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KINGSTONE COMPANIES, INC. - Quarter Report: 2020 June (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 June 30, 2020

 

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

 

36-2476480

(State or other jurisdiction of
incorporation or organization)

 

(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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

KINS

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐  

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 August 7, 2020, there were 10,670,342 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 June 30, 2020 (Unaudited) and December 31, 2019

 

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months and six months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)

 

4-5

 

 

Condensed Consolidated Statements of Cash Flows for the six  months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)

 

6

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

Item 2 -

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

39

 

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk

 

75

 

Item 4 -

Controls and Procedures

 

75

 

 

 

 

 

 

PART II - OTHER INFORMATION

77

Item 1 -

Legal Proceedings

 

77

 

Item 1A -

Risk Factors

 

77

 

Item 2 -

Unregistered Sales of Equity Securities and Use of Proceeds

 

79

 

Item 3 -

Defaults Upon Senior Securities

 

79

 

Item 4 -

Mine Safety Disclosures

 

79

 

Item 5 -

Other Information

 

79

 

Item 6 -

Exhibits

 

80

 

Signatures

 

 

 

 

  

Forward-Looking Statements

 

This Quarterly Report contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The events described in forward‑looking statements contained in this Quarterly Report may not occur.  Generally, these statements relate to business plans or strategies, projected or anticipated results or other consequences of our plans or strategies, projected or anticipated results from acquisitions to be made by us, or projections involving anticipated revenues, earnings, costs or other aspects of our operating results.  The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward‑looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may cause actual results and outcomes to differ materially from those contained in the forward-looking statements include, but are not limited to the risks and uncertainties discussed in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of this Quarterly Report. 

 

Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward‑looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward‑looking statements.  We undertake no obligation to publicly update or revise any forward‑looking statements, whether from new information, future events or otherwise except as required by law.

 

 
1

Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 June 30,

 

 

 December 31,

 

 

 

2020

 

 

2019

 

 

 

 (unaudited)

 

 

 

 Assets 

 

 

 

 

 

 

Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of 

 

 

 

 

 

 

$8,322,456 at June 30, 2020 and $4,124,767 at December 31, 2019)  

 

$7,870,374

 

 

$3,825,952

 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of 

 

 

 

 

 

 

 

 

$155,226,267 at June 30, 2020 and $162,202,355 at December 31, 2019)  

 

 

165,466,488

 

 

 

168,236,181

 

Equity securities, at fair value (cost of $24,564,076 at June 30, 2020 and 

 

 

 

 

 

 

 

 

$22,624,668 at December 31, 2019) 

 

 

22,705,709

 

 

 

24,661,382

 

Other investments

 

 

2,542,320

 

 

 

2,584,913

 

Total investments 

 

 

198,584,891

 

 

 

199,308,428

 

Cash and cash equivalents 

 

 

20,153,732

 

 

 

32,391,485

 

Premiums receivable, net

 

 

13,339,539

 

 

 

12,706,411

 

Reinsurance receivables, net

 

 

41,242,321

 

 

 

40,750,538

 

Deferred policy acquisition costs

 

 

19,522,342

 

 

 

20,634,378

 

Intangible asset

 

 

500,000

 

 

 

500,000

 

Property and equipment, net

 

 

7,361,798

 

 

 

7,620,636

 

Deferred income taxes, net

 

 

-

 

 

 

311,052

 

Other assets 

 

 

8,595,855

 

 

 

6,979,884

 

Total assets

 

$309,300,478

 

 

$321,202,812

 

 

 

 

 

 

 

 

 

 

Liabilities 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$76,608,359

 

 

$80,498,611

 

Unearned premiums 

 

 

85,006,280

 

 

 

90,383,238

 

Advance premiums

 

 

4,599,781

 

 

 

3,191,512

 

Reinsurance balances payable 

 

 

5,467,103

 

 

 

11,714,724

 

Deferred ceding commission revenue 

 

 

6,978,574

 

 

 

7,735,398

 

Accounts payable, accrued expenses and other liabilities 

 

 

9,869,913

 

 

 

9,986,317

 

Deferred income taxes, net

 

 

1,589,469

 

 

 

-

 

Long-term debt, net

 

 

29,559,521

 

 

 

29,471,431

 

Total liabilities 

 

 

219,679,000

 

 

 

232,981,231

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value; authorized 2,500,000 shares

 

 

-

 

 

 

-

 

Common stock, $.01 par value; authorized 20,000,000 shares; issued 11,866,254 shares  

 

 

 

 

 

 

 

 

at June 30, 2020 and 11,824,889 shares at December 31, 2019; outstanding  

 

 

 

 

 

 

 

 

10,670,145 shares at June 30, 2020 and 10,797,450 shares at December 31, 2019 

 

 

118,662

 

 

 

118,248

 

Capital in excess of par 

 

 

69,951,549

 

 

 

69,133,918

 

Accumulated other comprehensive income

 

 

8,091,923

 

 

 

4,768,870

 

Retained earnings 

 

 

14,973,684

 

 

 

16,913,097

 

 

 

 

93,135,818

 

 

 

90,934,133

 

Treasury stock, at cost, 1,196,109 shares at June 30, 2020

 

 

 

 

 

 

 

 

and 1,027,439 shares at December 31, 2019

 

 

(3,514,340)

 

 

(2,712,552)

Total stockholders' equity

 

 

89,621,478

 

 

 

88,221,581

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$309,300,478

 

 

$321,202,812

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
2

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned 

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

Ceding commission revenue 

 

 

3,480,214

 

 

 

675,695

 

 

 

7,311,313

 

 

 

1,953,378

 

Net investment income 

 

 

1,612,006

 

 

 

1,719,769

 

 

 

3,277,850

 

 

 

3,343,481

 

Net gains (losses) on investments 

 

 

2,697,868

 

 

 

678,655

 

 

 

(3,746,550)

 

 

2,714,018

 

Other income

 

 

683,480

 

 

 

329,972

 

 

 

1,313,099

 

 

 

695,873

 

Total revenues 

 

 

35,110,424

 

 

 

34,605,370

 

 

 

61,734,018

 

 

 

69,503,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses 

 

 

12,813,631

 

 

 

17,672,308

 

 

 

29,199,452

 

 

 

46,806,532

 

Commission expense 

 

 

7,850,607

 

 

 

7,299,173

 

 

 

15,749,798

 

 

 

14,152,589

 

Other underwriting expenses 

 

 

6,325,472

 

 

 

5,416,449

 

 

 

13,087,264

 

 

 

11,552,440

 

Other operating expenses 

 

 

1,420,160

 

 

 

1,097,468

 

 

 

2,983,780

 

 

 

2,068,640

 

Depreciation and amortization

 

 

673,160

 

 

 

627,669

 

 

 

1,360,254

 

 

 

1,230,001

 

Interest expense 

 

 

456,545

 

 

 

456,545

 

 

 

913,090

 

 

 

913,090

 

Total expenses 

 

 

29,539,575

 

 

 

32,569,612

 

 

 

63,293,638

 

 

 

76,723,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income taxes 

 

 

5,570,849

 

 

 

2,035,758

 

 

 

(1,559,620)

 

 

(7,219,374)

Income tax expense (benefit)

 

 

962,659

 

 

 

396,378

 

 

 

(723,607)

 

 

(1,523,564)

Net income (loss)

 

 

4,608,190

 

 

 

1,639,380

 

 

 

(836,013)

 

 

(5,695,810)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross change in unrealized gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on available-for-sale-securities

 

 

10,887,611

 

 

 

3,679,475

 

 

 

4,160,122

 

 

 

7,868,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income (loss)

 

 

148,495

 

 

 

12,364

 

 

 

46,273

 

 

 

34,795

 

Net change in unrealized gains 

 

 

11,036,106

 

 

 

3,691,839

 

 

 

4,206,395

 

 

 

7,902,986

 

Income tax expense related to items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of other comprehensive income

 

 

(2,317,582)

 

 

(775,285)

 

 

(883,342)

 

 

(1,659,626)

Other comprehensive income, net of tax

 

 

8,718,524

 

 

 

2,916,554

 

 

 

3,323,053

 

 

 

6,243,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$13,326,714

 

 

$4,555,934

 

 

$2,487,040

 

 

$547,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.43

 

 

$0.15

 

 

$(0.08)

 

$(0.53)

Diluted

 

$0.43

 

 

$0.15

 

 

$(0.08)

 

$(0.53)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,733,354

 

 

 

10,771,717

 

 

 

10,770,598

 

 

 

10,764,824

 

Diluted

 

 

10,734,784

 

 

 

10,785,064

 

 

 

10,770,598

 

 

 

10,764,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$0.0400

 

 

$0.1000

 

 

$0.1025

 

 

$0.2000

 

 

 

See accompanying notes to condensed consolidated financial statements. 

 

 
3

Table of Contents

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

 

 

 

 

 

 

 

 

Three months ended June 30, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 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, April 1, 2019

 

 

-

 

 

$-

 

 

 

11,796,188

 

 

$117,962

 

 

$67,957,604

 

 

$442,493

 

 

$17,969,664

 

 

 

1,027,439

 

 

$(2,712,552)

 

$83,775,171

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

399,325

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

399,325

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

3,553

 

 

 

34

 

 

 

(34)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(654)

 

 

(6)

 

 

(6,825)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,831)

Exercise of stock options

 

 

-

 

 

 

-

 

 

 

3,000

 

 

 

30

 

 

 

23,520

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,550

 

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,077,387)

 

 

-

 

 

 

-

 

 

 

(1,077,387)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,639,380

 

 

 

-

 

 

 

-

 

 

 

1,639,380

 

Change in unrealized gains on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,916,554

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,916,554

 

Balance, June 30, 2019

 

 

-

 

 

$-

 

 

 

11,802,087

 

 

$118,020

 

 

$68,373,590

 

 

$3,359,047

 

 

$18,531,657

 

 

 

1,027,439

 

 

$(2,712,552)

 

$87,669,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 Retained

 

 

 Treasury Stock

 

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Earnings

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, April 1, 2020

 

 

-

 

 

$-

 

 

 

11,851,266

 

 

$118,512

 

 

$69,533,150

 

 

$(626,601)

 

$10,792,934

 

 

 

1,069,873

 

 

$(2,955,276)

 

$76,862,719

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

454,937

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

454,937

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

22,030

 

 

 

220

 

 

 

(220)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(7,042)

 

 

(70)

 

 

(36,318)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(36,388)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

126,236

 

 

 

(559,064)

 

 

(559,064)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(427,440)

 

 

-

 

 

 

-

 

 

 

(427,440)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,608,190

 

 

 

-

 

 

 

-

 

 

 

4,608,190

 

Change in unrealized gains on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,718,524

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,718,524

 

Balance, June 30, 2020

 

 

-

 

 

$-

 

 

 

11,866,254

 

 

$118,662

 

 

$69,951,549

 

 

$8,091,923

 

 

$14,973,684

 

 

 

1,196,109

 

 

$(3,514,340)

 

$89,621,478

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

 

 

 

 

 

 

 

 

Six months ended June 30, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 Retained

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Earnings

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, January 1, 2019

 

-

 

 

$-

 

 

 

11,775,148

 

 

$117,751

 

 

$67,763,940

 

 

$(2,884,313)

 

$26,380,816

 

 

 

1,027,439

 

 

$(2,712,552)

 

$88,665,642

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

709,207

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

709,207

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

31,546

 

 

 

314

 

 

 

(314)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(7,607)

 

 

(75)

 

 

(122,763)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(122,838)

Exercise of stock options

 

 

-

 

 

 

-

 

 

 

3,000

 

 

 

30

 

 

 

23,520

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,550

 

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,153,349)

 

 

-

 

 

 

-

 

 

 

(2,153,349)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,695,810)

 

 

-

 

 

 

-

 

 

 

(5,695,810)

Change in unrealized gains on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,243,360

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,243,360

 

Balance, June 30, 2019

 

 

-

 

 

$-

 

 

 

11,802,087

 

 

$118,020

 

 

$68,373,590

 

 

$3,359,047

 

 

$18,531,657

 

 

 

1,027,439

 

 

$(2,712,552)

 

$87,669,762

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 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, 2020

 

-

 

 

$-

 

 

 

11,824,889

 

 

$118,248

 

 

$69,133,918

 

 

$4,768,870

 

 

$16,913,097

 

 

 

1,027,439

 

 

$(2,712,552)

 

$88,221,581

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

942,387

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

942,387

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

60,896

 

 

 

607

 

 

 

(607)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(19,531)

 

 

(193)

 

 

(124,149)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(124,342)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

168,670

 

 

 

(801,788)

 

 

(801,788)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,103,400)

 

 

-

 

 

 

-

 

 

 

(1,103,400)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(836,013)

 

 

-

 

 

 

-

 

 

 

(836,013)

Change in unrealized gains on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,323,053

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,323,053

 

Balance, June 30, 2020

 

 

-

 

 

$-

 

 

 

11,866,254

 

 

$118,662

 

 

$69,951,549

 

 

$8,091,923

 

 

$14,973,684

 

 

 

1,196,109

 

 

$(3,514,340)

 

$89,621,478

 

 

 See accompanying notes to condensed consolidated financial statements. 

 

 
5

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Six months ended June 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Cash flows from operating activities: 

 

 

 

 

 

 

Net loss

 

$(836,013)

 

$(5,695,810)

Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Net gains on sale of investments 

 

 

(275,158)

 

 

(931)

Net unrealized losses (gains) of equity investments

 

 

3,979,115

 

 

 

(2,232,438)

Net unrealized losses (gains) of other investments

 

 

42,593

 

 

 

(480,649)

Depreciation and amortization 

 

 

1,360,254

 

 

 

1,230,001

 

Bad debts

 

 

46,440

 

 

 

-

 

Amortization of bond premium, net

 

 

302,279

 

 

 

188,778

 

Amortization of discount and issuance costs on long-term debt

 

 

88,090

 

 

 

88,090

 

Stock-based compensation

 

 

942,387

 

 

 

709,207

 

Deferred income tax expense (benefit)

 

 

1,017,179

 

 

 

(1,521,867)

(Increase) decrease in operating assets: 

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

(679,568)

 

 

(996,601)

Reinsurance receivables, net

 

 

(491,783)

 

 

(2,276,245)

Deferred policy acquisition costs

 

 

1,112,036

 

 

 

(1,506,072)

Other assets 

 

 

(1,609,499)

 

 

(329,335)

Increase (decrease) in operating liabilities: 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves 

 

 

(3,890,252)

 

 

13,478,014

 

Unearned premiums

 

 

(5,376,958)

 

 

6,456,015

 

Advance premiums

 

 

1,408,269

 

 

 

1,360,596

 

Reinsurance balances payable 

 

 

(6,247,621)

 

 

873,527

 

Deferred ceding commission revenue 

 

 

(756,824)

 

 

413,479

 

Accounts payable, accrued expenses and other liabilities 

 

 

(116,404)

 

 

1,042,925

 

Net cash flows (used in) provided by operating activities

 

 

(9,981,438)

 

 

10,800,684

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities: 

 

 

 

 

 

 

 

 

Purchase - fixed-maturity securities held-to-maturity

 

 

(4,041,750)

 

 

-

 

Purchase - fixed-maturity securities available-for-sale

 

 

(12,447,259)

 

 

(11,867,613)

Purchase - equity securities

 

 

(8,290,221)

 

 

(4,461,684)

Sale and redemption - fixed-maturity securities held-to-maturity

 

 

-

 

 

 

400,000

 

Sale or maturity - fixed-maturity securities available-for-sale

 

 

19,174,048

 

 

 

6,987,908

 

Sale - equity securities

 

 

6,479,813

 

 

 

503,884

 

Acquisition of property and equipment

 

 

(1,101,416)

 

 

(2,353,140)

Net cash flows used in investing activities 

 

 

(226,785)

 

 

(10,790,645)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities: 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

-

 

 

 

23,550

 

Withholding taxes paid on vested retricted stock awards

 

 

(124,342)

 

 

(122,838)

Purchase of treasury stock

 

 

(801,788)

 

 

-

 

Dividends paid

 

 

(1,103,400)

 

 

(2,153,349)

Net cash flows used in financing activities 

 

 

(2,029,530)

 

 

(2,252,637)

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents 

 

$(12,237,753)

 

$(2,242,598)

Cash and cash equivalents, beginning of period

 

 

32,391,485

 

 

 

21,138,403

 

Cash and cash equivalents, end of period

 

$20,153,732

 

 

$18,895,805

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$-

 

 

$-

 

Cash paid for interest

 

$825,000

 

 

$825,000

 

   

 

See accompanying notes to condensed consolidated financial statements.

 

 
6

Table of Contents

 

 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 exclusively through retail and wholesale agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine and New Hampshire. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts, and Connecticut. Although New Jersey, Rhode Island, Massachusetts and Connecticut continue to be growing markets for the Company, 79.5% and 81.0% of KICO’s direct written premiums for the three months and six months ended June 30, 2020, respectively, came from the New York policies.  Kingstone, through its wholly owned subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, accesses alternate forms of distribution outside of the independent agent and broker network, through which KICO currently distributes its various products. Kingstone (through Cosi) now has the opportunity to partner with name-brand carriers and access nationwide insurance agencies.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020. 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 presentation of the Company’s financial position and results of operations. The results of operations for the six months ended June 30, 2020 may not be indicative of the results that may be expected for the year ending December 31, 2020.

 

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. Actual results could differ from these estimates and assumptions, which include the reserves for losses and loss adjustment expenses, and are subject to estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by management. On an ongoing basis, management reevaluates its assumptions and the methods for calculating these estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.

 

 
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Table of Contents

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements consist of Kingstone and its following wholly owned subsidiaries: (1) KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates, and (2) Cosi. All significant intercompany account balances and transactions have been eliminated in consolidation.

 

Accounting Changes

 

The Company has determined that it was not subject to any new accounting pronouncements that became effective during the six months ended June 30, 2020. 

 

Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The revised accounting guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2023. The Company is currently evaluating the effect the updated guidance will have on its condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods.  An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates.  Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective.  This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.  Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis.  However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year.  ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.  ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.

 

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

 

 
8

Table of Contents

 

Note 3 - Investments 

 

Fixed-Maturity Securities

 

The amortized cost, estimated fair value, and unrealized gains and losses of investments in fixed-maturity securities classified as available-for-sale as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

Unrealized

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Gains/

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

(Losses)

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

obligations of U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

corporations and agencies

 

$3,032,168

 

 

$54,542

 

 

$-

 

 

$-

 

 

$3,086,710

 

 

$54,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

8,577,207

 

 

 

423,179

 

 

 

-

 

 

 

-

 

 

 

9,000,386

 

 

 

423,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

121,977,355

 

 

 

10,145,949

 

 

 

(117,056)

 

 

-

 

 

 

132,006,248

 

 

 

10,028,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities (1)

 

 

21,639,537

 

 

 

256,784

 

 

 

(180,701)

 

 

(342,476)

 

 

21,373,144

 

 

 

(266,393)

Total

 

$155,226,267

 

 

$10,880,454

 

 

$(297,757)

 

$(342,476)

 

$165,466,488

 

 

$10,240,221

 

  

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of June 30, 2020, the estimated fair value of the eligible investments was approximately $6,993,000. KICO will retain all rights regarding all securities if pledged as collateral. As of June 30, 2020, there was no outstanding balance on the FHLBNY credit line.

