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KINGSTONE COMPANIES, INC. - Quarter Report: 2022 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, 2022

 

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 15, 2022, there were 10,645,675 shares of the registrant’s common stock outstanding.

 

 

 

KINGSTONE COMPANIES, INC.

INDEX

 

 

 

 

 

PAGE

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1 —

 

Financial Statements

 

 

4

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2022 (Unaudited) and December 31, 2021

 

 

4

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months and six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited)

 

 

5

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months and six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited)

 

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited)

 

 

8

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

9

 

Item 2 —

 

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

 

 

43

 

Item 3 —

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

76

 

Item 4 —

 

Controls and Procedures

 

 

76

 

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1 —

 

Legal Proceedings

 

 

77

 

Item 1A —

 

Risk Factors

 

 

77

 

Item 2 —

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

77

 

Item 3 —

 

Defaults Upon Senior Securities

 

 

77

 

Item 4 —

 

Mine Safety Disclosures

 

 

77

 

Item 5 —

 

Other Information

 

 

77

 

Item 6 —

 

Exhibits

 

 

 78

 

Signatures

 

 

 79

 

 

 
2

Table of Contents

 

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 (“Risk Factors”) of our Annual Report under “Factors That May Affect Future Results and Financial Condition” on Form 10-K for the year ended December 31, 2021, Part I, Item 2 of this Quarterly Report 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.

 

 
3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 June 30,

 

 

 December 31,

 

 

 

2022

 

 

2021

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of $6,913,536 at June 30, 2022 and $8,753,159 at December 31, 2021)

 

$7,768,218

 

 

$8,266,334

 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $156,683,115 at June 30, 2022 and $155,808,478 at December 31, 2021)

 

 

141,497,787

 

 

 

158,080,110

 

Equity securities, at fair value (cost of $30,239,520 at June 30, 2022 and $37,470,669 at December 31, 2021)

 

 

26,064,545

 

 

 

39,687,002

 

Other investments

 

 

5,253,582

 

 

 

7,561,415

 

Total investments

 

 

180,584,132

 

 

 

213,594,861

 

Cash and cash equivalents

 

 

13,200,128

 

 

 

24,290,598

 

Premiums receivable, net

 

 

11,994,265

 

 

 

12,318,336

 

Reinsurance receivables, net

 

 

54,652,171

 

 

 

40,292,438

 

Deferred policy acquisition costs

 

 

22,025,938

 

 

 

22,238,987

 

Intangible assets

 

 

500,000

 

 

 

500,000

 

Property and equipment, net

 

 

10,185,098

 

 

 

9,291,597

 

Deferred income taxes, net

 

 

7,344,092

 

 

 

192,253

 

Other assets

 

 

6,147,440

 

 

 

8,593,205

 

Total assets

 

$306,633,264

 

 

$331,312,275

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$98,903,060

 

 

$94,948,745

 

Unearned premiums

 

 

98,152,959

 

 

 

97,759,607

 

Advance premiums

 

 

5,773,444

 

 

 

2,693,466

 

Reinsurance balances payable

 

 

10,877,113

 

 

 

12,961,568

 

Deferred ceding commission revenue

 

 

9,759,340

 

 

 

9,748,508

 

Accounts payable, accrued expenses and other liabilities

 

 

6,166,043

 

 

 

7,704,396

 

Debt, net

 

 

29,911,881

 

 

 

29,823,791

 

Total liabilities

 

 

259,543,840

 

 

 

255,640,081

 

 

 

 

 

 

 

 

 

 

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 12,117,081 shares at June 30, 2022 and 11,955,660 shares at December 31, 2021; outstanding 10,645,675 shares at June 30, 2022 and 10,484,254 shares at December 31, 2021

 

 

121,171

 

 

 

119,557

 

Capital in excess of par

 

 

73,102,513

 

 

 

72,467,483

 

Accumulated other comprehensive (loss) income

 

 

(11,994,258)

 

 

1,796,739

 

(Accumulated deficit) retained earnings

 

 

(8,572,521)

 

 

6,855,896

 

Treasury stock, at cost, 1,471,406 shares at June 30, 2022 and December 31, 2021

 

 

(5,567,481)

 

 

(5,567,481)

Total stockholders' equity

 

 

47,089,424

 

 

 

75,672,194

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$306,633,264

 

 

$331,312,275

 

     

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

 

 

For the Three Months Ended,

 

 

For the Six Months Ended,

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

Ceding commission revenue

 

 

4,715,587

 

 

 

45,741

 

 

 

9,396,983

 

 

 

44,676

 

Net investment income

 

 

634,325

 

 

 

1,678,075

 

 

 

1,993,425

 

 

 

3,461,271

 

Net (losses) gains on investments

 

 

(4,517,373)

 

 

2,315,261

 

 

 

(8,915,778)

 

 

5,275,668

 

Other income

 

 

244,643

 

 

 

124,946

 

 

 

480,467

 

 

 

296,392

 

Total revenues

 

 

28,979,250

 

 

 

39,600,449

 

 

 

57,530,545

 

 

 

79,103,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

18,656,041

 

 

 

20,759,210

 

 

 

41,597,239

 

 

 

43,319,882

 

Commission expense

 

 

8,481,031

 

 

 

8,285,341

 

 

 

16,832,117

 

 

 

16,509,180

 

Other underwriting expenses

 

 

6,624,997

 

 

 

6,692,920

 

 

 

13,440,946

 

 

 

13,159,962

 

Other operating expenses

 

 

665,815

 

 

 

933,272

 

 

 

1,547,770

 

 

 

2,285,578

 

Depreciation and amortization

 

 

877,263

 

 

 

837,654

 

 

 

1,647,373

 

 

 

1,659,994

 

Interest expense

 

 

456,545

 

 

 

456,545

 

 

 

913,090

 

 

 

913,090

 

Total expenses

 

 

35,761,692

 

 

 

37,964,942

 

 

 

75,978,535

 

 

 

77,847,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before taxes

 

 

(6,782,442)

 

 

1,635,507

 

 

 

(18,447,990)

 

 

1,255,965

 

Income tax (benefit) provision

 

 

(1,402,823)

 

 

312,146

 

 

 

(3,870,839)

 

 

243,701

 

Net (loss) income

 

 

(5,379,619)

 

 

1,323,361

 

 

 

(14,577,151)

 

 

1,012,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross change in unrealized (losses) gains on available-for-sale-securities

 

 

(7,642,863)

 

 

1,074,164

 

 

 

(17,508,640)

 

 

(2,749,115)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses (gains) included in net (loss) income

 

 

10,356

 

 

 

(341,474)

 

 

51,680

 

 

 

(735,771)

Net change in unrealized (losses) gains

 

 

(7,632,507)

 

 

732,690

 

 

 

(17,456,960)

 

 

(3,484,886)

Income tax benefit (provision) related to items of other comprehensive (loss) income

 

 

1,602,827

 

 

 

(153,865)

 

 

3,665,963

 

 

 

731,827

 

Other comprehensive (loss) income, net of tax

 

 

(6,029,680)

 

 

578,825

 

 

 

(13,790,997)

 

 

(2,753,059)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$(11,409,299)

 

$1,902,186

 

 

$(28,368,148)

 

$(1,740,795)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$(0.51)

 

$0.12

 

 

$(1.37)

 

$0.09

 

Diluted

 

$(0.51)

 

$0.12

 

 

$(1.37)

 

$0.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,644,578

 

 

 

10,670,831

 

 

 

10,637,553

 

 

 

10,673,550

 

Diluted

 

 

10,644,578

 

 

 

10,846,724

 

 

 

10,637,553

 

 

 

10,809,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$0.04

 

 

$0.04

 

 

$0.08

 

 

$0.08

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Three months ended June 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess of Par 

 

 

 Comprehensive

 

 

 Retained

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 Amount

 

 

 Income (Loss)

 

 

 Earnings

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, April 1, 2021

 

 

-

 

 

$-

 

 

 

11,935,321

 

 

$119,353

 

 

$71,116,917

 

 

$6,548,178

 

 

$15,190,031

 

 

 

1,262,527

 

 

$(3,961,798)

 

$89,012,681

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

486,069

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

486,069

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

13,201

 

 

 

132

 

 

 

(132)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(4,302)

 

 

(43)

 

 

(35,057)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35,100)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120,550

 

 

 

(974,135)

 

 

(974,135)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(427,055)

 

 

-

 

 

 

-

 

 

 

(427,055)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,323,361

 

 

 

-

 

 

 

-

 

 

 

1,323,361

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

578,825

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

578,825

 

Balance, June 30, 2021

 

 

-

 

 

$-

 

 

 

11,944,220

 

 

$119,442

 

 

$71,567,797

 

 

$7,127,003

 

 

$16,086,337

 

 

 

1,383,077

 

 

$(4,935,933)

 

$89,964,646

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Capital in Excess of Par

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Income (Loss)

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance, April 1, 2022

 

 

-

 

 

$-

 

 

 

12,109,307

 

 

$121,093

 

 

$72,638,286

 

 

$(5,964,578)

 

$(2,767,126)

 

 

1,471,406

 

 

$(5,567,481)

 

$58,460,194

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

486,029

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

486,029

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

12,149

 

 

 

121

 

 

 

(121)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(4,375)

 

 

(43)

 

 

(21,681)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21,724)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(425,776)

 

 

-

 

 

 

-

 

 

 

(425,776)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,379,619)

 

 

-

 

 

