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KINGSTONE COMPANIES, INC. - Quarter Report: 2012 March (Form 10-Q)

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 March 31, 2012
 
OR
   
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
 
Accelerated filer    o
 
Non-accelerated filer    o
(Do not check if a smaller reporting company)
 
Smaller reporting company    þ

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 May 14, 2012, there were 3,779,900 shares of the registrant’s common stock outstanding.
 


 
 

 
KINGSTONE COMPANIES, INC.
INDEX
 
     
PAGE
 
         
PART I. FINANCIAL INFORMATION
    2  
Item 1.
Financial Statements
    2  
 
Condensed Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011
    2  
 
Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited)
    3  
 
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012 (Unaudited)
    4  
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited)
    5  
 
Notes to Condensed Consolidated Financial Statements  (Unaudited)
    6  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    25  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    37  
Item 4.
Controls and Procedures
    38  
           
PART II.  OTHER INFORMATION
    39  
Item 1.
Legal Proceedings
    39  
Item 1A.
Risk Factors
    39  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    39  
Item 3.
Defaults Upon Senior Securities
    39  
Item 4.
Mine Safety Disclosures
    39  
Item 5.
Other Information
    39  
Item 6.
Exhibits
    40  
Signatures
    41  
  EXHIBIT 3(a)    
  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, 2011 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.
 
 
1

 
 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
           
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
 Assets
           
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $718,616 at
           
 March 31, 2012 and $777,953 at December 31, 2011)
  $ 606,257     $ 606,234  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $21,350,396
               
 at March 31, 2012 and $22,215,191 at December 31, 2011)
    22,017,110       22,568,932  
 Equity securities, available-for-sale, at fair value (cost of $4,323,868
               
 at March 31, 2012 and $3,857,741 at December 31, 2011)
    4,665,530       4,065,210  
 Total investments
    27,288,897       27,240,376  
 Cash and cash equivalents
    312,051       173,126  
 Premiums receivable, net of provision for uncollectible amounts
    6,322,652       5,779,085  
 Receivables - reinsurance contracts
    2,591,858       1,734,535  
 Reinsurance receivables, net of provision for uncollectible amounts
    25,183,818       23,880,814  
 Notes receivable-sale of business
    386,445       393,511  
 Deferred acquisition costs
    4,716,352       4,535,773  
 Intangible assets, net
    3,541,743       3,660,672  
 Property and equipment, net of accumulated depreciation
    1,630,141       1,646,341  
 Other assets
    681,151       660,672  
 Total assets
  $ 72,655,108     $ 69,704,905  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 19,933,009     $ 18,480,717  
 Unearned premiums
    22,253,722       21,283,160  
 Advance premiums
    577,436       544,791  
 Reinsurance balances payable
    3,103,242       2,761,828  
 Deferred ceding commission revenue
    4,149,217       3,982,399  
 Notes payable (includes payable to related parties of $378,000
               
 at March 31, 2012 and December 31, 2011)
    997,000       1,047,000  
 Accounts payable, accrued expenses and other liabilities
    3,084,678       4,419,623  
 Income taxes payable
    365,903       85,393  
 Deferred income taxes
    1,872,876       1,789,439  
 Total liabilities
    56,337,083       54,394,350  
                 
 Commitments and Contingencies
               
                 
 Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,665,338
               
 shares at March 31, 2012 and 4,643,122 shares at December 31, 2011;
               
 outstanding 3,779,900 shares at March 31, 2012 and 3,759,900 shares
               
 at December 31, 2011
    46,654       46,432  
 Preferred stock, $.01 par value; authorized 1,000,000 shares;
               
 -0- shares issued and outstanding
    -       -  
 Capital in excess of par
    13,808,090       13,739,792  
 Accumulated other comprehensive income
    665,528       370,399  
 Retained earnings
    3,206,370       2,554,349  
      17,726,642       16,710,972  
 Treasury stock, at cost, 885,438 shares at March 31, 2012 and 883,222 shares
               
 at December 31, 2011
    (1,408,617 )     (1,400,417 )
 Total stockholders' equity
    16,318,025       15,310,555  
                 
 Total liabilities and stockholders' equity
  $ 72,655,108     $ 69,704,905  
 

See accompanying notes to condensed consolidated financial statements.
 
 
2

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 
Three months ended March 31,
 
2012
   
2011
 
             
 Revenues
           
 Net premiums earned
  $ 3,972,535     $ 3,367,699  
 Ceding commission revenue
    2,903,656       2,312,575  
 Net investment income
    267,517       177,670  
 Net realized gain on investments
    39,400       70,471  
 Other income
    239,055       247,472  
 Total revenues
    7,422,163       6,175,887  
                 
 Expenses
               
 Loss and loss adjustment expenses
    2,278,514       2,550,764  
 Commission expense
    1,671,607       1,371,749  
 Other underwriting expenses
    1,857,746       1,576,819  
 Other operating expenses
    286,887       303,963  
 Depreciation and amortization
    146,549       158,460  
 Interest expense
    20,785       45,765  
 Total expenses
    6,262,088       6,007,520  
                 
 Income from operations before taxes
    1,160,075       168,367  
 Income tax expense
    394,657       41,743  
 Net income
    765,418       126,624  
                 
 Gross unrealized investment holding gains arising during period
    447,165       31,850  
                 
 Income tax expense related to items of other comprehensive income
    (152,036 )     (10,829 )
 Comprehensive income
  $ 1,060,547     $ 147,645  
                 
Earnings per common share:
               
Basic
  $ 0.20     $ 0.03  
Diluted
  $ 0.20     $ 0.03  
                 
Weighted average common shares outstanding
               
Basic
    3,771,109       3,838,386  
Diluted
    3,771,109       3,838,386  
                 
Dividends declared and paid per common share
  $ 0.03     $ -  
 

See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity
 
Three months ended March 31, 2012 (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, 2011
    4,643,122       46,432       -       -       13,739,792       370,399       2,554,349       883,222       (1,400,417 )     15,310,555  
Stock-based compensation
    -       -       -       -       19,501       -       -       -       -       19,501  
Exercise of stock options
    22,216       222       -       -       40,978       -       -       2,216       (8,200 )     33,000  
Tax benefit from exercise of stock options
    -       -       -       -       7,819       -       -       -       -       7,819  
Dividends
    -       -       -       -       -       -       (113,397 )     -       -       (113,397 )
Net income
    -       -       -       -       -       -       765,418       -       -       765,418  
Other comprehensive income     -       -       -       -       -       295,129       -       -       -       295,129  
Balance, March 31, 2012
    4,665,338     $ 46,654       -     $ -     $ 13,808,090     $ 665,528     $ 3,206,370       885,438     $ (1,408,617 )   $ 16,318,025  
 