 

 
9

Table of Contents

  

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

Net

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Gains

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

obligations of U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

corporations and agencies

 

$7,037,856

 

 

$23,244

 

 

$-

 

 

$-

 

 

$7,061,100

 

 

$23,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

9,151,293

 

 

 

181,835

 

 

 

(11,316)

 

 

-

 

 

 

9,321,812

 

 

 

170,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

119,874,573

 

 

 

5,777,624

 

 

 

(16,685)

 

 

(13,473)

 

 

125,622,039

 

 

 

5,747,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities (1)

 

 

26,138,633

 

 

 

437,841

 

 

 

(68,793)

 

 

(276,451)

 

 

26,231,230

 

 

 

92,597

 

Total

 

$162,202,355

 

 

$6,420,544

 

 

$(96,794)

 

$(289,924)

 

$168,236,181

 

 

$6,033,826

 

 

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the FHLBNY (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2019, the estimated fair value of the eligible investments was approximately $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.

  

A summary of the amortized cost and estimated fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of June 30, 2020 and December 31, 2019 is shown below:

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$8,634,023

 

 

$8,717,499

 

 

$11,986,401

 

 

$12,025,804

 

One to five years

 

 

50,151,886

 

 

 

53,273,499

 

 

 

49,715,422

 

 

 

51,000,025

 

Five to ten years

 

 

66,090,352

 

 

 

73,226,458

 

 

 

69,850,104

 

 

 

74,410,275

 

More than 10 years

 

 

8,710,469

 

 

 

8,875,888

 

 

 

4,511,795

 

 

 

4,568,847

 

Residential mortgage and other asset backed securities

 

 

21,639,537

 

 

 

21,373,144

 

 

 

26,138,633

 

 

 

26,231,230

 

Total

 

$155,226,267

 

 

$165,466,488

 

 

$162,202,355

 

 

$168,236,181

 

 

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

 

 
10

Table of Contents

 

Equity Securities

 

The cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of June 30, 2020 and December 31, 2019 are as follows:

 

 

June 30, 2020

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$

9,023,896

 

 

$88,910

 

 

$(464,826)

 

$8,647,980

 

Common stocks, mutual funds,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and exchange traded funds

 

 

15,540,180

 

 

 

533,364

 

 

 

(2,015,815)

 

 

14,057,729

 

Total

 

$24,564,076

 

 

$622,274

 

 

$(2,480,641)

 

$22,705,709

 

 

 

 

 

December 31, 2019

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$

8,374,424

 

 

$

339,257

 

 

$

(11,794

)

 

$

8,701,887

 

Common stocks, mutual funds,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and exchange traded funds

 

 

14,250,244

 

 

 

1,982,878

 

 

 

(273,627

)

 

 

15,959,495

 

Total

 

$

22,624,668

 

 

$

2,322,135

 

 

$

(285,421

)

 

$

24,661,382

 

 

Other  Investments

The cost and estimated fair value of, and gross unrealized gains on, the Company’s other investments as of June 30, 2020 and December 31, 2019 are as follows:              

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Unrealized

 

 

Estimated

 

 

 

 

Unrealized

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Fair Value

 

 

Cost

 

 

Gains

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$1,999,381

 

 

$542,939

 

 

$2,542,320

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

Total

 

$1,999,381

 

 

$542,939

 

 

$2,542,320

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

 

 

 
11

Table of Contents

  

Held-to-Maturity Securities

 

The cost or amortized cost and estimated fair value of, and unrealized gross gains and losses on, investments in held-to-maturity fixed-maturity securities as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

Net

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Gains

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,572

 

 

$162,616

 

 

$-

 

 

$-

 

 

$892,188

 

 

$162,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,527

 

 

 

59,493

 

 

 

-

 

 

 

-

 

 

 

1,058,020

 

 

 

59,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,142,275

 

 

 

280,297

 

 

 

(50,324)

 

 

-

 

 

 

6,372,248

 

 

 

229,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$7,870,374

 

 

$502,406

 

 

$(50,324)

 

$-

 

 

$8,322,456

 

 

$452,082

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

Net

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Gains

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,550

 

 

$151,002

 

 

$-

 

 

$-

 

 

$880,552

 

 

$151,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,619

 

 

 

51,021

 

 

 

-

 

 

 

-

 

 

 

1,049,640

 

 

 

51,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

2,097,783

 

 

 

97,627

 

 

 

(835)

 

 

-

 

 

 

2,194,575

 

 

 

96,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$3,825,952

 

 

$299,650

 

 

$(835)

 

$-

 

 

$4,124,767

 

 

$298,815

 

 

Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum funds requirements. 

 

 
12

Table of Contents

  

A summary of the amortized cost and estimated fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of June 30, 2020 and December 31, 2019 is shown below:

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$500,000

 

 

$495,630

 

 

$500,000

 

 

$499,165

 

One to five years

 

 

2,099,913

 

 

 

2,264,353

 

 

 

2,099,268

 

 

 

2,215,640

 

Five to ten years

 

 

1,994,445

 

 

 

2,184,944

 

 

 

620,134

 

 

 

655,923

 

More than 10 years

 

 

3,276,016

 

 

 

3,377,529

 

 

 

606,550

 

 

 

754,039

 

Total

 

$7,870,374

 

 

$8,322,456

 

 

$3,825,952

 

 

$4,124,767

 

 

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

 

Investment Income

 

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

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

$1,394,284

 

 

$1,474,341

 

 

$2,841,771

 

 

$3,001,211

 

Equity securities

 

 

243,344

 

 

 

205,509

 

 

 

496,868

 

 

 

412,653

 

Cash and cash equivalents

 

 

43,936

 

 

 

172,680

 

 

 

88,159

 

 

 

213,081

 

Total

 

 

1,681,564

 

 

 

1,852,530

 

 

 

3,426,798

 

 

 

3,626,945

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment expenses

 

 

69,558

 

 

 

132,761

 

 

 

148,948

 

 

 

283,464

 

Net investment income

 

$1,612,006

 

 

$1,719,769

 

 

$3,277,850

 

 

$3,343,481

 

 

Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity were $-0- and $400,000 for the six months ended June 30, 2020 and 2019, respectively.

 

Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $19,174,048 and $6,987,908 for the six months ended June 30, 2020 and 2019, respectively.

 

Proceeds from the sale of equity securities were $6,479,813 and $503,884 for the six months ended June 30, 2020 and 2019, respectively.

 

 
13

Table of Contents

 

The Company’s net gains (losses) on investments are summarized as follows:

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Realized (Losses) Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$16,087

 

 

$4,942

 

 

$252,577

 

 

$10,944

 

Gross realized losses

 

 

(164,582)

 

 

(17,306)

 

 

(196,925)

 

 

(45,739)

 

 

 

(148,495)

 

 

(12,364)

 

 

55,652

 

 

 

(34,795)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

125,310

 

 

 

90,427

 

 

 

444,671

 

 

 

41,688

 

Gross realized losses

 

 

(11,350)

 

 

(27,638)

 

 

(225,165)

 

 

(5,962)

 

 

 

113,960

 

 

 

62,789

 

 

 

219,506

 

 

 

35,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (losses) gains

 

 

(34,535)

 

 

50,425

 

 

 

275,158

 

 

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

2,177,605

 

 

 

440,301

 

 

 

-

 

 

 

2,232,438

 

Gross losses

 

 

-

 

 

 

-

 

 

 

(3,979,115)

 

 

-

 

 

 

 

2,177,605

 

 

 

440,301

 

 

 

(3,979,115)

 

 

2,232,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

554,798

 

 

 

187,929

 

 

 

-

 

 

 

480,649

 

Gross losses

 

 

-

 

 

 

-

 

 

 

(42,593)

 

 

-

 

 

 

 

554,798

 

 

 

187,929

 

 

 

(42,593)

 

 

480,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses)

 

 

2,732,403

 

 

 

628,230

 

 

 

(4,021,708)

 

 

2,713,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments

 

$2,697,868

 

 

$678,655

 

 

$(3,746,550)

 

$2,714,018

 

 

Impairment Review

 

Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities to evaluate the necessity of recording impairment losses for other-than-temporary declines in the estimated fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in comprehensive income.  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 comprehensive loss for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security. 

 

OTTI losses are recorded in the condensed consolidated statements of operations and comprehensive loss as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At June 30, 2020 and December 31, 2019, there were 30 and 39 fixed-maturity securities, respectively, that accounted for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of investments for the six months ended June 30, 2020 and 2019.  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 estimated fair value to the Company’s cost basis.

   

 
14

Table of Contents

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at June 30, 2020 as follows:

 

 

 

 

June 30, 2020

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Estimated

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

Category

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

4,839,822

 

 

 

(117,056)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,839,822

 

 

 

(117,056)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities

 

 

7,060,988

 

 

 

(180,701)

 

 

9

 

 

 

10,639,265

 

 

 

(342,476)

 

 

16

 

 

 

17,700,253

 

 

 

(523,177)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$11,900,810

 

 

$(297,757)

 

 

14

 

 

$10,639,265

 

 

$(342,476)

 

 

16

 

 

$22,540,075

 

 

$(640,233)

 

 
15

Table of Contents

   

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2019 as follows:

 

 

 

 

December 31, 2019

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Estimated

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

Category

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

3,067,428

 

 

 

(11,316)

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,067,428

 

 

 

(11,316)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

3,730,478

 

 

 

(16,685)

 

 

7

 

 

 

1,300,915

 

 

 

(13,473)

 

 

3

 

 

 

5,031,393

 

 

 

(30,158)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities

 

 

5,862,636

 

 

 

(68,793)

 

 

5

 

 

 

13,534,768

 

 

 

(276,451)

 

 

21

 

 

 

19,397,404

 

 

 

(345,244)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$12,660,542

 

 

$(96,794)

 

 

15

 

 

$14,835,683

 

 

$(289,924)

 

 

24

 

 

$27,496,225

 

 

$(386,718)

 

 
16

Table of Contents

 

Note 4 - Fair Value Measurements

 

The following table presents information about the Company’s investments that are measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 indicating the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

 

 

June 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

Fixed-maturity securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$3,086,710

 

 

$-

 

 

$-

 

 

$3,086,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

-

 

 

 

9,000,386

 

 

 

-

 

 

 

9,000,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

129,921,971

 

 

 

2,084,277

 

 

 

-

 

 

 

132,006,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities

 

 

-

 

 

 

21,373,144

 

 

 

-

 

 

 

21,373,144

 

Total fixed maturities

 

 

133,008,681

 

 

 

32,457,807

 

 

 

-

 

 

 

165,466,488

 

Equity securities

 

 

22,705,709

 

 

 

-

 

 

 

-

 

 

 

22,705,709

 

Total investments

 

$155,714,390

 

 

$32,457,807

 

 

$-

 

 

$188,172,197

 

 

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

Fixed-maturity securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$7,061,100

 

 

$-

 

 

$-

 

 

$7,061,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

-

 

 

 

9,321,812

 

 

 

-

 

 

 

9,321,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

123,010,772

 

 

 

2,611,267

 

 

 

-

 

 

 

125,622,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities

 

 

-

 

 

 

26,231,230

 

 

 

-

 

 

 

26,231,230

 

Total fixed maturities

 

 

130,071,872

 

 

 

38,164,309

 

 

 

-

 

 

 

168,236,181

 

Equity securities

 

 

24,661,382

 

 

 

-

 

 

 

-

 

 

 

24,661,382

 

Total investments

 

$154,733,254

 

 

$38,164,309

 

 

$-

 

 

$192,897,563

 

 

 
17

Table of Contents

   

The following table sets forth the Company’s investment in a hedge fund measured at Net Asset Value (“NAV”) per share as of June 30, 2020 and December 31, 2019. The Company measures this investment at fair value on a recurring basis.  Fair value using NAV per share is as follows as of the dates indicated: 

  

Category

 

June 30, 2020

 

 

December 31, 2019

 

Other Investments:

 

 

 

 

 

 

Hedge fund

 

$2,542,320

 

 

$2,584,913

 

Total

 

$2,542,320

 

 

$2,584,913

 

 

The investment is generally redeemable with at least 45 days prior written notice.  The hedge fund investment is accounted for as a limited partnership by the Company. Income is earned based upon the Company’s allocated share of the partnership's changes in unrealized gains and losses to its partners. Such amounts have been recorded in the condensed consolidated statements of operations and comprehensive loss within net gains (losses) on investments.

 

The estimated fair value and the level of the fair value hierarchy of the Company’s long-term debt as of June 30, 2020 and December 31, 2019 not measured at fair value is as follows:

 

 

 

June 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$27,279,898

 

 

$-

 

 

$27,279,898

 

 

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$27,313,994

 

 

$-

 

 

$27,313,994

 

 

Note 5 - Fair Value of Financial Instruments and Real Estate

 

The estimated fair values of the Company’s financial instruments and real estate as of June 30, 2020 and December 31, 2019 are as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

 

Value

 

 

Fair Value

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities-held-to maturity

 

$7,870,374

 

 

$8,322,456

 

 

$3,825,952

 

 

$4,124,767

 

Cash and cash equivalents

 

$20,153,732

 

 

$20,153,732

 

 

$32,391,485

 

 

$32,391,485

 

Premiums receivable, net

 

$13,339,539

 

 

$13,339,539

 

 

$12,706,411

 

 

$12,706,411

 

Reinsurance receivables, net

 

$41,242,321

 

 

$41,242,321

 

 

$40,750,538

 

 

$40,750,538

 

Real estate, net of accumulated depreciation

 

$2,256,872

 

 

$2,705,000

 

 

$2,292,743

 

 

$2,705,000

 

Reinsurance balances payable

 

$5,467,103

 

 

$5,467,103

 

 

$11,714,724

 

 

$11,714,724

 

 

 
18

Table of Contents

 

Note 6 - Property and Casualty Insurance Activity

 

Premiums Earned

 

Premiums written, ceded and earned are as follows:

 

 

 

 

 

Direct

 

 

Assumed

 

 

Ceded

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$

79,347,406

 

 

$

-

 

 

$

(28,066,253

)

 

$

51,281,153

 

Change in unearned premiums

 

 

5,376,958

 

 

 

-

 

 

 

(3,079,805

)

 

 

2,297,153

 

Premiums earned

 

$

84,724,364

 

 

$

-

 

 

$

(31,146,058

)

 

$

53,578,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$

82,309,827

 

 

$

77

 

 

$

(15,327,796

)

 

$

66,982,108

 

Change in unearned premiums

 

 

(6,456,216

)

 

 

202

 

 

 

271,074

 

 

 

(6,184,940

)

Premiums earned

 

$

75,853,611

 

 

$

279

 

 

$

(15,056,722

)

 

$

60,797,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$

42,650,477

 

 

$

-

 

 

$

(14,559,998

)

 

$

28,090,479

 

Change in unearned premiums

 

 

(527,742

)

 

 

-

 

 

 

(925,881

)

 

 

(1,453,623

)

Premiums earned

 

$

42,122,735

 

 

$

-

 

 

$

(15,485,879

)

 

$

26,636,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$

44,821,279

 

 

$

111

 

 

$

(8,199,887

)

 

$

36,621,503

 

Change in unearned premiums

 

 

(5,828,149

)

 

 

7

 

 

 

407,918

 

 

 

(5,420,224

)

Premiums earned

 

$

38,993,130

 

 

$

118

 

 

$

(7,791,969

)

 

$

31,201,279

 

 

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of June 30, 2020 and December 31, 2019 was $4,599,781 and $3,191,512, respectively.

 

 
19

Table of Contents

  

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:

 

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

Balance at beginning of period

 

$80,498,611

 

 

$56,197,106

 

Less reinsurance recoverables

 

 

(15,728,224)

 

 

(15,671,247)

Net balance, beginning of period

 

 

64,770,387

 

 

 

40,525,859

 

 

 

 

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

 

 

 

Current year

 

 

29,373,472

 

 

 

40,689,147

 

Prior years

 

 

(174,020)

 

 

6,117,385

 

Total incurred

 

 

29,199,452

 

 

 

46,806,532

 

 

 

 

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

 

 

 

Current year

 

 

14,223,404

 

 

 

19,692,437

 

Prior years

 

 

20,204,732

 

 

 

13,999,258

 

Total paid

 

 

34,428,136

 

 

 

33,691,695

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

 

59,541,702

 

 

 

53,640,696

 

Add reinsurance recoverables

 

 

17,066,657

 

 

 

16,034,424

 

Balance at end of period

 

$76,608,359

 

 

$69,675,120

 

 

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $10,219,432 and $6,621,688 for the six months ended June 30, 2020 and 2019, 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 six months ended June 30, 2020 and 2019 was $174,020 favorable and $6,117,385 unfavorable, respectively. During the six months ended June 30, 2019, the Company increased case reserves for certain older open liability claims, which primarily affected the ultimate loss projections for commercial lines business. This was in response to management’s detailed review of open liability claims that resulted in new assessments of carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.

 

Loss and LAE reserves

 

The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known including losses that have occurred but that have not yet been reported. The process relies on standard actuarial reserving methodologies, judgments relative to estimates of ultimate claim severity and frequency, the length of time before losses will develop to their ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors that are beyond the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of the best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE reserves for individual reported claims (the “case reserve”) is determined by the claims department and changes over time as new information is gathered.  Such information is critical to the review of appropriate IBNR reserves and includes a review of coverage applicability, comparative liability on the part of the insured, injury severity, property damage, replacement cost estimates, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims and development on known claims (IBNR reserves) are determined using historical information aggregated by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

  

 
20

Table of Contents

 

Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a quarterly basis, the Company reviews by line of business existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior periods. Several methods are used, varying by line of business and accident year, in order to select the estimated period-end loss reserves.  These methods include the following:

 

Paid Loss Development - historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.

 

Incurred Loss Development - historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.

 

Paid Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns.  The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year.  This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.

 

Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns.  The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year.  This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.

 

Incremental Claim-Based Methods - historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed and assumptions are made regarding average loss and LAE development applied to remaining claims inventory.  Such methods more properly reflect changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development.  These methods may provide a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has occurred.

 

Frequency / Severity Based Methods - historical measurements of claim frequency and average paid claim size (severity) are reviewed for more mature accident years where a majority of claims have been reported and/or closed.  These historical averages are trended forward to more recent periods in order to estimate ultimate losses for newer accident years that are not yet fully developed.  These methods are useful for lines of business with slow and/or volatile loss development patterns, such as liability lines where information pertaining to individual cases may not be completely known for many years.  The claim frequency and severity information for older periods can then be used as reasonable measures for developing a range of estimates for more recent immature periods.

 

 
21

Table of Contents

  

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.

 

Three 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, the loss development factor selections used in the loss development methods, and the loss severity assumptions used in the frequency / severity method 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 severity assumptions used in the frequency / severity method are determined by reviewing historical average claim severity for older more mature accident periods, trended forward to less mature accident periods.

 

The Company is not aware of any claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.

 

In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (“pure” IBNR) for accident dates of June 30, 2017 and prior is limited, although there remains the possibility of adverse development on reported claims (“case development” IBNR).  In certain rare circumstances states have retroactively revised a statute of limitations.  The Company is not aware of any such effort that would have a material impact on the Company’s results. 

 

The following is information about incurred and paid claims development as of June 30, 2020, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of June 30, 2020 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, 2011 to December 31, 2019 is presented as supplementary unaudited information.

