are reported on a net basis
within the statutory basis financial statements. GAAP requires
these amounts to be shown gross.
|
|
●
|
For SAP
purposes, changes in deferred income taxes relating to temporary
differences between net income for financial reporting purposes and
taxable income are recognized as a separate component of gains and
losses in surplus rather than included in income tax expense or
benefit as required under GAAP.
|
State
insurance laws restrict the ability of KICO to declare dividends.
These restrictions are related to surplus and net investment
income. Dividends are restricted to the lesser of 10% of surplus or
100% of investment income (on a statutory accounting basis) for the
trailing 36 months, net of dividends paid by KICO during such
period. State insurance regulators require insurance companies to
maintain specified levels of statutory capital and surplus.
Generally, dividends may only be paid out of unassigned surplus,
and the amount of an insurer’s unassigned surplus following
payment of any dividends must be reasonable in relation to the
insurer’s outstanding liabilities and adequate to meet its
financial needs. For the years ended December 31, 2016 and 2015,
KICO paid dividends to Kingstone of $1,950,000 and $1,650,000,
respectively. On February 23, 2017, KICO’s Board of Directors
approved a cash dividend of $500,000 to Kingstone, which was paid
on February 24, 2017. For the years ended December 31, 2016 and
2015, KICO had statutory basis net income of $9,212,125 and
$6,632,042, respectively. At December 31, 2016 and 2015, KICO
had reported statutory basis surplus as regards policyholders of
$49,962,415 and $39,072,962, respectively, as filed with the
DFS.
F-40
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
State
insurance departments impose risk-based capital (“RBC”)
requirements on insurance enterprises. The RBC Model serves as a
benchmark for the regulation of insurance companies by state
insurance regulators. RBC provides for targeted surplus levels
based on formulas, which specify various weighting factors that are
applied to financial balances or various levels of activity based
on the perceived degree of risk, and are set forth in the RBC
requirements. Such formulas focus on four general types of risk:
(a) the risk with respect to the company’s assets (asset
or default risk); (b) the risk of default on amounts due from
reinsurers, policyholders, or other creditors (credit risk);
(c) the risk of underestimating liabilities from business
already written or inadequately pricing business to be written in
the coming year (underwriting risk); and, (d) the risk
associated with items such as excessive premium growth, contingent
liabilities, and other items not reflected on the balance sheet
(off-balance sheet risk). The amount determined under such formulas
is called the authorized control level RBC
(“ACL”).
The
RBC guidelines define specific capital levels based on a
company’s ACL that are determined by the ratio of the
company’s total adjusted capital (“TAC”) to its
ACL. TAC is equal to statutory capital, plus or minus certain other
specified adjustments. The Company’s TAC is far above the ACL
for each of the last two years and is in compliance with RBC
requirements as of December 31, 2016 and 2015.
The Company files a consolidated U.S. federal
income tax return that includes all wholly owned subsidiaries.
State tax returns are filed on a consolidated or separate return
basis depending on applicable laws. The Company records adjustments
related to prior years’ taxes during the period when they are
identified, generally when the tax returns are
filed. The effect of these adjustments on the current
and prior periods (during which the differences originated) is
evaluated based upon quantitative and qualitative factors and are
considered in relation to the condensed consolidated financial
statements taken as a whole for the respective
periods.
