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KINGSTONE COMPANIES, INC. - Quarter Report: 2017 March (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
 
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
(State or other jurisdiction of
incorporation or organization)
 
36-2476480
(I.R.S. Employer
Identification Number)
 
15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)
 
(845) 802-7900
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
◻ (Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
As of May 11, 2017 there were 10,623,593 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, 2017 (Unaudited) and December 31, 2016
 
 
2
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited)
 
 
3
 
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2017 (Unaudited)
 
 
4
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited)
 
 
5
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements  (Unaudited)
 
 
6
 
 
 
Item 2 —
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
33
 
 
 
Item 3 —
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
59
 
 
 
Item 4 —
 
Controls and Procedures
 
 
59
 
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
60
 
 
 
Item 1 —
 
Legal Proceedings
 
 
60
 
 
 
Item 1A —
 
Risk Factors
 
 
60
 
 
 
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
60
 
 
 
Item 3 —
 
Defaults Upon Senior Securities
 
 
60
 
 
 
Item 4 —
 
Mine Safety Disclosures
 
 
60
 
 
 
Item 5 —
 
Other Information
 
 
60
 
 
 
Item 6 —
 
Exhibits
 
 
61
 
Signatures
 
 
 62
 
 
 EXHIBIT 3(a)
 EXHIBIT 3(b)
 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 on Form 10-Q 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, 2016 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,
 
 
 
2017
 
 
2016
 
 
 
 (unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
  Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
  $5,159,351 at March 31, 2017 and $5,298,119 at December 31, 2016)
 $4,895,443 
 $5,094,902 
  Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
  $100,554,236 at March 31, 2017 and $80,596,628 at December 31, 2016)
  100,687,355 
  80,428,828 
  Equity securities, available-for-sale, at fair value (cost of $9,545,785
    
    
  at March 31, 2017 and $9,709,385 at December 31, 2016)
  10,102,495 
  9,987,686 
 Total investments
  115,685,293 
  95,511,416 
 Cash and cash equivalents
  23,235,655 
  12,044,520 
 Premiums receivable, net
  11,728,443 
  11,649,398 
 Reinsurance receivables, net
  33,502,642 
  32,197,765 
 Deferred policy acquisition costs
  12,467,976 
  12,239,781 
 Intangible assets, net
  1,265,000 
  1,350,000 
 Property and equipment, net
  3,375,436 
  3,011,373 
 Other assets
  1,430,646 
  1,442,209 
Total assets
 $202,691,091 
 $169,446,462 
 
    
    
Liabilities
    
    
 Loss and loss adjustment expense reserves
 $44,611,586 
 $41,736,719 
 Unearned premiums
  55,322,298 
  54,994,375 
 Advance premiums
  1,965,456 
  1,421,560 
 Reinsurance balances payable
  2,108,447 
  2,146,017 
 Deferred ceding commission revenue
  6,772,857 
  6,851,841 
 Accounts payable, accrued expenses and other liabilities
  3,212,865 
  5,448,448 
 Income taxes payable
  202,751 
  - 
 Deferred income taxes
  396,425 
  166,949 
Total liabilities
  114,592,685 
  112,765,909 
 
    
    
Commitments and Contingencies
    
    
 
    
    
Stockholders' Equity
    
    
  Preferred stock, $.01 par value; authorized 2,500,000 shares
  - 
  - 
  Common stock, $.01 par value; authorized 20,000,000 shares; issued 11,596,947 shares
    
    
  at March 31, 2017 and 8,896,335 at December 31, 2016; outstanding
    
    
  10,622,478 shares at March 31, 2017 and 7,921,866 shares at December 31, 2016
  115,969 
  88,963 
  Capital in excess of par
  68,152,149 
  37,950,401 
  Accumulated other comprehensive income
  455,287 
  72,931 
  Retained earnings
  21,370,463 
  20,563,720 
 
  90,093,868 
  58,676,015 
  Treasury stock, at cost, 974,469 shares at March 31, 2017 and December 31, 2016
  (1,995,462)
  (1,995,462)
Total stockholders' equity
  88,098,406 
  56,680,553 
 
    
    
Total liabilities and stockholders' equity
 $202,691,091 
 $169,446,462 
 

See accompanying notes to condensed consolidated financial statements.
 
 
 
2
 
 
 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
 
 
 
 
Three months ended March 31,
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
  Net premiums earned
 $16,369,748 
 $14,531,675 
  Ceding commission revenue
  3,184,452 
  2,770,337 
  Net investment income
  857,800 
  813,057 
  Net realized (losses) gains on sales of investments
  (54,506)
  80,436 
  Other income
  289,700 
  249,347 
 Total revenues
  20,647,194 
  18,444,852 
 
    
    
Expenses
    
    
  Loss and loss adjustment expenses
  8,292,996 
  9,483,855 
  Commission expense
  4,888,978 
  4,270,066 
  Other underwriting expenses
  4,212,417 
  3,346,441 
  Other operating expenses
  755,804 
  329,239 
  Depreciation and amortization
  318,698 
  283,828 
 Total expenses
  18,468,893 
  17,713,429 
 
    
    
  Income from operations before taxes
  2,178,301 
  731,423 
  Income tax expense
  707,721 
  190,391 
Net income
  1,470,580 
  541,032 
 
    
    
Other comprehensive income, net of tax
    
    
  Gross change in unrealized gains on available-for-sale-securities
  524,822 
  1,484,064 
 
    
    
 Reclassification adjustment for losses (gains)
    
    
   included in net income
  54,506 
  (80,436)
 Net change in unrealized gains
  579,328 
  1,403,628 
  Income tax expense related to items of other comprehensive income
  (196,972)
  (477,234)
Other comprehensive income, net of tax
  382,356 
  926,394 
 
    
    
Comprehensive income
 $1,852,936 
 $1,467,426 
 
    
    
Earnings per common share:
    
    
  Basic
 $0.15 
 $0.07 
  Diluted
 $0.15 
 $0.07 
 
    
    
Weighted average common shares outstanding
    
    
  Basic
  9,663,751 
  7,322,385 
  Diluted
  9,848,494 
  7,360,564 
 
    
    
Dividends declared and paid per common share
 $0.0625 
 $0.0625 
 

See accompanying notes to condensed consolidated financial statements.
 
 
 
3
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
                     
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)              
Three months ended March 31, 2017                    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Capital
 
 
 Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 in Excess
 
 
 Comprehensive
 
 
 Retained
 
 
 Treasury Stock  
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 of Par
 
 
 Income
 
 
 Earnings
 
 
 Shares
 
 
 Amount
 
 
 Total
 
Balance, January 1, 2017
  - 
 $- 
  8,896,335 
 $88,963 
 $37,950,401 
 $72,931 
 $20,563,720 
  974,469 
 $(1,995,462)
 $56,680,553 
Proceeds from public offering, net of
    
    
    
    
    
    
    
    
    
    
offering costs of $2,173,000
  - 
  - 
  2,692,500 
  26,925 
  30,109,774 
  - 
  - 
  - 
  - 
  30,136,699 
Stock-based compensation
  - 
  - 
  - 
  - 
  59,055 
  - 
  - 
  - 
  - 
  59,055 
Vesting of restricted stock awards
  - 
  - 
  2,946 
  29 
  (29)
  - 
  - 
  - 
  - 
  - 
Exercise of stock options
  - 
  - 
  5,166 
  52 
  32,948 
  - 
  - 
  - 
  - 
  33,000 
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (663,837)
  - 
  - 
  (663,837)
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  1,470,580 
  - 
  - 
  1,470,580 
Change in unrealized gains on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  382,356 
  - 
  - 
  - 
  382,356 
Balance, March 31, 2017
  - 
 $- 
  11,596,947 
 $115,969 
 $68,152,149 
 $455,287 
 $21,370,463 
  974,469 
 $(1,995,462)
 $88,098,406 
 

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,
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 $1,470,580 
 $541,032 
Adjustments to reconcile net income to net cash flows provided by operating activities:
    
    
Net realized losses (gains) on investments
  54,506 
  (80,436)
Depreciation and amortization
  318,698 
  283,828 
Amortization of bond premium, net
  124,054 
  92,646 
Stock-based compensation
  59,055 
  32,234 
Deferred income tax benefit (expense)
  32,504 
  (43,114)
(Increase) decrease in operating assets:
    
    
Premiums receivable, net
  (79,045)
  99,464 
Reinsurance receivables, net
  (1,304,877)
  (4,560,111)
Deferred policy acquisition costs
  (228,195)
  (141,970)
Other assets
  11,563 
  (666,404)
Increase (decrease) in operating liabilities:
    
    
Loss and loss adjustment expense reserves
  2,874,867 
  6,154,265 
Unearned premiums
  327,923 
  122,858 
Advance premiums
  543,896 
  532,486 
Reinsurance balances payable
  (37,570)
  1,536,971 
Deferred ceding commission revenue
  (78,984)
  (18,859)
Accounts payable, accrued expenses and other liabilities
  (2,032,832)
  (1,212,176)
Net cash flows provided by operating activities
  2,056,143 
  2,672,714 
 
    
    
Cash flows from investing activities:
    
    
Purchase - fixed-maturity securities available-for-sale
  (22,811,402)
  (15,890,742)
Purchase - equity securities available-for-sale
  - 
  (1,831,513)
Redemption - fixed-maturity securities held-to-maturity
  200,000 
  - 
Sale or maturity - fixed-maturity securities available-for-sale
  2,706,202 
  6,401,092 
Sale - equity securities available-for-sale
  132,091 
  1,161,501 
Acquisition of fixed assets
  (597,761)
  (182,164)
Other investing activities
  - 
  250,448 
Net cash flows used in investing activities
  (20,370,870)
  (10,091,378)
 
    
    
Cash flows from financing activities:
    
    
Net proceeds from issuance of common stock
  30,136,699 
  - 
Proceeds from exercise of stock options
  33,000 
  - 
Purchase of treasury stock
  - 
  (95,881)
Dividends paid
  (663,837)
  (457,603)
Net cash flows provided by (used in) financing activities
  29,505,862 
  (553,484)
 
    
    
Increase (decrease) in cash and cash equivalents
 $11,191,135 
 $(7,972,148)
Cash and cash equivalents, beginning of period
  12,044,520 
  13,551,372 
Cash and cash equivalents, end of period
 $23,235,655 
 $5,579,224 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $- 
 $30,000 
 

See accompanying notes to condensed consolidated financial statements.
 
 
 
5
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Nature of Business and Basis of Presentation
 
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned subsidiary, Kingstone Insurance Company (“KICO”), underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO writes substantially all of its business in New York.
 
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 condensed financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2016 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2017. 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, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017.
 
Note 2 – Accounting Policies
 
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: KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All significant inter-company account balances and transactions have been eliminated in consolidation.
 
Accounting Changes
 
In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-09, Financial Services – Insurance (Topic 944): Disclosures About Short-Duration Contracts. The updated accounting guidance requires expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with insurance claims. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred that typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting period is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, claims frequency information including the methodology used to determine claim frequency and any changes to that methodology, and claim duration. The guidance became effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and has been applied retrospectively. The new guidance affected disclosures only and had no impact on the Company’s results of operations or financial position.
 
Effective January 1, 2017, the Company has adopted the provisions of ASU 2016-09 – Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires recognition of all income tax effects from share-based payments arising on or after January 1, 2017 (the Company’s adoption date) in income tax expense. As a result, the Company realized windfall tax benefits in the interim period of adoption of approximately $5,000, which was recognized as a discrete period income tax benefit as required by this ASU. This benefit resulted in lowering the Company’s effective tax rate for the interim period by 0.1%.
 
 
 
6
 
 
Accounting Pronouncements
 
In May 2014, FASB issued ASU 2014-09 – Revenue from Contracts with Customers (Topic 606). The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
 
In January 2016, FASB issued ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated accounting guidance requires changes to the reporting model for financial instruments. The primary change for the Company is expected to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The updated guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
 
In February 2016, FASB issued ASU 2016-02 – Leases (Topic 842). Under this ASU, lessees will recognize a right-of-use-asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2018. The Company will apply the guidance using a modified retrospective approach. Early application is permitted. The Company is evaluating whether the adoption of ASU 2016-02 will have a significant impact on its consolidated results of operations, financial position or cash flows.
 
In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised accounting guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
 
 
 
7
 
 
In August 2016, FASB issued ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The revised ASU provides accounting guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or lacking in specific guidance. ASU 2016-15 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect the updated guidance will have on its consolidated statement of cash flows.
 
