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)
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☑
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2019
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from _________to _________
Commission File Number 0-1665
KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware(State or other jurisdiction of incorporation or
organization)
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36-2476480(I.R.S. EmployerIdentification Number)
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15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)
(845) 802-7900
(Registrant’s telephone number, including area
code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol(s)
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Name of
each exchange on which registered
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Common
Stock, $0.01 par value per share
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KINS
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Nasdaq Capital Market
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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(Title
of each class)
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 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
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☑ No ☐
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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☐
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Accelerated filer
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☑
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Non-accelerated filer
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☐
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Smaller reporting company
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☑
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
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, 2019, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was
$84,442,572 based on the closing sale price as reported on the
Nasdaq Global Select Market. As of March 9, 2020, there were
10,803,770 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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Business.
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3
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Risk
Factors.
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17
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Unresolved
Staff Comments.
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23
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Properties.
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23
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Legal
Proceedings.
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23
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Mine
Safety Disclosures.
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23
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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24
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Selected
Financial Data.
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24
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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25
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Quantitative
and Qualitative Disclosures About Market Risk.
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48
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Financial
Statements and Supplementary Data.
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48
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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48
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Controls
and Procedures.
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48
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Other
Information.
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50
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Directors,
Executive Officers and Corporate Governance.
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51
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Executive
Compensation.
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54
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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59
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Certain
Relationships and Related Transactions, and Director
Independence.
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61
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Principal
Accountant Fees and Services.
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62
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Exhibits
and Financial Statement Schedules.
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63
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Form
10-K Summary.
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64
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Signatures
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P
ART I
Forward-Looking Statements
This
Annual Report on Form 10-K (the “Annual Report”)
contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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 results or
other consequences of our plans or strategies, projected or
anticipated results from acquisitions to be made by us, or
projections involving anticipated revenues, earnings, costs 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 cause actual results and outcomes to
differ materially from those contained in the forward-looking
statements include, but are not limited to, the risks and
uncertainties discussed in Part I Item 1A (“Risk
Factors”) 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 except as required by
law.
2
I
TEM 1.
BUSINESS
.
(a)
Business Development
General
As used
in this 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
through our wholly owned subsidiary, Kingstone Insurance Company
(“KICO”), domiciled in the state of New York. KICO is a
licensed property and casualty insurance company in New York, New
Jersey, Connecticut, Massachusetts, Pennsylvania, Rhode Island,
Maine, and New Hampshire. KICO is currently offering its property
and casualty insurance products in New York, New Jersey, Rhode
Island, Massachusetts and Connecticut. Although in 2019 KICO wrote
85.0% of its direct written premiums in New York, we believe that
New Jersey, Connecticut, Massachusetts, and Rhode Island will
represent an increasing portion of the total over the coming
years.
In
addition, through our subsidiary, Cosi Agency, Inc.
(“Cosi”), a multi-state licensed general agency, we
access alternative distribution channels. Through Cosi, we have the
opportunity to partner with name-brand carriers and access
nationwide insurance agencies. See “Distribution” below
for a discussion of our distribution channels. Cosi receives
commission revenue from KICO for the policies it places with others
and pays commissions to these agencies. Cosi retains the profit
between the commission revenue received and the commission expense
paid. Cosi revenue is included in other income and Cosi related
expenses are included in other operating expenses. Cosi operations
are not included in our stand-alone insurance underwriting business
and, accordingly, its revenue and expenses are not included in the
calculation of our combined ratio as described below.
Recent Developments
Developments During 2019
●
Quota Share Reinsurance
Effective December
15, 2019, KICO entered into a 25% quota share reinsurance treaty
for its personal lines business, which primarily consists of
homeowners’ policies, covering the period from December 15,
2019 through December 31, 2020 (“2019/2020
Treaty”).
In
addition to the 2019/2020 Treaty, KICO’s quota share
reinsurance treaties in effect during the years ended December 31,
2019 and 2018 for its personal lines business, were covered under a
treaty covering a two-year period from July 1, 2017 through June
30, 2019 (“2017/2019 Treaty”). Effective July 1, 2019,
the 2017/2019 Treaty expired on a run-off basis.
●
Catastrophe Reinsurance Coverage
Effective July 1,
2019, KICO increased the top limit of its catastrophe reinsurance
coverage from $450,000,000 to $610,000,000, which, at the time,
equated to more than a 1-in-250 year storm event according to the
primary industry catastrophe model that we follow.
●
Expansion into Connecticut
In the
first quarter of 2019 KICO’s homeowners insurance product was
launched in Connecticut.
3
●
Exit Commercial Liability Business
In July
2019, due to the poor performance of our commercial liability
business, we made the decision to no longer underwrite commercial
lines or commercial umbrella risks.
Developments During 2018
●
Expanded Licensing; Connecticut, Maine and New Hampshire
Expansion
In
2018, KICO continued to expand its regional capabilities by
obtaining a license to write insurance policies in Connecticut,
Maine and New Hampshire. Also in 2018, KICO’s homeowners
insurance product was launched in Massachusetts.
●
Reduced Reliance on Quota Share Reinsurance
Effective July 1,
2018, KICO reduced the ceding percentage for its personal lines
quota share reinsurance treaty from 20% to 10%.
●
Increased Catastrophe Reinsurance Coverage
Effective July 1,
2018, KICO increased the top limit of its catastrophe reinsurance
coverage from $320,000,000 to $450,000,000, which at the time,
equated to more than a 1-in-250 year storm event according to the
primary industry catastrophe model that we follow.
(b)
Business
Property and Casualty Insurance
Overview
Property and
casualty insurance companies provide 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
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 owner’s building, inventory and equipment. Casualty
insurance (also 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 that cause 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 may take many years to settle.
4
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 collect a variety of policy fees
including installment fees, reinstatement fees, and non-sufficient
fund fees related to situations involving extended premium payment
plans. Earned premiums represent premiums received from insureds,
which are recognized as revenue over the period of time that
coverage is provided (i.e., ratably over the life of the policy).
All of our policies are 12 month policies; therefore, a significant
period of time can elapse between the receipt of insurance premiums
and the payment of claims. During this time, KICO invests the
premiums, earning investment income and generating net realized and
unrealized gains and losses on associated investments.
Insurance companies
incur a significant amount of their total expenses from insured
losses, which are commonly referred to as claims. In settling
insured 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,
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 taking the ratio of incurred loss
and LAE to earned premiums (the “loss and LAE ratio”)
and adding it 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.
Business; Strategy
We are
a multi-line regional property and casualty insurance company
writing business exclusively through retail and wholesale agents
and brokers (“producers”) appointed by our wholly owned
subsidiary, KICO. We are licensed to write insurance policies in
New York, New Jersey, Connecticut, Maine, Massachusetts, New
Hampshire, Pennsylvania and Rhode Island. We are actively writing
business in New York, New Jersey, Rhode Island, Massachusetts and
Connecticut.
Additionally,
through our subsidiary, Cosi, a multi-state licensed general
agency, we access alternative distribution channels. Through Cosi,
we have the opportunity to partner with name-brand carriers and
access nationwide insurance agencies. See
“Distribution” below for a discussion of our
distribution channels.
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 insureds and claimants.
Producers also value our financial stability coupled with
competitive rate and commission structures.
Our
principal objectives are to grow profitably while managing risk
through prudent use of reinsurance in order to strengthen our
capital base. We generate underwriting income through adequate
pricing of insurance policies and by effectively managing our other
underwriting and operating expenses. We are pursuing profitable
growth through existing producers in existing markets, by
developing new geographic markets and producer relationships, and
by introducing niche products that are relevant to our producers
and insureds.
For
the year ended December 31, 2019, our gross written premiums
totaled $171.2 million, an increase of 16.7% from the $146.7
million in gross written premiums for the year ended December 31,
2018.
Product Lines
Our
product lines include the following:
Personal lines -
Our largest line of
business is personal lines, consisting of homeowners and dwelling
fire multi-peril, cooperative/condominiums, renters, and personal
umbrella policies. Personal lines policies accounted for 87.6% of
our gross written premiums for the year ended December 31,
2019.
Livery physical damage -
We write
for-hire vehicle physical damage only policies for livery and car
service vehicles and taxicabs, primarily based in New York City.
These policies insure only the physical damage portion of insurance
for such vehicles, with no liability coverage included. These
policies accounted for 6.2% of our gross written premiums for the
year ended December 31, 2019.
5
Commercial liability –
Through
July 2019, we offered businessowners policies, which consist
primarily of small business retail, service, and office risks, with
limited property exposures. We also wrote artisan’s liability
policies for small independent contractors with smaller sized
workforces. In addition, we wrote special multi-peril
policies for larger and more specialized businessowners risks.
Further, we offered commercial umbrella policies written above our
supporting commercial lines policies. In July 2019, due to the poor
performance of these lines, we made the decision to no longer
underwrite commercial lines or commercial umbrella risks. In force
policies for these lines will be non-renewed at the end of their
current annual terms. Commercial lines policies accounted for 5.9%
of our gross written premiums for the year ended December 31,
2019.
Other -
We write canine legal liability
policies and have a small participation in mandatory state joint
underwriting associations. These policies accounted for 0.3% of our
gross written premiums for the year ended December 31,
2019.
Our Competitive Strengths
History of Growing Our Profitable Operations
KICO
has been in operation in the State of New York for over 130 years.
We have consistently grown the amount of profitable business that
we write by introducing new products, increasing volume written
with our selected producers in existing markets, and developing new
producer relationships and markets. KICO has earned an underwriting
profit in nine 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 insureds.
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. Our relationship with
selected producers was further strengthened by the A.M. Best
upgrade to a financial strength rating of A- (Excellent) in April
2017. This has allowed us to provide many producers with an A-
rated carrier option that was not previously available to them in
the markets where we operate.
We
offer our selected producers access to a variety of personal lines
and specialty products, including some that are unique to us. 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 our producers value
the longevity of the relationship. We believe that the excellent
service provided to our selected producers, our broad product
offerings, and our consistent prices and financial stability
provide a strong foundation for continued profitable
growth.
Sophisticated Underwriting and Risk Management
Practices
We
believe that a significant underwriting advantage exists due to our
local market presence and expertise. Our underwriting process
evaluates and screens out certain risks based on property reports,
individual insurance scoring, and 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 preferred risk profile in
order to reduce adverse selection from risks seeking the lowest
premiums and minimal coverage levels.
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 for the risk of loss. We manage coastal risk
exposure through use of individual catastrophe risk scoring and
prudent use of reinsurance.
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 from ceding commissions
earned pursuant to 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.
6
Scalable, Low-Cost Operations
We
focus on efficiently managing our expenses, and invest in tools and
processes that improve the 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 low-cost operating
environment.
We
continue to invest in improving our online application and quoting
systems for our personal lines products. We have leveraged a
paperless workflow management and document storage tool that has
improved efficiency and reduced costs. We provide an online payment
portal that allows insureds to make payments and to view policy
information for all of our products in one location. Our ability to
control the growth of operating and other expenses while expanding
our operations and growing revenue is a key component of our
business model and is important to our financial
success.
Underwriting and Claims Management Philosophy
Our
underwriting philosophy is to target niche segments for which we
have detailed expertise and can take advantage of market
conditions. We monitor results on a regular basis and our selected
producers are reviewed by management on at least a quarterly
basis.
We
believe that our rates are appropriately competitive with other
carriers in our target markets. 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 path we have chosen. We carefully
underwrite our business utilizing industry claims databases,
insurance scoring reports, physical inspection of risks and other
individual risk underwriting tools. We write homeowners and
dwelling fire business in coastal markets and are cognizant of our
exposure to hurricanes. We have mitigated this risk through
appropriate catastrophe reinsurance and application of hurricane
deductibles. We handle claims fairly while ensuring that coverage
provisions and exclusions are properly applied. Our claims and
underwriting expertise supports our ability to grow our profitable
business.
Distribution
We
generate business through our relationships with over 600
producers. We carefully select our producers by evaluating numerous
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 agency size. We only
distribute through agents and have never sought to distribute our
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 staff underwriter and the producer can
call that underwriter directly on any matter. We believe that the
close relationship and personal service received from their
underwriters is a principal reason producers place their business
with us. Our producers have access to a KICO website portal that
provides them the ability to quote risks for various products and
to review policy forms and underwriting guidelines for all lines of
business. We send out frequent “Producer Grams” in
order to inform our producers of updates at KICO. In addition, we
have an active Producer Council, made up of 11 active producers, to
advise us on market developments; and we have at least one annual
meeting with all of our producers.
During
2019, we initiated an alternative distribution program through Cosi
(“Alternative Distribution”). The goal of this program
is to enhance our personal lines distribution channel to include
nationally recognized name-brand carriers along with nationwide
call center and digital insurance agencies. While still in early
stages of development, the impact of this initiative can be
measured by the amount of new premiums written compared to total
premiums written, which includes renewals from our independent
agency network. The table below shows premiums written by
distribution channel for our homeowners and dwelling fire
components of personal lines.
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|
Year
ended
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($
in thousands)
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December
31, 2019
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Direct
Written Pemiums
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Amount
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Percent
|
|
|
|
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Core
Independent
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$
120,625
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80.6
%
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Expansion
Independent (1)
|
24,253
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16.2
%
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Alternative
Distribution through Cosi
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4,799
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3.2
%
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Total
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$
149,677
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100.0
%
|
(1)
Outside of New
York
For the
year ended December 31, 2019, Alternative Distribution made up 3.2%
of direct written premiums for our homeowners and dwelling fire
components of personal lines.
7
Competition; Market
The
insurance industry is highly competitive. We constantly assess and
make projections of market conditions and appropriate 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 the downstate regions of New
York State, but we are actively growing into other Northeast
markets, including New Jersey and Rhode Island during 2017 followed
by Massachusetts in 2018 and Connecticut in 2019. In addition, we
are licensed to write insurance policies in Maine, New Hampshire
and Pennsylvania. These homeowners markets align well with the
niche markets that have generated profitable results in New York,
and we believe that our market expertise can be effectively
utilized in new markets.
In
2018, KICO was the 14th largest writer of homeowners insurance in
the State of New York, according to data compiled by SNL Financial
LLC. Based on the same data, in 2018, we had a 1.45% market share
for this business. We compete with large national carriers as well
as regional and local carriers in the property and casualty
marketplace in New York and other states. We believe that many
national and regional carriers have chosen to limit their rate of
premium growth or to decrease their presence 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 continue expanding the size of our personal lines business in
New York, New Jersey, and other northeastern states in which we are
licensed.
Loss and Loss Adjustment Expense Reserves
We are
required to establish reserves for unpaid losses, including
reserves for claims 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:
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 it is received and we may subsequently adjust
case reserves as additional facts and information about the claim
develops.
IBNR reserves
- We also estimate
reserves for loss and LAE amounts incurred but not reported
(“IBNR”). 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; the first is a provision for claims
that have occurred but are not yet reported or known. We refer to
this as ‘Pure’ IBNR, and due to the fact that we write
primarily quickly reported property lines of business, this type of
IBNR does not make up a large portion of KICO’s total IBNR.
The second type of IBNR is a provision for expected future
development on known claims, from the evaluation date until the
time claims are settled and closed. We refer to this as ‘Case
Development’ IBNR and it makes up the majority of the IBNR
that KICO records. 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 evaluation date. The liability for loss and
LAE is estimated on an undiscounted basis, using individual
case-based valuations, statistical analyses, and various actuarial
procedures. The projection of future claim payments and reporting
patterns 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 uncertainty from
various sources, including changes in claims settlement patterns
and handling procedures, litigation trends, judicial decisions, and
economic conditions, actual loss experience may not conform to the
assumptions used in determining the estimated amounts for such
liabilities at the balance sheet date. As adjustments to these
estimates become necessary, they are reflected in 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, and fall within the range of those
determined as reasonable by the Appointed Actuary.
See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Principal Revenue and
Expense Items” in Item 7 of this Annual Report and Note 2 and
Note 11 in the accompanying Consolidated Financial Statements for
additional information and details regarding loss and LAE
reserves.
Reconciliation of Loss and Loss Adjustment Expenses
8
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,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Balance
at beginning of period
|
$
56,197,106
|
$
48,799,622
|
|
Less
reinsurance recoverables
|
(15,671,247
)
|
(16,748,908
)
|
|
Net
balance, beginning of period
|
40,525,859
|
32,050,714
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
Current
year
|
79,044,301
|
57,143,077
|
|
Prior
years
|
11,138,023
|
1,152,128
|
|
Total
incurred
|
90,182,324
|
58,295,205
|
|
|
|
|
|
Paid
related to:
|
|
|
|
Current
year
|
42,861,207
|
34,025,387
|
|
Prior
years
|
23,076,588
|
15,794,673
|
|
Total
paid
|
65,937,795
|
49,820,060
|
|
|
|
|
|
Net
balance at end of period
|
64,770,387
|
40,525,859
|
|
Add
reinsurance recoverables
|
15,728,224
|
15,671,247
|
|
Balance
at end of period
|
$
80,498,611
|
$
56,197,106
|
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 of reserves held as of
each calendar year-end from 2009 through 2019.
The first section of the table reflects the
changes in our loss and LAE reserves after each subsequent calendar
year of development. The table displays the re-estimated values of
incurred losses and LAE at each succeeding calendar year-end,
including payments made during the years indicated. The second
section of the table shows by year the cumulative amounts of loss
and LAE payments, net of amounts recoverable from reinsurers, as of
the end of each succeeding year. An example with respect to the net
loss and LAE reserves of $6,001,000 as of December 31, 2009 is as
follows. By December 31, 2011 (two years later), $3,992,000 had
actually been paid in settlement of the claims that relate to
liabilities as of December 31, 2009.
The
re-estimated ultimate reserves for those claims as of December 31,
2011 (two years later) had grown to $6,393,000.
9
The
“cumulative redundancy (deficiency)” represents, as of
December 31, 2019, 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.
|
(in thousands of $)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
|
Reserve
for loss and loss adjustment expenses, net of reinsurance
recoverables
|
6,001
|
7,280
|
8,520
|
12,065
|
17,139
|
21,663
|
23,170
|
25,960
|
32,051
|
40,526
|
64,770
|
|
Net
reserve estimated as of One year later
|
6,235
|
7,483
|
9,261
|
13,886
|
18,903
|
21,200
|
23,107
|
25,899
|
33,203
|
51,664
|
|
|
Two
years later
|
6,393
|
8,289
|
11,022
|
16,875
|
18,332
|
21,501
|
24,413
|
26,970
|
42,723
|
|
|
|
Three
years later
|
6,486
|
9,170
|
12,968
|
16,624
|
18,687
|
22,576
|
25,509
|
33,298
|
|
|
|
|
Four
years later
|
7,182
|
10,128
|
12,552
|
16,767
|
19,386
|
23,243
|
28,638
|
|
|
|
|
|
Five
years later
|
7,766
|
9,925
|
12,440
|
16,985
|
19,449
|
25,442
|
|
|
|
|
|
|
Six
years later
|
7,602
|
9,932
|
12,367
|
16,959
|
20,265
|
|
|
|
|
|
|
|
Seven
years later
|
7,615
|
9,779
|
12,307
|
17,198
|
|
|
|
|
|
|
|
|
Eight
years later
|
7,455
|
9,676
|
12,317
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
7,406
|
9,736
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
7,465
|
|
|
|
|
|
|
|
|
|
|
|
Net
cumulative redundancy (deficiency)
|
(1,464
)
|
(2,456
)
|
(3,797
)
|
(5,133
)
|
(3,126
)
|
(3,779
)
|
(5,468
)
|
(7,338
)
|
(10,672
)
|
(11,138
)
|
|
|
(in thousands of $)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
|
Cumulative
amount of reserve paid, net of reinsurance recoverable
through
|
|
|
|
|
|
||||||
|
One
year later
|
2,307
|
3,201
|
3,237
|
4,804
|
6,156
|
8,500
|
8,503
|
9,900
|
15,795
|
23,075
|
|
|
Two
years later
|
3,992
|
4,947
|
5,661
|
8,833
|
10,629
|
12,853
|
14,456
|
17,187
|
26,168
|
|
|
|
Three
years later
|
4,659
|
6,199
|
8,221
|
11,873
|
13,571
|
16,564
|
19,533
|
23,484
|
|
|
|
|
Four
years later
|
5,238
|
7,737
|
10,100
|
13,785
|
16,166
|
19,838
|
22,816
|
|
|
|
|
|
Five
years later
|
5,997
|
8,585
|
10,903
|
15,479
|
17,262
|
21,976
|
|
|
|
|
|
|
Six
years later
|
6,562
|
8,941
|
11,417
|
15,882
|
18,265
|
|
|
|
|
|
|
|
Seven
years later
|
6,749
|
9,275
|
11,725
|
16,152
|
|
|
|
|
|
|
|
|
Eight
years later
|
7,022
|
9,559
|
11,864
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
7,298
|
9,629
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
7,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserve -
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
6,001
|
7,280
|
8,520
|
12,065
|
17,139
|
21,663
|
23,170
|
25,960
|
32,051
|
40,526
|
64,770
|
|
*
Reinsurance Recoverable
|
10,512
|
10,432
|
9,960
|
18,420
|
17,364
|
18,250
|
16,707
|
15,777
|
16,749
|
15,671
|
15,728
|
|
*
Gross reserves -
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
16,513
|
17,712
|
18,480
|
30,485
|
34,503
|
39,913
|
39,877
|
41,737
|
48,800
|
56,197
|
80,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
re-estimated reserve
|
7,465
|
9,736
|
12,317
|
17,198
|
20,265
|
25,442
|
28,638
|
33,298
|
42,723
|
51,664
|
|
|
Re-estimated
reinsurance recoverable
|
12,526
|
13,158
|
13,592
|
28,456
|
22,572
|
23,640
|
21,657
|
21,179
|
21,204
|
19,455
|
|
|
Gross
re-estimated reserve
|
19,991
|
22,894
|
25,909
|
45,654
|
42,837
|
49,082
|
50,295
|
54,477
|
63,927
|
71,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
cumulative redundancy (deficiency)
|
(3,478
)
|
(5,182
)
|
(7,429
)
|
(15,169
)
|
(8,334
)
|
(9,169
)
|
(10,418
)
|
(12,740
)
|
(15,127
)
|
(14,922
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Components may not sum to totals due to rounding)
|
|
|
|
|
|
|
|
|
|||
10
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 a carrier to write business without
increasing its underwriting leverage above a level 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.
Effective
December
15, 2019, we entered into a quota share reinsurance treaty for our
personal lines business, which primarily consists of
homeowners’ policies, covering the period from December 15,
2019 through December 31, 2020 (“2019/2020 Treaty”). In
addition to the 2019/2020 Treaty, our quota share reinsurance
treaties in effect during the years ended December 31, 2019 and
2018 for our personal lines business, were covered under a treaty
covering a two-year period from July 1, 2017 through June 30, 2019
(“2017/2019 Treaty”). The treaty in effect during the
year ended December 31, 2019 was covered under the July 1, 2018
through June 30, 2019 treaty year (“2018/2019 Treaty
Year”). The treaties in effect during the year ended December
31, 2018 were covered under the July 1, 2017 through June 30, 2018
treaty year (“2017/2018 Treaty Year”) and the 2018/2019
Treaty Year that began on July 1, 2018.
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
December 15, 2019 is $750,000. 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, 2019 is
$750,000.
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 2019/2020 Treaty, KICO receives a fixed provisional rate with
no adjustment for sliding scale contingent commissions. Under the
2017/2019 Treaty, KICO received 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
2019/2020 Treaty and 2017/2019 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
2019, we purchased catastrophe reinsurance to provide coverage of
up to $610,000,000 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 $7,500,000.
Effective December 15, 2019 losses on personal lines policies are
subject to the 25% quota share treaty, which results in a net
retention by us of $5,625,000 of exposure per catastrophe
occurrence. Effective July 1, 2019, we have reinstatement premium
protection on the first $292,500,000 layer of catastrophe coverage
in excess of $7,500,000. This protects us from having to pay an
additional premium to reinstate catastrophe coverage for an event
up to this level.
11
Investments
Our
investment portfolio, including cash and cash equivalents, and
short term investments, as of December 31, 2019 and 2018, is
summarized in the table below by type of investment.
|
|
December
31, 2019
|
December
31, 2018
|
||
|
|
Carrying
|
%
of
|
Carrying
|
%
of
|
|
Category
|
Value
|
Portfolio
|
Value
|
Portfolio
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
32,391,485
|
14.0
%
|
$
21,138,403
|
10.8
%
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
corporations
and agencies
|
729,550
|
0.3
%
|
729,507
|
0.4
%
|
|
|
|
|
|
|
|
Political
subdivisions of states,
|
|
|
|
|
|
territories
and possessions
|
998,619
|
0.4
%
|
998,803
|
0.5
%
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
Industrial
and miscellaneous
|
2,097,783
|
0.9
%
|
2,494,545
|
1.3
%
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
corporations
and agencies
|
7,061,100
|
3.0
%
|
8,220,381
|
4.2
%
|
|
|
|
|
|
|
|
Political
subdivisions of states,
|
|
|
|
|
|
territories
and possessions
|
9,321,812
|
4.0
%
|
6,341,608
|
3.2
%
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
Industrial
and miscellaneous
|
125,622,039
|
54.2
%
|
115,750,293
|
59.2
%
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
26,231,230
|
11.3
%
|
21,465,234
|
11.0
%
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Preferred
stocks
|
8,701,887
|
3.8
%
|
6,152,956
|
3.1
%
|
|
|
|
|
|
|
|
Common
stocks, mutual funds, and
|
|
|
|
|
|
exchange
traded funds
|
15,959,495
|
6.9
%
|
10,419,660
|
5.3
%
|
|
|
|
|
|
|
|
Other
investments
|
2,584,913
|
1.1
%
|
1,855,225
|
0.9
%
|
|
Total
|
$
231,699,913
|
100.0
%
|
$
195,566,615
|
100.0
%
|
12
The table below summarizes the credit quality of our fixed-maturity
securities available-for-sale as of December 31, 2019 and 2018 as
rated by Standard and Poor’s (or if unavailable from Standard
and Poor’s, then Moody’s or Fitch):
|
|
December 31, 2019
|
December 31, 2018
|
||
|
|
Estimated
|
Percentage of
|
Estimated
|
Percentage of
|
|
|
Fair Market
|
Fair Market
|
Fair Market
|
Fair Market
|
|
|
Value
|
Value
|
Value
|
Value
|
|
Rating
|
|
|
|
|
|
U.S.
Treasury securities
|
$
7,061,100
|
4.2
%
|
$
8,220,381
|
5.4
%
|
|
|
|
|
|
|
|
Corporate and municipal bonds
|
|
|
|
|
|
AAA
|
1,996,676
|
1.2
%
|
979,123
|
0.6
%
|
|
AA
|
8,809,480
|
5.2
%
|
8,350,910
|
5.5
%
|
|
A
|
34,636,236
|
20.6
%
|
27,665,961
|
18.2
%
|
|
BBB
|
89,501,460
|
53.2
%
|
85,095,907
|
56.1
%
|
|
Total
corporate and municipal bonds
|
134,943,852
|
80.2
%
|
122,091,901
|
80.4
%
|
|
|
|
|
|
|
|
Residential mortgage backed securities
|
|
|
|
|
|
AAA
|
2,976,306
|
1.8
%
|
999,640
|
0.7
%
|
|
AA
|
18,440,382
|
10.9
%
|
12,743,906
|
8.5
%
|
|
A
|
2,471,761
|
1.5
%
|
4,777,356
|
3.1
%
|
|
CCC
|
1,174,273
|
0.7
%
|
1,440,825
|
0.9
%
|
|
CC
|
86,461
|
0.1
%
|
109,648
|
0.1
%
|
|
C
|
17,813
|
0.0
%
|
24,050
|
0.0
%
|
|
D
|
215,015
|
0.1
%
|
390,542
|
0.3
%
|
|
Non
rated
|
849,218
|
0.5
%
|
979,267
|
0.6
%
|
|
Total
residential mortgage backed securities
|
26,231,229
|
15.6
%
|
21,465,234
|
14.2
%
|
|
|
|
|
|
|
|
Total
|
$
168,236,181
|
100.0
%
|
$
151,777,516
|
100.0
%
|
See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Principal Revenue and Expense Items” in
Item 7 of this Annual Report and Note 2 and Note 11 in the
accompanying Consolidated Financial Statements for additional
information.
13
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
November 2016, we commenced a plan of action to upgrade
KICO’s A.M. Best rating. In April 2017, A.M. Best upgraded
the Financial Strength Rating (FSR) of KICO to A- (Excellent) from
B++ (Good). The A.M. Best financial strength rating of A-
(Excellent) has created significant additional demand from our
existing producers, particularly for our New York homeowners
business where we compete against many carriers that are not A-
rated by A.M. Best. Other ratings assigned to KICO and Kingstone by
A.M. Best and Kroll Bond Rating Agency are as follows:
|
|
|
Kingstone
|
|
|
KICO
|
Companies
|
|
|
|
|
|
A.M. Best Long-Term issuer credit rating (ICR)
|
a- (negative outlook)
|
bbb- (stable outlook)
|
|
A.M. Best Long-Term issue credit rating (IR)
|
|
|
|
$30.0 million, 5.50% senior unsecured notes due Dec. 30,
2022
|
n/a
|
bbb- (stable outlook)
|
|
Kroll Bond Rating Agency insurance financial strength rating
(IFSR)
|
A- (stable outlook)
|
n/a
|
|
Kroll Bond Rating Agency issuer rating
|
n/a
|
BBB- (stable outlook)
|
|
$30.0 million, 5.50% senior unsecured notes due Dec. 30,
2022
|
n/a
|
BBB- (stable outlook)
|
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.
Catastrophe Losses
In 2019
we had catastrophe losses, which are defined as losses from an
event for which a catastrophe bulletin and related serial number
has been issued by the Property Claims Services (PCS) unit of the
Insurance Services Office (ISO). PCS catastrophe bulletins are
issued for events that cause more than $25 million in total insured
losses and affect a significant number of policyholders and
insurers. Our predominant market, downstate New York, was affected
by several events, including one large event during the winter of
2019
. These claims were primarily from
losses due to frozen pipes and related water damage resulting from
abnormally low temperatures for an extended period.
The
effects of this catastrophe and other minor catastrophes during the
year increased our net loss ratio by 6.0 percentage points in 2019.
Our predominant market, downstate New York, was affected by several
events, including one large event during the winter of
2018
. These claims were primarily from
losses due to frozen pipes and related water damage resulting from
abnormally low temperatures for an extended period.
The
effects of this catastrophe and other minor catastrophes during the
year increased our net loss ratio by 6.0 percentage points in
2018.
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.
14
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 reject 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 liability market in New York State in 2019 and the
commercial auto market in New York State in 2015. On January 29,
2019, KICO was granted permission by the Texas Department of
Insurance to withdraw from the Texas insurance market for which it
never commenced business since receiving its certificate of
authority in August 2015.
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 either
have been or are 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 these 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
2017, the DFS implemented new comprehensive cybersecurity
regulations, which became effective on March 1, 2017 with
transitional implementation periods. 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 must annually certify compliance to the DFS
with the applicable cybersecurity regulatory provisions. Annual
certifications are due April 15.
In
2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) became law. It 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”, 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. In
its September 2019 Annual Report on the Insurance Industry (the
“Report”), the FIO provided an overview of its
statutory responsibilities and its role. The Report then summarizes
the FIO’s key activities since those described in its 2018
Annual Report on the Insurance Industry. Next, the Report provides
a summary of the EO Report. Sections II through V are organized
around the four key themes from the EO Report: (1) Systemic Risk
and Solvency; (2) Efficient Regulation and Government Processes;
(3) International Engagement; and (4) Economic Growth and Informed
Choices. The Report concludes with a discussion and analysis of the
insurance industry’s financial performance in calendar year
2018, its financial condition as of December 31, 2018, and the
domestic insurance market outlook for 2019.
15
On
December 22, 2017, a budget reconciliation act commonly referred to
as the Tax Cuts and Jobs Act (TCJA) was signed into law. Overall,
the reduction of the U.S. corporate tax rate to 21 percent
generally lowers the effective tax rates of insurance companies
operating in the United States.
On
December 20, 2020, the Terrorism Risk Insurance Program
Reauthorization Act of 2019 (TRIPRA of 2019) was enacted and is now
scheduled to expire on December 31, 2027. The Terrorism Risk
Insurance Program serves as a federal “backstop” for
insurance claims related to acts of terrorism.
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 2019 as of December
31, 2018. The examination is expected to be completed in
2020.
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 above the ACL and is in
compliance with New York’s RBC requirements as of December
31, 2019.
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.
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,
2019, KICO did not have any ratios outside the usual
range.
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”) are concerned
with a company’s solvency, but are also concerned with other
financial measurements, principally results of operations 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.
16
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.
Employees
As
of December 31, 2019, we had 97 employees. None of our employees
are covered by a collective bargaining agreement. We believe that
our relationship with our employees is good.
Availability
of Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), are filed
with the U.S. Securities and Exchange Commission (the
“SEC”). Such reports and other information filed by us
with the SEC are available free of charge at the investor relations
section of our website at www.kingstonecompanies.com as soon as
reasonably practicable after such reports are electronically filed
with, or furnished to, the SEC. Copies are also available, without
charge, by writing to Kingstone Companies, Inc., Investor
Relations, 15 Joys Lane, Kingstone, New York 12401. The SEC also
maintains a website, www.sec.gov, which contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. The inclusion of our website
address in this Annual Report does not include or incorporate by
reference the information on our website into this Annual
Report.
I
TEM 1A
.
RISK
FACTORS
.
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
We have identified a material weakness in our internal control over
financial reporting, which could adversely affect our business,
results of operations, stock price and reputation.
