KINS 10-Q Quarterly Report Sept. 30, 2011

KINGSTONE COMPANIES, INC.

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10-Q 1 kins_10q.htm QUARTERLY REPORT kins_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to _________

Commission File Number 0-1665

KINGSTONE COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		36-2476480
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1154 Broadway

Hewlett, NY 11557

(Address of principal executive offices)

(516) 374-7600

(Registrant’s telephone number, including area code)

(Former Name, if Changed Since Last Report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Non-accelerated filer	o
Accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 12, 2011, there were 3,838,386 shares of the registrant’s common stock outstanding.

KINGSTONE COMPANIES, INC.

INDEX

		PAGE

PART I — FINANCIAL INFORMATION			4
Item 1.	Financial Statements		4
	Condensed Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010		4
	Condensed Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended September 30, 2011 (Unaudited) and 2010 (Unaudited)		5
	Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2011 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 (Unaudited) and 2010 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		50

PART II — OTHER INFORMATION			51
Item 1 .	Legal Proceedings		51
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3.	Defaults Upon Senior Securities		51
Item 4.	Reserved		51
Item 5.	Other Information		51
Item 6.	Exhibits		52
	Signatures

EXHIBIT 31(a)
EXHIBIT 31(b)
EXHIBIT 32
EXHIBIT 101.INS XBRL Instance Document EXHIBIT 101.SCH XBRL Taxonomy Extension Schema EXHIBIT 101.CAL XBRL Taxonomy Extension Calculation Linkbase EXHIBIT 101.DEF XBRL Taxonomy Extension Definition Linkbase EXHIBIT 101.LAB XBRL Taxonomy Extension Label Linkbase EXHIBIT 101.PRE XBRL Taxonomy Extension Presentation Linkbase

Forward-Looking Statements

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010 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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS .

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	September 30,			December 31,
	2011				2010*
	(unaudited)
Asset s
Fixed-maturity securities, held to maturity, at amortized cost (fair value of $771,281 at September 30, 2011 and $606,398 at December 31, 2010)	$	606,234		$	605,424
Fixed-maturity securities, available for sale, at fair value (amortized cost of $17,588,998 at September 30, 2011 and $16,277,052 at December 31, 2010)		17,951,642			16,339,101
Equity securities, available-for-sale, at fair value (cost of $4,119,319 at September 30, 2011 and $2,825,015 at December 31, 2010)		4,143,257			2,983,035
Total investments		22,701,133			19,927,560
Cash and cash equivalents		3,031,068			326,620
Premiums receivable, net of provision for uncollectible amounts		6,038,333			5,001,886
Receivables - reinsurance contracts		685,316			1,174,729
Reinsurance receivables, net of provision for uncollectible amounts		25,643,556			20,720,194
Notes receivable-sale of business		400,417			705,019
Deferred acquisition costs		4,415,056			3,619,001
Intangible assets, net		3,779,600			4,136,386
Property and equipment, net of accumulated depreciation		1,633,152			1,585,029
Other assets		625,444			1,486,249
Total asset s	$	68,953,075		$	58,682,673

Liabilitie s
Loss and loss adjustment expenses	$	21,373,562		$	17,711,907
Unearned premiums		21,101,548			17,277,332
Advance premiums		637,357			410,574
Reinsurance balances payable		2,922,815			1,106,897
Deferred ceding commission revenue		3,857,820			3,219,513
Notes payable and capital lease obligations (includes payable to related parties of $378,000 at September 30, 2011 and $785,000 at December 31, 2010)		747,000			1,460,997
Accounts payable, accrued expenses and other liabilities		2,321,323			2,553,031
Income taxes payable		194,621			-
Deferred income taxes		1,652,724			1,998,557
Total liabilitie s		54,808,770			45,738,808

Commitments and Contingencies

Stockholders' Equity
Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,643,122 shares;outstanding 3,838,386 shares		46,432			46,432
Preferred stock, $.01 par value; authorized 1,000,000 shares;-0- shares issued and outstanding		-			-
Capital in excess of par		13,719,484			13,633,913
Accumulated other comprehensive income		255,145			145,247
Retained earnings		1,286,502			281,531
		15,307,563			14,107,123
Treasury stock, at cost, 804,736 shares		(1,163,258	)		(1,163,258	)
Total stockholders' equity		14,144,305			12,943,865

Total liabilities and stockholders' equity	$	68,953,075		$	58,682,673

* derived from audited financial information

See accompanying notes to condensed consolidated financial statements.

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenue s
Net premiums earned	$	3,937,189		$	3,065,289		$	10,822,137		$	7,905,350
Ceding commission revenue		2,307,390			2,231,493			7,347,832			6,413,774
Net investment income		172,039			154,679			510,173			435,882
Net realized gain on investments		196,574			84,054			357,006			228,803
Other income		228,615			214,606			693,188			664,091
Total revenues		6,841,807			5,750,121			19,730,336			15,647,900

Expense s
Loss and loss adjustment expenses		2,933,531			1,907,917			7,307,925			4,518,253
Commission expense		1,596,281			1,287,268			4,472,924			3,647,371
Other underwriting expenses		1,734,137			1,580,827			5,045,051			4,112,889
Other operating expenses		260,149			428,401			863,114			1,345,208
Depreciation and amortization		144,122			155,258			457,264			463,746
Interest expense		23,577			46,258			108,249			138,560
Interest expense - mandatorily redeemable preferred stock		-			-			-			74,706
Total expenses		6,691,797			5,405,929			18,254,527			14,300,733

Income from continuing operations before taxes		150,010			344,192			1,475,809			1,347,167
Income tax (benefit) expense		(69,559	)		128,278			355,685			564,388
Income from continuing operations		219,569			215,914			1,120,124			782,779
Income from discontinued operations, net of taxes		-			16,234			-			40,082
Net income		219,569			232,148			1,120,124			822,861

Gross unrealized investment holding gains (losses) arising during period		(166,793	)		523,690			166,513			560,337
Income tax benefit (expense) related to items of other comprehensive income (loss)		56,710			(178,055	)		(56,614	)		(190,515	)
Comprehensive income	$	109,486		$	577,783		$	1,230,023		$	1,192,683

Basic and diluted earnings per common share:
Income from continuing operations	$	0.06		$	0.06		$	0.29		$	0.24
Income from discontinued operations	$	-		$	-		$	-		$	0.01
Income per common share	$	0.06		$	0.06		$	0.29		$	0.25

Weighted average common shares outstanding
Basic		3,838,386			3,833,798			3,838,386			3,292,145
Diluted		3,918,763			3,833,798			3,921,289			3,292,145

See accompanying notes to condensed consolidated financial statements.

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

Nine months ended September 30, 2011 (unaudited)

											Accumulated
									Capital		Other
	Common Stock				Preferred Stock				in Excess		Comprehensive		Retained			Treasury Stock
	Shares		Amount		Shares		Amount		of Par		Income		Earnings			Shares		Amount			Total
Balance, December 31, 2010		4,643,122	$	46,432		-	$	-	$	13,633,913	$	145,247	$	281,531			804,736	$	(1,163,258	)	$	12,943,865
Stock-based payments		-		-		-		-		85,571		-		-			-		-			85,571
Dividends														(115,153	)							(115,153	)
Net income		-		-		-		-		-		-		1,120,124			-		-			1,120,124
Net unrealized gains on securities available for sale, net of income tax		-		-		-		-		-		109,899		-			-		-			109,899
Balance, September 30, 2011		4,643,122	$	46,432		-	$	-	$	13,719,484	$	255,145	$	1,286,502			804,736	$	(1,163,258	)	$	14,144,305

See accompanying notes to condensed consolidated financial statements.

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30,

	2011			2010

Cash flows provided by operating activities :
Net income	$	1,120,124		$	822,861
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of investments		(357,006	)		(228,803	)
Depreciation and amortization		457,264			463,746
Amortization of bond premium, net		162,990			54,810
Stock-based payments		85,571			326,573
Deferred income taxes		(402,447	)		(36,197	)
(Increase) decrease in assets:
Short term investments		-			225,336
Premiums receivable, net		(1,036,447	)		(795,761	)
Receivables - reinsurance contracts		489,413			(1,015,489	)
Reinsurance receivables, net		(4,923,362	)		(32,328	)
Deferred acquisition costs		(796,055	)		(677,169	)
Other assets		860,804			(142,389	)
Increase (decrease) in liabilities:
Loss and loss adjustment expenses		3,661,655			624,918
Unearned premiums		3,824,216			3,127,590
Advance premiums		226,783			110,262
Reinsurance balances payable		1,815,918			(92,772	)
Deferred ceding commission revenue		638,307			(96,230	)
Income taxes payable		194,621			-
Accounts payable, accrued expenses and other liabilities		(231,708	)		(512,401	)
Net cash provided by operating activities of continuing operations		5,790,641			2,126,557
Operating activities of discontinued operations		-			(26,000	)
Net cash flows provided by operating activities		5,790,641			2,100,557

Cash flows used in investing activities :
Purchase - fixed-maturity securities held to maturity		-			(106,205	)
Purchase - fixed-maturity securities available for sale		(4,372,917	)		(4,449,040	)
Purchase - equity securities		(2,570,333	)		(1,968,273	)
Sale or maturity - fixed-maturity securities available for sale		3,034,295			2,616,788
Sale - equity securities		1,362,700			1,202,909
Recovery of loss from failed bank		133,211			-
Collections of notes receivable and accrued interest - Sale of businesses		304,602			364,067
Other investing activities		(148,601	)		(5,820	)
Net cash flows used in investing activitie s		(2,257,043	)		(2,345,574	)

Cash flows (used in) provided by financing activities :
Proceeds from long term debt (includes $200,000 from related parties in 2010)		-			400,000
Principal payments on long-term debt (includes $407,000 to related parties in 2011)		(713,997	)		(18,268	)
Dividends paid		(115,153	)		-
Net cash flows (used in) provided by financing activitie s		(829,150	)		381,732

See accompanying notes to condensed consolidated financial statements.