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
 
Note 3 - Investments 
 
Available-for-Sale Securities
 
The amortized cost and fair value of investments in available-for-sale fixed-maturity securities and equity securities as of March 31, 2017 and December 31, 2016 are summarized as follows:
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
 Unrealized
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Gains/
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Territories and Possessions
 $7,582,088 
 $214,232 
 $(18,806)
 $(18,710)
 $7,758,804 
 $176,716 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  70,449,109 
  781,970 
  (556,753)
  (7,370)
  70,666,956 
  217,847 
 
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
 asset backed securities
  22,523,039 
  72,990 
  (308,073)
  (26,361)
  22,261,595 
  (261,444)
 Total fixed-maturity securities
  100,554,236 
  1,069,192 
  (883,632)
  (52,441)
  100,687,355 
  133,119 
 
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
 Preferred stocks
  5,986,588 
  63,123 
  (120,639)
  (75,322)
  5,853,750 
  (132,838)
 Common stocks
  3,559,197 
  756,966 
  - 
  (67,418)
  4,248,745 
  689,548 
 Total equity securities
  9,545,785 
  820,089 
  (120,639)
  (142,740)
  10,102,495 
  556,710 
 
    
    
    
    
    
    
 Total
 $110,100,021 
 $1,889,281 
 $(1,004,271)
 $(195,181)
 $110,789,850 
 $689,829 
 
 
 
8
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
 Unrealized
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Gains/
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Territories and Possessions
 $8,053,449 
 $199,028 
 $(46,589)
 $- 
 $8,205,888 
 $152,439 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  53,728,395 
  600,519 
  (638,113)
  (5,612)
  53,685,189 
  (43,206)
 
    
    
    
    
    
    
 Residential mortgage backed
    
    
    
    
    
    
 securities
  18,814,784 
  70,682 
  (309,273)
  (38,442)
  18,537,751 
  (277,033)
 Total fixed-maturity securities
  80,596,628 
  870,229 
  (993,975)
  (44,054)
  80,428,828 
  (167,800)
 
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
 Preferred stocks
  5,986,588 
  10,317 
  (241,333)
  (70,571)
  5,685,001 
  (301,587)
 Common stocks
  3,722,797 
  691,324 
  (13,968)
  (97,468)
  4,302,685 
  579,888 
 Total equity securities
  9,709,385 
  701,641 
  (255,301)
  (168,039)
  9,987,686 
  278,301 
 
    
    
    
    
    
    
 Total
 $90,306,013 
 $1,571,870 
 $(1,249,276)
 $(212,093)
 $90,416,514 
 $110,501 
 
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, 2017 and December 31, 2016 is shown below:
 
 
 
March 31, 2017
 
 
December 31, 2016
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $1,094,841 
 $1,106,433 
 $1,752,501 
 $1,765,795 
 One to five years
  31,745,373 
  32,254,008 
  29,541,568 
  29,913,308 
 Five to ten years
  42,572,660 
  42,468,839 
  30,487,775 
  30,211,974 
 More than 10 years
  2,618,323 
  2,596,480 
  - 
  - 
 Residential mortgage and other asset backed securities
  22,523,039 
  22,261,595 
  18,814,784 
  18,537,751 
 Total
 $100,554,236 
 $100,687,355 
 $80,596,628 
 $80,428,828 
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
 
 
9
 
 
Held-to-Maturity Securities
 
The amortized cost and fair value of investments in held-to-maturity fixed-maturity securities as of March 31, 2017 and December 31, 2016 are summarized as follows:
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
 Net
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $606,436 
 $147,603 
 $- 
 $- 
 $754,039 
 $147,603 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  1,149,119 
  38,236 
  (1,868)
  - 
  1,185,487 
  36,368 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,139,888 
  98,656 
  (7,065)
  (11,654)
  3,219,825 
  79,937 
 
    
    
    
    
    
    
 Total
 $4,895,443 
 $284,495 
 $(8,933)
 $(11,654)
 $5,159,351 
 $263,908 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
 Net
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $606,427 
 $147,612 
 $- 
 $- 
 $754,039 
 $147,612 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  1,349,916 
  37,321 
  - 
  - 
  1,387,237 
  37,321 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,138,559 
  72,784 
  (7,619)
  (46,881)
  3,156,843 
  18,284 
 
    
    
    
    
    
    
 Total
 $5,094,902 
 $257,717 
 $(7,619)
 $(46,881)
 $5,298,119 
 $203,217 
 
Held-to-maturity U.S. Treasury securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.
 
 
 
10
 
 
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2017 and December 31, 2016 is shown below:
 
 
 
March 31, 2017
 
 
December 31, 2016
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $- 
 $- 
 $- 
 $- 
 One to five years
  650,000 
  641,068 
  650,000 
  642,455 
 Five to ten years
  3,639,007 
  3,764,244 
  3,838,475 
  3,901,625 
 More than 10 years
  606,436 
  754,039 
  606,427 
  754,039 
 Total
 $4,895,443 
 $5,159,351 
 $5,094,902 
 $5,298,119 
 
Investment Income
 
Major categories of the Company’s net investment income are summarized as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Income:
 
 
 
 
 
 
 Fixed-maturity securities
 $745,453 
 $664,476 
 Equity securities
  136,485 
  175,951 
 Cash and cash equivalents
  6,169 
  6,446 
 Total
  888,107 
  846,873 
 Expenses:
    
    
 Investment expenses
  30,307 
  33,816 
 Net investment income
 $857,800 
 $813,057 
 
Proceeds from the redemption of fixed-maturity securities held-to-maturity were $200,000 and $-0- for the three months ended March 31, 2017 and 2016, respectively.
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $2,706,202 and $6,401,092 for the three months ended March 31, 2017 and 2016, respectively.
 
Proceeds from the sale of equity securities available-for-sale were $132,091 and $1,161,501 for the three months ended March 31, 2017 and 2016, respectively.
 
 
 
11
 
 
The Company’s net realized gains (losses) on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Fixed-maturity securities:
 
 
 
 
 
 
 Gross realized gains
 $13,123 
 $106,417 
 Gross realized losses (1)
  (36,120)
  (105,543)
 
  (22,997)
  874 
 
    
    
 Equity securities:
    
    
 Gross realized gains
  - 
  82,688 
 Gross realized losses
  (31,509)
  (3,126)
 
  (31,509)
  79,562 
 
    
    
 Net realized (losses) gains
 $(54,506)
 $80,436 
 
(1)  
Gross realized losses for the three months ended March 31, 2017 include $747 of loss from the redemption of fixed-maturity securities held-to-maturity.
 
Impairment Review
  
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.  For held-to-maturity debt securities, the amount of OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security.
 
OTTI losses are recorded in the condensed consolidated statements of income and comprehensive income as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At March 31, 2017 and December 31, 2016, there were 93 and 85 securities, respectively, that accounted for the gross unrealized loss. As of March 31, 2017, the Company’s held-to-maturity debt securities included an investment in one bond issued by the Commonwealth of Puerto Rico (“PR”). In July 2016, PR defaulted on its interest payment to bondholders. Due to the credit deterioration of PR, the Company recorded a credit loss component of OTTI on this investment as of June 30, 2016. As of December 31, 2016, the full amount of the write-down was recognized as a credit component of OTTI in the amount of $69,911. The Company determined that none of the other unrealized losses were deemed to be OTTI for its portfolio of fixed-maturity investments and equity securities for the three months ended March 31, 2017 and 2016. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery of fair value to the Company’s cost basis.
 
 
 
12
 
 
The Company held securities with unrealized losses representing declines that were considered temporary at March 31, 2017 and December 31, 2016 as follows:
 
 
 
March 31, 2017
 
 
 
Less than 12 months
 
 
12 months or more
 
 
Total
 
  
 
 
 
 
 
 
 
 No. of
 
 
 
 
 
 
 
 
 No. of
 
 
 Aggregate
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $759,346 
 $(18,8064)
  2 
 $313,326 
 $(18,710)
  1 
 $1,072,672 
 $(37,516)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  26,857,516 
  (556,753)
  46 
  238,393 
  (7,370)
  1 
  27,095,909 
  (564,123)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  18,537,897 
  (308,073)
  30 
  477,494 
  (26,361)
  4 
  19,015,391 
  (334,434)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $46,154,759 
 $(883,632)
  78 
 $1,029,213 
 $(52,441)
  6 
 $47,183,972 
 $(936,073)
 
    
    
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
    
    
 Preferred stocks
 $3,376,750 
 $(120,639)
  7 
 $656,000 
 $(75,322)
  1 
 $4,032,750 
 $(195,961)
 Common stocks
  - 
  - 
  - 
  291,000 
  (67,418)
  1 
  291,000 
  (67,418)
 
    
    
    
    
    
    
    
    
 Total equity securities
 $3,376,750 
 $(120,639)
  7 
 $947,000 
 $(142,740)
  2 
 $4,323,750 
 $(263,379)
 
    
    
    
    
    
    
    
    
 Total
 $49,531,509 
 $(1,004,271)
  85 
 $1,976,213 
 $(195,181)
  8 
 $51,507,722 
 $(1,199,452)
 
 
 
13
 
 
 
 
December 31, 2016
 
 
 
Less than 12 months
 
 
12 months or more
 
 
Total
 
  
 
 
 
 
 
 
 
 No. of
 
 
 
 
 
 
 
 
 No. of
 
 
 Aggregate
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $1,067,574 
 $(46,589)
  3 
 $- 
 $- 
  - 
 $1,067,574 
 $(46,589)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  19,859,293 
  (638,113)
  34 
  239,970 
  (5,612)
  1 
  20,099,263 
  (643,725)
 
    
    
    
    
    
    
    
    
 Residential mortgage
    
    
    
    
    
    
    
    
 backed securities
  15,918,090 
  (309,273)
  30 
  675,316 
  (38,442)
  6 
  16,593,406 
  (347,715)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $36,844,957 
 $(993,975)
  67 
 $915,286 
 $(44,054)
  7 
 $37,760,243 
 $(1,038,029)
 
    
    
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
    
    
 Preferred stocks
 $3,759,850 
 $(241,333)
  8 
 $660,750 
 $(70,571)
  1 
 $4,420,600 
 $(311,904)
 Common stocks
  288,075 
  (13,968)
  1 
  424,550 
  (97,468)
  1 
  712,625 
  (111,436)
 
    
    
    
    
    
    
    
    
 Total equity securities
 $4,047,925 
 $(255,301)
  9 
 $1,085,300 
 $(168,039)
  2 
 $5,133,225 
 $(423,340)
 
    
    
    
    
    
    
    
    
 Total
 $40,892,882 
 $(1,249,276)
  76 
 $2,000,586 
 $(212,093)
  9 
 $42,893,468 
 $(1,461,369)
 
 
 
14
 
 
Note 4 - Fair Value Measurements
 
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation technique used by the Company to fair value its financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.
 
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during period of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy and those investments included in each are as follows:
 
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Included are those investments traded on an active exchange, such as the NASDAQ Global Select Market, U.S. Treasury securities and obligations of U.S. government agencies, together with corporate debt securities that are generally investment grade.
 
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.  Municipal and corporate bonds, and residential mortgage-backed securities, that are traded in less active markets are classified as Level 2.  These securities are valued using market price quotations for recently executed transactions.
 
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows, market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period.
 
The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, the Company considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.
 
 
 
15
 
 
The Company’s investments are allocated among pricing input levels at March 31, 2017 and December 31, 2016 as follows:
 
 
 
March 31, 2017
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $- 
 $7,758,804 
 $- 
 $7,758,804 
 
    
    
    
    
 Corporate and other
    
    
    
    
 bonds industrial and
    
    
    
    
 miscellaneous
  65,841,558 
  4,825,398 
  - 
  70,666,956 
 
    
    
    
    
 Residential mortgage and other asset backed securities
  - 
  22,261,595 
  - 
  22,261,595 
 Total fixed maturities
  65,841,558 
  34,845,797 
  - 
  100,687,355 
 Equity securities
  10,102,495 
  - 
  - 
  10,102,495 
 Total investments
 $75,944,053 
 $34,845,797 
 $- 
 $110,789,850 
 
 
 
December 31, 2016
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $- 
 $8,205,888 
 $- 
 $8,205,888 
 
    
    
    
    
 Corporate and other
    
    
    
    
 bonds industrial and
    
    
    
    
 miscellaneous
  48,356,317 
  5,328,872 
  - 
  53,685,189 
 
    
    
    
    
 Residential mortgage backed securities
  - 
  18,537,751 
  - 
  18,537,751 
 Total fixed maturities
  48,356,317 
  32,072,511 
  - 
  80,428,828 
 Equity securities
  9,987,686 
  - 
  - 
  9,987,686 
 Total investments
 $58,344,003 
 $32,072,511 
 $- 
 $90,416,514 
 
Note 5 - Fair Value of Financial Instruments
 
The Company uses the following methods and assumptions in estimating its fair value disclosures for financial instruments:
 
Equity securities and fixed income securities available-for-sale:  Fair value is based on quoted market prices from a recognized pricing service.
 
Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their fair values because of the short-term nature of these instruments.
 
Premiums receivable and reinsurance receivables:  The carrying values reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to the short-term nature of the assets.
 
 
 
16
 
 
 
Real estate: The fair value of the land and building included in property and equipment, which is used in the Company’s operations, approximates the carrying value. The fair value was based on an appraisal prepared using the sales comparison approach and income approach, and accordingly the real estate is a Level 3 asset under the fair value hierarchy.
 
Reinsurance balances payable:  The carrying value reported in the condensed consolidated balance sheets for these financial instruments approximates fair value.
 
The estimated fair values of the Company’s financial instruments as of March 31, 2017 and December 31, 2016 are as follows:
 
 
 
March 31, 2017
 
 
December 31, 2016
 
 
 
Carrying Value
 
 
Fair Value
 
 
Carrying Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities held-to-maturity
 $4,895,443 
 $5,159,351 
 $5,094,902 
 $5,298,119 
 Cash and cash equivalents
 $23,235,655 
 $23,235,655 
 $12,044,520 
 $12,044,520 
 Premiums receivable
 $11,728,443 
 $11,728,443 
 $11,649,398 
 $11,649,398 
 Reinsurance receivables
 $33,502,642 
 $33,502,642 
 $32,197,765 
 $32,197,765 
 Real estate, net of accumulated depreciation
 $1,715,486
 $1,925,000 
 $1,659,405 
 $1,925,000 
 Reinsurance balances payable
 $2,108,447 
 $2,108,447 
 $2,146,017 
 $2,146,017 
 
Note 6 – Property and Casualty Insurance Activity
 
Premiums Earned
 
Premiums written, ceded and earned are as follows:
 
 
 
 Direct
 
 
 Assumed
 
 
 Ceded
 
 
 Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
  Premiums written
 $26,125,467 
 $4,428 
 $(9,395,590)
 $16,734,305 
  Change in unearned premiums
  (330,903)
  2,981 
  (36,635)
  (364,557)
 Premiums earned
 $25,794,564 
 $7,409 
 $(9,432,225)
 $16,369,748 
 
    
    
    
    
Three months ended March 31, 2016
    
    
    
    
  Premiums written
 $23,043,325 
 $5,078 
 $(8,386,528)
 $14,661,875 
  Change in unearned premiums
  (126,428)
  3,571 
  (7,343)
  (130,200)
 Premiums earned
 $22,916,897 
 $8,649 
 $(8,393,871)
 $14,531,675 
 
Premium receipts in advance of the policy effective date are recorded as advance premiums.  The balance of advance premiums as of March 31, 2017 and December 31, 2016 was approximately $1,965,000 and $1,422,000, respectively.
 