 

-

 

 

 

(5,379,619)

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,029,680)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,029,680)

Balance, June 30, 2022

 

 

-

 

 

$-

 

 

 

12,117,081

 

 

$121,171

 

 

$73,102,513

 

 

$(11,994,258)

 

$(8,572,521)

 

 

1,471,406

 

 

$(5,567,481)

 

$47,089,424

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
6

Table of Contents

    

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Six months ended June 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 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, 2021

 

 

-

 

 

$-

 

 

 

11,871,307

 

 

$118,713

 

 

$70,769,165

 

 

$9,880,062

 

 

$15,928,345

 

 

 

1,254,492

 

 

$(3,895,883)

 

$92,800,402

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

981,067

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

981,067

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

99,123

 

 

 

991

 

 

 

(991)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(26,210)

 

 

(262)

 

 

(181,444)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(181,706)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

128,585

 

 

 

(1,040,050)

 

 

(1,040,050)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(854,272)

 

 

-

 

 

 

-

 

 

 

(854,272)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,012,264

 

 

 

-

 

 

 

-

 

 

 

1,012,264

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,753,059)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,753,059)

Balance, June 30, 2021

 

 

-

 

 

$-

 

 

 

11,944,220

 

 

$119,442

 

 

$71,567,797

 

 

$7,127,003

 

 

$16,086,337

 

 

 

1,383,077

 

 

$(4,935,933)

 

$89,964,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 Earnings

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 (Accumulated

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Deficit)

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, January 1, 2022

 

 

-

 

 

$-

 

 

 

11,955,660

 

 

$119,557

 

 

$72,467,483

 

 

$1,796,739

 

 

$6,855,896

 

 

 

1,471,406

 

 

$(5,567,481)

 

$75,672,194

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,016,443

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,016,443

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

234,219

 

 

 

2,342

 

 

 

(2,342)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(72,798)

 

 

(728)

 

 

(379,071)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(379,799)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(851,266)

 

 

-

 

 

 

-

 

 

 

(851,266)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(14,577,151)

 

 

-

 

 

 

-

 

 

 

(14,577,151)

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,790,997)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,790,997)

Balance, June 30, 2022

 

 

-

 

 

$-

 

 

 

12,117,081

 

 

$121,171

 

 

$73,102,513

 

 

$(11,994,258)

 

$(8,572,521)

 

 

1,471,406

 

 

$(5,567,481)

 

$47,089,424

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
7

Table of Contents

    

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six months ended June 30,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net (loss) income

 

$(14,577,151)

 

$1,012,264

 

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

 

 

 

 

 

 

 

 

Net losses (gains) on investments

 

 

210,900

 

 

 

(1,844,257)

Net unrealized losses (gains) on equity investments

 

 

6,417,045

 

 

 

(1,924,072)

Net unrealized losses (gains) on other investments

 

 

2,287,833

 

 

 

(1,507,339)

Depreciation and amortization

 

 

1,647,373

 

 

 

1,659,994

 

Bad debt expense

 

 

42,226

 

 

 

128,518

 

Amortization of bond premium, net

 

 

248,650

 

 

 

107,068

 

Amortization of discount and issuance costs on debt

 

 

88,090

 

 

 

88,090

 

Stock-based compensation

 

 

1,016,443

 

 

 

981,067

 

Deferred income tax (benefit) expense

 

 

(3,485,876)

 

 

588,442

 

Decrease (increase) in operating assets:

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

281,845

 

 

 

971,389

 

Reinsurance receivables, net

 

 

(14,359,733)

 

 

17,267,805

 

Deferred policy acquisition costs

 

 

213,049

 

 

 

191,560

 

Other assets

 

 

2,437,007

 

 

 

(1,365,167)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

 

3,954,315

 

 

 

2,223,810

 

Unearned premiums

 

 

393,352

 

 

 

(1,936,706)

Advance premiums

 

 

3,079,978

 

 

 

2,582,330

 

Reinsurance balances payable

 

 

(2,084,455)

 

 

(4,953,735)

Deferred ceding commission revenue

 

 

10,832

 

 

 

(8,931)

Accounts payable, accrued expenses and other liabilities

 

 

(1,538,353)

 

 

102,185

 

Net cash flows (used in) provided by operating activities

 

 

(13,716,630)

 

 

14,364,315

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase - fixed-maturity securities held-to-maturity

 

 

(498,711)

 

 

(3,111,381)

Purchase - fixed-maturity securities available-for-sale

 

 

(14,386,410)

 

 

(5,424,374)

Purchase - equity securities

 

 

(589,317)

 

 

(8,431,047)

Purchase - other investments

 

 

-

 

 

 

(2,000,000)

Redemption - fixed-maturity securities held-to-maturity

 

 

1,000,000

 

 

 

625,000

 

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

 

 

13,228,270

 

 

 

22,276,142

 

Sale - equity securities

 

 

7,644,267

 

 

 

9,569,363

 

Acquisition of property and equipment

 

 

(2,540,874)

 

 

(2,195,985)

Net cash flows provided by investing activities

 

 

3,857,225

 

 

 

11,307,718

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Withholding taxes paid on vested retricted stock awards

 

 

(379,799)

 

 

(181,706)

Purchase of treasury stock

 

 

-

 

 

 

(1,040,050)

Dividends paid

 

 

(851,266)

 

 

(854,272)

Net cash flows used in financing activities

 

 

(1,231,065)

 

 

(2,076,028)

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

$(11,090,470)

 

$23,596,005

 

Cash and cash equivalents, beginning of period

 

 

24,290,598

 

 

 

19,463,742

 

Cash and cash equivalents, end of period

 

$13,200,128

 

 

$43,059,747

 

 

 

 

 

 

 

 

 

 

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.

 

 
8

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, 79.8% and 80.2% of KICO’s direct written premiums for the three months and six months ended June 30, 2022, 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.

 

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, 2021 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2022. 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, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022.

 

Certain prior year balances were reclassified to conform with the current year presentation. The reclassification had no effect on the Company’s previously reported financial condition, results of operations or cash flows.

   

Note 2 – Accounting Policies

 

Basis of Presentation; Going Concern

 

See Note 2 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further information.

 

The Company’s $30,000,000 5.5% Senior Unsecured Notes (the “Notes”) are due on December 30, 2022. The Company’s continuation as a going concern is dependent on its ability to obtain financing and/or other funds to satisfy such obligation. Management believes that KICO’s insurance operations would be able to continue in the unlikely event that financing is not obtained.

 

 
9

Table of Contents

 

In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. Disclosures in the notes to the consolidated financial statements are required if management concludes that substantial doubt exists and if its plans alleviate the substantial doubt that was raised.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP assuming that the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

   

Management’s Plan Related to Going Concern

 

In order to continue as a going concern, the Company will need to obtain financing and/or other funds to satisfy its debt obligation due on December 30, 2022. Management plans to refinance the Notes with a new issue of investment grade debt securities of similar or longer maturity that would result in net proceeds equal to or greater than the principal amount of the Notes. In connection therewith, the Company has engaged an investment banker to serve as exclusive placement agent for a proposed offering by the Company of its securities (including debt, equity and/or preferred securities). The engagement letter indicates that the offering would be of such size as to generate proceeds to the Company of no less than $30,000,000. Subject to regulatory requirements, the Company also may receive dividends paid to it by KICO, its insurance subsidiary, that could be utilized to repay the Notes. As of June 30, 2022, KICO had negative unassigned surplus and was not permitted to pay the Company any dividends without prior regulatory approval. Further, the Company plans to use available invested assets and cash to repay the Notes. As of June 30, 2022, invested assets and cash of Kingstone were approximately $2,780,000.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described above. The Company believes that its plan is probable of being implemented and that such plan would alleviate any adverse conditions.

 

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

 

 
10

Table of Contents

 

 

Principles of Consolidation

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

Note 3 - Investments 

 

Fixed-Maturity Securities

 

The amortized cost, estimated fair value, and unrealized gains and losses on investments in fixed-maturity securities classified as available-for-sale as of June 30, 2022 and December 31, 2021 are summarized as follows:

 

 

 

June 30, 2022

 

 

 

 Cost or 

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

 Net

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Losses

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

$17,218,274

 

 

$-

 

 

$(3,020,486)

 

$-

 

 

$14,197,788

 

 

$(3,020,486)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

84,235,861

 

 

 

9,782

 

 

 

(6,562,506)

 

 

-

 

 

 

77,683,137

 

 

 

(6,552,724)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed securities

 

 

55,228,980

 

 

 

114,844

 

 

 

(5,387,294)

 

 

(339,668)

 

 

49,616,862

 

 

 

(5,612,118)

Total fixed-maturity securities

 

$156,683,115

 

 

$124,626

 

 

$(14,970,286)

 

$(339,668)

 

$141,497,787

 

 

$(15,185,328)

      

 
11

Table of Contents

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

$17,236,750

 

 

$246,748

 

 

$(197,984)

 

$-

 

 

$17,285,514

 

 

$48,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

80,534,769

 

 

 

2,603,411

 

 

 

(126,926)

 

 

-

 

 

 

83,011,254

 

 

 

2,476,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed securities

 

 

58,036,959

 

 

 

355,985

 

 

 

(489,258)

 

 

(120,344)

 

 

57,783,342

 

 

 

(253,617)

Total fixed-maturity securities

 

$155,808,478

 

 

$3,206,144

 

 

$(814,168)

 

$(120,344)

 

$158,080,110

 