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30,

	2011		2010

Increase in cash and cash equivalents	$	2,704,448	$	136,715
Cash and cash equivalents, beginning of period		326,620		625,320
Cash and cash equivalents, end of period	$	3,031,068	$	762,035

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	458,871	$	501,102
Cash paid for interest	$	172,964	$	296,782

Supplemental Schedule of Non-Cash Investing and Finacing Activities:
Mandatorily redeemable preferred stock exchanged for common stock		-	$	1,299,231

See accompanying notes to condensed consolidated financial statements.

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation and Nature of Business

Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its subsidiary Kingstone Insurance Company (“KICO”), offers property and casualty insurance products to small businesses and individuals in New York State.

The accompanying unaudited condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8-03 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2010 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 31, 2011. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations for the nine months ended September 30, 2011 may not be indicative of the results that may be expected for the year ending December 31, 2011.

Note 2 – Accounting Policies and Basis of Presentation

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 those estimates.

Reclassification

The Company has reclassified certain amounts in its 2010 statements of consolidated operations and cash flows to conform to the 2011 presentation. None of these reclassifications had an effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.

Principles of Consolidation

The consolidated financial statements consist of Kingstone and its wholly-owned subsidiaries. Subsidiaries include KICO and its subsidiaries, CMIC Properties, Inc. (“CMIC Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All material intercompany transactions have been eliminated in consolidation.

Accounting Pronouncements

In October 2010, the FASB issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance generally follows the model of that for loan origination costs. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. The Company adopted this guidance retrospectively effective January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or liquidity.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”) . ASU 2011-03 provides amendments to Accounting Standards Codification (“ASC”) No. 860 “Transfers and Servicing”, which remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective prospectively for transactions or modifications of existing transactions that occur on or after the beginning of the first interim or annual reporting period beginning on or after December 15, 2011, with early adoption not permitted.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”). ASU 2011-04 provides amendments to ASC No. 820 “Fair Value Measurement”, which results in a consistent definition of fair value and common requirements for measurement of and disclosure of fair value between U.S. GAAP and IFRS. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this update are effective prospectively during interim and annual periods beginning after December 15, 2011, with early adoption not permitted.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 provides amendments to ASC No. 220 “Comprehensive Income”, which require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company has not elected to early adopt ASU 2011-05.

In September 2011, the FASB issued amended guidance on testing goodwill for impairment. This guidance is providing the option to first assess qualitative factors, such as macroeconomic conditions and industry and market considerations, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If indicated by the qualitative assessment, then it is necessary to perform the two−step goodwill impairment test. If the option is not elected, the guidance requiring the two−step goodwill impairment test is unchanged. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The impact of adoption is not expected to be material to the Company’s results of operations and financial position.

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.

Note 3 – Investments

Available for Sale Securities

The amortized cost and fair value of investments in available for sale fixed-maturity securities, equities and short term investments as of September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011
	Cost or		Gross		Gross Unrealized Losses								Unrealized
	Amortized		Unrealized		Less than 12			More than 12			Fair		Gains/
Categor y	Cost		Gains		Months			Months			Value		(Losses )
	(unaudited)
Fixed-Maturity Securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	499,815	$	49,398	$	-		$	-		$	549,213	$	49,398

Political subdivisions of States, Territories and Possessions		6,133,143		288,099		-			-			6,421,242		288,099

Corporate and other bonds i ndustrial and miscellaneous		10,956,040		271,758		(221,751	)		(24,860	)		10,981,187		25,147
Total fixed-maturity securities		17,588,998		609,255		(221,751	)		(24,860	)		17,951,642		362,644

Equity Securities:
Preferred stocks		1,268,171		26,616		(91,915	)		-			1,202,872		(65,299	)
Common stocks		2,851,148		209,110		(119,873	)		-			2,940,385		89,237
Total equity securities		4,119,319		235,726		(211,788	)		-			4,143,257		23,938

Total	$	21,708,317	$	844,981	$	(433,539	)	$	(24,860	)	$	22,094,899	$	386,582

	December 31, 2010
	Cost or		Gross		Gross Unrealized Losses								Unrealized
	Amortized		Unrealized		Less than 12			More than 12			Fair		Gains/
Categor y	Cost		Gains		Months			Months			Value		(Losses )
Fixed-Maturity Securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,572	$	42,085	$	-		$	-		$	1,042,657	$	42,085

Political subdivisions of States, Territories and Possessions		7,278,663		79,791		(86,234	)		(12,995	)		7,259,225		(19,438	)

Corporate and other bonds i ndustrial and miscellaneous		7,997,817		176,999		(137,597	)		-			8,037,219		39,402
Total fixed-maturity securities		16,277,052		298,875		(223,831	)		(12,995	)		16,339,101		62,049

Equity Securities:
Preferred stocks		824,569		29,934		(6,333	)		-			848,170		23,601
Common stocks		2,000,446		188,783		(54,364	)		-			2,134,865		134,419
Total equity securities		2,825,015		218,717		(60,697	)		-			2,983,035		158,020

Total	$	19,102,067	$	517,592	$	(284,528	)	$	(12,995	)	$	19,322,136	$	220,069

A summary of the amortized cost and fair value of the Company’s available for sale investments in fixed-maturity securities by contractual maturity as of September 30, 2011 and December 31, 2010 is shown below:

	September 30, 2011				December 31, 2010
	Amortized				Amortized
Remaining Time to Maturit y	Cost		Fair Value		Cost		Fair Value
	(unaudited)
Less than one year	$	301,268	$	303,207	$	263,098	$	253,385
One to five years		6,495,249		6,671,967		6,868,952		6,997,694
Five to ten years		9,506,527		9,615,351		7,132,079		7,118,405
More than 10 years		1,285,954		1,361,117		2,012,923		1,969,617
Total	$	17,588,998	$	17,951,642	$	16,277,052	$	16,339,101

The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.

Held to Maturity Securities

The amortized cost and fair value of investments in held to maturity fixed-maturity securities as of September 30, 2011 and December 31, 2010 are summarized as follows:

September 30, 2011

Cost or

Gross

Gross Unrealized Losses

Unrealized

Amortized

Unrealized

Less than 12

More than 12

Fair

Gains/

Categor y

Cost

Gains

Months

Value

(Losses )

(unaudited)

U.S. Treasury securities

606,234

165,047

771,281

165,047

December 31, 2010

Cost or

Gross

Gross Unrealized Losses

Unrealized

Amortized

Unrealized

Less than 12

More than 12

Fair

Gains/

Categor y

Cost

Gains

Months

Value

(Losses )

U.S. Treasury securities

605,424

974

606,398

974

All held to maturity securities are held in trust pursuant to the New York State Insurance Department’s minimum funds requirement.

Contractual maturities of all held to maturity securities are greater than ten years.

Investment Income

Major categories of the Company’s net investment income are summarized as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011			2010
	(unaudited)				(unaudited)
Income
Fixed-maturity securities	$	170,083	$	140,953	$	526,583		$	395,676
Equity securities		44,089		41,176		114,387			100,702
Cash and cash equivalents		2,552		61		4,775			4,878
Other		8		13		(3,307	)		34
Total		216,732		182,203		642,438			501,290
Expenses
Investment expenses		44,693		27,524		132,265			65,408
Net investment income	$	172,039	$	154,679	$	510,173		$	435,882

Proceeds from the sale and maturity of fixed-maturity securities were $3,034,295 and $2,616,788 for the nine months ended September 30, 2011 and 2010.

Proceeds from the sale of equity securities were $1,362,700 and $1,202,909 for the nine months ended September 30, 2011 and 2010, respectively.

The Company’s gross realized gains and losses on investments are summarized as follows:

	Three months ended					Nine months ended
	September 30,					September 30,
	2011		2010			2011			2010
Fixed-maturity securities
Gross realized gains	$	51,805	$	37,601		$	139,107		$	133,598
Gross realized losses		-		-			(1,983	)		(18,562	)
		51,805		37,601			137,124			115,036

Equity securities
Gross realized gains		11,558		64,210			147,375			148,462
Gross realized losses		-		(17,757	)		(60,704	)		(34,695	)
		11,558		46,453			86,671			113,767

Cash and short term investments (1)		133,211		-			133,211			-

Net realized gains	$	196,574	$	84,054		$	357,006		$	228,803

(1) Realized gain on cash and short term investments is a partial recovery from the FDIC of an amount previously written off in 2009 due to the failure of Waterfield Bank.