The
provision for income taxes is comprised of the
following:
|
Years ended December 31,
|
2016
|
2015
|
|
|
|
|
|
Current
federal income tax expense
|
$
4,824,655
|
$
3,557,385
|
|
Current
state income tax expense
|
(12,590
)
|
19,000
|
|
Deferred
federal and state income tax expense (benefit)
|
(293,364
)
|
(226,932
)
|
|
Provision
for income taxes
|
$
4,518,701
|
$
3,349,453
|
F-41
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
A
reconciliation of the federal statutory rate to the effective tax
rate is as follows:
|
Years ended December 31,
|
2016
|
2015
|
||
|
Computed
expected tax expense
|
$
4,696,463
|
35.0
%
|
$
3,505,085
|
34.0
%
|
|
State
taxes, net of Federal benefit
|
(71,428
)
|
(0.5
)
|
(74,827
)
|
(0.7
)
|
|
State
valuation allowance
|
85,714
|
0.6
|
171,532
|
1.7
|
|
Benefit
of lower tax brackets
|
(100,000
)
|
(0.7
)
|
-
|
-
|
|
Permanent
differences
|
|
|
|
|
|
Dividends
received deduction
|
(136,690
)
|
(1.0
)
|
(121,960
)
|
(1.2
)
|
|
Non-taxable
investment income
|
(110,784
)
|
(0.8
)
|
(177,487
)
|
(1.7
)
|
|
Other
permanent differences
|
48,139
|
0.3
|
55,623
|
0.5
|
|
Prior
year tax matters
|
123,976
|
0.9
|
(49,139
)
|
(0.5
)
|
|
Other
|
(16,689
)
|
(0.1
)
|
40,626
|
0.4
|
|
Total
tax
|
$
4,518,701
|
33.7
%
|
$
3,349,453
|
32.5
%
|
Deferred
tax assets and liabilities are determined using the enacted tax
rates applicable to the period the temporary differences are
expected to be recovered. Accordingly, the current period income
tax provision can be affected by the enactment of new tax rates.
The net deferred income taxes on the balance sheet reflect
temporary differences between the carrying amounts of the assets
and liabilities for financial reporting purposes and income tax
purposes, tax effected at a various rates depending on whether the
temporary differences are subject to federal taxes, state taxes, or
both.
Significant
components of the Company’s deferred tax assets and
liabilities are as follows:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
|
|
|
|
Deferred
tax asset:
|
|
|
|
Net
operating loss carryovers (1)
|
$
131,626
|
$
150,492
|
|
Claims
reserve discount
|
417,349
|
405,709
|
|
Unearned
premium
|
2,877,365
|
2,555,012
|
|
Deferred
ceding commission revenue
|
2,329,626
|
2,187,923
|
|
Other
|
188,675
|
151,250
|
|
Total
deferred tax assets
|
5,944,641
|
5,450,386
|
|
|
|
|
|
Deferred
tax liability:
|
|
|
|
Investment
in KICO (2)
|
1,169,000
|
1,169,000
|
|
Deferred
acquisition costs
|
4,161,526
|
3,684,004
|
|
Intangibles
|
459,000
|
597,657
|
|
Depreciation
and amortization
|
265,671
|
415,938
|
|
Net
unrealized appreciation of securities - available for
sale
|
56,393
|
255,977
|
|
Total
deferred tax liabilities
|
6,111,590
|
6,122,576
|
|
|
|
|
|
Net
deferred income tax liability
|
$
(166,949
)
|
$
(672,190
)
|
(1)
The
deferred tax assets from net operating loss carryovers are as
follows:
F-42
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
Type of NOL
|
December 31,
2016
|
December 31,
2015
|
Expiration
|
|
State
only (A)
|
$
655,719
|
$
540,865
|
December
31, 2036
|
|
Valuation
allowance
|
(534,293
)
|
(403,973
)
|
|
|
State
only, net of valuation allowance
|
121,426
|
136,892
|
|
|
Amount
subject to Annual Limitation, federal only (B)
|
10,200
|
13,600
|
December
31, 2019
|
|
Total
deferred tax asset from net operating loss carryovers
|
$
131,626
|
$
150,492
|
|
(A) Kingstone generates operating losses for state purposes and has
prior year NOLs available. The state NOL as of December 31, 2016
and 2015 was approximately
$10,088,000
and
$8,321,000
, respectively. KICO, the Company’s
insurance underwriting subsidiary, is not subject to state income
taxes. KICO’s state tax obligations are paid through a gross
premiums tax, which is included in
the consolidated
statements of income and comprehensive income within other
underwriting expenses
. A valuation
allowance has been recorded due to the uncertainty of generating
enough state taxable income to utilize 100% of the available state
NOLs over their remaining lives, which expire between 2027 and
2036.