 

$2,271,632

 

 

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, 2022 and December 31, 2021 is shown below:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$1,500,986

 

 

$1,500,790

 

 

$1,153,099

 

 

$1,156,636

 

One to five years

 

 

46,709,763

 

 

 

45,176,361

 

 

 

43,007,110

 

 

 

44,914,759

 

Five to ten years

 

 

32,088,366

 

 

 

27,928,816

 

 

 

26,808,853

 

 

 

27,332,581

 

More than 10 years

 

 

21,155,020

 

 

 

17,274,958

 

 

 

26,802,457

 

 

 

26,892,792

 

Residential mortgage and other asset backed securities

 

 

55,228,980

 

 

 

49,616,862

 

 

 

58,036,959

 

 

 

57,783,342

 

Total

 

$156,683,115

 

 

$141,497,787

 

 

$155,808,478

 

 

$158,080,110

 

   

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

  

Equity Securities

 

The cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of June 30, 2022 and December 31, 2021 are as follows:

 

 

 

June 30, 2022

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$18,430,554

 

 

$175,745

 

 

$(3,347,910)

 

$15,258,389

 

Common stocks, mutual funds, and exchange traded funds

 

 

11,808,966

 

 

 

392,745

 

 

 

(1,395,555)

 

 

10,806,156

 

Total

 

$30,239,520

 

 

$568,490

 

 

$(4,743,465)

 

$26,064,545

 

    

 
12

Table of Contents

    

 

 

December 31, 2021

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$22,019,509

 

 

$1,007,009

 

 

$(184,617)

 

$22,841,901

 

Common stocks, mutual funds, and exchange traded funds

 

 

15,451,160

 

 

 

1,573,653

 

 

 

(179,712)

 

 

16,845,101

 

Total

 

$37,470,669

 

 

$2,580,662

 

 

$(364,329)

 

$39,687,002

 

 

Other Investments

 

The cost and estimated fair value of, and gross gains on, the Company’s other investments as of June 30, 2022 and December 31, 2021 are as follows:

  

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

Gross

 

 

Estimated

 

 

 

 

 

Gross

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Fair Value

 

 

Cost

 

 

Gains

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$3,999,381

 

 

$1,254,201

 

 

$5,253,582

 

 

$3,999,381

 

 

$3,562,034

 

 

$7,561,415

 

     

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, 2022 and December 31, 2021 are summarized as follows:

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$1,228,410

 

 

$86,141

 

 

$(10,175)

 

$-

 

 

$1,304,376

 

 

$75,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

498,378

 

 

 

4,637

 

 

 

-

 

 

 

-

 

 

 

503,015

 

 

 

4,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

-

 

 

 

(29,111)

 

 

-

 

 

 

275,000

 

 

 

(29,111)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

5,737,319

 

 

 

39,429

 

 

 

(945,603)

 

 

-

 

 

 

4,831,145

 

 

 

(906,174)

Total

 

$7,768,218

 

 

$130,207

 

 

$(984,889)

 

$-

 

 

$6,913,536

 

 

$(854,682)

 

 
13

Table of Contents

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,642

 

 

$209,633

 

 

$-

 

 

$-

 

 

$939,275

 

 

$209,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,239

 

 

 

22,856

 

 

 

-

 

 

 

-

 

 

 

1,021,095

 

 

 

22,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

85

 

 

 

(13,921)

 

 

 

 

 

 

290,275

 

 

 

(13,836)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,234,342

 

 

 

280,951

 

 

 

(12,779)

 

 

-

 

 

 

6,502,514

 

 

 

268,172

 

Total

 

$8,266,334

 

 

$513,525

 

 

$(26,700)

 

$-

 

 

$8,753,159

 

 

$486,825

 

  

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

 

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, 2022 and December 31, 2021 is shown below:

  

June 30, 2022

December 31, 2021

Amortized

Estimated

Amortized

Estimated

Remaining Time to Maturity

Cost

Fair Value

Cost

Fair Value

Less than one year

$459,032$497,110$994,712$1,008,180

One to five years

1,246,2061,246,6901,205,8291,290,465

Five to ten years

1,519,7491,370,9501,513,9421,648,808

More than 10 years

4,543,2313,798,7864,551,8514,805,706

Total

$7,768,218$6,913,536$8,266,334$8,753,159

  

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

   

 
14

Table of Contents

     

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

$457,941

 

 

$1,459,342

 

 

$1,598,130

 

 

$2,950,469

 

Equity securities

 

 

279,562

 

 

 

351,100

 

 

 

624,730

 

 

 

708,411

 

Cash and cash equivalents

 

 

2,983

 

 

 

634

 

 

 

3,166

 

 

 

1,558

 

Other investments

 

 

-

 

 

 

(42,908)

 

 

-

 

 

 

(42,908)

Total

 

 

740,486

 

 

 

1,768,168

 

 

 

2,226,026

 

 

 

3,617,530

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment expenses

 

 

106,161

 

 

 

90,093

 

 

 

232,601

 

 

 

156,259

 

Net investment income

 

$634,325

 

 

$1,678,075

 

 

$1,993,425

 

 

$3,461,271

 

     

Proceeds from the redemption of fixed-maturity securities held-to-maturity were $1,000,000 and $625,000 for the six months ended June 30, 2022 and 2021, respectively.

 

Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $13,228,270 and $22,276,142 for the six months ended June 30, 2022 and 2021, respectively.

 

Proceeds from the sale of equity securities were $7,644,267 and $9,569,363 for the six months ended June 30, 2022 and 2021, respectively.

 

 
15

Table of Contents

 

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

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Realized Gains (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$17,311

 

 

$367,756

 

 

$102,411

 

 

$777,296

 

Gross realized losses

 

 

(27,666)

 

 

(26,255)

 

 

(154,091)

 

 

(41,499)

 

 

 

(10,355)

 

 

341,501

 

 

 

(51,680)

 

 

735,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

29,047

 

 

 

442,798

 

 

 

477,353

 

 

 

1,375,948

 

Gross realized losses

 

 

(307,352)

 

 

(67,276)

 

 

(636,573)

 

 

(267,488)

 

 

 

(278,305)

 

 

375,522

 

 

 

(159,220)

 

 

1,108,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (losses) gains

 

 

(288,660)

 

 

717,023

 

 

 

(210,900)

 

 

1,844,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (Losses) Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

-

 

 

 

920,863

 

 

 

-

 

 

 

1,924,072

 

Gross losses

 

 

(2,856,412)

 

 

-

 

 

 

(6,417,045)

 

 

-

 

 

 

 

(2,856,412)

 

 

920,863

 

 

 

(6,417,045)

 

 

1,924,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

-

 

 

 

677,375

 

 

 

-

 

 

 

1,507,339

 

Gross losses

 

 

(1,372,301)

 

 

-

 

 

 

(2,287,833)

 

 

-

 

 

 

 

(1,372,301)

 

 

677,375

 

 

 

(2,287,833)

 

 

1,507,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains

 

 

(4,228,713)

 

 

1,598,238

 

 

 

(8,704,878)

 

 

3,431,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains on investments

 

$(4,517,373)

 

$2,315,261

 

 

$(8,915,778)

 

$5,275,668

 

 

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 loss. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections. For held-to-maturity fixed-maturity securities, the amount of OTTI recorded in comprehensive loss for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security based on timing of future estimated cash flows of the security.

 

OTTI losses are recorded in the consolidated statements of operations and comprehensive (loss) income as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At June 30, 2022 and December 31, 2021, there were 146 and 48 fixed-maturity securities, respectively, that accounted for the gross unrealized losses. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of investments as of June 30, 2022 and December 31, 2021. Significant factors influencing the Company’s determination that unrealized losses were temporary included credit quality considerations, the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and interest rate environment factors, and management’s intent and ability to hold the investment for a period of time sufficient to allow for an anticipated recovery of estimated fair value to the Company’s cost basis.

 

 
16

Table of Contents

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at June 30, 2022 as follows:

  

 

 

June 30, 2022

 

 

 

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

 

 

14,197,788

 

 

 

(3,020,486)

 

 

14

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,197,788

 

 

 

(3,020,486)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

76,672,772

 

 

 

(6,562,506)

 

 

92

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

76,672,772

 

 

 

(6,562,506)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

45,843,567

 

 

 

(5,387,294)

 

 

37

 

 

 

2,724,188

 

 

 

(339,668)

 

 

3

 

 

 

48,567,755

 

 

 

(5,726,962)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities

 

$136,714,127

 

 

$(14,970,286)

 

 

143

 

 

$2,724,188

 

 

$(339,668)

 

 

3

 

 

$139,438,315

 

 

$(15,309,954)

  

 
17

Table of Contents

       

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2021 as follows:

  

 

 

December 31, 2021

 

 

 

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

 

 

6,768,123

 

 

 

(197,984)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,768,123

 

 

 

(197,984)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

17,593,707

 

 

 

(126,926)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,593,707

 

 

 

(126,926)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

45,399,451

 

 

 

(489,258)

 

 

26

 

 

 

2,923,182

 

 

 

(120,344)

 

 

2

 

 

 

48,322,633

 

 

 

(609,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities

 

$69,761,281

 

 

$(814,168)

 

 

46

 

 

$2,923,182

 

 

$(120,344)

 

 

2

 

 

$72,684,463

 

 

$(934,512)

    

 
18

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, 2022 and December 31, 2021 indicating the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

 

 

June 30, 2022

 

 