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
Three months ended March 31,
 
2012
   
2011
 
             
 Cash flows (used in) provided by operating activities:
           
 Net income
  $ 765,418     $ 126,624  
 Adjustments to reconcile net income to net cash provided by operations:
               
 Gain on sale of investments
    (39,400 )     (70,471 )
 Depreciation and amortization
    146,549       158,460  
 Amortization of bond premium, net
    32,938       23,482  
 Stock-based compensation
    19,501       40,494  
 Deferred income tax (expense) benefit
    (68,599 )     29,793  
 (Increase) decrease in assets:
               
 Premiums receivable, net
    (543,567 )     (762,287 )
 Receivables - reinsurance contracts
    (857,323 )     (745,584 )
 Reinsurance receivables, net
    (1,303,004 )     (1,127,162 )
 Deferred acquisition costs
    (180,579 )     (260,552 )
 Other assets
    (75,757 )     (240,372 )
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    1,452,292       1,501,710  
 Unearned premiums
    970,562       1,234,739  
 Advance premiums
    32,645       199,307  
 Reinsurance balances payable
    341,414       1,317,794  
 Deferred ceding commission revenue
    166,818       104,935  
 Accounts payable, accrued expenses and other liabilities
    (1,054,435 )     (284,612 )
 Net cash flows (used in) provided by operating activities
    (194,527 )     1,246,298  
                 
 Cash flows provided by (used in) investing activities:
               
 Purchase - fixed-maturity securities available for sale
    (105,544 )     (1,658,387 )
 Purchase - equity securities
    (658,388 )     (580,638 )
 Sale or maturity - fixed-maturity securities available for sale
    1,032,800       -  
 Sale - equity securities
    191,516       990,247  
 Collections of notes receivable and accrued interest - Sale of businesses
    7,066       80,438  
 Other investing activities
    (11,420 )     (4,092 )
 Net cash flows provided by (used in) investing activities
    456,030       (1,172,432 )
                 
 Cash flows used in financing activities:
               
 Proceeds from line of credit
    50,000       -  
 Principal payments on line of credit
    (100,000 )     -  
 Principal payments on long-term debt
    -       (6,518 )
 Proceeds from exercise of stock options
    41,200       -  
 Tax benefit from exercise of stock options
    7,819       -  
 Purchase of treasury stock
    (8,200 )     -  
 Dividends paid
    (113,397 )     -  
 Net cash flows used in financing activities
    (122,578 )     (6,518 )
                 
 Increase in cash and cash equivalents
  $ 138,925     $ 67,348  
 Cash and cash equivalents, beginning of period
    173,126       326,620  
 Cash and cash equivalents, end of period
  $ 312,051     $ 393,968  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for income taxes
  $ 500,000     $ -  
 Cash paid for interest
  $ 120,037     $ 91,441  
 

See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
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”), underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and brokers. KICO is a licensed insurance company in the State of New York. In February 2011, KICO’s application for an insurance license to write insurance in the Commonwealth of Pennsylvania was approved; however, KICO has not commenced writing business in Pennsylvania. Kingstone, through its subsidiary, Payments, Inc., a licensed premium finance company in the State of New York, receives fees for placing contracts with a third party licensed premium finance company.
 
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, 2011 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 30, 2012. 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 three months ended March 31, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012.
 
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. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses, are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of several years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require considerable judgment by management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements consist of Kingstone and its wholly-owned subsidiaries. Subsidiaries include KICO and its subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All significant inter-company transactions have been eliminated in consolidation.
 
 
6

 
 
Accounting Pronouncements
 
In June 2011 (and as amended in December 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. The Company adopted this guidance effective January 1, 2012.
 
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.
 
 
7

 

Note 3 - Investments 

Available for Sale Securities

The amortized cost and fair value of investments in available for sale fixed-maturity securities and equities as of March 31, 2012 and December 31, 2011 are summarized as follows:
 
   
March 31, 2012
 
                                 
Net
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
 Fixed-Maturity Securities:
                                   
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ 499,837     $ 44,716     $ -     $ -     $ 544,553     $ 44,716  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,585,259       255,975       (26,568 )     -       5,814,666       229,407  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,265,300       475,826       (33,700 )     (49,535 )     15,657,891       392,591  
 Total fixed-maturity securities
    21,350,396       776,517       (60,268 )     (49,535 )     22,017,110       666,714  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    1,468,554       36,208       (44,946 )     -       1,459,817       (8,737 )
 Common stocks
    2,855,314       372,927       (22,528 )     -       3,205,713       350,399  
 Total equity securities
    4,323,868       409,135       (67,474 )     -       4,665,530       341,662  
                                                 
 Total
  $ 25,674,264     $ 1,185,652     $ (127,742 )   $ (49,535 )   $ 26,682,640     $ 1,008,376  

 
8

 
 
   
December 31, 2011
 
                                 
Net
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                     
 Fixed-Maturity Securities:
                                   
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ 499,832     $ 50,356     $ -     $ -     $ 550,188     $ 50,356  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,868,743       301,559       -       -       6,170,302       301,559  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,846,616       338,284       (228,792 )     (107,666 )     15,848,442       1,826  
 Total fixed-maturity securities
    22,215,191       690,199       (228,792 )     (107,666 )     22,568,932       353,741  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    1,428,435       36,762       (76,969 )     (4,893 )     1,383,335       (45,100 )
 Common stocks
    2,429,306       274,538       (21,969 )     -       2,681,875       252,569  
 Total equity securities
    3,857,741       311,300       (98,938 )     (4,893 )     4,065,210       207,469  
                                                 
 Total
  $ 26,072,932     $ 1,001,499     $ (327,730 )   $ (112,559 )   $ 26,634,142     $ 561,210  
 
A summary of the amortized cost and fair value of the Company’s investments in available for sale fixed-maturity securities by contractual maturity as of March 31, 2012 and December 31, 2011 is shown below:

   
March 31, 2012
   
December 31, 2011
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
       
 Less than one year
  $ 785,661     $ 770,732     $ 1,063,493     $ 1,079,924  
 One to five years
    7,298,755       7,586,081       6,899,892       7,045,774  
 Five to ten years
    11,912,177       12,275,602       12,547,046       12,680,441  
 More than 10 years
    1,353,803       1,384,695       1,704,760       1,762,793  
 Total
  $ 21,350,396     $ 22,017,110     $ 22,215,191     $ 22,568,932  
 
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 March 31, 2012 and December 31, 2011 are summarized as follows:
 
   
March 31, 2012
 
                                 
Net
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
                                     
 U.S. Treasury securities
  $ 606,257     $ 112,359     $ -     $ -     $ 718,616     $ 112,359  

 
9

 
 
   
December 31, 2011
 
                                 
Net
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                                 
 U.S. Treasury securities
  $ 606,234     $ 171,719     $ -     $ -     $ 777,953     $ 171,719  
 
All held to maturity securities are held in trust pursuant to the New York State Department of Financial Services’ 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
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Income:
 
 
   
 
 
 Fixed-maturity securities
  $ 234,493     $ 182,137  
 Equity securities
    85,929       36,824  
 Cash and cash equivalents
    1,406       1,987  
 Other
    2       10  
 Total
    321,830       220,958  
 Expenses:
               
 Investment expenses
    54,313       43,288  
 Net investment income
  $ 267,517     $ 177,670  
 
Proceeds from the sale and maturity of fixed-maturity securities were $1,032,800 and $-0- for the three months ended March 31, 2012 and 2011, respectively.