(B)
The Company has an NOL of $30,000 that is subject to Internal
Revenue Code Section 382, which places a limitation on the
utilization of the federal net operating loss to approximately
$10,000 per year (“Annual Limitation”) as a result of a
greater than 50% ownership change of the Company in 1999. The
losses subject to the Annual Limitation will be available for
future years, expiring through December 31, 2019.
(2)
Deferred
tax liability - investment in KICO
On
July 1, 2009, the Company completed the acquisition of 100% of the
issued and outstanding common stock of KICO (formerly known as
Commercial Mutual Insurance Company (“CMIC”)) pursuant
to the conversion of CMIC from an advance premium cooperative to a
stock property and casualty insurance company. Pursuant to the plan
of conversion, the Company acquired a 100% equity interest in KICO,
in consideration for the exchange of $3,750,000 principal amount of
surplus notes of CMIC. In addition, the Company forgave all accrued
and unpaid interest on the surplus notes as of the date of
conversion. As of the date of acquisition, unpaid accrued interest
on the surplus notes along with the accretion of the discount on
the original purchase of the surplus notes totaled $2,921,319
(together “Untaxed Interest”). As of the date of
acquisition, the deferred tax liability on the Untaxed Interest was
$1,169,000. Under GAAP guidance for business combinations, a
temporary difference with an indefinite life exists when the parent
has a lower carrying value of its subsidiary for income tax
purposes. The Company is required to maintain its deferred tax
liability of $1,169,000 related to this temporary difference until
the stock of KICO is sold, or the assets of KICO are sold or KICO
and the parent are merged.
The
table below reconciles the changes in net deferred income tax
liability to the deferred income tax provision for the year ended
December 31, 2016:
|
Change
in net deferred income tax liabilities
|
$
(505,241
)
|
|
Deferred
tax expense (benefit) allocated to other comprehensive
income
|
(211,877
)
|
|
Deferred
income tax provision (benefit)
|
$
(293,364
)
|
In
assessing the valuation of deferred tax assets, the Company
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. No valuation allowance
against deferred tax assets has been established, except for NOL
limitations, as the Company believes it is more likely than not the
deferred tax assets will be realized based on the historical
taxable income of KICO, or by offset to deferred tax
liabilities.
F-43
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
Company had no material unrecognized tax benefit and no adjustments
to liabilities or operations were required. There were no material
interest or penalties related to income taxes that have been
accrued or recognized as of and for the years ended December 31,
2016 and 2015. If any had been recognized these would be reported
in income tax expense.
The
tax returns for years ended December 31, 2013 through 2016 are
subject to examination, generally for three years after
filing.
KICO
maintains a salary reduction plan under Section 401(k) of the
Internal Revenue Code (the “401(k) Plan”) for its
qualified employees. KICO matches 100% of each participant’s
contribution up to 4% of the participant’s eligible
contribution. The Company, at its discretion, may allocate an
amount for additional contributions (“Additional
Contributions”) to the 401(k) Plan. The Company incurred
approximately $483,000 and $422,000 of expense for the years ended
December 31, 2016 and 2015, respectively, related to the 401(k)
Plan. For the years ended December 31, 2016 and 2015, Additional
Contributions totaled approximately $309,000 and $263,000,
respectively.
Litigation
From
time to time, the Company is involved in various legal proceedings
in the ordinary course of business. For example, to the extent a
claim asserted by a third party in a lawsuit against one of the
Company’s insureds covered by a particular policy, the
Company may have a duty to defend the insured party against the
claim. These claims may relate to bodily injury, property damage or
other compensable injuries as set forth in the policy. Such
proceedings are considered in estimating the liability for loss and
LAE expenses. The Company is not subject to any other pending legal
proceedings that management believes are likely to have a material
adverse effect on the financial statements.
Office Lease
In
June 2016, the Company entered into a lease modification agreement
for its office facility for KICO located in Valley Stream, NY under
a non-cancelable operating lease dated March 27, 2015. The original
lease had a term of seven years and nine months. The lease
modification increased the space occupied by KICO and extended the
lease term to seven years and nine months to be measured from the
additional premises commencement date. The additional premises
commencement date was September 19, 2016, and additional rent will
be payable beginning March 19, 2017. The original lease
commencement date was July 1, 2015 and rent commencement began
January 1, 2016.