We have
identified a material weakness in the internal control over
financial reporting related to the operation of controls related to
the establishment and ongoing monitoring of case reserves for
losses and loss adjustment expenses. Based on the material
weakness, our management has determined that we have not maintained
effective internal control over financial reporting as of December
31, 2019. See Part II, Item 9A “Controls and
Procedures” for a discussion of the internal control over
financial reporting and the material weakness.
"Internal controls
over financial reporting" refer to those procedures within a
company that are designed to reasonably ensure the accuracy of the
company's financial statements. Section 404 of the Sarbanes-Oxley
Act of 2002 requires our management to annually assess the
effectiveness of our internal controls over financial
reporting.
If we
fail to achieve and maintain adequate internal controls, or if we
have material weaknesses in our internal controls, in each case in
accordance with applicable standards, we may be unable to conclude
on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404.
Because
effective internal controls are necessary for us to produce
reliable financial reports, our business, financial condition and
results of operations could be harmed, investors could lose
confidence in our reported financial information, and the market
price for our stock could decline if our internal controls are
ineffective or if material weaknesses in our internal controls are
identified.
Major public health issues could have an adverse effect on our
business and operating results.
Major
public health issues, including a large-scale pandemic, such as the
novel coronavirus COVID-19, may have a material adverse effect on
our workforce and business operations and cause disruptions in
commerce and reduced economic activity. Some of the assets in our
investment portfolio may be adversely affected by declines in the
equity markets, changes in interest rates, reduced liquidity and
economic activity caused by a large-scale pandemic. Accordingly, a
large-scale pandemic could have a material adverse effect on our
revenue, liquidity and operating results.
17
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) and other severe
weather events, 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 currently have
catastrophe reinsurance coverage with regard to losses of up to
$610,000,000. The initial $7,500,000 of losses in a catastrophe are
subject to a 25% quota share reinsurance treaty, such that we
retain $5,625,000 of risk per catastrophe occurrence. With respect
to any additional catastrophe losses of up to $602,500,000, 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.
A downgrade in our financial strength rating from A.M. Best may
have a material adverse effect on our competitive position, the
marketability of our product offerings, and our liquidity,
operating results and financial condition.
In
April 2017, A.M. Best upgraded the financial strength rating of
KICO to A- (Excellent) from B++ (Good). 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. 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. All ratings are subject
to continuous review; therefore, the retention of these ratings
cannot be assured. A downgrade in our financial strength rating
from A.M. Best 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 our outstanding and 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.
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
economy in general, 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.
18
Reinsurance may be
unavailable at current levels and prices, which may limit our
ability to write new business or maintain our financial strength
rating from A.M. Best.
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 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
maintain our financial strength rating from A.M. Best depends, in
part, on our ability to purchase a sufficient level of catastrophe
reinsurance.
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 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, prevent us from
making changes we believe are necessary to match rate to risk or
delay or prevent our entry into new states. 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.
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 in the absence of any change to a particular
regulator's or enforcement authority's interpretation of a legal
issue changing, cause us to change our views regarding the 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 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
apply in other states in which we operate.
19
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.
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.
Approximately 85%
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
costlier 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 relatively 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. For the year ended December
31, 2019, twenty-seven brokers provided a total of 35.1% of our
total gross premiums written for the year ended December 31, 2019.
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.
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.
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 (including $30,000,000
in aggregate principal amount of 5.5% Senior Unsecured Notes due
December 30, 2022 (the “Notes’)), pay expenses and pay
cash dividends to our shareholders.
State
insurance laws limit the ability of KICO to pay dividends and
require KICO to maintain specified minimum levels of statutory
capital and surplus. Maximum allowable dividends by KICO to us 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, 2019, the maximum permissible distribution
that KICO could pay without prior regulatory approval was
approximately $2,384,000. The aggregate maximum amount of dividends
permitted by law to be paid by an insurance company does not
necessarily define an insurance company’s actual ability to
pay dividends. The actual ability to pay dividends may be further
constrained by business and regulatory considerations, such as the
impact of dividends on surplus, by our competitive position and by
the amount of premiums that we can write. State insurance
regulators have broad discretion to limit the payment of dividends
by insurance companies. Our ability to pay interest on the Notes as
it comes due and the principal of the Notes at their maturity may
be limited by these regulatory constraints.
20
We may not be able to generate sufficient cash to service our debt
obligations, including the Notes.
Our
ability to make payments on and to refinance our indebtedness,
including the Notes, will depend on our financial and operating
performance, which is subject to prevailing economic and
competitive conditions and to certain financial, business and other
factors beyond our control. We may be unable to maintain a
sufficient level of cash flows from operating activities to permit
us to pay the principal, premium, if any, and interest on our
indebtedness, including the Notes.
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, Chief Executive Officer and Executive
Chairman and Meryl Golden our Chief Operating Officer. The loss of
Mr. Goldstein and Ms. Golden 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 prevailing
in the market for qualified personnel. Mr. Goldstein entered into
an amended and restated employment agreement effective January 1,
2020 and expiring December 31, 2022. Ms. Golden entered into an
employment agreement effective September 25, 2019 and expiring on
December 31, 2021, whereby Ms. Golden became Chief Operating
Officer.
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 to purchase lower levels of insurance.
Changes in accounting standards issued by the Financial Accounting
Standards Board or other standard-setting bodies may adversely
affect our reported 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.
21
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.
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 and certain present or former officers and directors are
defendants in a putative class action asserting claims under the
securities laws; an adverse outcome in such litigation could have a
material adverse effect on our operations and financial
condition.
On
June 12, 2019, Phillip Woolgar filed a suit naming the Company and
certain present or former officers and directors as defendants in a
putative class action captioned Woolgar v. Kingstone Companies et
al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b)
of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and
Section 20(a) of the Exchange Act. Plaintiff seeks to
represent a class of persons or entities that purchased Kingstone
securities between March 14, 2018, and April 29, 2019, and alleges
violations of the federal securities law in connection with the
Company’s April 29, 2019 announcement regarding losses
related to winter catastrophe events. The lawsuit alleges
that the Company failed to disclose that it did not adequately
follow industry best practices related to claims handling and thus
did not record sufficient claim reserves, and that as a result,
Defendants’ positive statements about the Company’s
business, operations and prospects misled investors.
Plaintiff seeks, among other things, an undetermined amount of
money damages. We believe the lawsuit to be without
merit. On February 18, 2020, a motion to dismiss was filed
with the court. However, litigation is inherently uncertain,
and we are unable to predict the outcome of this lawsuit or
estimate the range of loss, if any, that could result from an
unfavorable outcome. We also cannot provide any assurance
that the ultimate resolution of this lawsuit will not have a
material adverse effect on our operations or financial
condition.
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
(“Nasdaq”). 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.
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
an effective registration on Form S-3 under the Securities Act of
1933, as amended (the “Securities Act”) registering for
resale 595,238 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. As of December 31, 2019, options to
purchase 82,000 shares of our common stock, and 213,929 shares
subject to unvested restricted stock grants, were outstanding under
the 2014 plan and 327,900 shares were reserved for issuance
thereunder. We have also registered up to $39,290,000 of our
securities pursuant to registration statements 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 our
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, by 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.
22
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 9, 2020, our executive officers and directors beneficially
owned 990,904 shares of our common stock (including options to
purchase 19,500 shares of our common stock and 6,925 shares of our
common stock issuable upon the vesting of restricted stock within
60 days), representing 9.2% of the outstanding shares of our common
stock.
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.
I
TEM 1B
.
UNRESOLVED STAFF
COMMENTS
.
None.
I
TEM 2.
PROPERTIES
.
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. Our licensed general agency business
maintains an office located at 70 East Sunrise Highway, Valley
Stream, New York 11581, at which we lease 2,323 square feet of
space.
We own
the building at which our insurance underwriting business
principally operates, free of mortgage.
I
TEM 3.
LEGAL
PROCEEDINGS
.
On June
12, 2019, Phillip Woolgar filed a suit naming the Company and
certain present or former officers and directors as defendants in a
putative class action captioned
Woolgar v. Kingstone Companies et al.
,
19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the
Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section
20(a) of the Exchange Act. Plaintiff seeks to represent a
class of persons or entities that purchased Kingstone securities
between March 14, 2018, and April 29, 2019, and alleges violations
of the federal securities law in connection with the
Company’s April 29, 2019 announcement regarding losses
related to winter catastrophe events. The lawsuit alleges
that the Company failed to disclose that it did not adequately
follow industry best practices related to claims handling and thus
did not record sufficient claim reserves, and that as a result,
Defendants’ positive statements about the Company’s
business, operations and prospects misled investors.
Plaintiff seeks, among other things, an undetermined amount of
money damages. We believe the lawsuit to be without
merit.
On
February 18, 2020, a motion to dismiss was filed with the
court.
I
TEM 4.
MINE SAFETY
DISCLOSURES
.
Not
applicable.
23
P
ART II
I
TEM 5.
MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
.
Market Information
Our
common stock is quoted on The Nasdaq Capital Market under the
symbol “KINS.”
Holders
As of
March 9, 2020, there were 216 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. We have
paid a cash dividend in each quarter since September
2011.
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.
Our
ability to pay dividends depends, in part, 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, 2019, the maximum distribution
that KICO could pay without prior regulatory approval was
approximately $2,384,000, 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.
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, 2019.
I
TEM 6
.
SELECTED FINANCIAL
DATA
.
This
item is not applicable to smaller reporting companies.
24
I
TEM 7
.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
.
Overview
We
offer property and casualty insurance products to individuals
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, although we are actively writing business in
New Jersey, Rhode Island, Connecticut and Massachusetts. We are
licensed in the States of New York, New Jersey, Rhode Island,
Massachusetts, Pennsylvania, Connecticut, Maine, and New Hampshire.
For the year ended December 31, 2019, 85.0% of KICO’s direct
written premiums came from the New York policies.
In addition,
through our subsidiary, Cosi Agency, Inc. (“Cosi”), a
multi-state licensed general agency, we access alternative
distribution channels. Through Cosi, we have the opportunity to
partner with name-brand carriers and access nationwide insurance
agencies. See “Distribution Channels” below for a
discussion of our distribution channels. Cosi receives commission
revenue from KICO for the policies it places with others and pays
commissions to these agencies. Cosi retains the profit between the
commission revenue received and the commission expense paid. Cosi
revenue is included in other income and Cosi related expenses are
included in other operating expenses. Cosi operations are not
included in our stand-alone insurance underwriting business and,
accordingly, its revenue and expenses are not included in the
calculation of our combined ratio as described below.
We
derive substantially all of our revenue from KICO, which includes
revenues from earned premiums, ceding commissions from quota share
reinsurance, net investment income generated from its portfolio,
and net realized gains and losses on investment securities. All of
KICO’s insurance policies are written for a one-year term.
Earned premiums represent premiums received from insureds, which
are recognized as revenue over the period of time that insurance
coverage is provided (i.e., ratably over the one-year life of the
policy). A significant period of time can elapse from the receipt
of insurance premiums to the payment of insurance claims. During
this time, KICO invests the premiums, earns investment income and
generates net realized and unrealized investment gains and losses
on investments. Our holding company earns investment income from
its cash holdings and may also generate net realized and unrealized
investment gains and losses on future investments.
Our
expenses include the insurance underwriting expenses of KICO and
other operating expenses. Insurance companies incur a significant
amount of their total expenses from losses incurred by
policyholders, which are referred to as claims. In settling these
claims, various loss adjustment expenses (“LAE”) are
incurred such as insurance adjusters’ fees and legal
expenses. In addition, insurance companies incur policy acquisition
costs. Policy acquisition costs include commissions paid to
producers, premium taxes, and other expenses related to the
underwriting process, including employees’ compensation and
benefits.
Other
operating expenses include our corporate expenses as a holding
company and operating expenses of Cosi. These corporate expenses
include legal and auditing fees, executive employment costs, and
other costs directly associated with being a public company. Cosi
operating expenses primarily include commissions paid to brokers,
employment costs, and consulting costs.
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, 2019, we would earn half of the
premiums in 2019 and the other half in 2020.
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 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 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 while
our equity securities and other investments report changes in fair
value through earnings. See Note 2 in the accompanying Consolidated
Financial Statements for further discussion over our accounting
policies following Item 16 of this Annual Report.
25
Other
income:
We recognize installment fee income and
fees charged to reinstate a policy after it has been cancelled for
non-payment.
Loss and loss adjustment
expenses incurred:
Loss and LAE incurred
represent our largest expense item, and for any given reporting
period include estimates of future claim payments, changes in those
estimates from prior reporting periods and costs associated with
investigating, defending and servicing claims. These expenses
fluctuate based on the amount and types of risks we insure. We
record loss and LAE related to estimates of future claim payments
based on case-by-case valuations, statistical analyses and
actuarial procedures. We seek to establish all reserves at the most
likely ultimate liability based on our historical claims
experience. It is typical for certain claims to take several years
to settle and we revise our estimates as we receive additional
information on such claims. Our ability to estimate loss and LAE
accurately at the time of pricing our insurance policies is a
critical factor affecting our profitability.
Commission expenses and
other underwriting expenses:
Other underwriting
expenses include policy acquisition costs and other expenses
related to the underwriting of policies. Policy acquisition costs
represent the costs of originating new insurance policies that vary
with, and are primarily related to, the production of insurance
policies (principally commissions, premium taxes and certain
underwriting salaries). Policy acquisition costs are deferred and
recognized as expense as the related premiums are earned. Other
underwriting expenses represent general and administrative expenses
of our insurance business and are comprised of other costs
associated with our insurance activities such as regulatory fees,
telecommunication and technology costs, occupancy costs, employment
costs, and legal and auditing fees.
Other operating
expenses:
Other operating expenses include the corporate
expenses of our holding company, Kingstone Companies, Inc., and
operating expenses of Cosi. These expenses include executive
employment costs, legal and auditing fees, and other costs directly
associated with being a public company. Cosi operating expenses
primarily include commissions paid to brokers, employment costs,
and consulting costs.
Stock-based
compensation:
Non-cash equity compensation includes the fair
value of stock grants issued to our directors, officers and
employees, and amortization of stock options issued to the
same.
Depreciation and
amortization:
Depreciation and amortization includes the
amortization of intangibles related to the acquisition of KICO,
depreciation of the real estate used in KICO’s operations, as
well as depreciation of capital expenditures for information
technology projects, office equipment and furniture.
Interest
expense:
Interest expense represents amounts we
incur on our outstanding indebtedness at the applicable interest
rates. Interest expense also includes amortization of debt discount
and issuance costs.
Income tax
expense:
We incur federal income tax expense on
our condensed 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, cooperative/condominium, renters, and
personal umbrella policies.
Commercial
liability:
Through July 2019, we offered
businessowners policies, which consist primarily of small business
retail, service, and office risks, with limited property exposures.
We also wrote artisan’s liability policies for small
independent contractors with smaller sized workforces. In
addition, we wrote special multi-peril policies for larger and more
specialized businessowners risks, including those with limited
residential exposures. Further, we offered commercial umbrella
policies written above our supporting commercial lines
policies.
In May
2019, due to the poor performance of this line we placed a
moratorium on new commercial lines and new commercial umbrella
submissions while we further reviewed this business. In July
2019, due to the continuing poor performance of these lines, we
made the decision to no longer underwrite commercial lines or
commercial umbrella risks. In force policies for these lines are
being non-renewed at the end of their current annual terms. For the
twelve months ended December 31, 2019, these policies represent
approximately 10.7% of net premiums earned and as of December 31,
2019, 42.8% of loss and LAE reserves net of reinsurance
recoverables. See discussion below under “Additional
Financial Information”.
Livery physical
damage:
We
write for-hire vehicle physical damage only policies for livery and
car service vehicles and taxicabs. These policies insure only the
physical damage portion of insurance for such vehicles, with no
liability coverage included.
26
Other:
We write
canine legal liability policies and have a small participation in
mandatory state joint underwriting associations.
Key Measures
We
utilize the following key measures in analyzing the results of our
insurance underwriting business:
Net loss ratio:
The
net loss ratio is a measure of the underwriting profitability of an
insurance company’s business. Expressed as a percentage, this
is the ratio of net losses and LAE incurred to net premiums
earned.
Net underwriting expense
ratio:
The net underwriting expense ratio is a
measure of an insurance company’s operational efficiency in
administering its business. Expressed as a percentage, this is the
ratio of the sum of acquisition costs (the most significant being
commissions paid to our producers) and other underwriting expenses
less ceding commission revenue less other income to net premiums
earned.
Net combined
ratio:
The net combined ratio is a measure of an
insurance company’s overall underwriting profit. This is the
sum of the net loss and net underwriting expense ratios. If the net
combined ratio is at or above 100 percent, an insurance company
cannot be profitable without investment income, and may not be
profitable if investment income is insufficient.
Underwriting income:
Underwriting income is net pre-tax income attributable to our
insurance underwriting business before investment activity. It
excludes net investment income, net realized gains from
investments, and depreciation and amortization (net premiums earned
less expenses included in combined ratio). Underwriting income is a
measure of an insurance company’s overall operating
profitability before items such as investment income, depreciation
and amortization, interest expense and income taxes.
Distribution Channels
During
2019, we initiated an alternative distribution program through Cosi
(“Alternative Distribution”). The goal of this program
is to enhance our personal lines distribution channel to include
nationally recognized name-brand carriers along with nationwide
call center and digital insurance agencies. While still in early
stages of development, the impact of this initiative can be
measured by the amount of new premiums written compared to total
premiums written, which includes renewals from our independent
agency network. The table below shows premiums written by
distribution channel for our homeowners and dwelling fire
components of personal lines.
|
|
Year
ended
|
|
|
($
in thousands)
|
December
31, 2019
|
|
|
Direct
Written Pemiums
|
Amount
|
Percent
|
|
|
|
|
|
Core
Independent
|
$
120,625
|
80.6
%
|
|
Expansion
Independent (1)
|
24,253
|
16.2
%
|
|
Alternative
Distribution through Cosi
|
4,799
|
3.2
%
|
|
Total
|
$
149,677
|
100.0
%
|
(2)
Outside of New
York
For the
year ended December 31, 2019, Alternative Distribution made up 3.2%
of direct written premiums for our homeowners and dwelling fire
components of personal lines.
Critical Accounting Policies and Estimates
Our
condensed consolidated financial statements include the accounts of
Kingstone Companies, Inc. and all majority-owned and controlled
subsidiaries. The preparation of financial statements in conformity
with GAAP requires our management to make estimates and assumptions
in certain circumstances that affect amounts reported in our
condensed consolidated financial statements and related notes. In
preparing these condensed consolidated financial statements, our
management has utilized information including our past history,
industry standards, and the current economic environment, and other
factors, in forming its estimates and judgments of certain amounts
included in the condensed consolidated financial statements, giving
due consideration to materiality. It is possible that the ultimate
outcome as anticipated by our management in formulating its
estimates in these financial statements may not materialize.
Application of the critical accounting policies involves the
exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from
these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of our results of
operations to those of similar companies.
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 to
the Consolidated Financial Statements following Item 16 of this
Annual Report.
27
Consolidated Results of Operations
The
following table summarizes the changes in the results of our
operations for the periods indicated:
|
|
Year ended December 31,
|
|
||
|
($ in thousands)
|
2019
|
2018
|
Change
|
Percent
|
|
Revenue
s
|
|
|
|
|
|
Direct
written premiums
|
$
171,214
|
$
146,716
|
$
24,498
|
16.7
%
|
|
Assumed
written premiums
|
1
|
1
|
-
|
n/a
%
|
|
|
171,215
|
146,717
|
24,498
|
16.7
%
|
|
Ceded
written premiums
|
|
|
|
|
|
Ceded
to quota share treaties in force during the period
|
7,623
|
15,880
|
(8,257
)
|
(52.0
)%
|
|
Unearned
premiums ceded to new quota share treaty (1)
|
16,320
|
-
|
16,320
|
n/a
%
|
|
Return
of premiums previously ceded to prior quota share treaties
(1)
|
-
|
(4,553
)
|
4,553
|
n/a
%
|
|
Ceded
to quota share treaties
|
23,943
|
11,327
|
12,616
|
111.4
%
|
|
Ceded
to excess of loss treaties
|
1,879
|
1,386
|
493
|
35.6
%
|
|
Ceded
to catastrophe treaties
|
19,814
|
14,210
|
5,604
|
39.4
%
|
|
Total
ceded written premiums
|
45,636
|
26,923
|
18,713
|
69.5
%
|
|
|
|
|
|
|
|
Net
written premiums
|
125,579
|
119,794
|
5,785
|
4.8
%
|
|
|
|
|
|
|
|
Change
in unearned premiums
|
|
|
|
|
|
Direct
and assumed
|
(11,351
)
|
(13,384
)
|
2,033
|
(15.2)
%
|
|
Ceded
to quota share treaties
|
13,395
|
(2,995
)
|
16,390
|
(547.2)
%
|
|
Change
in net unearned premiums
|
2,044
|
(16,379
)
|
18,423
|
(112.5
)%
|
|
|
|
|
|
|
|
Premiums
earned
|
|
|
|
|
|
Direct
and assumed
|
159,864
|
133,333
|
26,531
|
19.9
%
|
|
Ceded
to reinsurance treaties
|
(32,240
)
|
(29,918
)
|
(2,322
)
|
7.8
%
|
|
Net
premiums earned
|
127,624
|
103,415
|
24,209
|
23.4
%
|
|
Ceding
commission revenue
|
|
|
|
|
|
Excluding
the effect of catastrophes
|
4,651
|
5,792
|
(1,141
)
|
(19.7)
%
|
|
Effect
of catastrophes
|
-
|
(459
)
|
459
|
n/a
%
|
|
Total
ceding commission revenue
|
4,651
|
5,333
|
(682
)
|
(12.8
)%
|
|
Net
investment income
|
6,869
|
6,186
|
683
|
11.0
%
|
|
Net
gains (losses) on investments
|
4,591
|
(2,496
)
|
7,087
|
(283.9)
%
|
|
Other
income
|
1,828
|
1,334
|
494
|
37.0
%
|
|
Total
revenues
|
145,563
|
113,772
|
31,791
|
27.9
%
|
|
Expense
s
|
|
|
|
|
|
Loss
and loss adjustment expenses
|
|
|
|
|
|
Direct
and assumed:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
94,775
|
61,950
|
32,825
|
53.0
%
|
|
Losses
from catastrophes (2)
|
8,177
|
10,828
|
(2,651
)
|
(24.5)
%
|
|
Total
direct and assumed loss and loss adjustment expenses
|
102,952
|
72,778
|
30,174
|
41.5
%
|
|
|
|
|
|
|
|
Ceded
loss and loss adjustment expenses:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
12,287
|
9,882
|
2,405
|
24.3
%
|
|
Losses
from catastrophes (2)
|
482
|
4,600
|
(4,118
)
|
(89.5)
%
|
|
Total
ceded loss and loss adjustment expenses
|
12,769
|
14,482
|
(1,713
)
|
(11.8)
%
|
|
|
|
|
|
|
|
Net
loss and loss adjustment expenses:
|
|
|
|
|
|
Loss
and loss adjustment expenses excluding the effect of
catastrophes
|
82,488
|
52,068
|
30,420
|
58.4
%
|
|
Losses
from catastrophes (2)
|
7,695
|
6,228
|
1,467
|
23.6
%
|
|
Net
loss and loss adjustment expenses
|
90,183
|
58,296
|
31,887
|
54.7
%
|
|
|
|
|
|
|
|
Commission
expense
|
30,193
|
25,342
|
4,851
|
19.1
%
|
|
Other
underwriting expenses
|
24,420
|
20,943
|
3,477
|
16.6
%
|
|
Other
operating expenses
|
4,178
|
2,575
|
1,603
|
62.3
%
|
|
Depreciation
and amortization
|
2,546
|
1,787
|
759
|
42.5
%
|
|
Interest
expense
|
1,826
|
1,822
|
4
|
0.2
%
|
|
Total
expenses
|
153,346
|
110,765
|
42,581
|
38.4
%
|
|
|
|
|
|
|
|
(Loss)
income before taxes
|
(7,783
)
|
3,006
|
(10,789
)
|
(358.9)
%
|
|
Income
tax benefit
|
(1,816
)
|
(86
)
|
(1,730
)
|
2,011.6
%
|
|
Net (loss) income
|
$
(5,967
)
|
$
3,092
|
$
(9,059
)
|
(293.0
)%
|
28
(1)
Effective July 1, 2018, we decreased the quota share ceding rate in
our personal lines quota share treaty from 20% to 10%. Effective
July 1, 2019, our personal lines 10% quota share treaty expired on
a run-off basis. Effective December 15, 2019, we entered into a 25%
quota share treaty.
(2) The
years ended December 31, 2019 and 2018 includes catastrophe losses,
which are defined as losses from an event for which a catastrophe
bulletin and related serial number has been issued by the Property
Claims Services (PCS) unit of the Insurance Services Office (ISO).
PCS catastrophe bulletins are issued for events that cause more
than $25 million in total insured losses and affect a significant
number of policyholders and insurers.
|
|
Years
ended December 31,
|
|||
|
|
2019
|
2018
|
Percentage
Point Change
|
Percent
Change
|
|
|
|
|
|
|
|
Key ratios:
|
|
|
|
|
|
Net
loss ratio
|
70.7
%
|
56.4
%
|
14.3
|
25.4
%
|
|
Net
underwriting expense ratio
|
38.1
%
|
38.4
%
|
(0.3
)
|
(0.8
)%
|
|
Net
combined ratio
|
108.8
%
|
94.8
%
|
14.0
|
14.8
%
|
Direct Written Premiums
Direct written premiums during the year ended
December 31, 2019 (“Year Ended 2019”) were $171,214,000
compared to $146,716,000 during the year ended December 31, 2018
(“Year Ended 2018”). The increase of $24,498,000, or
16.7%, was primarily due to an increase in policies in-force during
Year Ended 2019 as compared to Year Ended 2018. 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 14.1% as of
December 31, 2019 compared to Dec
ember 31, 2018
.
In
Year Ended 2018, we started writing homeowners policies in
Massachusetts. In the Year Ended 2019, we started writing
homeowners policies in Connecticut. We refer to our New York
business as our “Core” business and the business
outside of New York as our “Expansion” business. Direct
written premiums from our Expansion business were $25,647,000 in
Year Ended 2019 compared to $9,080,000 in Year Ended
2018.
Net Written Premiums and Net Premiums Earned
Through
June 30, 2019, our quota share reinsurance treaties were on a July
1 through June 30 fiscal year basis. Effective December 15, 2019,
we entered into a quota share reinsurance treaty for our personal
lines business covering the period from December 15, 2019 through
December 31, 2020 (“2019/2020 Treaty”). In addition to
the 2019/2020 Treaty, our personal lines quota share reinsurance
treaties in effect for Year Ended 2019 and Year Ended 2018 were
covered under a treaty covering a two-year period from July 1, 2017
through June 30, 2019 (“2017/2019 Treaty”). The
following table describes the quota share reinsurance ceding rates
in effect for each treaty year during Year Ended 2019 and Year
Ended 2018 under the 2019/2020 Treaty and the 2017/2019 Treaty,
respectively. 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, 2019
|
Year
ended December 31, 2018
|
|||
|
|
January
1,
|
July
1,
|
December
15,
|
January
1,
|
July
1,
|
|
|
to
|
to
|
to
|
to
|
to
|
|
|
June
30,
|
December
14,
|
December
31,
|
June
30,
|
December
31,
|
|
|
("2018/2019 Treaty Year") |
("2019/2020
Run-off Year")
|
("2019/2020 Treaty") | ("2017/2018 Treaty Year") |
("2018/2019
Treaty Year")
|
|
|
|
|
|
|
|
|
Quota share reinsurance rates
|
|
|
|
|
|
|
Personal lines
|
10% (1)
|
0% (2)
|
25% (3)
|
20% (1)
|
10% (1)
|
(1)
2017/2019
Treaty was a two-year treaty; quota share reinsurance rate was
reduced to 10% effective July 1, 2018 (the “2018
Cut-off”).
(2)
The
2017/2019 Treaty expired on a run-off basis effective July 1, 2019
(the “2019 Run-off”).
(3)
The
2019/2020 Treaty was effective December 15, 2019 with a quota share
reinsurance rate of 25%.
29
See “Reinsurance” below for changes to our personal
lines quota share treaty effective December 15, 2019, and July 1,
2019, 2018 and 2017.
Net
written premiums increased $5,785,000, or 4.8%, to $125,579,000 in
Year Ended 2019 from $119,794,000 in Year Ended 2018. 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 was
subject to the 2017/2019 Treaty under the 2018/2019 Treaty Year
through June 30, 2019. Following June 30, 2019, any earned premium
and associated claims for policies still inforce will continue to
be ceded under the 10% quota share rate until such policies expire
(run-off) over the next year. The 2019 Run-off period is from July
1, 2019 through June 30, 2020 and there is no return of unearned
premiums under this arrangement. The 2018 Cut-off on July 1, 2018
resulted in a $4,553,000 return of unearned premiums from our
reinsurers that were previously ceded under the expiring personal
lines quota share treaty.
The
table below shows the effect of the changes in quota share treaties
on net written premiums for Year Ended 2019 and Year Ended 2018,
respectively:
|
|
Years ended December 31,
|
|||
|
($ in thousands)
|
2019
|
2018
|
Change
|
Percent
|
|
|
|
|
|
|
|
Net
written premiums
|
$
125,579
|
$
119,794
|
$
5,785
|
4.8
%
|
|
Unearned
premiums ceded to 2019/2020 Treaty
|
16,320
|
-
|
16,320
|
na
%
|
|
Return
of premiums previously ceded to prior quota share
treaties
|
-
|
(4,553
)
|
4,553
|
na
%
|
|
Net
written premiums without the effect of changes in quota share
treaties
|
$
141,899
|
$
115,241
|
$
26,658
|
23.1
%
|
Without
the effect of changes in quota share treaties, net written premiums
increased by $26,658,000, or 23.1%, in Year Ended 2019 compared to
Year Ended 2018.
Excess of loss reinsurance treaties
An
increase in written premiums will increase the premiums ceded under
our excess of loss treaties. In Year Ended 2019, our ceded excess
of loss reinsurance premiums increased by $493,000 over the
comparable ceded premiums for Year Ended 2018. The increase was due
to an increase in premiums subject to excess of loss
reinsurance.
Catastrophe reinsurance treaty
Most
of the premiums written under our personal lines policies are also
subject to our catastrophe treaties. An increase in our personal
lines business gives rise to more property exposure, which
increases our exposure to catastrophe risk; therefore, our premiums
ceded under catastrophe treaties will increase. This results in an
increase in premiums ceded under our catastrophe treaties provided
that reinsurance rates are stable or are increasing. In Year Ended
2019, our premiums ceded under catastrophe treaties increased by
$5,604,000 over the comparable ceded premiums in Year Ended 2018.
The change was due to an increase in our catastrophe limit
purchased, an increase in premiums subject to catastrophe
reinsurance due to continued growth, and an increase in reinsurance
rates effective July 1, 2019. Our ceded catastrophe premiums are
paid based on the total direct written premiums subject to the
catastrophe reinsurance treaty.
Our
ceded catastrophe premiums are paid based on the total direct
written premiums subject to the catastrophe reinsurance
treaty.
Net premiums earned
Net
premiums earned increased $24,209,000, or 23.4%, to $127,624,000 in
Year Ended 2019 from $103,415,000 in Year Ended 2018. The increase
was due to the increase in written premiums discussed above and our
retaining more earned premiums effective: (1) July 1, 2019 as a
result of the expiration and non-renewal of the 2017/2019 Treaty,
and (2) July 1, 2018, as a result of the reduction in the quota
share reinsurance rates. The 2019/2020 Treaty in effect as of
December 15, 2019 had very little impact on net premiums earned due
to the short amount of time it was in effect during Year Ended
2019.
30
Ceding Commission Revenue
The
following table summarizes the changes in the components of ceding
commission revenue (in thousands) for the periods
indicated:
|
|
Years ended December 31,
|
|||
|
($ in thousands)
|
2019
|
2018
|
Change
|
Percent
|
|
|
|
|
|
|
|
Provisional
ceding commissions earned
|
$
5,446
|
$
6,746
|
$
(1,300
)
|
(19.3
)%
|
|
|
|
|
|
|
|
Contingent
ceding commissions earned
|
|
|
|
|
|
Contingent
ceding commissions earned excluding
|
|
|
|
|
|
the
effect of catastrophes
|
(795
)
|
(954
)
|
159
|
(16.7
)%
|
|
Effect
of catastrophes on ceding commissions earned
|
-
|
(459
)
|
459
|
n/a
|
|
Contingent
ceding commissions earned
|
(795
)
|
(1,413
)
|
618
|
(43.7
)%
|
|
|
|
|
|
|
|
Total
ceding commission revenue
|
$
4,651
|
$
5,333
|
$
(682
)
|
(12.8
)%
|
Ceding commission revenue was
$4,651,000
in Year Ended 2019 compared to
$5,333,000
in Year Ended 2018. The
decrease of
$682,000,
or 12.8%,
was due to a decrease in provisional ceding commissions earned,
partially offset by an increase in contingent ceding commissions
earned. The reduction in provisional ceding commissions occurred
due to the reduction in quota share reinsurance rates through
December 15, 2019 (see below for discussion of provisional ceding
commissions earned and contingent ceding commissions
earned).
Provisional Ceding Commissions Earned
We
receive a provisional ceding commission based on ceded written
premiums. The $1,300,000 decrease in provisional ceding commissions
earned is primarily due to: (1) the decrease in the quota share
ceding rate effective July 1, 2018 to 10%, from the 20% rate in
effect from July 1, 2017 through June 30, 2018, and (2) the
elimination of the 10% quota share effective July 1, 2019. There
was a reduction in ceded premiums in Year Ended 2019 available from
which to earn ceding commissions compared to Year Ended 2018 due to
the changes in quota share ceding rates. The decrease in
provisional ceding commissions was partially offset by an increase
in personal lines direct written premiums subject to the quota
share. The 2019/2020 Treaty in effect as of December 15, 2019 had
very little impact on provisional ceding commissions earned due to
the short amount of time it was in effect during Year Ended
2019.