Proceeds from the sale of equity securities were $191,516 and $990,247 for the three months ended March 31, 2012 and 2011, respectively.

The Company’s net realized gains and losses on investments are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Fixed-maturity securities
           
 Gross realized gains
  $ 40,146     $ -  
 Gross realized losses
    -       -  
      40,146       -  
                 
 Equity securities
               
 Gross realized gains
    7,069       117,333  
 Gross realized losses
    (7,815 )     (46,862 )
      (746 )     70,471  
                 
                 
 Net realized gains
  $ 39,400     $ 70,471  
 
 
10

 
 
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 investment (“OTTI”) declines 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 30 securities at March 31, 2012 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 three months ended March 31, 2012 and 2011. 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 March 31, 2012 as follows:
 
 
11

 
 
   
March 31, 2012
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
               
No. of
   
Aggregate
       
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Held
   
Value
   
Losses
 
   
(unaudited)
 
Fixed-Maturity Securities:
                                           
U.S. Treasury securities
                                           
 and obligations of U.S.
                                               
government corporations
                                           
 and agencies
  $ -     $ -       -     $ -     $ -       -     $ -     $ -  
                                                                 
Political subdivisions of
                                                         
 States, Territories and
                                                               
 Possessions
    782,235       (26,568 )     2       -       -       -       782,235       (26,568 )
                                                                 
 Corporate and other
                                                               
 bonds industrial and
                                                               
 miscellaneous
    2,021,911       (33,700 )     11       2,006,067       (49,535 )     9       4,027,978       (83,235 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 2,804,146     $ (60,268 )     13     $ 2,006,067     $ (49,535 )     9     $ 4,810,213     $ (109,803 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 530,592     $ (44,946 )     4     $ -     $ -       -     $ 530,592     $ (44,946 )
 Common stocks
    397,268       (22,528 )     4       -       -       -       397,268       (22,528 )
                                                                 
 Total equity securities
  $ 927,860     $ (67,474 )     8     $ -     $ -       -     $ 927,860     $ (67,474 )
                                                                 
 Total
  $ 3,732,006     $ (127,742 )     21     $ 2,006,067     $ (49,535 )     9     $ 5,738,073     $ (177,277 )

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 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.
 
 
12

 
 
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows, market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period.

The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, the Company considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the 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 March 31, 2012 and December 31, 2011 as follows:

   
March 31, 2012
 
 ($ 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
  $ 545     $ -     $ -     $ 545  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    -       5,815       -       5,815  
                                 
 Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    8,190       7,228       240       15,658  
 Total fixed maturities
    8,735       13,043       240       22,018  
 Equity investments
    4,665       -       -       4,665  
 Total investments
  $ 13,400     $ 13,043     $ 240     $ 26,683  
 
 
13

 
 
   
December 31, 2011
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
       
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporationsz
                       
 and agencies
  $ 550     $ -     $ -     $ 550  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    -       6,171       -       6,171  
                                 
 Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    8,465       7,168       215       15,848  
 Total fixed maturities
    9,015       13,339       215       22,569  
 Equity investments
    4,065       -       -       4,065  
 Total investments
  $ 13,080     $ 13,339     $ 215     $ 26,634  
 
A reconciliation of the beginning and ending balances of assets measured at fair value using Level 3 inputs is as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
             
 Beginning balance, January 1
  $ 215     $ -  
 Total unrealized (losses)
               
 included in other comprehensive income
    25       -  
 Net transfers into Level 3
    -       -  
 Ending balance, March 31
  $ 240     $ -  
 
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 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 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.
 
 
14

 

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

   
March 31, 2012
   
December 31, 2011
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(unaudited)
             
 Fixed-maturity investments held to maturity
  $ 606,257     $ 718,616     $ 606,234     $ 777,953  
 Cash and cash equivalents
    312,051       312,051       173,126       173,126  
 Premiums receivable
    6,322,652       6,322,652       5,779,085       5,779,085  
 Receivables - reinsurance contracts
    2,591,858       2,591,858       1,734,535       1,734,535  
 Reinsurance receivables
    25,183,818       25,183,818       23,880,814       23,880,814  
 Notes receivable-sale of business
    386,445       386,445       393,511       393,511  
 Real estate, net of
                               
 accumulated depreciation
    1,464,314       1,510,000       1,477,639       1,510,000  
 Reinsurance balances payable
    3,103,242       3,103,242       2,761,828       2,761,828  
 Notes payable (including related parties)
    997,000       997,000       1,047,000       1,047,000  
 
Note 6 - Notes Receivable-Sale of Businesses
 
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 May 1, 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 provided 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.
 
 
15

 
 
Notes receivable arising from the sale of businesses as of March 31, 2012 and December 31, 2011 consists of:
 
   
March 31, 2012
   
December 31, 2011
 
   
Total
   
Current
         
Total
   
Current
       
   
Note
   
Maturities
   
Long-Term
   
Note
   
Maturities
   
Long-Term
 
   
(unaudited)
                   
Sale of Pennsylvania stores
  $ 344,352     $ 31,702     $ 312,650     $ 351,861     $ 31,028     $ 320,833  
Sale of Franchise business
    37,797       37,797       -       37,797       37,797       -  
      382,149       69,499       312,650       389,658       68,825       320,833  
Accrued interest
    4,296       4,296       -       3,853       3,853       -  
Total
  $ 386,445     $ 73,795     $ 312,650     $ 393,511     $ 72,678     $ 320,833  
 
Note 7 – Property and Casualty Insurance Activity
 
Earned Premiums

Premiums written, ceded and earned are as follows:
 
   
Direct
   
Assumed
   
Ceded
   
Net
 
                         
Three months ended March 31, 2012 (unaudited)
   
 
   
 
   
 
 
 Premiums written
  $ 11,235,725     $ 1,400     $ (6,856,962 )   $ 4,380,163  
 Change in unearned premiums
    (972,141 )     1,579       562,934       (407,628 )
 Premiums earned
  $ 10,263,584     $ 2,979     $ (6,294,028 )   $ 3,972,535  
                                 