 
 
17
 
 
Loss and Loss Adjustment Expense Reserves
 
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expense (“LAE”) reserves:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 Balance at beginning of period
 $41,736,719 
 $39,876,500 
 Less reinsurance recoverables
  (15,776,880)
  (16,706,364)
 Net balance, beginning of period
  25,959,839 
  23,170,136 
 
    
    
 Incurred related to:
    
    
 Current year
  8,297,582 
  9,903,094 
 Prior years
  (4,586)
  (419,239)
 Total incurred
  8,292,996 
  9,483,855 
 
    
    
 Paid related to:
    
    
 Current year
  2,269,894 
  3,006,210 
 Prior years
  4,090,766 
  3,421,820 
 Total paid
  6,360,660 
  6,428,030 
  
    
    
 Net balance at end of period
  27,892,175 
  26,225,961 
 Add reinsurance recoverables
  16,719,411 
  19,804,804 
 Balance at end of period
 $44,611,586 
 $46,030,765 
 
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $4,233,804 and $4,313,667 for the three months ended March 31, 2017 and 2016, respectively.
 
Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the three months ended March 31, 2017 and 2016 was $(4,586) favorable and $(419,239) favorable, respectively. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves, giving consideration to Company and industry trends.
 
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a monthly basis, the Company reviews by line of business existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior years. Several methods are used, varying by product line and accident year, in order to determine the required IBNR reserves.  These methods include the following:
 
Paid Loss Development – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.
 
Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.
 
 
 
18
 
 
Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns.  The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year.  This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.
 
Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns.  The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year.  This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.
 
Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.
 
Two key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods described above, and the loss development factor selections used in the loss development methods described above. The loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business.
 
The Company is not aware of any claims trends that have emerged or that would cause future adverse development that have not already been considered in existing case reserves and in its current loss development factors.
 
In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (‘pure’ IBNR) for accident dates of March 31, 2014 and prior is limited although there remains the possibility of adverse development on reported claims (‘case development’ IBNR).
 
The following is information about incurred and paid claims development as of March 31, 2017, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of March 31, 2017 included in the net incurred loss and allocated expense amounts. The historical information regarding incurred and paid claims development for the years ended December 31, 2008 to December 31, 2015 is presented as supplementary unaudited information.
 
Reported claim counts are measured on an occurrence or per event basis.  A single claim occurrence could result in more than one loss type or claimant; however the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved. 
 
 
 
19
 
 
All Lines of Business                        
(in thousands, except reported claims data)                    
 
                     
 
 
As of
 
 
 
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance  
 
 
March 31, 2017
 
 
 
For the Years Ended December 31,
 
 
Three Months Ended March 31,
 
 
IBNR
 
 Cumulative Number of Reported Claims by Accident Year 
Accident Year
 
2008
 
 
2009
 
 
2010
 
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
 
 
 
 
 
 
 
 
(Unaudited 2008 - 2015)
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 $4,505 
 $4,329 
 $4,223 
 $4,189 
 $4,068 
 $4,055 
 $4,056 
 $4,040 
 $4,038 
 $4,036 
 $2 
  1,133 
2009
    
  4,403 
  4,254 
  4,287 
  4,384 
  4,511 
  4,609 
  4,616 
  4,667 
  4,669 
  8 
  1,136 
2010
    
    
  5,598 
  5,707 
  6,429 
  6,623 
  6,912 
  6,853 
  6,838 
  6,833 
  14 
  1,616 
2011
    
    
    
  7,603 
  7,678 
  8,618 
  9,440 
  9,198 
  9,066 
  9,127 
  59 
  1,913 
2012
    
    
    
    
  9,539 
  9,344 
  10,278 
  10,382 
  10,582 
  10,653 
  113 
  4,701(1)
2013
    
    
    
    
    
  10,728 
  9,745 
  9,424 
  9,621 
  9,513 
  348 
  1,554 
2014
    
    
    
    
    
    
  14,193 
  14,260 
  14,218 
  14,359 
  838 
  2,120 
2015
    
    
    
    
    
    
    
  22,340 
  21,994 
  21,675 
  2,048 
  2,514 
2016
    
    
    
    
    
    
    
    
  26,062 
  26,153 
  4,813 
  2,784 
2017
    
    
    
    
    
    
    
    
    
  7,718 
  3,174 
  657 
 
    
    
    
    
    
    
    
    
 
 Total
 
 $114,736 
    
    
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.              
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All Lines of Business                        
(in thousands)                          
 
 
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
 
 
 
  For the Years Ended December 31,
 
Three Months Ended March 31,
 
 
 
 
 
Accident Year
 
2008
 
 
2009
 
 
2010
 
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
 
 
 
 
 
 
 
 
(Unaudited 2008 - 2015)
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 $2,406 
 $3,346 
 $3,730 
 $3,969 
 $4,003 
 $4,029 
 $4,028 
 $4,031 
 $4,031 
 $4,031 
 
 
 
 
 
 
2009
    
  2,298 
  3,068 
  3,607 
  3,920 
  4,134 
  4,362 
  4,424 
  4,468 
  4,470 
     
     
2010
    
    
  2,566 
  3,947 
  4,972 
  5,602 
  6,323 
  6,576 
  6,720 
  6,742 
    
     
2011
    
    
    
  3,740 
  5,117 
  6,228 
  7,170 
  8,139 
  8,540 
  8,554 
    
    
2012
    
    
    
    
  3,950 
  5,770 
  7,127 
  8,196 
  9,187 
  9,477 
     
     
2013
    
    
    
    
    
  3,405 
  5,303 
  6,633 
  7,591 
  7,743 
    
    
2014
    
    
    
    
    
    
  5,710 
  9,429 
  10,738 
  10,905 
    
    
2015
    
    
    
    
    
    
    
  12,295 
  16,181 
  16,809 
    
    
2016
    
    
    
    
    
    
    
    
  15,364 
  17,814 
    
    
2017
    
    
    
    
    
    
    
    
    
  2,114 
    
    
 
    
    
    
    
    
    
    
    
 
Total
 
 $88,658 
    
    
 
    
    
    
    
    
    
    
    
    
    
    
    
 
Net liability for unpaid claim and allocated claim adjustment expenses for the accident years presented
 $26,079 
    
    
  All outstanding liabilities before 2008, net of reinsurance 
  634 
    
    
  Liabilities for claims and allocted claim adjustment expenses, net of reinsurance
 $26,713 
    
    
 
 
 
20
 
 
The reconciliation of the net incurred and paid claims development tables to the loss and LAE reserves in the consolidated balance sheet is as follows:
 
 
 
As of
 
(in thousands)
 
March 31, 2017
 
Liabilities for claims and claim adjustment expenses, net of reinsurance
 $26,713 
Total reinsurance recoverable on unpaid claims
  16,719 
Unallocated claims adjustment expenses
  1,180 
Total gross liability for loss and LAE reserves
 $44,612 
 
Commercial Auto Line of Business
 
Effective October 1, 2014 the Company decided that it would no longer accept applications for new commercial auto policies.  The action was taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of business.  The actions taken did not yield the hoped for results. In February 2015, the Company made the decision that it would no longer offer renewals on its existing commercial auto policies beginning with those that expired on or after May 1, 2015. The Company had -0- and 34 commercial auto policies in force as of March 31, 2017 and 2016, respectively.
 
Reinsurance
 
The Company’s quota share reinsurance treaties are on a July 1 through June 30 fiscal year basis; therefore, for year to date fiscal periods after June 30, two separate treaties will be included in such periods.
 
The Company’s quota share reinsurance treaties in effect for the three months ended March 31, 2017 for its personal lines business, which primarily consists of homeowners’ policies, were covered under the July 1, 2016/June 30, 2017 treaty year (“2016/2017 Treaty”).  The Company’s quota share reinsurance treaties in effect for the three months ended March 31, 2016 were covered under the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”).
 
The Company’s 2015/2016 Treaty and 2016/2017 Treaty provide for the following material terms:
 
 
 
21
 
 
 
 
 Treaty Year
 
 
 
July 1, 2016
 
 
July 1, 2015
 
 
 
to
 
 
to
 
 Line of Busines
 
June 30, 2017
 
 
June 30, 2016
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
Homeowners, dwelling fire and canine legal liability
 
 
 
 
 
 
 Quota share treaty:
 
 
 
 
 
 
 Percent ceded
  40%
  40%
 Risk retained
 $500,000 
 $450,000 
 Losses per occurrence subject to quota share reinsurance coverage
 $833,333 
 $750,000 
 Excess of loss coverage above quota share coverage
 $3,666,667 
 $3,750,000 
 
 in excess of
   in excess of 
 
 $833,333 
 $750,000 
 Total reinsurance coverage per occurrence
 $4,000,000 
 $4,050,000 
 Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 Expiration date
June 30, 2017
June 30, 2016
 
    
    
 Personal Umbrella
    
    
 Quota share treaty:
    
    
 Percent ceded - first $1,000,000 of coverage
  90%
  90%
 Percent ceded - excess of $1,000,000 of coverage
  100%
  100%
 Risk retained
 $100,000 
 $100,000 
 Total reinsurance coverage per occurrence
 $4,900,000 
 $2,900,000 
 Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
 $3,000,000 
 Expiration date
 
June 30, 2017
 
 
June 30, 2016
 
 
    
    
Commercial Lines:
    
    
 General liability commercial policies, except for commercial auto
    
    
 Quota share treaty:
    
    
 Percent ceded (terminated effective July 1, 2014)
  
None
 
  
None
 
 Risk retained
 $500,000 
 $425,000 
 Losses per occurrence subject to quota share reinsurance coverage
  
None
 
  
None
 
 Excess of loss coverage above quota share coverage
 $4,000,000 
 $4,075,000 
 
   in exess of 
   in excess of 
 
 $500,000 
 $425,000 
 Total reinsurance coverage per occurrence
 $4,000,000 
 $4,075,000 
 Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 
    
    
 Commercial Umbrella
    
    
 Quota share treaty:
    
    
 Percent ceded - first $1,000,000 of coverage
  90%
    
 Percent ceded - excess of $1,000,000 of coverage
  100%
    
 Risk retained
 $100,000 
    
 Total reinsurance coverage per occurrence
 $4,900,000 
    
 Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
    
 Expiration date
June 30, 2017
    
 
    
    
Commercial Auto:
    
    
 Risk retained
    
 $300,000 
 Excess of loss coverage in excess of risk retained
    
 $1,700,000 
 
    
  
  in excess of
 
 
    
 $300,000 
Catastrophe Reinsurance:
    
    
 Initial loss subject to personal lines quota share treaty
 $5,000,000 
 $4,000,000 
 Risk retained per catastrophe occurrence (1)
 $3,000,000 
 $2,400,000 
 Catastrophe loss coverage in excess of quota share coverage (2) (3)
 $247,000,000 
 $176,000,000 
 Severe winter weather aggregate (3)
 
 No
 
 
 Yes
 
 Reinstatement premium protection (4)
 
 Yes
 
 
 Yes
 
 
 
 
22
 
 
(1) 
Plus losses in excess of catastrophe coverage.
(2) 
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2016, the duration of a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone was extended to 168 consecutive hours from 120 consecutive hours.
(3) 
From July 1, 2015 through June 30, 2016, catastrophe treaty also covered losses caused by severe winter weather during any consecutive 28 day period.
(4) 
Effective July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage in excess of $4,000,000. Effective July 1, 2016, reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of $5,000,000.
 
The single maximum risks per occurrence to which the Company is subject under the new treaties effective July 1, 2016 and under the treaties that expired on June 30, 2016 are as follows:
 
 
 
July 1, 2016 - June 30, 2017
 
July 1, 2015 - June 30, 2016
Treaty
 
 Extent of Loss
 
 Risk Retained
 Extent of Loss
 
 Risk Retained
Personal Lines
 
 Initial $833,333
 
$500,000
 
 Initial $750,000
 
$450,000
 
 
 $833,333 - $4,500,000
 
 None(1)
 
 $750,000 - $4,500,000
 
 None(1)
 
 
 Over $4,500,000
 
100%
 
 Over $4,500,000
 
100%
 
 
 
 
 
 
 
 
 
Personal Umbrella
 
 Initial $1,000,000
 
$100,000
 
 Initial $1,000,000
 
$100,000
 
 
 $1,000,000 - $5,000,000
 
 None(1)
 
 $1,000,000 - $3,000,000
 
 None(1)
 
 
 Over $5,000,000
 
100%
 
 Over $3,000,000
 
100%
 
 
 
 
 
 
 
 
 
Commercial Lines
 
 Initial $500,000
 
$500,000
 
 Initial $425,000
 
$425,000
 
 
 $500,000 - $4,500,000
 
None(1)
 
 $425,000 - $4,500,000
 
None(1)
 
 
 Over $4,500,000
 
100%
 
 Over $4,500,000
 
100%
 
 
 
 
 
 
 
 
 
Commercial Umbrella
 
 Initial $1,000,000
 
$100,000
 
 
 
 
 
 
 $1,000,000 - $5,000,000
 
 None(1)
 
 
 
 
 
 
 Over $5,000,000
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe (2)
 
 Initial $5,000,000
 
$3,000,000
 
 Initial $4,000,000
 
$2,400,000
 
 
 $5,000,000 - $252,000,000
 
 None
 
 $4,000,000 - $180,000,000
 
 None
 
 
 Over $252,000,000
 
100%
 
 Over $180,000,000
 
100%
________________
(1)  
Covered by excess of loss treaties.
 