Impairment Review

The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines (“OTTI”) in the fair value of investments. In evaluating potential impairment, management considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value to cost; and (v) current economic conditions.

OTTI losses are recorded in the condensed consolidated statement of operations and comprehensive income as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. There are 42 securities at September 30, 2011 that account for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of fixed maturity investments and equity securities for the nine months ended September 30, 2011 and 2010. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for anticipated recovery of fair value to the Company’s cost basis.

The Company held securities with unrealized losses representing declines that were considered temporary at September 30, 2011 as follows:

	September 30, 2011
	Less than 12 months							12 months or more							Total
						No. of							No. of		Aggregate
	Fair		Unrealized			Positions		Fair		Unrealized			Positions		Fair		Unrealized
Categor y	Value		Losses			Held		Value		Losses			Held		Value		Losses
	(unaudited)
Fixed-Maturity Securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	-	$	-			-	$	-	$	-			-	$	-	$	-

Political subdivisions of States, Territories and Possessions		-		-			-		-		-			-		-		-

Corporate and other bonds industrial and miscellaneous		4,131,740		(221,751	)		1		375,140		(24,860	)		22		4,506,880		(246,611	)

Total fixed-maturity securities	$	4,131,740	$	(221,751	)		1	$	375,140	$	(24,860	)		22	$	4,506,880	$	(246,611	)

Equity Securities:
Preferred stocks	$	719,322	$	(91,915	)		6	$	-	$	-			-	$	719,322	$	(91,915	)
Common stocks		947,280		(119,873	)		13		-		-			-		947,280		(119,873	)

Total equity securities	$	1,666,602	$	(211,788	)		19	$	-	$	-			-	$	1,666,602	$	(211,788	)

Total	$	5,798,342	$	(433,539	)		20	$	375,140	$	(24,860	)		22	$	6,173,482	$	(458,399	)

Note 4 – Fair Value Measurements

The Company follows GAAP guidance regarding fair value measurements. The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.

This guidance establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. 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 municipal bonds, 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.

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. Included in this valuation methodology are the real estate assets owned by the Company that are utilized in its operations.

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 observability of prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.

The Company’s investments are allocated among pricing input levels at September 30, 2011 and December 31, 2010 as follows:

	September 30, 2011
($ in thousands )	Level 1		Level 2		Level 3		Total
	(unaudited)
Fixed-maturity investments available for sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	549	$	-	$	-	$	549

Political subdivisions of States, Territories and Possessions		5,044		1,378		-		6,422

Corporate and other bonds industrial and miscellaneous		10,453		528		-		10,981
Total fixed maturities		16,046		1,906		-		17,952
Equity investments		4,143		-		-		4,143
Short term investments		-		-		-		-
Total investments	$	20,189	$	1,906	$	-	$	22,095

	December 31, 2010
($ in thousands )	Level 1		Level 2		Level 3		Total

Fixed-maturity investments
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,043	$	-	$	-	$	1,043

Political subdivisions of States, Territories and Possessions		5,351		1,908		-		7,259

Corporate and other bonds industrial and miscellaneous		8,037		-		-		8,037
Total fixed maturities		14,431		1,908		-		16,339
Equity investments		2,983		-		-		2,983
Total investments	$	17,414	$	1,908	$	-	$	19,322

Note 5 – Fair Value of Financial Instruments

GAAP requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. The Company uses the following methods and assumptions in estimating its fair value disclosures for financial instruments:

Equity and fixed income investments: Fair value disclosures for investments are included in “Note 3 - Investments.”

Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their fair values because of the short maturity of these instruments.

Premiums receivable, reinsurance receivables: The carrying values reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to the short term nature of the assets.

Notes receivable: The carrying amount of notes receivable related to the sale of businesses approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.

Real Estate: The fair value of the land and building included in property and equipment, which is used in the Company’s operations, approximates the carrying value. The fair value was based on an appraisal prepared using the sales comparison approach.

Reinsurance balances payable: The carrying value reported in the condensed consolidated balance sheets for these financial instruments approximates fair value.

Notes payable (including related parties): The Company estimates that the carrying amount of notes payable approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.

The estimated fair values of the Company’s financial instruments are as follows:

	September 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(unaudited)
Fixed-maturity investments held to maturity	$	606,234	$	771,281	$	605,424	$	606,398
Cash and cash equivalents		3,031,068		3,031,068		326,620		326,620
Premiums receivable		6,038,333		6,038,333		5,001,886		5,001,886
Receivables - reinsurance contracts		685,316		685,316		1,174,729		1,174,729
Reinsurance receivables		25,643,556		25,643,556		20,720,194		20,720,194
Notes receivable-sale of business		400,417		400,417		705,019		705,019
Real estate, net of accumulated depreciation		1,515,916		1,510,000		1,437,787		1,510,000
Reinsurance balances payable		2,922,815		2,922,815		1,106,897		1,106,897
Notes payable (including related parties)		747,000		747,000		1,460,997		1,460,997

Note 6 – Notes Receivable-Sale of Businesses

Retail Business

New York Stores: On April 17, 2009, the Company’s wholly-owned subsidiaries that owned and operated 16 Retail Business locations in New York State sold substantially all of their assets, including their book of business (the “New York Assets”). The purchase price for the New York Assets was approximately $2,337,000, of which approximately $1,786,000 was paid at closing. Promissory notes in the aggregate original principal amount of approximately $551,000 (the “New York Notes”) were also delivered at the closing. On April 1, 2011 the purchaser of the New York Assets paid in advance the balance of the New York Notes in the amount of $138,762.

Pennsylvania Stores: Effective June 30, 2009, the Company sold all of the outstanding stock of the subsidiary that operated the three remaining Pennsylvania stores (the “Pennsylvania Stock”). The purchase price for the Pennsylvania Stock was approximately $397,000 which was paid by delivery of two promissory notes (the “Pennsylvania Notes”), one in the approximate principal amount of $238,000 and payable with interest at the rate of 9.375% per annum in 120 equal monthly installments, and the other in the approximate principal amount of $159,000 and payable with interest at the rate of 6% per annum in 60 monthly installments commencing August 10, 2011 (with interest only being payable prior to such date). Effective August 10, 2011, the Pennsylvania Notes were restructured into one note with a principal balance of $361,625. The restructured note provides for interest at the rate of 8.63% per annum and is payable in 102 equal monthly installments of $5,015. There was no gain or loss recorded on the restructuring of the Pennsylvania Notes.

Franchise Business

Effective May 1, 2009, the Company sold all of the outstanding stock of the subsidiaries that operated the DCAP franchise business (collectively, the “Franchise Stock”). The purchase price for the Franchise Stock was $200,000 which was paid by delivery of a promissory note in such principal amount (the “Franchise Note”). As of March 31, 2011, the terms of the Franchise Note called for installments of $50,000 on May 15, 2009, $50,000 on May 1, 2010, both of which were paid, and $100,000 plus accrued interest on May 1, 2011 and provides for interest at the rate of 5.25% per annum. On May 1, 2011, the Franchise Note was amended. Under the amended Franchise Note, the payment due on May 1, 2011 was reduced to a principal payment only of $75,000. The remaining balance of $25,000 plus accrued interest of $12,797 is due on May 1, 2012. A principal of the buyer is the son-in-law of Morton L. Certilman, one of the Company’s principal shareholders at the time.

Notes receivable arising from the sale of businesses as of September 30, 2011 and December 31, 2010 consists of:

	September 30, 2011						December 31, 2010
	Total		Current				Total		Current
	Note		Maturities		Long-Term		Note		Maturities		Long-Term
	(unaudited)
Sale of NY stores	$	-	$	-	$	-	$	211,536	$	211,536	$	-
Sale of Pennsylvania stores		359,210		30,368		328,842		375,211		28,730		346,481
Sale of Franchise business		37,797		37,797		-		100,000		100,000		-
		397,007		68,165		328,842		686,747		340,266		346,481
Accrued interest		3,410		3,410		-		18,272		18,272		-
Total	$	400,417	$	71,575	$	328,842	$	705,019	$	358,538	$	346,481

Note 7 – Property and Casualty Insurance Activity

Earned Premiums

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net

Nine months ended September 30, 2011 (unaudited)
Premiums written	$	30,502,800		$	6,289		$	(18,099,446	)	$	12,409,643
Change in unearned premiums		(3,823,593	)		1,611			2,234,476			(1,587,506	)
Premiums earned	$	26,679,207		$	7,900		$	(15,864,970	)	$	10,822,137

Nine months ended September 30, 2010 (unaudited)
Premiums written	$	24,969,119		$	9,572		$	(14,529,432	)	$	10,449,259
Change in unearned premiums		(3,126,232	)		(1,360	)		583,683			(2,543,909	)
Premiums earned	$	21,842,887		$	8,212		$	(13,945,749	)	$	7,905,350

Three months ended September 30, 2011 (unaudited)
Premiums written	$	10,382,641		$	3,409		$	(6,119,576	)	$	4,266,474
Change in unearned premiums		(909,125	)		(41	)		579,881			(329,285	)
Premiums earned	$	9,473,516		$	3,368		$	(5,539,695	)	$	3,937,189

Three months ended September 30, 2010 (unaudited)
Premiums written	$	8,375,776		$	6,436		$	(5,015,905	)	$	3,366,307
Change in unearned premiums		(595,995	)		(3,432	)		298,409			(301,018	)
Premiums earned	$	7,779,781		$	3,004		$	(4,717,496	)	$	3,065,289

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $637,000 and $411,000 as of September 30, 2011 (unaudited) and December 31, 2010, respectively.