Contingent Ceding Commissions Earned
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 2017/2019 Treaty is subject to change
based on losses incurred from claims with accident dates beginning
July 1, 2017. 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, 2017.
The
2017/2019 Treaty structure limits the amount of contingent ceding
commissions that we can receive by setting a higher provisional
commission rate than the rates received in prior years. As a result
of the higher upfront provisional ceding commissions that we
received under the 2017/2019 Treaty, there is not an opportunity to
earn additional contingent ceding commissions under this treaty.
Under the 2017/2019 Treaty “net” treaty structure,
catastrophe losses in excess of the $5,000,000 retention will fall
outside of the quota share treaty and such losses will not have an
impact on contingent ceding commissions. In Year Ended 2018,
catastrophe losses of $1,506,000 were ceded under our personal
lines quota share treaty. These catastrophe losses resulted in the
Loss Ratios for the period July 1, 2017 through June 30, 2018
(attributable to the 2017/2019 Treaty) being higher than the
contractual Loss Ratio at which provisional ceding commissions were
being earned. As a result, we incurred a reduction to the
contingent ceding commissions of $459,000 relative to what would
have been earned had the catastrophe losses not occurred. Effective
July 1, 2018, the provisional ceding commission rate was a fixed
rate with no downward adjustment required related to Loss Ratio;
accordingly, in Year Ended 2019, catastrophe losses of $927,000
that were ceded under our personal lines quota share treaty did not
have an effect on contingent ceding commissions. See
“Reinsurance” below for information as to our personal
lines quota share treaty effective December 15, 2019, and July 1,
2019, 2018 and 2017.
31
Net Investment Income
Net investment income was
$6,869,000
in Year Ended 2019 compared to
$6,186,000
in Year Ended 2018. The
increase of
$683,000
, or 11.0%,
was due to an increase in average invested assets in Year Ended
2019. The average yield on invested assets was 3.51% as of December
31, 2019 compared to 3.79% as of December 31, 2018. The pre-tax
equivalent yield on invested assets was 3.26% and 3.44% as of
December 31, 2019 and 2018, respectively.
Cash
and invested assets were $231,700,000 as of December 31, 2019,
compared to $195,567,000 as of December 31, 2018. The $36,133,000
increase in cash and invested assets resulted primarily from
increased operating cash flows for the Year Ended
2019.
Net Gains and Losses on Investments
Net gains on investments were
$4
,
591,000
in Year Ended 2019 compared to a net loss of $2,496,000 in Year
Ended 2018. Unrealized gains on our equity securities and other
investments in Year Ended 2019 were $4
,
562,000, compared to unrealized losses of
$2,383,000 in Year Ended 2018. Realized gains on sales of
investments were $29,000 in Year Ended 2019 compared to realized
losses of $94,000 in Year Ended 2018.
Other Income
Other
income was $1,828,000 in Year Ended 2019 compared to $1,334,000 in
Year Ended 2018.
The increase of
$494,000, or 37.0%, was primarily due to an increase in installment
and other fees earned in our insurance underwriting
business.
Net Loss and LAE
Net loss and LAE was
$90,182,000
in Year Ended 2019 compared to
$58,295,000
in Year Ended 2018. The
net loss ratio was 70.7% in 2019 compared to 56.4% in 2018, an
increase of 14.3 percentage points.
The
following graph summarizes the changes in the components of net
loss ratio for the periods indicated, along with the comparable
components excluding commercial lines business:
(Percent components may not sum to totals due to
rounding)
32
The
net loss ratio was 70.7% for Year Ended 2019, a 14.3 point increase
compared to Year Ended 2018. The loss ratio for Year Ended 2019 is
elevated primarily due to prior year loss development of $11.1
million, which has an 8.7 point effect on the loss ratio. This
compares to 1.1 points of prior year loss development in Year Ended
2018, or an increase of 7.6 points from the impact of prior year
loss development. Unfavorable claim resolution trends led to a
complete review of open liability case reserves by new claims
leadership in Year Ended 2019. The review determined that case
reserve strengthening was required and resulted in adjustments to
ultimate loss projections, primarily for commercial liability
claims. Of the $11.1 million of prior year loss development for the
year, $8.1 million was from commercial liability claims. The case
reserve adjustments underscored the volatility of our commercial
lines business, and contributed to our decision to stop writing
these risks. The prior year loss development significantly
increased the ultimate loss ratio projections for the commercial
lines business in accident years 2014 and forward leading to the
conclusion that these lines are not returning the required level of
profitability to be viable going forward. Excluding commercial
lines, prior year development for Year Ended 2019 had a 2.7 point
impact on our loss ratio, compared to a 1.0 point impact from prior
year loss development for Year Ended 2018. Most of the prior year
loss development outside of commercial liability claims was related
to liability claims in our New York Dwelling Fire
product.
The
impact of catastrophes was 6.0 points in Year Ended 2019, unchanged
from the impact from catastrophes in Year Ended 2018. Although the
impact from catastrophes was the same in each year, both years had
a catastrophe impact significantly above the Company’s
long-term average. The average catastrophe impact for the five
years ending in 2018 has been 3.8 points. There were nine PCS
catastrophe events affecting Kingstone in Year Ended 2019, but 56%
of net losses or 3.4 points of the impact relates to the first
winter freeze event in Mid-January.
The
underlying loss ratio excluding the impact of catastrophes and
prior year loss development was 56.0% for Year Ended 2019, an
increase of 6.8 points from the 49.2% underlying loss ratio
recorded for Year Ended 2018. The underlying loss ratio
increased compared to Year Ended 2018 due to continued increases in
average claim severity for non-weather water damage property claims
as well as increased large fire claim activity. In addition, the
underlying loss ratio for Year Ended 2019 is affected by increased
loss ratio expectations for commercial lines as a result of
increases in prior year loss ratio estimates for that business as
noted above. Excluding commercial lines, the underlying loss ratio
excluding the impact of catastrophes and prior year development for
Year Ended 2019 was 53.1%, an increase of 5.1 points from the 48.0%
underlying loss ratio recorded for Year Ended 2018. See table below
under “Additional Financial Information” summarizing
net loss ratios by line of business.
Commission Expense
Commission expense was
$30,193,000
in Year Ended 2019 or 18.9% of direct
earned premiums. Commission expense was
$25,342,000
in Year Ended 2018 or 19.0% of direct
earned premiums. The increase of
$4,851,000
is due to the increase in direct written premiums
in Year Ended 2019 as compared to Year Ended
2018.
Other Underwriting Expenses
Other
underwriting expenses were $24,420,000 in Year Ended 2019 compared
to $20,943,000 in Year Ended 2018. The increase of $3,477,000, or
16.6%, was primarily due to expenses related to growth in direct
written premiums. 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. The
other underwriting expense increase of 16.6 points was less than
the 16.7 point increase in total direct written
premiums.
Our
largest single component of other underwriting expenses is salaries
and employment costs, with costs of $10,358,000 in Year Ended 2019
compared to $9,280,000 in Year Ended 2018. The increase of
$1,078,000, or 11.6%, was less than the 16.7% increase in total
direct written premiums. The increase in employment costs was due
to hiring of additional staff to service our current level of
business and anticipated growth in volume, as well as annual
increases in salaries.
33
Our
net underwriting expense ratio in Year Ended 2019 was 38.1%
compared to 38.4% in Year Ended 2018. The following table shows the
individual components of our net underwriting expense ratio for the
periods indicated:
|
|
Year ended
|
|
|
|
|
December 31,
|
Percentage
|
|
|
|
2019
|
2018
|
Point Change
|
|
Other
underwriting expenses
|
|
|
|
|
Employment
costs
|
8.1
%
|
9.0
%
|
(0.9
)
|
|
Underwriting
fees (inspections/data services)
|
2.4
|
2.4
|
-
|
|
Other
expenses
|
8.6
|
8.9
|
(0.3
)
|
|
Total
other underwriting expenses
|
19.1
|
20.3
|
(1.2
)
|
|
|
|
|
|
|
Ceding
commission revenue
|
|
|
|
|
Provisional
|
(4.3
)
|
(6.5
)
|
2.2
|
|
Contingent
|
0.6
|
1.4
|
(0.8
)
|
|
Total
ceding commission revenue
|
(3.7
)
|
(5.1
)
|
1.4
|
|
|
|
|
|
|
Other
income
|
(1.0
)
|
(1.2
)
|
0.2
|
|
Commission
expense
|
23.7
|
24.4
|
(0.7
)
|
|
|
|
|
|
|
Net
underwriting expense ratio
|
38.1
%
|
38.4
%
|
(0.3
)
|
The
1.2 percentage point decrease in our other underwriting expense
ratio was driven by a decline of 0.9 percentage points from the
impact of employment costs.
The
overall 2.2 percentage point increase in provisional ceding
commissions was driven entirely by the change in our quota share
ceding rates and its impact on provisional ceding commission
revenue due to the additional retention resulting from the cut-off
to our quota share treaty on July 1, 2018 and run-off to our
expired quota share treaty on July 1, 2019. Additionally, through
December 15, 2019 we had a reduction in our quota share reinsurance
rates resulting in a reduction of provisional ceding commissions.
The components of our net underwriting expense ratio related to
other underwriting expenses, other income and commissions improved
in nearly all categories, resulting in an overall 0.3 percentage
point decrease in the net underwriting expense ratio.
Other Operating Expenses
Other
operating expenses, related to the expenses of our holding company
and Cosi, were $4,178,000 for Year Ended 2019 compared to
$2,575,000 for Year Ended 2018. The increase in Year Ended 2019 of
$1,603,000, or 62.3%, as compared to Year Ended 2018 was primarily
due to increases in equity compensation and salaries, partially
offset by a decrease in executive bonuses. The increase in salary
was due to the initial hiring of staff for Cosi and the increase in
equity compensation was due to 2019 annual restricted stock awards
to directors and executives. Executive bonus compensation is
accrued pursuant to the employment agreement in effect through
December 31, 2019 with Barry B. Goldstein, our Executive Chairman
and current Chief Executive Officer. The bonus is a one-time
payment computed at the end of the three-year period ended December
31, 2019, and as of December 31, 2019 the three-year computation
did not meet the required terms of profitability, resulting in no
payment and a reversal of the $698,000 previously
accrued.
Depreciation and
Amortization
Depreciation
and amortization was $2,546,000 in Year Ended 2019 compared to
$1,787,000 in Year Ended 2018. The increase of $759,000, or 42.5%,
in depreciation and amortization was primarily due to depreciation
of our new systems platform for handling business being written in
Expansion states. The increase was also impacted by newly purchased
assets used to upgrade our systems infrastructure and improvements
to the Kingston, New York home office building from which we
operate.
Interest Expense
Interest
expense in Year Ended 2019 was $1,826,000 and $1,822,000 in Year
Ended 2018. We incurred interest expense in connection with
our $30.0 million issuance of long-term debt in December
2017.
Income Tax Benefit
Income
tax benefit in Year Ended 2019 was $1,816,000, which resulted in an
effective tax rate of 23.3%. Income tax benefit in Year Ended 2018
was $86,000, which resulted in an effective tax rate of (2.9)%.
Loss before taxes was $7,783,000 in Year Ended 2019 compared to
income before taxes of $3,007,000 in Year Ended 2018.
Net Income (Loss)
Net
loss was $5,967,000 in Year Ended 2019 compared to net income of
$3,093,000 in Year Ended 2018. The decrease in net income of
$9,060,000, or 292.9%, was due to the circumstances described
above, which caused the increase in our net loss ratio, decrease in
ceding commission revenue, increases in other underwriting
expenses, and depreciation and amortization, partially offset by
the increase in our net premiums earned, net investment income and
net gains on investments.
34
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.
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
Gross premiums written:
|
|
|
|
Personal
lines
|
$
149,920,020
|
$
119,971,418
|
|
Livery
physical damage
|
10,576,156
|
9,792,456
|
|
Other(1)
|
593,945
|
251,190
|
|
Total
without commercial lines
|
161,090,121
|
130,015,064
|
|
Commercial
lines (in run-off effective July 2019)(2)
|
10,124,908
|
16,702,409
|
|
Total
gross premiums written
|
$
171,215,029
|
$
146,717,473
|
|
|
|
|
|
Net premiums written:
|
|
|
|
Personal
lines(3)
|
$
105,774,168
|
$
94,993,035
|
|
Livery
physical damage
|
10,576,156
|
9,792,456
|
|
Other(1)
|
549,978
|
228,551
|
|
Total
without commercial lines
|
116,900,302
|
105,014,042
|
|
Commercial
lines (in run-off effective July 2019)(2)
|
8,678,829
|
14,779,752
|
|
Total
net premiums written
|
$
125,579,131
|
$
119,793,794
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
Personal
lines(3)
|
$
102,943,699
|
$
79,603,364
|
|
Livery
physical damage
|
10,565,739
|
9,797,939
|
|
Other(1)
|
518,671
|
209,128
|
|
Total
without commercial lines
|
114,028,109
|
89,610,431
|
|
Commercial
lines (in run-off effective July 2019)(2)
|
13,595,333
|
13,804,284
|
|
Total
net premiums earned
|
$
127,623,442
|
$
103,414,715
|
|
|
|
|
|
Net loss and loss adjustment expenses(4):
|
|
|
|
Personal
lines
|
$
62,157,739
|
$
43,287,170
|
|
Livery
physical damage
|
5,209,065
|
4,211,273
|
|
Other(1)
|
605,994
|
334,015
|
|
Unallocated
loss adjustment expenses
|
2,846,248
|
2,242,365
|
|
Total
without commercial lines
|
70,819,046
|
50,074,823
|
|
Commercial
lines (in run-off effective July 2019)(2)
|
19,363,278
|
8,220,382
|
|
Total
net loss and loss adjustment expenses
|
$
90,182,324
|
$
58,295,205
|
|
|
|
|
|
Net loss ratio(4):
|
|
|
|
Personal
lines
|
60.4
%
|
54.4
%
|
|
Livery
physical damage
|
49.3
%
|
43.0
%
|
|
Other(1)
|
116.8
%
|
159.7
%
|
|
Total
without commercial lines
|
62.1
%
|
55.9
%
|
|
|
|
|
|
Commercial
lines (in run-off effective July 2019)(2)
|
142.4
%
|
59.5
%
|
|
Total
|
70.7
%
|
56.4
%
|
(1)
“Other”
includes, among other things, premiums and loss and loss adjustment
expenses from our participation in a mandatory state joint
underwriting association and loss and loss adjustment expenses from
commercial auto.
(2)
In July 2019, we
decided that we will no longer underwrite Commercial Liability
risks. See discussions above regarding the discontinuation of this
line of business.
(3)
See discussions
above with regard to “Net Written Premiums and Net Premiums
Earned”, as to changes in quota share ceding rates, effective
July 1, 2019 and 2018.
(4)
See discussions
above with regard to “Net Loss and LAE”, as to
catastrophe losses in the years ended December 31, 2019 and
2018.
35
Insurance
Underwriting Business on a Standalone Basis
Our
insurance underwriting business reported on a standalone basis for
the years ended December 31, 2019 and 2018 follows:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Revenue
s
|
|
|
|
Net
premiums earned
|
$
127,623,442
|
$
103,414,715
|
|
Ceding
commission revenue
|
4,650,851
|
5,332,630
|
|
Net
investment income
|
6,821,248
|
6,037,441
|
|
Net
gains (losses) on investments
|
4,495,230
|
(2,439,026
)
|
|
Other
income
|
1,306,820
|
1,266,654
|
|
Total
revenues
|
144,897,591
|
113,612,414
|
|
|
|
|
|
Expense
s
|
|
|
|
Loss
and loss adjustment expenses
|
90,182,324
|
58,295,205
|
|
Commission
expense
|
30,193,175
|
25,342,137
|
|
Other
underwriting expenses
|
24,420,208
|
20,943,342
|
|
Depreciation
and amortization
|
2,446,959
|
1,787,150
|
|
Total
expenses
|
147,242,666
|
106,367,834
|
|
|
|
|
|
(Loss)
income from operations
|
(2,345,075
)
|
7,244,580
|
|
Income
tax (benefit) expense
|
(785,784
)
|
1,387,508
|
|
Net (loss)
incom
e
|
$
(1,559,291
)
|
$
5,857,072
|
|
|
|
|
|
Key Measures:
|
|
|
|
Net
loss ratio
|
70.7
%
|
56.4
%
|
|
Net
underwriting expense ratio
|
38.1
%
|
38.4
%
|
|
Net
combined ratio
|
108.8
%
|
94.8
%
|
|
|
|
|
|
|
|
|
|
Acquisition
costs and other
|
|
|
|
underwriting
expenses
|
$
54,613,383
|
$
46,285,479
|
|
Less:
Ceding commission revenue
|
(4,650,851
)
|
(5,332,630
)
|
|
Less:
Other income
|
(1,306,820
)
|
(1,266,654
)
|
|
Net
underwriting expenses
|
$
48,655,712
|
$
39,686,195
|
|
|
|
|
|
Net
premiums earned
|
$
127,623,442
|
$
103,414,715
|
|
|
|
|
|
Net
Underwriting Expense Ratio
|
38.1
%
|
38.4
%
|
36
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, 2019
|
|
|
|
|
|
Written
premiums
|
$
171,214,091
|
$
939
|
$
(45,635,899
)
|
$
125,579,131
|
|
Change
in unearned premiums
|
(11,350,864
)
|
(243
)
|
13,395,418
|
2,044,311
|
|
Earned
premiums
|
$
159,863,227
|
$
696
|
$
(32,240,481
)
|
$
127,623,442
|
|
|
|
|
|
|
|
Loss
and loss adjustment expenses exluding
|
|
|
|
|
|
the
effect of catastrophes
|
$
94,776,624
|
$
(1,813
)
|
$
(12,287,304
)
|
$
82,487,507
|
|
Catastrophe
loss
|
8,176,529
|
-
|
(481,712
)
|
7,694,817
|
|
Loss
and loss adjustment expenses
|
$
102,953,153
|
$
(1,813
)
|
$
(12,769,016
)
|
$
90,182,324
|
|
|
|
|
|
|
|
Loss
ratio excluding the effect of catastrophes
|
59.3
%
|
-260.5
%
|
38.1
%
|
64.7
%
|
|
Catastrophe
loss
|
5.1
%
|
0.0
%
|
1.5
%
|
6.0
%
|
|
Loss
ratio
|
64.3
%
|
-260.5
%
|
39.6
%
|
70.7
%
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
Written
premiums
|
$
146,716,468
|
$
1,004
|
$
(26,923,679
)
|
$
119,793,793
|
|
Change
in unearned premiums
|
(13,388,535
)
|
4,067
|
(2,994,610
)
|
(16,379,078
)
|
|
Earned
premiums
|
$
133,327,933
|
$
5,071
|
$
(29,918,289
)
|
$
103,414,715
|
|
|
|
|
|
|
|
Loss
and loss adjustment expenses exluding
|
|
|
|
|
|
the
effect of catastrophes
|
$
61,921,559
|
$
28,237
|
$
(9,882,474
)
|
$
52,067,322
|
|
Catastrophe
loss
|
10,828,121
|
-
|
(4,600,238
)
|
6,227,883
|
|
Loss
and loss adjustment expenses
|
$
72,749,680
|
$
28,237
|
$
(14,482,712
)
|
$
58,295,205
|
|
|
|
|
|
|
|
Loss
ratio excluding the effect of catastrophes
|
46.4
%
|
556.8
%
|
33.0
%
|
50.3
%
|
|
Catastrophe
loss
|
8.1
%
|
0.0
%
|
15.4
%
|
6.0
%
|
|
Loss
ratio
|
54.6
%
|
556.8
%
|
48.4
%
|
56.4
%
|
37
The key
measures for our insurance underwriting business for the years
ended December 31, 2019 and 2018 are as follows:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
premiums earned
|
$
127,623,442
|
$
103,414,715
|
|
Ceding
commission revenue
|
4,650,851
|
5,332,630
|
|
Other
income
|
1,306,820
|
1,266,654
|
|
|
|
|
|
Loss
and loss adjustment expenses (1)
|
90,182,324
|
58,295,205
|
|
|
|
|
|
Acquisition
costs and other underwriting expenses:
|
|
|
|
Commission
expense
|
30,193,175
|
25,342,137
|
|
Other
underwriting expenses
|
24,420,208
|
20,943,342
|
|
Total
acquisition costs and other
|
|
|
|
underwriting
expenses
|
54,613,383
|
46,285,479
|
|
|
|
|
|
Underwriting
(loss) income
|
$
(11,214,594
)
|
$
5,433,315
|
|
|
|
|
|
Key
Measures:
|
|
|
|
Net
loss ratio excluding the effect of catastrophes
|
64.6
%
|
50.4
%
|
|
Effect
of catastrophe loss on net loss ratio (1)
|
6.1
%
|
6.0
%
|
|
Net
loss ratio
|
70.7
%
|
56.4
%
|
|
|
|
|
|
Net
underwriting expense ratio excluding the
|
|
|
|
effect
of catastrophes
|
38.1
%
|
37.9
%
|
|
Effect
of catastrophe loss on net underwriting
|
|
|
|
expense
ratio (2)
|
0.0
%
|
0.5
%
|
|
Net
underwriting expense ratio
|
38.1
%
|
38.4
%
|
|
|
|
|
|
Net
combined ratio excluding the effect
|
|
|
|
of
catastrophes
|
102.7
%
|
88.3
%
|
|
Effect
of catastrophe loss on net combined
|
|
|
|
ratio
(1) (2)
|
6.1
%
|
6.5
%
|
|
Net
combined ratio
|
108.8
%
|
94.8
%
|
|
|
|
|
|
Reconciliation
of net underwriting expense ratio:
|
|
|
|
Acquisition
costs and other
|
|
|
|
underwriting
expenses
|
$
54,613,383
|
$
46,285,479
|
|
Less:
Ceding commission revenue (2)
|
(4,650,851
)
|
(5,332,630
)
|
|
Less:
Other income
|
(1,306,820
)
|
(1,266,654
)
|
|
|
$
48,655,712
|
$
39,686,195
|
|
|
|
|
|
Net
earned premium
|
$
127,623,442
|
$
103,414,715
|
|
|
|
|
|
Net
Underwriting Expense Ratio
|
38.1
%
|
38.4
%
|
(1)
For the year ended
December 31, 2019 and 2018, includes the sum of net catastrophe
losses and loss adjustment expenses of $7,694,817 and $6,227,883,
respectively.
(2)
For the year ended
December 31, 2018, the effect of catastrophe loss on our net
underwriting expense ratio includes the direct effect of reduced
contingent ceding commission revenue by $459,068 and does not
include the indirect effects of a $124,817 decrease in other
underwriting expenses.
38
Investments
Portfolio Summary
The
following table presents a breakdown of the amortized cost,
aggregate estimated fair value and unrealized gains and losses by
investment type as of December 31, 2019 and 2018:
Available-for-Sale Securities
|
|
December
31, 2019
|
|||||
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
Categor
y
|
Cost
or
Amortized
Cos
t
|
Gross
Unrealized
Gains
|
Less
than 12
Months
|
More
than 12
Months
|
Estimated
Fair
Value
|
%
of
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
|
|
corporations
and agencies
|
$
7,037,856
|
$
23,244
|
$
-
|
$
-
|
$
7,061,100
|
4.2
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
9,151,293
|
181,835
|
(11,316
)
|
-
|
9,321,812
|
5.5
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
119,874,573
|
5,777,624
|
(16,685
)
|
(13,473
)
|
125,622,039
|
74.7
%
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
asset
backed securities (1)
|
26,138,633
|
437,841
|
(68,793
)
|
(276,451
)
|
26,231,230
|
15.6
%
|
|
Total
fixed-maturity securities
|
$
162,202,355
|
$
6,420,544
|
$
(96,794
)
|
$
(289,924
)
|
$
168,236,181
|
100.0
%
|
(1) In 2017, KICO placed certain residential mortgage backed
securities as eligible collateral in a designated custodian account
related to its relationship with the Federal Home Loan Bank of New
York ("FHLBNY"). The eligible collateral would be pledged to FHLBNY
if KICO draws an advance from FHLBNY. As of December 31, 2019, the
estimated fair value of the eligible investments was $7,284,000.
KICO will retain all rights regarding all securities if pledged as
collateral. As of December 31, 2019, there was no outstanding
balance on the FHLBNY credit line.
|
|
December
31, 2018
|
|||||
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
Categor
y
|
Cost
or
Amortized
Cos
t
|
Gross
Unrealized
Gains
|
Less
than 12
Months
|
More
than 12
Months
|
Estimated
Fair
Value
|
%
of
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
|
|
corporations
and agencies
|
$
8,222,050
|
$
26,331
|
$
(28,000
)
|
$
-
|
$
8,220,381
|
5.4
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
6,339,540
|
50,903
|
(12,327
)
|
(36,508
)
|
6,341,608
|
4.2
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
119,078,698
|
123,740
|
(2,775,540
)
|
(676,605
)
|
115,750,293
|
76.3
%
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
asset
backed securities (1)
|
21,790,973
|
236,502
|
(231,229
)
|
(331,012
)
|
21,465,234
|
14.1
%
|
|
Total
fixed-maturity securities
|
$
155,431,261
|
$
437,476
|
$
(3,047,096
)
|
$
(1,044,125
)
|
$
151,777,516
|
100.0
%
|
(1)
In 2017, KICO placed certain
residential mortgage backed securities as eligible collateral in a
designated custodian account related to its relationship with the
Federal Home Loan Bank of New York ("FHLBNY"). The eligible
collateral would be pledged to FHLBNY if KICO draws an advance from
FHLBNY. As of December 31, 2018, the estimated fair value of the
eligible investments was $5,116,000. KICO will retain all rights
regarding all securities if pledged as collateral. As of December
31, 2018, there was no outstanding balance on the FHLBNY credit
line.
39
Equity Securities
The
following table presents a breakdown of the cost, estimated fair
value, and gross gains and losses of investments in equity
securities as of December 31, 2019 and 2018:
|
|
December
31, 2019
|
||||
|
|
|
|
|
Estimated
|
%
of
|
|
|
|
Gross
|
Gross
|
Fair
|
Estimated
|
|
Categor
y
|
Cost
|
Gains
|
Losses
|
Value
|
Fair
Value
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
Preferred
stocks
|
$
8,374,424
|
$
339,257
|
$
(11,794
)
|
$
8,701,887
|
35.3
%
|
|
Common
stocks and exchange
|
|
|
|
|
|
|
traded
mutual funds
|
14,250,244
|
1,982,878
|
(273,627
)
|
15,959,495
|
64.7
%
|
|
Total
|
$
22,624,668
|
$
2,322,135
|
$
(285,421
)
|
$
24,661,382
|
100.0
%
|
|
|
December
31, 2018
|
||||
|
|
|
|
|
Estimated
|
%
of
|
|
|
|
Gross
|
Gross
|
Fair
|
Estimated
|
|
Categor
y
|
Cost
|
Gains
|
Losses
|
Value
|
Fair
Value
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
Preferred
stocks
|
$
6,694,754
|
$
-
|
$
(541,798
)
|
$
6,152,956
|
37.1
%
|
|
Common stocks and exchange
|
|
|
|
|
|
|
traded
mutual funds
|
11,611,232
|
99,817
|
(1,291,389
)
|
10,419,660
|
62.9
%
|
|
Total
|
$
18,305,986
|
$
99,817
|
$
(1,833,187
)
|
$
16,572,616
|
100.0
%
|
Other Investments
Pursuant to the
definition of “Fair Value Measurement,” set forth in
the Accounting Standards Codification 820 “Fair Value
Measurement” (“ASC 820”) an entity is permitted,
as a practical expedient, to estimate the fair value of an
investment within the scope of ASC 820 using the net asset value
(“NAV”) per share (or its equivalent) of the
investment. The following table presents a breakdown of the cost,
estimated fair value, and gross losses of our other investments as
of December 31, 2019 and 2018:
|
|
December
31, 2019
|
December
31, 2018
|
||||
|
|
|
Gross
|
Estimated
|
|
Gross
|
Estimated
|
|
Categor
y
|
Cost
|
Gains
|
Fair
Value
|
Cost
|
Losses
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
Hedge
fund
|
$
1,999,381
|
$
585,532
|
$
2,584,913
|
$
1,999,381
|
$
(144,156
)
|
$
1,855,225
|
|
Total
|
$
1,999,381
|
$
585,532
|
$
2,584,913
|
$
1,999,381
|
$
(144,156
)
|
$
1,855,225
|
40
Held-to-Maturity Securities
|
|
December
31, 2019
|
|||||
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
Categor
y
|
Cost
or
Amortized
Cos
t
|
Gross
Unrealized
Gains
|
Less
than 12
Months
|
More
than 12
Months
|
Estimated
Fair
Value
|
%
of
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
729,550
|
$
151,002
|
$
-
|
$
-
|
$
880,552
|
21.3
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
998,619
|
51,021
|
-
|
-
|
1,049,640
|
25.4
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
2,097,783
|
97,627
|
(835
)
|
-
|
2,194,575
|
53.3
%
|
|
|
|
|
|
|
|
|
|
Total
|
$
3,825,952
|
$
299,650
|
$
(835
)
|
$
-
|
$
4,124,767
|
100.0
%
|
|
|
December
31, 2018
|
|||||
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
Categor
y
|
Cost
or
Amortized
Cos
t
|
Gross
Unrealized
Gains
|
Less
than 12
Months
|
More
than 12
Months
|
Estimated
Fair
Value
|
%
of
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
729,507
|
$
147,532
|
$
(3,964
)
|
$
-
|
$
873,075
|
19.7
%
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
998,803
|
33,862
|
-
|
-
|
1,032,665
|
23.3
%
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
2,494,545
|
38,461
|
(1,425
)
|
(10,905
)
|
2,520,676
|
57.0
%
|
|
|
|
|
|
|
|
|
|
Total
|
$
4,222,855
|
$
219,855
|
$
(5,389
)
|
$
(10,905
)
|
$
4,426,416
|
100.0
%
|
Held-to-maturity
U.S. Treasury securities are held in trust pursuant to various
states’ minimum fund requirements.
41
A
summary of the amortized cost and estimated fair value of our
investments in held-to-maturity securities by contractual maturity
as of December 31, 2019 and 2018 is shown below:
|
|
December
31, 2019
|
December
31, 2018
|
||
|
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|
Remaining Time to
Maturit
y
|
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|
|
|
|
|
|
|
Less
than one year
|
$
500,000
|
$
499,165
|
$
-
|
$
-
|
|
One
to five years
|
2,099,268
|
2,215,640
|
2,996,685
|
3,036,531
|
|
Five
to ten years
|
620,134
|
655,923
|
619,663
|
635,846
|
|
More
than 10 years
|
606,550
|
754,039
|
606,507
|
754,039
|
|
Total
|
$
3,825,952
|
$
4,124,767
|
$
4,222,855
|
$
4,426,416
|
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, 2019 and 2018 as rated
by Standard and Poor’s (or, if unavailable from Standard and
Poor’s, then Moody’s or Fitch):
|
|
December
31, 2019
|
December
31, 2018
|
||
|
|
Estimated
|
Percentage
of
|
Estimated
|
Percentage
of
|
|
|
Fair
Market
|
Fair
Market
|
Fair
Market
|
Fair
Market
|
|
|
Value
|
Value
|
Value
|
Value
|
|
Rating
|
|
|
|
|
|
U.S.
Treasury securities
|
$
7,061,100
|
4.2
%
|
$
8,220,381
|
5.4
%
|
|
|
|
|
|
|
|
Corporate
and municipal bonds
|
|
|
|
|
|
AAA
|
1,996,676
|
1.2
%
|
979,123
|
0.6
%
|
|
AA
|
8,809,480
|
5.2
%
|
8,350,910
|
5.5
%
|
|
A
|
34,636,236
|
20.6
%
|
27,665,961
|
18.2
%
|
|
BBB
|
89,501,460
|
53.2
%
|
85,095,907
|
56.1
%
|
|
Total
corporate and municipal bonds
|
134,943,852
|
80.2
%
|
122,091,901
|
80.4
%
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
|
|
|
|
|
AAA
|
2,976,306
|
1.8
%
|
999,640
|
0.7
%
|
|
AA
|
18,440,382
|
10.9
%
|
12,743,906
|
8.5
%
|
|
A
|
2,471,761
|
1.5
%
|
4,777,356
|
3.1
%
|
|
CCC
|
1,174,273
|
0.7
%
|
1,440,825
|
0.9
%
|
|
CC
|
86,461
|
0.1
%
|
109,648
|
0.1
%
|
|
C
|
17,813
|
0.0
%
|
24,050
|
0.0
%
|
|
D
|
215,015
|
0.1
%
|
390,542
|
0.3
%
|
|
Non
rated
|
849,218
|
0.5
%
|
979,267
|
0.6
%
|
|
Total
residential mortgage backed securities
|
26,231,229
|
15.6
%
|
21,465,234
|
14.2
%
|
|
|
|
|
|
|
|
Total
|
$
168,236,181
|
100.0
%
|
$
151,777,516
|
100.0
%
|
42
The
table below details the average yield by type of fixed-maturity
security as of December 31, 2019 and 2018:
|
Categor
y
|
December
31,
2019
|
December
31,
2018
|
|
U.S.
Treasury securities and
|
|
|
|
obligations
of U.S. government
|
|
|
|
corporations
and agencies
|
2.18
%
|
2.20
%
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
Territories
and Possessions
|
3.26
%
|
3.62
%
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
Industrial
and miscellaneous
|
3.73
%
|
4.11
%
|
|
|
|
|
|
Residential
mortgage backed securities
|
2.01
%
|
1.94
%
|
|
|
|
|
|
Total
|
3.37
%
|
3.68
%
|
The
table below lists the weighted average maturity and effective
duration in years on our fixed-maturity securities as of December
31, 2019 and 2018:
|
|
December
31,
2019
|
December
31,
2018
|
|
Weighted
average effective maturity
|
4.8
|
5.6
|
|
|
|
|
|
Weighted
average final maturity
|
6.3
|
6.9
|
|
|
|
|
|
Effective
duration
|
4.3
|
4.6
|
Fair Value Consideration
As
disclosed in Note 4 to the condensed 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
, 2019
and December 31, 2018, 80% and 81%,
respectively, of the investment portfolio recorded at fair value
was priced based upon quoted market prices.