 

 
22

Table of Contents

 

All Lines of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except reported claims data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

June 30, 2020

 

 

 

For the Years Ended December 31,

 

 

For the six months ended June

 

 

 

 

 

Cumulative Number of Reported Claims by Accident

 

Accident Year

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

30, 2020 

 

 

IBNR 

 

 

Year

 

 

 

(Unaudited 2011 - 2019)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

$7,603

 

 

$7,678

 

 

$8,618

 

 

$9,440

 

 

$9,198

 

 

$9,066

 

 

$9,144

 

 

$9,171

 

 

$9,127

 

 

$9,128

 

 

$-

 

 

 

1,914

 

2012

 

 

 

 

 

 

9,539

 

 

 

9,344

 

 

 

10,278

 

 

 

10,382

 

 

 

10,582

 

 

 

10,790

 

 

 

10,791

 

 

 

11,015

 

 

 

10,963

 

 

 

91

 

 

 

4,704

(1)

2013

 

 

 

 

 

 

 

 

 

 

10,728

 

 

 

9,745

 

 

 

9,424

 

 

 

9,621

 

 

 

10,061

 

 

 

10,089

 

 

 

10,607

 

 

 

10,430

 

 

 

33

 

 

 

1,561

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,193

 

 

 

14,260

 

 

 

14,218

 

 

 

14,564

 

 

 

15,023

 

 

 

16,381

 

 

 

16,509

 

 

 

299

 

 

 

2,137

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,340

 

 

 

21,994

 

 

 

22,148

 

 

 

22,491

 

 

 

23,386

 

 

 

23,031

 

 

 

130

 

 

 

2,555

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,062

 

 

 

24,941

 

 

 

24,789

 

 

 

27,887

 

 

 

27,832

 

 

 

423

 

 

 

2,878

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,605

 

 

 

32,169

 

 

 

35,304

 

 

 

36,026

 

 

 

414

 

 

 

3,384

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,455

 

 

 

56,351

 

 

 

58,289

 

 

 

2,187

 

 

 

4,191

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,092

 

 

 

72,769

 

 

 

11,498

 

 

 

4,394

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,492

 

 

 

7,445

 

 

 

1,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$292,469

 

 

 

 

 

 

 

 

 

                          

(1)

Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.

 

All Lines of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

 

For the Years Ended December 31,

 

 

For the six months ended

June 30,

 

Accident Year

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(Unaudited 2011 - 2019)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

$3,740

 

 

$5,117

 

 

$6,228

 

 

$7,170

 

 

$8,139

 

 

$8,540

 

 

$8,702

 

 

$8,727

 

 

$8,789

 

 

$8,993

 

2012

 

 

 

 

 

 

3,950

 

 

 

5,770

 

 

 

7,127

 

 

 

8,196

 

 

 

9,187

 

 

 

10,236

 

 

 

10,323

 

 

 

10,428

 

 

 

10,443

 

2013

 

 

 

 

 

 

 

 

 

 

3,405

 

 

 

5,303

 

 

 

6,633

 

 

 

7,591

 

 

 

8,407

 

 

 

9,056

 

 

 

9,717

 

 

 

10,007

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,710

 

 

 

9,429

 

 

 

10,738

 

 

 

11,770

 

 

 

13,819

 

 

 

14,901

 

 

 

15,169

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,295

 

 

 

16,181

 

 

 

18,266

 

 

 

19,984

 

 

 

21,067

 

 

 

22,058

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,364

 

 

 

19,001

 

 

 

21,106

 

 

 

23,974

 

 

 

24,863

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,704

 

 

 

24,820

 

 

 

28,693

 

 

 

30,172

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,383

 

 

 

44,516

 

 

 

47,698

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,933

 

 

 

52,940

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$235,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented

$

57,038

 

All outstanding liabilities before 2011, net of reinsurance

98

 

Liabilities for loss and allocated loss adjustment expenses, net of reinsurance

$

57,136

 

 

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.

 

 
23

Table of Contents

 

The reconciliation of the net incurred and paid loss development tables to the loss and LAE reserves in the consolidated balance sheet is as follows:

 

 

 

 

As of

 

(in thousands)

 

June 30, 2020

 

Liabilities for loss and loss adjustment expenses, net of reinsurance

 

$57,136

 

Total reinsurance recoverable on unpaid losses

 

 

17,066

 

Unallocated loss adjustment expenses

 

 

2,406

 

Total gross liability for loss and LAE reserves

 

$76,608

 

 

Reinsurance

 

Through June 30, 2019, the Company’s quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ policies, covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). The Company’s quota share reinsurance treaties in effect during the six months ended June 30, 2019 for its personal lines business were covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during the six months ended June 30, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).

 

Effective July 1, 2019, the 2017/2019 Treaty and the commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. The Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2020. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

 

 
24

Table of Contents

 

Treaty Year

 

 

December 15, 2019

 

 

July 1, 2019

 

July 1, 2018

 

 

 

to

 

 

to

 

to

 

Line of Business

 

December 31,

2020

 

 

December 14,

2019

 

June 30,

2019

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

Percent ceded

 

 

25

%

 

None

 

 

10

%

   

Treaty Year

 

 

January 1, 2021

 

 

July 1, 2020

 

 

December 15, 2019

 

 

July 1, 2019

 

 

July 1, 2018

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 Line of Business

 

June 30,

2021

 

 

December 31,

2020

 

 

June 30,

2020

 

 

December 14,

2019

 

 

June 30,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Risk retained on intial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $1,000,000 of losses

 

NA (7)

 

 

$

750,000

 

 

$

750,000

 

 

$

1,000,000

 

 

$

900,000

 

 Losses per occurrence subject

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 to quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 reinsurance coverage

 

NA (7)

 

 

$

1,000,000

 

 

$

1,000,000

 

 

None

 

 

$

1,000,000

 

 Expiration date

 

 

 

 

December 31, 2020

 

 

December 31, 2020

 

 

 

 

 

 

June 30, 2019

 

 Excess of loss coverage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 facultative facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (1)

 

$

8,000,000

 

 

$

8,000,000

 

 

$

9,000,000

 

 

$

9,000,000

 

 

$

9,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

$

1,000,000

 

 

$

1,000,000

 

 

$

1,000,000

 

 

$

1,000,000

 

 

$

1,000,000

 

 Total reinsurance coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per occurrence (7)

 

 8,000,000

 

 

$

8,250,000

 

 

$

9,250,000

 

 

$

9,000,000

 

 

$

9,100,000

 

 Losses per occurrence subject

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 to reinsurance coverage

 

$

8,000,000

 

 

$

9,000,000

 

 

$

10,000,000

 

 

$

10,000,000

 

 

$

10,000,000

 

 Expiration date (7)

 

June 30, 2021

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Initial loss subject to personal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 lines quota share treaty

 

$

NA (7)

 

 

$

7,500,000

 

 

$

7,500,000

 

 

None

 

 

$

5,000,000

 

 Risk retained per catastrophe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occurrence (2) (7)

 

$

10,000,000

 

 

$

8,125,000

 

 

$

5,625,000

 

 

$

7,500,000

 

 

$

4,500,000

 

 Catastrophe loss coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 quota share coverage (3) (7)

 

$

475,000,000

 

 

$

475,000,000

 

 

$

602,500,000

 

 

$

602,500,000

 

 

$

445,000,000

 

 Reinstatement premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 protection (4) (5) (6)

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

  

(1)

For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.

(2)

Plus losses in excess of catastrophe coverage. Effective July 1, 2020, no reinsurance coverage for the $2,500,000 gap between quota share limit of $7,500,000 and first $10,000,000 layer of catastrophe coverage (see note 7 below).

(3)

Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.

(4)

Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.

(5)

Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

(6)

Effective July 1, 2020, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

(7)

Quota share expires December 31, 2020; reinsurance coverage from January 1, 2021 through June 30, 2021 is only for excess of loss and catastrophe reinsurance.

 

 
25

Table of Contents

 

 

 

 

 

 Treaty Year

 

 

 

July 1, 2020

 

 

July 1, 2019

 

 

July 1, 2018

 

 

 

to

 

 

to

 

 

to

 

Line of Business

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Umbrella

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

Percent ceded - first $1,000,000 of coverage

 

 

90%

 

 

90%

 

 

90%

Percent ceded - excess of $1,000,000 of coverage

 

 

95%

 

 

100%

 

 

100%

Risk retained

 

$300,000

 

 

$100,000

 

 

$100,000

 

Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,900,000

 

 

$4,900,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

Expiration date

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines:

 

 

 

 

 

 

 

 

 

 

 

 

General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

None

 

 

None

 

 

None

 

Risk retained

 

$750,000

 

 

$750,000

 

 

$750,000

 

Excess of loss coverage above risk retained

 

$3,750,000

 

 

$3,750,000

 

 

$3,750,000

 

 

 

in excess of

 

 

in excess of

 

 

in excess of

 

 

 

$750,000

 

 

$750,000

 

 

$750,000

 

Total reinsurance coverage per occurrence

 

$3,750,000

 

 

$3,750,000

 

 

$3,750,000

 

Losses per occurrence subject to reinsurance coverage

 

$4,500,000

 

 

$4,500,000

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

None

 

 

None

 

 

 

 

 

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, 2019

 

  

The Company’s reinsurance program has been structured to enable the Company to 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.

 

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.

 

 
26

Table of Contents

 

The Company’s estimated ultimate treaty year loss ratios (the “Loss Ratio(s)”) for treaties in effect during the three months and six months ended June 30, 2020 are attributable to contracts under the 2019/2020 Treaty. The Loss Ratios for treaties in effect for the three months and six months ended June 30, 2019 are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was not renewed.

 

Under the 2019/2020 Treaty and the 2017/2019 Treaty for the 2018/2019 Treaty Year, the Company received an upfront fixed provisional ceding commission rate that is not subject to a sliding scale contingent adjustment. In addition to the treaties that were in effect during the three months and six months ended June 30, 2020 and 2019, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.  

 

Ceding commission revenue consists of the following:

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$3,440,676

 

 

$1,363,474

 

 

$7,161,036

 

 

$2,681,225

 

Contingent ceding commissions earned

 

 

39,538

 

 

 

(687,779)

 

 

150,277

 

 

 

(727,847)

 

 

$3,480,214

 

 

$675,695

 

 

$7,311,313

 

 

$1,953,378

 

 

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 June 30, 2020 and December 31, 2019, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,736,000 and $2,886,000, respectively, which is recorded in reinsurance balances payable on the accompanying condensed consolidated balance sheets.

 

Note 7 - Debt

 

Federal Home Loan Bank

 

In July 2017, KICO became a member of, and invested in, the Federal Home Loan Bank of New York (“FHLBNY”). The aggregate fair value of the investment in dividend bearing common stock was $11,200 and $15,180 as of June 30, 2020 and December 31, 2019, respectively. FHLBNY members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized.  Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 - Investments for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within ninety days of borrowing.  The maximum allowable advance as of June 30, 2020 was approximately $11,339,000. Advances are limited to 85% of the amount of available collateral, which was approximately $5,944,000 as of June 30, 2020.  There were no borrowings under this facility during the six months ended June 30, 2020 and 2019.

 

 
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Long-term Debt

 

On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December 30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50% per annum. The net proceeds of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an effective yield of 5.67% per annum. The balance of long-term debt as of June 30, 2020 and December 31, 2019 is as follows:

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

5.50% Senior Unsecured Notes

 

$30,000,000

 

 

$30,000,000

 

Discount

 

 

(81,133)

 

 

(97,325)
Issuance costs

 

 

(359,346)

 

 

(431,244)
Long-term debt, net

 

$29,559,521

 

 

$29,471,431

 

 

The Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of the Company's subsidiaries. The Notes rank senior in right of payment to any of the Company's existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the Notes. The Notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, but will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes will be structurally subordinated to the indebtedness and other obligations of the Company's subsidiaries. The Company may redeem the Notes, at any time in whole or from time to time in part, at the redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed that would be due if the Notes matured on the applicable redemption date (exclusive of interest accrued to the applicable redemption date) discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points.

 

The Company has used an aggregate $28,256,335 of the net proceeds from the offering to contribute capital to KICO in order to support additional growth. The remainder of the net proceeds is being used for general corporate purposes. A registration statement relating to the debt issued in the offering was filed with the SEC, which became effective on November 28, 2017.

 

Note 8 - Stockholders’ Equity

 

Dividends Declared and Paid

 

Dividends declared and paid on Common Stock were $1,103,400 and $2,153,349 for the six months ended June 30, 2020 and 2019, respectively. The Company’s Board of Directors approved a quarterly dividend on August 5, 2020 of $.04 per share payable in cash on September 15, 2020 to stockholders of record as of August 31, 2020 (see Note 13 - Subsequent Events).

 

 
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Stock Options

 

Effective August 12, 2014, the Company adopted the 2014 Equity Participation Plan (the “2014 Plan”) pursuant to which a maximum of 700,000 shares of Common Stock of the Company were initially 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 expire no later than ten years from the date of grant (except no later than five years for a grant to a 10% stockholder). Non-statutory stock options granted under the 2014 Plan expire no later than ten years from the date of grant. The Board of Directors or the Compensation Committee determines the vesting provisions for stock awards granted under the 2014 Plan, subject to the provisions of the 2014 Plan. On August 5, 2020, the Company’s stockholders approved amendments to the 2014 Plan, including an increase in the maximum shares of Common Stock of the Company that are authorized to be used pursuant to the 2014 Plan to 1,400,000 (see Note 13 - Subsequent Events).

 

The results of operations for the three months ended June 30, 2020 and 2019 include stock-based compensation expense for stock options totaling approximately $21,000 and $0, respectively. The results of operations for the six months ended June 30, 2020 and 2019 include stock-based compensation expense for stock options totaling approximately $38,000 and $0, respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of approximately 16% for the three months and six months ended June 30 2020 and 2019. Such amounts have been included in the consolidated statements of operations and comprehensive income within other operating expenses.  

 

The weighted average estimated fair value of stock options granted during the six months ended June 30, 2020 was $2.40 per share.  No options were granted during the six months ended June 30, 2019.  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:

 

 

 

 

 Six months ended

 

 

 

 June 30,

 

 

 

 2020

 

 

 2019

 

 

 

 

 

 

 

 

Dividend Yield

 

 

3.14%

 

 

n/a

 

Volatility

 

 

37.69%

 

 

n/a

 

Risk-Free Interest Rate

 

 

1.40%

 

 

n/a

 

Expected Life

 

2.75 years

 

 

 

n/a

 

  

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

 

 
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A summary of stock option activity under the Company’s 2014 Plan for the six months ended June 30, 2020 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, 2020

 

 

82,000

 

 

$8.61

 

 

 

3.38

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

74,523

 

 

$7.96

 

 

 

4.59

 

 

$-

 

Exercised

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Forfeited

 

 

(36,557)

 

$8.43

 

 

 

-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

119,966

 

 

$8.26

 

 

 

3.94

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and Exercisable at June 30, 2020

 

 

50,000

 

 

$8.45

 

 

 

1.62

 

 

$-

 

  

The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2020 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 $4.42 closing price of the Company’s Common Stock on June 30, 2020. No options were exercised during the six months ended June 30, 2020. The total intrinsic value of options forfeited during the six months ended June 30, 2020 was $-0-, determined as of the date of forfeiture.

 

Participants in the 2014 Plan may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”), or by exchanging a number of shares owned for a period of greater than one year having a fair market value equal to the exercise price of the option being exercised (“Share Exchange”).

 

As of June 30, 2020, the estimated fair value of unamortized compensation cost related to unvested stock option awards was approximately $98,000. Unamortized compensation cost as of June 30, 2020 is expected to be recognized over a remaining weighted-average vesting period of 1.68 years.

 

As of June 30, 2020, there were 110,199 shares reserved for grants under the 2014 Plan.

 

 
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Restricted Stock Awards

 

A summary of the restricted Common Stock activity under the Company’s 2014 Plan for the six months ended June 30, 2020 is as follows:

 

 

Restricted Stock Awards

 

Shares

 

 

 Weighted Average Grant Date Fair Value per Share

 

 

 Aggregate Fair Value

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

213,929

 

 

$16.51

 

 

$3,554,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

199,812

 

 

$7.94

 

 

$1,586,507

 

Vested

 

 

(59,420)

 

$17.12

 

 

$(1,017,090)

Forfeited

 

 

(10,863)

 

$15.24

 

 

$(165,500)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2020

 

 

343,458

 

 

$10.81

 

 

$3,958,091

 

 

Fair value was calculated using the closing price of the Company’s Common Stock on the grant date. For the three months ended June 30, 2020 and 2019, stock-based compensation for these grants was approximately $434,000 and $399,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income. For the six months ended June 30, 2020 and 2019, stock-based compensation for these grants was approximately $905,000 and $708,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be recognized by the directors, executives and employees.

 

Note 9 - Income Taxes

 

The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated or separate return basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the period when they are identified, generally when the tax returns are filed.  The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the consolidated financial statements taken as a whole for the respective periods.

 

Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the temporary differences are expected to be recovered. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheets reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at various rates depending on whether the temporary differences are subject to federal taxes, state taxes, or both.

 

 
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Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

 

 

 

 June 30,

 

 

 December 31,

 

 

 

 2020

 

 

 2019

 

 

 

 

 

 

 

 

Deferred tax asset:

 

 

 

 

 

 

Net operating loss carryovers (1)

 

$55,845

 

 

$1,586,247

 

Claims reserve discount

 

 

771,358

 

 

 

839,959

 

Unearned premium

 

 

3,068,011

 

 

 

3,105,344

 

Deferred ceding commission revenue

 

 

1,465,501

 

 

 

1,624,434

 

Other

 

 

332,021

 

 

 

462,019

 

Total deferred tax assets

 

 

5,692,736

 

 

 

7,618,003

 

 

 

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

 

 

 

Investment in KICO (2)

 

 

759,543

 

 

 

759,543

 

Deferred acquisition costs

 

 

4,099,692

 

 

 

4,333,219

 

Intangible asset

 

 

105,000

 

 

 

105,000

 

Depreciation and amortization

 

 

302,443

 

 

 

312,298

 

Net unrealized gains of securities - available-for-sale

 

 

2,015,527

 

 

 

1,796,891

 

Total deferred tax liabilities

 

 

7,282,205

 

 

 

7,306,951

 

 

 

 

 

 

 

 

 

 

Net deferred income tax (liability) asset

 

$(1,589,469)

 

$311,052

 

 

 

(1)

The deferred tax assets from net operating loss carryovers (“NOL”) are as follows:

 

 

 

 

June 30,

 

 

December 31,

 

 

 

Type of NOL

 

2020

 

 

2019

 

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

Federal only, current year

 

$-

 

 

$1,517,866

 

 

(A)

 

 

 

 

 

 

 

 

 

 

 

 

 

State only (B)

 

 

1,805,591

 

 

 

1,616,568

 

 

December 31, 2040

 

Valuation allowance

 

 

(1,749,746)

 

 

(1,548,187)

 

 

 

State only, net of valuation allowance

 

 

55,845

 

 

 

68,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred tax asset from net operating loss carryovers

 

$55,845

 

 

$1,586,247

 

 

 

 

 

(A) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. The Company will elect on its 2019 federal income tax return to carry back the 2019 NOL to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.   

 

(B) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of June 30, 2020 and December 31, 2019 was approximately $26,502,000 and $24,901,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the consolidated statements of operations and comprehensive loss within other underwriting expenses. Kingstone has recorded a valuation allowance due to the uncertainty of generating enough state taxable income to utilize 100% of the available state NOLs over their remaining lives, which expire between 2027 and 2040.  

 

 
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(2)   Deferred tax liability - Investment in KICO

 

On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition, the deferred tax liability on the Untaxed Interest was $1,169,000. A temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The deferred tax liability was reduced to $759,543 upon the reduction of federal income tax rates as of December 31, 2017. The Company is required to maintain its deferred tax liability of $759,543 related to this temporary difference until the stock of KICO is sold, or the assets of KICO are sold or KICO and the parent are merged.

 

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 six months ended June 30, 2020 and 2019. If any had been recognized these would have been reported in income tax expense.

 

Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing.  The Company’s tax returns for the years ended December 31, 2016 through December 31, 2019 remain subject to examination.  The Company’s federal income tax return for the year ended December 31, 2016 has been examined by the Internal Revenue Service and was accepted as filed. 