Loss and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):

	Nine months ended
	September 30,
	2011			2010
	(unaudited)
Balance at beginning of period	$	17,711,907		$	16,513,318
Less reinsurance recoverables		(10,431,415	)		(10,512,203	)
Net balance, beginning of period		7,280,492			6,001,115

Incurred related to:
Current year		6,742,201			4,211,203
Prior years		565,724			307,050
Total incurred		7,307,925			4,518,253

Paid related to:
Current year		2,414,171			1,960,235
Prior years		2,608,709			1,725,204
Total paid		5,022,880			3,685,439

Net balance at end of period		9,565,537			6,833,929
Add reinsurance recoverables		11,808,025			10,304,307
Balance at end of period	$	21,373,562		$	17,138,236

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $7,035,191 and $6,588,317 for the nine months ended September 30, 2011 and 2010.

Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to Company and industry trends.

Loss and loss adjustment expense reserves

The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often beyond the Company’s control. The loss ratio projection method is used to estimate loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the result of numerous best estimates made by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior years.

Reinsurance

The Company’s reinsurance treaties for both its Personal Lines business, which primarily consists of homeowners’ policies, and Commercial Lines business, other than commercial auto were renewed as of July 1, 2011. The treaties are renewed annually; the terms of the treaties effective July 1, 2011 are as follows:

Personal Lines

Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty which provides coverage up to $700,000 per occurrence. An excess of loss contract provides $1,500,000 of coverage in excess of the $700,000 included under the 75% quota share treaty for a total coverage up to $2,200,000 per occurrence. Personal umbrella policies are reinsured under a 90% quota share treaty limiting the Company to a maximum of $100,000 per occurrence for the first $1,000,000 of coverage. The second $1,000,000 of coverage is 100% reinsured.

Commercial Lines

General liability commercial policies written by the Company, except for commercial auto policies, are reinsured under a 60% quota share treaty, which provides coverage up to $700,000 per occurrence. An excess of loss contract provides $1,500,000 of coverage in excess of the $700,000 included under the 60% quota share treaty for a total coverage up to $2,200,000 per occurrence.

Commercial Auto

Commercial auto policies are covered by an excess of loss reinsurance contract which provides $1,750,000 of coverage in excess of $250,000 for a total coverage up to $2,000,000 per occurrence.

Catastrophe Reinsurance

A total of $54,000,000 of catastrophe reinsurance coverage has been obtained, whereby the Company retains $500,000 per occurrence.

The Company’s reinsurance program is structured to enable it to reflect significant reductions in premiums written and earned and also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. This structure has enabled the Company to significantly grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The Company’s participation in reinsurance arrangements does not relieve the Company from its obligations to policyholders.

Ceding Commission Revenue

The Company earns ceding commissions under its quota share reinsurance agreements based on a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and ceding commissions earned decreases when the estimated ultimate loss ratio increases.

As of September 30, 2011 and 2010, the Company’s estimated ultimate loss ratios attributable to these contracts are lower than the contractual ultimate loss ratios at which provisional ceding commissions are earned. Accordingly, the Company has recorded contingent ceding commissions earned in addition to the provisional ceding commissions earned.

Ceding commission revenue consists of the following:

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
	(unaudited)				(unaudited)
Provisional ceding commissions earned	$	1,763,930	$	1,547,878	$	5,048,609	$	4,771,366
Contingent ceding commissions earned		543,460		683,615		2,299,223		1,642,408
	$	2,307,390	$	2,231,493	$	7,347,832	$	6,413,774

Note 8 – Notes Payable and Capital Lease Obligations

Notes payable and capital lease obligations consist of:

	September 30, 2011						December 31, 2010
			Less						Less
	Total		Current		Long-Term		Total		Current		Long-Term
	Debt		Maturities		Debt		Debt		Maturities		Debt
			(unaudited)
Capital lease obligation	$	-	$	-	$	-	$	10,997	$	10,997	$	-
Notes payable (includes payable to related parties of $378,000 at September 30, 2011 and $785,000 at December 31, 2010)		747,000		-		747,000		1,450,000		1,450,000		-
	$	747,000	$	-	$	747,000	$	1,460,997	$	1,460,997	$	-

Notes Payable

From June 2009 through January 2010, the Company borrowed $1,450,000 (including $785,000 from related parties as disclosed below) and issued promissory notes in such aggregate principal amount (the “2009 Notes”). The 2009 Notes provide for interest at the rate of 12.625% per annum through the maturity date of July 10, 2011. During the quarter the ended June 30, 2011, the Company prepaid $703,000 (including $407,000 to related parties) of the principal amount of the 2009 Notes. In June 2011, the remaining note holders agreed to extend the maturity date for a period of three years from July 10, 2011 to July 10 2014, and effective July 11, 2011, reduce the interest rate from 12.625% to 9.5% per annum. The remaining 2009 Notes, as extended, can be prepaid without premium or penalty.

Interest expense on the 2009 Notes for the nine months ended and three months ended September 30, 2011 was approximately $108,000 and $24,000, respectively. Interest expense on the 2009 Notes for the nine months ended and three months ended September 30, 2010 was approximately $133,000 and $46,000, respectively.

Related party balances as of September 30, 2011 and principal prepayments for the nine months ended September 30, 2011 under the 2009 Notes are as follows:

	Balance		Less		Balance
	December 31,		Principal		September 30,
	2010		Prepayments		2011
Barry Goldstein IRA	$	150,000	$	60,000	$	90,000
A limited liability company owned by Mr. Goldstein, along with Sam Yedid and Steven Shapiro (who are both directors of KICO)		120,000		120,000		-
Jay Haft, a director of the Company		50,000		20,000		30,000
A member of the family of Michael Feinsod, a director of the Company		100,000		40,000		60,000
Mr. Yedid and members of his family		295,000		139,000		156,000
A member of the family of Floyd Tupper, a director of KICO		70,000		28,000		42,000
Total related party transations	$	785,000	$	407,000	$	378,000

Interest expense on related party borrowings for the nine months and three months ended September 30, 2011 was approximately $57,000 and $12,000, respectively. Interest expense on related party borrowings for the nine months and three months ended September 30, 2010 was approximately $71,000 and $24,000, respectively.

Note 9 – Preferred Stock

In accordance with GAAP guidance for accounting for certain financial instruments with characteristics of both liabilities and equity, the Company recorded previously issued Preferred Stock as a liability. All of the preferred stock was exchanged for common stock effective June 30, 2010. For the nine months ended September 30, 2011 and 2010, the preferred dividends have been classified as interest expense of $-0- and $74,706 (including $65,274 to related parties), respectively. For the three months ended September 30, 2011 and 2010, the preferred dividends have been classified as interest expense of $-0- and $-0-, respectively.

Note 10 – Stockholders’ Equity

Dividend Declared

The Company’s Board of Directors approved a quarterly dividend on November 10, 2011 of $.03 per share payable in cash on December 15, 2011 to stockholders of record as of November 30, 2011.

Other Equity Compensation

The results of operations for the nine months ended September 30, 2011 and 2010 include other share-based stock compensation expense totaling $-0- and $143,129, respectively. The results of operations for the three months ended September 30, 2011 and 2010 include other share-based stock compensation expense totaling $-0- and $10,000, respectively. For the nine months ended September 30, 2010, other equity compensation consists of: (a) 50,000 shares granted to the Company’s chief executive officer pursuant to an amended employment agreement dated March 24, 2010, and (b) 12,466 shares granted to directors. The fair value of stock grants is as follows:

	Three months ended				Three months ended				Nine months ended				Nine months ended
	September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
	(unaudited)				(unaudited)				(unaudited)				(unaudited)

Grant	Shares		Fair Value		Shares		Fair Value		Shares		Fair Value		Shares		Fair Value
Chief Executive Officer		-	$	-		-	$	-		-	$	-		50,000	$	112,000
Directors		-		-		4,588		10,000		-		-		12,466		31,129
		-	$	-		4,588	$	10,000		-	$	-		62,466	$	143,129

The fair value of stock grants has been included in the Condensed Consolidated Statement of Operations and Comprehensive Income within other operating expenses.

Stock Options

In December 2005, the Company’s shareholders ratified the adoption of the 2005 Equity Participation Plan (the “2005 Plan”), which provides for the issuance of incentive stock options, non-statutory stock options and restricted stock. Under the 2005 Plan, a maximum of 300,000 shares of Common Stock were permitted to be issued pursuant to options granted and restricted stock issued. In March 2010, the Board of Directors of the Company increased the number of shares of Common Stock authorized to be issued pursuant to the 2005 Plan to 550,000, subject to stockholder approval. In June 2010, the stockholders approved the increase to 550,000 shares. Incentive stock options granted under the 2005 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Stock Option Committee will determine the expiration date with respect to non-statutory options, and the vesting provisions for restricted stock, granted under the 2005 Plan.