43
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, 2019 and
2018:
|
|
December
31, 2019
|
|||||||
|
|
Less
than 12 months
|
12
months or more
|
Total
|
|||||
|
|
Estimated
|
|
No.
of
|
Estimated
|
|
No.
of
|
Estimated
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Categor
y
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity
Securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
|
|
|
|
and obligations
of U.S.
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
and
agencies
|
$
-
|
$
-
|
-
|
$
-
|
$
-
|
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
3,067,428
|
(11,316
)
|
3
|
-
|
-
|
-
|
3,067,428
|
(11,316
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and
other
|
|
|
|
|
|
|
|
|
|
bonds industrial
and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
3,730,478
|
(16,685
)
|
7
|
1,300,915
|
(13,473
)
|
3
|
5,031,393
|
(30,158
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
|
|
asset backed
securities
|
5,862,636
|
(68,793
)
|
5
|
13,534,768
|
(276,451
)
|
21
|
19,397,404
|
(345,244
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
12,660,542
|
$
(96,794
)
|
15
|
$
14,835,683
|
$
(289,924
)
|
24
|
$
27,496,225
|
$
(386,718
)
|
|
|
December
31, 2018
|
|||||||
|
|
Less
than 12 months
|
12
months or more
|
Total
|
|||||
|
|
Estimated
|
|
No.
of
|
Estimated
|
|
No.
of
|
Aggregate
|
|
|
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
Positions
|
Fair
|
Unrealized
|
|
Categor
y
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
Held
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
|
|
|
|
|
|
and
obligations of U.S.
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
and
agencies
|
$
4,948,530
|
$
(28,000
)
|
3
|
$
-
|
$
-
|
-
|
$
4,948,530
|
$
(28,000
)
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
Possessions
|
555,375
|
(12,327
)
|
1
|
1,436,242
|
(36,508
)
|
3
|
1,991,617
|
(48,835
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
81,004,459
|
(2,775,540
)
|
97
|
13,424,888
|
(676,605
)
|
24
|
94,429,347
|
(3,452,145
)
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
|
|
asset
backed securities
|
7,002,713
|
(231,229
)
|
9
|
11,928,425
|
(331,012
)
|
19
|
18,931,138
|
(562,241
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
securities
|
$
93,511,077
|
$
(3,047,096
)
|
110
|
$
26,789,555
|
$
(1,044,125
)
|
46
|
$
120,300,632
|
$
(4,091,221
)
|
44
There
were 39 securities at December 31
,
2019
that accounted for the gross unrealized loss, none of
which were deemed by us to be other than temporarily impaired.
There were 156 securities at December 31, 2018 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.
For the
year ended December 31, 2019, the primary source of cash flow for
our holding company was the dividends received from KICO, subject
to statutory restrictions. For the year ended December 31, 2019,
KICO paid dividends of $7,000,000 to us.
KICO is
a member of the Federal Home Loan Bank of New York
(“FHLBNY”), which provides additional access to
liquidity. Members have access to a variety of flexible, low cost
funding through FHLBNY’s credit products, enabling members to
customize advances. Advances are to be fully collateralized;
eligible collateral to pledge to FHLBNY includes residential and
commercial mortgage backed securities, along with U.S. Treasury and
agency securities. See Note 3 to our Consolidated Financial
Statements – Investments, for eligible collateral held in a
designated custodian account available for future advances.
Advances are limited to 5% of KICO’s net admitted assets as
of the end of the previous quarter, which is September 30, 2019,
and are due and payable within one year of borrowing. The maximum
allowable advance as of December 31, 2019, based on the net
admitted assets as of September 30, 2019, was approximately
$11,888,000. Advances are limited to 90% of the amount of available
collateral, which was approximately $6,556,000 as of December 31,
2019. There were no borrowings under this facility for the year
ended December 31, 2019.
As of
December 31, 2019, invested assets and cash in our holding company
was approximately $939,000. 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.
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,
|
2019
|
2018
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
Operating
activities
|
$
29,859,049
|
$
22,295,366
|
|
Investing
activities
|
(14,973,699
)
|
(43,401,314
)
|
|
Financing
activities
|
(3,632,268
)
|
(6,137,282
)
|
|
Net increase (decrease) in cash and cash
equivalents
|
11,253,082
|
(27,243,230
)
|
|
Cash
and cash equivalents, beginning of period
|
21,138,403
|
48,381,633
|
|
Cash and cash equivalents, end of period
|
$
32,391,485
|
$
21,138,403
|
45
Net
cash provided by operating activities was $29,859,000 in Year Ended
2019 as compared to $22,295,000 in Year Ended 2018. The $7,564,000
increase in cash flows provided by operating activities in Year
Ended 2019 was primarily a result of a decrease in net income
(adjusted for non-cash items) of $16,383,000, increases in other
assets, accounts payable, accrued expenses and other liabilities of
$5,924,000, offset by an increase in net cash arising from
insurance related items from KICO of $18,023,000.
Net
cash used in investing activities was $14,974,000 in Year Ended
2019 compared to $43,401,000 in Year Ended 2018. The $28,427,000
decrease in net cash used in investing activities was the result of
a $38,463,000 decrease in acquisitions of invested assets and a
$8,827,000 decrease in sales or maturities of invested
assets.
Net
cash used in financing activities was $3,632,000 in Year Ended 2019
compared to $6,137,000 used in Year Ended 2018. The $2,505,000
decrease in net cash used in financing activities was attributable
to higher withholding taxes paid on net exercises of stock options,
a purchase of $540,000 in treasury stock in Year Ended 2018 as
compared to none in Year Ended 2019 and a decrease in dividends
paid to shareholders.
Reinsurance
The
following table provides summary information with respect to each
reinsurer that accounted for more than 10% of our reinsurance
recoverables on paid and unpaid losses and loss adjustment expenses
as of December 31, 2019:
|
|
|
Amount
|
|
|
|
|
Recoverable
|
|
|
|
A.M.
|
as
of
|
|
|
($ in thousands)
|
Best
Rating
|
December
31, 2019
|
%
|
|
Cavello
Bay Reinsurance Limited
|
A-
|
$
6,463
|
30.6
%
|
|
Swiss
Reinsurance America Corporation
|
A+
|
5,754
|
27.3
%
|
|
Hannover
Rueck SE
|
A+
|
3,678
|
17.4
%
|
|
|
|
15,895
|
75.3
%
|
|
Others
|
|
5,218
|
24.7
%
|
|
Total
|
|
$
21,113
|
100.0
%
|
Reinsurance
recoverable from Cavello Bay Reinsurance Limited is secured
pursuant to a collateralized trust agreement. Assets held in the
trust are not included in our invested assets and investment income
earned on this asset is credited to the reinsurer.
Through June 30, 2019, our quota share reinsurance
treaties were on a July 1 through June 30 fiscal year basis.
E
ffective December 15, 2019, we
entered into a quota share reinsurance treaty for our personal
lines business
covering the
period from December 15, 2019 through December 31, 2020
(“2019/2020 Treaty”).
Our
quota share reinsurance treaties in effect during Years Ended 2019
and 2018 for our personal lines business, which primarily consists
of homeowners’ policies, were covered under the 2019/2020
Treaty and under a treaty covering a two-year period from July 1,
2017 through June 30, 2019 (“2017/2019 Treaty”). The
treaty in effect during Year Ended 2019 was covered under the July
1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty
Year”) and since December 15, 2019, the 2019/2020 Treaty. The
treaty in effect during Year Ended 2018 was covered under the July
1, 2017 through June 30, 2018 treaty year (“2017/2018 Treaty
Year”) and the 2018/2019 Treaty Year that began on July 1,
2018.
In
August 2018, we terminated our contract with one of the reinsurers
that was a party to the 2017/2019 Treaty. This termination was
retroactive to July 1, 2018 and had the effect of reducing the
quota share ceding rate to 10% under the 2018/2019 Treaty Year from
20% under the 2017/2018 Treaty Year.
46
Effective
July 1, 2019, our 2017/2019 Treaty and commercial umbrella treaty
expired on a run-off basis; these treaties were not renewed. We
entered into new excess of loss and catastrophe reinsurance
treaties effective July 1, 2019. Material terms for our reinsurance
treaties in effect for the treaty years shown below are as
follows:
|
|
Treaty
Year
|
|||
|
Line of
Business
|
December 15,
2019
to
December 31,
2020
|
July 1,
2019
to
December 14,
2019
|
July 1,
2018
to
June 30,
2019
|
July 1,
2017
to
June 30,
2018
|
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
|
Homeowners,
dwelling fire and
|
|
|
|
|
|
and
canine legal liability
|
|
|
|
|
|
Quota share
treaty:
|
|
|
|
|
|
Percent
ceded
|
25
%
|
None
|
10
%
|
20
%
|
|
|
Treaty
Year
|
|||
|
Line of
Business
|
December 15,
2019
to
June 30,
2020
|
July 1,
2019
to
December 14,
2019
|
July 1,
2018
to
June 30,
2019
|
July 1,
2017
to
June 30,
2018
|
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
|
Homeowners,
dwelling fire and
|
|
|
|
|
|
and canine
legal liability
|
|
|
|
|
|
Quota share
treaty:
|
|
|
|
|
|
Risk retained on intial
$1,000,000
|
|
|
|
|
|
of losses
|
$
750,000
|
$
1,000,000
|
$
900,000
|
$
800,000
|
|
Losses per occurrence subject
to
|
|
|
|
|
|
quota share reinsurance
coverage
|
$
1,000,000
|
None
|
$
1,000,000
|
$
1,000,000
|
|
Excess of loss coverage and
facultative
|
|
|
|
|
|
facility coverage
(1)
|
9,000,000
|
9,000,000
|
9,000,000
|
9,000,000
|
|
|
in excess o
f
|
in excess of
|
in excess of
|
in excess of
|
|
|
1,000,000
|
1,000,000
|
1,000,000
|
1,000,000
|
|
Total reinsurance coverage
per occurrence
|
9,250,000
|
9,000,000
|
9,100,000
|
9,200,000
|
|
Losses per occurrence subject
to
|
|
|
|
|
|
reinsurance
coverage
|
10,000,000
|
10,000,000
|
10,000,000
|
10,000,000
|
|
Expiration
date
|
June 30, 2020
|
June 30,
2020
|
June 30,
2019
|
June 30,
2018
|
|
|
|
|
|
|
|
Catastrophe
Reinsurance:
|
|
|
|
|
|
Initial loss subject to
personal lines
|
|
|
|
|
|
quota share
treaty
|
7,500,000
|
None
|
$
5,000,000
|
$
5,000,000
|
|
Risk retained per
catastrophe
|
|
|
|
|
|
occurrence
(2)
|
5,625,000
|
$
7,500,000
|
$
4,500,000
|
$
4,000,000
|
|
Catastrophe loss coverage in
excess of
|
|
|
|
|
|
quota share coverage
(3)
|
602,500,000
|
$
602,500,000
|
$
445,000,000
|
$
315,000,000
|
|
Reinstatement
premium
|
|
|
|
|
|
protection (4) (5)
(6)
|
Yes
|
Yes
|
Yes
|
Yes
|
|
|
|
|
|
|
(1)
For
personal lines, includes the addition of an automatic facultative
facility allowing KICO to obtain homeowners single risk coverage up
to $10,000,000 in total insured value, which covers direct losses
from $3,500,000 to $10,000,000.
(2)
Plus
losses in excess of catastrophe coverage.
(3)
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts. Duration of 168 consecutive hours for a
catastrophe occurrence from windstorm, hail, tornado, hurricane and
cyclone.
(4)
Effective
July 1, 2017, reinstatement premium protection for $145,000,000 of
catastrophe coverage in excess of $5,000,000.
(5)
Effective
July 1, 2018, reinstatement premium protection for $210,000,000 of
catastrophe coverage in excess of $5,000,000.
(6)
Effective
July 1, 2019, reinstatement premium protection for $292,500,000 of
catastrophe coverage in excess of $7,500,000.
47
|
|
Treaty
Year
|
||
|
|
July 1,
2019
|
July 1,
2018
|
July 1,
2017
|
|
|
to
|
to
|
to
|
|
Line of
Business
|
June 30,
2020
|
June 30,
2019
|
June 30,
2018
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
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
|
$
4,900,000
|
$
4,900,000
|
|
Losses per occurrence subject
to quota share reinsurance coverage
|
$
5,000,000
|
$
5,000,000
|
$
5,000,000
|
|
Expiration
date
|
June 30, 2020
|
June 30, 2019
|
June 30, 2018
|
|
|
|
|
|
|
Commercial
Lines
:
|
|
|
|
|
General liability commercial
policies
|
|
|
|
|
Quota share
treaty
|
None
|
None
|
None
|
|
Risk
retained
|
$
750,000
|
$
750,000
|
$
750,000
|
|
Excess of loss coverage above
risk retained
|
$
3,750,000
|
$
3,750,000
|
$
3,750,000
|
|
|
|
|
|
|
|
$
750,000
|
$
750,000
|
$
750,000
|
|
Total reinsurance coverage per
occurrence
|
$
3,750,000
|
$
3,750,000
|
$
3,750,000
|
|
Losses per occurrence subject
to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,500,000
|
|
|
|
|
|
|
Commercial
Umbrella
|
|
|
|
|
Quota share
treaty:
|
|
|
|
|
Percent ceded - first
$1,000,000 of coverage
|
None
|
90
%
|
90
%
|
|
Percent ceded - excess of
$1,000,000 of coverage
|
|
100
%
|
100
%
|
|
Risk
retained
|
|
$
100,000
|
$
100,000
|
|
Total reinsurance coverage per
occurrence
|
|
$
4,900,000
|
$
4,900,000
|
|
Losses per occurrence subject
to quota share reinsurance coverage
|
|
$
5,000,000
|
$
5,000,000
|
|
Expiration
date
|
|
June 30, 2019
|
June 30, 2018
|
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.
I
TEM 7A
.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.
This
item is not applicable to smaller reporting companies.
I
TEM 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
.
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.
I
TEM 9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
.
None.
I
TEM 9A.
CONTROLS AND
PROCEDURES
.
Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) that is designed to ensure
that information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Exchange Act. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2019, our
disclosure controls and procedures were not effective at the
reasonable assurance level.
48
Changes in Internal Control over Financial Reporting
Except
for the steps taken to remediate the material weakness identified
below, there have not been any changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fourth fiscal quarter
to which this report relates that materially affected, or are
reasonably likely to materially affect, our 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. Under the supervision
and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on criteria established in
Internal Control — Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, our management concluded that
our internal control over financial reporting was not effective as
of December 31, 2019.
A
“material weakness” is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements would not be
prevented or detected on a timely basis.
Our management
assessed the effectiveness of our internal control over financial
reporting as of December 31, 2019 using criteria set forth in
Internal Control –
Integrated Framework (2013)
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our management concluded there is a material weakness
in internal control over financial reporting as December 31, 2019
related to the operation of controls related to the establishment
and ongoing monitoring of case reserves for losses and loss
adjustment expenses.
Remediation
Management has been
implementing and continues to implement measures designed to ensure
that the control deficiency contributing to the material weakness
is remediated, such that the controls are designed, implemented,
and operating effectively. The remediation actions
include:
●
Engaged external
resources to perform a comprehensive review of our claims
operations surrounding the establishment and monitoring of
liability case reserves;
●
Hired a new Chief
Claims Officer whose role includes a review of the entire
population of case reserves to the policy level to ensure proper
valuation, existence, and completeness;
●
Increased the
number, experience level and skill of the personnel involved in our
claims function through hiring and improved training;
●
Performed a
thorough review of existing policies and procedures in place to
facilitate the development and documentation of controls over
financial reporting regarding liability case reserves. This review
led to the addition of multiple controls including a quality
assurance process as well as enhanced documentation of our existing
controls in place;
●
Enhanced testing
procedures performed by our outsourced internal audit to ensure
adequate design and operating effectiveness of new and existing
internal controls.
We
believe that these actions will remediate the material weakness.
The weakness will not be considered remediated, however, until the
applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed prior to the end of fiscal
2020.
Our
independent registered public accounting firm, Marcum LLP, has
audited the consolidated financial statements and has issued an
adverse attestation report on the effectiveness of our internal
control over financial reporting as of December 31, 2019, as stated
in their report which is included in the Financial Statements of
this Annual Report on Form 10-K.
Inherent Limitation on Effectiveness of Controls
Internal control
over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and 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.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Kingstone Companies, Inc.
Adverse Opinion on Internal Control over Financial
Reporting
We have audited Kingstone Companies, Inc. and Subsidiaries’
(the “Company”) internal control over financial
reporting as of December 31, 2019 based on criteria established
in
Internal
Control-Integrated Framework (2013)
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, because
of the effect of the material weakness described in the following
paragraph on the achievement of the objectives of the control
criteria, the Company
has not maintained effective internal control over
financial reporting as of December 31, 2019 based on criteria
established in
Internal Control-Integrated
Framework (2013)
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission.
A material weakness is a control deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the Company's annual or interim financial statements will not be
prevented or detected on a timely basis. A material weakness in the
operation of controls related to the establishment and ongoing
monitoring of case reserves for losses and loss adjustment expenses
has been identified and included in “Management's Annual
Report on Internal Control over Financial
Reporting”
.
This material weakness was considered in determining the nature,
timing and extent of audit tests applied in our audit of the
consolidated financial statements for the year ended December 31,
2019, and this report does not affect our report dated March 16,
2020 on those consolidated financial statements.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (the
“PCAOB”), the consolidated balance sheets as of
December 31, 2019 and 2018 and the related consolidated statements
of operations and comprehensive income (loss), stockholders’
equity, and cash flows for each of the two years in the period
ended December 31, 2019, and our report dated March 16,
2020
expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying "Management’s Annual Report on
Internal Control over Financial Reporting." Our responsibility is
to express an opinion on the Company's internal control over
financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures, as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of the 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 degree of compliance with the
policies or procedures may deteriorate.
Marcum
llp
Hartford,
CT
March
16, 2020
I
TEM 9B.
OTHER
INFORMATION
.
None.
50
P
ART III
I
TEM 10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
.
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
|
66
|
Chief Executive Officer, President, Executive Chairman of the Board
and Director
|
|
Meryl
S. Golden
|
60
|
Chief Operating Officer and Director
|
|
Victor J. Brodsky
|
62
|
Chief Financial Officer and Treasurer
|
|
Benjamin Walden
|
52
|
Executive Vice President and Chief Actuary,
Kingstone Insurance Company
|
|
Floyd R. Tupper
|
65
|
Secretary and Director
|
|
Timothy P. McFadden
|
57
|
Assistant Secretary and Director
|
|
Jay M. Haft
|
84
|
Director
|
|
William L. Yankus
|
60
|
Director
|
|
Carla A. D’Andre
|
64
|
Director
|
Barry B. Goldstein
Mr.
Goldstein has served as our Chief Executive Officer and President,
as well as Chief Executive Officer and President of Kingstone
Insurance Company, our wholly owned New York property and casualty
insurer (“KICO”), since July 19, 2019. He previously
served as our Chief Executive Officer, President and Chairman of
the Board from March 2001 through December 31, 2018 and as Chief
Executive Officer and President of KICO from January 2012 through
December 31, 2018. Mr. Goldstein has served as our Executive
Chairman of the Board since January 1, 2019 and as one of our
directors 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 KICO. He has
served as Chairman of its Executive Committee since October 2019
(having previously served in such capacity from 2006 to 2018). Mr.
Goldstein has served as Chief Investment Officer of KICO since
August 2008. 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 is a certified public
accountant (inactive). 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 executive-level service with KICO since 2006, give
him the qualifications and skills to serve as one of our
directors.
Meryl S. Golden
Ms.
Golden has served as our Chief Operating Officer since September
25, 2019 and as one of our directors since March 11, 2020. She has
also served as Chief Operating Officer, a director and a member of
the Executive Committee of KICO since September 25, 2019. Ms.
Golden has over 25 years of experience in the insurance industry.
She served as Northeast General Manager of Progressive Insurance
from 2000 to 2004 (having served as Connecticut General Manager at
Progressive from 1996 to 2000). Ms. Golden was Senior Vice
President/General Manager at Liberty Mutual from 2005 to 2007. From
2007 to 2009, she was a Management Committee advisor to Bridgewater
Associates, a hedge fund. Ms. Golden served as General Manager of
North America for Earnix, a banking and insurance software company,
from 2010 to 2018 and was Sales Manager, Insurance Solutions for
Arity, a mobility and data analytics company founded by Allstate,
from 2018 until September 2019. Ms. Golden received her B.S. degree
in Accounting from the Wharton School of the University of
Pennsylvania and her M.B.A. in Marketing and Finance from the
University of Chicago. We believe that Ms. Golden’s executive
level experience in the insurance industry gives her the
qualifications and skills to serve as one of our
directors.
51
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. 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. Mr. Walden tendered his
resignation effective May 31, 2020.
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 served as
a director of KICO from 2006 to 2018 and has served as Chairman of
its Audit Committee since 2006. 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 and Chairman of our Audit Committee 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 (including his service as Chairman of its Audit
Committee), give him the qualifications and skills to serve as one
of our directors.
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 The Link of
Times Foundation and The Mariinski 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 served as counsel to Reed Smith, an international
law firm. 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 (serving
as Chairman of our Nominating and Corporate Governance Committee
from 2010 to 2018). 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, give him
the qualifications and skills to serve as one of our
directors.
52
William L. Yankus
Mr. Yankus brings to the Board over 30 years’ experience
in the insurance industry. Since September 2015, Mr.
Yankus 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 completed the CFA program
in 1989 and passed the CT uniform CPA exam in 1984. Mr.
Yankus has served as one of our directors since March 2016,
Chairman of our Compensation Committee since April 2017 and
Chairman of our Investment Committee since February
2020. 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.
Carla
A. D’Andre
Ms.
D’Andre has more than 40 years of experience in the insurance
industry. Since 2009, Ms. D’Andre has been Chairman, CEO and
President of D’Andre Insurance Group, Inc., which she
co-founded. D’Andre Insurance Group, Inc. is the parent of
two independent insurance agencies. Prior to co-founding
D’Andre Insurance Group, Ms. D’Andre held
executive-level roles at several companies in the insurance
industry, including Executive Vice President, Head – Global
Corporate Practice and Member – Partner’s Council at
Willis Group Holdings plc, a multinational risk advisor, insurance
brokerage and reinsurance brokerage company; Managing Director and
Strategic Account Manager at AON Risk Services, a global provider
of risk management solutions; Chief Operating Officer at XL
Capital’s insurance and technology start-up firm, Inquis
Logic Inc.; Member of Senior Management and Managing Director of
Swiss Re New Markets and Director of Alternative Markets at Swiss
ReAmerica, affiliates of Swiss Reinsurance Company Ltd, a global
reinsurance company; Senior Vice President of Sedgwick North
America, an insurance brokerage firm; and Vice President of Johnson
& Higgins, an insurance brokerage firm. Ms. D’Andre
serves in senior capacities in several insurance industry groups.
In January 2019 she was elected by her peers to a three-year term
as a member of The Institutes’ CPCU Society Leadership
Council. She also serves as a member of the Executive Advisory
Council of St. John’s University School of Risk Management,
Insurance and Actuarial Science. She has served as one of our
directors since May 2017 and currently serves as Co-Chair of our
Finance Committee. Ms. D’Andre has an M.B.A. from Pace
University’s Lubin School of Business and a B.B.A. from St.
John’s University’s School of Risk Management,
Insurance and Actuarial Science. We believe that Ms.
D’Andre’s extensive experience in multiple capacities
in the insurance industry gives her the qualifications and skills
to serve as one of our directors.
Timothy P.
McFadden
Mr.
McFadden has more than 28 years of experience in the insurance
industry. Since 2012, Mr. McFadden has served as CEO and President
of State Farm Indemnity Auto Insurance Company and Senior Vice
President of State Farm Insurance, Eastern Market Area. Since 2015,
he has also served as CEO and President of State Farm Florida Fire
Company. Mr. McFadden served as Senior Vice President of State Farm
Insurance Companies, Southern Zone from 2008 to 2011 and Senior
Vice President of State Farm Insurance Companies, Southern &
Mid Atlantic Zones from 2011 to 2013. He is a member of the Board
of State Farm Indemnity Auto Insurance Company, Local Initiatives
Support Corporation, American College Ethics Board, State Farm
Florida Fire Company, Top Layer Reinsurance and Florida Council of
100. Mr. McFadden received his B.S. degree from the United States
Military Academy at West Point and his J.D. from Stetson College of
Law. He also completed the General Management Program at Harvard
Business School and received his Chartered Life Underwriter
Designation from The American College of Financial Services. Mr.
McFadden has served as one of our directors and Chair of our
Nominating and Corporate Governance Committee since August 2018. We
believe that Mr. McFadden's 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; however, see Item 13 (“Certain Relationships and
Related Transactions, and Director Independence - Other”) of
this Annual Report.
Term of Office
Each
director will hold office until the next annual meeting of
stockholders and until his or her successor is elected and
qualified or until his or her 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 or her successor is elected and
qualified or until his or her earlier resignation or
removal.
Audit Committee
The
Audit Committee of the Board of Directors is responsible for
overseeing our accounting and financial reporting processes, the
audits of our financial statements and the appointment of our
Independent Registered Public Accounting Firm. The members of the
Audit Committee are Messrs. Tupper, Yankus and
McFadden.
53
Audit Committee Financial Expert
Our
Board of Directors has determined that Mr. Tupper qualifies as an
“audit committee financial expert,” as defined in
applicable Nasdaq listing standards and federal securities rules
and regulations, and that Mr. Tupper is independent under
applicable and federal securities rules and regulations on
independence of Audit Committee members.
Delinquent Section 16(a) Reports
Section
16 of the Exchange Act requires that reports of beneficial
ownership of common shares and changes in such ownership be filed
with the SEC 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, 2019. To our knowledge, based solely
on a review of copies of Forms 3, 4 and 5 filed with the SEC and
written representations that no other reports were required, during
the fiscal year ended December 31, 2019, our officers, directors
and 10% stockholders complied with all Section 16(a) filing
requirements applicable to them, except that Mr. Brodsky filed two
Forms 4 one day late, each reporting one transaction.
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
.
I
TEM 11.
EXECUTIVE
COMPENSATION
.
Summary Compensation Table
The
following table sets forth certain information concerning the
compensation for the fiscal years ended December 31, 2019 and 2018
for certain executive officers, including our Chief Executive
Officer:
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards(3)
|
Option Awards
|
Non-Equity
Incentive Plan
Compensation
|
All
Other
Compensation
|
Total
|
|
Barry
B. Goldstein (1)
|
2019
|
$
636,500
|
$
-
|
$
-
|
$
-
|
$
-
|
$
37,520
(5)
|
$
674,020
|
|
Chief
Executive Officer;
Executive Chairman of the
Board
|
2018
|
$
630,000
|
$
-
|
$
-
|
$
-
|
$
21,887
(4)
|
$
43,784
(6)
|
$
695,671
|
|
Dale A.
Thatcher (2)
|
2019
|
$
625,000
|
$
-
|
$
750,000
|
$
-
|
$
5,000
(4)
|
$
38,200
(7)
|
$
1,418,200
|
|
Chief
Executive Officer;
Chief
Operating Officer
|
2018
|
$
398,630
|
$
-
|
$
750,000
|
$
-
|
$
59,795
(4)
|
$
79,157
(8)
|
$
1,287,582
|
|
Victor J.
Brodsky
|
2019
|
$
369,666
|
$
-
|
$
150,000
|
$
-
|
$
34,508
(4)
|
$
22,042
(9)
|
$
576,217
|
|
Chief
Financial Officer
|
2018
|
$
350,000
|
$
-
|
$
140,009
|
$
-
|
$
17,573
(4)
|
$
27,759
(10)
|
$
535,341
|
|
Benjamin
Walden
|
2019
|
$
339,025
|
$
-
|
$
135,000
|
$
-
|
$
31,601
(4)
|
$
11,200
(11)
|
$
516,825
|
|
Executive Vice
President and Chief Actuary, Kingstone Insurance
Company
|
2018
|
$
315,000
|
$
-
|
$
110,856
|
$
-
|
$
15,760
(4)
|
$
16,000
(12)
|
$
457,616
|
54
(1)
Mr.
Goldstein has served as our Chief Executive Officer since July 19,
2019 and Executive Chairman of the Board since January 1, 2019. He
previously served as Chief Executive Officer from March 2001
through December 31, 2018.
(2)
Mr.
Thatcher served as our Chief Executive Officer from January 1, 2019
to July 19, 2019. He previously served as our Chief Operating
Officer from March 15, 2018 through December 31, 2018.
(3)
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 12 to our
Consolidated Financial Statements included in this Annual
Report.
(4)
Represents
amounts earned pursuant to the KICO employee bonus plan for 2019
and profit sharing plan for 2018.
(5)
Represents
employer matching contributions under our deferred compensation
plan of $17,025, employer matching contributions under our defined
contribution plan of $8,495 and a car allowance of
$12,000.
(6)
Represents
employer matching contributions under our deferred compensation
plan of $15,018, employer matching contributions under our defined
contribution plan of $10,266, a car allowance of $12,000 and KICO
director fees.
(7)
Represents
employer matching contributions under our deferred compensation
plan of $2,090, employer matching contributions under our defined
contribution plan of $9,110, severance payment of $20,000 and a car
allowance of $7,000.
(8)
Represents
compensation paid for services as a non-employee director during
2018 comprised of a cash retainer of $11,458 and restricted shares
of our common stock with a grant date fair value of $41,300,
matching contributions under our defined contribution plan of
$10,615, a car allowance of $9,567 and KICO director
fees.
(9)
Represents
employer matching contributions under our deferred compensation
plan of $4,090, employer matching contributions under our defined
contribution plan of $10,752 and a car allowance of
$7,200.
(10)
Represents
employer matching contributions under our defined contribution plan
of $10,847, a car allowance of $7,200 and KICO director
fees.
(11)
Represents
employer matching contributions under our defined contribution plan
of $11,200.
(12)
Represents
employer matching contributions under our defined contribution plan
of $11,000 and $5,000 of KICO director fees.
Employment Contracts
Barry B. Goldstein
●
Agreement
in effect for the year ended December 31, 2018
During
the year ended December 31, 2018, Mr. Goldstein was employed as our
President, Chairman of the Board and Chief Executive Officer
pursuant to an employment agreement, dated January 20, 2017 (the
“2017 Goldstein Employment Agreement”), that was
scheduled to expire on December 31, 2019. Pursuant to the 2017
Goldstein Employment Agreement, Mr. Goldstein was 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 our 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 2017 Goldstein Employment Agreement,
Mr. Goldstein was entitled to a long-term compensation ("LTC")
payment of between $945,000 and $2,835,000 in the event our
adjusted book value per share (as defined in the 2017 Goldstein
Employment Agreement) 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 was at least 14%). Accrued LTC compensation credit of
$247,311 for the year ended December 31, 2018 is included in other
operating expenses in the Consolidated Statements of Income and
Comprehensive (Loss) Income included in this Annual
Report.
●
Agreement
in effect for the year ended December 31, 2019
On
October 16, 2018, we entered into an amended and restated
employment agreement with Mr. Goldstein which took effect as of
January 1, 2019 and which was scheduled to expire on December 31,
2021 (the “Amended and Restated Goldstein Employment
Agreement”). Pursuant to the Amended and Restated Goldstein
Employment Agreement, Mr. Goldstein stepped down as our Chief
Executive Officer on January 1, 2019 and was named Executive
Chairman of the Board.
55
Pursuant
to the Amended and Restated Goldstein Employment Agreement, Mr.
Goldstein was entitled to receive an annual base salary of $636,500
for the calendar year 2019. In addition, Mr. Goldstein was eligible
to receive an annual performance bonus equal to 3% of our
consolidated income from operations before taxes, exclusive of our
consolidated net investment income (loss) and net realized gains
(losses) on investments. In addition, pursuant to the Amended and
Restated Goldstein Employment Agreement, Mr. Goldstein was entitled
to an LTC payment (which was a continuation of the previous terms
under the 2017 Goldstein Employment Agreement) of between $945,000
and $2,835,000 based on a specified minimum increase in our
adjusted book value per share (as defined in the Amended and
Restated Goldstein Employment Agreement) as of December 31, 2019 as
compared to December 31, 2016 (with the maximum LTC payment being
due if the average per annum increase was at least 14%). Pursuant
to the Amended and Restated Goldstein Employment Agreement, Mr.
Goldstein was entitled to receive a grant, under the terms of our
2014 Equity Participation Plan (the “2014 Plan”),
during the first 30 days of January 2020, with respect to a number
of shares of restricted stock determined by dividing $436,500 by
the fair market value of our common stock on the date of grant. The
January 2020 grant was to vest with respect to 50% of the award on
each of December 31, 2020 and December 31, 2021 based on the
continued provision of services through the applicable vesting
date. Also, pursuant to the Amended and Restated Goldstein
Employment Agreement, Mr. Goldstein was entitled to receive a
grant, under the 2014 Plan, during the first 30 days of 2021, with
respect to a number of shares of restricted stock determined by
dividing $236,500 by the fair market value of our common stock on
the date of grant. The January 2021 grant was to vest on December
31, 2021 based on the continued provision of services through such
date. The above stock grant provisions were superseded by the
provisions of the Second Amended and Restated Goldstein Employment
Agreement as discussed below.