F-44
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
In
addition to the base rental costs, occupancy lease agreements
generally provide for rent escalations resulting from increased
assessments from real estate taxes and other charges. Rent expense
under the lease will be recognized on a straight-line basis over
the lease term. At December 31, 2016, cumulative rent expense
exceeded cumulative rent payments by $71,221. This difference is
recorded as deferred rent and is included in accounts payable,
accrued expenses and other liabilities in the accompanying
consolidated balance sheets.
As
of December 31, 2016, aggregate future minimum rental commitments
under this agreement are as follows:
|
|
For the Year
|
|
|
|
|
Ending
|
|
|
|
|
December 31,
|
Total
|
|
|
|
2017
|
$
146,008
|
|
|
|
2018
|
164,117
|
|
|
|
2019
|
169,861
|
|
|
|
2020
|
175,806
|
|
|
|
2021
|
181,959
|
|
|
|
Thereafter
|
432,392
|
|
|
|
Total
|
$
1,270,143
|
|
Rent expense for the years ended December 31, 2016
and 2015 amounted to $119,720 and $52,252, respectively, and
is
included in the consolidated statements of income and
comprehensive income within
other
underwriting expenses.
Employment Agreements
Chief Executive Officer (Kingstone)
Effective August 12, 2014, the Company entered
into an amendment to its employment agreement with Barry Goldstein,
its President, Chairman of the Board and Chief Executive
Officer
(as amended, the “Goldstein Employment
Agreement”)
, pursuant to which
the term of the employment agreement was extended from December 31,
2014 to December 31, 2016 and, effective July 1, 2014 and
continuing through the term of the agreement, Mr. Goldstein’s
annual base salary was increased to $575,000 and his bonus was
revised to equal 6% of the Company’s consolidated income from
operations before taxes, net of the Company’s consolidated
net investment income and net realized gains on sales of
investments. In addition, in consideration of Mr. Goldstein
entering into the amendment, the Company paid him a bonus in the
amount of $62,500.
Concurrently with the amendment, the Company
granted to Mr. Goldstein, pursuant to the 2005 Plan, a five year
option for the purchase of 200,000 shares of common stock at an
exercise price of $6.73 per share, exercisable to the extent of
62,500 shares on the date of grant and each of the initial two
anniversary dates of the grant and 12,500 shares on the third
anniversary date of the grant. In addition, the Company granted to
Mr. Goldstein, pursuant to the 2014 Plan, a five year option for
the purchase of 50,000 shares of common stock at an exercise price
of $6.73 per share, exercisable on the third anniversary of the
date of the grant. The 50,000 share option grant was subject to
stockholder approval of the 2014 Plan.
The stockholders
approved the 2014 Plan on August 11, 2015.
Pursuant to the stock option agreements with Mr.
Goldstein, the Company agreed that, under certain circumstances
following a change of control of the Company, and the termination
of his employment, or in the event Mr. Goldstein’s employment
with the Company is terminated by the Company without cause or he
resigns with good reason (each as defined in his employment
agreement), all of the options granted to Mr. Goldstein would
become exercisable and would remain exercisable until the first
anniversary of the termination date.
Pursuant to the
Goldstein Employment Agreement, the Company also agreed that, under
certain circumstances following a change of control of Kingstone
Companies, Inc. and the termination of his employment, Mr.
Goldstein would be entitled to a payout equal to one and one-half
times his then annual salary
.
In the event of termination of Mr. Goldstein’s employment by
the Company
without cause or he
resigns with good reason (as each term is defined in the Goldstein
Employment Agreement), Mr. Goldstein would be entitled to receive
his base salary and bonuses from the Company for the remainder of
the term, and his outstanding options would become exercisable and
would remain exercisable until the first anniversary of the
termination date. In addition, in the event Mr. Goldstein’s
employment with KICO is terminated by KICO with or without cause,
he would be entitled to receive a lump sum payment from KICO equal
to six months base salary.