(2)  
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
 
In March 2017, the Company bound its personal lines quota share reinsurance treaty effective July 1, 2017. The treaty provides for a reduction in the quota share ceding rate to 20%, from the current 40% in the expiring treaty, and the provisional ceding commission rate increases to 52.5%, from the current 52.0% in the expiring treaty. The new treaty covers a two year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The Company shall have the option under broad circumstances to reduce the quota share ceding rate or terminate the 2017/2019 Treaty effective July 1, 2018 by giving advance notice to the two reinsurers who participate in the quota share reinsurance treaty. The two reinsurers who participate in the quota share reinsurance treaty shall have the option under limited circumstances to reduce the quota share ceding rate or terminate the 2017/2019 Treaty effective July 1, 2018 by giving advance notice to the Company.
 
The Company’s reinsurance program is structured to enable the Company to significantly grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not relieve the Company of its obligations to policyholders.
 
 
 
23
 
 
Ceding Commission Revenue
 
The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios.  The commission rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.
 
The Company’s estimated ultimate treaty year loss ratios (“Loss Ratio(s)”) for treaties in effect for the three months ended March 31, 2017 are attributable to contracts for the 2016/2017 Treaty.  The Company’s Loss Ratios for treaties in effect for the three months ended March 31, 2016 are attributable to contracts for the 2015/2016 Treaty.
 
Treaties in effect for the three months ended March 31, 2017
 
Under the 2016/2017 Treaty, the Company is receiving a higher upfront fixed provisional rate in exchange for a less favorable sliding scale contingent rate. Under this arrangement, the Company earns more provisional ceding commissions, while contingent ceding commissions are reduced due to the less favorable sliding scale rate. The Company’s Loss Ratios for the period July 1, 2016 through March 31, 2017 (attributable to the 2016/2017 Treaty) were consistent with the contractual Loss Ratio at which the provisional ceding commissions are earned and therefore no contingent commission was recorded.
 
Treaties in effect for the three months ended March 31, 2016
 
Under the 2015/2016 Treaty, the Company is receiving a higher upfront fixed provisional rate in exchange for a less favorable sliding scale contingent rate. Under this arrangement, the Company earns more provisional ceding commissions, while contingent ceding commissions are reduced due to the less favorable sliding scale rate. The Company’s Loss Ratio for the period July 1, 2015 through March 31, 2016, which is attributable to the 2015/2016 Treaty, was higher than the contractual Loss Ratio at which provisional ceding commissions are earned. Accordingly, for the three month period ended March 31, 2016, the Company’s contingent ceding commission earned was reduced as a result of the estimated Loss Ratio for the 2015/2016 Treaty.
 
In addition to the treaties that were in effect for the three months ended March 31, 2017 and 2016, the Loss Ratios from prior years’ treaties are subject to change as loss reserves from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.
 
 
 
24
 
 
Ceding commission revenue consists of the following:
 
 
 
 Three months ended
 
 
 
March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Provisional ceding commissions earned
 $3,343,769 
 $3,099,614 
 Contingent ceding commissions earned
  (159,317)
  (329,277)
 
 $3,184,452 
 $2,770,337 
 
Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled annually based on the loss ratio of each treaty year that ends on June 30. As discussed above, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned. As of March 31, 2017 and December 31, 2016, net contingent ceding commissions payable to reinsurers under all treaties was approximately $1,051,000 and $773,000, respectively.
 
Note 7 – Stockholders’ Equity
 
Public Offering of Common Stock
 
On January 31, 2017, the Company closed on an underwritten public offering of 2,500,000 shares of its Common Stock. On February 14, 2017, the Company closed on the underwriters’ purchase option for an additional 192,500 shares of its Common Stock. The public offering price for the 2,692,500 shares sold was $12.00 per share. The aggregate net proceeds to the Company was approximately $30,137,000, after deducting underwriting discounts and commissions and other offering expenses in the aggregate amount of $2,173,000.
 
On March 1, 2017, the Company used $23,000,000 of the net proceeds of the offering to contribute capital to its insurance subsidiary, KICO, to support its ratings upgrade plan and additional growth. The remainder of the net proceeds will be used for general corporate purposes. A shelf registration statement relating to the shares sold in the offering was filed with the SEC and became effective on January 19, 2017.
 
Dividends Declared
 
Dividends declared and paid on Common Stock were $663,837 and $457,603 for the three months ended March 31, 2017 and 2016, respectively. The Company’s Board of Directors approved a quarterly dividend on May 10, 2017 of $.08 per share payable in cash on June 15, 2017 to stockholders of record as of May 31, 2017 (see Note 11).
 
Stock Options
 
Pursuant to the Company’s 2005 Equity Participation Plan (the “2005 Plan”), which provides for the issuance of incentive stock options, non-statutory stock options and restricted stock, a maximum of 700,000 shares of the Company’s Common Stock are permitted to be issued pursuant to options granted and restricted stock issued. Pursuant to the Company’s 2014 Equity Participation Plan (the “2014 Plan”), a maximum of 700,000 shares of Common Stock of the Company are authorized to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and stock bonuses.  Incentive stock options granted under the 2014 Plan and 2005 Plan expire no later than ten years from the date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Compensation Committee of the Board determines the expiration date with respect to non-statutory stock options and the vesting provisions for restricted stock granted under the 2014 Plan and 2005 Plan.
 
 
 
25
 
 
The results of operations for the three months ended March 31, 2017 and 2016 include stock-based stock option compensation expense totaling approximately $16,000 and $32,000, respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of 17% for each of the three months ended March 31, 2017 and 2016. Such amounts have been included in the condensed consolidated statements of income and comprehensive income within other operating expenses.
 
Stock-based compensation expense for the three months ended March 31, 2017 and 2016 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award less an estimate for anticipated forfeitures. The Company uses the “simplified” method to estimate the expected term of the options because the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term. No options were granted during the three months ended March 31, 2017. The weighted average estimated fair value of stock options granted during the three months ended March 31, 2016 was $1.97 per share. The fair value of stock options at the grant date was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants during the following periods:
 
 
 
 Three months ended
 
 
 
 March 31,    
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
Dividend Yield
  n/a 
  3.18%
Volatility
  n/a 
  31.61%
Risk-Free Interest Rate
  n/a 
  1.11%
Expected Life
  n/a 
 
 3.25 years
 
 
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.
 
 
 
26
 
 
A summary of stock option activity under the Company’s 2014 Plan and 2005 Plan for the three months ended March 31, 2017 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, 2017
  362,750 
 $6.62 
  2.61 
 $2,586,748 
 
    
    
    
    
Granted
  - 
 $- 
    
 $- 
Exercised
  (5,250)
 $6.53 
    
 $37,863 
Forfeited
  - 
 $- 
    
 $- 
 
    
    
    
    
Outstanding at March 31, 2017
  357,500 
 $6.62 
  2.37 
 $3,335,360 
 
    
    
    
    
Vested and Exercisable at March 31, 2017
  271,250 
 $6.43 
  2.23 
 $2,581,023 
 
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2017 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 $15.95 closing price of the Company’s Common Stock on March 31, 2017.
 
Participants in the 2005 and 2014 Plans may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”). The Company received cash proceeds of $33,000 from the exercise of options for the purchase of 5,000 shares of Common Stock during the three months ended March 31, 2017. The remaining 250 options exercised during the three months ended March 31, 2017 were Net Exercises, resulting in the issuance of 166 shares of Common Stock. No options were exercised during the three months ended March 31, 2016.
 
As of March 31, 2017, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $28,000. Unamortized compensation cost as of March 31, 2017 is expected to be recognized over a remaining weighted-average vesting period of 0.70 years.
 
As of March 31, 2017, there were 578,500 shares reserved for grants under the 2014 Plan.
 
Other Equity Compensation
 
In January 2017, the Company granted a total of 8,000 shares of restricted Common Stock under the 2014 Plan to its four non-employee directors. In January 2016, the Company granted a total of 6,000 shares of restricted Common Stock under the 2014 Plan to its three then non-employee directors. In March 2016, the Company granted 1,500 shares of restricted Common Stock under the 2014 Plan to a newly elected non-employee director. One-third of the shares granted will vest on each of the three annual anniversaries following the grant date.
 
In February 2017, the Company granted a total of 16,000 shares of restricted Common Stock under the 2014 Plan to two executive officers. The shares granted will vest on a monthly basis over the three year period following the grant date.
 
 
 
27
 
 
The fair value of the shares will be determined on each of the vesting dates. For the three months ended March 31, 2017, stock-based compensation of approximately $43,000 for these grants is included in the condensed consolidated statements of income and comprehensive income.
 
Note 8 – Income Taxes
 
The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated or separate return basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the period when they are identified, generally when the tax returns are filed.  The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the condensed consolidated financial statements taken as a whole for the respective periods.
 
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 various rates depending on whether the temporary differences are subject to federal taxes, state taxes, or both.
 
 
 
28
 
 
Significant components of the Company’s deferred tax assets and liabilities are as follows:
 
 
 
 March 31,
 
 
 December 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Deferred tax asset:
 
 
 
 
 
 
 Net operating loss carryovers (1)
 $112,760 
 $131,626 
 Claims reserve discount
  448,437 
  417,349 
 Unearned premium
  2,902,155 
  2,877,365 
 Deferred ceding commission revenue
  2,302,771 
  2,329,626 
 Other
  166,025 
  188,675 
 Total deferred tax assets
  5,932,148 
  5,944,641 
 
    
    
 Deferred tax liability:
    
    
 Investment in KICO (2)
  1,169,000 
  1,169,000 
 Deferred acquisition costs
  4,239,112 
  4,161,526 
 Intangibles
  430,100 
  459,000 
 Depreciation and amortization
  250,206 
  265,671 
 Net unrealized appreciation of securities - available for sale
  240,155 
  56,393 
 Total deferred tax liabilities
  6,328,573 
  6,111,590 
 
    
    
 Net deferred income tax liability
 $(396,425)
 $(166,949)
_____________________________
 
(1)  
The deferred tax assets from net operating loss carryovers (“NOL”) are as follows:
 
 
 
 March 31,
 
 
 December 31,
 
 
 Type of NOL
 
 2017
 
 
 2016
 
Expiration
 State only (A)
 $698,350 
 $655,719 
December 31, 2037
 Valuation allowance
  (592,390)
  (534,293)
 
 State only, net of valuation allowance
  105,960 
  121,426 
 
 Amount subject to Annual Limitation, federal only (B)
  6,800 
  10,200 
December 31, 2019
 Total deferred tax asset from net operating loss carryovers
 $112,760 
 $131,626 
 
 
(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of March 31, 2017 and December 31, 2016 was approximately $10,744,000 and $10,088,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the condensed consolidated statements of income and comprehensive income within other underwriting expenses. A valuation allowance has been recorded due to the uncertainty of generating enough state taxable income to utilize 100% of the available state NOLs over their remaining lives, which expire between 2027 and 2037.
 
(B) The Company has an NOL of $20,000 that is subject to Internal Revenue Code Section 382, which places a limitation on the utilization of the federal NOL loss to approximately $10,000 per year (“Annual Limitation”) as a result of a greater than 50% ownership change of the Company in 1999. The losses subject to the Annual Limitation will be available for future years, expiring through December 31, 2019.
 
(2)  
Deferred tax liability – Investment in KICO
 
 
 
29
 
 
On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition, the deferred tax liability on the Untaxed Interest was $1,169,000. A temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The Company is required to maintain its deferred tax liability of $1,169,000 related to this temporary difference until the stock of KICO is sold, or the assets of KICO are sold or KICO and the parent are merged.
 
In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. No valuation allowance against deferred tax assets has been established, except for NOL limitations, as the Company believes it is more likely than not the deferred tax assets will be realized based on the historical taxable income of KICO, or by offset to deferred tax liabilities.
 
The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the three months ended March 31, 2017 and 2016. If any had been recognized these would have been reported in income tax expense.
 
Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing. The Company’s tax returns for the years ended December 31 2013 through December 31, 2016 remain subject to examination
 
Note 9 – Earnings 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 common share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options.  The computation of diluted earnings per common share excludes those options with an exercise price in excess of the average market price of the Company’s common shares during the periods presented.
 
The computation of diluted earnings per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the three months ended March 31, 2017 and 2016, the inclusion of -0- and 54,327 options, respectively, in the computation of diluted earnings per common share would have been anti-dilutive for the periods and, as a result, the weighted average number of common shares used in the calculation of diluted earnings per common share has not been adjusted for the effect of such options.
 
 
 
30
 
 
The reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per common share follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Weighted average number of shares outstanding
  9,663,751 
  7,322,385 
 Effect of dilutive securities, common share equivalents
  184,743 
  38,179 
 
    
    
 Weighted average number of shares outstanding,
    
    
 used for computing diluted earnings per share
  9,848,494 
  7,360,564 
 
Note 10 - Commitments and Contingencies
 
Litigation
 
From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim asserted by a third party in a lawsuit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses. The Company is not subject to any other pending legal proceedings that management believes are likely to have a material adverse effect on the condensed consolidated financial statements.
 