 

Note 10 -Earnings/(Loss) Per Common Share

 

Basic net earnings/(loss) per common share is computed by dividing income/(loss) available to common shareholders by the weighted-average number of shares of Common Stock outstanding. Diluted earnings/(loss) per common share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options as well as non-vested restricted stock awards.  The computation of diluted earnings/(loss) per common share excludes those options with an exercise price in excess of the average market price of the Company’s Common Stock during the periods presented.

 

The computation of diluted earnings/(loss) per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the six months ended June 30, 2020, no options were included in the computation of diluted earnings (loss) per common share as they would have been anti-dilutive for the relevant periods and, as a result, the weighted average number of shares of Common Stock used in the calculation of diluted earnings per common share has not been adjusted for the effect of such options.

 

 
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The reconciliation of the weighted average number of shares of Common Stock used in the calculation of basic and diluted earnings (loss) per common share follows:

 

 

 

 

 Three months ended

 

 

 Six months ended

 

 

 

 June 30,

 

 

 June 30,

 

 

 

 2020

 

 

 2019

 

 

 2020

 

 

 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

10,733,354

 

 

 

10,771,717

 

 

 

10,770,598

 

 

 

10,764,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities, common share equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

-

 

 

 

4,188

 

 

 

-

 

 

 

-

 

Restricted stock awards

 

 

1,430

 

 

 

9,159

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

used for computing diluted earnings per share

 

 

10,734,784

 

 

 

10,785,064

 

 

 

10,770,598

 

 

 

10,764,824

 

 

Note 11 - Commitments and Contingencies

 

Litigation

 

From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim is asserted by a third party in a lawsuit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses.

 

On June 12, 2019, Phillip Woolgar filed a suit naming the Company and certain present or former officers and directors as defendants in a putative class action captioned Woolgar v. Kingstone Companies et al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  Plaintiff seeks to represent a class of persons or entities that purchased Kingstone securities between March 14, 2018, and April 29, 2019, and alleges violations of the federal securities law in connection with the Company’s April 29, 2019 announcement regarding losses related to winter catastrophe events.  The lawsuit alleges that the Company failed to disclose that it did not adequately follow industry best practices related to claims handling and thus did not record sufficient claim reserves, and that as a result, Defendants’ positive statements about the Company’s business, operations and prospects misled investors. Plaintiff seeks, among other things, an undetermined amount of money damages.   The Company believes the lawsuit to be without merit. The Company has not established an accrual for this matter as a loss is not considered to be probable and reasonably estimable.  It is the opinion of management, after consulting legal counsel, that facts known at the present time do not indicate that such litigation will have a material adverse impact on the Company’s results of operations, financial position, or cash flows. On August 10, 2020, the court granted the Company’s motion to dismiss the amended complaint in the suit. The court has permitted plaintiff to amend the complaint to attempt to cure the deficiencies identified by the court in its opinion (to the extent plaintiff has a good faith basis to do so). The amended complaint, if any, would need to be filed by September 11, 2020.

 

Office Lease

 

The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.

 

 
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The Company is a party to a non-cancellable operating lease, dated March 27, 2015, for its office facility for KICO located in Valley Stream, New York expiring March 31, 2024. 

 

On July 8, 2019, the Company entered into a lease agreement for an additional office facility for Cosi located in Valley Stream, New York under a non-cancelable operating lease. The lease has a term of seven years and two months expiring December 31, 2026.

 

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.

 

Additional information regarding the Company’s office operating leases is as follows:

 

 

 

 

Three months ended

 

 

 Six months ended

 

Lease cost

 

 June 30, 2020

 

 

 June 30, 2020

 

Operating leases

 

$61,297

 

 

$122,594

 

Short-term leases

 

 

-

 

 

 

-

 

Total lease cost (1)

 

$61,297

 

 

$122,594

 

 

 

 

 

 

 

 

 

 

Other information on operating leases

 

 

 

 

 

 

 

 

Cash payments included in the measurement of lease

 

 

 

 

 

 

 

 

liability reported in operating cash flows

 

$62,782

 

 

$127,063

 

Discount rate

 

 

5.50%

 

 

5.50%

Remaining lease term in years

 

5 years

 

 

5 years

 

 

 

(1)

Included in the condensed consolidated statements of operations and comprehensive income within other underwriting expenses for KICO and within other operating expenses for Cosi.

  

The following table presents the contractual maturities of the Company’s lease liabilities as of June 30, 2020:

  

 

For the Year

 

 

 Ending

 

 

 December 31,

 

 Total

 

Remainder of 2020

 

$128,561

 

2021

 

 

264,571

 

2022

 

 

273,831

 

2023

 

 

283,415

 

2024

 

 

140,739

 

 Thereafter

 

 

192,916

 

 Total undiscounted lease payments

 

 

1,284,033

 

 Less:  present value adjustment

 

 

190,041

 

 Operating lease liability

 

$1,093,992

 

  

Rent expense for the three months ended June 30, 2020 and 2019 amounted to $61,297 and $41,342, respectively.  Rent expense for the six months ended June 30, 2020 and 2019 totaled $122,594 and $82,684, respectively.  Rent expense is included in the accompanying condensed consolidated statements of operations and comprehensive income within other underwriting expenses.

 

 
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Employment Agreements

 

Barry Goldstein, President, Chief Executive Officer and Executive Chairman of the Board

 

On October 14, 2019, the Company and Barry B. Goldstein, the Company’s President, Chief Executive Officer and Executive Chairman of the Board, entered into a Second Amended and Restated Employment Agreement (the “Amended Employment Agreement”).  The Amended Employment Agreement is effective as of January 1, 2020 and expires on December 31, 2022.  The Amended Employment Agreement extends the expiration date of the employment agreement in effect for Mr. Goldstein from December 31, 2021 to December 31, 2022.

 

Pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 6% of the Company’s consolidated income from operations before taxes, exclusive of the Company’s consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 2.5 times his base salary.  In addition, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a long-term compensation (“LTC”) award of between $945,000 and $2,835,000 based on a specified minimum increase in the Company’s adjusted book value per share (as defined in the Amended Employment Agreement) as of December 31, 2022 as compared to December 31, 2019 (with the maximum LTC payment being due if the average per annum increase is at least 14%).  Further, pursuant to the Amended Employment Agreement, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason (each as defined in the Amended Employment Agreement), Mr. Goldstein would be entitled to receive his base salary, the 6% bonus and the LTC payment for the remainder of the term.  In addition, in the event of Mr. Goldstein’s death, his estate would be entitled to receive his base salary, accrued bonus and accrued LTC payment through the date of death.  Further, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason, or, in the event of the termination of Mr. Goldstein’s employment due to disability or death, Mr. Goldstein’s granted but unvested restricted stock awards will vest.  Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to 3.82 times his then annual salary, the target LTC payment of $1,890,000 and his accrued 6% bonus in the event of the termination of his employment within eighteen months following a change of control of the Company.

 

Pursuant to the Amended Employment Agreement, in January 2020, Mr. Goldstein received a grant of 157,431 shares of restricted stock, under the terms of the Company’s 2014 Plan determined by dividing $1,250,000 by the fair market value of the Company’s Common Stock on the date of grant. This 2020 grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date.  Also pursuant to the Amended Employment Agreement, Mr. Goldstein will be entitled to receive a grant, under the terms of the 2014 Plan, during January 2021, of a number of shares of restricted stock determined by dividing $1,500,000 by the fair market value of the Company’s Common Stock on the date of grant.  The January 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date.  Further, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a grant, under the terms of the 2014 Plan, during each of 2020, 2021 and 2022, of a number of shares of restricted stock determined by dividing $136,500 by the fair market value of the Company’s Common Stock on the date of grant. In January 2020, Mr. Goldstein was granted 17,191 shares of restricted stock pursuant to this provision. This grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date.  The 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date.  The 2022 grant will become vested on December 31, 2022 based on the continued provision of services through such date.

 

 
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Dale A. Thatcher

 

Effective July 19, 2019 (the “Separation Date”), Dale A. Thatcher retired and resigned his positions as Chief Executive Officer and President of the Company and KICO. At such time, he also resigned his positions on the Board of Directors of each of the Company and KICO.  Effective upon Mr. Thatcher’s separation from employment, the Board appointed Barry B. Goldstein, former Chief Executive Officer and Executive Chairman of the Board of Directors, to the position of Chief Executive Officer and President of each of the Company and KICO. Mr. Goldstein previously served as Chief Executive Officer and President of the Company from March 2001 through December 31, 2018, and as Chief Executive Officer and President of KICO from January 2012 through December 31, 2018.

 

In connection with his separation from employment, each of the Company and KICO entered into an Agreement and General Release (the “Separation Agreement”) with Mr. Thatcher.  Pursuant to the Separation Agreement, the Company and KICO shall collectively provide the following payments and benefits to Mr. Thatcher in full satisfaction of all payments and benefits and other amounts due to him under the terms of the existing employment agreements upon his separation from employment: (i) $381,111 (representing the amount of base salary he would have received had he remained employed through March 31, 2020), (ii) $5,000 in full satisfaction for any bonus payments payable under the existing employment agreements, (iii) continuing group health coverage commencing on the Separation Date and ending on March 31, 2020, and (iv) continued vesting of all stock awards previously granted to Mr. Thatcher in his capacity as an executive officer but which were unvested as of the Separation Date (Mr. Thatcher shall not be entitled to any further grants of stock awards after the Separation Date) .  In addition, the Company and KICO agreed to provide Mr. Thatcher with a severance payment of $20,000 in consideration for a release.  Pursuant to the Separation Agreement, Mr. Thatcher agreed that, for a period of three years following the Separation Date, he shall not accept any operating executive role with another property and casualty insurance company.

 

Meryl Golden, Chief Operating Officer

 

On September 16, 2019, the Company and Meryl Golden entered into an employment agreement (the “Golden Employment Agreement”) pursuant to which Ms. Golden serves as the Company’s Chief Operating Officer. Ms. Golden also serves as KICO’s Chief Operating Officer. The Golden Employment Agreement became effective as of September 25, 2019 and expires on December 31, 2021.

 

Pursuant to the Golden Employment Agreement, Ms. Golden is entitled to receive an annual salary of $500,000 and was granted a five year option for the purchase of 50,000 shares of the Company’s Common Stock pursuant to the 2014 Plan. The options granted will vest in three equal installments, with the first installment vesting on the grant date, and the remaining installments vesting on the first and second anniversaries following the grant date, subject to the terms of the stock option agreement between the Company and Ms. Golden.

 

 
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COVID-19

 

The recent outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well as on the Company's business activities. The extent to which COVID-19 may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. These events are highly uncertain and, as such, the Company cannot determine their financial impact at this time.  No adjustments have been made to the amounts reported in these condensed consolidated financial statements as a result of this matter.

 

Note 12 - Deferred Compensation Plan

 

On June 18, 2018, the Company adopted the Kingstone Companies, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is offered to a select group (“Participants”), consisting of management and highly compensated employees as a method of recognizing and retaining such Participants. The Deferred Compensation Plan provides for eligible Participants to elect to defer up to 75% of their base compensation and up to 100% of bonuses and other compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the Participant deferrals, the Company may choose to make matching contributions to some or all of the Participants in the Deferred Compensation Plan to the extent the Participant did not receive the maximum matching or non-elective contributions permissible under the Company’s 401(k) Plan due to limitations under the Internal Revenue Code or the 401(k) Plan. Participants may elect to receive payment of their account balances in a single cash payment or in annual installments for a period of up to ten years. The deferred compensation liability as of June 30, 2020 and December 31, 2019 amounted to $559,917 and $599,274, respectively, and is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.  The Company did not make any voluntary contributions for the six months ended June 30, 2020 and 2019.

 

Note 13 - Subsequent Events

 

The Company has evaluated events that occurred subsequent to June 30, 2020 through the date these condensed consolidated financial statements were issued for matters that required disclosure or adjustment in these condensed consolidated financial statements.

 

Reinsurance

 

Effective July 1, 2020, the Company entered into new excess of loss and catastrophe reinsurance treaties (see Note 6 – Property and Casualty Insurance Activity “Reinsurance”).

 

A. M. Best

    

On July 10, 2020, KICO’s A.M. Best financial strength rating was downgraded from A- (Excellent) to B++ (Good) and its  long-term issuer credit rating (“Long-Term ICR”) was downgraded from “a-” to “bbb”.  Concurrently, A.M. Best also downgraded the Company’s Long-Term ICR from “bbb-” to “bb”.  Also downgraded was the long-term issue credit rating on the Company’s $30.0 million 5.50% senior unsecured notes due 2022 from “bbb-” to “bb”. 

 

Executive Employment

    

On July 20, 2020, the Company and Victor J. Brodsky, Chief Financial Officer and Treasurer of the Company and Chief Financial Officer, Executive Vice President and a director of KICO, agreed that Mr. Brodsky’s employment with the Company and KICO will cease on September 30, 2020.  Mr. Brodsky’s cessation of employment was a voluntary decision made by him to pursue other interests.  The Company, KICO and Mr. Brodsky also agreed that Mr. Brodsky will serve as a consultant to the Company and KICO for the period from October 1, 2020 through March 31, 2021.

 

Tropical Storm Isaias

      

On August 4, 2020, the Northeast, which is the primary location of KICO’s insureds, was struck by Tropical Storm Isaias which caused power outages and significant damage to homes. KICO has received more than 1,100 claims relating to the storm. The Company is unable to determine the aggregate dollar amount of the claims at this time but the claims will in all likelihood have a material adverse effect upon the 2020 third quarter results of operations.

 

Dividends Declared

 

On August 5, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.04 per share payable in cash on September 15, 2020 to stockholders of record as of the close of business on August 31, 2020 (see Note 8 - Stockholders’ Equity).

 

Equity Participation Plan

 

On August 5, 2020, the Company’s stockholders approved amendments to the 2014 Plan, including an increase in the maximum shares of Common Stock of the Company that are authorized to be used pursuant to the 2014 Plan to 1,400,000.

 

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

 

We offer property and casualty insurance products to individuals through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County, although we are actively writing business in New Jersey, Rhode Island, Connecticut and Massachusetts. We are licensed in the States of New York, New Jersey, Rhode Island, Connecticut, Massachusetts, Pennsylvania, Maine, and New Hampshire. For the three and six months ended June 30, 2020, respectively, 79.5% and 81.0% of KICO’s direct written premiums came from the New York policies.

 

 In addition, through our subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, we access alternative distribution channels. Through Cosi, we have the opportunity to partner with name-brand carriers and access nationwide insurance agencies. See “Distribution Channels” below for a discussion of our distribution channels. Cosi receives commission revenue from KICO for the policies it places with others and pays commissions to these agencies. Cosi retains the profit between the commission revenue received and the commission expense paid.  Cosi revenue is included in other income and Cosi related expenses are included in other operating expenses. Cosi operations are not included in our stand-alone insurance underwriting business and, accordingly, its revenue and expenses are not included in the calculation of our combined ratio as described below.

 

We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities.  All of KICO’s insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings and may also generate net realized and unrealized investment gains and losses on future investments.

 

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

 

 
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Other operating expenses include our corporate expenses as a holding company and operating expenses of Cosi. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company. Cosi operating expenses primarily include commissions paid to brokers, employment costs, and consulting costs.

 

Product Lines

 

Our product lines include the following:

 

Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies.

 

 Commercial liability: Through July 2019, we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan’s liability policies for small independent contractors with smaller sized workforces.  In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies.

 

In May 2019, due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business. In July 2019, due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks. In force policies for these lines are being non-renewed at the end of their current annual terms. For the three months and six months ended June 30, 2020, these policies represent approximately 3.0% and 4.6%, respectively of net premiums earned and as of June 30, 2020, 41.7% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

 

Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.

 

Other:  We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations.

 

Key Measures

 

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

 

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

 

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

 

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

 

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

 

Distribution Channels

 

During 2019, we initiated an alternative distribution program through Cosi (“Alternative Distribution”). The goal of this program is to enhance our personal lines distribution channel to include nationally recognized name-brand carriers along with nationwide call center and digital insurance agencies. While still in early stages of development, the impact of this initiative can be measured by the amount of new premiums written compared to total premiums written, which includes renewals from our independent agency network. The table below shows premiums written by distribution channel for our homeowners and dwelling fire components of personal lines.

   

 

 

Three months ended

 

 

Three months ended

 

 

Six months ended

 

 

Six months ended

 

($ in thousands)

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Direct Written Pemiums

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Independent

 

$31,282

 

 

 

75.5%

 

$30,746

 

 

 

80.9%

 

$58,427

 

 

 

77.1%

 

$57,281

 

 

 

84.2%

Expansion Independent (1)

 

 

8,100

 

 

 

19.5%

 

 

6,272

 

 

 

16.5%

 

 

13,342

 

 

 

17.6%

 

 

9,492

 

 

 

14.0%

Alternative Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

through Cosi

 

 

2,078

 

 

 

5.0%

 

 

964

 

 

 

2.5%

 

 

4,057

 

 

 

5.4%

 

 

1,243

 

 

 

1.8%

Total

 

$41,460

 

 

 

100.0%

 

$37,982

 

 

 

100.0%

 

$75,826

 

 

 

100.0%

 

$68,016

 

 

 

100.0%

 

(1) Outside of New York

 

(Percent components may not sum to totals due to rounding)

 

For the three months ended June 30, 2020 and 2019, Alternative Distribution made up 5.0% and 2.5% of direct written premiums for our homeowners and dwelling fire components of personal lines. As discussed above, on July 10, 2020, KICO’s A.M. Best Financial Strength Rating was downgraded from A- (Excellent) to B++ (Good),. We believe this action will result in a material decrease in the business from Cosi, a multi-state licensed general agent that had partnered with name-brand carriers which require an A.M. Best rating of A- (Excellent) from its partners.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our condensed consolidated financial statements and related notes. In preparing these condensed consolidated financial statements, our management has utilized information including our past history, industry standards, the current economic environment, and other factors, in forming its estimates and judgments for certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of similar companies.

 

 
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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.