Three months ended March 31, 2011 (unaudited)
                         
 Premiums written
  $ 9,533,146     $ 234     $ (5,496,365 )   $ 4,037,015  
 Change in unearned premiums
    (1,236,876 )     2,138       565,422       (669,316 )
 Premiums earned
  $ 8,296,270     $ 2,372     $ (4,930,943 )   $ 3,367,699  
 
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $577,000 and $545,000 as of March 31, 2012 (unaudited) and December 31, 2011, 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”):
 
 
16

 
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Balance at beginning of period
  $ 18,480,717     $ 17,711,907  
 Less reinsurance recoverables
    (10,001,060 )     (10,431,415 )
 Net balance, beginning of period
    8,479,657       7,280,092  
                 
 Incurred related to:
               
 Current year
    2,286,000       2,617,490  
 Prior years
    (7,486     (66,726
 Total incurred
    2,287,514       2,550,764  
                 
 Paid related to:
               
 Current year
    455,147       502,497  
 Prior years
    1,194,688       936,756  
 Total paid
    1,649,835       1,439,253  
  
               
 Net balance at end of period
    9,108,336       8,392,003  
 Add reinsurance recoverables
    10,824,673       10,821,614  
 Balance at end of period
  $ 19,933,009     $ 19,213,617  
 
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $2,688,652 and $1,688,251 for the three months ended March 31, 2012 and 2011, respectively.

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.
 
 
17

 

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, which are renewed annually, provide for the following material terms:

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.

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 the Company to significantly grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not relieve the Company 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.
 
 
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As of March 31, 2012 and 2011, the Company’s estimated ultimate loss ratios attributable to these contracts are lower than the contractual ultimate loss ratios at which the minimum amount of ceding commissions can be earned. Accordingly, the Company has recorded ceding commissions earned that are greater than the minimum provisional commissions.

Ceding commission revenue consists of the following:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Provisional ceding commissions earned
  $ 1,984,983     $ 1,588,306  
 Contingent ceding commissions earned
    918,673       724,269  
    $ 2,903,656     $ 2,312,575  
 
Ceding commissions due from reinsurers as of March 31, 2012 (unaudited) and December 31, 2011 were $2,591,858 and $1,734,535, respectively, and are in included in “Receivables – reinsurance contracts” in the Consolidated Balance Sheets.
 
Note 8 – Long-Term Debt
 
Long-term debt consists of:
 
   
March 31, 2012
   
December 31, 2011
 
         
Less
               
Less
       
   
Total
   
Current
   
Long-Term
   
Total
   
Current
   
Long-Term
 
   
Debt
   
Maturities
   
Debt
   
Debt
   
Maturities
   
Debt
 
   
(unaudited)
                   
                                     
Notes payable
  $ 747,000     $ -     $ 747,000     $ 747,000     $ -     $ 747,000  
Line of credit
    250,000       250,000       -       300,000       300,000       -  
    $ 997,000     $ 250,000     $ 747,000     $ 1,047,000     $ 300,000     $ 747,000  
 
Notes Payable
 
From June 2009 through March 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 “2009/2010 Notes”).  The 2009/2010 Notes provided 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 2009/2010 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 2009/2010 Notes, as extended, can be prepaid without premium or penalty. The reduction in the interest rate and the extension of the maturity date did not significantly change the fair value of the 2009/2010 Notes.
 
Interest expense on the 2009/2010 Notes for the three months ended March 31, 2012 and 2011 was approximately $17,800 and $46,000, respectively.  Interest expense includes related party borrowings for the three months ended March 31, 2012 and 2011 of approximately $9,000 and $25,000, respectively.
 
 
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Related party balances as of March 31, 2012 and December 31, 2011 under the 2009/2010 Notes are as follows:

Barry Goldstein IRA (Mr. Goldstein is Chairman of the Board, President and
     
 Chief Executive Officer, and principal stockholder of the Company)
  $ 90,000  
 Jay Haft, a director of the Company
    30,000  
 A member of the family of Michael Feinsod, a director of the Company
    60,000  
 Mr. Yedid and members of his family
    156,000  
 A member of the family of Floyd Tupper, a director of KICO
    42,000  
 Total related party balances
  $ 378,000  
 
Line of credit
 
On December 27, 2011, Kingstone executed a Promissory Note pursuant to a line of credit (together, the “Trustco Agreement”) with Trustco Bank (“Lender”). Under the Trustco Agreement, Kingstone may receive advances from Lender not to exceed an unpaid principal balance of $500,000. Advances extended under the Trustco Agreement will bear interest at a floating rate based on the Lender’s prime rate.
 
Interest only payments are due monthly. The principal balance is payable on demand, and must be reduced to zero for a minimum of thirty consecutive days during each year of the term of the Trustco Agreement. Lender may set off any depository accounts maintained by Kingstone that are held by Lender. Payment of amounts due pursuant to the Trustco Agreement is secured by all of Kingstone’s cash and deposit accounts, receivables, inventory and  fixed assets, and is guaranteed by Kingstone’s subsidiary, Payments, Inc.
 
There were no closing costs or fees paid in connection with the Trustco Agreement. Kingstone received an initial advance of $300,000 on December 27, 2011. The line of credit is being used for general corporate purposes.
 
The interest rate on the amount outstanding as of March 31, 2012 was 3.75%. There are no other fees in connection with this credit line.
 
Note 9 – Stockholders’ Equity
 
Dividend Declared

Dividends declared and paid on Common Stock was $113,397 and $-0- for the three months ended March 31, 2012 and 2011, respectively. The Company’s Board of Directors approved a quarterly dividend on May 14, 2012 of $.03 per share payable in cash on June 15, 2012 to stockholders of record as of May 31, 2011.

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.
 
 
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The results of operations for the three months ended March 31, 2012 and 2011 include share-based stock option compensation expense totaling approximately $20,000 and $40,000, respectively. Share-based compensation expense related to stock options is net of estimated forfeitures of 21% for the three months ended March 31, 2012 and 2011, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations and Comprehensive Income within other operating expenses.
 
Stock option compensation expense in 2012 and 2011 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. No stock options were granted during the three months ended March 31, 2012 and 2011.