Office Lease
 
The Company is a party to a non-cancellable operating lease, dated March 27, 2015, for its office facility for KICO located in Valley Stream, New York. In June 2016, the Company entered into a lease modification agreement. The original lease had a term of seven years and nine months. The lease modification increased the space occupied by KICO and extended the lease term to seven years and nine months to be measured from the additional premises commencement date. The additional premises commencement date was September 19, 2016, and additional rent was payable beginning March 19, 2017. The original lease commencement date was July 1, 2015 and rent commencement began January 1, 2016.
 
In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments from real estate taxes and other charges. Rent expense under the lease will be recognized on a straight-line basis over the lease term. At March 31, 2017, cumulative rent expense exceeded cumulative rent payments by $86,494. This difference is recorded as deferred rent and is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
 
 
 
31
 
 
As of March 31, 2017, aggregate future minimum rental commitments under the Company’s modified lease agreement are as follows:
 
        For the Year
 
 
 
            Ending
 
 
 
        December 31,
 
 Total
 
2017 (nine months)
 $119,939 
2018
  164,117 
2019
  169,861 
2020
  175,806 
2021
  181,959 
 Thereafter
  432,392 
 Total
 $1,244,074 
 
Rent expense for the three months ended March 31, 2017 and 2016 amounted to $41,342 and $26,126, respectively, and is included in the condensed consolidated statements of income and comprehensive income within other underwriting expenses.
 
Note 11 – Subsequent Events
 
The Company has evaluated events that occurred subsequent to March 31, 2017 through the date these condensed consolidated financial statements were issued for matters that required disclosure or adjustment in these condensed consolidated financial statements.
 
Dividends Declared and Paid
 
On May 10, 2017, the Company’s Board of Directors approved a quarterly dividend of $.08 per share payable in cash on June 15, 2017 to stockholders of record as of the close of business on May 31, 2017.
 
Reinsurance
 
In March 2017, the Company bound a new personal lines quota share reinsurance treaty with different terms effective July 1, 2017. See Note 6, Property and Casualty Insurance Activity – Reinsurance.
 
 
 
32
 
 
ITEM 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
We offer property and casualty insurance products to individuals and small businesses in New York State through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County. We are also licensed in the States of New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas. In October 2016, a homeowners rate, rule, and form filing was approved for use by the State of New Jersey.  We began writing business in New Jersey on May 4, 2017.
 
In November 2016, we commenced a plan of action to upgrade KICO’s A. M. Best rating. In April 2017, A.M. Best upgraded the Financial Strength Rating (FSR) of KICO to A- (Excellent) from B++ (Good). We believe that an A.M. Best rating of A- will open new opportunities of growth for KICO. The plan called for us to raise capital with the intent to contribute a portion of the proceeds to KICO and to reduce KICO’s reliance on quota share reinsurance. On January 31, 2017, we closed on an underwritten public offering of 2,500,000 shares of our common stock. On February 14, 2017, we closed on the underwriters’ purchase option for an additional 192,500 shares of our common stock. The public offering price for the 2,692,500 shares sold was $12.00 per share. The aggregate net proceeds to us was approximately $30,137,000. On March 1, 2017, we used $23,000,000 of the net proceeds of the offering to contribute capital to KICO, to support its ratings upgrade plan and additional growth. The remainder of the net proceeds will be used for general corporate purposes. In March 2017, KICO bound its personal lines quota share treaty effective July 1, 2017, reducing the quota share rate to 20% from the current 40%.
 
We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities.  All of KICO’s insurance policies are for a one year period. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one year life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
 
Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are commonly referred to as claims. In settling these claims, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.
 
Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company.
 
 
 
33
 
 
Product Lines
 
Our product lines include the following:
 
Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, cooperative and condominium, renters, equipment breakdown and service line endorsements, and personal umbrella policies.
 
 Commercial liability: We offer businessowners policies, which consist primarily of small business retail, service, and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees.  In addition, we write special multi-peril policies for larger and more specialized businessowners’ risks, including those with limited residential exposures. In the fourth quarter of 2016, we began offering commercial umbrella policies written above our supporting commercial lines policies.
 
Commercial automobile: Until April 2016, we provided liability and physical damage coverage for light commercial vehicles. Due to the poor performance of this line, effective October 1, 2014, we decided to no longer accept new commercial auto policies. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of April 30, 2016 we had no commercial auto policies in force. We have 28 open claims remaining as of April 30, 2017.
 
Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.
 
Other:  We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations.
 
Key Measures
 
We utilize the following key measures in analyzing the results of our insurance underwriting business:
 
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business.  Expressed as a percentage, this is the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
 
Net underwriting expense ratio:  The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.
 
Net combined ratio:  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.
 
 
 
34
 
 
Critical Accounting Policies and Estimates
 
 Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with 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 condensed consolidated 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 ceding commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets and the valuation of stock-based compensation. See Note 2 to the condensed consolidated financial statements - “Accounting Policies” for information related to updated accounting policies. 
 
 
 
35
 
 
Consolidated Results of Operations
 
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
 
The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:
 
 
 
Three months ended March 31,
 
($ in thousands)
 
2017
 
 
2016
 
 
Change
 
 
 Percent
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Direct written premiums
 $26,125 
 $23,043 
 $3,082 
  13.4%
 Assumed written premiums
  4 
  5 
  (1)
  (20.0)%
 
  26,129 
  23,048 
  3,081 
  13.4%
 Ceded written premiums
    
    
    
    
 Ceded to quota share treaties
  6,542 
  5,823 
  719 
  12.3%
 Ceded to excess of loss treaties
  311 
  319 
  (8)
  (2.5)%
 Total ceded to catastrophe treaties
  2,542 
  2,244 
  298 
  13.3%
 Total ceded written premiums
  9,395 
  8,386 
  1,009 
  12.0%
 
    
    
    
    
 Net written premiums
  16,734 
  14,662 
  2,072 
  14.1%
 
    
    
    
    
 Change in unearned premiums
    
    
    
    
 Direct and assumed
  (328)
  (123)
  (205)
  166.7%
 Ceded to quota share treaties
  (37)
  (7)
  (30)
  428.6%
 Change in net unearned premiums
  (365)
  (130)
  (235)
  180.8%
 
    
    
    
    
 Premiums earned
    
    
    
    
 Direct and assumed
  25,802 
  22,926 
  2,876 
  12.5%
 Ceded to quota share treaties
  (9,432)
  (8,394)
  (1,038)
  12.4%
 Net premiums earned
  16,370 
  14,532 
  1,838 
  12.6%
 Ceding commission revenue
  3,184 
  2,770 
  414 
  14.9%
 Net investment income
  858 
  813 
  45 
  5.5%
 Net realized (loss) gain on investments
  (55)
  80 
  (135)
  (168.8)%
 Other income
  290 
  249 
  41 
  16.5%
 Total revenues
  20,647 
  18,444 
  2,203 
  11.9%
 
 
 
36
 
 
 
 
Three months ended March 31,
 
($ in thousands)
 
2017
 
 
2016
 
 
Change
 
 
 Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
  20,647 
  18,444 
  2,203 
  11.9%
 
    
    
    
    
 Expenses
    
    
    
    
 Loss and loss adjustment expenses
    
    
    
    
 Direct and assumed:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  12,527 
  11,460 
  1,067 
  9.3%
 Losses from catastrophes (1)
  - 
  2,337 
  (2,337)
  (100.0)%
 Total direct and assumed loss and loss adjustment expenses
  12,527 
  13,797 
  (1,270)
  (9.2)%
 
    
    
    
    
 Ceded loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  4,234 
  3,378 
  856 
  25.3%
 Losses from catastrophes (1)
  - 
  935 
  (935)
  (100.0)%
 Total ceded loss and loss adjustment expenses
  4,234 
  4,313 
  (79)
  (1.8)%
 
    
    
    
    
 Net loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  8,293 
  8,082 
  211 
  2.6%
 Losses from catastrophes (1)
  - 
  1,402 
  (1,402)
  (100.0)%
 Net loss and loss adjustment expenses
  8,293 
  9,484 
  (1,191)
  (12.6)%
 
    
    
    
    
 Commission expense
  4,889 
  4,270 
  619 
  14.5%
 Other underwriting expenses
  4,212 
  3,346 
  866 
  25.9%
 Other operating expenses
  756 
  329 
  427 
  129.8%
 Depreciation and amortization
  319 
  284 
  35 
  12.3%
 Total expenses
  18,469 
  17,713 
  756 
  4.3%
 
    
    
    
    
 Income from operations before taxes
  2,178 
  731 
  1,447 
  197.9%
 Provision for income tax
  708 
  190 
  518 
  272.6%
 Net income
 $1,470 
 $541 
 $929 
  171.7%
 
(1) For the three months ended March 31, 2016, includes the effects of severe winter weather (which we define as a catastrophe).  We define a “catastrophe” as an event or series of related events that involve multiple first party policyholders, or an event or series of events that produce a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event or series of events.  Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, severe winter weather, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
 
 
 
Three months ended March 31,
 
 
 
2017
 
 
2016
 
 
Percentage Point Change
 
 
 Percent Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Key ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 Net loss ratio
  50.7%
  65.3%
  (14.6)
  (22.4)%
 Net underwriting expense ratio
  34.5%
  31.6%
  2.9 
  9.2%
 Net combined ratio
  85.2%
  96.9%
  (11.7)
  (12.1)%
 
Direct Written Premiums
 
 Direct written premiums during the three months ended March 31, 2017 (“2017”) were $26,125,000 compared to $23,043,000 during the three months ended March 31, 2016 (“2016”). The increase of $3,082,000, or 13.4%, was primarily due to an increase in policies in-force during 2017 as compared to 2016, and writing policies with higher premiums. We wrote more new policies as a result of continued demand for our products in the markets that we serve. Policies in-force increased by 10.8% as of March 31, 2017 compared to March 31, 2016.
 
 
 
37
 
 
Net Written Premiums and Net Premiums Earned
 
 Net written premiums increased $2,072,000, or 14.1%, to $16,734,000 in 2017 from $14,662,000 in 2016. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). Our personal lines business is currently subject to a 40% quota share treaty. A reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded written premiums, which will result in a corresponding increase to our net written premiums. In March 2017, we bound a new personal lines quota share treaty effective July 1, 2017, reducing the quota share rate to 20%.
 
Excess of loss reinsurance treaty
 
An increase in written premiums will also increase the premiums ceded under our excess of loss treaties, which incrementally reduces our net written premiums. In 2017, our ceded excess of loss reinsurance premiums decreased by $8,000 over the comparable ceded premiums for 2016. The decrease was due to more favorable rates in 2017, partially offset by an increase in premiums subject to excess of loss reinsurance.
 
Catastrophe reinsurance treaty
 
Most of the premiums written under our personal lines are also subject to our catastrophe treaty. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums for catastrophe insurance will increase. This results in an increase in premiums ceded under our catastrophe treaty, which reduces net written premiums. In 2017, our catastrophe reinsurance premiums increased by $298,000 over the comparable ceded premiums for 2016.
 
With the inception of our personal lines quota share treaty being on a “net” basis effective July 1, 2015, our catastrophe premiums are paid based on all of our direct written premiums subject to the quota share, compared to catastrophe premiums being paid only on the amount of written premiums that we retained under the “gross” basis that expired on June 30, 2015.
 
Net premiums earned
 
Net premiums earned increased $1,838,000, or 12.6%, to $16,370,000 in 2017 from $14,532,000 in 2016. As premiums written earn ratably over a twelve month period, net premiums earned in 2017 increased due to the higher net written premiums generated for the twelve months ended March 31, 2017 compared to the twelve months ended March 31, 2016.
 
Ceding Commission Revenue
 
The following table details the quota share provisional ceding commission rates in effect during 2017 and 2016. This table should be referred to in conjunction with the discussion for ceding commission revenue that follows.
 
 
 
Three months ended
 
 
 
March 31,
 
 
 
2017
 
 
2016
 
 
 
("2016/2017 Treaty")
 
 
("2015/2016 Treaty")
 
 
 
 
 
 
 
 
 Provisional ceding commission rate on quota share treaty
   
 
    
 Personal lines
  52%
  55%
 
 
 
38
 
 
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:
 
 
 
Three months ended March 31,
 
($ in thousands)
 
2017
 
 
2016
 
 
Change
 
 
 Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Provisional ceding commissions earned
 $3,343 
 $3,099 
 $244 
  7.9%
 Contingent ceding commissions earned
  (159)
  (329)
  170 
  (51.7)%
 
    
    
    
    
 Total ceding commission revenue
 $3,184 
 $2,770 
 $414 
  14.9%
 
Ceding commission revenue was $3,184,000 in 2017 compared to $2,770,000 in 2016. The increase of $414,000, or 14.9%, was due to an increase in provisional ceding commissions earned and a reduction in negative contingent ceding commissions earned.
 
 Provisional Ceding Commissions Earned
 
We receive a provisional ceding commission based on ceded written premiums. In 2017 our provisional ceding rate was 52% effective July 1, 2016 under the 2016/2017 Treaty. In 2016 our provisional ceding rate was 55% effective July 1, 2015 under the 2015/2016 Treaty. The $244,000 increase in provisional ceding commissions earned is due to an increase in personal lines direct written premiums subject to the quota share, partially offset by the decrease in our provisional ceding commission rate as discussed above.
 
Contingent Ceding Commissions Earned
 
We receive a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive. The amount of contingent ceding commissions we are eligible to receive under the personal lines quota share treaties detailed in the table above that were in effect during 2017 are subject to change based on losses incurred from claims with accident dates beginning July 1, 2016. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2016 under those treaties.
 