 

Consolidated Results of Operations

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

 

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

 

 

 

Six months ended June 30,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Percent

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct written premiums

 

$79,347

 

 

$82,310

 

 

$(2,963)

 

 

(3.6) %

Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

n/a

%

 

 

 

79,347

 

 

 

82,310

 

 

 

(2,963)

 

 

(3.6)%

Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded to quota share treaties

 

 

15,600

 

 

 

5,963

 

 

 

9,637

 

 

 

161.6%

Ceded to excess of loss treaties

 

 

947

 

 

 

833

 

 

 

114

 

 

 

13.7%

Ceded to catastrophe treaties

 

 

11,519

 

 

 

8,532

 

 

 

2,987

 

 

 

35.0%

Total ceded written premiums

 

 

28,066

 

 

 

15,328

 

 

 

12,738

 

 

 

83.1%

Net written premiums

 

 

51,281

 

 

 

66,982

 

 

 

(15,701)

 

 

(23.4) %

Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

5,377

 

 

 

(6,456)

 

 

11,833

 

 

 

n/a

%

Ceded to quota share treaties

 

 

(3,080)

 

 

271

 

 

 

(3,351)

 

 

n/a

%

Change in net unearned premiums

 

 

2,297

 

 

 

(6,185)

 

 

8,482

 

 

 

n/a

%

Premiums earned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

84,724

 

 

 

75,854

 

 

 

8,870

 

 

 

11.7%

Ceded to reinsurance treaties

 

 

(31,146)

 

 

(15,057)

 

 

(16,089)

 

 

106.9%

Net premiums earned

 

 

53,578

 

 

 

60,797

 

 

 

(7,219)

 

 

(11.9)%

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding the effect of catastrophes

 

 

7,311

 

 

 

1,953

 

 

 

5,358

 

 

 

274.3%

Effect of catastrophes

 

 

-

 

 

 

-

 

 

 

-

 

 

n/a

%

Total ceding commission revenue

 

 

7,311

 

 

 

1,953

 

 

 

5,358

 

 

 

274.3%

Net investment income

 

 

3,278

 

 

 

3,343

 

 

 

(65)

 

 

(1.9)%

Net (losses) gains on investments

 

 

(3,746)

 

 

2,714

 

 

 

(6,460)

 

 

(238.0)%

Other income

 

 

1,313

 

 

 

696

 

 

 

617

 

 

 

88.6%

Total revenues

 

 

61,734

 

 

 

69,503

 

 

 

(7,769)

 

 

(11.2)%

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

37,081

 

 

 

46,164

 

 

 

(9,083)

 

 

(19.7)%

Losses from catastrophes (1)

 

 

2,338

 

 

 

7,264

 

 

 

(4,926)

 

 

(67.8)%

Total direct and assumed loss and loss adjustment expenses

 

 

39,419

 

 

 

53,428

 

 

 

(14,009)

 

 

(26.2)%

Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrop hes

 

 

9,592

 

 

 

5,859

 

 

 

3,733

 

 

 

63.7%

Losses from catastrophes (1)

 

 

628

 

 

 

763

 

 

 

(135)

 

 

(17.7)%

Total ceded loss and loss adjustment expenses

 

 

10,220

 

 

 

6,622

 

 

 

3,598

 

 

 

54.3%

Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

27,489

 

 

 

40,305

 

 

 

(12,816)

 

 

(31.8)%

Losses from catastrophes (1)

 

 

1,710

 

 

 

6,501

 

 

 

(4,791)

 

 

(73.7)%

Net loss and loss adjustment expenses

 

 

29,199

 

 

 

46,806

 

 

 

(17,607)

 

 

(37.6)%

Commission expense

 

 

15,750

 

 

 

14,153

 

 

 

1,597

 

 

 

11.3 %

Other underwriting expenses

 

 

13,087

 

 

 

11,552

 

 

 

1,535

 

 

 

13.3%

Other operating expenses

 

 

2,984

 

 

 

2,069

 

 

 

915

 

 

 

44.2%

Depreciation and amortization

 

 

1,360

 

 

 

1,230

 

 

 

130

 

 

 

10.6%

Interest expense

 

 

913

 

 

 

913

 

 

 

-

 

 

-

%

Total expenses

 

 

63,294

 

 

 

76,723

 

 

 

(13,430)

 

 

(17.5)%

Loss before taxes

 

 

(1,560)

 

 

(7,220)

 

 

5,660

 

 

 

(78.4) %

Income tax benefit

 

 

(724)

 

 

(1,524)

 

 

800

 

 

 

(52.5)%

Net loss

 

$(836)

 

$(5,696)

 

$4,860

 

 

 

(85.3)%

 

(1)

The six months ended June 30, 2020 and 2019 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.

 

 
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Six months ended June 30,

 

 

 

2020

 

 

2019

 

 

Percentage Point Change

 

 

 Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

54.5%

 

 

77.0%

 

 

(22.5)

 

 

(29.2)%

Net underwriting expense ratio

 

 

39.2%

 

 

38.0%

 

 

1.2

 

 

 

3.2%

Net combined ratio

 

 

93.7%

 

 

115.0%

 

 

(21.3)

 

 

(18.5)%

 

Direct Written Premiums

 

Direct written premiums during the six months ended June 30, 2020 (“Six Months 2020”) were $79,347,000 compared to $82,310,000 during the six months ended June 30, 2019 (“Six Months 2019”). The decrease of $2,963,000, or 3.6%, was primarily due to an $8,580,000 decrease in premiums from our commercial lines business as result of our decision in July 2019 to no longer underwrite this line of business. Direct written premiums from our personal lines business for Six Months 2020 were $75,958,000, an increase of $7,811,000, or 11.5%, from $68,147,000 in Six Months 2019. 

 

            Beginning in 2017 we started writing homeowners policies in New Jersey. Through 2019 we expanded to Rhode Island, Massachusetts and Connecticut. We refer to our New York business as our “Core” business and the business outside of New York as our “Expansion” business. Direct written premiums from our Expansion business were $15,095,000 in Six Months 2020 compared to $9,529,000 in Six Months 2019. 

 

Net Written Premiums and Net Premiums Earned

 

Through June 30, 2019, our quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). Our personal lines quota share reinsurance treaty in effect for Six Months 2019 was covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Six Months 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”). The following table describes the quota share reinsurance ceding rates in effect for each treaty year during Six Months 2020 and Six Months 2019 under the 2019/2020 Treaty and the 2017/2019 Treaty, respectively. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.

 

 

 

Six months ended June 30,

 

 

 

2020

 

2019

 

 

 

("2019/2020 Treaty")

 

("2018/2019 Treaty Year")

 

 

 

 

 

 

 

Quota share reinsurance rates

 

 

 

 

 

Personal lines

 

25%

(2) 

 

10%

(1)

  

 

(1)

The 2018/2019 Treaty Year, covered under the 2017/2019 Treaty, expired on a run-off basis effective July 1, 2019 through June 30, 2020 (the “2019 Run-off”).

 

 

 

 

(2)

The 2019/2020 Treaty was effective December 15, 2019 with a quota share reinsurance rate of 25%.
See “Reinsurance” below for changes to our personal lines quota share treaty effective December 15, 2019, and July 1, 2019 and 2018.

  

 
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Net written premiums decreased $15,701,000, or 23.4%, to $51,281,000 in Six Months 2020 from $66,982,000 in Six Months 2019. 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). The decrease in net written premiums in Six Months 2020 was attributable to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums, which are not subject to a quota share treaty. In Six Months 2020, our premiums ceded under quota share treaties increased by $9,637,000 over the comparable ceded premiums in Six Months 2019. Our personal lines business was subject to the 2017/2019 Treaty under the 2018/2019 Treaty Year through June 30, 2019. Following June 30, 2019, any earned premium and associated claims for policies still in force will continue to be ceded under the 10% quota share rate until such policies expire (run-off) over the next year. The 2019 Run-off period is from July 1, 2019 through June 30, 2020 and there was no return of unearned premiums under this arrangement.

 

Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Six Months 2020, our ceded excess of loss reinsurance premiums increased by 114,000 over the comparable ceded premiums for Six Months 2019. The increase was due to an increase in premiums subject to excess of loss reinsurance.

 

Catastrophe reinsurance treaties

 

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Six Months 2020, our premiums ceded under catastrophe treaties increased by $2,987,000 over the comparable ceded premiums in Six Months 2019. The change was due to an increase in our catastrophe limit purchased, an increase in premiums subject to catastrophe reinsurance due to continued growth of our personal lines business, and an increase in reinsurance rates effective July 1, 2019. Our ceded catastrophe premiums are paid based on the total direct written premiums subject to the catastrophe reinsurance treaty. 

 

Net premiums earned

 

Net premiums earned decreased $7,219,000, or 11.9%, to $53,578,000 in Six Months 2020 from $60,797,000 in Six Months 2019. The decrease was due to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums, which are not subject to a quota share treaty.

   

 
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Ceding Commission Revenue

 

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

 

 

 

Six months ended June 30,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$7,161

 

 

$2,681

 

 

$4,480

 

 

 

167.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent ceding commissions earned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent ceding commissions earned excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

 

150

 

 

 

(728)

 

 

878

 

 

 

n/a

Effect of catastrophes on ceding commissions earned

 

 

-

 

 

 

-

 

 

 

-

 

 

 

n/a

 

Contingent ceding commissions earned

 

 

150

 

 

 

(728)

 

 

878

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$7,311

 

 

$1,953

 

 

$5,358

 

 

 

274.3%

  

Ceding commission revenue was $7,311,000 in Six Months 2020 compared to $1,953,000 in Six Months 2019. The increase of $5,358,000, or 274.3%, was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. The increase in provisional ceding commissions occurred due to the increase in quota share reinsurance rates effective December 15, 2019 (see below for discussion of provisional ceding commissions earned and contingent ceding commissions earned).

 

Provisional Ceding Commissions Earned

 

We receive a provisional ceding commission based on ceded written premiums. The $4,480,000 increase in provisional ceding commissions earned is primarily due to the increase in the quota share ceding rate effective December 15, 2019 to 25%, from the 10% rate in effect in Six Months 2019. There was an increase in ceded premiums in Six Months 2020 available from which to earn ceding commissions compared to Six Months 2019 due to the changes in quota share ceding rates and an increase in personal lines direct written premiums subject to the quota share.

 

Contingent Ceding Commissions Earned

 

The 2019/2020 Treaty and 2017/2019 Treaty structure calls for a higher upfront provisional ceding commission and there is not an opportunity to earn additional contingent ceding commissions under these treaties. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2017. Under our prior years’ quota share treaties, we received 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.

 

Net Investment Income

 

Net investment income was $3,278,000 in Six Months 2020 compared to $3,343,000 in Six Months 2019, a decrease of $65,000, or 1.9%. The average yield on invested assets was 3.53% as of June 30, 2020 compared to 3.64% as of June 30, 2019. The pre-tax equivalent yield on invested assets was 3.09% and 3.43% as of June 30, 2020 and 2019, respectively.

 

 
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Cash and invested assets were $218,739,000 as of June 30, 2020 compared to $212,130,000 as of June 30, 2019. The $6,608,000 increase in cash and invested assets was primarily attributable to an increase in operating cash flows for the periods after June 30, 2019.

 

Net Gains and Losses on Investments

 

Net losses on investments were $3,746,000 in Six Months 2020 compared to a net gain of $2,714,000 in Six Months 2019. Unrealized losses on our equity securities and other investments in Six Months 2020 were $4,022,000, compared to unrealized gains of $2,713,000 in Six Months 2019.  Realized gains on sales of investments were $275,000 in Six Months 2020 compared to $1000 in Six Months 2019. Unrealized losses in Six Months 2020 were due to the market fluctuations related to the Covid-19 pandemic.

 

Other Income

 

Other income was $1,313,000 in Six Months 2020 compared to $696,000 in Six Months 2019. The increase of $617,000, or 88.6%, was primarily due to commission revenue from Cosi.

 

Net Loss and LAE

 

Net loss and LAE was $29,199,000 in Six Months 2020 compared to $48,806,000 in Six Months 2019. The net loss ratio was 54.5% in Six Months 2020 compared to 77.0% in Six Months 2019, an improvement of 22.5 percentage points.

 

 
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The following graph summarizes the changes in the components of net loss ratio for the periods indicated, along with the comparable components excluding commercial lines business: 

 

    kins_10qimg9.jpg

 

(Components may not sum to totals due to rounding)

 

During Six Months 2020, the loss ratio improved 22.5 points, from 77.0% in Six Months 2019 to 54.5% in Six Months 2020.  The loss ratio improved due to several factors, including a reduction in the impact of winter weather catastrophes, reduced impact from prior year loss development, and an improvement in the core loss ratio driven by reductions in claim frequency affecting both personal lines and Auto Physical Damage. 

 

Prior year development has been slightly favorable for the Six Months 2020, with a 0.3 points of favorable impact on the overall loss ratio.  The favorable loss development for the Six Months 2020 compares to 10.0 points of unfavorable impact in the Six Months 2019, which was primarily related to adverse loss development from commercial lines business, now in runoff.  The impact of prior year development was 10.3 points more favorable in Six Months 2020 compared to the prior year period. 

 

The impact of catastrophe losses was lower in Six Months 2020 when compared to the prior period.  In the Six Months 2020 there was a much smaller impact from winter catastrophes events than in 2019.  Catastrophe events through Six Months 2020 had a 3.2 point impact on the loss ratio, as compared to a 10.7 impact from catastrophe events in the Six Months 2019, or a decrease in the impact from catastrophe events of 7.5 points compared to the prior period.

 

 
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The underlying loss ratio (loss ratio excluding the impact of catastrophes and prior year development) was 51.6% for the Six Months 2020, a decrease of 4.7 points from the 56.3% underlying loss ratio recorded for Six Months 2019.  The improvement was primarily due to reduced core claim frequency in personal lines and reduced claim frequency in the Auto Physical Damage line.  Excluding commercial lines, the underlying loss ratio improved 3.5 points, from 53.1% for Six Months 2019 to 49.6% for the Six Months 2020. 

 

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

 

Commission Expense

 

Commission expense was $15,750,000 in Six Months 2020 or 18.6% of direct earned premiums. Commission expense was $14,153,000 in Six Months 2019 or 18.7% of direct earned premiums. The increase of $1,597,000 is primarily due to the increase in direct earned premiums for Six Months 2020 as compared to Six Months 2019.

 

Other Underwriting Expenses

 

Other underwriting expenses were $13,087,000 in Six Months 2020 compared to $11,552,000 in Six Months 2019. The increase of $1,535,000, or 13.3%, was primarily due to expenses related to growth in personal lines direct written premiums and salaries. Expenses directly related to the increase in personal lines direct written premiums primarily consist of underwriting expenses, software usage fees, and state premium taxes. Expenses indirectly related to the increase in personal lines direct written premiums primarily consist of salaries along with related other employment costs.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $5,342,000 in Six Months 2020 compared to $4,899,000 in Six Months 2019. The increase of $443,000, or 9.0%, was less than the 11.5% increase in personal lines direct written premiums. The increase in employment costs was attributable to the hiring of additional highly experienced management, offset by staff reductions. 

 

 
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Our net underwriting expense ratio in Six Months 2020 was 39.2% compared to 38.0% in Six Months 2019. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

 Six months ended

 

 

 

 

 

 June 30, 

 

 

Percentage

 

 

 

 2020

 

 

 2019

 

 

 Point Change

 

 

 

 

 

 

 

 

 

 

 

Other underwriting expenses 

 

 

 

 

 

 

 

 

 

Employment costs

 

 

10.0%

 

 

8.1%

 

 

1.9

 

Underwriting fees (inspections/data services)

 

 

3.0

 

 

 

2.4

 

 

 

0.6

 

Other expenses

 

 

11.4

 

 

 

8.5

 

 

 

2.9

 

Total other underwriting expenses

 

 

24.4

 

 

 

19.0

 

 

 

5.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(13.4)

 

 

(4.4)

 

 

(9.0)

Contingent

 

 

(0.3)

 

 

1.2

 

 

 

(1.5)

Total ceding commission revenue

 

 

(13.7)

 

 

(3.2)

 

 

(10.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(0.9)

 

 

(1.1)

 

 

0.2

 

Commission expense

 

 

29.4

 

 

 

23.3

 

 

 

6.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

39.2%

 

 

38.0%

 

 

1.2

 

 

The overall 9.0 percentage point increase in the benefit from provisional ceding commissions was driven entirely by the change in our quota share ceding rates and its impact on provisional ceding commission revenue due to less retention beginning with the inception of the 2019/2020 Treaty on December 15, 2019, resulting in an increase in provisional ceding commissions. The components of our net underwriting expense ratio related to other underwriting expenses, other income and commissions increased in all categories due to less retention beginning with the inception of 2019/2020 Treaty on December 15, 2019, resulting in an overall 1.2 percentage point increase in the net underwriting expense ratio.

 

Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $2,983,000 for Six Months 2020 compared to $2,069,000 for Six Months 2019. The increase in Six Months 2020 of $914,000, or 44.2%, as compared to Six Months 2019 was primarily due to increases in equity compensation, commissions incurred by Cosi and professional fees. The increase in equity compensation was due to an annual restricted stock award pursuant to the employment agreement with Barry B. Goldstein, our Chief Executive Officer.

 

Depreciation and Amortization

 

Depreciation and amortization was $1,360,000 in Six Months 2020 compared to $1,230,000 in Six Months 2019. The increase of $130,000, or 10.6%, in depreciation and amortization was primarily due to depreciation of our new systems platform for handling business being written in Expansion states, newly purchased assets used to upgrade our systems infrastructure and improvements to the Kingston, New York home office building from which we operate.

 

 
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Interest Expense

 

Interest expense was $913,000 for both Six Months 2020 and Six Months 2019. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017. 

 

Income Tax Benefit

 

Income tax benefit in Six Months 2020 was $724,000, which resulted in an effective tax benefit rate of 46.4%. Income tax benefit in Six Months 2019 was $1,524,000, which resulted in an effective tax benefit rate of 21.1%. Loss before taxes was $1,560,000 in Six Months 2020 compared to loss before taxes of $7,220,000 in Six Months 2019. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. We will elect on our 2019 federal income tax return to carry back the 2019 NOL of $7,222,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.

 

Net Loss

 

Net loss was $836,000 in Six Months 2020 compared to net loss of $5,696,000 in Six Months 2019. The decrease in net loss of $4,860,000 was due to the circumstances described above, which caused the decrease in our net loss ratio, increase in ceding commission revenue and other income, partially offset by the decrease in our net premiums earned, and increases in net losses on investments, other underwriting and operating expenses, and depreciation and amortization.

 

 
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Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

 

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

 

 

 

Three months ended June 30,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

 Percent

 

Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct written premiums

 

$42,650

 

 

$44,821

 

 

$(2,171)

 

 

(4.8)%

 Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

n/a

%

 

 

 

42,650

 

 

 

44,821

 

 

 

(2,171)

 

 

(4.8)%

 Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded to quota share treaties

 

 

8,502

 

 

 

3,304

 

 

 

5,198

 

 

 

157.3%

 Ceded to excess of loss treaties

 

 

452

 

 

 

429

 

 

 

23

 

 

 

5.4%

 Ceded to catastrophe treaties

 

 

5,606

 

 

 

4,467

 

 

 

1,139

 

 

 

25.5%

 Total ceded written premiums

 

 

14,560

 

 

 

8,200

 

 

 

6,360

 

 

 

77.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net written premiums

 

 

28,090

 

 

 

36,621

 

 

 

(8,531)

 

 

(23.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

(527)

 

 

(5,828)

 

 

5,301

 

 

 

(91.0)%

 Ceded to quota share treaties

 

 

(926)

 

 

408

 

 

 

(1,334)

 

 

n/a

%

 Change in net unearned premiums

 

 

(1,453)

 

 

(5,420)

 

 

3,967

 

 

 

(73.2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Premiums earned 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

42,123

 

 

 

38,993

 

 

 

3,130

 

 

 

8.0%

 Ceded to reinsurance treaties

 

 

(15,486)

 

 

(7,792)

 

 

(7,694)

 

 

98.7%

 Net premiums earned 

 

 

26,637

 

 

 

31,201

 

 

 

(4,564)

 

 

(14.6)%

 Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Excluding the effect of catastrophes

 

 

3,480

 

 

 

675

 

 

 

2,805

 

 

 

415.6%

 Effect of catastrophes

 

 

-

 

 

 

-

 

 

 

-

 

 

n/a

%

 Total ceding commission revenue

 

 

3,480

 

 

 

675

 

 

 

2,805

 

 

 

415.6%

 Net investment income 

 

 

1,612

 

 

 

1,719

 

 

 

(107)

 

 

(6.2)%

 Net gains on investments 

 

 

2,698

 

 

 

679

 

 

 

2,019

 

 

 

297.3%

 Other income

 

 

683

 

 

 

330

 

 

 

353

 

 

 

107.0%

 Total revenues 

 

 

35,110

 

 

 

34,604

 

 

 

506

 

 

 

1.5%

Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

15,109

 

 

 

19,521

 

 

 

(4,412)

 

 

(22.6)%

 Losses from catastrophes (1)

 

 

2,057

 

 

 

1,637

 

 

 

420

 

 

 

25.7%

 Total direct and assumed loss and loss adjustment expenses 

 

 

17,166

 

 

 

21,158

 

 

 

(3,992)

 

 

(18.9)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

3,808

 

 

 

3,287

 

 

 

521

 

 

 

15.9%

 Losses from catastrophes (1)

 

 

545

 

 

 

199

 

 

 

346

 

 

 

173.9%

 Total ceded loss and loss adjustment expenses 

 

 

4,353

 

 

 

3,486

 

 

 

867

 

 

 

24.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

11,301

 

 

 

16,234

 

 

 

(4,933)

 

 

(30.4)%

 Losses from catastrophes (1)

 

 

1,512

 

 

 

1,438

 

 

 

74

 

 

 

5.1%

 Net loss and loss adjustment expenses 

 

 

12,813

 

 

 

17,672

 

 

 

(4,859)

 

 

(27.5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commission expense 

 

 

7,851

 

 

 

7,300

 

 

 

551

 

 

 

7.5%

 Other underwriting expenses 

 

 

6,325

 

 

 

5,416

 

 

 

909

 

 

 

16.8%

 Other operating expenses 

 

 

1,420

 

 

 

1,097

 

 

 

323

 

 

 

29.4%

 Depreciation and amortization

 

 

673

 

 

 

628

 

 

 

45

 

 

 

7.2%

 Interest expense

 

 

456

 

 

 

456

 

 

 

-

 

 

-

%

 Total expenses 

 

 

29,539

 

 

 

32,569

 

 

 

(3,031)

 

 

(9.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Income before taxes

 

 

5,571

 

 

 

2,035

 

 

 

3,536

 

 

 

173.8%

 Income tax expense

 

 

963

 

 

 

396

 

 

 

567

 

 

 

143.2%

Net income

 

$4,608

 

 

$1,639

 

 

$2,969

 

 

 

181.1%

 

(1) The three months ended June 30, 2020 and 2019 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers. 