F-45
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
The
Goldstein Employment Agreement expired on December 31, 2016 and in
January 2017, Mr. Goldstein entered into a new employment agreement
with the Company. See Note 19 Subsequent Events for the new
employment agreement in effect as of January 1, 2017.
Executive Vice President (KICO)
John D.
Reiersen, KICO’s Executive Vice President, was employed
through December 31, 2016 pursuant to an employment agreement
effective as of November 13, 2006 and amended as of January 25,
2008, February 28, 2011 and October 14, 2013 (together, the
“Reiersen Employment Agreement”). The Reiersen
Employment Agreement expired on December 31, 2016 and was
terminable by KICO at any time with or without cause upon written
notice. In the event of termination by KICO, Mr. Reiersen was
entitled to receive severance in an amount equal to the lesser of
$50,000 or the remaining salary payable to him through the term of
his agreement. Pursuant to the Reiersen Employment Agreement,
Mr. Reiersen’s minimum annual salary effective from January
1, 2012 through December 31, 2014 was $100,000. His minimum annual
salary effective January 1, 2015 was $105,000. His minimum salary
in both periods was subject to increase based upon the provision of
more than 500 hours of service per year on behalf of
KICO. Mr. Reiersen also received additional customary
benefits and a $5,000 annual fee for his position as a director of
KICO.
The
Reiersen Employment Agreement expired on December 31, 2016 and was
not renewed upon his retirement. In 2017, Mr. Reiersen’s
annual fee for his position as a non-employee director of KICO was
increased to $10,000.
Approval Required for Transactions with Subsidiary
On July
1, 2009, Kingstone completed the acquisition of 100% of the issued
and outstanding common stock of KICO (formerly known as Commercial
Mutual Insurance Company (“CMIC”)) pursuant to the
conversion of CMIC from an advance premium cooperative to a stock
property and casualty insurance company. Pursuant to the plan of
conversion, Kingstone acquired a 100% equity interest in KICO. In
connection with the plan of conversion of CMIC, the Company has
agreed with the DFS that any intercompany transaction between
itself and KICO must be filed with the DFS 30 days prior to
implementation.
F-46
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Basic
net earnings per common share is computed by dividing income
available to common shareholders by the weighted-average number of
common shares outstanding. Diluted earnings per common share
reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options.
The computation of diluted earnings per common share excludes those
options with an exercise price in excess of the average market
price of the Company’s common shares during the periods
presented.
The
computation of diluted earnings per common share excludes
outstanding options in periods where the exercise of such options
would be anti-dilutive. For the years ended December 31, 2016 and
2015, the inclusion of 7,715 and -0- options, respectively, in the
computation of diluted earnings per common share would have been
anti-dilutive for the periods and, as a result, the weighted
average number of common shares used in the calculation of diluted
earnings per common share has not been adjusted for the effect of
such options.
The
reconciliation of the weighted average number of common shares used
in the calculation of basic and diluted earnings per common share
follows:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
7,736,594
|
7,331,114
|
|
Effect
of dilutive securities, common share equivalents
|
70,669
|
46,766
|
|
|
|
|
|
Weighted
average number of shares outstanding,
|
|
|
|
used
for computing diluted earnings per share
|
7,807,263
|
7,377,880
|
The
Company’s wholly owned subsidiary, Payments Inc.
(“Payments”), is licensed as a premium finance agency
in the state of New York. Prior to February 1, 2008, Payments
provided premium financing in connection with the obtaining of
insurance policies. Effective February 1, 2008, Payments sold its
outstanding premium finance loan portfolio. The purchaser of the
portfolio (the “Purchaser”) agreed that, during the
five year period ended February 1, 2013 (which period was extended
to February 1, 2015), it would purchase, assume and service all
eligible premium finance contracts originated by Payments in the
state of New York (the “Payments Agreement”). In
connection with such purchases, Payments was entitled to receive a
fee generally equal to a percentage of the amount
financed.