●
Agreement
in effect as of January 1, 2020
On
October 14, 2019, we entered into a second amended and restated
employment agreement with Mr. Goldstein which took effect as of
January 1, 2020 and expires on December 31, 2022 (the “Second
Amended and Restated Goldstein Employment
Agreement”).
Pursuant
to the Second Amended and Restated Goldstein Employment Agreement,
Mr. Goldstein is entitled to receive an annual base salary of
$500,000 and an annual bonus equal to 6% of our consolidated income
from operations before taxes, exclusive of our consolidated net
investment income (loss), net unrealized gains (losses) on equity
securities and net realized gains (losses) on investments, up to a
maximum of 2.5 times his base salary. In addition, pursuant
to the Second Amended and Restated Goldstein Employment Agreement,
Mr. Goldstein is entitled to receive an LTC payment of between
$945,000 and $2,835,000 based on a specified minimum increase in
our adjusted book value per share (as defined in the Second Amended
and Restated Goldstein Employment Agreement) as of December 31,
2022 as compared to December 31, 2019 (with the maximum LTC payment
being due if the average per annum increase is at least
14%).
Pursuant
to the Second Amended and Restated Goldstein Employment Agreement,
Mr. Goldstein is entitled to receive a grant, under the terms of
the 2014 Plan, during January 2020, of a number of shares of
restricted stock determined by dividing $1,250,000 by the fair
market value of our common stock on the date of grant. The January
2020 grant will become vested with respect to one-third of the
award on each of the first and second anniversaries of the grant
date and on December 31, 2022 based on the continued provision of
services through the applicable vesting date. Also pursuant
to the Second Amended and Restated Goldstein Employment Agreement,
Mr. Goldstein will be entitled to receive a grant, under the terms
of the 2014 Plan, during January 2021, of a number of shares of
restricted stock determined by dividing $1,500,000 by the fair
market value of our common stock on the date of grant. The
January 2021 grant will become vested with respect to one-half of
the award on each of the first anniversary of the grant date and on
December 31, 2022 based on the continued provision of services
through the applicable vesting date. Further, pursuant to the
Second Amended and Restated Goldstein Employment Agreement, Mr.
Goldstein will be entitled to receive a grant, under the terms of
the 2014 Plan, during each of 2020, 2021 and 2022, of a number of
shares of restricted stock determined by dividing $136,500 by the
fair market value of our common stock on the date of grant.
The 2020 grant will become vested with respect to one-third of the
award on each of the first and second anniversaries of the grant
date and on December 31, 2022 based on the continued provision of
services through the applicable vesting date. The 2021 grant
will become vested with respect to one-half of the award on each of
the first anniversary of the grant date and on December 31, 2022
based on the continued provision of services through the applicable
vesting date. The 2022 grant will become vested on December
31, 2022 based on the continued provision of services through such
date.
See
“Termination of Employment and Change-in-Control
Arrangements–Barry B. Goldstein” below for a discussion
of the provisions of the Second Amended and Restated Goldstein
Employment Agreement with regard to payments due in the event of
the termination of Mr. Goldstein’s employment.
Dale A. Thatcher
●
Agreement
in effect for the year ended December 31, 2018
On
March 14, 2018, we and Dale A. Thatcher, then one of our directors,
entered into an employment agreement (the “2018 Thatcher
Employment Agreement”) pursuant to which Mr. Thatcher become
our Chief Operating Officer. The 2018 Thatcher Employment Agreement
became effective as of March 15, 2018 and expired on December 31,
2018. Pursuant the 2018 Thatcher Employment Agreement, Mr. Thatcher
was entitled to receive a base salary of $500,000 per annum and a
minimum bonus equal to 15% of his base salary. Concurrently with
the execution of the 2018 Thatcher Employment Agreement, we granted
to Mr. Thatcher 35,715 shares of restricted common stock under the
2014 Plan. Such shares vest to the extent of one-third of the award
on each of the first, second and third anniversaries of the grant
date.
●
Agreement
in effect from January 1, 2019 through July 19, 2019
On
October 16, 2018, we and Mr. Thatcher entered into an employment
agreement effective as of January 1, 2019 (the “2019 Thatcher
Employment Agreement”). Pursuant to the 2019 Thatcher
Employment Agreement, Mr. Thatcher succeeded Mr. Goldstein as our
Chief Executive Officer and was entitled to receive an annual base
salary of $500,000 for 2019 and $630,000 for each of 2020 and 2021.
In addition, Mr. Thatcher was eligible to receive an annual
performance bonus equal to 3% of our consolidated income from
operations before taxes, exclusive of our consolidated net
investment income (loss) and net realized gains (losses) on
investments. Pursuant to the 2019 Thatcher Employment Agreement,
Mr. Thatcher was entitled to receive a grant, under the terms of
the 2014 Plan, of a number of shares of restricted stock in each of
2019, 2020 and 2021 determined by dividing $750,000, $1,250,000 and
$1,500,000, respectively, by the fair market value of our common
stock on the date of grant. See Item 13 (“Certain
Relationships and Related Transactions, and Director
Independence–Dale A. Thatcher”) of this Annual Report
for a discussion of an agreement entered into with Mr. Thatcher in
July 2019 with regard to the termination of his
employment.
56
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth certain information concerning
unexercised options held by the above named executive officers as
of December 31, 2019.
|
|
Option
Awards
|
Stock
Awards
|
||||||
|
Name
|
Number
of Securities Underlying
Unexercised
Options
Exercisable
|
Number
of Securities Underlying
Unexercised
Options
Unexercisable
|
Option
Exercise
Price
|
Option
Expiration Date
|
Number
of Shares of Stock That Have Not Vested
|
Market
Value of Shares of Stock That Have Not Vested
|
Equity
Incentive Plan Awards: Number of Unearned Shares That Have Not
Vested
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares
That Have Not Vested
|
|
Dale
A. Thatcher
|
-
|
-
|
|
-
|
42,230
(1)
|
$
327,283
|
-
|
$
-
|
|
|
|
|
|
|
23,810
(2)
|
$
184,528
|
-
|
$
-
|
|
Victor
J. Brodsky
|
-
|
-
|
|
-
|
555
(3)
|
$
4,304
|
-
|
$
-
|
|
|
|
|
|
|
4,655
(4)
|
$
36,076
|
-
|
$
-
|
|
|
|
|
|
|
10,933
(5)
|
$
84,731
|
-
|
$
-
|
|
Benjamin
Walden
|
7,000
|
-
|
$
7.85
|
3/11/21
|
333
(3)
|
$
2,583
|
-
|
$
-
|
|
|
|
|
|
|
3,686
(6)
|
$
28,567
|
-
|
$
-
|
|
|
|
|
|
|
9,840
(7)
|
$
76,260
|
-
|
$
-
|
(1)
Such
shares vest to the
extent of 14,077 shares
on each of January 2, 2020 and 2021, and 14,076 shares on January
2, 2022
.
(2)
Such
shares vest to the
extent of 11,905 shares
on each of March 14, 2020 and 2021
.
(3)
Such
shares vest in two as nearly equal as possible monthly installments
through February 23, 2020.
(4)
Such
shares vest to the extent of 2,328 shares on February 22, 2020 and
2,327 shares on February 22, 2021.
(5)
Such
shares vest to the extent of 3,645 shares on April 10, 2020 and
3,644 shares on each of April 10, 2021 and 2022.
(6)
Such
shares vest to the extent of 1,843 shares on each of February 22,
2020 and 2021.
(7) Such shares vest to the extent of 3,280 shares on each of April
10, 2020, 2021 and 2022.
57
Termination of Employment and
Change-in-Control
Arrangements
Barry B. Goldstein
Pursuant to the Second Amended and Restated 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 Second Amended and Restated Goldstein Employment
Agreement), Mr. Goldstein would be entitled to receive his base
salary, bonus and LTC payment for the remainder of the term.
In addition, in the event of Mr. Goldstein’s death, his
estate would be entitled to receive his base salary, accrued bonus
and accrued LTC payment through the date of death. Further, in the
event that Mr. Goldstein’s employment is terminated by the
Company without cause or he resigns for good reason, or, in the
event of the termination of Mr. Goldstein’s employment due to
disability or death, Mr. Goldstein’s granted but unvested
restricted stock awards will vest.
Mr. Goldstein would be entitled to receive, under certain
circumstances, a payment equal to 3.82 times his then annual
salary, the target LTC payment of $1,890,000 and his accrued bonus
in the event of the termination of his employment within eighteen
months following a change of control of our
company.
Dale A. Thatcher
See Item 13
(“Certain Relationships and Related Transactions, and
Director Independence
–
Dale A.
Thatcher”) for a discussion of an agreement entered into with
Mr. Thatcher in July 2019 with regard to the termination of his
employment.
Compensation of Directors
The
following table sets forth certain information concerning the
compensation of our directors for the fiscal year ended December
31, 2019:
DIRECTOR COMPENSATION
|
Name
|
Fees
Earned or
Paid in
Cash
|
Stock
Awards(1)
|
Option
Awards
|
Total
|
|
|
|
|
|
|
|
Jay
M. Haft
|
$
75,000
|
$
40,000
|
$
-
|
$
115,000
|
|
Floyd
R. Tupper
|
$
85,000
|
$
40,000
|
$
-
|
$
125,000
|
|
William
L. Yankus
|
$
80,000
|
$
40,000
|
$
-
|
$
120,000
|
|
Carla
A. D’Andre
|
$
75,000
|
$
40,000
|
$
-
|
$
115,000
|
|
Timothy
P. McFadden
|
$
75,000
|
$
40,000
|
$
-
|
$
115,000
|
(1)
Amounts
reflect the aggregate grant date fair value of grants made in the
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 12 to our Consolidated Financial
Statements included in this Annual Report. The aggregate number of
unvested restricted stock awards outstanding as of fiscal year end
for each non-employee director is as follows:
|
Name
|
Unvested
Restricted Stock Awards (#)
|
|
|
|
|
Jay
M. Haft
|
1,999
|
|
Floyd
R. Tupper
|
1,999
|
|
William
L. Yankus
|
1,999
|
|
Carla
A. D’Andre
|
1,749
|
|
Timothy
P. McFadden
|
530
|
Effective January 1, 2019, our non-employee directors are entitled
to receive annual compensation for their services as directors as
follows:
●
$60,000;
●
an
additional $25,000 for service as audit committee chair, an
additional $20,000 for service as compensation committee chair, an
additional $10,000 for service as investment committee chair, and
an additional $15,000 for service as chair of other committees;
and
●
$40,000
of our common stock determined by the closing stock price on the
first business day of the year, which vest on the first anniversary
of the grant date.
58
I
TEM 12.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
.
Security Ownership
The
following table sets forth certain information as of March 9, 2020
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 named executive officer 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
|
707,158(1)
|
6.5 %
|
|
|
|
|
|
Jay M. Haft
69 Beaver Dam Road
Salisbury, Connecticut
|
98,010
|
*
|
|
|
|
|
|
Floyd R. Tupper
220 East 57
th
Street
New York, New York
|
67,388(2)
|
*
|
|
|
|
|
|
Dale A. Thatcher
212 Third Street
Milford, Pennsylvania
|
59,882(3)
|
*
|
|
|
|
|
|
Victor J. Brodsky
15 Joys Lane
Kingston, New York
|
36,457(4)
|
*
|
|
|
|
|
|
Benjamin Walden
15 Joys Lane
Kingston, New York
|
32,966(5)
|
*
|
|
|
|
|
|
Carla A. D’Andre
3561 Avocado Avenue
Miami, Florida
|
15,821(6)
|
*
|
|
|
|
|
|
William L. Yankus
10 Pheasant Hill Road
Farmington, Connecticut
|
13,086
|
*
|
|
|
|
|
|
Meryl S. Golden
15 Joys Lane
Kingston, New York
|
12,500(7)
|
*
|
|
|
|
|
|
Timothy P. McFadden
310 8
th
Avenue N.
Saint Petersburg, Florida
|
7,518
|
*
|
|
|
|
|
|
The TCW Group, Inc.
on behalf of the TCW Business
Unit
865 South Figueroa Street
Los Angeles, California
|
673,170(8)
|
6.2%
|
|
|
|
|
|
RenaissanceRe Ventures Ltd.
Renaissance Other Investments
Holding II Ltd.
RenaissanceRe Holdings Ltd.
Renaissance House
12 Crow Lane
Pembrooke HM19
Bermuda
|
595,238(9)
|
5.5%
|
|
|
|
|
|
All executive officers
and directors as a group
(9 persons)
|
990,904(1)(2)(4)(5)(6)(7)
|
9.1%
|
* Less than 1%.
59
|
|
|
|
(1)
|
The
information regarding Mr. Goldstein is based solely on publicly
available information filed with the SEC. Includes (i) 73,168
shares of common stock owned by Mr. Goldstein's wife and (ii) 2,000
shares held in a retirement trust for the benefit of Mr. Goldstein.
Mr. Goldstein has sole voting and dispositive power over 638,890
shares of common stock and shared voting and dispositive power over
73,168 shares of common stock. The inclusion of the shares owned by
Mr. Goldstein's wife and the retirement trust shall not be
construed as an admission that Mr. Goldstein is, for purposes of
Section 13(d) o
r 13(g) of the Exchange
Act, the beneficial owner of such shares.
|
|
|
|
|
(2)
|
Includes
(i) 32,065 shares owned by Mr. Tupper’s wife
(ii) 6,675 shares held in a retirement trust for
the benefit of Mr. Tupper and (iii) 810 shares held in a retirement
trust for the benefit of Mr. Tupper's wife
. Mr. Tupper
has sole voting and dispositive power over 34,513 shares of common
stock and shared voting and dispositive power over 32,875 shares of
common stock.
The inclusion of the
shares owned by Mr. Tupper's wife and the retirement trusts for the
benefit of Mr. Tupper and his 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.
|
|
|
|
|
(3)
|
Includes
11,905 shares issuable upon the vesting of restricted stock within
60 days.
|
|
|
|
|
(4)
|
Includes
3,644 shares issuable upon the vesting of restricted stock within
60 days.
|
|
|
|
|
(5)
|
Includes
7,000 shares issuable upon the exercise of options that are
exercisable currently and 3,280 shares issuable upon the vesting of
restricted stock within 60 days.
|
|
|
|
|
(6)
|
Includes
10,000 shares held in a retirement trust for the benefit of Ms.
D’Andre’s husband. Ms. D’Andre has sole voting
and dispositive power over 5,821 shares of common stock and shared
voting and dispositive power over 10,000 shares of common stock.
The inclusion of the shares owned by
the retirement trust for the benefit of Ms. D'Andre’s husband
shall not be construed as an admission that Ms. D’Andre is,
for purposes of Section 13(d) or 13(g) of the Exchange Act, the
beneficial owner of such shares.
|
|
|
|
|
(7)
|
Represents
shares issuable upon the exercise of options that are exercisable
currently.
|
|
|
|
|
(8)
|
The
information regarding The TCW Group, Inc. on behalf of the TCW
Business Unit is based solely on a Schedule 13G filed by such
reporting person with the SEC on February 7, 2020 (the “TCW
13G”). According to the TCW 13G, such reporting person has
shared voting and dispositive power over the 673,170 shares of
common stock.
|
|
|
|
|
(9)
|
The
information regarding RenaissanceRe Ventures Ltd.
(“RenaissanceRe Ventures”), Renaissance Other
Investments Holding II Ltd. (“ROIHL II”) and
RenaissanceRe Holdings Ltd. (“RenaissanceRe Holdings”)
is based solely on a Schedule 13G/A filed by such reporting persons
with the SEC on February 14, 2019 (the “Renaissance
13G/A”). According to the Renaissance 13G/A, RenaissanceRe
Ventures, ROIHL II and RenaissanceRe Holdings each has shared
voting and dispositive power over the 595,238 shares of common
stock.
|
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table sets forth information as of December 31, 2019 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.
60
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
|
82,000
|
$
8.61
|
327,900
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
82,000
|
$
8.61
|
327,900
|
I
TEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
.
Director Independence
Board of Directors
Our
Board of Directors is currently comprised of Barry B. Goldstein,
Jay M. Haft, Floyd R. Tupper, William L. Yankus, Carla A.
D’Andre, Timothy P. McFadden and Meryl S. Golden. Our board
of directors has determined that each of Messrs. Haft, Tupper,
Yankus and McFadden and Ms. D’Andre are independent under
applicable Nasdaq listing standards and federal securities rules
and regulations.
Audit Committee
The
members of our Board’s Audit Committee currently are Messrs.
Tupper, Yankus and McFadden, each of whom is independent under
applicable Nasdaq listing standards and federal securities rules
and regulations on independence of Audit Committee
members.
Nominating and Corporate Governance Committee
The
members of our Board’s Nominating and Corporate Governance
Committee currently are Messrs. McFadden and Tupper and Ms.
D’Andre, each of whom is independent under applicable
Nasdaq listing standards and federal securities rules and
regulations on independence.
Compensation Committee
The
members of our Board’s Compensation Committee currently are
Messrs. Yankus, Haft and Tupper and Ms. D’Andre, each of whom
is independent under applicable Nasdaq listing standards and
federal securities rules and regulations on
independence.
61
Dale A. Thatcher
In connection with the separation from employment of Dale Thatcher
as our Chief Executive Officer and President in July 2019 (the
“Separation Date”), each of we and KICO entered into an
Agreement and General Release (the “Separation
Agreement”) with Mr. Thatcher. Pursuant to the
Separation Agreement, we and KICO agreed to collectively provide
the following payments and benefits to Mr. Thatcher in full
satisfaction of all payments and benefits and other amounts due to
him under the terms of the 2019 Thatcher Employment Agreement (and
related KICO employment agreement) upon his separation from
employment: (i) $381,111 (representing the amount of base salary he
would have received had he remained employed through March 31,
2020), (ii) $5,000 in full satisfaction of any bonus payments
payable under the 2019 Thatcher Employment Agreement (and related
KICO employment agreement), (iii) continuing group health coverage
commencing on the Separation Date and ending on March 31, 2020; and
(iv) continued vesting of all stock awards previously granted to
Mr. Thatcher in his capacity as an executive officer but which were
unvested as of the Separation Date. In addition, we and KICO
agreed to provide Mr. Thatcher with a severance payment of $20,000
in consideration for a release. Pursuant to the Separation
Agreement, Mr. Thatcher agreed that, for a period of three years
following the Separation Date, he shall not accept any operating
executive role with another property and casualty insurance
company.
Other
The
daughter of Barry Goldstein, Amanda Goldstein, is employed as our
Investor Relations Director and serves as Vice President of Cosi
Agency, Inc., one of our subsidiaries. For the fiscal year ended
December 31, 2019, she earned $155,368 in
compensation.
Related Party Transactions
Due
to the infrequency of related party transactions, we have not
formally adopted procedures for the review of, or standards for
approval of, such transactions; however, our Board of Directors (or
a designated committee thereof) will review related party
transactions on a case-by-case basis.
I
TEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
.
The
following is a summary of the fees billed to us by Marcum LLP, our
independent auditors, for professional services rendered for the
fiscal years ended December 31, 2019 and 2018.
|
Fee
Category
|
Fiscal
2019
Fees
|
Fiscal
2018
Fees
|
|
Audit
Fees(1)
|
$
306,940
|
$
309,684
|
|
Tax
Fees(2)
|
$
-
|
$
-
|
|
Audit-Related
Fees(3)
|
$
-
|
$
-
|
|
All
Other Fees(4)
|
$
-
|
$
-
|
|
|
$
306,940
|
$
309,684
|
(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, and services provided in connection with other
statutory or regulatory filings.
(2)
Marcum
did not provide any tax services during the fiscal
year.
(3)
Marcum
did not provide any “Audit-Related” services during the
fiscal year.
(4)
Marcum
did not provide any other services during the fiscal
year.
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.
62
P
ART IV
I
TEM 15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
.
|
Exhibit
Number
|
Description of Exhibit
|
|
|
|
|
|
|
|
|
Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(a) to the Company’s Quarterly Report
on Form 10-Q for the period ended March 31, 2014 filed on May 15,
2014).
|
|
||
|
|
|
|
|
|
By-laws, as amended (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K filed on November 9,
2009).
|
|
||
|
|
|
|
|
|
Indenture, dated as of December 19, 2017, between Kingstone
Companies, Inc. and Wilmington Trust, National Association
(incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed on December 20,
2017).
|
|
||
|
|
|
|
|
|
First Supplemental Indenture, dated as of December 19, 2017,
between Kingstone Companies, Inc. and Wilmington Trust, National
Association (incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on December 20,
2017).
|
|
||
|
|
|
|
|
|
Form of Global Note representing $30,000,000 aggregate principal
amount of 5.50% Senior Unsecured Notes due 2022 (incorporated by
reference to Exhibit 4.3 to the Company’s Current Report on
Form 8-K filed on December 20, 2017).
|
|
||
|
|
|
|
|
|
2014 Equity Participation Plan (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on August 14, 2014).
|
|
||
|
|
|
|
|
|
Second Amended and Restated Employment Agreement, dated October 14,
2019, by and between Kingstone Companies, Inc. and Barry B.
Goldstein (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on October 18,
2019).
|
|
||
|
|
|
|
|
|
Stock Grant Agreement, dated as of January 3, 2020, between
Kingstone Companies, Inc. and Barry B. Goldstein (157,431
shares).
|
|
||
|
|
|
|
|
|
Stock Grant Agreement, dated as of January 3, 2020, between
Kingstone Companies, Inc. and Barry B. Goldstein (17,191
shares).
|
|
||
|
|
|
|
|
|
10(e)
|
Stock Grant Agreement, dated as of March 14, 2018, between
Kingstone Companies, Inc. and Dale A. Thatcher (incorporated by
reference to Exhibit 10(k) to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2017 filed on March 15,
2018).
|
|
|
|
|
|
|
|
|
Stock Grant
Agreement, dated as of January 1, 2019, between Kingstone
Companies, Inc. and Dale A. Thatcher.
|
|
||
|
|
|
|
|
|
10(g)
|
Agreement and
General Release, dated as of July 19, 2019, by and among Kingstone
Companies, Inc., Kingstone Insurance Company and Dale A. Thatcher
(incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on July 19,
2019).
|
|
|
|
|
|
|
|
|
10(h)
|
Employment
Agreement, dated as of August 27, 2019, by and between Kingstone
Companies, Inc. and Meryl S. Golden (incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on September 17, 2019).
|
|
|
|
|
|
|
|
|
10(i)
|
Deferred Compensation Plan, dated as of June 18, 2018 (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on June 20, 2018).
|
|
|
|
|
|
|
|
|
21
|
Subsidiaries (incorporated by reference to Exhibit 21 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
filed
on March 16, 2017).
|
|
|
|
|
|
|
|
|
Consent of Marcum LLP.
|
|
||
|
|
|
|
|
|
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.
|
|
||
|
|
|
|
|
|
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.
|
|
||
|
|
|
|
|
|
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.
|
|
||
|
|
|
|
|
63
|
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.
|
|
|
|
|
|
||
I
TEM
16
.
FORM 10-K SUMMARY
.
Not
applicable.
64
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. |
|
|
|
|
|
|
|
|
Date
:
March 16, 2020
|
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
|
|
|
|
Barry B.
Goldstein
|
Chief Executive
Officer, President and Executive Chairman of the Board
|
March 16,
2020
|
|
|
|
|
|
/s/ Victor J.
Brodsky
|
|
|
|
Victor J.
Brodsky
|
Chief Financial
Officer and Treasurer
(Principal
Financial and Accounting Officer)
|
March 16,
2020
|
|
|
|
|
|
/s/ Meryl S.
Golden
|
|
|
|
Meryl S.
Golden
|
Chief Operating
Officer and Director
|
March 16,
2020
|
|
|
|
|
|
/s/ Floyd R.
Tupper
|
|
|
|
Floyd R.
Tupper
|
Director
|
March 16,
2020
|
|
|
|
|
|
/s/ William L.
Yankus
|
|
|
|
William L.
Yankus
|
Director
|
March 16,
2020
|
|
|
|
|
|
/s/ Carla A.
D’Andre
|
|
|
|
Carla A.
D’Andre
|
Director
|
March 16,
2020
|
|
|
|
|
|
/s/ Jay M.
Haft
|
|
|
|
Jay M.
Haft
|
Director
|
March 16,
2020
|
|
|
|
|
|
/s/ Timothy P.
McFadden
|
|
|
|
Timothy P.
McFadden
|
Director
|
March 16,
2020
|
65
Index to Consolidated Financial Statements
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2019 and 2018
|
F-3
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
years
|
F-4
|
|
ended
December 31, 2019 and 2018
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2019
|
F-5
|
|
and
2018
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2019
and 2018
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders
and Board of Directors of
Kingstone
Companies, Inc.
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of
Kingstone Companies, Inc. and subsidiaries (the
“Company”) as of December 31, 2019 and 2018, the
related consolidated statements of operations and comprehensive
income (loss), stockholders’ equity and cash flows for each
of the two years in the period ended December 31, 2019, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United
States) (the "PCAOB"), the Company's internal control over
financial reporting as of December 31, 2019 based on the criteria
established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 16, 2020 expressed an
adverse opinion on the effectiveness of the Company’s
internal control over financial reporting
because of the existence of a material
weakness.
Basis
for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Marcum
LLP
We have served as
the Company’s auditor since 2012.
Hartford,
CT
March 16,
2020
F-2
|
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
|
||
|
Consolidated
Balance Sheets
|
|
|
|
|
December
31,
|
December
31,
|
|
|
2019
|
2018
|
|
Assets
|
|
|
|
Fixed-maturity
securities, held-to-maturity, at amortized cost (fair value
of
|
|
|
|
$4,124,767
at December 31, 2019 and $4,426,416 at December 31,
2018)
|
$
3,825,952
|
$
4,222,855
|
|
Fixed-maturity
securities, available-for-sale, at fair value (amortized cost
of
|
|
|
|
$162,202,355
at December 31, 2019 and $155,431,261 at December 31,
2018)
|
168,236,181
|
151,777,516
|
|
Equity
securities, at fair value (cost of $22,624,668 at December 31, 2019
and
|
|
|
|
$18,305,986
at December 31, 2018)
|
24,661,382
|
16,572,616
|
|
Other
investments
|
2,584,913
|
1,855,225
|
|
Total
investments
|
199,308,428
|
174,428,212
|
|
Cash
and cash equivalents
|
32,391,485
|
21,138,403
|
|
Premiums
receivable, net
|
12,706,411
|
13,961,599
|
|
Reinsurance
receivables, net
|
40,750,538
|
26,367,115
|
|
Deferred
policy acquisition costs
|
20,634,378
|
17,907,737
|
|
Intangible
assets, net
|
500,000
|
670,000
|
|
Property
and equipment, net
|
7,620,636
|
6,056,929
|
|
Deferred
income taxes, net
|
311,052
|
354,233
|
|
Other
assets
|
6,979,884
|
5,867,850
|
|
Total assets
|
$
321,202,812
|
$
266,752,078
|
|
|
|
|
|
Liabilities
|
|
|
|
Loss
and loss adjustment expense reserves
|
$
80,498,611
|
$
56,197,106
|
|
Unearned
premiums
|
90,383,238
|
79,032,131
|
|
Advance
premiums
|
3,191,512
|
2,107,629
|
|
Reinsurance
balances payable
|
11,714,724
|
1,933,376
|
|
Deferred
ceding commission revenue
|
7,735,398
|
2,686,677
|
|
Accounts
payable, accrued expenses and other liabilities
|
9,986,317
|
6,819,231
|
|
Income
taxes payable
|
-
|
15,035
|
|
Long-term
debt, net
|
29,471,431
|
29,295,251
|
|
Total liabilities
|
232,981,231
|
178,086,436
|
|
|
|
|
|
Commitments and Contingencies (Note 17)
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
Preferred
stock, $.01 par value; authorized 2,500,000 shares
|
-
|
-
|
|
Common
stock, $.01 par value, authorized 20,000,000 shares; issued
11,824,889 shares
|
|
|
|
at
December 31, 2019 and 11,775,148 shares at December 31, 2018;
outstanding
|
|
|
|
10,797,450
shares at December 31, 2019 and 10,747,709 shares at December 31,
2018
|
118,248
|
117,751
|
|
Capital
in excess of par
|
69,133,918
|
67,763,940
|
|
Accumulated
other comprehensive income (loss)
|
4,768,870
|
(2,884,313
)
|
|
Retained
earnings
|
16,913,097
|
26,380,816
|
|
|
90,934,133
|
91,378,194
|
|
Treasury
stock, at cost, 1,027,439 shares at December 31, 2019
|
|
|
|
and
at December 31, 2018
|
(2,712,552
)
|
(2,712,552
)
|
|
Total stockholders' equity
|
88,221,581
|
88,665,642
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
321,202,812
|
$
266,752,078
|
See accompanying notes to these consolidated financial
statements.
F-3
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income
(Loss)
|
|
|
|
Years ended December 31,
|
2019
|
2018
|
|
|
|
|
|
Revenues
|
|
|
|
Net
premiums earned
|
$
127,623,442
|
$
103,414,715
|
|
Ceding
commission revenue
|
4,650,851
|
5,332,630
|
|
Net
investment income
|
6,869,346
|
6,186,248
|
|
Net
gains (losses) on investments
|
4,591,019
|
(2,495,857
)
|
|
Other
income
|
1,828,362
|
1,334,162
|
|
Total
revenues
|
145,563,020
|
113,771,898
|
|
|
|
|
|
Expenses
|
|
|
|
Loss
and loss adjustment expenses
|
90,182,324
|
58,295,205
|
|
Commission
expense
|
30,193,175
|
25,342,137
|
|
Other
underwriting expenses
|
24,420,208
|
20,943,342
|
|
Other
operating expenses
|
4,177,731
|
2,575,404
|
|
Depreciation
and amortization
|
2,545,946
|
1,787,150
|
|
Interest
expense
|
1,826,180
|
1,821,597
|
|
Total
expenses
|
153,345,564
|
110,764,835
|
|
|
|
|
|
(Loss)
income from operations before taxes
|
(7,782,544
)
|
3,007,063
|
|
Income
tax benefit
|
(1,816,191
)
|
(86,183
)
|
|
Net (loss) income
|
(5,966,353
)
|
3,093,246
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
Gross
change in unrealized gains (losses)
|
|
|
|
on
available-for-sale-securities
|
9,564,647
|
(4,984,149
)
|
|
|
|
|
|
Reclassification
adjustment for losses
|
|
|
|
included
in net (loss) income
|
122,925
|
464,254
|
|
Net
change in unrealized gains (losses)
|
9,687,572
|
(4,519,895
)
|
|
Income
tax (expense) benefit related to items
|
|
|
|
of
other comprehensive income (loss)
|
(2,034,389
)
|
949,177
|
|
Other comprehensive income (loss), net of tax
|
7,653,183
|
(3,570,718
)
|
|
|
|
|
|
Comprehensive income (loss)
|
$
1,686,830
|
$
(477,472
)
|
|
|
|
|
|
(Loss)
Earnings per common share:
|
|
|
|
Basic
|
$
(0.55
)
|
$
0.29
|
|
Diluted
|
$
(0.55
)
|
$
0.29
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
Basic
|
10,773,623
|
10,686,813
|
|
Diluted
|
10,773,623
|
10,716,886
|
|
|
|
|
|
Dividends
declared and paid per common share
|
$
0.325
|
$
0.400
|
See accompanying notes to these consolidated financial
statements.
F-4
|
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
||||||||||
|
Years
ended December 31, 2019 and 2018
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Capital
|
Other
|
|
|
|
|
|
|
Preferred
Stock
|
Common
Stock
|
in
Excess
|
Comprehensive
|
Retained
|
Treasury
Stock
|
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
of
Par
|
Income
(Loss)
|
Earnings
|
Shares
|
Amount
|
Total
|
|
Balance, December 31, 2017, as
reported
|
-
|
$
-
|
11,618,646
|
$
116,186
|
$
68,380,390
|
$
1,100,647
|
$
27,152,822
|
986,809
|
$
(2,172,299
)
|
$
94,577,746
|
|
Cumulative effect
of adoption of updated accounting guidance for equity financial
instruments at January 1, 2018
|
-
|
-
|
-
|
-
|
-
|
(414,242
)
|
414,242
|
-
|
-
|
-
|
|
Balance, January 1, 2018, as
adjusted
|
-
|
-
|
11,618,646
|
116,186
|
68,380,390
|
686,405
|
27,567,064
|
986,809
|
(2,172,299
)
|
94,577,746
|
|
Stock-based
compensation
|
|
|
-
|
-
|
702,650
|
-
|
-
|
-
|
-
|
702,650
|
|
Shares deducted
from exercise of stock options for payment of withholding
taxes
|
-
|
-
|
(72,063
)
|
(719
)
|
(1,356,452
)
|
-
|
-
|
-
|
-
|
(1,357,171
)
|
|
Vesting of restricted stock
awards
|
-
|
-
|
19,482
|
190
|
(190
)
|
-
|
-
|
-
|
-
|
-
|
|
Shares deducted
from restricted stock awards for payment of withholding
taxes
|
-
|
-
|
(2,877
)
|
(29
)
|
(50,975
)
|
-
|
-
|
-
|
-
|
(51,004
)
|
|
Exercise of stock
options
|
-
|
-
|
211,960
|
2,123
|
88,517
|
-
|
-
|
-
|
-
|
90,640
|
|
Acquisition of treasury
stock
|
|
|
-
|
-
|
-
|
-
|
-
|
40,630
|
(540,253
)
|
(540,253
)
|
|
Dividends
|
|
|
-
|
-
|
-
|
-
|
(4,279,494
)
|
-
|
-
|
(4,279,494
)
|
|
Net income
|
-
|
-
|
-
|
-
|
-
|
-
|
3,093,246
|
-
|
-
|
3,093,246
|
|
Other comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
(3,570,718
)
|
-
|
-
|
-
|
(3,570,718
)
|
|
Balance, December 31,
2018
|
-
|
-
|
11,775,148
|
117,751
|
67,763,940
|
(2,884,313
)
|
26,380,816
|
1,027,439
|
(2,712,552
)
|
88,665,642
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
1,501,377
|
-
|
-
|
-
|
-
|
1,501,377
|
|
Vesting of restricted stock
awards
|
-
|
-
|
58,246
|
580
|
(580
)
|
-
|
-
|
-
|
-
|
-
|
|
Shares deducted
from restricted stock awards for payment of withholding
taxes
|
-
|
-
|
(11,505
)
|
(113
)
|
(154,339
)
|
-
|
-
|
-
|
-
|
(154,452
)
|
|
Exercise of stock
options
|
-
|
-
|
3,000
|
30
|
23,520
|
-
|
-
|
-
|
-
|
23,550
|
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,501,366
)
|
-
|
-
|
(3,501,366
)
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,966,353
)
|
-
|
-
|
(5,966,353
)
|
|
Other comprehensive
income
|
-
|
-
|
-
|
-
|
-
|
7,653,183
|
-
|
-
|
-
|
7,653,183
|
|
Balance, December 31,
2019
|
-
|
$
-
|
11,824,889
|
$
118,248
|
$
69,133,918
|
$
4,768,870
|
$
16,913,097
|
1,027,439
|
$
(2,712,552
)
|
$
88,221,581
|
See accompanying notes to these consolidated financial
statements.