The results of operations for the nine months and three months ended September 30, 2011 include share-based stock option compensation expense totaling approximately $86,000 and $21,000, respectively. The results of operations for the nine months and three months ended September 30, 2010 include share-based stock option compensation expense totaling approximately $183,000 and $45,000, respectively. Share-based compensation expense related to stock options is net of estimated forfeitures of 21% for the nine months and three months ended September 30, 2011. Share-based compensation expense related to stock options is net of estimated forfeitures of 23% for the nine months and three months ended September 30, 2010. Such amounts have been included in the Condensed Consolidated Statements of Operations and Comprehensive Income within other operating expenses.

Stock option compensation expense in 2011 and 2010 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The weighted average estimated fair value of stock options granted during the nine months ended September 30, 2010 was $2.04 per share. The fair value of options at the grant date was estimated using the Black-Scholes option-pricing method. No stock options were granted during the nine months ended September 30, 2011. The following weighted average assumptions were used for grants during the nine months ended September 30, 2010:

Dividend Yield	0.00%
Volatility	101.25%
Risk-Free Interest Rate	2.62%
Expected Life	5 years

A summary of option activity under the Company’s 1998 Stock Option Plan (terminated in November, 2008) and the 2005 Plan as of September 30, 2011, and changes during the nine months then ended, 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, 2011		393,865	$	2.32		3.28	$	463,465

Granted			$	-		-	$	-
Exercised		-	$	-		-	$	-
Forfeited		-	$	-		-	$	-

Outstanding at September 30, 2011		393,865	$	2.32		2.53	$	455,588

Vested and Exercisable at September 30, 2011		269,432	$	2.26		2.17	$	329,293

The aggregate intrinsic value of options outstanding and options exercisable at September 30, 2011 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 $3.48 closing price of the Company’s Common Stock on September 30, 2011. No stock options were exercised in the nine months ended September 30, 2011 and 2010.

As of September 30, 2011, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $75,000. Unamortized compensation cost as of September 30, 2011 is expected to be recognized over a remaining weighted-average vesting period of 1.21 years.

Note 11 – 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 basis depending on applicable laws. The company records adjustments related to prior year’s 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 financial statements taken as a whole for the respective periods. The Company has evaluated this year’s amounts in relation to the current and prior reporting periods and determined that a restatement of those prior reporting periods is not appropriate. The Company’s effective tax rate from continuing operations for the nine months and three months ended September 30, 2011 was 24.1% and 41.9%, respectively. A reconciliation of the Federal statutory rate to our effective rate from continuing operations is as follows:

	For the Three Months Ended										For the Nine Months Ended
	September 30,										September 30,
	2011					2010					2011					2010

Computed expected tax expense	$	51,003		34.0	%	$	117,025		34.0	%	$	501,775		34.0	%	$	458,036	34.0	%
State taxes, net of Federal benefit		(10,225	)	(6.8	)		10,164		3.0			(24,976	)	(1.7	)		24,932	1.9
Permanent differences		(70,835	)	(47.2	)		(12,773	)	2.6			(88,153	)	(6.0	)		46,756	4.5
True-up of prior year taxes		(72,960	)	(48.6	)		-		-			(50,886	)	(3.5	)		-	-
Other		33,458		22.3			13,862		(2.3	)		17,926		1.2			34,664	1.6
Total tax	$	(69,559	)	(46.4	)%	$	128,278		37.3	%	$	355,686		24.1	%	$	564,388	41.9	%

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 sheet reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at a various rates depending on whether the temporary differences are subject to Federal taxes, State taxes, or both. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	September 30,			December 31,
	2011			2010
	(unaudited)
Deferred tax asset:
Net operating loss carryovers	$	383,403		$	253,564
Claims reserve discount		247,454			188,074
Unearned premium		664,933			551,966
Loss and loss adjustment expenses		-			39,100
Reinsurance recoverable		-			13,600
Deferred ceding commission revenue		1,311,659			1,094,634
Accrued expenses		-			56,800
Other		47,447			-
Total deferred tax assets		2,654,896			2,197,738

Deferred tax liability:
Investment in KICO		1,169,000			1,169,000
Deferred acquisition costs		1,501,119			1,230,460
Intangibles		1,285,064			1,406,371
Depreciation and amortization		195,443			204,287
Reinsurance recoverable		20,400			-
Net unrealized appreciation of securities - available for sale		108,730			109,497
Investment income		27,864			42,348
Other		-			34,332
Total deferred tax liabilities		4,307,620			4,196,295

Net deferred income tax liability	$	(1,652,724	)	$	(1,998,557	)

Under GAAP guidance for the “Accounting for Uncertainty in Income Taxes”, the Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. Additionally, Accounting for Uncertainty in Income Taxes, provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the nine months and three months ended September 30, 2011 and 2010. If any had been recognized these would be reported in income tax expense.

IRS Tax Audit

In July 2011, the Company received a notice that its Federal income tax return for the year ended December 31, 2009 has been selected for examination by the Internal Revenue Service. The audit commenced in September 2011. The final results of this audit are unknown, although management is confident in the tax assertions made in the tax return.

Note 12 – Net Income Per Common Share

For the nine months and three months ended September 30, 2011 there were 269,432 vested options with an exercise price below the average market price of the Company’s Common Stock during the period. For the nine months ended September 30, 2011 the inclusion of 83,788 net shares of Common Stock assumed to issued upon the exercise of such options in the computation of diluted earnings per share would have been anti-dilutive for such period, and as a result, the weighted average number of shares of Common Stock used in the calculation of basic and diluted earnings per common share have not been adjusted for the effect of such options.

For the nine months and three months ended September 30, 2010 there were 204,716 and 157,500 vested options with an exercise price below the average market price of the Company’s shares of Common Stock during the period. For the nine months and three months ended September 30, 2010 the inclusion of 51,289 net shares of Common Stock and 20,608 net shares of Common Stock, respectively, assumed to issued upon the exercise of such options in the computation of diluted earnings per share would have been anti-dilutive for both periods, and as a result, the weighted average number of shares of Common Stock used in the calculation of basic and diluted earnings per common share have not been adjusted for the effects of such options.

The reconciliation of the weighted average number of shares of Common Stock used in the calculation of basic and diluted earnings per common share for the three months ended September 30, 2011 follows:

Weighted average number of shares outstanding			3,838,386
Effect of dilutive securities, common share equivalents			74,650

Weighted average number of shares outstanding, used for computing diluted earnings per share			3,913,036

Note 13 – Commitments and Contingencies

Legal Proceedings

From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim asserted by a third party in a law suit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses. The Company is not subject to any other pending legal proceedings that management believes are likely to have a material adverse effect on the financial statements.

Note 14 – Discontinued Operations

On April 17, 2009, the Company’s wholly-owned subsidiaries that owned and operated its former network of retail brokerage outlets in New York State sold substantially all of their assets, including the book of business (the “New York Assets”). As additional consideration, the Company was entitled to receive through September 30, 2010 an additional amount equal to 60% of the net commissions derived from the book of business of six New York retail locations that were closed in 2008. Income from discontinued operations for the nine months ended September 30, 2011 and 2010 includes approximately $-0- and $40,000, respectively, of income from additional consideration from the sale of the New York Assets. Income from discontinued operations for the three months ended September 30, 2011 and 2010 includes approximately $-0- and $16,000, respectively, of income from additional consideration from the sale of the New York Assets.

Note 15 – Subsequent Event

On November 10, 2011, KICO’s board of directors approved a cash dividend of $175,000 to the Company, which was paid on November 11, 2011. Payment of the cash dividend will have no effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We offer property and casualty insurance products to small businesses and individuals in New York State through our subsidiary, Kingstone Insurance Company (“KICO”).

We derive 98% of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, investment income and net realized and unrealized gains and losses on investment securities. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.

Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers and premium taxes, and other expenses related to the underwriting process, including their employees’ compensation and benefits.

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

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

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

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

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

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

Critical Accounting Policies

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 accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, our management has utilized information available including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.

We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred 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 - “Accounting Policies and Basis of Presentation” for information related to updated accounting policies.