A summary of option activity under the Company’s 1998 Stock Option Plan (terminated in November, 2008) and the 2005 Plan as of March 31, 2012, and changes during the three 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, 2012
    393,865     $ 2.32       2.28     $ 498,913  
                                 
Granted
    -     $ -       -     $ -  
Exercised
    (25,000 )   $ 2.06       -     $ 31,200  
Forfeited
    -     $ -       -     $ -  
                                 
Outstanding at March 31, 2012
    368,865     $ 2.34       2.13     $ 390,428  
                                 
Vested and Exercisable at March 31, 2012
    291,648     $ 2.31       1.97     $ 252,571  
 
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2012 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 $3.18 closing price of the Company’s Common Stock on March 31, 2012. The total intrinsic value of options exercised in the three months ended March 31, 2012 was $31,200, determined as of the date of exercise. The Company received cash proceeds from options exercised in the three months end March 31, 2012 of approximately $41,200. No stock options were exercised in the three months ended March 31, 2011.

As of March 31, 2012, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $36,000. Unamortized compensation cost as of March 31, 2012 is expected to be recognized over a remaining weighted-average vesting period of .95 years.
 
Note 10 – 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 years’ taxes during the period when they are identified, generally when the tax returns are filed.   The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the 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 three months ended March 31, 2012 and 2011 was 34.0% and 24.8%, respectively. A reconciliation of the Federal statutory rate to our effective rate from continuing operations is as follows:
 
 
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Three months ended March 31,
 
2012
   
2011
 
                         
 Computed expected tax expense
  $ 394,426       34.0 %   $ 57,245       34.0 %
 State taxes, net of Federal benefit
    28,497       2.4       (1,038 )     (0.6 )
 Permanent differences
                               
 Dividends received deduction
    (20,451 )     (1.8 )     (7,129 )     (4.2 )
 Non-taxable investment income
    (17,038 )     (1.5 )     (22,144 )     (13.2 )
 Stock-based compensation expense
    6,630       0.6       13,768       8.2  
 Other permanent differences
    6,450       0.6       10,014       5.9  
 Other
    (3,857 )     (0.3 )     (8,973 )     (5.3 )
 Total tax
  $ 394,657       34.0 %   $ 41,743       24.8 %
 
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:

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
 Deferred tax asset:
       
 
 
 Net operating loss carryovers
  $ 264,293     $ 276,312  
 Claims reserve discount
    236,691       220,354  
 Unearned premium
    677,534       647,596  
 Deferred ceding commission revenue
    1,410,734       1,354,016  
 Other
    6,171       321,000  
 Total deferred tax assets
    2,595,423       2,819,278  
                 
 Deferred tax liability:
               
 Investment in KICO
    1,169,000       1,169,000  
 Deferred acquisition costs
    1,603,560       1,542,163  
 Intangibles
    1,204,193       1,244,628  
 Depreciation and amortization
    131,698       133,411  
 Reinsurance recoverable
    20,400       20,400  
 Net unrealized appreciation of securities - available for sale
    320,203       172,155  
 Loss from uninsured bank deposits
    -       316,417  
 Investment income
    19,245       10,543  
 Total deferred tax liabilities
    4,468,299       4,608,717  
                 
 Net deferred income tax liability
  $ (1,872,876 )   $ (1,789,439 )
 
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 three months ended March 31, 2012 and 2011. If any had been recognized these would be reported in income tax expense.
 
 
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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 11 - Net Income Per Common Share
 
Basic net earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of vested stock options.  The computation of diluted earnings per share excludes those options with an exercise price in excess of the average market price of the Company’s common shares during the periods presented.
 
For the three months ended March 31, 2012 and 2011 there were 291,648 and 251,932 vested options, respectively, with an exercise price below the average market price of the Company’s Common Stock during the period. For the three months ended March 31, 2012 and 2011 the inclusion of net common shares assumed to be issued upon the exercise of such options in the computation of diluted earnings per share would have been anti-dilutive for the period, and as a result, the weighted average number of common shares used in the calculation of basic and diluted earnings per common share is the same, and has not been adjusted for the effects of such options.
 
Note 12 - 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.
 
 
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Note 13 – Subsequent Event
 
Dividends Declared and Paid
 
On May 14, 2012, the Company’s board of directors approved a cash dividend of $.03 per share, or $113,397, to be paid on June 15, 2012.
 
On May 14, 2012, KICO’s board of directors approved a cash dividend of $175,000 to the Company, which was paid on May 15, 2012. Payment of the cash dividend will have no effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.
 
Employment Agreement
 
Effective April 16, 2012, the Company entered into an amendment to its employment agreement with Barry Goldstein, its President, Chairman of the Board and Chief Executive Officer, pursuant to which, effective January 1, 2012 and continuing through the term of the agreement, Mr. Goldstein’s annual base salary was increased to $450,000 from $375,000.
 
 
24

 

ITEM 2MANAGEMENT’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, net investment income generated from our portfolio, and net realized 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. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.
 
Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc. These expenses include legal, auditing and consulting fees, occupancy costs related to our corporate office, executive employment costs, 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.
 
 
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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  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
 
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
 
The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:
 
 
26

 
 
   
Three months ended March 31,
 
($ in thousands)
 
2012
   
2011
   
Change
   
Percent
 
 Revenues
                       
 Direct written premiums
  $ 11,236     $ 9,533     $ 1,703       17.9 %
 Net written premiums
    4,380       4,037       343       8.5 %
 Change in net unearned premiums
    (408 )     (669 )     262       (39.1 )  %
 Net premiums earned
    3,973       3,368       605       18.0 %
 Ceding commission revenue
    2,904       2,313       591       25.6 %
 Net investment income
    267       178       89       50.0 %
 Net realized gain on investments
    39       70       (31 )     (44.3 )  %
 Other income
    239       247       (8 )     (3.2 )  %
 Total revenues
    7,422       6,176       1,246       20.2 %
                                 
 Expenses
                               
 Loss and loss adjustment expenses (1)
                               
 Direct loss and loss adjustment expenses
    4,967       4,239       728       17.2 %
 Less: ceded loss and loss adjustment expenses
    (2,689 )     (1,688 )     (1,000 )     59.3 %
 Net loss and loss adjustment expenses
    2,279       2,551       (272 )     (10.7 )  %
 Commission expense
    1,671       1,372       299       21.8 %
 Other underwriting expenses
    1,858       1,577       281       17.8 %
 Other operating expenses
    287       304       (17 )     (5.6 )  %
 Depreciation and amortization
    146       158       (12 )     (7.6 )  %
 Interest expense
    21       46       (25 )     (54.3 )  %
 Total expenses
    6,262       6,008       254       4.2 %
                                 
 Income from operations before taxes
    1,160       168       992       590.8 %
 Provision for income tax
    395       42       353       840.5 %
 Net income
  $ 765     $ 126     $ 639       507.5 %
                                 
 Percent of total revenues:
                               
 Net premiums earned
    53.5 %     54.5 %                
 Ceding commission revenue
    39.1 %     37.5 %                
 Net investment income
    3.6 %     2.9 %                
 Net realized gains on investments
    0.5 %     1.1 %                
 Other income
    3.2 %     4.0 %                
      100.0 %     100.0 %                
 
(1) For the three months ended March 31, 2012 and 2011, we did not incur any catastrophe losses and loss adjustment expenses. 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 March 31, 2012 (“2012”) were $11,236,000 compared to $9,533,000 during the three months ended March 31, 2011 (“2011”). The increase of $1,703,000, or 17.9%, was primarily due to an increase in policies in-force during 2012 as compared to 2011. We wrote more policies as a result of an increase in demand for the products in the markets that we serve. Policies in-force increased by 19.2% as of March 31, 2012 compared to March 31, 2011. In addition to the increase of policies in-force, we are also writing more policies which have higher premiums.
 