The 2016/2017 Treaty and 2015/2016 Treaty structure limits the amount of contingent ceding commissions that we can receive by setting the provisional commission rate higher than the rates we received in prior years. As a result of the higher upfront provisional ceding commissions that we receive, there is only a limited opportunity to earn contingent ceding commissions under these treaties. Under our “net” treaty structure, catastrophe losses in excess of the $5,000,000 retention will fall outside of the quota share treaty and such losses will not have an impact on contingent ceding commissions, as was the case under previous “gross” treaties. The “net” structure eliminates the adverse impact that catastrophe losses can have on contingent ceding commissions. See “Reinsurance” below for changes to our personal lines quota share treaty to take effect on July 1, 2017.
 
Net Investment Income
 
Net investment income was $858,000 in 2017 compared to $813,000 in 2016. The increase of $45,000, or 5.5%, was due to an increase in average invested assets in 2017, partially offset by a decrease in average yield. The average investment yield on invested assets was 3.77% as of March 31, 2017 compared to 4.51% as of March 31, 2016. The pre-tax equivalent investment yield on invested assets was 4.03% and 4.80% as of March 31, 2017 and 2016, respectively. The decrease in the average investment yield and the pre-tax equivalent investment yield is due to a shift toward: (1) shorter duration investments, which inherently have a lower yield, and (2) higher rated securities. A reduction in interest rates resulted in an increase to unrealized gains on our portfolio, which in turn reduced the average investment yield and the pre-tax equivalent investment yield.
 
 
 
39
 
 
Cash and invested assets was $138,921,000 as of March 31, 2017, compared to $93,976,000 as of March 31, 2016. The $44,945,000 increase in cash and invested assets resulted primarily from the net proceeds of $30,137,000 that we received in January and February of 2017 from our public offering, net proceeds of $4,808,000 that we received in April 2016 from a private placement and increased operating cash flows for the period after March 31, 2016. The net proceeds of the public offering was invested in cash equivalents until we received approval from the New York State Department of Financial Services to contribute $23,000,000 to KICO. The contribution of $23,000,000 to KICO on March 1, 2017, and subsequent investments from the proceeds was too late in the quarter to have a material effect on our investment income.
 
Other Income
 
 Other income was $290,000 in 2017 compared to $249,000 in 2016. The increase of $41,000, or 16.5%, was primarily due to an increase in installment and finance fees earned in our insurance underwriting business.
 
Net Loss and LAE
 
Net loss and LAE was $8,293,000 in 2017 compared to $9,484,000 in 2016. The net loss ratio was 50.7% in 2017 compared to 65.3% in 2016, a decrease of 14.6 percentage points.
 
 
 
40
 
 
The following graphs summarize the changes in the components of net loss ratio for the periods indicated:
 
 
During 2017, the net loss ratio decreased compared to 2016 due to a combination of several factors. First, due to a relatively mild winter season, there was a reduction in the impact of severe winter weather.  We record a catastrophe impact for this component if losses incurred from winter weather claims exceed those expected in an average winter.  Since 2017 exhibited milder than average winter weather, we did not record a catastrophe impact from severe winter weather.  This compares to the 9.7 point impact in 2016, or a decrease of 9.7 points.  We recorded no impact from prior year loss development in 2017 compared to 2.9 points of favorable prior year development in 2016, or a decrease in the favorable impact of 2.9 points year-over-year. In addition, the core loss ratio excluding the impact of severe winter weather and prior year development decreased to 50.7% in 2017 from 58.5% in 2016, or a decrease of 7.8 points.  The decrease in the core net loss ratio is driven by declines in personal lines frequency and a reduced impact from large fire claims.  See table below under “Additional Financial Information” summarizing net loss ratios by line of business.
 
Commercial Auto Line of Business
 
Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. The action was taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of business.  The actions taken did not yield the hoped for results. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015.
 
 
 
41
 
 
 The decision to exit this line of business has significantly reduced the adverse impact that associated commercial auto liability claims will have on our overall results.  The following table displays the impact that this decision has had on our loss and LAE reserves over time:
 
 
 
Commercial Auto
 
 
 
Commercial Auto as a Percentage of
As of
 
Number of Open Claims
Loss and LAE Reserves

Total Loss and LAE Reserves

Total Loss and LAE Reserves
(in thousands except number of open claims and percentages)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 170
 
 $9,185
 
 $34,503
 
26.6%
December 31, 2014
 
 114
 
 $8,126
 
 $39,613
 
20.5%
December 31, 2015
 
 68
 
 $4,971
 
 $39,877
 
12.5%
December 31, 2016
 
 34
 
 $2,434
 
 $41,737
 
5.8%
March 31, 2017
 
 29
 
 $2,053
 
 $44,612
 
4.6%
 
 Commercial auto liability loss and LAE reserves account for a rapidly decreasing percentage of our total loss and LAE reserves, and as of March 31, 2017 comprise 4.6% of our total loss and LAE reserves.  This line of business was historically subject to a high level of uncertainty and volatility in claim emergence and loss development.  The exit from this line therefore significantly decreases the uncertainty surrounding our overall reserve levels and reduces the associated volatility in financial results.
 
Commission Expense
 
Commission expense was $4,889,000 in 2017 or 19.0% of direct earned premiums. Commission expense was $4,270,000 in 2016 or 18.6% of direct earned premiums. The increase of $619,000 is due to the increase in direct written premiums in 2017 as compared to 2016. The increase in the percentage of commission expense to direct earned premiums to 19.0% in 2017 from 18.6% in 2016. The higher average commission rate in 2017 is due to growth in premiums written by certain producers, which made them eligible for an increase in commission rates in 2017. In addition, average commission rates increased due to a change in the mix of business to lines of business with higher commission rates.
 
Other Underwriting Expenses
 
Other underwriting expenses were $4,212,000 in 2017 compared to $3,346,000 in 2016. The increase of $866,000, or 25.9%, in other underwriting expenses was primarily due to expenses directly and indirectly related to growth in direct written premiums. We are also incurring expenses related to our efforts to expand into the other states in which we recently obtained licensing (“Expansion Expenses”). Expenses directly related to the increase in direct written premiums primarily consist of underwriting expenses, software usage fees and state premium taxes. Expenses indirectly related to the increase in direct written premiums primarily consist of salaries along with related other employment costs. Expansion Expenses were $228,000 in 2017 compared to $25,000 in 2016. The increase of $203,000 includes the costs of salaries and employment costs, professional fees, IT and data services.
 
Salaries and employment costs, excluding Expansion Expenses costs discussed above, were $1,727,000 in 2017 compared to $1,516,000 in 2016. The increase of $211,000, or 13.9%, was slightly above the 12.6% increase in net premiums earned. Our employee bonus plan is aligned with our combined ratio. The lower the combined ratio, the greater the bonus percentage that our employees receive on their annual salaries. The combined ratio decreased by 11.7 percentage points in 2017, resulting in a $94,000 increase in the 2017 accrued bonus. The remaining increase in employment costs was due to hiring of additional staff to service our current level of business and anticipated growth in volume and annual rate increases in salaries.
 
 
 
42
 
 
Other underwriting expenses as a percentage of net premiums earned was 25.7% in 2017 compared to 23.0% in 2016. The table below provides an analysis of the significant components of the 2.7 percentage point increase. Our net underwriting expense ratio in 2017 was 34.5% compared with 31.6% in 2016. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:
 
 
 
 Three months ended
 
 
 
 
 
 
 March 31,
 
 
Percentage
 
 
 
 2017
 
 
 2016
 
 
 Point Change
 
 
 
 
 
 
 
 
 
 
 
 Ceding commission revenue - provisional
  (20.4)%
  (21.3)%
  0.9 
 Ceding commission revenue - contingent
  1.0 
  2.2 
  (1.2)
 Other income
  (1.6)
  (1.7)
  0.1 
 Acquistion costs and other underwriting expenses:
    
    
    
 Commission expense
  29.8 
  29.4 
  0.4 
 
  8.8 
  8.6 
  0.2 
  Other underwriting expenses
    
    
    
 Employment costs attributable to core NY business
  10.5 
  10.4 
  0.1 
 Expansion Expenses
  1.4 
  0.2 
  1.2 
 IT expenses
  2.0 
  1.5 
  0.5 
 Adjustment to state premium tax rate
  - 
  (0.9)
  0.9 
 Other expenses
  11.8 
  11.8 
  - 
 Total other underwriting expenses
  25.7 
  23.0 
  2.7 
 
    
    
    
 Net underwriting expense ratio
  34.5%
  31.6%
  2.9 
 
Other Operating Expenses
 
Other operating expenses, related to the expenses of our holding company, were $756,000 in 2017 compared to $329,000 in 2016. The increase in 2017 of $427,000, or 129.8%, was primarily due to increases in both executive bonus compensation and equity compensation.
 
 Depreciation and Amortization
 
Depreciation and amortization was $319,000 in 2017 compared to $284,000 in 2016. The increase of $35,000, or 12.3%, in depreciation and amortization was primarily due to depreciation on newly purchased assets used to upgrade our systems infrastructure and the Kingston, New York home office building from which we operate.
 
Income Tax Expense
 
Income tax expense in 2017 was $708,000, which resulted in an effective tax rate of 32.5%. Income tax expense in 2016 was $190,000, which resulted in an effective tax rate of 26.0%. Income before taxes was $2,178,000 in 2017 compared to $731,000 in 2016. The increase in the effective tax rate by 6.5 percentage points in 2017 is primarily due to a decrease in benefits from various permanent differences.
 
 
 
43
 
 
Net Income
 
Net income was $1,470,000 in 2017 compared to $541,000 in 2016. The increase in net income of $929,000, or 171.7%, was due to the circumstances described above that caused the increase in our net premiums earned, ceding commission revenue, net investment income, other income and a decrease in our net loss ratio, partially offset by increases in net realized losses on investments, other underwriting expenses related to premium growth, other operating expenses, and depreciation and amortization.
 
Additional Financial Information
 
We operate our business as one segment, property and casualty insurance. Within this segment, we offer a wide array of property and casualty policies to our producers. The following table summarizes gross and net written premiums, net premiums earned, and net loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.
 
 
 
 
44
 
 
 
 
 For the Three Months Ended
 
 
 
 March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Gross premiums written:
 
 
 
 
 
 
 Personal lines
 $19,461,972 
 $17,441,086 
 Commercial lines
  3,584,054 
  3,128,138 
 Livery physical damage
  3,026,483 
  2,431,915 
 Other(1)
  57,386 
  47,264 
 Total
 $26,129,895 
 $23,048,403 
 
    
    
 Net premiums written:
    
    
 Personal lines
 $10,466,368 
 $9,385,438 
 Commercial lines
  3,202,565 
  2,814,905 
 Livery physical damage
  3,026,483 
  2,431,915 
 Other(1)
  38,889 
  29,617 
 Total
 $16,734,305 
 $14,661,875 
 
    
    
 Net premiums earned:
    
    
 Personal lines
 $10,690,583 
 $9,463,896 
 Commercial lines
  2,842,580 
  2,680,725 
 Livery physical damage
  2,792,347 
  2,255,854 
 Other(1)
  44,238 
  131,200 
 Total
 $16,369,748 
 $14,531,675 
 
    
    
 Net loss and loss adjustment expenses:
    
    
 Personal lines
 $5,352,112 
 $7,548,551 
 Commercial lines
  1,528,796 
  910,834 
 Livery physical damage
  965,522 
  988,553 
 Other(1)
  (52,074)
  (380,407)
 Unallocated loss adjustment expenses
  498,640 
  416,324 
 Total
 $8,292,996 
 $9,483,855 
 
    
    
Net loss ratio:
    
    
Personal lines
  50.1%
  79.8%
Commercial lines
  53.8%
  34.0%
Livery physical damage
  34.6%
  43.8%
Other(1)
  -117.7%
  -289.9%
Total
  50.7%
  65.3%
 
__________________________________
 
(1)  
 “Other” includes, among other things, premiums and loss and loss adjustment expenses from commercial auto and our participation in a mandatory state joint underwriting association. Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015
 
 
 
45
 
 
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,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 Net premiums earned
 $16,369,748 
 $14,531,675 
 Ceding commission revenue
  3,184,452 
  2,770,337 
 Net investment income
  857,800 
  813,057 
 Net realized gain (loss) on investments
  (54,506)
  80,436 
 Other income
  267,376 
  248,998 
 Total revenues
  20,624,870 
  18,444,503 
 
    
    
 Expenses
    
    
 Loss and loss adjustment expenses
  8,292,996 
  9,483,855 
 Commission expense
  4,888,978 
  4,270,066 
 Other underwriting expenses
  4,212,417 
  3,346,441 
 Depreciation and amortization
  318,698 
  283,538 
 Total expenses
  17,713,089 
  17,383,900 
 
    
    
 Income from operations
  2,911,781 
  1,060,603 
 Income tax expense
  955,141 
  272,438 
 Net income
 $1,956,640 
 $788,165 
 
    
    
 
    
    
 Key Measures:
    
    
 Net loss ratio
  50.7%
  65.3%
 Net underwriting expense ratio
  34.5%
  31.6%
 Net combined ratio
  85.2%
  96.9%
 
    
    
 Reconciliation of net underwriting expense ratio:
    
    
 Acquisition costs and other
    
    
 underwriting expenses
 $9,101,395 
 $7,616,507 
 Less: Ceding commission revenue
  (3,184,452)
  (2,770,337)
 Less: Other income
  (267,376)
  (248,998)
 Net underwriting expenses
 $5,649,567 
 $4,597,172 
 
    
    