F-5
|
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
|
||
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
|
Years ended December 31,
|
2019
|
2018
|
|
|
|
|
|
Cash flows from operating
activities
:
|
|
|
|
Net
(loss) income
|
$
(5,966,353
)
|
$
3,093,246
|
|
Adjustments
to reconcile net (loss) income to net cash flows provided by
operating activities:
|
||
|
Net
(gains) losses on sale of investments
|
(28,845
)
|
93,974
|
|
Net
unrealized (gains) losses of equity investments
|
(3,832,486
)
|
2,257,727
|
|
Net
unrealized (gains) losses of other investments
|
(729,688
)
|
144,156
|
|
Depreciation
and amortization
|
2,545,946
|
1,787,150
|
|
Bad
debts
|
(112,761
)
|
(252,492
)
|
|
Amortization
of bond premium, net
|
417,119
|
373,014
|
|
Amortization
of discount and issuance costs on long-term debt
|
176,180
|
168,286
|
|
Stock-based
compensation
|
1,501,377
|
702,650
|
|
Deferred
income tax benefit
|
(1,991,208
)
|
(5,398
)
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Premiums
receivable, net
|
1,367,949
|
(491,409
)
|
|
Reinsurance
receivables, net
|
(14,383,423
)
|
2,152,015
|
|
Deferred
policy acquisition costs
|
(2,726,641
)
|
(3,060,501
)
|
|
Other
assets
|
(1,096,732
)
|
(3,215,227
)
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Loss
and loss adjustment expense reserves
|
24,301,505
|
7,397,484
|
|
Unearned
premiums
|
11,351,107
|
13,384,468
|
|
Advance
premiums
|
1,083,883
|
629,936
|
|
Reinsurance
balances payable
|
9,781,348
|
(630,590
)
|
|
Deferred
ceding commission revenue
|
5,048,721
|
(1,579,735
)
|
|
Accounts
payable, accrued expenses and other liabilities
|
3,152,051
|
(653,388
)
|
|
Net cash flows provided by operating activities
|
29,859,049
|
22,295,366
|
|
|
|
|
|
Cash flows from investing
activities
:
|
|
|
|
Purchase
- fixed-maturity securities, available-for-sale
|
(23,881,518
)
|
(58,542,741
)
|
|
Purchase
- equity securities
|
(9,578,765
)
|
(13,380,542
)
|
|
Sale
and redemption - fixed-maturity securities,
held-to-maturity
|
400,000
|
624,963
|
|
Sale
and maturity - fixed-maturity securities,
available-for-sale
|
16,567,284
|
21,381,668
|
|
Sale
- equity securities
|
5,458,953
|
9,246,840
|
|
Acquisition
of fixed assets
|
(3,939,653
)
|
(2,731,502
)
|
|
Net cash flows used in
investing activitie
s
|
(14,973,699
)
|
(43,401,314
)
|
|
|
|
|
|
Cash flows from financing
activities
:
|
|
|
|
Proceeds
from exercise of stock options
|
23,550
|
90,640
|
|
Withholding
taxes paid on net exercise of stock options
|
-
|
(1,357,171
)
|
|
Withholding
taxes paid on vested retricted stock awards
|
(154,452
)
|
(51,004
)
|
|
Purchase
of treasury stock
|
-
|
(540,253
)
|
|
Dividends
paid
|
(3,501,366
)
|
(4,279,494
)
|
|
Net cash flows used in
financing activitie
s
|
(3,632,268
)
|
(6,137,282
)
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
$
11,253,082
|
$
(27,243,230
)
|
|
Cash
and cash equivalents, beginning of period
|
21,138,403
|
48,381,633
|
|
Cash and cash equivalents, end of period
|
$
32,391,485
|
$
21,138,403
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
Cash
paid for income taxes
|
$
388,000
|
$
2,201,000
|
|
Cash
paid for interest
|
$
1,650,000
|
$
1,700,417
|
See accompanying notes to these consolidated financial
statements.
F-6
KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2019 AND 2018
Note
1 - Nature of Business
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 and individuals exclusively through
retail and wholesale agents and brokers. KICO is a licensed
insurance company in the States of New York, New Jersey, Rhode
Island, Massachusetts, Pennsylvania, Connecticut, Maine and New
Hampshire. KICO is currently offering its property and casualty
insurance products in New York, New Jersey, Rhode Island,
Massachusetts, and Connecticut. Although New Jersey, Rhode Island,
Massachusetts and Connecticut continue to be growing markets for
the Company, 85.0% and 93.7% of KICO’s direct written
premiums for the years ended December 31, 2019 and 2018,
respectively, came from the New York policies. Kingstone, through
its subsidiary, Cosi Agency, Inc. (“Cosi”), a
multi-state licensed general agency, accesses alternate forms of
distribution outside of the independent agent and broker network,
through which KICO currently distributes its various products.
Kingstone (through Cosi) now has the opportunity to partner with
name-brand carriers and access nationwide insurance
agencies.
Note
2 – Summary of Significant Accounting Policies
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 the financials for 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) Cosi. All
significant inter-company account balances and 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 ceding commission revenue in the period that changes
in the estimated losses are determined.
F-7
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
loss 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 statements of operations and comprehensive income
(loss) 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, 2019 and 2018. The Company did not expense any
uncollectible reinsurance for the years ended December 31, 2019 and
2018. 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
Cash and Cash Equivalents
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.
Effective January 1, 2018, the Company adopted Accounting Standards
Update (“ASU”) 2016-01– Financial Instruments
– Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities (“ASU
2016-01”), which resulted in changes in the estimated fair
value of equity securities and other investments being reported in
net income (loss) instead of other comprehensive income (loss). For
additional discussion, see Note 2, Accounting Changes.
The Company may sell its available-for-sale
securities, equity securities, and other investments 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 recognized pricing services, with
unrealized gains and losses, net of tax effects, reported as a
separate component of accumulated other comprehensive income
(loss). Realized gains and losses are determined on the specific
identification method and reported in net income (loss) in the
consolidated statements of operations and comprehensive income
(loss).
Equity
securities are reported at their estimated fair values based on
quoted market prices from recognized pricing services, with
unrealized gains and losses reported in net income (loss). Other
investments are reported at their estimated fair values using the
net asset value (“NAV”) per share (or its equivalent)
of the instrument with unrealized gains and losses reported in net
income (loss). See Note 3, Investments for additional
discussion.
Investment
income is accrued to the balance sheet dates of the consolidated
financial statements and includes amortization of premium and
accretion of discount on fixed-maturity securities. Interest is
recognized when earned, while dividends are recognized when
declared. Due and accrued investment income totaled approximately
$1,922,000 and $1,721,000 as of December 31, 2019 and 2018,
respectively, and is included in other assets on the accompanying
consolidated balance sheets.
Premiums Receivable
Premiums
receivable include balances due currently or in the future and are
presented net of an allowance for doubtful accounts of
approximately $338,000 and $255,000 as of December 31, 2019 and
2018, 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 $113,000 and $252,000 were written off for the years
ended December 31, 2019 and 2018, respectively.
F-9
Deferred Policy Acquisition Costs
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.
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 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 impairment testing if events or
changes in circumstances indicate that it is more likely than not
the asset is impaired. 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, 2019 and
2018.
Property and Equipment
Building
and building improvements, automobiles, furniture, computer
equipment, and computer 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, automobiles, 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 estimated 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, 2019 and 2018, 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 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 (loss) in the period
that includes the enactment date. The Company files a consolidated
tax return with its subsidiaries
.
At December 31, 2019 and 2018, the
Company had no material unrecognized tax benefits and no
adjustments to liabilities or operations were
required.
F-10
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, Credit Risk and Market Risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents,
investments, and premium and reinsurance receivables. At times,
cash may be uninsured or in deposit accounts that exceed Federal
Deposit Insurance Corporation (“FDIC”) insurance
limits. The Company has not experienced any losses on such accounts
and management believes the Company is not exposed to any
significant credit risk.
Stressed
conditions, volatility and disruptions in capital markets or
financial asset classes can have an adverse effect on the Company,
in part because the Company has a large investment portfolio
supporting the Company’s insurance liabilities, which are
sensitive to changing market factors. These market factors, which
include interest rates, credit spread, equity prices, and the
volatility and strength of the capital markets, all affect the
business and economic environment and, ultimately, the
profitability of the Company’s business. The Company manages
its investments to limit credit and other market risks by
diversifying its portfolio among various security types and
industry sectors based on KICO’s investment committee
guidelines, which employs a variety of investment
strategies.
As
of December 31, 2019 and 2018, the Company’s cash equivalents
were as follows:
|
|
December
31,
|
December
31,
|
|
|
2019
|
2018
|
|
|
|
|
|
Collateralized
bank repurchase agreement (1)
|
$
941,792
|
$
568,123
|
|
Money market
funds
|
12,583,957
|
15,012,559
|
|
Total
|
$
13,525,749
|
$
15,580,682
|
(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, 2019, the outstanding premiums receivable balance is
generally diversified due to the large number of individual
insureds comprising the Company’s customer base.
Approximately 85% of the Company’s customer base is
concentrated in the New York City metropolitan area.
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 quarterly as well as the bad debt write-offs
experienced in the past and establish an allowance for doubtful
accounts, if deemed necessary.
F-11
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, 2019 and 2018 as follows:
|
|
Years ended
December 31,
|
|
|
|
2019
|
2018
|
|
Personal
Lines
|
83.5
%
|
80.7
%
|
|
Commercial
Lines
|
n/a
|
11.6
%
|
|
Total
premiums earned subject to concentration
|
83.5
%
|
92.3
%
|
|
Premiums
earned not subject to concentration (1)
|
16.5
%
|
7.7
%
|
|
Total
premiums earned
|
100.0
%
|
100.0
%
|
Premiums
earned not subject to concentration is comprised of two different
lines of business.
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. Actual results could differ
from these estimates and assumptions, and includes the reserves for
losses and LAE, which 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 used in preparing the consolidated
financial statements.
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 reflects, in periods
in which they have a dilutive effect, the impact of common shares
issuable upon the exercise of stock options as well as non-vested
restricted stock awards. The computation of diluted earnings per
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. Additionally, the computation of
diluted earnings per share excludes unvested restricted stock
awards as calculated using the treasury stock method.
Advertising Costs
Advertising
costs are charged to operations as incurred. Advertising costs are
included in other underwriting expenses in the accompanying
consolidated statements of operations and comprehensive income
(loss) and were approximately $153,000 and $173,000 for the years
ended December 31, 2019 and 2018, respectively.
F-12
Stock-based Compensation
Stock-based
compensation expense in 2019 and 2018 is the estimated fair value
of restricted stock awards and 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.
Compensated Absences
Employees of the
Company are entitled to paid vacations, sick days, and other time
off depending on job classification, length of service and other
factors. The Company has determined it is impracticable to estimate
the amount of compensation of future absences and, accordingly, no
liability has been recorded in the accompanying consolidated
financial statements. The Company’s policy is to recognize
the cost of compensated absences when paid to
employees.
Comprehensive Income (Loss)
Comprehensive income (loss) refers to revenues,
expenses, gains and losses that are included in comprehensive
income (loss) but are excluded from net income (loss) 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, and related income
taxes
.
Accounting Changes
In August 2018, the
Securities and Exchange Commission (the “SEC”) adopted
the final rule under SEC Release No. 33-10532,
“Disclosure Update and Simplification,” amending
certain disclosure requirements that were redundant, duplicative,
overlapping, outdated or superseded. In addition, the amendments
expanded the disclosure requirements on the analysis of
stockholders' equity for interim financial statements. Under the
amendments, an analysis of changes in each caption of stockholders'
equity presented in the balance sheet must be provided in a note or
separate statement. The analysis should present a reconciliation of
the beginning balance to the ending balance of each period for
which a statement of comprehensive income is required to be filed.
This final rule was effective on November 5, 2018. The Company
adopted the provisions of this Release effective January 1,
2019.
In February 2016,
the Financial Accounting Standards Board (“FASB”)
issued ASU 2016-02 – Leases (Topic 842) (“ASU
2016-02”). Under this ASU, the Company recognized 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 has been measured at 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
Company’s incremental borrowing rate. The Company adopted ASU
2016-02 effective January 1, 2019 using the cumulative effect
adjustment transition method, which applies the provision of the
standard at the effective date without adjusting the comparative
periods presented. The adoption of the updated guidance resulted in
the Company recognizing a right-of-use asset of $855,000 as part of
other assets and a lease liability of $855,000 as part of accounts
payable, accrued expenses and other liabilities in the consolidated
balance sheet. The right-of-use asset is amortized as rent expense
on a straight line basis. The adoption of this ASU did not have a
material effect on the Company's results of operations or
liquidity.
F-13
In May 2014, the
FASB issued ASU 2014-09 – Revenue from Contracts with
Customers (Topic 606) (“ASU 2014-09”). 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. The Company adopted ASU 2014-09 effective
January 1, 2018. The standard excludes from its scope the
accounting for insurance contracts, financial instruments, and
certain other agreements that are governed under other GAAP
guidance. Accordingly, the adoption of ASU 2014-09, as amended, did
not have a material impact on the Company’s consolidated
financial statements.
In January 2016,
the FASB issued ASU 2016-01. Effective January 1, 2018, the Company
adopted the provisions of ASU 2016-01. The updated guidance
requires equity investments, including limited partnership
interests, except those accounted for under the equity method of
accounting, that have a readily determinable fair value to be
measured at fair value with any changes in fair value recognized in
net income. Equity securities that do not have readily determinable
fair values may be measured at estimated fair value or cost less
impairment, if any, adjusted for subsequent observable price
changes, with changes in the carrying value recognized in net
income. A qualitative assessment for impairment is required for
equity investments without readily determinable fair values. The
updated guidance also eliminates the requirement to disclose the
method and significant assumptions used to estimate the fair value
of financial instruments measured at amortized cost on the balance
sheet. The adoption of this guidance resulted in the recognition
of approximately $414,000 of net after-tax unrealized
gains on equity investments as a cumulative effect adjustment that
increased retained earnings as of January 1, 2018 and
decreased accumulated other comprehensive income (loss)
(“AOCI”) by the same amount. For the year ended
December 31, 2018, net loss on investments of approximately
$2,496,000 were recorded in the consolidated statements of
operations and comprehensive income (loss), which includes net
losses of approximately $2,402,000 from the estimated fair value
change of equity securities and other investments.
In August 2016, the
FASB issued ASU 2016-15 – Statement of Cash Flows (Topic
320): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). The revised ASU provides accounting
guidance for eight specific cash flow issues. The FASB issued the
standard to clarify areas where GAAP has been either unclear or
lacking in specific guidance. The Company adopted ASU 2016-15
effective January 1, 2018, and it did not have a material impact on
the Company’s consolidated financial statements.
In May 2017, the
FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic
718): Scope of Modification Accounting (“ASU
2017-09”).
ASU
2017-09 clarifies when to account for a change to the terms or
conditions of a share-based payment award as a modification. Under
the new guidance, modification accounting is required only if the
fair value, the vesting conditions, or the classification of the
award (as equity or liability) changes as a result of the change in
terms or conditions. The Company adopted this ASU effective January
1, 2018 on a prospective basis and it did not have a material
impact on the Company’s consolidated financial
statements.
F-14
Recent Accounting Pronouncements
In June 2016, the
FASB issued ASU 2016-13 - Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). 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 for the Company on
January 1, 2023. The Company is currently evaluating the effect the
updated guidance will have on its consolidated financial
statements.
In December 2019,
the FASB issued ASU 2019-12, Income Taxes - Simplifying the
Accounting for Income Taxes (“ASU 2019-12”). Among
other items, the amendments in ASU 2019-12 simplify the accounting
treatment of tax law changes and year-to-date losses in interim
periods. An entity generally recognizes the effects of a change in
tax law in the period of enactment; however, there is an exception
for tax laws with delayed effective dates. Under current guidance,
an entity may not adjust its annual effective tax rate for a tax
law change until the period in which the law is effective. This
exception was removed under ASU 2019-12, thereby providing that all
effects of a tax law change are recognized in the period of
enactment, including adjustment of the estimated annual effective
tax rate. Regarding year-to-date losses in interim periods, an
entity is required to estimate its annual effective tax rate for
the full fiscal year at the end of each interim period and use that
rate to calculate its income taxes on a year-to-date basis.
However, current guidance provides an exception that when a loss in
an interim period exceeds the anticipated loss for the year, the
income tax benefit is limited to the amount that would be
recognized if the year-to-date loss were the anticipated loss for
the full year. ASU 2019-12 removes this exception and provides that
in this situation, an entity would compute its income tax benefit
at each interim period based on its estimated annual effective tax
rate. ASU 2019-12 is effective for fiscal years beginning after
December 15, 2020, including interim periods within those annual
periods. Early adoption is permitted. The Company is currently
evaluating the impact of this guidance on its financial condition
and results of operations.
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.
F-15
Note
3 - Investments
Available-for-Sale Securities
The
amortized cost and estimated fair value of investments in
available-for-sale fixed-maturity securities as of December 31,
2019 and December 31, 2018 are summarized as follows:
|
|
December 31, 2019
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost or
|
Gross
|
Gross
Unrealized Losses
|
Estimated
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than
12
|
More than
12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
|
|
corporations
and agencies
|
$
7,037,856
|
$
23,244
|
$
-
|
$
-
|
$
7,061,100
|
$
23,244
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
9,151,293
|
181,835
|
(11,316
)
|
-
|
9,321,812
|
170,519
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
119,874,573
|
5,777,624
|
(16,685
)
|
(13,473
)
|
125,622,039
|
5,747,466
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
asset
backed securities (1)
|
26,138,633
|
437,841
|
(68,793
)
|
(276,451
)
|
26,231,230
|
92,597
|
|
Total
|
$
162,202,355
|
$
6,420,544
|
$
(96,794
)
|
$
(289,924
)
|
$
168,236,181
|
$
6,033,826
|
(1)
KICO
placed certain residential mortgage backed securities as eligible
collateral in a designated custodian account related to its
membership in the Federal Home Loan Bank of New York ("FHLBNY")
(See Note 9). The eligible collateral would be pledged to FHLBNY if
KICO draws an advance from the FHLBNY credit line. As of December
31, 2019, the estimated fair value of the eligible investments was
approximately $7,284,000. KICO will retain all rights regarding all
securities if pledged as collateral. As of December 31, 2019, there
was no outstanding balance on the FHLBNY credit line.
F-16
|
|
December 31, 2018
|
|||||
|
|
|
|
|
|
|
Net
|
|
|
Cost
or
|
Gross
|
Gross
Unrealized Losses
|
Estimated
|
Unrealized
|
|
|
|
Amortized
|
Unrealized
|
Less than
12
|
More than
12
|
Fair
|
Gains/
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
(Losses)
|
|
|
|
|||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
U.S.
Treasury securities and
|
|
|
|
|
|
|
|
obligations
of U.S. government
|
|
|
|
|
|
|
|
corporations
and agencies
|
$
8,222,050
|
$
26,331
|
$
(28,000
)
|
$
-
|
$
8,220,381
|
$
(1,669
)
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
6,339,540
|
50,903
|
(12,327
)
|
(36,508
)
|
6,341,608
|
2,068
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
119,078,698
|
123,740
|
(2,775,540
)
|
(676,605
)
|
115,750,293
|
(3,328,405
)
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
asset
backed securities (1)
|
21,790,973
|
236,502
|
(231,229
)
|
(331,012
)
|
21,465,234
|
(325,739
)
|
|
Total
|
$
155,431,261
|
$
437,476
|
$
(3,047,096
)
|
$
(1,044,125
)
|
$
151,777,516
|
$
(3,653,745
)
|
(1)
KICO
placed certain residential mortgage backed securities as eligible
collateral in a designated custodian account related to its
membership in the Federal Home Loan Bank of New York ("FHLBNY")
(See Note 9). The eligible collateral would be pledged to FHLBNY if
KICO draws an advance from the FHLBNY credit line. As of December
31, 2018, the estimated fair value of the eligible investments was
approximately $5,116,000. KICO will retain all rights regarding all
securities if pledged as collateral. As of December 31, 2018, there
was no outstanding balance on the FHLBNY credit line.
A
summary of the amortized cost and estimated fair value of the
Company’s investments in available-for-sale fixed-maturity
securities by contractual maturity as of December 31, 2019 and 2018
is shown below:
|
|
December 31, 2019
|
December 31, 2018
|
||
|
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|
Remaining Time to
Maturit
y
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|
|
|
|
|
|
|
Less
than one year
|
$
11,986,401
|
$
12,025,804
|
$
6,742,519
|
$
6,738,014
|
|
One
to five years
|
49,715,422
|
51,000,025
|
47,038,838
|
46,640,012
|
|
Five
to ten years
|
69,850,104
|
74,410,275
|
76,884,505
|
74,290,076
|
|
More
than 10 years
|
4,511,795
|
4,568,847
|
2,974,426
|
2,644,180
|
|
Residential
mortgage and other asset backed securities
|
26,138,633
|
26,231,230
|
21,790,973
|
21,465,234
|
|
Total
|
$
162,202,355
|
$
168,236,181
|
$
155,431,261
|
$
151,777,516
|
The
actual maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations with
or without penalties.
F-17
Equity Securities
The cost, estimated
fair value, and gross gains and losses of investments in equity
securities as of December 31, 2019 and 2018 are as
follows:
|
|
December
31, 2019
|
|||
|
|
|
Gross
|
Gross
|
Estimated
|
|
Category
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
|
|
|
|||
|
Equity Securities:
|
|
|
|
|
|
Preferred
stocks
|
$
8,374,424
|
$
339,257
|
$
(11,794
)
|
$
8,701,887
|
|
Common
stocks, mutual funds,
|
|
|
|
|
|
and
exchange traded funds
|
14,250,244
|
1,982,878
|
(273,627
)
|
15,959,495
|
|
Total
|
$
22,624,668
|
$
2,322,135
|
$
(285,421
)
|
$
24,661,382
|
|
|
December
31, 2018
|
|||
|
|
|
Gross
|
Gross
|
Estimated
|
|
Category
|
Cost
|
Gains
|
Losses
|
Fair
Value
|
|
|
|
|||
|
Equity Securities:
|
|
|
|
|
|
Preferred
stocks
|
$
6,694,754
|
$
-
|
$
(541,798
)
|
$
6,152,956
|
|
Common
stocks, mutual funds,
|
|
|
|
|
|
and
exchange traded funds
|
11,611,232
|
99,817
|
(1,291,389
)
|
10,419,660
|
|
Total
|
$
18,305,986
|
$
99,817
|
$
(1,833,187
)
|
$
16,572,616
|
Other Investments
The cost, estimated
fair value, and gross gains and losses of the Company’s other
investments as of December 31, 2019 and 2018 are as
follows:
|
|
December
31, 2019
|
December
31, 2018
|
||||
|
|
|
Gross
|
Estimated
|
|
Gross
|
Estimated
|
|
Category
|
Cost
|
Gains
|
Fair
Value
|
Cost
|
Losses
|
Fair
Value
|
|
|
|
|
|
|
||
|
Other Investments:
|
|
|
|
|
|
|
|
Hedge
fund
|
$
1,999,381
|
$
585,532
|
$
2,584,913
|
$
1,999,381
|
$
(144,156
)
|
$
1,855,225
|
|
Total
|
$
1,999,381
|
$
585,532
|
$
2,584,913
|
$
1,999,381
|
$
(144,156
)
|
$
1,855,225
|
F-18
Held-to-Maturity Securities
The
amortized cost and estimated fair value of investments in
held-to-maturity fixed-maturity securities as of December 31, 2019
and 2018 are summarized as follows:
|
|
December
31, 2019
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost
or
|
Gross
|
Gross
Unrealized Losses
|
Estimated
|
Net
|
|
|
|
Amortized
|
Unrealized
|
Less than
12
|
More than
12
|
Fair
|
Unrealized
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
Gains/(Losses)
|
|
|
|
|||||
|
Held-to-Maturity Securities:
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
729,550
|
$
151,002
|
$
-
|
$
-
|
$
880,552
|
$
151,002
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
998,619
|
51,021
|
-
|
-
|
1,049,640
|
51,021
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
2,097,783
|
97,627
|
(835
)
|
-
|
2,194,575
|
96,792
|
|
|
|
|
|
|
|
|
|
Total
|
$
3,825,952
|
$
299,650
|
$
(835
)
|
$
-
|
$
4,124,767
|
$
298,815
|
|
|
December
31, 2018
|
|||||
|
|
|
|
|
|
|
|
|
|
Cost
or
|
Gross
|
Gross
Unrealized Losses
|
Estimated
|
Net
|
|
|
|
Amortized
|
Unrealized
|
Less than
12
|
More than
12
|
Fair
|
Unrealized
|
|
Category
|
Cost
|
Gains
|
Months
|
Months
|
Value
|
Gains/(Losses)
|
|
|
|
|||||
|
Held-to-Maturity Securities:
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
$
729,507
|
$
147,532
|
$
(3,964
)
|
$
-
|
$
873,075
|
$
143,568
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of States,
|
|
|
|
|
|
|
|
Territories
and Possessions
|
998,803
|
33,862
|
-
|
-
|
1,032,665
|
33,862
|
|
|
|
|
|
|
|
|
|
Corporate
and other bonds
|
|
|
|
|
|
|
|
Industrial
and miscellaneous
|
2,494,545
|
38,461
|
(1,425
)
|
(10,905
)
|
2,520,676
|
26,131
|
|
|
|
|
|
|
|
|
|
Total
|
$
4,222,855
|
$
219,855
|
$
(5,389
)
|
$
(10,905
)
|
$
4,426,416
|
$
203,561
|
Held-to-maturity
U.S. Treasury securities are held in trust pursuant to various
states’ minimum fund requirements.
F-19
A
summary of the amortized cost and the estimated fair value of the
Company’s investments in held-to-maturity securities by
contractual maturity as of December 31, 2019 and 2018 is shown
below:
|
|
December
31, 2019
|
December
31, 2018
|
||
|
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|
Remaining
Time to Maturity
|
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|
|
|
|
||
|
Less
than one year
|
$
500,000
|
$
499,165
|
$
-
|
$
-
|
|
One
to five years
|
2,099,268
|
2,215,640
|
2,996,685
|
3,036,531
|
|
Five
to ten years
|
620,134
|
655,923
|
619,663
|
635,846
|
|
More
than 10 years
|
606,550
|
754,039
|
606,507
|
754,039
|
|
Total
|
$
3,825,952
|
$
4,124,767
|
$
4,222,855
|
$
4,426,416
|
The
actual maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations with
or without penalties.
Investment Income
Major
categories of the Company’s net investment income are
summarized as follows:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Income:
|
|
|
|
Fixed-maturity
securities
|
$
5,943,889
|
$
5,316,970
|
|
Equity
securities
|
930,004
|
820,827
|
|
Cash
and cash equivalents
|
337,602
|
219,238
|
|
Total
|
7,211,495
|
6,357,035
|
|
Expenses:
|
|
|
|
Investment
expenses
|
342,149
|
170,787
|
|
Net
investment income
|
$
6,869,346
|
$
6,186,248
|
Proceeds
from the sale and redemption of fixed-maturity securities
held-to-maturity were $400,000 and $624,963 for the years ended
December 31, 2019 and 2018, respectively.
Proceeds
from the sale and maturity of fixed-maturity securities
available-for-sale were $16,567,284 and $21,381,668 for the years
ended December 31, 2019 and 2018, respectively.
Proceeds
from the sale of equity securities were $5,458,953 and $9,246,840
for the years ended December 31, 2019 and 2018,
respectively.
F-20
The
Company’s net gains (losses) on investments are summarized as
follows:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Realized Gains (Losses)
|
|
|
|
|
|
|
|
Fixed-maturity
securities:
|
|
|
|
Gross
realized gains
|
$
11,608
|
$
117,186
|
|
Gross
realized losses
|
(134,533
)
|
(618,699
)
|
|
|
(122,925
)
|
(501,513
)
|
|
|
|
|
|
Equity
securities:
|
|
|
|
Gross
realized gains
|
316,924
|
992,012
|
|
Gross
realized losses
|
(165,154
)
|
(584,473
)
|
|
|
151,770
|
407,539
|
|
|
|
|
|
Net realized
gains (losses)
|
28,845
|
(93,974
)
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
||
|
Equity
Securities:
|
|
|
|
Gross
gains
|
3,832,486
|
-
|
|
Gross
losses
|
-
|
(2,257,727
)
|
|
|
3,832,486
|
(2,257,727
)
|
|
|
|
|
|
Other
Investments:
|
|
|
|
Gross
gains
|
729,688
|
-
|
|
Gross
losses
|
-
|
(144,156
)
|
|
|
729,688
|
(144,156
)
|
|
|
|
|
|
Net
unrealized gains (losses)
|
4,562,174
|
(2,401,883
)
|
|
|
|
|
|
Net gains
(losses) on investments
|
$
4,591,019
|
$
(2,495,857
)
|
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 to evaluate
the necessity of recording impairment losses for
other-than-temporary declines in the estimated 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 comprehensive
income (loss). 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
based on cash flow projections. For held-to-maturity
fixed-maturity securities, the amount of OTTI recorded in
comprehensive income (loss) 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.
OTTI
losses are recorded in the consolidated statements of operations
and comprehensive income (loss) 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, 2019 and
December 31, 2018, there were 39 and 156 fixed-maturity securities,
respectively, that accounted for the gross unrealized losses. The
Company determined that none of the unrealized losses were deemed
to be OTTI for its portfolio of investments for the years ended
December 31, 2019 and 2018. 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 hold the investment for a
period of time sufficient to allow for an anticipated recovery of
estimated fair value to the Company’s cost
basis.
F-21
The
Company held available-for-sale securities with unrealized losses
representing declines that were considered temporary at December
31, 2019 and 2018 as follows:
|
|
December
31, 2019
|
|||||||||
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|||||
|
|
Estimated
|
|
No.
of
|
|
Estimated
|
|
No.
of
|
|
Estimated
|
|
|
|
Fair
|
Unrealized
|
Positions
|
|
Fair
|
Unrealized
|
Positions
|
|
Fair
|
Unrealized
|
|
Category
|
Value
|
Losses
|
Held
|
|
Value
|
Losses
|
Held
|
|
Value
|
Losses
|
|
|
|
|
||||||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
|
|
|
|
|
|
and
obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
$
-
|
$
-
|
-
|
|
$
-
|
$
-
|
-
|
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
|
|
Possessions
|
3,067,428
|
(11,316
)
|
3
|
|
-
|
-
|
-
|
|
3,067,428
|
(11,316
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
3,730,478
|
(16,685
)
|
7
|
|
1,300,915
|
(13,473
)
|
3
|
|
5,031,393
|
(30,158
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
|
|
|
|
asset
backed securities
|
5,862,636
|
(68,793
)
|
5
|
|
13,534,768
|
(276,451
)
|
21
|
|
19,397,404
|
(345,244
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
$
12,660,542
|
$
(96,794
)
|
15
|
|
$
14,835,683
|
$
(289,924
)
|
24
|
|
$
27,496,225
|
$
(386,718
)
|
F-22
|
|
December
31, 2018
|
|||||||||
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|||||
|
|
Estimated
|
|
No.
of
|
|
Estimated
|
|
No.
of
|
|
Estimated
|
|
|
|
Fair
|
Unrealized
|
Positions
|
|
Fair
|
Unrealized
|
Positions
|
|
Fair
|
Unrealized
|
|
Category
|
Value
|
Losses
|
Held
|
|
Value
|
Losses
|
Held
|
|
Value
|
Losses
|
|
|
|
|
||||||||
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
|
|
|
|
|
|
and
obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
$
4,948,530
|
$
(28,000
)
|
3
|
|
$
-
|
$
-
|
-
|
|
$
4,948,530
|
$
(28,000
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
|
|
|
|
|
|
Possessions
|
555,375
|
(12,327
)
|
1
|
|
1,436,242
|
(36,508
)
|
3
|
|
1,991,617
|
(48,835
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
81,004,459
|
(2,775,540
)
|
97
|
|
13,424,888
|
(676,605
)
|
24
|
|
94,429,347
|
(3,452,145
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage and other
|
|
|
|
|
|
|
|
|
|
|
|
asset
backed securities
|
7,002,713
|
(231,229
)
|
9
|
|
11,928,425
|
(331,012
)
|
19
|
|
18,931,138
|
(562,241
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
$
93,511,077
|
$
(3,047,096
)
|
110
|
|
$
26,789,555
|
$
(1,044,125
)
|
46
|
|
$
120,300,632
|
$
(4,091,221
)
|
F-23
Note 4 - Fair Value Measurements
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 estimate the fair value of 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-24
The
Company’s investments measured at fair value on a recurring
basis are allocated among fair value levels at December 31, 2019
and 2018 as follows:
|
|
December 31,
2019
|
|||
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
|
|||
|
Fixed-maturity
securities available-for-sale
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
and
obligations of U.S.