Net written premiums increased $343,000, or 8.5%, to $4,380,000 in 2012 from $4,037,000 in 2011. The increase in net written premiums resulted from an increase in direct written premiums in 2012 compared to direct written premiums in 2011. Net written premiums grew at a lower rate than direct written premiums (8.5% compared to 17.9%) due to a greater increase in policies 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.
 
 
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Net premiums earned increased $605,000, or 18.0%, to $3,973,000 in 2012 from $3,368,000 in 2011. As premiums written earn ratably over a twelve month period, the increase was a result of higher net written premiums for the twelve months ended March 31, 2012 compared to the twelve months ended March 31, 2011.
 
Ceding commission revenue was $2,904,000 in 2012 compared to $2,313,000 in 2011. The increase of $591,000, or 25.6%, was due to the increase in the amount of premiums ceded and more favorable ceding commission rates. Our previous 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 which began July 1, 2011. The current treaty allows for a greater maximum amount of contingent ceding commission that can be paid to us, allowing us to utilize the full benefit from the carryover amount in our current treaty. The carryover amount was included in our computation of contingent ceding commission effective July 1, 2011, and resulted in an additional $169,000 to our contingent ceding commission revenue in 2012.
 
Net investment income was $267,000 in 2012 compared to $178,000 in 2011. The increase of $89,000, or 50.0%, was due to an increase in average invested assets in 2012 as compared to 2011. The increase in cash and invested assets resulted primarily from increased operating cash flows throughout 2011. The tax equivalent investment yield, excluding cash, was 5.26% and 5.61% at March 31, 2012 and 2011, respectively.
 
Net loss and loss adjustment expenses were $2,279,000 in 2012 compared to $2,551,000 in 2011. The net loss ratio was 57.4% in 2012 compared to 75.7% in 2011. The decrease of 18.3 percentage points in our net loss ratio for 2012 as compared to 2011 is primarily due to a decrease in losses in our commercial auto line of business, which is not subject to a quota share treaty.
 
Commission expense was $1,671,000 in 2012 or 14.9 % of direct written premiums. Commission expense was $1,372,000 in 2011 or 14.4% of direct written premiums. The increase of $299,000 is due to the increase in direct written premiums in 2012 as compared to 2011.
 
Other underwriting expenses were $1,858,000 in 2012 compared to $1,577,000 in 2011. The $281,000, or 17.8%, 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 both the hiring of additional staff needed to service our growth in written premiums and increases in annual salaries. Underwriting expenses as a percentage of direct written premiums was 16.5% in 2012 and 2011.
 
Other operating expenses, related to the corporate expenses of our holding company, were $287,000 in 2012 compared to $304,000 in 2011. The $17,000 decrease in 2012 was primarily due to a decrease in amortization of stock options as a result of more stock options being fully vested prior to March 31, 2012.
 
Interest expense was $21,000 in 2012 compared to $46,000 in 2011. The $25,000 decrease in interest expense was due to the partial redemption of $703,000 to our 2009/2010 Notes during the quarter ended June 30, 2011, and effective July 11, 2011, a reduction in the interest rate to 9.5% per annum from the previous 12.625% per annum.
 
Income tax expense in 2012 was $395,000, which resulted in an effective tax rate of 34.0%. Income tax expense in 2011 was $42,000, which resulted in an effective tax rate of 24.8%. Income before taxes was $1,160,000 in 2012 compared to $168,000 in 2011. The benefit from non-taxable or tax exempt permanent differences was less in 2012 due to the greater amount of income before taxes in 2012 as compared to 2011. The decrease in the benefit from tax exempt permanent differences resulted in an increase to our effective tax rate in 2012.
 
 
28

 
 
Net income was $765,000 in 2012 compared to $126,000 in 2011. The increase in net income of $639,000 was due to the circumstances described above that caused the increases in our net premiums earned and ceding commission revenue and a decrease in net losses and loss adjustment expenses, offset by increases in our other underwriting expenses.
 
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
 
   
March 31,
 
   
2012
   
2011
 
             
 Revenues
           
 Net premiums earned
  $ 3,972,535     $ 3,367,699  
 Ceding commission revenue
    2,903,656       2,312,575  
 Net investment income
    267,517       177,670  
 Net realized gain on investments
    39,400       70,471  
 Other income
    115,050       97,930  
 Total revenues
    7,298,158       6,026,345  
                 
 Expenses
               
 Loss and loss adjustment expenses
    2,278,514       2,550,764  
 Commission expense
    1,671,607       1,371,749  
 Other underwriting expenses
    1,857,745       1,576,819  
 Depreciation and amortization
    146,259       155,915  
 Total expenses
    5,954,125       5,655,247  
                 
 Income from operations
    1,344,033       371,098  
 Income tax expense
    416,837       119,379  
 Net income
  $ 927,196     $ 251,719  
 
An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:
 
   
Direct
   
Assumed
   
Ceded
   
Net
 
                         
 Three months ended March 31, 2012
                       
 Written premiums
  $ 11,235,725     $ 1,400     $ (6,856,962 )   $ 4,380,163  
 Unearned premiums
    (972,141 )     1,579       562,934       (407,628 )
 Earned premiums
  $ 10,263,584     $ 2,979     $ (6,294,028 )   $ 3,972,535  
                                 
 Loss and loss adjustment expenses
  $ 4,956,069     $ 11,097     $ (2,688,652 )   $ 2,278,514  
                                 
 Loss ratio
    48.3 %     372.5 %     42.7 %     57.4 %
                                 
 Three months ended March 31, 2011
                               
 Written premiums
  $ 9,533,146     $ 234     $ (5,496,365 )   $ 4,037,015  
 Unearned premiums
    (1,236,876 )     2,138       565,422       (669,316 )
 Earned premiums
  $ 8,296,270     $ 2,372     $ (4,930,943 )   $ 3,367,699  
                                 
 Loss and loss adjustment expenses
  $ 4,237,389     $ 1,626     $ (1,688,251 )   $ 2,550,764  
                                 
 Loss ratio
    51.1 %     68.5 %     34.2 %     75.7 %

 
29

 
 