 

 
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Three months ended June 30,

 

 

 

2020

 

 

2019

 

 

Percentage Point Change

 

 

 Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss ratio

 

 

48.1%

 

 

56.6%

 

 

(8.5)

 

 

(15.0)%

 Net underwriting expense ratio

 

 

39.2%

 

 

37.5%

 

 

1.7

 

 

 

4.5%

 Net combined ratio

 

 

87.3%

 

 

94.1%

 

 

(6.8)

 

 

(7.2)%

 

Direct Written Premiums

 

Direct written premiums during the three months ended June 30, 2020 (“Three Months 2020”) were $42,650,000 compared to $44,821,000 during the three months ended June 30, 2019 (“Three Months 2019”). The decrease of $2,171,000, or 4.8%, was primarily due to a $3,866,000 decrease in premiums from our commercial lines business as result of our decision in July 2019 to no longer underwrite this line of business. Direct written premiums from our personal lines business for Three Months 2020 were $41,523,000, an increase of $3,475,000, or 9.1%, from $38,048,000 in Three Months 2019. 

Beginning in 2017 we started writing homeowners policies in New Jersey. Through 2019 we expanded to Rhode Island, Massachusetts and Connecticut. We refer to our New York business as our “Core” business and the business outside of New York as our “Expansion” business. Direct written premiums from our Expansion business were $8,760,000 in Three Months 2020 compared to $6,297,000 in Three Months 2019. 

 

Net Written Premiums and Net Premiums Earned

 

Through June 30, 2019, our quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). Our personal lines quota share reinsurance treaty in effect for Three Months 2019 was covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Three Months 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”). The following table describes the quota share reinsurance ceding rates in effect for each treaty year during Three Months 2020 and Three Months 2019 under the 2019/2020 Treaty and the 2017/2019 Treaty, respectively. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.

 

 

 Three months ended June 30,

 

2020

 

2019

 

("2019/2020

Treaty")

 

("2018/2019

Treaty Year")

 

 

 

 

Quota share reinsurance rates

 

 

 

 Personal lines

25% (2)

 

10% (1)

 

 

(1)

The 2018/2019 Treaty Year, covered under the 2017/2019 Treaty, expired on a run-off basis effective July 1, 2019 through June 30, 2020 (the “2019 Run-off”).

 

 

 

 

(2)

The 2019/2020 Treaty was effective December 15, 2019 with a quota share reinsurance rate of 25%. See “Reinsurance” below for changes to our personal lines quota share treaty effective December 15, 2019, and July 1, 2019 and 2018.

 

 
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Net written premiums decreased $8,531,000, or 23.3%, to $28,090,000 in Three Months 2020 from $36,621,000 in Three Months 2019. 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). The decrease in net written premiums in Three Months 2020 was attributable to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums, which are not subject to a quota share treaty. In Three Months 2020, our premiums ceded under quota share treaties increased by $5,198,000 over the comparable ceded premiums in Three Months 2019. Our personal lines business was subject to the 2017/2019 Treaty under the 2018/2019 Treaty Year through June 30, 2019. Following June 30, 2019, any earned premium and associated claims for policies still in force will continue to be ceded under the 10% quota share rate until such policies expire (run-off) over the next year. The 2019 Run-off period is from July 1, 2019 through June 30, 2020 and there was no return of unearned premiums under this arrangement.

 

Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2020, our ceded excess of loss reinsurance premiums increased by $23,000 over the comparable ceded premiums for Three Months 2019. The increase was due to an increase in premiums subject to excess of loss reinsurance.

 

Catastrophe reinsurance treaties

 

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Three Months 2020, our premiums ceded under catastrophe treaties increased by $1,140,000 over the comparable ceded premiums in Three Months 2019. The change was due to an increase in our catastrophe limit purchased, an increase in premiums subject to catastrophe reinsurance due to continued growth of our personal lines business, and an increase in reinsurance rates effective July 1, 2019. Our ceded catastrophe premiums are paid based on the total direct written premiums subject to the catastrophe reinsurance treaty. 

 

Net premiums earned

 

Net premiums earned decreased $4,564,000, or 14.6%, to $26,637,000 in Three Months 2020 from $31,201,000 in Three Months 2019. The decrease was due to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums, which are not subject to a quota share treaty.

 

 
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Ceding Commission Revenue

 

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

 

 

 

Three months ended June 30,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$3,441

 

 

$1,363

 

 

$2,078

 

 

 

152.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent ceding commissions earned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Contingent ceding commissions earned excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 the effect of catastrophes

 

 

39

 

 

 

(688)

 

 

727

 

 

 

n/a

 Effect of catastrophes on ceding commissions earned

 

 

-

 

 

 

-

 

 

 

-

 

 

 

n/a

 

 Contingent ceding commissions earned

 

 

39

 

 

 

(688)

 

 

727

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$3,480

 

 

$675

 

 

$2,805

 

 

 

415.6%

 

Ceding commission revenue was $3,480,000 in Three Months 2020 compared to $675,000 in Three Months 2019. The increase of $2,805,000, or 415.6%, was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. The increase in provisional ceding commissions occurred due to the increase in quota share reinsurance rates effective December 15, 2019 (see below for discussion of provisional ceding commissions earned and contingent ceding commissions earned).

 

Provisional Ceding Commissions Earned

 

We receive a provisional ceding commission based on ceded written premiums. The $2,078,000 increase in provisional ceding commissions earned is primarily due to the increase in the quota share ceding rate effective December 15, 2019 to 25%, from the 10% rate in effect in Three Months 2019. There was an increase in ceded premiums in Three Months 2020 available from which to earn ceding commissions compared to Three Months 2019 due to the changes in quota share ceding rates and an increase in personal lines direct written premiums subject to the quota share.

 

Contingent Ceding Commissions Earned

 

The 2019/2020 Treaty and 2017/2019 Treaty structure calls for a higher upfront provisional ceding commission and there is not an opportunity to earn additional contingent ceding commissions under these treaties. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2017. Under our prior years’ quota share treaties, we received 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.

 

 
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Net Investment Income

 

Net investment income was $1,612,000 in Three Months 2020 compared to $1,719,000 in Three Months 2019, a decrease of $107,000, or 6.2%. The average yield on invested assets was 3.53% as of June 30, 2020 compared to 3.64% as of June 30, 2019. The pre-tax equivalent yield on invested assets was 3.09% and 3.43% as of June 30, 2020 and 2019, respectively.

 

Cash and invested assets were $218,739,000 as of June 30, 2020 compared to $212,130,000 as of June 30, 2019. The $6,608,000 increase in cash and invested assets was primarily attributable to an increase in operating cash flows for the periods after June 30, 2019.

 

Net Gains and Losses on Investments

 

Net gains on investments were $2,697,000 in Three Months 2020 compared to $679,000 in Three Months 2019. Unrealized losses on our equity securities and other investments in Three Months 2020 were $2,732,000, compared to unrealized gains of $628,000 in Three Months 2019.  Realized losses on sales of investments were $35,000 in Three Months 2020 compared to $50,000 in Three Months 2019.

 

Other Income

 

Other income was $683,000 in Three Months 2020 compared to $330,000 in Three Months 2019. The increase of $353,000, or 107.0%, was primarily due to commission revenue from Cosi.

 

Net Loss and LAE

 

Net loss and LAE was $12,813,000 in Three Months 2020 compared to $17,672,000 in Three Months 2019. The net loss ratio was 48.1% in Three Months 2020 compared to 56.6% in Three Months 2019, an improvement of 8.5 percentage points.

 

 
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The following graph summarizes the changes in the components of net loss ratio for the periods indicated, along with the comparable components excluding commercial lines business: 

 kins_10qimg8.jpg

 

(Components may not sum to totals due to rounding)

 

During Three Months 2020, the loss ratio improved 8.5 points, from 56.6% in Three Months 2019 to 48.1%.  The loss ratio improved due to decreased claim frequency affecting both personal lines and auto physical damage, as well as a reduction in the impact of prior year loss development.  This was partially offset by an increase in the impact of catastrophe losses for the quarter ended June 30, 2020. 

 

Prior year development was slightly favorable in Three Months 2020, with a 0.2 point favorable impact to the overall loss ratio.  This was the third consecutive quarter of stable prior year loss development.  The favorable loss development for Three Months 2020 compares to 5.0 points of unfavorable impact in Three Months 2019, which was primarily related to adverse loss development from commercial lines business, now in runoff.  The impact of prior year development was 5.2 points more favorable in Three Months 2020 compared to the prior year period. 

 

 
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The impact of catastrophe losses was slightly greater in Three Months 2020 when compared to Three Months 2019.  In the Three Months 2020 there were several small cat events and one larger wind event in April.  These events had a 5.7 point impact on the loss ratio for the quarter.  This compares to a 4.6 impact from catastrophe events in the Three Months 2019, or an increase in impact from catastrophe events of 1.1 points compared to the prior period.

 

The underlying loss ratio (loss ratio excluding the impact of catastrophes and prior year development) was 42.6% for Three Months 2020, a decrease of 4.5 points from the 47.1% underlying loss ratio recorded for Three Months 2019.  The improvement was primarily due to reduced core claim frequency in personal lines, and well as a large reduction in claims frequency in the Auto Physical Damage line.  Excluding commercial lines, the underlying loss ratio improved 1.3 points, from 43.5% for Three Months 2019 to 42.2% for Three Months 2020. 

 

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

 

Commission Expense

 

Commission expense was $7,851,000 in Three Months 2020 or 18.6% of direct earned premiums. Commission expense was $7,300,000 in Three Months 2019 or 18.7% of direct earned premiums. The increase of $551,000 is primarily due to the increase in direct earned premiums for Three Months 2020 as compared to Three Months 2019.

 

Other Underwriting Expenses

 

Other underwriting expenses were $6,325,000 in Three Months 2020 compared to $5,416,000 in Three Months 2019. The increase of $909,000, or 16.8%, was primarily due to expenses related to growth in personal lines direct written premiums. Expenses directly related to the increase in personal lines direct written premiums primarily consist of underwriting expenses, software usage fees, and state premium taxes. Expenses indirectly related to the increase in personal lines direct written premiums primarily consist of salaries along with related other employment costs.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $2,602,000 in Three Months 2020 compared to $2,347,000 in Three Months 2019. The increase of $255,000, or 10.9%, was more than the 9.1% increase in personal lines direct written premiums. The increase in employment costs was attributable to the hiring of additional highly experienced management, offset by staff reductions. 

 

 
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Our net underwriting expense ratio in Three Months 2020 was 39.2% compared to 37.5% in Three Months 2019. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

 Three months ended

 

 

 

 

 

June 30,

 

 

Percentage

 

 

 

 2020

 

 

 2019

 

 

Point Change

 

 

 

 

 

 

 

 

 

 

 

 Other underwriting expenses 

 

 

 

 

 

 

 

 

 

Employment costs

 

 

9.8%

 

 

7.5

 

 

 

2.3

 

Underwriting fees (inspections/data services)

 

 

2.9

 

 

 

2.4

 

 

 

0.5

 

Other expenses

 

 

11.0

 

 

 

7.5

 

 

 

3.5

 

Total other underwriting expenses

 

 

23.7

 

 

 

17.4

 

 

 

6.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(12.9)

 

 

(4.4)

 

 

(8.5)

Contingent

 

 

(0.1)

 

 

2.2

 

 

 

(2.3)

Total ceding commission revenue

 

 

(13.0)

 

 

(2.2)

 

 

(10.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(1.0)

 

 

(1.1)

 

 

0.1

 

Commission expense

 

 

29.5

 

 

 

23.4

 

 

 

6.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

39.2%

 

 

37.5

 

 

 

1.7

 

 

The overall 8.5 percentage point increase in the benefit from provisional ceding commissions was driven entirely by the change in our quota share ceding rates and its impact on provisional ceding commission revenue due to less retention beginning with the inception of the 2019/2020 Treaty on December 15, 2019, resulting in an increase in provisional ceding commissions. The components of our net underwriting expense ratio related to other underwriting expenses, other income and commissions increased in all categories due to less retention beginning with the inception of 2019/2020 Treaty on December 15, 2019, resulting in an overall 1.7 percentage point increase in the net underwriting expense ratio.

 

Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $1,420,000 for Three Months 2020 compared to $1,097,000 for Three Months 2019. The increase in Three Months 2020 of $323,000, or 29.4%, as compared to Three Months 2019 was primarily due to increases in equity compensation, commissions incurred by Cosi and professional fees. The increase in equity compensation was due to an annual restricted stock award pursuant to the employment agreement with Barry B. Goldstein, our Chief Executive Officer.

 

 
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Depreciation and Amortization

 

Depreciation and amortization was $673,000 in Three Months 2020 compared to $628,000 in Three Months 2019. The increase of $45,000, or 7.2%, in depreciation and amortization was primarily due to depreciation of our new systems platform for handling business being written in Expansion states, newly purchased assets used to upgrade our systems infrastructure and improvements to the Kingston, New York home office building from which we operate.

  

Interest Expense

 

Interest expense was $456,000 for both Three Months 2020 and Three Months 2019. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017. 

 

Income Tax Expense

 

Income tax expense in Three Months 2020 was $963,000, which resulted in an effective tax expense rate of 17.3%. Income tax expense in Three Months 2019 was $396,000, which resulted in an effective tax expense rate of 19.5%. Income before taxes was $5,571,000 in Three Months 2020 compared to $2,035,000 in Three Months 2019. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. We will elect on our 2019 federal income tax return to carry back the 2019 NOL of $7,222,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.

 

Net Income

 

Net income was $4,608,000 in Three Months 2020 compared to net income of $1,639,000 in Three Months 2019. The increase in net income of $2,969,000 was due to the circumstances described above, which caused the decrease in our net loss ratio, increase in ceding commission revenue, increases in net gains on investments,  and other income, partially offset by the decrease in our net premiums earned, other underwriting and 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 an 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.

 

 
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 For the Three Months Ended

 

 

 For the Six Months Ended

 

 

 

 June 30,

 

 

 June 30,

 

 

 

 2020

 

 

 2019

 

 

 2020

 

 

 2019

 

Gross premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

$41,522,768

 

 

$38,047,987

 

 

$75,957,604

 

 

$68,146,956

 

Livery physical damage

 

 

1,106,405

 

 

 

2,878,749

 

 

 

3,420,806

 

 

 

5,608,835

 

Other(1)

 

 

54,876

 

 

 

61,806

 

 

 

129,731

 

 

 

134,877

 

Total without commercial lines

 

 

42,684,049

 

 

 

40,988,542

 

 

 

79,508,141

 

 

 

73,890,668

 

Commercial lines (in run-off effective July 2019)(2)

 

 

(33,572)

 

 

3,832,848

 

 

 

(160,735)

 

 

8,419,236

 

Total gross premiums written

 

$42,650,477

 

 

$44,821,390

 

 

$79,347,406

 

 

$82,309,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines(3)

 

$27,103,665

 

 

$30,340,230

 

 

$48,315,146

 

 

$53,844,093

 

Livery physical damage

 

 

1,106,405

 

 

 

2,878,749

 

 

 

3,420,806

 

 

 

5,608,835

 

Other(1)

 

 

42,579

 

 

 

45,984

 

 

 

101,158

 

 

 

112,279

 

Total without commercial lines

 

 

28,252,649

 

 

 

33,264,963

 

 

 

51,837,110

 

 

 

59,565,207

 

Commercial lines (in run-off effective July 2019)(2)

 

 

(162,170)

 

 

3,346,540

 

 

 

(555,957)

 

 

7,406,901

 

Total net premiums written

 

$28,090,479

 

 

$36,611,503

 

 

$51,281,153

 

 

$66,972,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines(3)

 

$23,614,240

 

 

$24,828,974

 

 

$46,213,874

 

 

$48,249,848

 

Livery physical damage

 

 

2,182,438

 

 

 

2,620,857

 

 

 

4,789,017

 

 

 

5,138,539

 

Other(1)

 

 

48,999

 

 

 

59,404

 

 

 

99,148

 

 

 

117,421

 

Total without commercial lines

 

 

25,845,677

 

 

 

27,509,235

 

 

 

51,102,039

 

 

 

53,505,808

 

Commercial lines (in run-off effective July 2019)(2)

 

 

791,179

 

 

 

3,692,044

 

 

 

2,476,267

 

 

 

7,291,360

 

Total net premiums earned

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

$10,639,057

 

 

$11,874,563

 

 

$23,153,625

 

 

$32,277,107

 

Livery physical damage

 

 

369,120

 

 

 

1,203,457

 

 

 

1,149,690

 

 

 

2,420,760

 

Other(1)

 

 

(72,436)

 

 

176,091

 

 

 

(23,639)

 

 

326,565

 

Unallocated loss adjustment expenses

 

 

1,242,516

 

 

 

651,142

 

 

 

2,012,328

 

 

 

1,345,792

 

Total without commercial lines

 

 

12,178,257

 

 

 

13,905,253

 

 

 

26,292,004

 

 

 

36,370,224

 

Commercial lines (in run-off effective July 2019)(2)

 

 

635,374

 

 

 

3,767,085

 

 

 

2,907,448

 

 

 

10,436,308

 

Total net loss and loss adjustment expenses

 

$12,813,631

 

 

$17,672,338

 

 

$29,199,452

 

 

$46,806,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

 

45.1%

 

 

47.8%

 

 

50.1%

 

 

66.9%

Livery physical damage

 

 

16.9%

 

 

45.9%

 

 

24.0%

 

 

47.1%

Other(1)

 

 

-147.8%

 

 

296.4%

 

 

-23.8%

 

 

278.1%

Total without commercial lines

 

 

47.1%

 

 

50.5%

 

 

51.5%

 

 

68.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines (in run-off effective July 2019)(2)

 

 

80.3%

 

 

102.0%

 

 

117.4%

 

 

143.1%

Total

 

 

48.1%

 

 

56.6%

 

 

54.5%

 

 

77.0%

 

(1)

“Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory state joint underwriting association and loss and loss adjustment expenses from commercial auto.

(2)

In July 2019, we decided that we will no longer underwrite Commercial Liability risks. See discussions above regarding the discontinuation of this line of business.