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
and
agencies
|
$
7,061,100
|
$
-
|
$
-
|
$
7,061,100
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
Possessions
|
-
|
9,321,812
|
-
|
9,321,812
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
miscellaneous
|
123,010,772
|
2,611,267
|
-
|
125,622,039
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
-
|
26,231,230
|
-
|
26,231,230
|
|
Total fixed
maturities
|
130,071,872
|
38,164,309
|
-
|
168,236,181
|
|
Equity
securities
|
24,661,382
|
-
|
-
|
24,661,382
|
|
Total
investments
|
$
154,733,254
|
$
38,164,309
|
$
-
|
$
192,897,563
|
|
|
December 31,
2018
|
|||
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
|
|||
|
Fixed-maturity
securities available-for-sale
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
and
obligations of U.S.
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
and
agencies
|
$
8,220,381
|
$
-
|
$
-
|
$
8,220,381
|
|
|
|
|
|
|
|
Political
subdivisions of
|
|
|
|
|
|
States,
Territories and
|
|
|
|
|
|
Possessions
|
-
|
6,341,608
|
-
|
6,341,608
|
|
|
|
|
|
|
|
Corporate
and other
|
|
|
|
|
|
bonds
industrial and
|
|
|
|
|
|
miscellaneous
|
112,076,270
|
3,674,023
|
-
|
115,750,293
|
|
|
|
|
|
|
|
Residential
mortgage backed securities
|
-
|
21,465,234
|
-
|
21,465,234
|
|
Total fixed
maturities
|
120,296,651
|
31,480,865
|
-
|
151,777,516
|
|
Equity
securities
|
16,572,616
|
-
|
-
|
16,572,616
|
|
Total
investments
|
$
136,869,267
|
$
31,480,865
|
$
-
|
$
168,350,132
|
F-25
Pursuant
to ASC 820 “Fair Value Measurement” (“ASC
820”) an entity is permitted, as a practical expedient, to
estimate the fair value of an investment within the scope of ASC
820 using the NAV per share (or its equivalent) of the investment.
The following table sets forth the Company’s investment in a
hedge fund measured at NAV per share (or its equivalent) as of
December 31, 2019 and 2018. The Company measures this investment at
fair value on a recurring basis. Fair value using NAV per share is
as follows as of the dates indicated:
|
Category
|
December
31, 2019
|
December
31, 2018
|
|
|
|
|
|
Other Investments:
|
|
|
|
Hedge
fund
|
$
2,584,913
|
$
1,855,225
|
|
Total
|
$
2,584,913
|
$
1,855,225
|
The investment is generally redeemable with at
least 45 days prior written notice. The hedge fund investment is
accounted for as a limited partnership by the Company. Revenue is
earned based upon the Company’s allocated share of the
partnership's changes in unrealized gains and losses to its
partners. S
uch amounts have been recorded in the
accompanying consolidated statements of operations and
comprehensive income (loss) within net gains (losses) on
investments.
The estimated fair
value and the level of the fair value hierarchy of the
Company’s long-term debt as of December 31, 2019 and 2018,
which is not measured at fair value is as follows:
|
|
December 31,
2019
|
|||
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Long-term
debt
|
|
|||
|
|
|
|
|
|
|
Senior Notes
due 2022
|
$
-
|
$
27,313,994
|
$
-
|
$
27,313,994
|
|
|
December 31,
2018
|
|||
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Long-term
debt
|
|
|||
|
|
|
|
|
|
|
Senior Notes
due 2022
|
$
-
|
$
28,521,734
|
$
-
|
$
28,521,734
|
The fair value of
long-term debt is estimated based on observable market prices when
available. When observable market prices are not available, the
fair values of debt are based on observable market prices of
comparable instruments adjusted for differences between the
observed instruments and the instruments being valued or is
estimated using discounted cash flow analyses, based on current
incremental borrowing rates for similar types of borrowing
arrangements.
F-26
Note 5 - Fair Value of Financial Instruments and Real
Estate
The
Company uses the following methods and assumptions in estimating
the fair value of financial instruments and real
estate:
Equity
securities, available-for-sale fixed income securities,
held-to-maturity fixed income securities, and other
investments:
Fair value disclosures for these investments are
included in “Note 3 - Investments” and “Note
4 – Fair Value Measurements”.
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.
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
estimated fair value was based on an appraisal prepared using the
sales comparison 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 and real estate
as of December 31, 2019 and 2018 are as follows:
|
|
December 31, 2019
|
|
December 31, 2018
|
||
|
|
Carrying
|
Estimated
|
|
Carrying
|
Estimated
|
|
|
Value
|
Fair Value
|
|
Value
|
Fair Value
|
|
|
|
|
|
|
|
|
Fixed-maturity
securities-held-to maturity
|
$
3,825,952
|
$
4,124,767
|
|
$
4,222,855
|
$
4,426,416
|
|
Cash
and cash equivalents
|
$
32,391,485
|
$
32,391,485
|
|
$
21,138,403
|
$
21,138,403
|
|
Premiums
receivable, net
|
$
12,706,411
|
$
12,706,411
|
|
$
13,961,599
|
$
13,961,599
|
|
Reinsurance
receivables, net
|
$
40,750,538
|
$
40,750,538
|
|
$
26,367,115
|
$
26,367,115
|
|
Real
estate, net of accumulated depreciation
|
$
2,292,743
|
$
2,705,000
|
|
$
2,300,827
|
$
2,705,000
|
|
Reinsurance
balances payable
|
$
11,714,724
|
$
11,714,724
|
|
$
1,933,376
|
$
1,933,376
|
Note 6 - Intangible Assets
Intangible assets
consist of finite and indefinite life assets. Finite life
intangible assets include customer and producer relationships and
other identifiable intangibles. KICO’s insurance company
license is considered an indefinite life intangible asset subject
to annual impairment testing. All identified intangible assets of
finite useful life were fully amortized as of December 31,
2019.
F-27
The components of
intangible assets and their useful lives, accumulated amortization,
and net carrying value as of December 31, 2019 and 2018 are
summarized as follows:
|
|
|
December 31,
2019
|
|
December 31,
2018
|
||||
|
|
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
|
3,400,000
|
-
|
|
3,400,000
|
3,230,000
|
170,000
|
|
Other
identifiable
|
|
|
|
|
|
|
|
|
|
intangibles
|
7
|
950,000
|
950,000
|
-
|
|
950,000
|
950,000
|
-
|
|
Total
|
|
$
4,850,000
|
$
4,350,000
|
$
500,000
|
|
$
4,850,000
|
$
4,180,000
|
$
670,000
|
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 for the years ended December 31, 2019 and
2018.
The Company
recorded amortization expense related to intangible assets of
$170,000 and $340,000, for the years ended December 31, 2019 and
2018, respectively.
Note 7 - Reinsurance
Through June 30,
2019, the Company’s quota share reinsurance treaties were on
a July 1 through June 30 fiscal year basis. Effective December 15,
2019, the Company entered into a quota share reinsurance treaty for
its personal lines business, which primarily consists of
homeowners’ policies, covering the period from December 15,
2019 through December 31, 2020 (“2019/2020”) Treaty. In
addition to the 2019/2020 Treaty, the Company’s quota share
reinsurance treaties in effect during the years ended December,
2019 and 2018 for its personal lines business were covered under a
treaty covering a two-year period from July 1, 2017 through June
30, 2019 (“2017/2019 Treaty”). The treaty in effect
during the year ended December 31, 2019 was covered under the July
1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty
Year”). The treaties in effect during the year ended December
31, 2018 were covered under the July 1, 2017 through June 30, 2018
treaty year (“2017/2018 Treaty Year”) and the 2018/2019
Treaty Year that began on July 1, 2018.
In August 2018, the
Company terminated its contract with one of the reinsurers that was
a party to the 2017/2019 Treaty. This termination was retroactive
to July 1, 2018 and had the effect of reducing the quota share
ceding rate to 10% under the 2018/2019 Treaty Year from 20% under
the 2017/2018 Treaty Year.
F-28
Effective July 1,
2019, the 2017/2019 Treaty and commercial umbrella treaty expired
on a run-off basis; these treaties were not renewed. The Company
entered into new excess of loss and catastrophe reinsurance
treaties effective July 1, 2019. Material terms for reinsurance
treaties in effect for the treaty years shown below are as
follows:
|
|
Treaty
Year
|
||||||
|
|
December 15,
2019
|
|
July 1,
2019
|
|
July 1,
2018
|
|
July 1,
2017
|
|
|
to
|
|
to
|
|
to
|
|
to
|
|
Line of Business
|
December 31,
2020
|
|
December 14,
2019
|
|
June 30,
2019
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
|
|
|
|
Homeowners, dwelling fire and
|
|
|
|
|
|
|
|
|
and
canine legal liability
|
|
|
|
|
|
|
|
|
Quota share
treaty:
|
|
|
|
|
|
|
|
|
Percent
ceded
|
25%
|
|
None
|
|
10%
|
|
20%
|
|
|
Treaty
Year
|
|||
|
Line of
Business
|
December 15,
2019
to
June 30,
2020
|
July 1,
2019
to
December 14,
2019
|
July 1,
2018
to
June 30,
2019
|
July 1,
2017
to
June 30,
2018
|
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
|
Homeowners,
dwelling fire and
|
|
|
|
|
|
and canine
legal liability
|
|
|
|
|
|
Quota share
treaty:
|
|
|
|
|
|
Risk retained on intial
$1,000,000
|
|
|
|
|
|
of losses
|
$
750,000
|
$
1,000,000
|
$
900,000
|
$
800,000
|
|
Losses per occurrence subject
to
|
|
|
|
|
|
quota share reinsurance
coverage
|
$
1,000,000
|
None
|
$
1,000,000
|
$
1,000,000
|
|
Excess of loss coverage and
facultative
|
|
|
|
|
|
facility coverage
(1)
|
$
9,000,000
|
$
9,000,000
|
$
9,000,000
|
$
9,000,000
|
|
|
in excess
of
|
in excess
of
|
in excess
of
|
in excess
of
|
|
|
$
1,000,000
|
$
1,000,000
|
$
1,000,000
|
$
1,000,000
|
|
Total reinsurance coverage
per occurrence
|
$
9,250,000
|
$
9,000,000
|
$
9,100,000
|
$
9,200,000
|
|
Losses per occurrence subject
to
|
|
|
|
|
|
reinsurance
coverage
|
$
10,000,000
|
$
10,000,000
|
$
10,000,000
|
$
10,000,000
|
|
Expiration
date
|
June 30, 2020
|
June 30, 2020
|
June 30, 2019
|
June 30, 2018
|
|
|
|
|
|
|
|
Catastrophe
Reinsurance:
|
|
|
|
|
|
Initial loss subject to
personal lines
|
|
|
|
|
|
quota share
treaty
|
$
7,500,000
|
None
|
$
5,000,000
|
$
5,000,000
|
|
Risk retained per
catastrophe
|
|
|
|
|
|
occurrence
(2)
|
$
5,625,000
|
$
7,500,000
|
$
4,500,000
|
$
4,000,000
|
|
Catastrophe loss coverage in
excess of
|
|
|
|
|
|
quota share coverage
(3)
|
$
602,500,000
|
$
602,500,000
|
$
445,000,000
|
$
315,000,000
|
|
Reinstatement
premium
|
|
|
|
|
|
protection (4) (5)
(6)
|
Yes
|
Yes
|
Yes
|
Yes
|
(1)
For
personal lines, includes the addition of an automatic facultative
facility allowing KICO to obtain homeowners single risk coverage up
to $10,000,000 in total insured value, which covers direct losses
from $3,500,000 to $10,000,000.
(2)
Plus
losses in excess of catastrophe coverage.
(3)
Catastrophe
coverage is limited on an annual basis to two times the per
occurrence amounts. Duration of 168 consecutive hours for a
catastrophe occurrence from windstorm, hail, tornado, hurricane and
cyclone.
(4)
Effective
July 1, 2017, reinstatement premium protection for $145,000,000 of
catastrophe coverage in excess of $5,000,000.
(5)
Effective
July 1, 2018, reinstatement premium protection for $210,000,000 of
catastrophe coverage in excess of $5,000,000.
(6)
Effective
July 1, 2019, reinstatement premium protection for $292,500,000 of
catastrophe coverage in excess of $7,500,000.
F-29
|
|
Treaty
Year
|
||
|
|
July 1,
2019
|
July 1,
2018
|
July 1,
2017
|
|
|
to
|
to
|
to
|
|
Line of
Business
|
June 30,
2020
|
June 30,
2019
|
June 30,
2018
|
|
|
|
|
|
|
Personal
Lines:
|
|
|
|
|
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
|
$
4,900,000
|
$
4,900,000
|
|
Losses per
occurrence subject to quota share reinsurance coverage
|
$
5,000,000
|
$
5,000,000
|
$
5,000,000
|
|
Expiration
date
|
June 30, 2020
|
June 30, 2019
|
June 30, 2018
|
|
|
|
|
|
|
Commercial
Lines
:
|
|
|
|
|
General
liability commercial policies
|
|
|
|
|
Quota share
treaty
|
None
|
None
|
None
|
|
Risk
retained
|
$
750,000
|
$
750,000
|
$
750,000
|
|
Excess of
loss coverage above risk retained
|
$
3,750,000
|
$
3,750,000
|
$
3,750,000
|
|
|
in excess of
|
in excess o
f
|
in excess of
|
|
|
$
750,000
|
$
750,000
|
$
750,000
|
|
Total
reinsurance coverage per occurrence
|
$
3,750,000
|
$
3,750,000
|
$
3,750,000
|
|
Losses per
occurrence subject to reinsurance coverage
|
$
4,500,000
|
$
4,500,000
|
$
4,500,000
|
|
|
|
|
|
|
Commercial
Umbrella
|
|
|
|
|
Quota share
treaty:
|
None
|
|
|
|
Percent
ceded - first $1,000,000 of coverage
|
|
90
%
|
90
%
|
|
Percent
ceded - excess of $1,000,000 of coverage
|
|
100
%
|
100
%
|
|
Risk
retained
|
|
$
100,000
|
$
100,000
|
|
Total
reinsurance coverage per occurrence
|
|
$
4,900,000
|
$
4,900,000
|
|
Losses per
occurrence subject to quota share reinsurance coverage
|
|
$
5,000,000
|
$
5,000,000
|
|
Expiration
date
|
|
June 30, 2019
|
June 30, 2018
|
F-30
Approximate
reinsurance recoverables on unpaid and paid losses by reinsurer at
December 31, 2019 and 2018 are as follows:
|
|
Unpaid
|
Paid
|
|
|
|
|
($ in
thousands)
|
Losses
|
Losses
|
Total
|
Security
|
|
|
December
31, 2019
|
|
|
|
|
|
|
Cavello
Bay Reinsurance Limited (1)
|
$
4,036
|
$
2,427
|
$
6,463
|
$
5,995
|
(2
)
|
|
Swiss
Reinsurance America Corporation
|
4,418
|
1,336
|
5,754
|
-
|
|
|
Hanover
Rueck SE
|
3,156
|
522
|
3,678
|
-
|
|
|
SCOR
Reinsurance Company
|
394
|
458
|
852
|
-
|
|
|
Allied
World Assurance Company
|
760
|
170
|
930
|
-
|
|
|
Others
|
2,964
|
471
|
3,435
|
-
|
|
|
Total
|
$
15,728
|
$
5,384
|
$
21,113
|
$
5,995
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
Cavello
Bay Reinsurance Limited (1)
|
$
5,319
|
$
1,277
|
$
6,596
|
$
7,548
|
(2
)
|
|
Swiss
Reinsurance America Corporation
|
4,499
|
1,251
|
5,750
|
-
|
|
|
Hanover
Rueck SE
|
2,728
|
1,181
|
3,909
|
-
|
|
|
SCOR
Reinsurance Company
|
528
|
89
|
617
|
-
|
|
|
Allied
World Assurance Company
|
306
|
373
|
679
|
-
|
|
|
Others
|
2,291
|
282
|
2,573
|
58
|
(3
)
|
|
Total
|
$
15,671
|
$
4,453
|
$
20,125
|
$
7,606
|
|
(Columns in the tables above may not sum to totals due to
rounding)
(1)
On December 27, 2018, Enstar Group Limited announced that one of
its wholly owned subsidiaries, Cavello Bay Reinsurance Limited
acquired Maiden Reinsurance North America, Inc.
(2)
Secured pursuant to collateralized trust agreements.
(3)
Represents $53,000 secured pursuant to collateralized trust
agreement and $5,000 guaranteed by an irrevocable letter of
credit.
Assets
held in the trusts referred to in footnotes (2) and (3) in the
table above are not included in the Company’s invested assets
and investment income earned on these assets is credited to the
reinsurers respectively. In addition to reinsurance recoverables on
unpaid and paid losses, reinsurance receivables in the accompanying
consolidated balance sheets as of December 31, 2019 and 2018
include unearned ceded premiums of approximately $19,638,000 and
$6,243,000, 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 increases when the estimated
ultimate loss ratio decreases and, conversely, the commission rate
and contingent ceding commissions earned decreases when the
estimated ultimate loss ratio increases.
The
Company’s estimated ultimate treaty year loss ratios (the
“Loss Ratio(s)”) for treaties in effect during the year
ended December 31, 2019 are attributable to contracts under: (1)
the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired
on June 30, 2019 and was not renewed, and (2) the 2019/20 Treaty.
The Loss Ratios for treaties in effect for the year ended December
31, 2018 are attributable to contracts under the 2017/2019 Treaty
for both the 2017/2018 Treaty Year and the 2018/2019 Treaty
Year.
F-31
Treaties in effect for the year ended December 31,
2019
Under
the 2019/2020 Treaty, the Company receives an upfront fixed
provisional rate that is not subject to a sliding scale contingent
adjustment. Under the 2017/2019 Treaty, the Company received an
upfront fixed provisional rate that was only subject to a sliding
scale contingent adjustment based upon Loss Ratio for the 2017/2018
Treaty Year (“Loss Period”). Under this arrangement,
the Company earned provisional ceding commissions that were subject
to later adjustment dependent on changes to the estimated Loss
Period Loss Ratio for the 2017/2019 Treaty. The Company’s
Loss Period Loss Ratios attributable to the 2017/2019 Treaty
reached the maximum contractual level during the six months ended
June 30, 2018, and therefore no contingent commission adjustment
was recorded for the year ended December 31, 2019.
Treaty in effect for the year ended December 31, 2018
Under
the 2017/2019 Treaty, the Company received an upfront fixed
provisional rate that was only subject to a sliding scale
contingent adjustment based upon Loss Ratio for the 2017/2018
Treaty Year (“Loss Period”). For the year ended
December 31, 2018, the Company incurred negative contingent ceding
commissions as a result of the Loss Period Loss Ratio for the
2017/2019 Treaty, which reduced contingent ceding commissions
earned.
In
addition to the treaties that were in effect during the years ended
December 31, 2019 and 2018, the Loss Ratios from prior years’
treaties are subject to change as incurred losses from those
periods increase or decrease, resulting in an increase or decrease
in the commission rate and contingent ceding commissions
earned.
Ceding
commission revenues earned consists of the following:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Provisional
ceding commissions earned
|
$
5,446,370
|
$
6,745,928
|
|
Contingent
ceding commissions earned
|
(795,519
)
|
(1,413,298
)
|
|
|
$
4,650,851
|
$
5,332,630
|
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, 2019 and 2018, net contingent ceding
commissions payable to reinsurers under all treaties was
approximately $2,886,000 and $1,581,000, respectively, which is
recorded in reinsurance balances payable on the accompanying
consolidated balance sheets.
F-32
Note
8 -
Deferred Policy Acquisition Costs
and Deferred Ceding Commission Revenue
Deferred
policy acquisition costs incurred and policy-related ceding
commission revenue are deferred and amortized to income on property
and casualty insurance business as follows:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net deferred
policy acquisition costs, net of ceding
|
|
|
|
commission
revenue, beginning of year
|
$
15,221,060
|
$
10,580,824
|
|
|
|
|
|
Cost incurred
and deferred:
|
|
|
|
Commissions
and brokerage
|
32,541,094
|
27,687,907
|
|
Other
underwriting and policy acquisition costs
|
9,423,340
|
8,227,992
|
|
Ceding
commission revenue
|
(10,495,091
)
|
(5,166,193
)
|
|
Net deferred
policy acquisition costs
|
31,469,343
|
30,749,706
|
|
Return of
deferred ceding commission revenue
|
|
|
|
due to
reduction of quota share
|
-
|
(2,413,273
)
|
|
Amortization
|
(33,791,423
)
|
(23,696,197
)
|
|
|
(2,322,080
)
|
4,640,236
|
|
|
|
|
|
Net deferred
policy acquisition costs, net of ceding
|
|
|
|
commission
revenue, end of year
|
$
12,898,980
|
$
15,221,060
|
Deferred
policy acquisition costs and deferred ceding commission revenue as
of December 31, 2019 and 2018 are as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Deferred
policy acquisition costs
|
$
20,634,378
|
$
17,907,737
|
|
Deferred
ceding commission revenue
|
(7,735,398
)
|
(2,686,677
)
|
|
Balance at
end of period
|
$
12,898,980
|
$
15,221,060
|
Note 9 – Debt
Federal Home Loan Bank
In July 2017, KICO
became a member of, and invested in, the Federal Home Loan Bank of
New York (“FHLBNY”). The aggregate fair value of the
investment in dividend bearing common stock was $15,180 and $18,400
as of December 31, 2019 and 2018, respectively. FHLBNY members have
access to a variety of flexible, low cost funding through
FHLBNY’s credit products, enabling members to customize
advances, which are to be fully collateralized. Eligible collateral
to pledge to FHLBNY includes residential and commercial mortgage
backed securities, along with U.S. Treasury and agency securities.
See Note 3 – Investments for eligible collateral held in a
designated custodian account available for future advances.
Advances are limited to 5% of KICO’s net admitted assets as
of the previous quarter and are due and payable within one year of
borrowing. The maximum allowable advance as of December 31, 2019
was approximately $11,888,000. Advances are limited to 90% of the
amount of available collateral, which was approximately $6,556,000
as of December 31, 2019. There were no borrowings under this
facility during the years ended December 31, 2019 and
2018.
F-33
Long-term Debt
On
December 19, 2017, the Company issued $30 million of its 5.50%
Senior Unsecured Notes due December 30, 2022 (the
“Notes”) in an underwritten public offering. Interest
is payable semi-annually in arrears on June 30 and December 30 of
each year, which began on June 30, 2018 at the rate of 5.50%. The
net proceeds of the issuance were $29,121,630, net of discount of
$163,200 and transaction costs of $715,170, for an effective yield
of 5.67%. The balance of long-term debt as of December 31, 2019 and
2018 is as follows:
|
|
December
31,
|
December
31,
|
|
|
2019
|
2018
|
|
|
|
|
|
5.50%
Senior Unsecured Notes
|
$
30,000,000
|
$
30,000,000
|
|
Discount
|
(97,325
)
|
(129,796
)
|
|
Issuance
costs
|
(431,244
)
|
(574,953
)
|
|
Long-term
debt, net
|
$
29,471,431
|
$
29,295,251
|
The
Notes are unsecured obligations of the Company and are not the
obligations of or guaranteed by any of the Company's subsidiaries.
The Notes rank senior in right of payment to any of the Company's
existing and future indebtedness that is by its terms expressly
subordinated or junior in right of payment to the Notes. The Notes
rank equally in right of payment to all of the Company's existing
and future senior indebtedness, but will be effectively
subordinated to any secured indebtedness to the extent of the
value of the collateral securing such secured indebtedness. In
addition, the Notes will be structurally subordinated to the
indebtedness and other obligations of the Company's subsidiaries.
The Company may redeem the Notes, at any time in whole or from time
to time in part, at the redemption price equal to the greater of:
(i) 100% of the principal amount of the Notes to be redeemed; and
(ii) the sum of the present values of the remaining scheduled
payments of principal and interest on the Notes to be redeemed that
would be due if the Notes matured on the applicable redemption date
(exclusive of interest accrued to the applicable redemption date)
discounted to the redemption date on a semi-annual basis at the
Treasury Rate, plus 50 basis points.
The Company used
$25,000,000 of the net proceeds from the offering to contribute
capital to KICO in order to support additional growth. The
remainder of the net proceeds is being used for general corporate
purposes. A registration statement relating to the debt issued in
the offering was filed with the SEC, which became effective on
November 28, 2017. On December 4, 2019, the Company contributed
additional capital of $3,256,335 to KICO to further support
growth.
F-34
Note 10 - Property and Equipment
The
components of property and equipment are summarized as
follows:
|
|
|
Accumulated
|
|
|
|
Cost
|
Depreciation
|
Net
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Building
|
$
2,344,188
|
$
(663,200
)
|
$
1,680,988
|
|
Land
|
652,437
|
-
|
652,437
|
|
Furniture
office equipment
|
802,325
|
(656,204
)
|
146,121
|
|
Leasehold
improvements
|
18,996
|
(226
)
|
18,770
|
|
Computer
equipment and software
|
10,861,385
|
(5,813,308
)
|
5,048,077
|
|
Automobile
|
99,352
|
(25,109
)
|
74,243
|
|
Total
|
$
14,778,683
|
$
(7,158,047
)
|
$
7,620,636
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
Building
|
$
2,231,967
|
$
(554,077
)
|
$
1,677,890
|
|
Land
|
622,937
|
-
|
622,937
|
|
Furniture
office equipment
|
723,217
|
(586,010
)
|
137,207
|
|
Computer
equipment and software
|
7,240,613
|
(3,621,718
)
|
3,618,895
|
|
Total
|
$
10,818,734
|
$
(4,761,805
)
|
$
6,056,929
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was
$2,375,946 and $1,447,150, respectively.
Note
11 -
Property and Casualty
Insurance Activity
Premiums
written, ceded and earned are as follows:
|
|
Direct
|
Assumed
|
Ceded
|
Net
|
|
|
|
|
|
|
|
Year
ended December 31, 2019
|
|
|
|
|
|
Premiums
written
|
$
171,214,091
|
$
939
|
$
(45,635,899
)
|
$
125,579,131
|
|
Change in
unearned premiums
|
(11,350,864
)
|
(243
)
|
13,395,418
|
2,044,311
|
|
Premiums
earned
|
$
159,863,227
|
$
696
|
$
(32,240,481
)
|
$
127,623,442
|
|
|
|
|
|
|
|
Year
ended December 31, 2018
|
|
|
|
|
|
Premiums
written
|
$
146,716,468
|
$
1,004
|
$
(26,923,679
)
|
$
119,793,793
|
|
Change in
unearned premiums
|
(13,388,535
)
|
4,067
|
(2,994,610
)
|
(16,379,078
)
|
|
Premiums
earned
|
$
133,327,933
|
$
5,071
|
$
(29,918,289
)
|
$
103,414,715
|
Premium receipts in
advance of the policy effective date are recorded as advance
premiums. The balance of advance premiums as of December 31, 2019
and December 31, 2018 was $3,191,512 and $2,107,629,
respectively.
F-35
The
components of the liability for loss and LAE expenses and related
reinsurance receivables as of December 31, 2019 and 2018 are as
follows:
|
|
Gross
|
Reinsurance
|
|
|
Liability
|
Receivables
|
|
December
31, 2019
|
|
|
|
Case-basis
reserves
|
$
48,688,643
|
$
12,894,469
|
|
Loss
adjustment expenses
|
12,606,236
|
1,416,686
|
|
IBNR
reserves
|
19,203,732
|
1,417,070
|
|
Recoverable
on unpaid losses
|
|
15,728,225
|
|
Recoverable
on paid losses
|
-
|
5,384,325
|
|
Total loss
and loss adjustment expenses
|
$
80,498,611
|
21,112,550
|
|
Unearned
premiums
|
|
19,637,988
|
|
Total
reinsurance receivables
|
|
$
40,750,538
|
|
|
|
|
|
December
31, 2018
|
|
|
|
Case-basis
reserves
|
$
35,812,037
|
$
12,283,616
|
|
Loss
adjustment expenses
|
9,102,862
|
1,433,170
|
|
IBNR
reserves
|
11,282,207
|
1,954,461
|
|
Recoverable
on unpaid losses
|
|
15,671,247
|
|
Recoverable
on paid losses
|
-
|
4,453,298
|
|
Total loss
and loss adjustment expenses
|
$
56,197,106
|
20,124,545
|
|
Unearned
premiums
|
|
6,242,570
|
|
Total
reinsurance receivables
|
|
$
26,367,115
|
The following table provides a reconciliation of
the beginning and ending balances for unpaid losses and
LAE:
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Balance at
beginning of period
|
$
56,197,106
|
$
48,799,622
|
|
Less
reinsurance recoverables
|
(15,671,247
)
|
(16,748,908
)
|
|
Net balance,
beginning of period
|
40,525,859
|
32,050,714
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
Current
year
|
79,044,301
|
57,143,077
|
|
Prior
years
|
11,138,023
|
1,152,128
|
|
Total
incurred
|
90,182,324
|
58,295,205
|
|
|
|
|
|
Paid related
to:
|
|
|
|
Current
year
|
42,861,207
|
34,025,387
|
|
Prior
years
|
23,076,588
|
15,794,673
|
|
Total
paid
|
65,937,795
|
49,820,060
|
|
|
|
|
|
Net balance
at end of period
|
64,770,387
|
40,525,859
|
|
Add
reinsurance recoverables
|
15,728,224
|
15,671,247
|
|
Balance at
end of period
|
$
80,498,611
|
$
56,197,106
|
Incurred
losses and LAE are net of reinsurance recoveries under reinsurance
contracts of $12,769,015 and $14,482,712 for the years ended
December 31, 2019 and 2018, respectively.
F-36
Prior year incurred
loss and LAE development is based upon estimates by line of
business and accident year. Prior year loss and LAE development
incurred during the years ended December 31, 2019 and 2018 was
$11,138,023 unfavorable and $1,152,128 unfavorable, respectively.
During the year ended December 31, 2019, the Company increased case
reserves for a significant number of older liability claims, which
primarily affected the ultimate loss projections for commercial
lines business. This was in response to management’s
detailed review of open liability claims that resulted in new
assessments of carried case and incurred but not reported
(“IBNR”) reserve levels, giving consideration to both
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 claim 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 is
critical to the review of appropriate IBNR reserves and 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
period’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 periods.
Several methods are used, varying by line of business and accident
year, in order to select the estimated period-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-37
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 may 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.
Frequency / Severity Based
Methods
– historical
measurements of claim frequency and average paid claim size
(severity) are reviewed for more mature accident years where a
majority of claims have been reported and/or closed. These
historical averages are trended forward to more recent periods in
order to estimate ultimate losses for newer accident years that are
not yet fully developed. These methods are useful for lines of
business with slow and/or volatile loss development patterns, such
as liability lines where information pertaining to individual cases
may not be completely known for many years. The claim frequency and
severity information for older periods can then be used as
reasonable measures for developing a range of estimates for more
recent immature periods.
Management’s
best estimate of required reserves is generally based on an average
of the methods above, with appropriate weighting of 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 claim trends that have emerged or that
would cause future adverse development that have not already been
contemplated in setting current carried reserves
levels.
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, 2016 and prior is limited,
although there remains the possibility of adverse development on
reported claims (“case development” IBNR).
In
certain rare circumstances states have retroactively revised a
statute of limitations. The Company is not aware of any such effort
that would have a material impact on the Company’s
results.
The
following is information about incurred and paid claims development
as of December 31, 2019, net of reinsurance, as well as the
cumulative reported claims by accident year and total IBNR reserves
as of December 31, 2019 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, 2010 to December 31, 2018 is presented as supplementary
unaudited information.