 

 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

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

-

 

 

 

14,197,788

 

 

 

-

 

 

 

14,197,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

77,185,757

 

 

 

497,380

 

 

 

-

 

 

 

77,683,137

 

Residential mortgage and other asset backed securities

 

 

-

 

 

 

49,616,862

 

 

 

-

 

 

 

49,616,862

 

Total fixed maturities

 

 

77,185,757

 

 

 

64,312,030

 

 

 

-

 

 

 

141,497,787

 

Equity securities

 

 

26,064,545

 

 

 

-

 

 

 

-

 

 

 

26,064,545

 

Total investments

 

$103,250,302

 

 

$64,312,030

 

 

$-

 

 

$167,562,332

 

 

 

 

December 31, 2021

 

 

 

 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

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

-

 

 

 

17,285,514

 

 

 

-

 

 

 

17,285,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

82,500,779

 

 

 

510,475

 

 

 

-

 

 

 

83,011,254

 

Residential mortgage and other asset backed securities

 

 

-

 

 

 

57,783,342

 

 

 

-

 

 

 

57,783,342

 

Total fixed maturities

 

 

82,500,779

 

 

 

75,579,331

 

 

 

-

 

 

 

158,080,110

 

Equity securities

 

 

39,687,002

 

 

 

-

 

 

 

-

 

 

 

39,687,002

 

Total investments

 

$122,187,781

 

 

$75,579,331

 

 

$-

 

 

$197,767,112

 

 

 
19

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, 2022 and December 31, 2021. 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, 2022

 

 

December 31, 2021

 

 

 

 

 

 

Other Investments

 

 

 

 

 

 

Hedge fund

 

$5,253,582

 

 

$7,561,415

 

 

The hedge fund 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 (losses) gains 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, 2022 and December 31, 2021 not measured at fair value is as follows:

  

 

 

June 30, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$29,207,543

 

 

$-

 

 

$29,207,543

 

  

 

 

December 31, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$28,436,019

 

 

$-

 

 

$28,436,019

 

   

Note 5 - Fair Value of Financial Instruments and Real Estate

 

The estimated fair values of the Company’s financial instruments and real estate, including their fair value level as of June 30, 2022 and December 31, 2021 are as follows:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities-held-to maturity, Level 1

 

$7,768,218

 

 

$6,913,536

 

 

$8,266,334

 

 

$8,753,159

 

Cash and cash equivalents, Level 1

 

$13,200,128

 

 

$13,200,128

 

 

$24,290,598

 

 

$24,290,598

 

Premiums receivable, net, Level 3

 

$11,994,265

 

 

$11,994,265

 

 

$12,318,336

 

 

$12,318,336

 

Reinsurance receivables, net, Level 3

 

$54,652,171

 

 

$54,652,171

 

 

$40,292,438

 

 

$40,292,438

 

Real estate, net of accumulated depreciation, Level 3

 

$2,107,592

 

 

$3,025,000

 

 

$2,144,464

 

 

$3,025,000

 

Reinsurance balances payable, Level 3

 

$10,877,113

 

 

$10,877,113

 

 

$12,961,568

 

 

$12,961,568

 

    

 
20

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$92,762,360

 

 

$-

 

 

$(37,818,392)

 

$54,943,968

 

Change in unearned premiums

 

 

(393,353)

 

 

-

 

 

 

24,833

 

 

 

(368,520)

Premiums earned

 

$92,369,007

 

 

$-

 

 

$(37,793,559)

 

$54,575,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$82,744,761

 

 

$-

 

 

$(14,630,872)

 

$68,113,889

 

Change in unearned premiums

 

 

1,936,706

 

 

 

-

 

 

 

(24,951)

 

 

1,911,755

 

Premiums earned

 

$84,681,467

 

 

$-

 

 

$(14,655,823)

 

$70,025,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$49,778,463

 

 

$-

 

 

$(19,752,683)

 

$30,025,780

 

Change in unearned premiums

 

 

(2,786,080)

 

 

-

 

 

 

662,368

 

 

 

(2,123,712)

Premiums earned

 

$46,992,383

 

 

$-

 

 

$(19,090,315)

 

$27,902,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written

 

$44,615,644

 

 

$-

 

 

$(7,301,365)

 

$37,314,279

 

Change in unearned premiums

 

 

(1,852,772)

 

 

-

 

 

 

(25,081)

 

 

(1,877,853)

Premiums earned

 

$42,762,872

 

 

$-

 

 

$(7,326,446)

 

$35,436,426

 

      

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of June 30, 2022 and December 31, 2021 was $5,773,444 and $2,693,466, respectively.

 

 
21

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,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

Balance at beginning of period

 

$94,948,745

 

 

$82,801,228

 

Less reinsurance recoverables

 

 

(10,637,679)

 

 

(20,154,251)

Net balance, beginning of period

 

 

84,311,066

 

 

 

62,646,977

 

 

 

 

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

 

 

 

Current year

 

 

41,326,838

 

 

 

43,328,342

 

Prior years

 

 

270,401

 

 

 

(8,460)

Total incurred

 

 

41,597,239

 

 

 

43,319,882

 

 

 

 

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

 

 

 

Current year

 

 

23,188,157

 

 

 

19,716,893

 

Prior years

 

 

21,700,500

 

 

 

14,799,794

 

Total paid

 

 

44,888,657

 

 

 

34,516,687

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

 

81,019,648

 

 

 

71,450,172

 

Add reinsurance recoverables

 

 

17,883,412

 

 

 

13,574,866

 

Balance at end of period

 

$98,903,060

 

 

$85,025,038

 

 

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $18,267,384 and $881,729 for the six months ended June 30, 2022 and 2021, 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, 2022 and 2021 was $270,401 unfavorable and $8,460 favorable, respectively. Management, on a quarterly basis, performs a review of open liability claims to assess 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.

 

 
22

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.

 

 
23

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.

 

COVID-19 has introduced additional uncertainty to recent claim trends. The Company reviews the carried reserves levels on a regular basis as additional information becomes available and makes adjustments in the periods in which such adjustments are determined to be necessary. The Company is not aware of any other 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, 2019 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, 2022, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of June 30, 2022 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, 2013 to December 31, 2021 is presented as supplementary unaudited information.

 

 
24

Table of Contents

 

All Lines of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except reported claims data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

As of

 

 

 

For the Years Ended December 31,

 

 

 

 

 

June 30, 2022

 

Accident Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Six

Months Ended

June 30,

2022

 

 

IBNR

Cumulative Number of Reported Claims by Accident Year

 

 

 

(Unaudited 2013 - 2021)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

$10,728

 

 

$9,745

 

 

$9,424

 

 

$9,621

 

 

$10,061

 

 

$10,089

 

 

$10,607

 

 

$10,495

 

 

$10,529

 

 

$10,503

 

 

$6

 

 

 

1,564

 

2014

 

 

 

 

 

 

14,193

 

 

 

14,260

 

 

 

14,218

 

 

 

14,564

 

 

 

15,023

 

 

 

16,381

 

 

 

16,428

 

 

 

16,434

 

 

 

16,505

 

 

 

35

 

 

 

2,138

 

2015

 

 

 

 

 

 

 

 

 

 

22,340

 

 

 

21,994

 

 

 

22,148

 

 

 

22,491

 

 

 

23,386

 

 

 

23,291

 

 

 

23,528

 

 

 

23,541

 

 

 

266

 

 

 

2,558

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,062

 

 

 

24,941

 

 

 

24,789

 

 

 

27,887

 

 

 

27,966

 

 

 

27,417

 

 

 

27,423

 

 

 

108

 

 

 

2,881

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,605

 

 

 

32,169

 

 

 

35,304

 

 

 

36,160

 

 

 

36,532

 

 

 

36,512

 

 

 

310

 

 

 

3,398

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,455

 

 

 

56,351

 

 

 

58,441

 

 

 

59,404

 

 

 

59,838

 

 

 

647

 

 

 

4,226

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,092

 

 

 

72,368

 

 

 

71,544

 

 

 

71,327

 

 

 

4,094

 

 

 

4,485

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,083

 

 

 

62,833

 

 

 

62,261

 

 

 

3,848

 

 

 

5,854

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,425

 

 

 

97,124

 

 

 

10,253

 

 

 

5,762

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,506

 

 

 

10,000

 

 

 

2,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total

 

 

$443,540

 

 

 

 

 

 

 

 

 

 

All Lines of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

For the Years Ended December 31,

 

 

Six

Months Ended

June 30,

 

Accident Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

 

(Unaudited 2013 - 2021)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

$3,405

 

 

$5,303

 

 

$6,633

 

 

$7,591

 

 

$8,407

 

 

$9,056

 

 

$9,717

 

 

$10,016

 

 

$10,392

 

 

$10,402

 

2014

 

 

 

 

 

 

5,710

 

 

 

9,429

 

 

 

10,738

 

 

 

11,770

 

 

 

13,819

 

 

 

14,901

 

 

 

15,491

 

 

 

15,770

 

 

 

16,074

 

2015

 

 

 

 

 

 

 

 

 

 

12,295

 

 

 

16,181

 

 

 

18,266

 

 

 

19,984

 

 

 

21,067

 

 

 

22,104

 

 

 

22,318

 

 

 

22,452

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,364

 

 

 

19,001

 

 

 

21,106

 

 

 

23,974

 

 

 

25,234

 

 

 

25,750

 

 

 

25,977

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,704

 

 

 

24,820

 

 

 

28,693

 

 

 

31,393

 

 

 

32,529

 

 

 

32,821

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,383

 

 

 

44,516

 

 

 

50,553

 

 

 

52,025

 

 

 

53,176

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,933

 

 

 

54,897

 

 

 

58,055

 

 

 

59,819

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,045

 

 

 

50,719

 

 

 

51,982

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,282

 

 

 

72,020

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$365,966

 

 

 

 

 

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

 

$77,574

 

All outstanding liabilities before 2013, net of reinsurance

 

 

275

 

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

 

$77,850

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

 

 

 

  

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.