(3)

See discussion above with regard to “Net Written Premiums and Net Premiums Earned”, as to changes in quota share ceding rates, effective July 1, 2019 and 2018.

(4)

See discussion above with regard to “Net Loss and LAE”, as to catastrophe losses in the six months ended June 30, 2020 and 2019.

 

 
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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

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

Ceding commission revenue

 

 

3,480,214

 

 

 

675,695

 

 

 

7,311,313

 

 

 

1,953,378

 

Net investment income

 

 

1,611,837

 

 

 

1,697,492

 

 

 

3,277,230

 

 

 

3,297,424

 

Net gains (losses) on investments

 

 

2,655,541

 

 

 

663,586

 

 

 

(3,653,643)

 

 

2,657,149

 

Other income

 

 

261,145

 

 

 

336,854

 

 

 

506,119

 

 

 

651,592

 

Total revenues

 

 

34,645,593

 

 

 

34,574,906

 

 

 

61,019,325

 

 

 

69,356,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

12,813,631

 

 

 

17,672,308

 

 

 

29,199,452

 

 

 

46,806,532

 

Commission expense

 

 

7,850,607

 

 

 

7,299,173

 

 

 

15,749,798

 

 

 

14,152,589

 

Other underwriting expenses

 

 

6,325,472

 

 

 

5,416,449

 

 

 

13,087,264

 

 

 

11,552,440

 

Depreciation and amortization

 

 

639,968

 

 

 

603,690

 

 

 

1,293,870

 

 

 

1,182,043

 

Total expenses

 

 

27,629,678

 

 

 

30,991,620

 

 

 

59,330,384

 

 

 

73,693,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

7,015,915

 

 

 

3,583,286

 

 

 

1,688,941

 

 

 

(4,336,893)

Income tax expense (benefit)

 

 

1,387,003

 

 

 

745,041

 

 

 

179,034

 

 

 

(957,930)

Net income (loss)

 

$5,628,912

 

 

$2,838,245

 

 

$1,509,907

 

 

$(3,378,963)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

48.1%

 

 

56.6%

 

 

54.5%

 

 

77.0%

Net underwriting expense ratio

 

 

39.2%

 

 

37.5%

 

 

39.2%

 

 

38.0%

Net combined ratio

 

 

87.3%

 

 

94.1%

 

 

93.7%

 

 

115.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

underwriting expenses

 

$14,176,079

 

 

$12,715,622

 

 

$28,837,062

 

 

$25,705,029

 

Less: Ceding commission revenue

 

 

(3,480,214)

 

 

(675,695)

 

 

(7,311,313)

 

 

(1,953,378)

Less: Other income

 

 

(261,145)

 

 

(336,854)

 

 

(506,119)

 

 

(651,592)

Net underwriting expenses

 

$10,434,720

 

 

$11,703,073

 

 

$21,019,630

 

 

$23,100,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

39.2%

 

 

37.5%

 

 

39.2%

 

 

38.0%

 

 
61

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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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$79,347,406

 

 

$-

 

 

$(28,066,253)

 

$51,281,153

 

Change in unearned premiums

 

 

5,376,958

 

 

 

-

 

 

 

(3,079,805)

 

 

2,297,153

 

Earned premiums

 

$84,724,364

 

 

$-

 

 

$(31,146,058)

 

$53,578,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$37,080,936

 

 

$-

 

 

$(9,591,600)

 

$27,489,336

 

Catastrophe loss

 

 

2,337,948

 

 

 

-

 

 

 

(627,832)

 

 

1,710,116

 

Loss and loss adjustment expenses

 

$39,418,884

 

 

$-

 

 

$(10,219,432)

 

$29,199,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

43.8%

 

 

n/a

 

 

 

30.8%

 

 

51.3%

Catastrophe loss

 

 

2.8%

 

 

n/a

 

 

 

2.0%

 

 

3.2%

Loss ratio

 

 

46.6%

 

 

n/a

 

 

 

32.8%

 

 

54.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$82,309,827

 

 

$77

 

 

$(15,327,796)

 

$66,982,108

 

Change in unearned premiums

 

 

(6,456,216)

 

 

202

 

 

 

271,074

 

 

 

(6,184,940)

Earned premiums

 

$75,853,611

 

 

$279

 

 

$(15,056,722)

 

$60,797,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$46,166,574

 

 

$(2,081)

 

$(5,858,517)

 

$40,305,976

 

Catastrophe loss

 

 

7,263,727

 

 

 

-

 

 

 

(763,171)

 

 

6,500,556

 

Loss and loss adjustment expenses

 

$53,430,301

 

 

$(2,081)

 

$(6,621,688)

 

$46,806,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

60.9%

 

 

-745.9%

 

 

38.9%

 

 

66.3%

Catastrophe loss

 

 

9.6%

 

 

0.0%

 

 

5.0%

 

 

10.7%

Loss ratio

 

 

70.4%

 

 

-745.9%

 

 

44.0%

 

 

77.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$42,650,477

 

 

$-

 

 

$(14,559,998)

 

$28,090,479

 

Change in unearned premiums

 

 

(527,742)

 

 

-

 

 

 

(925,881)

 

 

(1,453,623)

Earned premiums

 

$42,122,735

 

 

$-

 

 

$(15,485,879)

 

$26,636,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$15,109,585

 

 

$-

 

 

$(3,807,610)

 

$11,301,975

 

Catastrophe loss

 

 

2,056,580

 

 

 

-

 

 

 

(544,924)

 

 

1,511,656

 

Loss and loss adjustment expenses

 

$17,166,165

 

 

$-

 

 

$(4,352,534)

 

$12,813,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

35.9%

 

 

n/a

 

 

 

24.6%

 

 

42.4%

Catastrophe loss

 

 

4.9%

 

 

n/a

 

 

 

3.4%

 

 

5.7%

Loss ratio

 

 

40.8%

 

 

n/a

 

 

 

28.1%

 

 

48.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$44,821,279

 

 

$111

 

 

$(8,199,887)

 

$36,621,503

 

Change in unearned premiums

 

 

(5,828,149)

 

 

7

 

 

 

407,918

 

 

 

(5,420,224)

Earned premiums

 

$38,993,130

 

 

$118

 

 

$(7,791,969)

 

$31,201,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$19,520,797

 

 

$921

 

 

$(3,286,770)

 

$16,234,948

 

Catastrophe loss

 

 

1,636,384

 

 

 

-

 

 

 

(199,024)

 

 

1,437,360

 

Loss and loss adjustment expenses

 

$21,157,181

 

 

$921

 

 

$(3,485,794)

 

$17,672,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

50.1%

 

 

780.5%

 

 

42.2%

 

 

52.0%

Catastrophe loss

 

 

4.1%

 

 

0.0%

 

 

2.6%

 

 

4.6%

Loss ratio

 

 

54.3%

 

 

780.5%

 

 

44.7%

 

 

56.6%

 

(Percent components may not sum to totals due to rounding)

 

 
62

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

 

 

 

 Three months ended

 

 

 Six months ended

 

 

 

 June 30,

 

 

 June 30,

 

 

 

 2020

 

 

 2019

 

 

 2020

 

 

 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

Ceding commission revenue

 

 

3,480,214

 

 

 

675,695

 

 

 

7,311,313

 

 

 

1,953,378

 

Other income

 

 

261,145

 

 

 

336,854

 

 

 

506,119

 

 

 

651,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses (1)

 

 

12,813,631

 

 

 

17,672,308

 

 

 

29,199,452

 

 

 

46,806,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquistion costs and other underwriting expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

7,850,607

 

 

 

7,299,173

 

 

 

15,749,798

 

 

 

14,152,589

 

Other underwriting expenses

 

 

6,325,472

 

 

 

5,416,449

 

 

 

13,087,264

 

 

 

11,552,440

 

Total acquistion costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

underwriting expenses

 

 

14,176,079

 

 

 

12,715,622

 

 

 

28,837,062

 

 

 

25,705,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting income (loss)

 

$3,388,505

 

 

$1,825,898

 

 

$3,359,224

 

 

$(9,109,423)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio excluding the effect of catastrophes

 

 

42.4%

 

 

52.0%

 

 

51.3%

 

 

66.3%

Effect of catastrophe loss on net loss ratio (1)

 

 

5.7%

 

 

4.6%

 

 

3.2%

 

 

10.7%

Net loss ratio

 

 

48.1%

 

 

56.6%

 

 

54.5%

 

 

77.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio excluding the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

effect of catastrophes

 

 

39.2%

 

 

37.5%

 

 

39.2%

 

 

38.0%

Effect of catastrophe loss on net underwriting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expense ratio (2)

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

Net underwriting expense ratio

 

 

39.2%

 

 

37.5%

 

 

39.2%

 

 

38.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net combined ratio excluding the effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of catastrophes

 

 

81.6%

 

 

89.5%

 

 

90.5%

 

 

104.3%

Effect of catastrophe loss on net combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ratio (1) (2)

 

 

5.7%

 

 

4.6%

 

 

3.2%

 

 

10.7%

Net combined ratio

 

 

87.3%

 

 

94.1%

 

 

93.7%

 

 

115.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

underwriting expenses

 

$14,176,079

 

 

$12,715,622

 

 

$28,837,062

 

 

$25,705,029

 

Less: Ceding commission revenue (2)

 

 

(3,480,214)

 

 

(675,695)

 

 

(7,311,313)

 

 

(1,953,378)

Less: Other income

 

 

(261,145)

 

 

(336,854)

 

 

(506,119)

 

 

(651,592)

 

 

$10,434,720

 

 

$11,703,073

 

 

$21,019,630

 

 

$23,100,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premium

 

$26,636,856

 

 

$31,201,279

 

 

$53,578,306

 

 

$60,797,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

39.2%

 

 

37.5%

 

 

39.2%

 

 

38.0%

 

(1) For the three months ended June 30, 2020 and 2019, includes the sum of net catastrophe losses and loss adjustment expenses of $1,511,656 and $1,437,360, respectively. For the six months ended June 30, 2020 and 2019, includes the sum of net catastrophe losses and loss adjustment expenses of $1,710,116 and $6,500,556, respectively.

 

 
63

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Investments

 

Portfolio Summary

 

Fixed-Maturity Securities

 

The following table presents a breakdown of the amortized cost, estimated fair value, and unrealized gains and losses of our investments in fixed-maturity securities classified as available-for-sale as of June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Cost or

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

% of

 

 

 

 Amortized

 

 

 Unrealized 

 

 

 Less than 12

 

 

 More than 12

 

 

 Fair

 

 

Estimated

 

Category 

 

 Cost 

 

 

 Gains

 

 

 Months

 

 

 Months

 

 

 Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

obligations of U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

corporations and agencies

 

$3,032,168

 

 

$54,542

 

 

$-

 

 

$-

 

 

$3,086,710

 

 

 

1.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

8,577,207

 

 

 

423,179

 

 

 

-

 

 

 

-

 

 

 

9,000,386

 

 

 

5.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

121,977,355

 

 

 

10,145,949

 

 

 

(117,056)

 

 

-

 

 

 

132,006,248

 

 

 

79.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities (1)

 

 

21,639,537

 

 

 

256,784

 

 

 

(180,701)

 

 

(342,476)

 

 

21,373,144

 

 

 

12.9%

Total

 

$155,226,267

 

 

$10,880,454

 

 

$(297,757)

 

$(342,476)

 

$165,466,488

 

 

 

100.0%

 

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY"). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of June 30, 2020, the estimated fair value of the eligible investments was approximately $6,993,000. KICO will retain all rights regarding all securities if pledged as collateral. As of June 30, 2020, there was no outstanding balance on the FHLBNY credit line.

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Cost or

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

% of

 

 

 

 Amortized

 

 

 Unrealized 

 

 

 Less than 12

 

 

 More than 12

 

 

 Fair

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

obligations of U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

corporations and agencies

 

$7,037,856

 

 

$23,244

 

 

$-

 

 

$-

 

 

$7,061,100

 

 

 

4.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

9,151,293

 

 

 

181,835

 

 

 

(11,316)

 

 

-

 

 

 

9,321,812

 

 

 

5.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

119,874,573

 

 

 

5,777,624

 

 

 

(16,685)

 

 

(13,473)

 

 

125,622,039

 

 

 

74.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities (1)

 

 

26,138,633

 

 

 

437,841

 

 

 

(68,793)

 

 

(276,451)

 

 

26,231,230

 

 

 

15.6%

Total

 

$162,202,355

 

 

$6,420,544

 

 

$(96,794)

 

$(289,924)

 

$168,236,181

 

 

 

100.0%

 

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its relationship with the FHLBNY. The eligible collateral would be pledged to FHLBNY if KICO draws an advance from FHLBNY. As of December 31, 2019, the estimated fair value of the eligible investments was $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.

 

 
64

Table of Contents

 

Equity Securities

 

The following table presents a breakdown of the cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of June 30, 2020 and December 31, 2019:

 

 

 

 

June 30, 2020

 

 

 

 

 

 Gross

 

 

 Gross

 

 

Estimated

 

 

 % of

 

 

 

 

 

 Unrealized

 

 

 Unrealized

 

 

 Fair

 

 

 Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$9,023,896

 

 

$88,910

 

 

$(464,826)

 

$8,647,980

 

 

 

38.1%

Common stocks, mutual funds,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and exchange traded funds

 

 

15,540,180

 

 

 

533,364

 

 

 

(2,015,815)

 

 

14,057,729

 

 

 

61.9%

Total

 

$24,564,076

 

 

$622,274

 

 

$(2,480,641)

 

$22,705,709

 

 

 

100.0%

  

 

 

December 31, 2019

 

 

 

 

 

 

 Gross

 

 

 Gross

 

 

Estimated

 

 

 % of

 

 

 

 

 

 

 Unrealized

 

 

 Unrealized

 

 

 Fair

 

 

 Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$8,374,424

 

 

$339,257

 

 

$(11,794)

 

$8,701,887

 

 

 

35.3%

Common stocks, mutual funds,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and exchange traded funds

 

 

14,250,244

 

 

 

1,982,878

 

 

 

(273,627)

 

 

15,959,495

 

 

 

64.7%

Total

 

$22,624,668

 

 

$2,322,135

 

 

$(285,421)

 

$24,661,382

 

 

 

100.0%

 

Other Investments

 

The following table presents a breakdown of the cost and estimated fair value of, and gross unrealized gains on, our other investments as of June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

 

 

 Gross 

 

 

 

 

 

 

 Gross 

 

 

 

 

 

 

 

Unrealized

 

 

Estimated

 

 

 

 

Unrealized

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Fair Value

 

 

Cost

 

 

Gains

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$1,999,381

 

 

$542,939

 

 

$2,542,320

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

Total

 

$1,999,381

 

 

$542,939

 

 

$2,542,320

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

 

 
65

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Held-to-Maturity Securities

 

The following table presents a breakdown of the amortized cost and estimated fair value of, and gross unrealized gains and losses on, investments in held-to-maturity securities as of June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

% of

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,572

 

 

$162,616

 

 

$-

 

 

$-

 

 

$892,188

 

 

 

10.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,527

 

 

 

59,493

 

 

 

-

 

 

 

-

 

 

 

1,058,020

 

 

 

12.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,142,275

 

 

 

280,297

 

 

 

(50,324)

 

 

-

 

 

 

6,372,248

 

 

 

76.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$7,870,374

 

 

$502,406

 

 

$(50,324)

 

$-

 

 

$8,322,456

 

 

 

100.0%

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

Gross

 

 

Gross Unrealized Losses

 

 

Estimated

 

 

% of

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,550

 

 

$151,002

 

 

$-

 

 

$-

 

 

$880,552

 

 

 

21.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,619

 

 

 

51,021

 

 

 

-

 

 

 

-

 

 

 

1,049,640

 

 

 

25.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

2,097,783

 

 

 

97,627

 

 

 

(835)

 

 

-

 

 

 

2,194,575

 

 

 

53.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$3,825,952

 

 

$299,650

 

 

$(835)

 

$-

 

 

$4,124,767

 

 

 

100.0%

 

Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund requirements.

 

 
66

Table of Contents

 

A summary of the amortized cost and fair value of our investments in held-to-maturity securities by contractual maturity as of June 30, 2020 and December 31, 2019 is shown below:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$500,000

 

 

$495,630

 

 

$500,000

 

 

$499,165

 

One to five years

 

 

2,099,913

 

 

 

2,264,353

 

 

 

2,099,268

 

 

 

2,215,640

 

Five to ten years

 

 

1,994,445

 

 

 

2,184,944

 

 

 

620,134

 

 

 

655,923

 

More than 10 years

 

 

3,276,016

 

 

 

3,377,529

 

 

 

606,550

 

 

 

754,039

 

Total

 

$7,870,374

 

 

$8,322,456

 

 

$3,825,952

 

 

$4,124,767

 

 

Credit Rating of Fixed-Maturity Securities

 

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of June 30, 2020 and December 31, 2019 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s or Fitch):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

 Estimated

 

 

 Percentage of

 

 

 Estimated

 

 

 Percentage of

 

 

 

 Fair

 

 

 Fair

 

 

 Fair

 

 

 Fair

 

 

 

 Value

 

 

 Value

 

 

 Value

 

 

 Value

 

 

 

 

 

 

 

 

 

 

Rating

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$3,086,710

 

 

 

1.9%

 

$7,061,100

 

 

 

4.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and municipal bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

1,495,753

 

 

 

0.9%

 

 

1,996,676

 

 

 

1.2%

AA

 

 

6,937,577

 

 

 

4.2%

 

 

8,809,480

 

 

 

5.2%

A

 

 

27,641,146

 

 

 

16.7%

 

 

34,636,236

 

 

 

20.6%

BBB

 

 

100,128,865

 

 

 

60.5%

 

 

89,501,460

 

 

 

53.2%

BB

 

 

1,411,305

 

 

 

0.9%

 

 

-

 

 

 

0.0%

Total corporate and municipal bonds

 

 

137,614,646

 

 

 

83.2%

 

 

134,943,852

 

 

 

80.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

2,895,529

 

 

 

1.7%

 

 

2,976,306

 

 

 

1.8%

AA

 

 

17,433,461

 

 

 

10.5%

 

 

18,440,382

 

 

 

10.9%

A

 

 

2,402,420

 

 

 

1.5%

 

 

2,471,761

 

 

 

1.5%

CCC

 

 

830,309

 

 

 

0.5%

 

 

1,174,273

 

 

 

0.7%

CC

 

 

61,709

 

 

 

0.0%

 

 

86,461

 

 

 

0.1%

C

 

 

17,230

 

 

 

0.0%

 

 

17,813

 

 

 

0.0%

D

 

 

378,628

 

 

 

0.2%

 

 

215,015

 

 

 

0.1%

Non rated

 

 

745,846

 

 

 

0.5%

 

 

849,218

 

 

 

0.5%

Total residential mortgage backed securities

 

 

24,765,132

 

 

 

14.9%

 

 

26,231,229

 

 

 

15.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$165,466,488

 

 

 

100.0%

 

$168,236,181

 

 

 

100.0%

 

 
67

Table of Contents

 

The table below summarizes the average yield by type of fixed-maturity security as of June 30, 2020 and December 31, 2019:

 

Category

 

June 30,

2020

 

 

December 31, 2019

 

U.S. Treasury securities and

 

 

 

 

 

 

obligations of U.S. government

 

 

 

 

 

 

corporations and agencies

 

 

2.66%

 

 

2.18%

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

3.14%

 

 

3.26%

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

3.49%

 

 

3.73%

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities

 

 

2.29%

 

 

2.01%

 

 

 

 

 

 

 

 

 

Total

 

 

3.30%

 

 

3.37%

 

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of June 30, 2020 and December 31, 2019:

 

 

 

June 30,

2020

 

 

December 31, 2019

 

Weighted average effective maturity

 

 

5.7

 

 

 

4.8

 

 

 

 

 

 

 

 

 

 

Weighted average final maturity

 

 

6.9

 

 

 

6.3

 

 

 

 

 

 

 

 

 

 

Effective duration

 

 

4.2

 

 

 

4.3

 

 

Fair Value Consideration

 

Fair value is 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 June 30, 2020 and December 31, 2019, 83% and 80%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

 

 
68

Table of Contents

 

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 June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

Category

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

4,839,822

 

 

 

(117,056)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,839,822

 

 

 

(117,056)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities

 

 

7,060,988

 

 

 

(180,701)

 

 

9

 

 

 

10,639,265

 

 

 

(342,476)

 

 

16

 

 

 

17,700,253

 

 

 

(523,177)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$11,900,810

 

 

$(297,757)

 

 

14

 

 

$10,639,265

 

 

$(342,476)

 

 

16

 

 

$22,540,075

 

 

$(640,233)

 

 
69

Table of Contents

 

 

 

December 31, 2019

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Estimated

 

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

 

No. of

 

 

Estimated

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

 

Positions

 

 

Fair

 

 

Unrealized

 

Category

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

Held

 

 

Value

 

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, Territories and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possessions

 

 

3,067,428

 

 

 

(11,316)

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,067,428

 

 

 

(11,316)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

3,730,478

 

 

 

(16,685)

 

 

7

 

 

 

1,300,915

 

 

 

(13,473)

 

 

3

 

 

 

5,031,393

 

 

 

(30,158)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset backed securities

 

 

5,862,636

 

 

 

(68,793)

 

 

5

 

 

 

13,534,768

 

 

 

(276,451)

 

 

21

 

 

 

19,397,404

 

 

 

(345,244)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$12,660,542

 

 

$(96,794)

 

 

15

 

 

$14,835,683

 

 

$(289,924)

 

 

24

 

 

$27,496,225

 

 

$(386,718)

 

 
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There were 30 securities at June 30, 2020 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed by us to be other than temporarily impaired. There were 39 securities at December 31, 2019 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.