F-38
|
All
Lines of Business
|
||||||||||||||
|
(in thousands, except reported claims data)
|
|
|
|
As
of
|
||||||||||
|
|
Incurred
Loss and Allocated Loss Adjustment Expenses, Net of
Reinsurance
|
December
31, 2019
|
||||||||||
|
|
For
the Years Ended December 31,
|
|
||||||||||
|
Accident
Year
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
IBNR
|
Cumulative Number
of Reported Claims by Accident Year
|
|
|
(Unaudited 2010 -
2018)
|
|
|
|
||||||||
|
2010
|
$
5,598
|
$
5,707
|
$
6,429
|
$
6,623
|
$
6,912
|
$
6,853
|
$
6,838
|
$
6,840
|
$
6,787
|
$
6,788
|
$
(4
)
|
1,617
|
|
2011
|
|
7,603
|
7,678
|
8,618
|
9,440
|
9,198
|
9,066
|
9,144
|
9,171
|
9,127
|
(2
)
|
1,914
|
|
2012
|
|
|
9,539
|
9,344
|
10,278
|
10,382
|
10,582
|
10,790
|
10,791
|
11,015
|
77
|
4,704
(1)
|
|
2013
|
|
|
|
10,728
|
9,745
|
9,424
|
9,621
|
10,061
|
10,089
|
10,607
|
98
|
1,561
|
|
2014
|
|
|
|
|
14,193
|
14,260
|
14,218
|
14,564
|
15,023
|
16,381
|
249
|
2,134
|
|
2015
|
|
|
|
|
|
22,340
|
21,994
|
22,148
|
22,491
|
23,386
|
228
|
2,555
|
|
2016
|
|
|
|
|
|
|
26,062
|
24,941
|
24,789
|
27,887
|
414
|
2,875
|
|
2017
|
|
|
|
|
|
|
|
31,605
|
32,169
|
35,304
|
847
|
3,375
|
|
2018
|
|
|
|
|
|
|
|
|
54,455
|
56,351
|
2,771
|
4,178
|
|
2019
|
|
|
|
|
|
|
|
|
|
75,092
|
19,458
|
4,225
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
271,938
|
|
|
|
(1) Reported claims
for accident year 2012 includes 3,406 claims from Superstorm
Sandy.
|
||||||||||||
|
All
Lines of Business
|
||||||||||
|
(in thousands)
|
|
|
Cumulative Paid
Loss and Allocated Loss Adjustment Expenses, Net of
Reinsurance
|
|
|
|||||||||
|
|
For the Years Ended
December 31,
|
|
|
|||||||||
|
Accident
Year
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
|
|
|
|
(Unaudited 2010 -
2018)
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
$
2,566
|
$
3,947
|
$
4,972
|
$
5,602
|
$
6,323
|
$
6,576
|
$
6,720
|
$
6,772
|
$
6,780
|
$
6,785
|
|
|
|
2011
|
|
3,740
|
5,117
|
6,228
|
7,170
|
8,139
|
8,540
|
8,702
|
8,727
|
8,789
|
|
|
|
2012
|
|
|
3,950
|
5,770
|
7,127
|
8,196
|
9,187
|
10,236
|
10,323
|
10,428
|
|
|
|
2013
|
|
|
|
3,405
|
5,303
|
6,633
|
7,591
|
8,407
|
9,056
|
9,717
|
|
|
|
2014
|
|
|
|
|
5,710
|
9,429
|
10,738
|
11,770
|
13,819
|
14,901
|
|
|
|
2015
|
|
|
|
|
|
12,295
|
16,181
|
18,266
|
19,984
|
21,067
|
|
|
|
2016
|
|
|
|
|
|
|
15,364
|
19,001
|
21,106
|
23,974
|
|
|
|
2017
|
|
|
|
|
|
|
|
16,704
|
24,820
|
28,693
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
32,383
|
44,516
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
40,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
209,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
liability for unpaid loss and allocated loss adjustment expenses
for the accident years presented
|
$
62,135
|
|
|
|||||||||
|
|
98
|
|
|
|||||||||
|
Liabilities
for loss and allocted loss adjustment expenses, net of
reinsurance
|
$
62,233
|
|
|
|||||||||
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.
F-39
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, 2019
|
|
Liabilities for
loss and loss adjustment expenses, net of reinsurance
|
$
62,233
|
|
Total
reinsurance recoverable on unpaid losses
|
15,728
|
|
Unallocated
loss adjustment expenses
|
2,538
|
|
Total
gross liability for loss and LAE reserves
|
$
80,499
|
The following is
supplementary unaudited information about average historical claims
duration as of December 31, 2019:
|
Average Annual Percentage Payout of
Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of
Reinsurance (unaudited)
|
||||||||||
|
Years
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines of
Business
|
44.9
%
|
18.5
%
|
10.9
%
|
8.9
%
|
9.2
%
|
6.1
%
|
2.7
%
|
0.7
%
|
0.4
%
|
0.1
%
|
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.
Note 12 – Stockholders’ Equity
Dividends Declared
Dividends declared
and paid on Common Stock were $3,501,366 and $4,279,494 for the
years ended December 31, 2019 and 2018, respectively. The
Company’s Board of Directors approved a quarterly dividend on
February 6, 2020 of $.0625 per share payable in cash on March 13,
2020 to stockholders of record as of February 28, 2020 (see Note 19
- Subsequent Events).
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, 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. 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 Compensation 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. During the year ended December 31, 2018, the remaining
options outstanding under the 2005 Plan were exercised and as of
December 31, 2018, there were no options outstanding under the 2005
Plan.
F-40
The results of
operations for the years ended December 31, 2019 and 2018 include
stock-based compensation expense for stock options totaling
approximately $30,000 and $6,000, respectively. Stock-based
compensation expense related to stock options is net of estimated
forfeitures of approximately 17% for the years ended December 31,
2019 and 2018. Such amounts have been included in the consolidated
statements of operations and comprehensive income (loss) within
other operating expenses.
The weighted
average estimated fair value of stock options granted during the
year ended December 31, 2019 was $1.91 per share. No options were
granted during the year ended December 31, 2018. 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,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Dividend
Yield
|
2.87
%
|
n/a
|
|
Volatility
|
36.11
%
|
n/a
|
|
Risk-Free Interest
Rate
|
1.61
%
|
n/a
|
|
Expected
Life
|
3.25 years
|
n/a
|
The Black-Scholes
option pricing 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 the Company’s 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 the Company’s stock
options.
A summary of stock
option activity under the Company’s 2014 Plan for the year
ended December 31, 2019 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, 2019
|
37,500
|
$
8.36
|
2.24
|
$
349,950
|
|
|
|
|
|
|
|
Granted
|
50,000
|
$
8.72
|
|
$
-
|
|
Exercised
|
(3,000
)
|
$
7.85
|
|
$
6,270
|
|
Forfeited
|
(2,500
)
|
$
7.85
|
2.04
|
$
13,588
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2019
|
82,000
|
$
8.61
|
3.38
|
$
-
|
|
|
|
|
|
|
|
Vested and
Exercisable at December 31, 2019
|
50,000
|
$
8.45
|
2.12
|
$
-
|
F-41
The aggregate
intrinsic value of options outstanding and options exercisable at
December 31, 2019 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 $7.75 closing price of the
Company’s Common Stock on December 31, 2019.
The total intrinsic value of options exercised
during the year ended December 31, 2019 was $6,270, determined as
of the date of exercise.
Participants in the 2014 Plans 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”), or by
exchanging a number of shares owned for a period of greater than
one year having a fair market value equal to the exercise price of
the option being exercised (“Share Exchange”). The
Company received cash proceeds of $23,550 from the exercise of
options for the purchase of 3,000 shares of common stock during the
year ended December 31, 2019.
The Company received cash proceeds of $90,640 from
the exercise of options for the purchase of 15,250 shares of common
stock during the year ended December 31, 2018. The Company received
7,855 shares from the exercise of options under a Share Exchange
for the purchase of 30,000 shares of common stock during the year
ended December 31, 2018. The remaining 258,400 options exercised
during the year ended December 31, 2018 were Net Exercises,
resulting in the issuance of 94,647 shares of common
stock.
As of December 31,
2019, the estimated fair value of unamortized compensation cost
related to unvested stock option awards was approximately $59,000.
Unamortized compensation cost as of December 31, 2019 is expected
to be recognized over a remaining weighted-average vesting period
of 1.74 years.
As of December 31,
2019, there were 327,900 shares reserved for grants under the 2014
Plan.
Restricted Stock Awards
A
summary of the restricted Common Stock activity under the
Company’s 2014 Plan for the year ended December 31, 2019 is
as follows:
|
Restricted
Stock Awards
|
Shares
|
Weighted
Average Grant Date Fair Value per Share
|
Aggregate
Fair Value
|
|
|
|
|
|
|
Balance
at January 1, 2019
|
120,499
|
$
17.66
|
$
2,129,175
|
|
|
|
|
|
|
Granted
|
120,586
|
$
15.51
|
$
1,870,487
|
|
Vested
|
(15,440
)
|
$
17.04
|
$
(263,071
)
|
|
Forfeited
|
(11,716
)
|
$
15.57
|
$
(182,417
)
|
|
|
|
|
|
|
Balance at December
31, 2019
|
213,929
|
$
16.51
|
$
3,554,174
|
Fair value was calculated using the closing price
of the Company’s Common Stock on the grant date.
Stock-based compensation expense in 2019 and 2018 includes the
estimated fair value of restricted Common Stock granted, amortized
on a straight-line basis over the requisite service period.
For the years ended December 31, 2019
and 2018, stock-based compensation for these grants was
approximately $1,471,500 and $697,000, respectively, which is
included in other operating expenses on the accompanying
consolidated statements of operations and comprehensive income
(loss). These amounts reflect the Company’s accounting
expense and do not correspond to the actual value that will be
recognized by the directors, executives and
employees.
F-42
Note 13 - Statutory Financial Information and Accounting
Policies
For regulatory
purposes, KICO prepares its statutory basis financial based on
statutory accounting principles prescribed or permitted by the New
York State Department of Financial Services (the
“DFS”). The DFS requires insurance companies domiciled
in New York State to prepare their statutory financial statements
in accordance with Statements of Statutory Accounting Principles as
promulgated by the National Association of Insurance Commissioners
(the “NAIC”), subject to any deviations prescribed or
permitted by the DFS. These statutory accounting practices differ
substantially from GAAP used by most business entities. The more
significant 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, 2019 and 2018,
KICO paid dividends to Kingstone of $7,000,000 and $3,600,000,
respectively. On February 19, 2020, KICO’s Board of Directors
approved a cash dividend of $1,500,000 to Kingstone, which was paid
on February 20, 2020. For the years ended December 31, 2019 and
2018, KICO recorded statutory basis net income (loss) of
$(4,519,183) and $3,801,498, respectively. At December 31,
2019 and 2018, KICO reported statutory basis surplus as regards
policyholders of $93,844,197 and $98,745,944, respectively, as
filed with the DFS.
F-43
Statutory Surplus
In December 2019,
the Company made a surplus contribution of $3,256,335 to
KICO.
S
ee Note 9 – Debt for further detail
regarding this contribution.
Note 14 - Risk Based Capital
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 was above the ACL
for each of the last two years and is in compliance with RBC
requirements as of December 31, 2019 and 2018.
Note
15 – Income Taxes
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
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,
|
2019
|
2018
|
|
|
|
|
|
Current
federal income tax expense (benefit)
|
$
174,779
|
$
(74,001
)
|
|
Current state
income tax expense (benefit)
|
238
|
(6,784
)
|
|
Deferred
federal and state income tax benefit
|
(1,991,208
)
|
(5,398
)
|
|
Income tax
benefit
|
$
(1,816,191
)
|
$
(86,183
)
|
F-44
A
reconciliation of the federal statutory rate to the Company’s
effective tax rate is as follows:
|
Years
ended December 31,
|
2019
|
2018
|
||
|
Computed
expected tax (benefit) expense
|
$
(1,634,334
)
|
21.0
%
|
$
631,483
|
21.0
%
|
|
State taxes,
net of federal benefit
|
(247,909
)
|
3.2
|
(377,884
)
|
(12.6
)
|
|
State
valuation allowance
|
261,573
|
(3.4
)
|
390,976
|
13.0
|
|
Permanent
differences
|
|
|
|
|
|
Dividends
received deduction
|
(97,631
)
|
1.3
|
(85,703
)
|
(2.9
)
|
|
Non-taxable
investment income
|
(39,901
)
|
0.5
|
(40,861
)
|
(1.4
)
|
|
Excess
benefit from stock-based compensation
|
184
|
-
|
(569,459
)
|
(18.9
)
|
|
Stock-based
compensation
|
80,453
|
(1.0
)
|
(16,960
)
|
(0.5
)
|
|
Other
permanent differences
|
(15,961
)
|
0.2
|
42,496
|
1.4
|
|
Prior year
tax matters
|
(91,748
)
|
1.2
|
(61,415
)
|
(2.0
)
|
|
Other
|
(30,917
)
|
0.3
|
1,144
|
-
|
|
Income tax
benefit, as reported
|
$
(1,816,191
)
|
23.3
%
|
$
(86,183
)
|
(2.9
)%
|
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 sheets reflect
temporary differences between the carrying amounts of the assets
and liabilities for financial reporting purposes and income tax
purposes, tax effected at 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,
|
|
|
2019
|
2018
|
|
|
|
|
|
Deferred tax
asset:
|
|
|
|
Net operating
loss carryovers (1)
|
$
1,586,247
|
$
90,438
|
|
Claims
reserve discount
|
839,959
|
343,905
|
|
Unearned
premium
|
3,105,344
|
3,145,682
|
|
Deferred
ceding commission revenue
|
1,624,434
|
564,202
|
|
Other
|
462,019
|
383,733
|
|
Total
deferred tax assets
|
7,618,003
|
4,527,960
|
|
|
|
|
|
Deferred tax
liability:
|
|
|
|
Investment in
KICO (2)
|
759,543
|
759,543
|
|
Deferred
acquisition costs
|
4,333,219
|
3,760,625
|
|
Intangibles
|
105,000
|
140,700
|
|
Depreciation
and amortization
|
312,298
|
664,194
|
|
Net
unrealized gains (losses) of securities -
available-for-sale
|
1,796,891
|
(1,151,335
)
|
|
Total
deferred tax liabilities
|
7,306,951
|
4,173,727
|
|
|
|
|
|
Net deferred
income tax asset
|
$
311,052
|
$
354,233
|
(1)
The
deferred tax assets from net operating loss carryovers are as
follows:
F-45
|
|
December
31,
|
December
31,
|
|
|
Type
of NOL
|
2019
|
2018
|
Expiration
|
|
|
|
|
|
|
Federal
only, current year
|
$
1,517,866
|
$
-
|
None
|
|
Amount
subject to Annual Limitation, federal only
|
-
|
2,100
|
December
31, 2019
|
|
Total
federal only
|
1,517,866
|
2,100
|
|
|
|
|
|
|
|
State
only (A)
|
1,616,568
|
1,305,365
|
December
31, 2039
|
|
Valuation
allowance
|
(1,548,187
)
|
(1,217,027
)
|
|
|
State
only, net of valuation allowance
|
68,381
|
88,338
|
|
|
|
|
|
|
|
Total
deferred tax asset from net operating loss carryovers
|
$
1,586,247
|
$
90,438
|
|
(A) Kingstone generates operating losses for state
purposes and has prior year NOLs available. The state NOL as of
December 31, 2019 and 2018 was approximately
$24,901,000
and
$20,083,000
, 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 operations and comprehensive income (loss) within
other underwriting expenses
. Kingstone
has recorded a valuation allowance 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 2039.
(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
insurance company 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 (collectively the “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 company has a lower carrying
value of its subsidiary for income tax purposes. The deferred tax
liability was reduced to $759,543 upon the reduction of federal
income tax rates as of December 31, 2017. The Company is required
to maintain its deferred tax liability of $759,543 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
assets (liabilities) to the deferred income tax provision for the
year ended December 31, 2019:
|
Change
in net deferred income tax assets
|
$
43,181
|
|
Deferred
tax expense allocated to other comprehensive (loss)
income
|
(2,034,389
)
|
|
Deferred
income tax benefit
|
$
(1,991,208
)
|
F-46
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.
The
Company had no material unrecognized tax benefit and no adjustments
to liabilities or operations were required. There were no interest
or penalties related to income taxes that have been accrued or
recognized as of and for the years ended December 31, 2019 and
2018. If any had been recognized these would have been reported in
income tax expense.
Generally,
taxing authorities may examine the Company’s tax returns for
the three years from the date of filing. The Company’s tax
returns for the years ended December 31, 2016 through December 31,
2018 remain subject to examination. The Company’s federal
income tax return for the year ended December 31, 2016 has been
examined by the Internal Revenue Service and was accepted as
filed.
Note 16 - Employee Benefit Plans
Employee Profit Sharing Plan
The
Company maintained a discretionary employee profit sharing plan
(the “Profit Sharing Plan”) available to full-time
employees who were employed as of December 31. For the year ended
December 31, 2018, the Profit Sharing Plan called for a bonus to be
paid based on a formula that was tied to the annual GAAP combined
ratio (“Combined Ratio”). The maximum the bonus could
be was 25% of eligible wages at a Combined Ratio of 70%. The bonus
decreased by 1% for each percentage point increase in the Combined
Ratio. There was a minimum bonus of 5% at a Combined Ratio of 90%
and above. The bonus was allocated 35% to the employees’
401(k) account and 65% as cash through payroll. The Company
incurred approximately $445,000 of expense for the year ended
December 31, 2018, related to the Profit Sharing Plan, which was
recorded in other operating expenses on the accompanying
consolidated statements of operations and comprehensive income
(loss). For the year ended December 31, 2019, the Company
maintained a new discretionary employee bonus plan, which is
discussed below.
Employee Bonus Plan
In
November 2018, the Company’s Board of Directors approved a
new discretionary employee bonus plan (“Bonus Plan”) to
replace the existing Profit Sharing Plan to be effective as of
January 1, 2019. Eligible employees can receive a target bonus rate
of between 12% and 30% of base salary depending on their position.
The target bonus rate is subject to adjustment depending on annual
performance evaluation scores. The Bonus Plan is funded through a
point system whereby up to 60 points are funded by a target return
on investment (“Target ROE”) sliding scale and up to 40
points are funded by achieving various annual corporate goals as
approved in advance by the Company’s Board of Directors. A
maximum of 60 points can be achieved with a Target ROE of 14%. The
bonus is decreased by six points for each percentage point decrease
in Target ROE. The minimum of six points can be achieved with
Target ROE of 5%. The Company incurred approximately $457,000 of
expense for the year ended December 31, 2019, related to the Bonus
Plan related to achieving certain annual corporate goals, which is
recorded in other operating expenses on the accompanying
consolidated statements of operations and comprehensive income
(loss).
F-47
401 (k) Plan
The
Company maintains a salary reduction plan under Section 401(k) of
the Internal Revenue Code (the “401(k) Plan”) for its
qualified employees. The Company matches 100% of each
participant’s contribution up to 4% of the
participant’s eligible contribution. The Company incurred
approximately $305,000 and $247,000 of expense for the years ended
December 31, 2019 and 2018, respectively, related to the 401(k)
Plan, which is recorded in other operating expenses on the
accompanying consolidated statements of operations and
comprehensive income (loss).
Deferred Compensation Plan
On June 18, 2018,
the Company adopted the Kingstone Companies, Inc. Deferred
Compensation Plan (the "Deferred Compensation Plan"). The Deferred
Compensation Plan is offered to a select group
(“Participants”), consisting of management and highly
compensated employees as a method of recognizing and retaining such
Participants. The Deferred Compensation Plan provides for eligible
Participants to elect to defer up to 75% of their base compensation
and up to 100% of bonuses and other compensation and to have such
deferred amounts deemed to be invested in specified investment
options. In addition to the Participant deferrals, the Company
may choose to make matching contributions to some or all of the
Participants in the Deferred Compensation Plan to the extent the
Participant did not receive the maximum matching or non-elective
contributions permissible under the Company’s 401(k) Plan due
to limitations under the Internal Revenue Code or the 401(k) Plan.
Participants may elect to receive payment of their account balances
in a single cash payment or in annual installments for a period of
up to ten years. The first payroll subject to the Deferred
Compensation Plan was in July 2018. The deferred compensation
liability as of December 31, 2019 and 2018 amounted to $599,274 and
$298,638, respectively, and is recorded in accounts payable,
accrued expenses and other liabilities in the accompanying
consolidated balance sheets. The Company made voluntary
contributions of $5,399 and $24,957 for the years ended December
31, 2019 and 2018, respectively, which are recorded in other
operating expenses in the accompanying consolidated statements of
operations and comprehensive income (loss).
Note 17 - Commitments and Contingencies
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 is 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.
F-48
On June 12, 2019, Phillip Woolgar filed a suit
naming the Company and certain present or former officers and
directors as defendants in a putative class action captioned
Woolgar v.
Kingstone Companies et al.
, 19
cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the
Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section
20(a) of the Exchange Act. Plaintiff seeks to represent a
class of persons or entities that purchased Kingstone securities
between March 14, 2018, and April 29, 2019, and alleges violations
of the federal securities law in connection with the
Company’s April 29, 2019 announcement regarding losses
related to winter catastrophe events. The lawsuit alleges
that the Company failed to disclose that it did not adequately
follow industry best practices related to claims handling and thus
did not record sufficient claim reserves, and that as a result,
Defendants’ positive statements about the Company’s
business, operations and prospects misled investors. Plaintiff
seeks, among other things, an undetermined amount of money
damages. The Company believes the lawsuit to be without
merit. The Company has not established an accrual for this matter
as a loss is not considered to be probable and reasonably
estimable. It is the opinion of management that facts known at the
present time do not indicate that such litigation will have a
material adverse impact on the Company’s results of
operations, financial position, or cash flows.
On February 18, 2020, a motion to dismiss was
filed with the court.
Office Leases
The
Company enters into lease agreements for real estate that is
primarily used for office space in the ordinary course of business.
These leases are accounted for as operating leases, whereby lease
expense is recognized on a straight-line basis over the term of the
lease. See Note 2 - Accounting Policies for additional information
regarding the accounting for leases.
The
Company is a party to a non-cancellable operating lease, dated
March 27, 2015, for its office facility for KICO located in Valley
Stream, New York expiring March 31, 2024.
On
July 8, 2019, the Company entered into a lease agreement for an
additional office facility for Cosi located in Valley Stream, New
York under a non-cancelable operating lease. 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. The lease has a term of seven years
and two months expiring December 31, 2026.
Additional
information regarding the Company’s office operating leases
is as follows:
|
|
Year ended
|
|
Lease cost
|
December 31, 2019
|
|
Operating
leases
|
$
165,368
|
|
Short-term
leases
|
-
|
|
Total
lease cost (1) (2)
|
$
165,368
|
|
|
|
|
Other information on operating leases
|
|
|
Cash
payments included in the measurement of lease
|
|
|
liability
reported in operating cash flows (2)
|
$
169,861
|
|
Discount
rate
|
5.50
%
|
|
Weighted
average remaining lease term in years
|
5.88 year
|
(1)
Included in the
consolidated statements of
operations and comprehensive income (loss) within
other underwriting expenses.
(2)
Amount only contains lease cost for the
Company’s KICO lease, Cosi lease payments are due and payable
January 2020.
F-49
The
following table presents the contractual maturities of the
Company’s lease liabilities as of December 31,
2019:
|
For
the Year
|
|
|
Ending
|
|
|
December
31,
|
Total
|
|
2020
|
255,624
|
|
2021
|
264,571
|
|
2022
|
273,831
|
|
2023
|
283,415
|
|
2024
|
140,738
|
|
Thereafter
|
192,916
|
|
Total
undiscounted lease payments
|
1,411,095
|
|
Less:
present value adjustment
|
230,154
|
|
Operating
lease liability
|
$
1,180,941
|
Rent expense for the years ended December 31, 2019
and 2018 amounted to $165,368 for each period and is
included in the accompanying consolidated statements of operations
and comprehensive income (loss) within
other underwriting expenses.
Employment Agreements
Dale A. Thatcher
Effective July 19,
2019 (the “Separation Date”), Dale A. Thatcher retired
and resigned his positions as Chief Executive Officer and President
of the Company and KICO. At such time, he also resigned his
positions on the Board of Directors of each of the Company and
KICO. Effective upon Mr. Thatcher’s separation from
employment, the Board appointed Barry B. Goldstein, former Chief
Executive Officer and Executive Chairman of the Board of Directors,
to the position of Chief Executive Officer and President of each of
the Company and KICO. Mr. Goldstein previously served as Chief
Executive Officer and President of the Company from March 2001
through December 31, 2018, and as Chief Executive Officer and
President of KICO from January 2012 through December 31,
2018.
In connection with
his separation from employment, each of the Company and KICO
entered into an Agreement and General Release (the
“Separation Agreement”) with Mr. Thatcher.
Pursuant to the Separation Agreement, the Company and KICO shall
collectively provide the following payments and benefits to Mr.
Thatcher in full satisfaction of all payments and benefits and
other amounts due to him under the terms of the existing employment
agreements upon his separation from employment: (i) $381,111
(representing the amount of base salary he would have received had
he remained employed through March 31, 2020), (ii) $5,000 in full
satisfaction for any bonus payments payable under the existing
employment agreements, (iii) continuing group health coverage
commencing on the Separation Date and ending on March 31, 2020, and
(iv) continued vesting of all stock awards previously granted to
Mr. Thatcher in his capacity as an executive officer but which were
unvested as of the Separation Date (Mr. Thatcher shall not be
entitled to any further grants of stock awards after the Separation
Date). In addition, the Company and KICO agreed to provide
Mr. Thatcher with a severance payment of $20,000 in consideration
for a release. Pursuant to the Separation Agreement, Mr.
Thatcher agreed that, for a period of three years following the
Separation Date, he shall not accept any operating executive role
with another property and casualty insurance company.
F-50
Barry Goldstein, President, Chief Executive Officer and Executive
Chairman of the Board
On
October 14, 2019, the Company and Barry B. Goldstein, the
Company’s President, Chief Executive Officer and Executive
Chairman of the Board, entered into a Second Amended and Restated
Employment Agreement (the “Amended Employment
Agreement”). The Amended Employment Agreement is effective as
of January 1, 2020 and expires on December 31, 2022. The Amended
Employment Agreement extends the expiration date of the employment
agreement in effect for Mr. Goldstein from December 31, 2021 to
December 31, 2022.
Pursuant to the Amended Employment Agreement, Mr.
Goldstein is entitled to receive an annual base salary of $500,000
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), net
unrealized gains (losses) on equity securities and net realized
gains (losses) on investments, up to a maximum of 2.5 times his
base salary. In addition, pursuant to the Amended Employment
Agreement, Mr. Goldstein is entitled to receive a long-term
compensation (“LTC”) award of between $945,000 and
$2,835,000 based on a specified minimum increase in the
Company’s adjusted book value per share (as defined in the
Amended Employment Agreement) as of December 31, 2022 as compared
to December 31, 2019 (with the maximum LTC payment being due if the
average per annum increase is at least 14%). Further, pursuant to
the Amended 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 Amended
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 the
event of Mr. Goldstein’s death, his estate would be entitled
to receive his base salary, accrued bonus and accrued LTC payment
through the date of death. Further, in the event that Mr.
Goldstein’s employment is terminated by the Company without
cause or he resigns for good reason, or, in the event of the
termination of Mr. Goldstein’s employment due to disability
or death, Mr. Goldstein’s granted but unvested restricted
stock awards will vest.
Mr.
Goldstein would be entitled, under certain circumstances, to a
payment equal to 3.82 times his then annual salary, the target LTC
payment of $1,890,000 and his accrued 6% bonus in the event of the
termination of his employment within eighteen months following a
change of control of the Company.
Pursuant
to the Amended Employment Agreement, Mr. Goldstein is entitled to
receive a grant, under the terms of the Company’s 2014 Plan,
during January 2020, of a number of shares of restricted stock
determined by dividing $1,250,000 by the fair market value of the
Company’s Common Stock on the date of grant. On January 3,
2020, Mr. Goldstein was granted 157,431 shares of restricted stock
pursuant to this provision. The January 2020 grant will become
vested with respect to one-third of the award on each of the first
and second anniversaries of the grant date and on December 31, 2022
based on the continued provision of services through the applicable
vesting date. Also pursuant to the Amended Employment Agreement,
Mr. Goldstein will be entitled to receive a grant, under the terms
of the 2014 Plan, during January 2021, of a number of shares of
restricted stock determined by dividing $1,500,000 by the fair
market value of the Company’s Common Stock on the date of
grant. The January 2021 grant will become vested with respect to
one-half of the award on each of the first anniversary of the grant
date and on December 31, 2022 based on the continued provision of
services through the applicable vesting date. Further, pursuant to
the Amended Employment Agreement, Mr. Goldstein will be entitled to
receive a grant, under the terms of the 2014 Plan, during each of
2020, 2021 and 2022, of a number of shares of restricted stock
determined by dividing $136,500 by the fair market value of the
Company’s Common Stock on the date of grant. On January 3,
2020, Mr. Goldstein was granted 17,191 shares of restricted stock
pursuant to this provision. The 2020 grant will become vested with
respect to one-third of the award on each of the first and second
anniversaries of the grant date and on December 31, 2022 based on
the continued provision of services through the applicable vesting
date. The 2021 grant will become vested with respect to one-half of
the award on each of the first anniversary of the grant date and on
December 31, 2022 based on the continued provision of services
through the applicable vesting date. The 2022 grant will become
vested on December 31, 2022 based on the continued provision of
services through such date.
F-51
Meryl Golden, Chief Operating Officer
On September 16, 2019, the Company and Meryl
Golden entered into an employment agreement (the “Golden
Employment Agreement”) pursuant to which Ms. Golden serves as
the Company’s Chief Operating Officer. Ms. Golden also
serves KICO’s Chief Operating Officer.
The Golden Employment Agreement became effective
as of September 25, 2019 and expires on December 31,
2021.
Pursuant to the Golden Employment Agreement, Ms.
Golden is entitled to receive an annual salary of $500,000. The
Golden Employment also provides for the grant on the effective date
of a five year option for the purchase of 50,000 shares of the
Company’s Common Stock pursuant to the 2014 Plan.
The options granted will vest in three
equal installments, with the first installment vesting on the grant
date, and the remaining installments vesting on the first and
second anniversaries following the grant date, subject to the terms
of the stock option agreement between the Company and Ms.
Golden.
Note
18 - Earnings Per Common Share
Basic net earnings
(loss) per common share is computed by dividing income (loss)
available to common shareholders by the weighted-average number of
common shares outstanding. Diluted earnings (loss) per common share
reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options as
well as non-vested restricted stock awards. The computation of
diluted earnings (loss) 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 (loss) per common share excludes outstanding
options in periods where the exercise of such options would be
anti-dilutive. For the year ended December 31, 2019, no options
were included in the computation of diluted earnings (loss) per
common share as they would have been anti-dilutive for the relevant
period and, as a result, the weighted average number of common
shares used in the calculation of diluted earnings per common share
for the year ended December 31, 2019 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 (loss) per common share
follows:
F-52
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
10,773,623
|
10,686,813
|
|
|
|
|
|
|
|
|
|
Stock
options
|
-
|
19,823
|
|
Restricted
stock awards
|
-
|
10,250
|
|
|
|
|
|
Weighted
average number of shares outstanding,
|
|
|
|
used
for computing diluted earnings per share
|
10,773,623
|
10,716,886
|
Note
19 - Subsequent Events
The Company has
evaluated events that occurred subsequent to December 31, 2019
through March 16, 2020, 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 6,
2020, the Company’s Board of Directors approved a quarterly
dividend of $0.0625 per share payable in cash on March 13, 2020 to
stockholders of record as of the close of business on February 28,
2020 (see Note 12).
Restricted Stock Awards
Pursuant
to the terms of the Amended Employment Agreement between the
Company and Mr. Goldstein, on January 3, 2020, he was granted
157,431 shares of restricted stock valued at $1,250,000 and 17,191
shares of restricted stock valued at $136,500 (see Note
17).
F-53
Note
20 – Quarterly Financial Data (Unaudited)
The following is a
summary of unaudited quarterly results of operations for the years
ended December 31, 2019 and 2018:
|
|
2019
|
||||
|
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Total
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
$
29,595,889
|
$
31,201,279
|
$
34,220,010
|
$
32,606,264
|
$
127,623,442
|
|
Ceding
commission revenue
|
1,277,683
|
675,695
|
1,029,582
|
1,667,891
|
4,650,851
|
|
Net
investment income
|
1,623,712
|
1,719,769
|
1,856,553
|
1,669,312
|
6,869,346
|
|
Net
gains on investments
|
2,035,363
|
678,655
|
998,162
|
878,839
|
4,591,019
|
|
Total
revenues
|
34,898,548
|
34,605,370
|
38,600,003
|
37,459,099
|
145,563,020
|
|
Loss
and loss adjustment expenses
|
29,134,224
|
17,672,308
|
24,781,318
|
18,594,474
|
90,182,324
|
|
Commission
expense and
|
|
|
|
|
|
|
other
underwriting expenses
|
12,989,407
|
12,715,622
|
14,210,078
|
14,698,276
|
54,613,383
|
|
Net
income (loss)
|
(7,335,190
)
|
1,639,380
|
(1,725,162
)
|
1,454,619
|
(5,966,353
)
|
|
Basic
earnings (loss) per share
|
$
(0.68
)
|
$
0.15
|
$
(0.16
)
|
$
0.13
|
$
(0.55
)
|
|
Diluted
earnings (loss) per share
|
$
(0.68
)
|
$
0.15
|
$
(0.16
)
|
$
0.13
|
$
(0.55
)
|
|
|
2018
|
||||
|
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Total
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
$
22,837,617
|
$
24,104,614
|
$
27,533,907
|
$
28,938,577
|
$
103,414,715
|
|
Ceding
commission revenue
|
1,695,158
|
1,691,168
|
1,044,529
|
901,775
|
5,332,630
|
|
Net
investment income
|
1,383,989
|
1,556,866
|
1,602,371
|
1,643,022
|
6,186,248
|
|
Net
realized gain (loss) on investments
|
(523,127
)
|
(106,733
)
|
352,025
|
(2,218,022
)
|
(2,495,857
)
|
|
Total
revenues
|
25,701,870
|
27,546,186
|
30,885,909
|
29,637,933
|
113,771,898
|
|
Loss
and loss adjustment expenses
|
17,266,330
|
11,176,085
|
13,296,708
|
16,556,082
|
58,295,205
|
|
Commission
expense and
|
|
|
|
|
|
|
other
underwriting expenses
|
10,831,451
|
11,093,175
|
11,788,002
|
12,572,851
|
46,285,479
|
|
Net
income (loss)
|
(2,717,934
)
|
2,757,297
|
3,933,730
|
(879,847
)
|
3,093,246
|
|
Basic
earnings per share
|
$
(0.28
)
|
$
0.26
|
$
0.37
|
$
(0.08
)
|
$
0.29
|
|
Diluted
earnings per share
|
$
(0.28
)
|
$
0.25
|
$
0.36
|
$
(0.08
)
|
$
0.29
|
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 total earnings per share for the year.
F-54
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 Instruments and Real EstateNote 6 - Intangible AssetsNote 7 - ReinsuranceNote 8 - Deferred Policy Acquisition Costs and Deferred Ceding Commission RevenueNote 9 DebtNote 10 - Property and EquipmentNote 11 - Property and Casualty Insurance ActivityNote 12 Stockholders EquityNote 13 - Statutory Financial Information and Accounting PoliciesNote 14 - Risk Based CapitalNote 15 Income TaxesNote 16 - Employee Benefit PlansNote 17 - Commitments and ContingenciesNote 18 - Earnings Per Common ShareNote 19 - Subsequent EventsNote 20 Quarterly Financial Data (unaudited)