Key Measures
 
The key measures for our insurance underwriting business for the periods indicated are as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
             
 Net premiums earned
  $ 3,972,535     $ 3,367,699  
 Ceding commission revenue
    2,903,656       2,312,575  
 Other income
    115,050       97,930  
                 
 Loss and loss adjustment expenses
    2,278,514       2,550,764  
                 
 Acquistion costs and other underwriting expenses:
               
 Commission expense
    1,671,607       1,371,749  
 Other underwriting expenses
    1,857,745       1,576,819  
 Total acquistion costs and other
               
 underwriting expenses
    3,529,352       2,948,568  
                 
 Underwriting income
  $ 1,183,375     $ 278,872  
                 
 Key Measures:
               
 Net loss ratio
    57.4 %     75.7 %
 Net underwriting expense ratio
    12.9 %     16.0 %
 Net combined ratio
    70.2 %     91.7 %
                 
 Reconciliation of net underwriting expense ratio:
               
 Acquisition costs and other
               
 underwriting expenses
  $ 3,529,352     $ 2,948,568  
 Less: Ceding commission revenue
    (2,903,656 )     (2,312,575 )
 Less: Other income
    (115,050 )     (97,930 )
   
  $ 510,646     $ 538,063  
                 
 Net earned premium
  $ 3,972,535     $ 3,367,699  
 
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 March 31, 2012 and December 31, 2011:

 
30

 

Available for Sale Securities
 
   
March 31, 2012
 
  
 
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
  $ 499,837     $ 44,716     $ -     $ -     $ 544,553       2.0 %
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,585,259       255,975       (26,568 )     -       5,814,666       21.8 %
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,265,300       475,826       (33,700 )     (49,535 )     15,657,891       58.7 %
 Total fixed-maturity securities
    21,350,396       776,517       (60,268 )     (49,535 )     22,017,110       82.5 %
 Equity Securities
    4,323,868       409,136       (67,474 )     -       4,665,530       17.5 %
 Total
  $ 25,674,264     $ 1,185,653     $ (127,742 )   $ (49,535 )   $ 26,682,640       100.0 %
 
   
December 31, 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
 
                                     
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ 499,832     $ 50,356     $ -     $ -     $ 550,188       2.1 %
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,868,743       301,559       -       -       6,170,302       23.2 %
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,846,616       338,284       (228,792 )     (107,666 )     15,848,442       59.5 %
 Total fixed-maturity securities
    22,215,191       690,199       (228,792 )     (107,666 )     22,568,932       84.7 %
 Equity Securities
    3,857,741       311,300       (98,938 )     (4,893 )     4,065,210       15.3 %
 Total
  $ 26,072,932     $ 1,001,499     $ (327,730 )   $ (112,559 )   $ 26,634,142       100.0 %

 
31

 
 
Held to Maturity Securities
 
   
March 31, 2012
 
   
(unaudited)
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
% of
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Fair
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
Value
 
       
 U.S. Treasury securities
  $ 606,257     $ 112,359     $ -     $ -     $ 718,616       100.0 %
                                                 
   
December 31, 2011
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
           
% of
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Fair
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
Value
 
                                                 
 U.S. Treasury securities
  $ 606,234     $ 171,719     $ -     $ -     $ 779,953       100.0 %
 
Credit Rating of Fixed-Maturity Securities
 
The table below summarizes the credit quality of our fixed-maturity securities available for sale as of March 31, 2012 and December 31, 2011 as rated by Standard and Poor’s.
 
     
March 31, 2012
   
December 31, 2011
 
           
Percentage of
         
Percentage of
 
     
Fair Market
   
Fair Market
   
Fair Market
   
Fair Market
 
     
Value
   
Value
   
Value
   
Value
 
     
(unaudited)
             
Rating
                         
U.S. Treasury securities
    $ 544,553       2.5 %   $ 550,188       2.4 %
AAA
      3,016,660       13.7 %     3,041,576       13.5 %
AA
      4,020,686       18.3 %     4,502,733       20.0 %
A       6,652,418       30.2 %     6,977,222       30.9 %
BBB
      7,782,793       35.3 %     7,497,213       33.2 %
Total
    $ 22,017,110       100.00 %   $ 22,568,932       100.0 %
 
The table below summarizes the average duration by type of fixed-maturity security available for sale as well as detailing the average yield as of March 31, 2012 and December 31, 2011:
 
 
32

 
 
   
March 31, 2012
   
December 31, 2011
 
         
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
    2.78 %     17.6       2.75 %     17.8  
                                 
 Political subdivisions of States,
                               
 Territories and Possessions
    4.11 %     5.2       3.86 %     5.2  
                                 
 Corporate and other bonds
                               
 Industrial and miscellaneous
    4.90 %     7.0       4.98 %     7.1  
 
Fair Value Consideration
 
As disclosed in Note 4 to the Condensed Consolidated Financial Statements, with respect to “Fair Value Measurements,” we define fair value under GAAP guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). This GAAP guidance establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of March 31, 2012 and December 31, 2011, 50% and 49%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices. As of March 31, 2012 and December 31, 2011, 49% and 50%, respectively, of the investment portfolio recorded at fair value was priced based upon observable inputs other than quoted prices.
 
 As more fully described in Note 3 to our Condensed Consolidated Financial Statements, “Investments—Impairment Review,” we completed a detailed review of all our securities in a continuous loss position as of March 31, 2012 and December 31, 2011, and concluded that the unrealized losses in these asset classes are the result of a decrease in value due to technical spread widening and broader market sentiment, rather than fundamental collateral deterioration, and are temporary in nature.
 
The table below summarizes the gross unrealized losses of our fixed-maturity securities available for sale and equity securities by length of time the security has continuously been in an unrealized loss position as of March 31, 2012 and December 31, 2011:
 
 
33

 
 
   
March 31, 2012
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
               
No. of
   
Aggregate
       
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Held
   
Value
   
Losses
 
   
(unaudited)
 
Fixed-Maturity Securities:
                                           
U.S. Treasury securities
                                           
 and obligations of U.S.
                                               
government corporations
                                           
 and agencies
  $ -     $ -       -     $ -     $ -       -     $ -     $ -  
                                                                 
Political subdivisions of
                                                         
 States, Territories and
                                                               
 Possessions
    782,235       (26,568 )     2       -       -       -       782,235       (26,568 )
                                                                 
 Corporate and other
                                                               
 bonds industrial and
                                                               
 miscellaneous
    2,021,911       (33,700 )     11       2,006,067       (49,535 )     9       4,027,978       (83,235 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 2,804,146     $ (60,268 )     13     $ 2,006,067     $ (49,535 )     9     $ 4,810,213     $ (109,803 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 530,592     $ (44,946 )     4     $ -     $ -       -     $ 530,592     $ (44,946 )
 Common stocks
    397,268       (22,528 )     4       -       -       -       397,268       (22,528 )
                                                                 