Consolidated Results of Operations

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

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

	Nine months ended September 30,
($ in thousands)	2011			2010			Change			Percent
Revenue s
Direct written premiums	$	30,503		$	24,969		$	5,534			22.2	%
Net written premiums		12,410			10,449			1,960			18.8	%
Change in net unearned premiums		(1,588	)		(2,544	)		956			(37.6	)%
Net premiums earned		10,822			7,905			2,917			36.9	%
Ceding commission revenue (1)		7,348			6,414			934			14.6	%
Net investment income		510			436			74			17.0	%
Net realized gain on investments		357			229			128			55.9	%
Other income		693			664			29			4.4	%
Total revenues		19,730			15,648			4,082			26.1	%

Expense s
Loss and loss adjustment expenses
Direct loss and loss adjustment expenses		14,343			11,107			3,237			29.1	%
Less: ceded loss and loss adjustment expenses		(7,035	)		(6,588	)		(447	)		6.8	%
Net loss and loss adjustment expenses (1)		7,308			4,518			2,790			61.7	%
Commission expense		4,473			3,647			826			22.6	%
Other underwriting expenses		5,045			4,113			932			22.7	%
Other operating expenses		863			1,345			(482	)		(35.8	) %
Depreciation and amortization		457			464			(7	)		(1.5	) %
Interest expense		108			139			(31	)		(22.3	) %
Interest expense - mandatorily redeemable preferred stock		-			75			(75	)		(100.0	) %
Total expenses		18,254			14,301			3,953			27.6	%

Income from continuing operations before taxes		1,476			1,347			129			9.6	%
Provision for (benefit from) income tax		356			564			(208	)		(36.9	) %
Income from continuing operations		1,120			783			337			43.0	%
Income from discontinued operations, net of taxes		-			40			(40	)		(100.0	) %
Net income	$	1,120		$	823		$	297			36.1	%

Percent of total revenues:
Net premiums earned		54.9	%		50.5	%
Ceding commission revenue		37.2	%		41.0	%
Net investment income		2.6	%		2.8	%
Net realized gains on investments		1.8	%		1.5	%
Other income		3.5	%		4.2	%
		100.0	%		100.0	%

Net loss ratio excluding the effect of catastrophes		63.6	%		57.2	%
Net catastrophe loss		3.9	%		0.0	%
Net loss ratio		67.5	%		57.2	%

(1) Includes net catastrophe losses and net loss adjustment expenses for the nine months ended September 30, 2011of $422,000 incurred from August 27, 2011 to August 29, 2011 from Tropical Storm Irene. Catastrophe losses incurred from Tropical Storm Irene decreased our ceded loss ratio which reduced our contingent ceding commission revenue by $493,000. We define a “catastrophe” as an event that involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event. Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.

Direct written premiums during the nine months ended September 30, 2011 (“2011”) were $30,503,000 compared to $24,969,000 during the nine months ended September 30, 2010 (“2010”). The increase of $5,534,000 or 22.2% was primarily due to an increase in policies in-force during 2011 as compared to 2010. Policies in-force increased by 19.7% as of September 30, 2011 compared to September 30, 2010. In addition to the increase of policies in-force, we are also writing more policies which have higher premiums.

Net written premiums increased $1,960,000, or 18.8%, to $12,410,000 in 2011 from $10,449,000 in 2010. The increase in net written premiums resulted from an increase in direct written premiums in 2011 compared to direct written premiums in 2010. Net written premiums grew at a lower rate than direct written premiums (18.8% compared to 22.2%) due to a greater increase in premiums written in lines of business that are subject to quota share treaties compared to lines of business that are not subject to quota share treaties.

Net premiums earned increased $2,917,000, or 36.9%, to $10,822,000 in 2011 from $7,905,000 in 2010. As premiums written earn ratably primarily over a twelve month period, the increase was a result of higher net written premiums for the twelve months ended September 30, 2011 compared to the twelve months ended September 30, 2010.

Ceding commission revenue was $7,348,000 in 2011 compared to $6,414,000 in 2010. The increase of $934,000 or 14.6% was due to the increase in the amount of premiums ceded and more favorable ceding commission rates, offset by the effects of Tropical Storm Irene on our ceded net loss ratio which reduced our contingent ceding commission revenue by $493,000. Our quota share reinsurance treaty, which expired June 30, 2011, contained a provision which limited the maximum contingent ceding commission that could be paid to us, with the unused benefit carried forward to the current treaty year which began July 1, 2011. The carryover amount was recognized effective July 1, 2011, and resulted in an additional $136,000 to our contingent ceding commission revenue. Ceding commission revenue also increased as a result of decreases in ceded loss ratios on prior year’s quota share treaties.

Net investment income was $510,000 in 2011 compared to $436,000 in 2010. The increase of $74,000 or 17.0% was due to an increase in average invested assets in 2011 as compared to 2010, offset by an adjustment to amortization of bond premium in 2011. The increase in cash and invested assets resulted primarily from increased operating cash flows. The tax equivalent investment yield, excluding cash, was 5.07% and 5.77% at September 30, 2011 and 2010, respectively.

Net realized gains on investments were $357,000 in 2011 compared to $229,000 in 2010. The increase of $128,000 or 55.9% was due to a $133,000 FDIC recovery from a failed bank which was included in other than temporary impaired losses in 2009.

Net loss and loss adjustment expenses were $7,308,000 in 2011 compared to $4,518,000 in 2010. The net loss ratio was 67.5% in 2011 compared to 57.2% in 2010. The increase of 10.3 percentage points in our net loss ratio for 2011 as compared to 2010 is primarily due to the effects of Tropical Storm Irene in August 2011 and an increase in losses in our commercial auto line of business, which is not subject to a quota share treaty in 2011. As a result of Tropical Storm Irene, which we define as a catastrophe, we incurred $422,000 of losses and loss adjustment expenses (net of reinsurance recoverable of $1,266,000), and added 3.9 percentage points to our net loss ratio.

Commission expense was $4,473,000 in 2011 or 14.7% of direct written premiums. Commission expense was $3,647,000 in 2010 or 14.6% of direct written premiums. The increase of $826,000 or 22.6% is due to the 22.2% increase in direct written premiums in 2011 as compared to 2010.

Other underwriting expenses were $5,045,000 in 2011 compared to $4,113,000 in 2010. The $932,000 increase in other underwriting expenses was primarily due to expenses directly related to the increase in direct written premiums and additional employment costs due to the hiring of additional staff needed to service our growth in written premiums. The net underwriting expense ratio was 46.6% in 2011 as compared to 52.0% in 2010.

Other operating expenses, related to the corporate expenses of our holding company, were $863,000 in 2011 compared to $1,345,000 in 2010. The $482,000 decrease in 2011 was primarily due to decreases in professional fees, executive employment costs, and amortization of stock options. The reduction of professional fees in 2011 was due to the elimination of the additional costs incurred in 2010 stemming from the acquisition of KICO on July 1, 2009. The reduction of executive employment costs is due to share-based bonus compensation to our Chief Executive Officer in 2010, which was incurred pursuant to his amended employment agreement dated March 24, 2010. No such share-based bonus compensation was incurred in 2011. The reduction in amortization of stock options decreased as a result of more stock options being fully vested prior to 2011.

Interest expense was $108,000 in 2011 compared to $139,000 in 2010. The $31,000 decrease in interest expense was due to the $703,000 partial redemption of our 2009 Notes during the quarter ended June 30, 2011, and effective July 11, 2011, a reduction in the interest rate from 12.625% to 9.5%.

Interest expense on mandatorily redeemable preferred stock was $-0- in 2011 compared to $75,000 in 2010. The reduction was due to the exchange of all of the outstanding preferred stock into common stock on June 30, 2010, which resulted in the elimination of additional related interest expense as of that date.

Income tax expense in 2011 was $356,000, which resulted in an effective tax rate of 24.1%. Income tax expense in 2010 was $564,000, which resulted in an effective tax rate of 41.9%. The decrease in our effective tax rate resulted primarily from a change to tax exempt permanent differences in 2011 from taxable permanent differences in 2010 and the true-up of our 2010 income tax liability. Permanent differences in 2011 had less of an impact on the effective tax rate due to a lower percentage of permanent differences to book income compared to 2010.

Net income was $1,120,000 in 2011 compared to $823,000 in 2010. The increase in net income of $297,000 was due to the circumstances that caused the increases in our net premiums earned and ceding commission revenue, increase in net realized gains and a decrease in other operating expenses, offset by increases in our net loss ratio and other underwriting expenses, as described above.

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

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

	Three months ended September 30,
($ in thousands)	2011			2010			Change			Percent
Revenue s
Direct written premiums	$	10,383		$	8,376		$	2,007			24.0	%
Net written premiums		4,267			3,366			900			26.7	%
Change in net unearned premiums		(330	)		(301	)		(29	)		9.6	%
Net premiums earned		3,937			3,065			871			28.4	%
Ceding commission revenue (1)		2,308			2,232			76			3.4	%
Net investment income		172			155			17			11.0	%
Net realized gain on investments		197			84			113			134.5	%
Other income		228			215			13			6.0	%
Total revenues		6,842			5,751			1,090			19.0	%

Expense s
Loss and loss adjustment expenses
Direct loss and loss adjustment expenses		6,555			4,490			2,065			46.0	%
Less: ceded loss and loss adjustment expenses		(3,621	)		(2,582	)		(1,039	)		40.3	%
Net loss and loss adjustment expenses (1)		2,934			1,908			1,026			53.8	%
Commission expense		1,596			1,287			309			24.0	%
Other underwriting expenses		1,734			1,581			153			9.7	%
Other operating expenses		260			428			(168	)		(39.3	) %
Depreciation and amortization		144			156			(12	)		(7.7	) %
Interest expense		24			47			(23	)		(48.9	) %
Total expenses		6,692			5,407			1,285			23.8	%

Income from continuing operations before taxes		150			344			(195	)		(56.5	) %
Provision for (benefit from) income tax		(70	)		128			(198	)		(154.7	) %
Income from continuing operations		220			216			3			1.5	%
Income from discontinued operations, net of taxes		-			16			(16	)		(100.0	) %
Net income	$	220		$	232		$	(13	)		(5.5	) %

Percent of total revenues:
Net premiums earned		57.5	%		53.3	%
Ceding commission revenue		33.7	%		38.8	%
Net investment income		2.5	%		2.7	%
Net realized gains on investments		2.9	%		1.5	%
Other income		3.3	%		3.7	%
		100.0	%		100.0	%

Net loss ratio excluding the effect of catastrophes		63.8	%		62.2	%
Net catastrophe loss		10.7	%		0.0	%
Net loss ratio		74.5	%		62.2	%

(1) Includes net catastrophe losses and net loss adjustment expenses for the three months ended September 30, 2011of $422,000 incurred from August 27, 2011 to August 29, 2011 from Tropical Storm Irene. Catastrophe losses incurred from Tropical Storm Irene decreased our ceded loss ratio which reduced our contingent ceding commission revenue by $493,000. We define a “catastrophe” as an event that involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event. Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.