 

 
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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:

  

Reconciliation of the Disclosure of Incurred and Paid Loss Development

to the Liability for Loss and LAE Reserves

 

 

 

 

 

 

As of

 

(in thousands)

 

June 30, 2022

 

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

 

$77,850

 

Total reinsurance recoverable on unpaid losses

 

 

17,883

 

Unallocated loss adjustment expenses

 

 

3,170

 

Total gross liability for loss and LAE reserves

 

$98,903

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

 

 

 

 

Reinsurance

 

Effective December 31, 2021, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”).

     

The Company’s excess of loss and catastrophe reinsurance treaties expired on June 30, 2022 and the Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2022. Effective October 18, 2021, the Company entered into a stub catastrophe reinsurance treaty covering the period from October 18, 2021 through December 31, 2021. The treaty provided reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, the Company entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

   

 
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 Treaty Period

 

 

 

 

 

 (2021/2023 Treaty)

 

 

 

 

 

 

 

 January 2,

 

 

 July 1,

 

 

 December 31,

 

 

 July 1,

 

 

 December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

2020

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 

 

June 30,

 

 

 January 1,

 

 

June 30,

 

 

December 30,

 

 

June 30,

 

Line of Business

 

2023

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Percent ceded (9)

 

 None (8)

 

 

 

30%

 

 

30%

 

 None (5)

 

 

 None (5)

 

 Risk retained on intial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $1,000,000 of losses (5) (7) (8) (9)

 

$1,000,000

 

 

$700,000

 

 

$700,000

 

 

$1,000,000

 

 

$1,000,000

 

 Losses per occurrence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 subject to quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 reinsurance coverage

 

 None (8)

 

 

$1,000,000

 

 

$1,000,000

 

 

 None (5)

 

 

 None (5)

 

 Expiration date

 

 

(8)

 

January 1, 2023

 

 

January 1, 2023

 

 

 NA (5)

 

 

 NA (5)

 

 Excess of loss coverage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 facultative facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (1) (7)

 

$8,000,000

 

 

$8,400,000

 

 

$8,400,000

 

 

$8,000,000

 

 

$8,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

$1,000,000

 

 

$600,000

 

 

$600,000

 

 

$1,000,000

 

 

$1,000,000

 

 Total reinsurance coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per occurrence (5) (7) (8)

 

$8,000,000

 

 

$8,500,000

 

 

$8,500,000

 

 

$8,000,000

 

 

$8,000,000

 

 Losses per occurrence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 subject to reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (5) (8)

 

$8,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 Expiration date (8)

 

June 30, 2023

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Initial loss subject to personal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 lines quota share treaty

 

 

(8)

 

 

10,000,000

 

 

 

10,000,000

 

 

 None (5)

 

 

 None (5)

 

 Risk retained per catastrophe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occurrence (5) (8) (9) (10)

 

$10,000,000

 

 

$7,400,000

 

 

$7,400,000

 

 

$10,000,000

 

 

$10,000,000

 

 Catastrophe loss coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 in excess of quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (2) (5) (8)

 

$335,000,000

 

 

$335,000,000

 

 

$490,000,000

 

 

$490,000,000

 

 

$475,000,000

 

 Catastrophe stub coverage for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 the period from October 18,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 2021 through December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 2021 (6) 

 

  NA 

 

 

  NA 

 

 

  NA 

 

 

$5,000,000

 

 

  NA 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  in excess of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$5,000,000

 

 

 

 

 

 Reinstatement premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 protection (3) (4)

 

 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 $9,000,000 in total insured value, which covers direct losses from $3,500,000 to $9,000,000 through June 30, 2023.

 

 

(2)

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.

 

 

(3)

For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

 

 

(4)

For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $9,800,000 of catastrophe coverage in excess of $10,000,000.

 

 
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(5)

The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.

 

 

(6)

Excludes freeze and freeze related claims.

 

 

(7)

For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.

 

 

(8)

Personal lines quota share (homeowners, dwelling fire and canine liability) and underlying excess of loss reinsurance will expire on January 1, 2023; reinsurance coverage in effect from January 2, 2023 through June 30, 2023 is only for excess of loss and catastrophe reinsurance treaties.

 

 

(9)

For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

 

 

(10)

Plus losses in excess of catastrophe coverage.

 

 

 

 Treaty Year

 

 

 

July 1, 2022

 

 

July 1, 2021

 

 

July 1, 2020

 

 

 

to

 

 

to

 

 

to

 

 Line of Business

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

95%

 

 

95%

 Risk retained

 

$300,000

 

 

$300,000

 

 

$300,000

 

 Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,700,000

 

 

$4,700,000

 

 Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

 Expiration date

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines (1):

 

 

 

 

 

 

 

 

 

 

 

 

 General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

 Risk retained

 

 

 

 

 

 

 

 

 

$750,000

 

 Excess of loss coverage above risk retained

 

 

 

 

 

 

 

 

 

$3,750,000

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

$750,000

 

 Total reinsurance coverage per occurrence

 

 

 

 

 

 

 

 

 

$3,750,000

 

 Losses per occurrence subject to reinsurance coverage

 

 

 

 

 

 

 

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

  

 

(1)

Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

 

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.

 

 
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Ceding Commission Revenue

 

The Company earned ceding commission revenue under the 2021/2023 Treaty for the three months and six months ended June 30, 2022 based on a fixed provisional commission rate at which provisional ceding commissions will be earned. There was no quota share treaty in effect during the three months and six months ended June 30, 2021. The Company earned ceding commission revenue under its expired quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions were earned, and (ii) a continuing 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.

  

Ceding commission revenue consists of the following:

 

 

 

 Three months ended

 

 

 Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 Provisional ceding commissions earned

 

$4,692,931

 

 

$49,589

 

 

$9,234,464

 

 

$95,088

 

 Contingent ceding commissions earned

 

 

22,656

 

 

 

(3,848)

 

 

162,519

 

 

 

(50,412)

 

 

$4,715,587

 

 

$45,741

 

 

$9,396,983

 

 

$44,676

 

 

Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled periodically based on the Loss Ratio of each treaty year that ends on June 30, for the expired treaties that were subject to contingent commissions. 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, 2022 and December 31, 2021, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,718,000 and $2,881,000, 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”). KICO is required to maintain an investment in capital stock of FHLBNY. Based on redemption provisions of FHLBNY, the stock has no quoted market value and is carried at cost. At its discretion, FHLBNY may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock. At June 30, 2022 and December 31, 2021, no impairment has been recognized. 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. Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within one year of borrowing. KICO is currently able to borrow on an overnight basis. If KICO has collateral, the maximum allowable advance as of June 30, 2022 was approximately $12,438,000. Advances are limited to 85% of the amount of available collateral, which as of June 30, 2022 and December 31, 2021 was $-0-. There have been no borrowings under this facility since KICO became a member of FHLBNY. See Note 13 – Subsequent Events for additional information regarding KICO’s pledged collateral.

 

 
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Table of Contents

     

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 debt as of June 30, 2022 and December 31, 2021 is as follows:

 

 

 

 June 30,

 

 

 December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 5.50% Senior Unsecured Notes

 

$30,000,000

 

 

$30,000,000

 

 Discount

 

 

(16,221)

 

 

(32,442)

 Issuance costs

 

 

(71,898)

 

 

(143,767)

 Debt, net

 

$29,911,881

 

 

$29,823,791

 

 

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 (“Make Whole Call”).

 

Due to the Make Whole Call, management intends to retire the Notes at or close to the scheduled maturity date in December 2022. Management plans to refinance the Notes with a new issue of debt of similar or longer maturity that would result in net proceeds equal to or greater than the principal amount of the current issue. In connection therewith, the Company has engaged an investment banker to serve as exclusive placement agent for a proposed offering by the Company of its securities (including debt, equity and/or preferred securities). The engagement letter indicates that the offering would be of such size as to generate proceeds to the Company of no less than $30,000,000. Subject to regulatory requirements, the Company also plans to use dividends paid to it by KICO, its insurance subsidiary, to repay the Notes. As of June 30, 2022, KICO had negative unassigned surplus and was not permitted to pay the Company any dividends without prior regulatory approval. Further, the Company plans to use available invested assets and cash to repay the Notes. As of June 30, 2022, invested assets and cash of Kingstone was approximately $2,780,000.

 

The Company 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 was 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.

 

 
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Table of Contents

 

Note 8 – Stockholders’ Equity

 

Dividends Declared and Paid

 

Dividends declared and paid on Common Stock were $851,266 and $854,272 for the six months ended June 30, 2022 and 2021, respectively. The Company announced on August 11, 2022 that its Board of Directors approved a quarterly dividend of $0.04 per share payable in cash on September 15, 2022 to stockholders of record as of August 31, 2022 (see Note 13 - Subsequent Events).

 

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 number of shares of Common Stock of the Company that are authorized to be issued pursuant to the 2014 Plan to 1,400,000.