 Total equity securities
  $ 927,860     $ (67,474 )     8     $ -     $ -       -     $ 927,860     $ (67,474 )
                                                                 
 Total
  $ 3,732,006     $ (127,742 )     21     $ 2,006,067     $ (49,535 )     9     $ 5,738,073     $ (177,277 )

 
34

 
 
   
December 31, 2011
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
               
No. of
   
Aggregate
       
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Held
   
Value
   
Losses
 
                                                 
Fixed-Maturity Securities:
                                           
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
    4,849,378       (228,792 )     26       1,483,425       (107,666 )     7       6,332,803       (336,458 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 4,849,378     $ (228,792 )     26     $ 1,483,425     $ (107,666 )     7     $ 6,332,803     $ (336,458 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 368,350     $ (76,969 )     12     $ 189,364     $ (4,893 )     5     $ 557,714     $ (81,862 )
 Common stocks
    397,268       (21,969 )     14       -       -       -       397,268       (21,969 )
 Total equity securities
  $ 765,618     $ (98,938 )     26     $ 189,364     $ (4,893 )     5     $ 954,982     $ (103,831 )
                                                                 
 Total
  $ 5,614,996     $ (327,730 )     52     $ 1,672,789     $ (112,559 )     12     $ 7,287,785     $ (440,289 )

 
35

 
 
There were 30 securities at March 31, 2012 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 64 securities at December 31, 2011 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
 
Liquidity and Capital Resources
 
Cash Flows
 
The primary sources of cash flow is from our insurance underwriting subsidiary, KICO, which are direct premiums written, ceding commissions from our quota share reinsurers, loss payments by our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.
 
On July 1, 2009, we completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, we acquired a 100% equity interest in KICO. In connection with the plan of conversion of CMIC, we agreed with the Department of Financial Services (formerly known as the Insurance Department) (the “Department”) that, for a period of two years following the effective date of conversion of July 1, 2009, no dividend could be paid by KICO to us without the approval of the Department (“Dividend Restriction Period”). No such request was made by us to the Department. For the three months ended March 31, 2012, KICO paid dividends of $175,000 to us. On May 14, 2012, KICO’s board of directors approved a cash dividend of $175,000 to us which was paid on May 15, 2012. We also agreed with the Department that certain intercompany transactions between KICO and us must be filed with the Department 30 days prior to implementation and not disapproved by the Department.
 
The primary sources of cash flow for our holding company operations are in connection with the fee income we receive from the premium finance loans and collection of principal and interest income from the notes received by us upon the sale of businesses that were included in our former discontinued operations. Effective July 1, 2011, as discussed above, we may also receive cash dividends from KICO, subject to statutory restrictions. As of March 31, 2012, the maximum distribution that KICO could pay without prior regulatory approval was approximately $617,000.
 
In December 2011, we entered into an agreement with a bank for a $500,000 line of credit to be used for general corporate needs. The principal balance is payable on demand, and must be reduced to zero for a minimum of 30 consecutive days during each year of the term of the credit line. The outstanding balance was $250,000 as of March 31, 2012. If the aforementioned is insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
 
We prepaid $703,000 of our notes payable during the year ended December 31, 2011. As of March 31, 2012, the outstanding principal balance of our notes payable was $747,000; such notes bear interest at the rate of 9.5% per annum and mature on July 10, 2014. We believe that our present cash flows as described above will be sufficient on a short-term basis and over the next 12 months to fund our company-wide working capital requirements.
 
 
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Our reconciliation of net income to cash (used in) provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.
 
Cash flow and liquidity are categorized into three sources: (1) operating activities; (2) investing activities; and (3) financing activities, which are shown in the following table:
 
Three Months Ended March 31,
 
2012
   
2011
 
             
 Cash flows provided by (used in):
           
 Operating activities
  $ (194,527 )   $ 1,246,298  
 Investing activities
    456,030       (1,172,432 )
 Financing activities
    (122,578 )     (6,518 )
 Net increae in cash and cash equivalents
    138,925       67,348  
 Cash and cash equivalents, beginning of period
    173,126       326,620  
 Cash and cash equivalents, end of period
  $ 312,051     $ 393,968  

Net cash used by operating activities was $195,000 in 2012 as compared to $1,246,000 provided in 2011. The $1,441,000 decrease in cash flows provided by operating activities in 2012 was primarily a result of the fluctuations in assets and liabilities relating to operating activities of KICO as affected by the growth in its operations which are described above, offset by an increase in net income (adjusted for non-cash items) of $517,000.
 
 Net cash provided by investing activities was $456,000 in 2012 compared to $1,172,000 used in 2011. The $1,628,000 increase in cash flows used in investing activities is a result of the decrease in acquisitions and increase in sales of invested assets.
 
Net cash used in financing activities was $123,000 in 2012 compared to $7,000 used in 2011. The $116,000 decrease in cash flows from financing activities is a result of a dividend payment of $113,000 in 2012 compared to no such payment in 2011.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable
 
 
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ITEM  4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
 
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.
 
Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II.  OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS.
 
None
 
ITEM 1A. RISK FACTORS.
 
Not applicable
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(a)  None

(b)  Not applicable

(c) The following table sets forth certain information with respect to purchases of common stock made by us or any “affiliated purchaser” during the quarter ended March 31, 2012:

Period
 
Total Number of Shares Purchased
   
Average Price
Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Be Purchased Under the Plans or Programs
 
                         
1/1/12 - 1/31/12
    4,716 (1)   $ 3.50       -       -  
2/1/12 - 2/29/12
    -       -       -       -  
3/1/12 - 3/31/12
    -       -       -       -  
Total
    4,716     $ 3.50       -       -  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.
 
None

_______________________
(1) Represents 2,216 shares repurchased by us in a private transaction and 2.500 shares purchased by persons who may be considered “affiliated purchasers.”
 
 
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ITEM 6. EXHIBITS.

Restated Certificate of Incorporation, as amended
   
3(b)
Certificate of Designation of Series E Preferred Stock1
   
3(c)
By-laws, as amended2
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Executive Officer and Chief Financial Officer 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.
______________ 
1 Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated May 12, 2009 and incorporated herein by reference. 
2 Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated November 5, 2009 and incorporated herein by reference.

 
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SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  KINGSTONE COMPANIES, INC.  
       
Dated:  May 15, 2012
By:
/s/ Barry B. Goldstein  
    Barry B. Goldstein       
    President  
 
 
By:
/s/ Victor Brodsky  
    Victor Brodsky  
    Chief Financial Officer  
 
 
 
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