Direct written premiums during the three months ended September 30, 2011 (“Q3 2011”) were $10,383,000 compared to $8,376,000 during the three months ended September 30, 2010 (“Q3 2010”). The increase of $2,007,000 or 24.0% was primarily due to an increase in policies in-force during Q2 2011 as compared to Q2 2010. Policies in-force increased by 19.7% as of September 30, 2011 compared to September 30, 2010. In addition to the increase of policies in-force, we are also writing more policies which have higher premiums.

Net written premiums increased $900,000, or 26.7%, to $4,267,000 in Q3 2011 from $3,366,000 in Q3 2010. The increase in net written premiums resulted from an increase in direct written premiums in Q3 2011 compared to direct written premiums in Q3 2010. Net written premiums grew at a greater rate than direct written premiums (26.7% compared to 24.0%) due to a reduction effective July 1, 2011 in the quota share percentage on our commercial lines from 75% to 60%.

Net premiums earned increased $871,000, or 28.4%, to $3,937,000 in Q3 2011 from $3,065,000 in Q3 2010. As premiums written earn ratably primarily over a twelve month period, the increase was a result of higher net written premiums for the twelve months ended September 30, 2011 compared to the twelve months ended September 30, 2010.

Ceding commission revenue was $2,308,000 in Q3 2011 compared to $2,232,000 in Q3 2010. The increase of $76,000 or 3.4% was due to the increase in the amount of premiums ceded and more favorable ceding commission rates, offset by the effects of Tropical Storm Irene on our ceded net loss ratio which reduced our contingent ceding commission revenue by $493,000. Our quota share reinsurance treaty, which expired June 30, 2011, contained a provision which limited the maximum contingent ceding commission that could be paid to us, with the unused benefit carried forward to the current treaty year which began July 1, 2011. The carryover amount was recognized effective July 1, 2011, and resulted in an additional $136,000 to our contingent ceding commission revenue. Increases in ceded loss ratios on prior year’s quota share treaties had the effect of decreasing Ceding commission revenue in Q3.

Net investment income was $172,000 in Q3 2011 compared to $155,000 in Q3 2010. The increase of $17,000 or 11.0% was due to an increase in average invested assets in Q3 2011 as compared to Q3 2010. The increase in cash and invested assets resulted primarily from increased operating cash flows. The tax equivalent investment yield, excluding cash, was 5.07% and 5.77% at September 30, 2011 and 2010, respectively.

Net realized gains on investments were $197,000 in 2011 compared to $84,000 in 2010. The increase of $113,000 or 134.5% was primarily due to a $133,000 FDIC recovery from a failed bank which was included in other than temporary impaired losses in 2009.

Net loss and loss adjustment expenses were $2,934,000 in Q3 2011 compared to $1,908,000 in Q3 2010. The net loss ratio was 74.5% in Q3 2011 compared to 62.2% in Q3 2010. The increase of 12.3 percentage points in our net loss ratio for 2011 as compared to 2010 is primarily due to the effects of Tropical Storm Irene in August 2011 and an increase in losses in our commercial auto line of business, which is not subject to a quota share treaty in 2011. As a result of Tropical Storm Irene, which we define as a catastrophe, we incurred $422,000 of losses and loss adjustment expenses (net of reinsurance recoverable of $1,266,000), and added 10.7 percentage points to our net loss ratio.

Commission expense was $1,596,000 in Q3 2011 or 15.4% of direct premiums written. Commission expense was $1,287,000 in Q3 2010 or 15.4% of direct written premiums. The increase of $309,000 or 24.0% is due to the 24.0% increase in direct written premiums in Q3 2011 as compared to Q3 2010.

Other underwriting expenses were $1,734,000 in Q3 2011 compared to $1,581,000 in Q3 2010. The $153,000 increase in other underwriting expenses was primarily due to expenses directly related to the increase in direct written premiums and additional employment costs due to the hiring of additional staff needed to service our growth in written premiums. The net underwriting expense ratio was 44.0% in Q3 2011 as compared to 51.6% in Q3 2010.

Other operating expenses, related to the corporate expenses of our holding company, were $260,000 in Q3 2011 compared to $428,000 in Q3 2010. The $168,000 decrease in Q3 2011 was primarily due to decreases in salaries and amortization of stock options. The decrease in salaries is due a change in allocation of our executive salaries to corporate expenses and a reduction of the accrued bonus to our CEO based on the formula calculated pursuant to his amended employment agreement date March 24, 2010. The reduction in amortization of stock options decreased as a result of more stock options being fully vested prior to Q3 2011.

Interest expense was $24,000 in Q3 2011 compared to $47,000 in Q3 2010. The $23,000 decrease in interest expense was due to the $703,000 partial redemption of our 2009 Notes during the quarter ended June 30, 2011, and effective July 11, 2011, a reduction in the interest rate from 12.625% to 9.5%.

Income tax benefit in Q3 2011 was $70,000, which resulted in an effective tax rate of (46.4)%. Income tax expense in Q3 2010 was $128,000, which resulted in an effective tax rate of 37.3%.

Net income was $220,000 in Q3 2011 compared to $232,000 in Q3 2010. The decrease in net income of $13,000 was due to the circumstances that caused the increases in our net loss ratio and other underwriting expenses, offset by increases in our net premiums earned and ceding commission revenue, increase in realized gains, decrease in other operating expenses, and increase in tax benefit, as described above.

Insurance Underwriting Business on a Standalone Basis

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010

Revenue s
Net premiums earned	$	3,937,189	$	3,065,289	$	10,822,137	$	7,905,350
Ceding commission revenue		2,307,390		2,231,493		7,347,832		6,413,774
Net investment income		172,039		154,679		510,173		435,882
Net realized gain on investments		196,574		84,054		357,006		228,803
Other income		109,452		82,498		307,511		244,666
Total revenues		6,722,644		5,618,013		19,344,659		15,228,475

Expense s
Loss and loss adjustment expenses		2,933,531		1,907,917		7,307,925		4,518,253
Commission expense		1,596,281		1,287,268		4,472,924		3,647,371
Other underwriting expenses		1,734,137		1,580,827		5,045,051		4,112,889
Depreciation and amortization		144,122		154,475		452,503		461,076
Total expenses		6,408,071		4,930,488		17,278,403		12,739,590

Income from operations		314,573		687,525		2,066,256		2,488,885
Income tax expense		30,295		209,426		601,939		820,036
Net income	$	284,278	$	478,100	$	1,464,317	$	1,668,850

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

	Direct			Assumed			Ceded			Net

Nine months ended September 30, 2011
Written premiums	$	30,502,800		$	6,289		$	(18,099,446	)	$	12,409,643
Unearned premiums		(3,823,593	)		1,611			2,234,476			(1,587,506	)
Earned premiums	$	26,679,207		$	7,900		$	(15,864,970	)	$	10,822,137

Loss and loss adjustment expenses exluding the effect of catastrophes	$	12,639,123		$	15,704		$	(5,768,974	)	$	6,885,853
Catastrophe loss		1,688,289			-			(1,266,217	)		422,072
Loss and loss adjustment expenses	$	14,327,412		$	15,704		$	(7,035,191	)	$	7,307,925

Loss ratio excluding the effect of catastrophes		47.4	%		198.8	%		36.4	%		63.6	%
Catastrophe loss		6.3	%		0.0	%		8.0	%		3.9	%
Loss ratio		53.7	%		198.8	%		44.3	%		67.5	%

Nine months ended September 30, 2010
Written premiums	$	24,969,119		$	9,572		$	(14,529,432	)	$	10,449,259
Unearned premiums		(3,126,232	)		(1,360	)		583,683			(2,543,909	)
Earned premiums	$	21,842,887		$	8,212		$	(13,945,749	)	$	7,905,350

Loss and loss adjustment expenses exluding the effect of catastrophes	$	11,095,027		$	11,543		$	(6,588,317	)	$	4,518,253
Catastrophe loss		-			-			-			-
Loss and loss adjustment expenses	$	11,095,027		$	11,543		$	(6,588,317	)	$	4,518,253

Loss ratio excluding the effect of catastrophes		50.8	%		140.6	%		47.2	%		57.2	%
Catastrophe loss		0.0	%		0.0	%		0.0	%		0.0	%
Loss ratio		50.8	%		140.6	%		47.2	%		57.2	%

Three months ended September 30, 2011
Written premiums	$	10,382,641		$	3,409		$	(6,119,576	)	$	4,266,474
Unearned premiums		(909,125	)		(41	)		579,881			(329,285	)
Earned premiums	$	9,473,516		$	3,368		$	(5,539,695	)	$	3,937,189