   

The results of operations for the three months ended June 30, 2022 and 2021 include stock-based compensation expense for stock options totaling approximately $2,000 and $14,000, respectively. The results of operations for the six months ended June 30, 2022 and 2021 include stock-based compensation expense for stock options totaling approximately $8,000 and $29,000, respectively. Stock-based compensation expense related to stock options for the three months and six months ended June 30, 2022 and 2021 is net of estimated forfeitures of approximately 18% and 16%, respectively. Such amounts have been included in the condensed consolidated statements of operations and comprehensive (loss) income within other operating expenses.

 

No options were granted during the six months ended June 30, 2022. The fair value of stock options at the grant date are estimated using the Black-Scholes option-pricing model. 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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Table of Contents

 

A summary of stock option activity under the Company’s 2014 Plan for the six months ended June 30, 2022 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, 2022

 

 

107,201

 

 

$8.31

 

 

 

2.92

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Exercised

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Expired/Forfeited

 

 

-

 

 

$-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2022

 

 

107,201

 

 

$8.31

 

 

 

2.43

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and Exercisable at June 30, 2022

 

 

94,701

 

 

$8.26

 

 

 

2.46

 

 

$-

 

 

The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2022 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Common Stock for the options that had exercise prices that were lower than the $3.94 closing price of the Company’s Common Stock on June 30, 2022. No options were exercised, forfeited or expired during the six months ended June 30, 2022. The total intrinsic value of options when forfeited are determined as of the date of forfeiture. The total intrinsic value of options when expired are determined as of the date of expiration.

 

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, 2022, the estimated fair value of unamortized compensation cost related to unvested stock option awards was approximately $2,000. Unamortized compensation cost as of June 30, 2022 is expected to be recognized over a remaining weighted-average vesting period of 0.24 years.

 

As of June 30, 2022, there were 352,066 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 six months ended June 30, 2022 is as follows:

 

Restricted Stock Awards

 

Shares

 

 

 Weighted Average Grant Date Fair Value per Share

 

 

 Aggregate Fair Value

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

535,410

 

 

$7.01

 

 

$3,753,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

98,456

 

 

$5.53

 

 

$544,503

 

Vested

 

 

(234,219)

 

$7.32

 

 

$(1,715,220)

Forfeited

 

 

(9,748)

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

 

389,899

 

 

$6.91

 

 

$2,582,506

 

 

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, 2022 and 2021, stock-based compensation for these grants was approximately $479,000 and $472,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive (loss) income. For the six months ended June 30, 2022 and 2021, stock-based compensation for these grants was approximately $998,000 and $952,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive (loss) 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.

 

Employee Stock Purchase Plan

   

On June 19, 2021, the Company’s Board of Directors adopted the Kingstone Companies, Inc. Employee Stock Purchase Plan (the “ESPP”), subject to stockholder approval. Such approval was obtained on August 10, 2021. The purpose of the ESPP is to provide eligible employees of the Company with an opportunity to use payroll deductions to purchase shares of Common Stock of the Company. The maximum number of shares of Common Stock that may be purchased under the ESPP is 750,000, subject to adjustment as provided for in the ESPP. The ESPP was effective August 10, 2021 and expires on August 10, 2031. A maximum of 5,000 shares of Common Stock may be purchased by an employee during any offering period.

 

The ESPP currently provides for an offering period from November 1, 2021 through October 31, 2022 (“2021/2022 Offering”). For the three months ended June 30, 2022 and 2021, stock-based compensation under the 2021/2022 Offering was approximately $5,000 and $-0-, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2022 and 2021, stock-based compensation under the 2021/2022 Offering was approximately $11,000 and $-0-, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive (loss) income.

 

 
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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.

 

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

 

 

 

 June 30,

 

 

 December 31,

 

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 Deferred tax asset: 

 

 

 

 

 

 

 Net operating loss carryovers (1)

 

$3,689,538

 

 

$1,112,318

 

 Claims reserve discount 

 

 

1,140,458

 

 

 

1,186,789

 

 Unearned premium 

 

 

3,391,201

 

 

 

3,246,364

 

 Deferred ceding commission revenue

 

 

2,049,461

 

 

 

2,047,187

 

 Net unrealized losses on securities

 

 

3,002,462

 

 

 

-

 

 Other

 

 

1,057,762

 

 

 

1,220,898

 

 Total deferred tax assets 

 

 

14,330,882

 

 

 

8,813,556

 

 

 

 

 

 

 

 

 

 

 Deferred tax liability: 

 

 

 

 

 

 

 

 

 Investment in KICO (2)

 

 

759,543

 

 

 

759,543

 

 Deferred acquisition costs

 

 

4,625,447

 

 

 

4,670,187

 

 Intangibles

 

 

105,000

 

 

 

105,000

 

 Depreciation and amortization 

 

 

1,496,800

 

 

 

1,046,817

 

 Net unrealized gains on securities

 

 

-

 

 

 

2,039,756

 

 Total deferred tax liabilities 

 

 

6,986,790

 

 

 

8,621,303

 

 

 

 

 

 

 

 

 

 

 Net deferred income tax asset

 

$7,344,092

 

 

$192,253

 

 

(1)

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

 

 
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June 30,

 

 

 December 31,

 

 

 

 

 Type of NOL

 

2022

 

 

2021

 

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

Federal only, NOL from 2022 and 2021

 

$3,689,538

 

 

$1,112,318

 

 

 

 

NOL carried back

 

 

-

 

 

 

-

 

 

 

 

Federal only, NOL from 2022 and 2021

 

 

3,689,538

 

 

 

1,112,318

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

State only (A)

 

 

2,166,732

 

 

 

2,099,239

 

 

December 2027 -December 2042

 

Valuation allowance

 

 

(2,166,732)

 

 

(2,099,239)

 

 

 

State only, net of valuation allowance

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred tax asset from net operating loss carryovers

 

$3,689,538

 

 

$1,112,318

 

 

 

 

 

(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of June 30, 2022 and December 31, 2021 was approximately $33,334,000 and $32,296,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the condensed consolidated statements of operations and comprehensive (loss) income 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 2042.

 

(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, 2022 and 2021. If any had been recognized these would have been reported in income tax expense.

 

 
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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, 2018 through December 31, 2020 remain subject to examination.

 

Note 10 – (Loss) Earnings Per Common Share

 

Basic net (loss) earnings per common share is computed by dividing loss available to common shareholders by the weighted-average number of shares of Common Stock outstanding. Diluted 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 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 loss per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the three months and six months ended June 30, 2022 and 2021, no options were included in the computation of diluted 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 loss per common share has not been adjusted for the effect of such options.

 

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

  

 

 

 Three months ended

 

 

 Six months ended

 

 

 

 June 30,

 

 

 June 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Weighted average number of shares outstanding

 

 

10,644,578

 

 

 

10,670,831

 

 

 

10,637,553

 

 

 

10,673,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Effect of dilutive securities, common share equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Stock options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Restricted stock awards

 

 

-

 

 

 

175,893

 

 

 

-

 

 

 

136,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Weighted average number of shares outstanding,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 used for computing diluted (loss) earnings per share

 

 

10,644,578

 

 

 

10,846,724

 

 

 

10,637,553

 

 

 

10,809,924

 

 

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.

 

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. See Note 2 - Accounting Policies for additional information regarding the accounting for leases.

 

 
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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 had a term of seven years and two months expiring December 31, 2026. During January 2022, pursuant to a mutual agreement with the landlord at a cost of $40,000, the Cosi lease was terminated effective as of January 31, 2022.

  

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

  

 

 

 Three months ended

 

 

 Six months

 ended

 

 Lease cost

 

June 30, 2022

 

 

June 30, 2022

 

 Operating lease

 

$41,342

 

 

$89,810

 

 Short-term leases

 

 

-

 

 

 

-

 

 Total lease cost (1) (2)

 

$41,342

 

 

$89,810

 

 

 

 

 

 

 

 

 

 

 Other information on operating leases

 

 

 

 

 

 

 

 

 Cash payments included in the measurement of lease

 

 

 

 

 

 

 

 

 liability reported in operating cash flows

 

$47,483

 

 

$100,486

 

 Discount rate

 

 

5.50%

 

 

5.50%

 Remaing lease term in years

 

 

 

 

 

 

 

 

 KICO

 

 1.75 years

 

 

 1.75 years

 

 Cosi

 

 

-

 

 

 

-

 

 

 

(1)

Included in the condensed consolidated statements of operations and comprehensive loss 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, 2022:

  

For the Year

 

 

 Ending

 

 

 December 31,

 

 Total

 

Remainder of 2022

 

$94,967

 

2023

 

 

194,919

 

2024

 

 

49,145

 

 Total undiscounted lease payments

 

 

339,031

 

 Less:  present value adjustment

 

 

36,909

 

 Operating lease liability (1)

 

$302,122

 

 

 

(1)

The operating lease liability is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

 

Rent expense for the three months ended June 30, 2022 and 2021 amounted to $41,342 and $58,988, respectively. Rent expense for the six months ended June 30, 2022 and 2021 amounted to $89,810 and $117,977, respectively. Rent expense is included in the accompanying condensed consolidated statements of operations and comprehensive (loss) income within other underwriting expenses.