 Net premiums earned
 $16,369,748 
 $14,531,675 
 
    
    
 Net Underwriting Expense Ratio
  34.5%
  31.6%
 
 
 
46
 
 
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, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 Written premiums
 $26,125,467 
 $4,428 
 $(9,395,590)
 $16,734,305 
 Change in unearned premiums
  (330,903)
  2,981 
  (36,635)
  (364,557)
 Earned premiums
 $25,794,564 
 $7,409 
 $(9,432,225)
 $16,369,748 
 
    
    
    
    
 Loss and loss adjustment expenses exluding
    
    
    
    
 the effect of catastrophes
 $12,518,760 
 $8,040 
 $(4,233,804)
 $8,292,996 
 Catastrophe loss
  - 
  - 
  - 
  - 
 Loss and loss adjustment expenses
 $12,518,760 
 $8,040 
 $(4,233,804)
 $8,292,996 
 
    
    
    
    
 Loss ratio excluding the effect of catastrophes
  48.5%
  108.5%
  44.9%
  50.7%
 Catastrophe loss
  0.0%
  0.0%
  0.0%
  0.0%
 Loss ratio
  48.5%
  108.5%
  44.9%
  50.7%
 
    
    
    
    
 Three months ended March 31, 2016
    
    
    
    
 Written premiums
 $23,043,325 
 $5,078 
 $(8,386,528)
 $14,661,875 
 Change in unearned premiums
  (126,428)
  3,571 
  (7,343)
  (130,200)
 Earned premiums
 $22,916,897 
 $8,649 
 $(8,393,871)
 $14,531,675 
 
    
    
    
    
 Loss and loss adjustment expenses exluding
    
    
    
    
 the effect of catastrophes
 $11,437,764 
 $22,297 
 $(3,378,683)
 $8,081,378 
 Catastrophe loss
  2,337,461 
  - 
  (934,984)
  1,402,477 
 Loss and loss adjustment expenses
 $13,775,225 
 $22,297 
 $(4,313,667)
 $9,483,855 
 
    
    
    
    
 Loss ratio excluding the effect of catastrophes
  49.9%
  257.8%
  40.3%
  55.6%
 Catastrophe loss
  10.2%
  0.0%
  11.1%
  9.7%
 Loss ratio
  60.1%
  257.8%
  51.4%
  65.3%
 
 
 
47
 
 
The key measures for our insurance underwriting business for the periods indicated are as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 Net premiums earned
 $16,369,748 
 $14,531,675 
 Ceding commission revenue
  3,184,452 
  2,770,337 
 Other income
  267,376 
  248,998 
 
    
    
 Loss and loss adjustment expenses (1)
  8,292,996 
  9,483,855 
 
    
    
 Acquistion costs and other underwriting expenses:
    
    
 Commission expense
  4,888,978 
  4,270,066 
 Other underwriting expenses
  4,212,417 
  3,346,441 
 Total acquistion costs and other
    
    
 underwriting expenses
  9,101,395 
  7,616,507 
 
    
    
 Underwriting income
 $2,427,185 
 $450,648 
 
    
    
 Key Measures:
    
    
 Net loss ratio excluding the effect of catastrophes
  50.7%
  55.6%
 Effect of catastrophe loss on net loss ratio (1) (2)
  0.0%
  9.7%
 Net loss ratio
  50.7%
  65.3%
 
    
    
 Net underwriting expense ratio excluding the
    
    
 effect of catastrophes
  34.5%
  31.6%
 Effect of catastrophe loss on net underwriting
    
    
 expense ratio (2)
  0.0%
  0.0%
 Net underwriting expense ratio
  34.5%
  31.6%
 
    
    
 Net combined ratio excluding the effect
    
    
 of catastrophes
  85.2%
  87.2%
 Effect of catastrophe loss on net combined
    
    
 ratio (1) (2)
  0.0%
  9.7%
 Net combined ratio
  85.2%
  96.9%
 
    
    
 Reconciliation of net underwriting expense ratio:
    
    
 Acquisition costs and other
    
    
 underwriting expenses
 $9,101,395 
 $7,616,507 
 Less: Ceding commission revenue (1)
  (3,184,452)
  (2,770,337)
 Less: Other income
  (267,376)
  (248,998)
 Net underwriting expenses
 $5,649,567 
 $4,597,172 
 
    
    
 Net premium earned
 $16,369,748 
 $14,531,675 
 
    
    
 Net underwriting expense ratio
  34.5%
  31.6%
_________________________________________________
 
 (1) For the three months ended March 31, 2017 and 2016, includes the sum of net catastrophe losses and loss adjustment expenses of $-0- and $1,402,477, respectively, resulting from severe winter weather.
 
 
 
48
 
 
(2) For the three months ended March 31, 2016, the effect of catastrophe loss from severe winter weather on our net combined ratio includes the direct effects of loss and loss adjustment expenses and there were no indirect effects in other underwriting expenses.
 
Investments
 
Portfolio Summary
 
The following table presents a breakdown of the amortized cost, fair value and unrealized gains and losses by investment type as of March 31, 2017 and December 31, 2016:
 
Available-for-Sale Securities
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
% of
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
Fair
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Territories and Possessions
 $7,582,088 
 $214,232 
 $(18,806)
 $(18,710)
 $7,758,804 
  7.0%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  70,449,109 
  781,970 
  (556,753)
  (7,370)
  70,666,956 
  63.8%
 
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
 asset backed securities
  22,523,039 
  72,990 
  (308,073)
  (26,361)
  22,261,595 
  20.1%
 Total fixed-maturity securities
  100,554,236 
  1,069,192 
  (883,632)
  (52,441)
  100,687,355 
  90.9%
 Equity Securities
  9,545,785 
  820,089 
  (120,639)
  (142,740)
  10,102,495 
  9.1%
 Total
 $110,100,021 
 $1,889,281 
 $(1,004,271)
 $(195,181)
 $110,789,850 
  100.0%
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
% of
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
Fair
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Territories and Possessions
 $8,053,449 
 $199,028 
 $(46,589)
 $- 
 $8,205,888 
  9.1%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  53,728,395 
  600,519 
  (638,113)
  (5,612)
  53,685,189 
  59.4%
 
    
    
    
    
    
    
 Residential mortgage backed
    
    
    
    
    
    
 securities
  18,814,784 
  70,682 
  (309,273)
  (38,442)
  18,537,751 
  20.5%
 Total fixed-maturity securities
  80,596,628 
  870,229 
  (993,975)
  (44,054)
  80,428,828 
  89.0%
 Equity Securities
  9,709,385 
  701,641 
  (255,301)
  (168,039)
  9,987,686 
  11.0%
 Total
 $90,306,013 
 $1,571,870 
 $(1,249,276)
 $(212,093)
 $90,416,514 
  100.0%
 
 
 
49
 
 
Held-to-Maturity Securities
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 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
 $606,436 
 $147,603 
 
 
 
 
 
 
 $754,039 
  14.6%
 
    
    
 
 
 
 
 
 
    
    
 Political subdivisions of States,
    
    
 
 
 
 
 
 
    
    
 Territories and Possessions
  1,149,119 
  38,236 
  (1,868)
 
 
 
  1,185,487 
  23.0%
 
    
    
    
 
 
 
    
    
 Corporate and other bonds
    
    
    
 
 
 
    
    
 Industrial and miscellaneous
  3,139,888 
  98,656 
  (7,065)
  (11,654)
  3,219,825 
  62.4%
 
    
    
    
    
    
    
 Total
 $4,895,443 
 $284,495 
 $(8,933)
 $(11,654)
 $5,159,351 
  100.0%
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 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
 $606,427 
 $147,612 
 $- 
 $- 
 $754,039 
  14.2%
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  1,349,916 
  37,321 
  - 
  - 
  1,387,237 
  26.2%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,138,559 
  72,784 
  (7,619)
  (46,881)
  3,156,843 
  59.6%
 
    
    
    
    
    
    
 Total
 $5,094,902 
 $257,717 
 $(7,619)
 $(46,881)
 $5,298,119 
  100.0%
 
U.S. Treasury securities included in held-to-maturity securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.
 
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2017 and December 31, 2016 is shown below:
 
 
 
March 31, 2017
 
 
December 31, 2016
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $- 
 $- 
 $- 
 $- 
 One to five years
  650,000 
  641,068 
  650,000 
  642,455 
 Five to ten years
  3,639,007 
  3,764,244 
  3,838,475 
  3,901,625 
 More than 10 years
  606,436 
  754,039 
  606,427 
  754,039 
 Total
 $4,895,443 
 $5,159,351 
 $5,094,902 
 $5,298,119 
 
 
 
50
 
 
 
Credit Rating of Fixed-Maturity Securities
 
The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of March 31, 2017 and December 31, 2016 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s or Fitch):
 
 
 
  March 31, 2017
 
 
  December 31, 2016
 
 
 
 
 
 
 Percentage of
 
 
 
 
 
 Percentage of
 
 
 
 Fair Market
 
 
 Fair Market
 
 
 Fair Market
 
 
 Fair Market
 
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Rating
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $- 
  0.0%
 $- 
  0.0%
 
    
    
    
    
 Corporate and municipal bonds
    
    
    
    
 AAA
  1,569,684 
  1.6%
  1,801,106 
  2.2%
 AA
  7,265,319 
  7.2%
  7,236,457 
  9.0%
 A
  16,722,227 
  16.6%
  13,944,784 
  17.3%
 BBB
  51,660,891 
  51.3%
  38,908,731 
  48.4%
 BB
  1,207,640 
  1.2%
  - 
  0.0%
 Total corporate and municipal bonds
  78,425,761 
  77.9%
  61,891,078 
  76.9%
 
    
    
    
    
 Residential mortgage and other asset backed securities
    
    
    
    
 AAA
  2,008,270 
  2.0%
  - 
  0.0%
 AA
  13,589,245 
  13.5%
  14,143,828 
  17.7%
 A
  2,654,485 
  2.6%
  173,973 
  0.2%
 CCC
  488,902 
  0.5%
  513,369 
  0.6%
 C
  28,905 
  0.0%
  112,136 
  0.1%
 D
  3,491,787 
  3.5%
  3,594,444 
  4.5%
 Total residential mortgage and other asset backed securities
  22,261,594 
  22.1%
  18,537,750 
  23.1%
 
    
    
    
    
 Total
 $100,687,355 
  100.0%
 $80,428,828 
  100.0%
 
The table below summarizes the average yield by type of fixed-maturity security as of March 31, 2017 and December 31, 2016:
 
 Category
 
March 31,
2017
 
 
December 31,
2016
 
 U.S. Treasury securities and
 
 
 
 
 
 
 obligations of U.S. government
 
 
 
 
 
 
 corporations and agencies
  3.44%
  3.44%
 
    
    
 Political subdivisions of States,
    
    
 Territories and Possessions
  3.88%
  3.87%
 
    
    
 Corporate and other bonds
    
    
 Industrial and miscellaneous
  3.89%
  3.86%
 
    
    
 Residential mortgage and other asset backed securities
  3.05%
  3.83%
 
    
    
 Total
  3.71%
  3.85%
 
 
 
51
 
 
The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of March 31, 2017 and December 31, 2016:
 
 
 
March 31,
2017
 
 
December 31,
2016
 
 Weighted average effective maturity
  5.6 
  5.0 
 
    
    
 Weighted average final maturity
  8.3 
  8.3 
 
    
    
 Effective duration
  4.8 
  4.4 
 
Fair Value Consideration
 
As disclosed in Note 4 to the Condensed Consolidated Financial Statements, with respect to “Fair Value Measurements,” we define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction involving identical or comparable assets or liabilities between market participants (an “exit price”). The fair value hierarchy distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of March 31, 2017 and December 31, 2016, 69% and 65%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.
 
As more fully described in Note 3 to our 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, 2017 and December 31, 2016. As of March 31, 2017 our held-to-maturity debt securities included an investment in one bond issued by the Commonwealth of Puerto Rico (“PR”). In July 2016, PR defaulted on its interest payment to bondholders. Due to the credit deterioration of PR, we recorded a credit loss component of other-than-temporary impairment (“OTTI”) on this investment as of June 30, 2016. As of December 31, 2016, the full amount of the write-down was recognized as a credit component of OTTI in the amount of $69,911. We concluded that the other unrealized losses in these asset classes are temporary in nature and the result of a decrease in value due to technical spread widening and broader market sentiment, rather than fundamental collateral deterioration.
 