Loss and loss adjustment expenses exluding the effect of catastrophes	$	4,857,144		$	9,649		$	(2,355,334	)	$	2,511,459
Catastrophe loss		1,688,289			-			(1,266,217	)		422,072
Loss and loss adjustment expenses	$	6,545,433		$	9,649		$	(3,621,551	)	$	2,933,531

Loss ratio excluding the effect of catastrophes		51.3	%		286.5	%		42.5	%		63.8	%
Catastrophe loss		17.8	%		0.0	%		22.9	%		10.7	%
Loss ratio		69.1	%		286.5	%		65.4	%		74.5	%

Three months ended September 30, 2010
Written premiums	$	8,375,776		$	6,436		$	(5,015,905	)	$	3,366,307
Unearned premiums		(595,995	)		(3,432	)		298,409			(301,018	)
Earned premiums	$	7,779,781		$	3,004		$	(4,717,496	)	$	3,065,289

Loss and loss adjustment expenses exluding the effect of catastrophes	$	4,482,894		$	6,825		$	(2,581,802	)	$	1,907,917
Catastrophe loss		-			-			-			-
Loss and loss adjustment expenses	$	4,482,894		$	6,825		$	(2,581,802	)	$	1,907,917

Loss ratio excluding the effect of catastrophes		57.6	%		227.2	%		54.7	%		62.2	%
Catastrophe loss		0.0	%		0.0	%		0.0	%		0.0	%
Loss ratio		57.6	%		227.2	%		54.7	%		62.2	%

Key Measures

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Net premiums earned	$	3,937,189		$	3,065,289		$	10,822,137		$	7,905,350
Ceding commission revenue (1)		2,307,390			2,231,493			7,347,832			6,413,774
Other income		109,452			82,498			307,511			244,666

Loss and loss adjustment expenses (2)		2,933,531			1,907,917			7,307,925			4,518,253

Acquistion costs and other underwriting expenses:
Commission expense		1,596,281			1,287,268			4,472,924			3,647,371
Other underwriting expenses		1,734,137			1,580,827			5,045,051			4,112,889
Total acquistion costs and other underwriting expenses		3,330,418			2,868,095			9,517,975			7,760,260

Underwriting income	$	90,082		$	603,268		$	1,651,580		$	2,285,277

Key Measures:
Net loss ratio excluding the effect of catastrophes		63.8	%		62.3	%		63.6	%		57.2	%
Effect of catastrophe loss on loss ratio (2)		10.7	%		0.0	%		3.9	%		0.0	%
Net loss ratio		74.5	%		62.3	%		67.5	%		57.2	%

Net underwriting expense ratio excluding the effect of catastrophes		10.7	%		18.1	%		12.7	%		13.9	%
Effect of catastrophe loss on net underwriting expense ratio (1) (2)		12.5	%		0.0	%		4.6	%		0.0	%
Net underwriting expense ratio		23.2	%		18.1	%		17.2	%		13.9	%

Net combined ratio excluding the effect of catastrophes		74.5	%		80.3	%		76.3	%		71.1	%
Effect of catastrophe loss on net combined ratio (1) (2)		23.2	%		0.0	%		8.5	%		0.0	%
Net combined ratio		97.7	%		80.3	%		84.7	%		71.1	%

Reconciliation of net underwriting expense ratio:
Acquisition costs and other underwriting expenses	$	3,330,418		$	2,868,095		$	9,517,975		$	7,760,260
Less: Ceding commission revenue (1)		(2,307,390	)		(2,231,493	)		(7,347,832	)		(6,413,774	)
Less: Other income		(109,452	)		(82,498	)		(307,511	)		(244,666	)
	$	913,576		$	554,104		$	1,862,632		$	1,101,820

Net earned premium	$	3,937,189		$	3,065,289		$	10,822,137		$	7,905,350

(1) The effect of catastrophes reduced contingent ceding commission revenue by $492,870 for the three months and nine months ended September 30, 2011. A provision in our quota share reinsurance treaty, which expired June 30, 2011, limited the maximum contingent ceding commission that could be paid to us, with the unused benefit carried forward to the current treaty year which began July 1, 2011. The carry forward of the unused benefit resulted in additional contingent ceding commission revenue of approximately $136,000 for the three months and nine months ended September 30, 2011.

(2) Includes net catastrophe losses and net loss adjustment expenses for the three months ended September 30, 2011of $422,072 .

Investments

Portfolio Summary

The following table presents a breakdown of the amortized cost, aggregate fair value and unrealized gains and losses by investment type as of September 30, 2011 and December 31, 2010:

Available for Sale Securities

	September 30, 2011

	Cost or		Gross		Gross Unrealized Losses						Aggregate		% of
	Amortized		Unrealized		Less than 12			More than 12			Fair		Fair
Category	Cost		Gains		Months			Months			Value		Value
	(unaudited)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	499,815	$	49,398	$	-		$	-		$	549,213		2.5	%

Political subdivisions of States, Territories and Possessions		6,133,143		288,099		-			-			6,421,242		29.1	%

Corporate and other bonds i ndustrial and miscellaneous		10,956,040		271,758		(221,751	)		(24,860	)		10,981,187		49.7	%
Total fixed-maturity securities		17,588,998		609,255		(221,751	)		(24,860	)		17,951,642		81.2	%
Equity Securities		4,119,319		235,726		(211,788	)		-			4,143,257		18.8	%
Total	$	21,708,317	$	844,981	$	(433,539	)	$	(24,860	)	$	22,094,899		100.0	%

	December 31, 2010

	Cost or		Gross		Gross Unrealized Losses						Aggregate		% of
	Amortized		Unrealized		Less than 12			More than 12			Fair		Fair
Category	Cost		Gains		Months			Months			Value		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000,572	$	42,085	$	-		$	-		$	1,042,657		5.4	%

Political subdivisions of States, Territories and Possessions		7,278,663		79,791		(86,234	)		(12,995	)		7,259,225		37.6	%

Corporate and other bonds i ndustrial and miscellaneous		7,997,817		176,999		(137,597	)		-			8,037,219		41.6	%
Total fixed-maturity securities		16,277,052		298,875		(223,831	)		(12,995	)		16,339,101		84.6	%
Equity Securities		2,825,015		218,717		(60,697	)		-			2,983,035		15.4	%
Total	$	19,102,067	$	517,592	$	(284,528	)	$	(12,995	)	$	19,322,136		100.0	%

Held to Maturity Securities

September 30, 2011

Cost or

Gross

Gross Unrealized Losses

% of

Amortized

Unrealized

Less than 12

More than 12

Fair

Exhibits

31(a) Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31(b) Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer 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

	September 30, 2011					December 31, 2010
			Percentage of					Percentage of
	Fair Market		Fair Market			Fair Market		Fair Market
	Value		Value			Value		Value
	(unaudited)
Rating
U.S. Treasury securities	$	549,213		3.1	%	$	1,042,657		6.4	%
AAA		3,952,158		22.0	%		4,229,483		25.9	%
AA		3,794,815		21.1	%		3,698,610		22.6	%
A		4,705,163		26.2	%		4,770,488		29.2	%
BBB		4,950,293		27.6	%		2,597,863		15.9	%
Total	$	17,951,642		100.00	%	$	16,339,101		100.0	%

2(a)	Asset Purchase Agreement, dated as of March 27, 2009, by and among NII BSA LLC, Barry Scott Agency, Inc., DCAP Accurate, Inc. and DCAP Group, Inc. 1

2(b)	Stock Purchase Agreement, dated as of May 1, 2009, by and between Stuart Greenvald and Abraham Weinzimer and DCAP Group, Inc. 2

2(c)	Stock Purchase Agreement, dated as of June 30, 2009, between Barry Lefkowitz and Blast Acquisition Corp. 3

3(a)	Restated Certificate of Incorporation 4

3(b)	Certificate of Amendment of Certificate of Incorporation filed July 1, 2009 5

3(c)	Certificate of Designation of Series A Preferred Stock 6

3(d)	Certificate of Designation of Series B Preferred Stock 7

3(e)	Certificate of Designation of Series C Preferred Stock 8

	KINGSTONE COMPANIES, INC.

Dated: November 14, 2011	By:	/s/ Barry B. Goldstein
		Barry B. Goldstein
		President


	By:	/s/ Victor Brodsky
		Victor Brodsky
		Chief Financial Officer

	September 30, 2011					December 31, 2010
				Weighted					Weighted
				Average					Average
	Average			Duration in		Average			Duration in
Category	Yield %			Years		Yield %			Years
U.S. Treasury securities and obligations of U.S. government corporations and agencies		2.75	%		18.1		3.27	%		14.1

Political subdivisions of States, Territories and Possessions		3.89	%		5.6		4.24	%		6.9

Corporate and other bonds industrial and miscellaneous		5.12	%		6.8		5.20	%		7.6

3(f)	Certificate of Designation of Series D Preferred Stock 9

3(g)	Certificate of Designation of Series E Preferred Stock 10

3(h)	By-laws, as amended 11

31(a)	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31(b)	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.

101.DEF	XBRL Taxonomy Extension Definition Linkbase.

101.LAB	XBRL Taxonomy Extension Label Linkbase.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

KINS 10-Q Quarter ended Sept. 30, 2011

Exhibits