 

 
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Employment Agreements

 

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

 

Employment Agreement effective as of January 1, 2020

 

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 “Second Amended Goldstein Employment Agreement”). The Second Amended Goldstein Employment Agreement became effective as of January 1, 2020 and expires on December 31, 2022. The Second Amended Goldstein 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 Second Amended Goldstein 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 Second Amended Goldstein Employment Agreement, Mr. Goldstein was 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 Second Amended Goldstein Employment Agreement) as of December 31, 2022 as compared to December 31, 2019 (with the maximum LTC payment being due if the average per annum increase is at least 14%). Pursuant to the Third Amended Goldstein Employment Agreement (discussed below), Mr. Goldstein relinquished the right to receive the LTC. Pursuant to the Second Amended Goldstein 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 Second Amended Goldstein Employment Agreement), Mr. Goldstein would be entitled to receive his base salary and the 6% bonus 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 and accrued bonus 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 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 Second Amended Goldstein 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 vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and will vest with respect to one-sixth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates. Also pursuant to the Second Amended Goldstein Employment Agreement, Mr. Goldstein received a grant, under the terms of the 2014 Plan, during January 2021, of 230,769 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. This 2021 grant vested with respect to one-half of the award on the first anniversary of the grant date and will vest with respect to one-fourth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates. Further, pursuant to the Second Amended Goldstein Employment Agreement, Mr. Goldstein received in 2020, 2021, and 2022 a grant, under the terms of the 2014 Plan 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 vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and will vest with respect to one-sixth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates. In January 2021, Mr. Goldstein was granted 21,000 shares of restricted stock pursuant to this provision. This grant vested with respect to one-half of the award on the first anniversary of the grant date and will vest with respect to one-fourth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates. In January 2022, Mr. Goldstein was granted 27,300 shares of restricted stock pursuant to this provision. This grant will vest with respect to one-half of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates. Pursuant to the 2014 Plan, Mr. Goldstein’s unvested restricted stock awards will vest in the event of a change in control of the Company.

 

 
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Employment Agreement effective as of January 1, 2023

 

On June 27, 2022, the Company and Mr. Goldstein entered into a third amended and restated employment agreement which takes effect as of January 1, 2023, and expires on December 31, 2024 (the “Third Amended Goldstein Employment Agreement”).

 

Pursuant to the Third Amended Goldstein Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 3% of our 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 1.25 times his base salary. Pursuant to the Third Amended Goldstein Employment Agreement, Mr. Goldstein would be entitled to receive, under certain circumstances, a payment equal to 1.5 times his then annual base salary and his accrued bonus in the event of the termination of his employment within eighteen months following a change of control of the Company.

 

Meryl Golden, Chief Operating Officer

 

Employment Agreement effective as of January 1, 2021

 

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 President and Chief Operating Officer. The Golden Employment Agreement became effective as of September 25, 2019 (amended on December 24, 2020) and now expires on December 31, 2022.

    

Pursuant to the Golden Employment Agreement, Ms. Golden is entitled to receive an annual salary of $500,000. The Golden Employment Agreement also provides for the grant on the effective date of a five year option for the purchase of 50,000 shares of the Company’s Common Stock pursuant to the 2014 Plan. The options granted vest in four equal installments, with the first installment vesting on the grant date, and the remaining installments vesting on the first, second, and third anniversaries of the grant date, subject to the terms of the stock option agreement between the Company and Ms. Golden. Pursuant to the Golden Employment Agreement, as amended, in each of January 2021 and January 2022, Ms. Golden was granted 30,000 shares of restricted Common Stock pursuant to the 2014 Plan. Each such grant will vest in three equal installments on each of the first, second and third anniversaries of the grant date. Pursuant to the 2014 Plan, Ms. Golden’s outstanding stock options and restricted stock awards will vest in the event of a change in control of the Company.

 

 
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Employment Agreement effective as of January 1, 2023

 

On June 27, 2022, the Company and Ms. Golden entered into a second amended and restated employment agreement which takes effect as of January 1, 2023, and expires on December 31, 2024 (the “Second Amended Golden Employment Agreement”).

 

Pursuant to the Second Amended Golden Employment Agreement, Ms. Golden is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 3% of the Company’s consolidated income from operations before taxes, exclusive of our consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 1.25 times her base salary. In addition, pursuant to the Second Amended Golden Employment Agreement, Ms. Golden is entitled to receive a grant, under the terms of the 2014 Plan, during each of January 2023 and January 2024, under certain circumstances, 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. The 2023 grant will vest with respect to one-half of the award on the first anniversary of the grant date and one-half of the award on December 31, 2024, based on the continued provision of services through such dates. The 2024 grant will vest on December 31, 2024, based on the continued provision of services through such date. In the event that we are precluded from making a grant in 2023 or 2024, then instead Ms. Golden shall be entitled to receive a cash bonus of $136,500 for such year. Further, pursuant to the Second Amended Golden Employment Agreement, Ms. Golden would be entitled to receive, under certain circumstances, a payment equal to 1.5 times her then annual base salary and her accrued bonus in the event of the termination of her employment within eighteen months following a change of control of the Company.

 

COVID-19

 

The outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus including the emergence of new strains 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. Although the impact has been manageable thus far, 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, prevent 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 – Employee Benefit Plans

 

Employee Bonus Plan

 

For the six months ended June 30, 2022 and year ended December 31, 2021 the Company did not accrue for, or pay, bonuses related to the employee bonus plan.

 

 
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401 (k) Plan

 

The Company maintains a salary reduction plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for its qualified employees. The Company matches 100% of each participant’s contribution up to 4% of the participant’s eligible contribution. The Company incurred approximately $74,000 of expense for the three months ended June 30, 2022 and 2021, related to the 401(k) Plan. The Company incurred approximately $136,000 and $130,000, respectively, of expense for the six months ended June 30, 2022 and 2021, related to the 401(k) Plan, which is recorded in other operating expenses on the accompanying consolidated statements of operations and comprehensive (loss) income.

    

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, 2022 and December 31, 2021 amounted to $1,019,958 and $907,914, 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, 2022 and 2021.

 

Note 13 – Subsequent Events

 

The Company has evaluated events that occurred subsequent to June 30, 2022 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, 2022, the Company entered into new excess of loss and catastrophe reinsurance treaties (see Note 6 – Property and Casualty Insurance Activity - “Reinsurance”).

 

Kroll Bond Rating Agency

 

On July 22, 2022, KICO’s Kroll Bond Rating Agency (“KBRA”) financial strength rating was reduced from “A-“ to “BBB+” and the Company’s KBRA issuer rating and the long-term credit rating of the Company’s $30.0 million 5.5% senior unsecured notes due in 2022 were reduced from “BBB” to “BB+”. The outlook of the credit ratings has been revised from stable to negative. Subsequently, at the request of the Company, KBRA withdrew all ratings for KICO and the Company.

 

 
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A.M. Best

 

On July 28, 2022, KICO’s A.M. Best financial strength rating was downgraded from B+ (Good) to B (Fair) and its long-term issuer credit rating (“Long-Term ICR”) was downgraded from “bbb-” (Good) to “bb” (Fair). Concurrently, A.M. Best also downgraded the Company’s Long-Term ICR from “bb-” (Fair) to “b-” (Marginal). Also downgraded was the A. M. Best long-term issue credit rating on the Company’s $30.0 million 5.50% senior unsecured notes due 2022 from “bb-” (Fair) to “ccc+” (Weak). The outlook of the credit ratings were revised from stable to negative. Concurrently, A.M. Best’s public rating for the Company was withdrawn.

 

Non-binding Indication of Interest

 

On August 5, 2022, Griffin Highline Capital LLC (“Griffin Highline”) filed Amendment No. 3 to Schedule 13D with the SEC which indicates that, following substantial completion of Griffin Highline’s due diligence and after discussions with the management of the Company, Griffin Highline submitted a final non-binding indication of interest to the Company’s Board of Directors proposing a transaction whereby an entity formed by Griffin Highline would acquire all of the outstanding equity of the Company. Following delivery of the non-binding proposal, the Company agreed to extend the period of exclusivity with Griffin Highline under its previously executed exclusivity agreement for a limited time period to further pursue the proposal.

 

Dividends Declared

 

On August 11, 2022, the Company announced that its Board of Directors approved a quarterly dividend of $0.04 per share payable in cash on September 15, 2022 to stockholders of record as of the close of business on August 31, 2022 (see Note 8 – Stockholders’ Equity).

 

Federal Home Loan Bank

 

On August 10, 2022, KICO transferred and pledged ten FNMA bonds to the FHLBNY. As of August 8, 2022 the book value of these bonds is $15,144,568 and their fair value is $13,567,331. KICO will have a credit facility with respect to the transferred bonds and the maximum advance KICO will be able to receive is approximately $12,000,000.

 

 
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ITEM 2MANAGEMENT’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 months and six months ended June 30, 2022, respectively, 79.8% and 80.2% 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. 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 (“Net Cosi Revenue”). Commission expense is reduced by Net Cosi Revenue and Cosi-related operating expenses are included in other operating expenses. Cosi-related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, Cosi’s expenses are not included in the calculation of our combined ratio as described below.

 

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

 

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

 

Other operating expenses include our corporate expenses as a holding company and operating expenses of Cosi. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment, occupancy 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 as of July 31, 2019 for these lines were non-renewed at the end of their annual terms. As of June 30, 2022 and December 31, 2021, there were no commercial liability policies in-force. As of June 30, 2022, these expired policies represent approximately 18.6% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

 

 
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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.

 

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.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our condensed consolidated financial statements and related notes. In preparing these condensed consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of similar companies. See the Critical Accounting Estimates section within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 for further information.