In July
2014, the Purchaser terminated the Payments Agreement effective
February 1, 2015. Following any expiration or termination of the
obligation of the Purchaser to purchase premium finance contracts,
Payments was entitled to receive the fees for an additional two
years (“Termination Period”) with regard to contracts
for policies from the Company’s producers. On March 26, 2015,
the Company and the Purchaser agreed to amend the Termination
Period to end as of March 31, 2015. The Company received a one-time
payment of $350,000 in exchange for the fees that the Company would
have received during the Termination Period. The Company’s
premium financing business consisted of the placement fees that
Payments earned from placing contracts.
F-47
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Placement fee
revenue included in other income and the related direct expenses
included in other operating expenses in the consolidated statements
of net income and comprehensive income are as follows:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Placement
fee revenue
|
$
-
|
$
54,343
|
|
Termination
fee
|
-
|
350,000
|
|
Direct
expenses
|
-
|
(12,989
)
|
|
Net
income before taxes from placement fees
|
$
-
|
$
391,354
|
The
Company has evaluated events that occurred subsequent to December
31, 2016 through March 16, 2017, the date these consolidated
financial statements were issued for matters that required
disclosure or adjustment in these consolidated financial
statements.
Dividends Declared and Paid
On
February 7, 2017, the Company’s Board of Directors approved a
dividend of $.0625 per share, or $663,837, payable in cash on March
15, 2017 to stockholders of record as of February 28,
2017.
Public Offering of Common Stock
On
January 31, 2017, the Company closed on an underwritten public
offering of 2,500,000 shares of its Common Stock. On February 14,
2017, the Company closed on the underwriters’ 30-day purchase
option for an additional 192,500 shares of its Common Stock. The
public offering price for the 2,692,500 shares sold was $12.00 per
share. The aggregate net proceeds to the Company was approximately
$30,230,000, after deducting underwriting discounts and commissions
and other offering expenses of $2,080,000.
On
March 1, 2017, the Company used $23,000,000 of the net proceeds of
the offering to contribute capital to its insurance subsidiary,
KICO, to support its ratings upgrade plan and additional growth.
The remainder of the net proceeds will be used for general
corporate purposes. A shelf registration statement relating to the
shares sold in the offering was filed with the SEC and became
effective on January 19, 2017.
Employment Agreement
On
January 20, 2017, the Company and Barry Goldstein, the Company's
President, Chief Executive Officer and Chairman of the Board,
entered into a new employment agreement (the “2017 Goldstein
Employment Agreement”). The 2017 Goldstein Employment
Agreement is effective as of January 1, 2017 and expires on
December 31, 2019
.
Pursuant to the
2017 Goldstein Employment Agreement, Mr. Goldstein is entitled to
receive an annual base salary of $630,000 (an increase from
$575,000 per annum in effect through December 31, 2016) and an
annual bonus equal to 6% of the Company's consolidated income from
operations before taxes, exclusive of the Company's consolidated
net investment income (loss) and net realized gains (losses) on
investments (consistent with the bonus payable to Mr. Goldstein
through December 31, 2016). In addition, pursuant to the 2017
Goldstein Employment Agreement, Mr. Goldstein is entitled to a
long-term compensation payment ("LTC") of between $945,000 and
$2,835,000 in the event the Company's adjusted book value per share
(as defined in the 2017 Goldstein Employment Agreement) has
increased by at least an average of 8% per annum as of December 31,
2019 as compared to December 31, 2016 (with the maximum LTC payment
being due if the average per annum increase is at least
14%).
F-48
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Further, pursuant
to the 2017 Goldstein Employment Agreement, in the event that Mr.
Goldstein's employment is terminated by the Company without cause
or he resigns for good reason (each as defined in the 2017
Goldstein Employment Agreement), Mr. Goldstein would be entitled to
receive his base salary, the 6% bonus and the LTC payment for the
remainder of the term. Mr. Goldstein would be entitled, under
certain circumstances, to a payment equal to one and one-half times
his then annual salary and the target LTC payment of $1,890,000 in
the event of the termination of his employment following a change
of control of the Company.
In
consideration of certain accomplishments during the three year
period ended December 31, 2016, the Company also paid Mr. Goldstein
a bonus in the amount of $200,000.