 

Liquidity and Capital Resources

 

Cash Flows

 

The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.

 

For the six months ended June 30, 2020, the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions.  For the six months ended June 30, 2020, KICO paid dividends of $3,500,000 to us.

 

KICO is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 to our condensed consolidated financial statements - Investments, for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the end of the previous quarter, which is March 31, 2020, and are due and payable within 90 days of borrowing. The maximum allowable advance as of June 30, 2020, based on the net admitted assets as of March 31, 2020, was approximately $11,339,000. Advances are limited to 85% of the amount of available collateral, which was approximately $5,944,000 as of June 30, 2020. There were no borrowings under this facility during the six months ended June 30, 2020.

 

As of June 30, 2020, invested assets and cash in our holding company totaled approximately $1,700,000. If the aforementioned sources of cash flow currently available are insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.

 

Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.

 

 
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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:

 

Six Months Ended June 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Cash flows provided by (used in):

 

 

 

 

 

 

Operating activities

 

$(9,981,438)

 

$10,800,684

 

Investing activities

 

 

(226,785)

 

 

(10,790,645)

Financing activities

 

 

(2,029,530)

 

 

(2,252,637)

Net decrease in cash and cash equivalents

 

 

(12,237,753)

 

 

(2,242,598)

Cash and cash equivalents, beginning of period

 

 

32,391,485

 

 

 

21,138,403

 

Cash and cash equivalents, end of period

 

$20,153,732

 

 

$18,895,805

 

 

Net cash used in operating activities was $9,981,000 in Six Months 2020 as compared to $10,801,000 provided by operating activities in Six Months 2019. The $20,782,000 decrease in cash flows provided by operating activities in Six Months 2020 was primarily a result of a decrease in cash arising from net fluctuations in assets and liabilities, partially offset by an increase in net income (adjusted for non-cash items) of $14,383,000.  The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and changes in quota share ceding rates which are described above.

 

Net cash used by investing activities was $227,000 in Six Months 2020 compared to $10,791,000 used in investing activities in Six Months 2019. The $10,564,000 decrease in net cash used in investing activities was the result of a $17,762,000 increase in disposal of invested assets, partially offset by a $8,450,000 increase in acquisitions of invested assets in Six Months 2020. 

 

Net cash used in financing activities was $2,030,000 in Six Months 2020 compared to $2,253,000 used in Six Months 2019. The $223,000 decrease in net cash used in financing activities was attributable to a $1,049,000 reduction in dividends paid, partially offset by $802,000 purchases of treasury stock in Six Months 2020 compared to Six Months 2019.

 

Reinsurance

 

Through June 30, 2019, our quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”).

 

Our quota share reinsurance treaties in effect during Six Months 2020 and Six Months 2019 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the 2019/2020 Treaty and under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Three Months 2019 and Six Months 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).

 

 
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Effective July 1, 2019, our 2017/2019 Treaty and commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. We entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2020.  Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:

 

 

 

Treaty Year

 

 

 

December 15, 2019

 

 

July 1, 2019

 

 

July 1, 2018

 

 

 

to

 

 

to

 

 

to

 

Line of Business

 

December 31, 2020

 

 

December 14, 2019

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

Percent ceded

 

 

25%

 

 

None

 

 

 

10%

 

Treaty Year

 

 

January 1, 2021

 

 

July 1, 2020

 

 

December 15, 2019

 

 

July 1, 2019

 

 

July 1, 2018

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 Line of Business

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

December 14, 2019

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Risk retained on intial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $1,000,000 of losses

 

 

NA (7)

 

$

750,000

 

 

$

750,000

 

 

$

1,000,000

 

 

$

900,000

 

 Losses per occurrence subject

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 to quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 reinsurance coverage

 

 

NA (7)

 

$

1,000,000

 

 

$

1,000,000

 

 

None

 

 

$

1,000,000

 

Expiration date

 

 

 

 

 

December 31,2020

 

 

 December 31, 2020

 

 

 

 

 

June 30, 2019

 

 Excess of loss coverage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 facultative facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (1)

 

 

8,000,000

 

 

 

8,000,000

 

 

 

9,000,000

 

 

 

9,000,000

 

 

 

9,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

 

1,000,000

 

 

 

1,000,000

 

 

 

1,000,000

 

 

 

1,000,000

 

 

 

1,000,000

 

 Total reinsurance coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per occurrence (7)

 

 

8,000,000

 

 

8,250,000

 

 

 

9,250,000

 

 

 

9,000,000

 

 

 

9,100,000

 

 Losses per occurrence subject

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 to reinsurance coverage

 

 

8,000,000

 

 

 

9,000,000

 

 

 

10,000,000

 

 

 

10,000,000

 

 

 

10,000,000

 

 Expiration date (7)

 

June 30, 2021

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Initial loss subject to personal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 lines quota share treaty

 

 

NA (7)

 

 

 

7,500,000

 

 

 

7,500,000

 

 

None

 

 

$

5,000,000

 

 Risk retained per catastrophe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occurrence (2) (7)

 

 

10,000,000

 

 

 

8,125,000

 

 

 

5,625,000

 

 

$

7,500,000

 

 

$

4,500,000

 

 Catastrophe loss coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 quota share coverage (3) (7)

 

 

475,000,000

 

 

 

475,000,000

 

 

 

602,500,000

 

 

$

602,500,000

 

 

$

445,000,000

 

 Reinstatement premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 protection (4) (5) (6)

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

(1)

For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.

(2)

Plus losses in excess of catastrophe coverage. Effective July 1, 2020, no reinsurance coverage for the $2,500,000 gap between quota share limit of $7,500,000 and first $10,000,000 layer of catastrophe coverage (see note 7 below).

(3)

Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.

(4)

Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.

(5)

Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

(6)

Effective July 1, 2020, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

(7)

Quota share expires December 31, 2020; reinsurance coverage from January 1, 2021 through June 30, 2021 is only for excess of loss and catastrophe reinsurance.

 

 
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 Treaty Year

 

 

 

July 1, 2020

 

 

July 1, 2019

 

 

July 1, 2018

 

 

 

to

 

 

to

 

 

to

 

Line of Business

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Umbrella

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

Percent ceded - first $1,000,000 of coverage

 

 

90%

 

 

90%

 

 

90%

Percent ceded - excess of $1,000,000 dollars of coverage

 

 

95%

 

 

100%

 

 

100%

Risk retained

 

$300,000

 

 

$100,000

 

 

$100,000

 

Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,900,000

 

 

$4,900,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

Expiration date

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines:

 

 

 

 

 

 

 

 

 

 

 

 

General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

None

 

 

None

 

 

None

 

Risk retained

 

$750,000

 

 

$750,000

 

 

$750,000

 

Excess of loss coverage above risk retained

 

$3,750,000

 

 

$3,750,000

 

 

$3,750,000

 

 

 

in excess of

 

 

in excess of

 

 

in excess of

 

 

 

$750,000

 

 

$750,000

 

 

$750,000

 

Total reinsurance coverage per occurrence

 

$3,750,000

 

 

$3,750,000

 

 

$3,750,000

 

Losses per occurrence subject to reinsurance coverage

 

$4,500,000

 

 

$4,500,000

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

None

 

 

None

 

 

 

 

 

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, 2019

 

 

Our catastrophe reinsurance treaty expired on June 30, 2020. Our growth in personal lines premiums and the increasing coastal exposure in Expansion states has increased our risks for catastrophes. Our catastrophe rates increased effective July 1, 2020 to reflect our increased risk and size of our personal lines business as well as increases in the reinsurance market related to COVID-19 exposure. 

 

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.

 

Outlook

 

The impacts of COVID-19 and related economic conditions on our results are highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not begin to affect our financial results until late in the first quarter of 2020, its impact on our results through June 30, 2020 is not indicative of its impact on our results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in Part II, Item 1A- “Risk Factors” in this Quarterly Report.

 

Our net premiums earned may be impacted by a number of factors.  Net premiums earned are a function of net written premium volume.  Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions.  As a result of COVID-19, economic conditions in the United States have rapidly deteriorated. The decreased levels of economic activity will negatively impact premium volumes generated by new business. We began to experience this impact in March 2020 and it became more significant in the second quarter of 2020. We also expect this impact will further persist but to a lesser extent for the remainder of 2020, but the degree of the impact will depend on the extent and duration of the economic contraction and could be material.   We have also made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return.  This action has lead, and will continue to lead, to a slowdown in premium growth, particularly in new business.

 

 
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Item  3. Quantitative and Qualitative Disclosures About Market Risk.

 

This item is not applicable to smaller reporting companies.

 

Item  4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to assure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act, and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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 June 30, 2020.

 

 
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Changes in Internal Control over Financial Reporting

 

Remediation of Material Weakness

 

During the quarter ended September 30, 2019 we identified and disclosed material weakness in our internal control over financial reporting relating to ineffective operation of controls related to the establishment and ongoing monitoring of case reserves for losses and loss adjustment expenses. Case reserve estimates are subject to individual judgment, and provide the primary information used as the basis for setting overall reserve levels including a provision for IBNR reserves.  In order to remediate the material weakness identified as of September 30, 2019, we made the following changes outlined directly below, which include changes and/or enhancements to our internal controls over financial reporting within our claims cycle and they are as follows:

 

 

·

Engaged external resources to perform a comprehensive review of our claims operations surrounding the establishment and monitoring of liability case reserves;

 

 

 

 

·

Hired a new Chief Claims Officer whose role includes a review of the entire population of case reserves to the policy level to ensure proper valuation, existence, and completeness;

 

 

 

 

·

Increased the number, experience level and skill of the personnel involved in our claims function through hiring and improved training;

 

 

 

 

·

Performed a thorough review of existing policies and procedures in place to facilitate the development and documentation of controls over financial reporting regarding liability case reserves.This review led to the addition of multiple controls including a quality assurance process as well as enhanced documentation of our existing controls in place;

 

 

 

 

Added new and enhanced existing controls within our claims transaction cycle.

 

 

 

 

·

Enhanced testing procedures performed by our outsourced internal audit to ensure adequate design and operating effectiveness of new and existing internal controls;

 

We believe that these actions, which are all incorporated in the process of estimating the liability for case reserves for losses and loss adjustment expenses, were sufficient to remediate the material weakness as of June 30, 2020. 

 

Except for the steps taken to remediate the material weakness identified above, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitation on Effectiveness of Controls

 

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.  

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.  

 

 
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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On June 12, 2019, Phillip Woolgar filed a suit naming the Company and certain present or former officers and directors as defendants in a putative class action captioned Woolgar v. Kingstone Companies et al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  Plaintiff seeks to represent a class of persons or entities that purchased Kingstone securities between March 14, 2018, and April 29, 2019, and alleges violations of the federal securities law in connection with the Company’s April 29, 2019 announcement regarding losses related to winter catastrophe events.  The lawsuit alleges that the Company failed to disclose that it did not adequately follow industry best practices related to claims handling and thus did not record sufficient claim reserves, and that as a result, Defendants’ positive statements about the Company’s business, operations and prospects misled investors. Plaintiff seeks, among other things, an undetermined amount of money damages.   The Company, after consulting legal counsel, believes the lawsuit to be without merit. On August 10, 2020, the court granted the Company’s motion to dismiss the amended complaint in the suit. The court has permitted plaintiff to amend the complaint to attempt to cure the deficiencies identified by the court in its opinion (to the extent plaintiff has a good faith basis to do so). The amended complaint, if any, would need to be filed by September 11, 2020.

Item 1A. Risk Factors.

 

For a discussion of the Company’s potential risks and uncertainties, see Part I, Item 1A- “Risk Factors” and Part II, Item 7- “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Annual Report filed with the SEC, and Part I, Item 2-“Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company's periodic filings with the SEC.  Other than as described below, there have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s 2019 Annual Report.

 

The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity.

 

Beginning in March 2020, the global pandemic related to the novel coronavirus COVID-19 began to impact the global economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include, among others, the following:

 

Revenues. We expect that the impact of COVID-19 on general economic activity will negatively impact our premium volumes. We began to experience this impact in March 2020 and it became more significant in the second quarter of 2020. We also expect this impact will further persist but to a lesser extent for the remainder of 2020, but the degree of the impact will depend on the extent and duration of the economic contraction and could be material.

 

Investments. The disruption in the financial markets related to COVID-19 has contributed to net investment losses, primarily due to the impact of changes in fair value on our equity investments and in our fixed-income investment portfolio. Our corporate fixed income portfolio may be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries. In addition, in recent years, many state and local governments have been operating under deficits or projected deficits. These deficits may be exacerbated by the costs of responding to COVID-19 and reduced tax revenues due to adverse economic conditions. The severity and duration of these deficits could have an adverse impact on the collectability and valuation of our municipal bond portfolio. Our investment portfolio also includes mortgage-backed securities which could be adversely impacted by declines in real estate valuations and/or financial market disruption. Further disruptions in global financial markets could adversely impact our net investment income in future periods.

 

 
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Adverse Legislative and/or Regulatory Action. Federal, state and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, we may be subject to legislative and/or regulatory action that seeks to retroactively mandate coverage for losses which our insurance policies were not designed or priced to cover. Currently, in some states there is proposed legislation to require insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage.  Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel or non-renew policies and our right to collect premiums.

 

Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our producers are unable to continue to work because of illness, government directives or otherwise. In addition, the interruption of our or their system capabilities could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities.

 

Reinsurance Risks. We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations to policyholders. Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes. Market conditions beyond our control, including the effect of COVID-19 on the reinsurance market, have impacted and may continue to impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or seek other alternatives.

     

Recent decline in the financial strength rating assigned to our insurance subsidiary by A.M. Best will impact our revenues and earnings.

 

Financial strength ratings are an important factor influencing the competitive position of insurance companies. The objective of the rating agencies’ rating systems is to provide an opinion as to an insurer’s financial strength and ability to meet ongoing obligations to its policyholders. The ratings of Kingstone Insurance Company (“KICO”), our insurance subsidiary, reflect the rating agencies’ opinion as to its financial strength and are not evaluations directed to investors in our securities, nor are they recommendations to buy, sell or hold our securities.

 

Our ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, the rating agencies.  Our ability to write business, particularly commercial liability lines, is influenced by our financial strength rating from A.M. Best.  On July 10, 2020, A.M. Best lowered the financial strength rating of KICO from “A-“ (Excellent) to “B++” (Good).  The outlook of A.M. Best’s credit rating is negative. A.M. Best indicated that the ratings downgrade of KICO reflects its balance sheet strength, which A.M. Best categorizes as adequate, as well as its strong operating performance, limited business profile and appropriate enterprise risk management.  It stated that the ratings action was driven by a revision in KICO’s catastrophe reinsurance program effective July 1, 2020 which significantly reduces the amount of reinsurance protection previously contemplated and purchased. 

    

Management believes that A.M. Best’s financial strength rating is more significant with regard to commercial liability insurance, as opposed to personal lines business.  Since we have discontinued our commercial lines business, we believe that A.M. Best’s rating action will not result in a material decrease in the amount of business that KICO will be a ble to write. However, the A.M Best ratings downgrade has resulted in a material decrease in the business of our subsidiary, Cosi, a multi-state licensed general agency that had partnered with name-brand carriers which require an A.M. Best “A-“ rating from its partners.

 

The effects of Tropical Storm Isaias will be material to our results of operations for the third quarter of 2020.

 

On August 4, 2020, the Northeast, which is the primary location of KICO’s insureds, was struck by Tropical Storm Isaias which caused power outages and significant damage to homes.  We have received more than 1,100 claims relating to the storm.  We are unable to determine the aggregate dollar amount of the claims at this time but the claims will in all likelihood have a material adverse effect upon our 2020 third quarter results of operations.  

 

 

 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) None.

 

(b) Not applicable.

 

(c) The following table sets forth certain information with respect to purchases of common stock made by us during the quarter ended June 30, 2020:

 

Period

 

Total

Number of Shares Purchased(1)

 

 

Average

 Price Paid

per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that May Be Purchased Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4/1/20 - 4/30/20

 

 

5,000

 

 

$4.79

 

 

 

-

 

 

 

-

 

5/1/20 - 5/31/20

 

 

121,236

 

 

$4.36

 

 

 

-

 

 

 

-

 

6/1/20 - 6/30/20

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

 

126,236

 

 

$4.38

 

 

 

-

 

 

 

-

 

 

(1)   Purchases were made by us in open market transactions.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 
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Item 6. Exhibits.

 

 

3(a)

 

Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed on May 15, 2014).

 

 

 

 

 

3(b)

 

By-laws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 9, 2009).

 

 

 

 

 

31(a)

 

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

 

 

 

 

 

31(b)

 

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

 

 

 

 

 

32+

 

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

 

 

 

 

 

   101.INS

 

XBRL Instance Document 

 

 

 

 

 

101.SCH

 

101.SCH  XBRL Taxonomy Extension Schema.

 

 

 

 

 

101.CAL

 

101.CAL   XBRL Taxonomy Extension Calculation Linkbase.

 

 

 

 

 

101.DEF

 

101.DEF   XBRL Taxonomy Extension Definition Linkbase.

 

 

 

 

 

101.LAB

 

101.LAB   XBRL Taxonomy Extension Label Linkbase.

 

 

 

 

 

101.PRE

 

101.PRE  XBRL Taxonomy Extension Presentation Linkbase.

 

 

 

 

 

+

 

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended.

 

 
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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: August 11, 2020

By: 

/s/ Barry B. Goldstein

 

 

 

Barry B. Goldstein  

 

 

 

Chief Executive Officer

 

 

 

 

 

Dated: August 11, 2020

By: 

/s/ Victor Brodsky

 

 

 

Victor Brodsky

 

 

 

Chief Financial Officer

 

 

 
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