The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by length of time the security has continuously been in an unrealized loss position as of March 31, 2017 and December 31, 2016:
 
 
 
 
52
 
 
 
 
March 31, 2017
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 
 
 
 
 
 
 No. of
 
 
 
 
 
 
 
 
 No. of
 
 
 Aggregate
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $759,346 
 $(18,806)
  2 
 $313,326 
 $(18,710)
  1 
 $1,072,672 
 $(37,516)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  26,857,516 
  (556,753)
  46 
  238,393 
  (7,370)
  1 
  27,095,909 
  (564,123)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  18,537,897 
  (308,073)
  30 
  477,494 
  (26,361)
  4 
  19,015,391 
  (334,434)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $46,154,759 
 $(883,632)
  78 
 $1,029,213 
 $(52,441)
  6 
 $47,183,972 
 $(936,073)
 
    
    
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
    
    
 Preferred stocks
 $3,376,750 
 $(120,639)
  7 
 $656,000 
 $(75,322)
  1 
 $4,032,750 
 $(195,961)
 Common stocks
  - 
  - 
  - 
  291,000 
  (67,418)
  1 
  291,000 
  (67,418)
 
    
    
    
    
    
    
    
    
 Total equity securities
 $3,376,750 
 $(120,639)
  7 
 $947,000 
 $(142,740)
  2 
 $4,323,750 
 $(263,379)
 
    
    
    
    
    
    
    
    
 Total
 $49,531,509 
 $(1,004,271)
  85 
 $1,976,213 
 $(195,181)
  8 
 $51,507,722 
 $(1,199,452)
 
 
 
53
 
 
 
 
December 31, 2016                            
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 
 
 
 
 
 
 No. of
 
 
 
 
 
 
 
 
 No. of
 
 
 Aggregate
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Possessions
 $1,067,574 
 $(46,589)
  3 
 $- 
 $- 
  - 
 $1,067,574 
 $(46,589)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  19,859,293 
  (638,113)
  34 
  239,970 
  (5,612)
  1 
  20,099,263 
  (643,725)
 
    
    
    
    
    
    
    
    
 Residential mortgage
    
    
    
    
    
    
    
    
 backed securities
  15,918,090 
  (309,273)
  30 
  675,316 
  (38,442)
  6 
  16,593,406 
  (347,715)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $36,844,957 
 $(993,975)
  67 
 $915,286 
 $(44,054)
  7 
 $37,760,243 
 $(1,038,029)
 
    
    
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
    
    
 Preferred stocks
 $3,759,850 
 $(241,333)
  8 
 $660,750 
 $(70,571)
  1 
 $4,420,600 
 $(311,904)
 Common stocks
  288,075 
  (13,968)
  1 
  424,550 
  (97,468)
  1 
  712,625 
  (111,436)
 
    
    
    
    
    
    
    
    
 Total equity securities
 $4,047,925 
 $(255,301)
  9 
 $1,085,300 
 $(168,039)
  2 
 $5,133,225 
 $(423,340)
 
    
    
    
    
    
    
    
    
 Total
 $40,892,882 
 $(1,249,276)
  76 
 $2,000,586 
 $(212,093)
  9 
 $42,893,468 
 $(1,461,369)
 
 
 
54
 
 
There were 93 securities at March 31, 2017 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 85 securities at December 31, 2016 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
 
Liquidity and Capital Resources
 
Cash Flows
 
The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.
 
On January 31, 2017, we closed on an underwritten public offering of 2,500,000 shares of our common stock. On February 14, 2017, we closed on the underwriters’ purchase option for an additional 192,500 shares of our common stock. The public offering price for the 2,692,500 shares sold was $12.00 per share. The aggregate net proceeds to us was approximately $30,137,000. On March 1, 2017, we used $23,000,000 of the net proceeds of the offering to contribute capital to KICO, to support its ratings upgrade plan and additional growth. The remainder of the net proceeds will be used for general corporate purposes.
 
Through the quarter ended March 31, 2017, the primary source of cash flow for our holding company are dividends received from KICO, subject to statutory restrictions.  For the three months ended March 31, 2017, KICO paid dividends of $500,000 to us.
 
If the aforementioned sources of cash flow currently available are insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
 
Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.
 
 
 
55
 
 
 
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,
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 Cash flows provided by (used in):
 
 
 
 
 
 
 Operating activities
 $2,056,143 
 $2,672,714 
 Investing activities
  (20,370,870)
  (10,091,378)
 Financing activities
  29,505,862 
  (553,484)
 Net increase (decrease) in cash and cash equivalents
  11,191,135 
  (7,972,148)
 Cash and cash equivalents, beginning of period
  12,044,520 
  13,551,372 
 Cash and cash equivalents, end of period
 $23,235,655 
 $5,579,224 
 
Net cash provided by operating activities was $2,056,000 in 2017 as compared to $2,673,000 in 2016. The $617,000 decrease in cash flows provided by operating activities in 2017 was primarily a result of a decrease in cash arising from net fluctuations in assets and liabilities relating to operating activities of KICO as affected by the growth in its operations which are described above, partially offset by an increase in net income (adjusted for non-cash items) of $1,233,000. We had a greater amount of payables and accrued liabilities including commissions and employee bonuses as of December 31, 2016 compared to December 31, 2015, which were paid in the subsequent three months ended in 2017 and 2016.
 
Net cash used in investing activities was $20,371,000 in 2017 compared to $10,091,000 in 2016. The $10,280,000 increase in net cash used in investing activities is the result of a $5,089,000 increase in acquisitions of invested assets, a $4,524,000 decrease in sales or maturities of invested assets and a $415,000 increase in the amount of fixed asset acquisitions in 2017.
 
Net cash provided by financing activities was $29,506,000 in 2017 compared to $553,000 used in 2016. The $30,059,000 increase in net cash provided by financing activities is the result of the $30,137,000 net proceeds we received from the public offering of our common stock in January/February 2017 and a $96,000 decrease in the purchase of treasury stock, offset partially by a $206,000 increase in dividends paid due to an increase in the shares outstanding.
 
Reinsurance
 
Our quota share reinsurance treaties are on a July 1 through June 30 fiscal year basis; therefore, for year to date fiscal periods after June 30, two separate treaties will be included in such periods.
 
Our quota share reinsurance treaty in effect for 2017 for our personal lines business, which primarily consists of homeowners’ policies, was covered under the 2016/2017 Treaty. Our quota share reinsurance treaty in effect for 2016 for our personal lines business, which primarily consists of homeowners’ policies, was covered under the 2015/2016 Treaty.
 
Our 2015/2016 Treaty and 2016/2017 Treaty provide for the following material terms:
 
 
 
56
 
 
 
 
 Treaty Year
 
 
 
July 1, 2016
 
 
July 1, 2015
 
 
 
to
 
 
to
 
 Line of Busines
 
June 30, 2017
 
 
June 30, 2016
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
Homeowners, dwelling fire and canine legal liability
 
 
 
 
 
 
 Quota share treaty:
 
 
 
 
 
 
 Percent ceded
  40%
  40%
 Risk retained
 $500,000 
 $450,000 
 Losses per occurrence subject to quota share reinsurance coverage
 $833,333 
 $750,000 
 Excess of loss coverage above quota share coverage
 $3,666,667 
 $3,750,000 
 
  in excess of  
  in excess of  
 
 $833,333 
 $750,000 
 Total reinsurance coverage per occurrence
 $4,000,000 
 $4,050,000 
 Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 Expiration date
 
June 30, 2017
 
 
June 30, 2016
 
 
    
    
 Personal Umbrella
    
    
 Quota share treaty:
    
    
 Percent ceded - first $1,000,000 of coverage
  90%
  90%
 Percent ceded - excess of $1,000,000 dollars of coverage
  100%
  100%
 Risk retained
 $100,000 
 $100,000 
 Total reinsurance coverage per occurrence
 $4,900,000 
 $2,900,000 
 Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
 $3,000,000 
 Expiration date
 
June 30, 2017
 
 
June 30, 2016
 
 
    
    
Commercial Lines:
    
    
 General liability commercial policies, except for commercial auto
    
    
 Quota share treaty:
    
    
 Percent ceded (terminated effective July 1, 2014)
  
None
 
  
None
 
 Risk retained
 $500,000 
 $425,000 
 Losses per occurrence subject to quota share reinsurance coverage
  
None
 
  
None
 
 Excess of loss coverage above quota share coverage
 $4,000,000 
 $4,075,000 
 
   in excess of 
   in ecess of 
 
 $500,000 
 $425,000 
 Total reinsurance coverage per occurrence
 $4,000,000 
 $4,075,000 
 Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 
    
    
 Commercial Umbrella
    
    
 Quota share treaty:
    
    
 Percent ceded - first $1,000,000 of coverage
  90%
    
 Percent ceded - excess of $1,000,000 of coverage
  100%
    
 Risk retained
 $100,000 
    
 Total reinsurance coverage per occurrence
 $4,900,000 
    
 Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
    
 Expiration date
 
June 30, 2017
 
    
 
    
    
Commercial Auto:
    
    
 Risk retained
    
 $300,000 
 Excess of loss coverage in excess of risk retained
    
 $1,700,000 
 
    
  
  in excess of
 
 
    
 $300,000 
Catastrophe Reinsurance:
    
    
 Initial loss subject to personal lines quota share treaty
 $5,000,000 
 $4,000,000 
 Risk retained per catastrophe occurrence (1)
 $3,000,000 
 $2,400,000 
 Catastrophe loss coverage in excess of quota share coverage (2) (3)
 $247,000,000 
 $176,000,000 
 Severe winter weather aggregate (3)
 
 No
 
 
 Yes
 
 Reinstatement premium protection (4)
 
 Yes
 
 
 Yes
 
 
 
 
57
 
 
(1) 
Plus losses in excess of catastrophe coverage.
(2) 
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2016, the duration of a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone was extended to 168 consecutive hours from 120 consecutive hours.
(3) 
From July 1, 2015 through June 30, 2016, catastrophe treaty also covered losses caused by severe winter weather during any consecutive 28 day period.
(4) 
Effective July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage in excess of $4,000,000. Effective July 1, 2016, reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of $5,000,000.
 
The single maximum risks per occurrence to which we are subject under the new treaties effective July 1, 2016 and under the treaties that expired on June 30, 2016 are as follows:
 
 
 
July 1, 2016 - June 30, 2017    
 
July 1, 2015 - June 30, 2016    
Treaty
 
 Extent of Loss
 
 Risk Retained
 Extent of Loss
 
 Risk Retained
Personal Lines
 
 Initial $833,333
 
$500,000
 
 Initial $750,000
 
$450,000
 
 
 $833,333 - $4,500,000
 
 None(1)
 
 $750,000 - $4,500,000
 
 None(1)
 
 
 Over $4,500,000
 
100%
 
 Over $4,500,000
 
100%
 
 
 
 
 
 
 
 
 
Personal Umbrella
 
 Initial $1,000,000
 
$100,000
 
 Initial $1,000,000
 
$100,000
 
 
 $1,000,000 - $5,000,000
 
 None(1)
 
 $1,000,000 - $3,000,000
 
 None(1)
 
 
 Over $5,000,000
 
100%
 
 Over $3,000,000
 
100%
 
 
 
 
 
 
 
 
 
Commercial Lines
 
 Initial $500,000
 
$500,000
 
 Initial $425,000
 
$425,000
 
 
 $500,000 - $4,500,000
 
None(1)
 
 $425,000 - $4,500,000
 
None(1)
 
 
 Over $4,500,000
 
100%
 
 Over $4,500,000
 
100%
 
 
 
 
 
 
 
 
 
Commercial Umbrella
 
 Initial $1,000,000
 
$100,000
 
 
 
 
 
 
 $1,000,000 - $5,000,000
 
 None(1)
 
 
 
 
 
 
 Over $5,000,000
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe (2)
 
 Initial $5,000,000
 
$3,000,000
 
 Initial $4,000,000
 
$2,400,000
 
 
 $5,000,000 - $252,000,000
 
 None
 
 $4,000,000 - $180,000,000
 
 None
 
 
 Over $252,000,000
 
100%
 
 Over $180,000,000
 
100%
________________
(1)  
Covered by excess of loss treaties.
 
(2)  
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
 
New Quota Share Reinsurance Treaty Effective July 1, 2017
 
In March 2017, we bound our personal lines quota share reinsurance treaty effective July 1, 2017. The treaty provides for a reduction in the quota share ceding rate to 20%, from the current 40% in the expiring treaty, and the provisional ceding commission rate increases to 52.5%, from the current 52.0% in the expiring treaty. The new treaty covers a two year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). We shall have the option under broad circumstances to reduce the quota share ceding rate or terminate the 2017/2019 Treaty effective July 1, 2018 by giving advance notice to the two reinsurers who participate in the quota share reinsurance treaty. The two reinsurers who participate in the quota share reinsurance treaty shall have the option under limited circumstances to reduce the quota share ceding rate or terminate the 2017/2019 Treaty effective July 1, 2018 by giving advance notice to us.
 
 
 
58
 
 
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.
 
Factors That May Affect Future Results and Financial Condition
 
 Based upon the factors set forth under “Factors That May Affect Future Results and Financial Condition” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 as well as other factors affecting our operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.  In addition, such factors, among others, may affect the accuracy of certain forward-looking statements contained in our periodic reports, including this Quarterly Report.
 
Item  3. Quantitative and Qualitative Disclosures About Market Risk.
 
Not applicable
 
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 Quarterly 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, 2017.
 
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.
 
 
 
59
 
 
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)
There were no purchases of common stock made by us or any “affiliated purchaser” during the quarter ended March 31, 2017.
 
 
Item 3. Defaults Upon Senior Securities.
 
None
 
Item 4. Mine Safety Disclosures.
 
Not applicable
 
Item 5. Other Information.
 
None
 
 
 
60
 
 
Item 6. Exhibits.
 
3(a)
 
Restated Certificate of Incorporation, as amended1
 
 
 
3(b)
 
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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
101.SCH  XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
 
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
 
101.DEF   XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB
 
101.LAB   XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
 
101.PRE  XBRL Taxonomy Extension Presentation Linkbase.
 
1Denotes document filed as Exhibit 3 (a) to our Quarterly Report on Form 10-Q for the period ended March 31, 2014 and incorporated herein by reference.
 
2 Denotes document filed Exhibit 3.1 to our Current Report on Form 8-K for an event dated November 5, 2009 and incorporated herein by reference.
 
 
 
61
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
KINGSTONE COMPANIES, INC.
 
 
 
 
 
Dated:  May 11, 2017
By:  
/s/  Barry B. Goldstein
 
 
 
Barry B. Goldstein 
 
 
 
President 
 
 
 
 
 
 
 
 
Dated:  May 11, 2017
By:  
/s/  Victor Brodsky
 
 
 
Victor Brodsky 
 
 
 
Chief Financial Officer 
 
 
 
 
 
 
 
62