The
following is a summary of unaudited quarterly results of operations
for the years ended December 31, 2016 and 2015:
F-49
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
|
|
2016
|
||||
|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Total
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
$
14,531,675
|
$
15,010,875
|
$
15,646,181
|
$
16,219,175
|
$
61,407,906
|
|
Ceding
commission revenue
|
2,770,337
|
2,569,025
|
2,934,928
|
2,993,951
|
11,268,241
|
|
Net
investment income
|
813,057
|
764,070
|
709,072
|
829,384
|
3,115,583
|
|
Net
realized gain (loss) on sale of investments
|
80,436
|
283,432
|
241,035
|
(75,455
)
|
529,448
|
|
Total
revenues
|
18,444,852
|
18,911,910
|
19,828,397
|
20,251,505
|
77,436,664
|
|
Loss
and loss adjustment expenses
|
9,483,855
|
5,786,836
|
5,134,854
|
7,384,116
|
27,789,661
|
|
Commission
expense and
|
|
|
|
|
|
|
other
underwriting expenses
|
7,616,507
|
8,122,342
|
8,642,964
|
8,812,023
|
33,193,836
|
|
Net
income
|
541,032
|
2,842,261
|
3,460,626
|
2,055,847
|
8,899,766
|
|
Basic
earnings per share
|
$
0.07
|
$
0.36
|
$
0.44
|
$
0.26
|
$
1.15
|
|
Diluted
earnings per share
|
$
0.07
|
$
0.36
|
$
0.43
|
$
0.26
|
$
1.14
|
|
|
2015
|
||||
|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Total
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
$
10,385,799
|
$
10,865,715
|
$
13,129,604
|
$
14,230,964
|
$
48,612,082
|
|
Ceding
commission revenue
|
3,089,404
|
3,655,522
|
2,643,531
|
2,084,660
|
11,473,117
|
|
Net
investment income
|
574,656
|
625,972
|
649,441
|
713,821
|
2,563,890
|
|
Net
realized gain (loss) on sale of investments
|
(67,494
)
|
2,263
|
(40,487
)
|
55,172
|
(50,546
)
|
|
Total
revenues
|
14,613,556
|
15,542,512
|
16,657,369
|
17,362,297
|
64,175,734
|
|
Loss
and loss adjustment expenses
|
7,063,217
|
4,770,813
|
5,050,194
|
6,295,776
|
23,180,000
|
|
Commission
expense and
|
|
|
|
|
|
|
other
underwriting expenses
|
6,411,482
|
6,561,827
|
7,410,407
|
7,766,815
|
28,150,531
|
|
Net
income
|
382,499
|
2,379,182
|
2,345,654
|
1,852,285
|
6,959,620
|
|
Basic
earnings per share
|
$
0.05
|
$
0.32
|
$
0.32
|
$
0.25
|
$
0.95
|
|
Diluted
earnings per share
|
$
0.05
|
$
0.32
|
$
0.32
|
$
0.25
|
$
0.94
|
Due to
changes in number of shares outstanding from quarter to quarter,
the total earnings per share of the four quarters may not
necessarily equal the earnings per share for the year.
F-50
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A . Risk FactorsItem 1B . Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6 . Selected Financial DataItem 7 . Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A . Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16 . Form 10-k SummaryNote 1 - Nature Of BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 - InvestmentsNote 4 - Fair Value MeasurementsNote 5 - Fair Value Of Financial InstrumentsNote 6 - IntangiblesNote 7 - ReinsuranceNote 8 - Deferred Policy Acquisition Costs and Deferred Ceding Commission RevenueNote 9 - Property and EquipmentNote 10 - Property and Casualty Insurance ActivityNote 11 Stockholders EquityNote 12 - Statutory Financial Information and Accounting PoliciesNote 13 - Risk Based CapitalNote 14 Income TaxesNote 15 - Employee Benefit PlansNote 16 - Commitments and ContingenciesNote 17 - Earnings Per Common ShareNote 18 Premium Finance Placement FeesNote 19 - Subsequent EventsNote 20 Quarterly Financial Data (unaudited)