     

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 income taxes, the impairment of investment securities, and the valuation of stock-based compensation. See Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

     

Non-binding Indication of Interest

 

 On May 4, 2022, our Board of Directors received a preliminary non-binding indication of interest from Griffin Highline Capital LLC (“Griffin Highline”) with regard to an acquisition of all of the outstanding equity of our company. On August 5, 2022, Griffin Highline filed Amendment No. 3 to Schedule 13D with the SEC which indicates that, following substantial completion of Griffin Highline’s due diligence and after discussions with management of our company, Griffin Highline submitted a final non-binding indication of interest to our Board of Directors proposing a transaction whereby an entity formed by Griffin Highline would acquire all of the outstanding equity of our company. Following delivery of the non-binding proposal, we agreed to extend the period of exclusivity with Griffin Highline under its previously executed exclusivity agreement for a limited time period to further pursue the proposal. TigerRisk Capital Markets & Advisory has been engaged to advise our Board of Directors regarding strategic transactions. Our Board of Directors will carefully review the proposal to determine the course of action that it believes is in the best interest of our company and all of our stockholders. Due to the uncertainty as to the consummation of a transaction of the type sought by Griffin Highline, nothing in this Quarterly Report, including the financial statements comprising a portion hereof, include any adjustments to reflect the possible effects of the consummation of such a transaction.

 

 
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Consolidated Results of Operations

 

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

     

                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)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct written premiums

 

$92,762

 

 

$82,745

 

 

$10,017

 

 

 

12.1%

 Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

na

%

 

 

 

92,762

 

 

 

82,745

 

 

 

10,017

 

 

 

12.1%

 Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded to quota share treaties (1)

 

 

21,949

 

 

 

236

 

 

 

21,713

 

 

 

9,200.4%

 Ceded to excess of loss treaties

 

 

1,743

 

 

 

1,059

 

 

 

684

 

 

 

64.6%

 Ceded to catastrophe treaties

 

 

14,126

 

 

 

13,336

 

 

 

790

 

 

 

5.9%

 Total ceded written premiums

 

 

37,818

 

 

 

14,631

 

 

 

23,187

 

 

 

158.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net written premiums

 

 

54,944

 

 

 

68,114

 

 

 

(13,170)

 

 

(19.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

(393)

 

 

1,937

 

 

 

(2,330)

 

 

120.3%

 Ceded to quota share treaties (1)

 

 

25

 

 

 

(25)

 

 

50

 

 

na

%

 Change in net unearned premiums

 

 

(368)

 

 

1,912

 

 

 

(2,280)

 

 

119.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Premiums earned 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

92,369

 

 

 

84,681

 

 

 

7,688

 

 

 

9.1%

 Ceded to reinsurance treaties

 

 

(37,794)

 

 

(14,655)

 

 

(23,139)

 

 

(157.9)%

 Net premiums earned 

 

 

54,575

 

 

 

70,026

 

 

 

(15,451)

 

 

(22.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceding commission revenue (1)

 

 

9,397

 

 

 

45

 

 

 

9,352

 

 

na

%

 Net investment income 

 

 

1,993

 

 

 

3,461

 

 

 

(1,468)

 

 

(42.4)%

 Net (losses) gains on investments 

 

 

(8,916)

 

 

5,276

 

 

 

(14,192)

 

na

%

 Other income

 

 

480

 

 

 

296

 

 

 

184

 

 

 

62.2%

 Total revenues 

 

 

57,530

 

 

 

79,104

 

 

 

(21,575)

 

 

(27.3)%

 Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

52,832

 

 

 

44,096

 

 

 

8,736

 

 

 

19.8%

 Losses from catastrophes (2)

 

 

7,032

 

 

 

106

 

 

 

6,926

 

 

 

6,534.0%

 Total direct and assumed loss and loss adjustment expenses 

 

 

59,864

 

 

 

44,202

 

 

 

15,662

 

 

 

35.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

14,367

 

 

 

882

 

 

 

13,485

 

 

 

1,528.9%

 Losses from catastrophes (2)

 

 

3,901

 

 

 

-

 

 

 

3,901

 

 

na

%

 Total ceded loss and loss adjustment expenses 

 

 

18,268

 

 

 

882

 

 

 

17,386

 

 

 

1,971.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

38,465

 

 

 

43,214

 

 

 

(4,749)

 

 

(11.0)%

 Losses from catastrophes (2)

 

 

3,132

 

 

 

106

 

 

 

3,026

 

 

 

2,854.7%

 Net loss and loss adjustment expenses 

 

 

41,597

 

 

 

43,320

 

 

 

(1,723)

 

 

(4.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commission expense 

 

 

16,832

 

 

 

16,509

 

 

 

323

 

 

 

2.0%

 Other underwriting expenses 

 

 

13,441

 

 

 

13,160

 

 

 

281

 

 

 

2.1%

 Other operating expenses 

 

 

1,548

 

 

 

2,286

 

 

 

(738)

 

 

(32.3)%

 Depreciation and amortization

 

 

1,647

 

 

 

1,660

 

 

 

(13)

 

 

(0.8)%

 Interest expense

 

 

913

 

 

 

913

 

 

 

-

 

 

-

%

 Total expenses 

 

 

75,978

 

 

 

77,848

 

 

 

(1,870)

 

 

(2.4)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (Loss) income before taxes

 

 

(18,448)

 

 

1,256

 

 

 

(19,704)

 

na

%

 Income tax (benefit) expense

 

 

(3,871)

 

 

244

 

 

 

(4,115)

 

na

 Net (loss) income

 

$(14,577)

 

$1,012

 

 

$(15,589)

 

na

%

                              

(Columns in the table above may not sum to totals due to rounding) 

 

 
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(1)

Effective December 31, 2021, we entered into a 30% personal lines quota share treaty.

(2)

The six months ended June 30, 2022 and 2021 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.

   

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

 

Percentage Point Change

 

 

 Percent

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss ratio

 

 

76.2%

 

 

61.9%

 

 

14.3

 

 

 

23.1%

 Net underwriting expense ratio

 

 

37.4%

 

 

41.9%

 

 

(4.5)

 

 

(10.7)%

 Net combined ratio

 

 

113.6%

 

 

103.8%

 

 

9.8

 

 

 

9.4%

 

Direct Written Premiums

 

Direct written premiums during the six months ended June 30, 2022 (“Six Months 2022”) were $92,762,000 compared to $82,745,000 during the six months ended June 30, 2021 (“Six Months 2021”). The increase of $10,017,000, or 12.1%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Six Months 2022 were $86,955,000, an increase of $8,347,000, or 10.6%, from $78,608,000 in Six Months 2021. The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force. Direct written premiums from our livery physical damage business for Six Months 2022 were $5,727,000, an increase of $1,704,000, or 42.3%, from $4,023,000 in Six Months 2021. The increase in livery physical damage direct written premiums was due to the declining effect of the COVID-19 pandemic in our geographic area.

 

                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 Core business were $74,382,000 in Six Months 2022 compared to $66,531,000 in Six Months 2021. Direct written premiums from our Expansion business were $18,380,000 in Six Months 2022 compared to $16,214,000 in Six Months 2021.

 

Net Written Premiums and Net Premiums Earned

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). There was no quota share reinsurance treaty in effect in Six Months 2021. Net written premiums decreased $13,170,000, or 19.3%, to $54,944,000 in Six Months 2022 from $68,114,000 in Six Months 2021. 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). In Six Months 2022, our premiums ceded under quota share treaties increased by $23,187,000 in comparison to ceded premiums in Six Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Six Months 2022, compared to no personal lines quota share treaty in Six Months 2021.

 

 
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Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Six Months 2022, our ceded excess of loss reinsurance premiums increased by $684,000 over the comparable ceded premiums for Six Months 2021. The increase was due to an increase in subject premiums and additional coverage obtained. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty.

    

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 2022, our premiums ceded under catastrophe treaties increased by $790,000 over the comparable ceded premiums in Six Months 2021. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as of August 31, 2020. Effective July 1, 2021, and continuing through June 30, 2022, our ceded catastrophe premiums were paid based on the total insured value of our risks as of August 31, 2021. Effective July 1, 2022, and continuing through June 30, 2023, our ceded catastrophe premiums will be paid based on the total insured value of our risks as of August 31, 2022.

 

Net premiums earned

 

Net premiums earned decreased $15,451,000, or 22.1%, to $54,575,000 in Six Months 2022 from $70,026,000 in Six Months 2021. The decrease was due to the inception of the 2021/2023 Treaty on December 31, 2021. The decrease resulting from the 2021/2023 Treaty in Six Months 2022 was partially offset by an increase in direct written premium.

 

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)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Provisional ceding commissions earned

 

$9,234

 

 

$95

 

 

$9,139

 

 

 

9,620.0%

 Contingent ceding commissions earned

 

 

163

 

 

 

(50)

 

 

213

 

 

n/a%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total ceding commission revenue

 

$9,397

 

 

$45

 

 

$9,352

 

 

 

20,782.2%

 

Ceding commission revenue was $9,397,000 in Six Months 2022 compared to $45,000 in Six Months 2021. The increase of $9,352,000 was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

 

 
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Provisional Ceding Commissions Earned

 

In Six Months 2022 we earned provisional ceding commissions from personal lines earned premiums ceded under the 2021/2023 Treaty which was effective as of December 31, 2021. There was no personal lines quota share in effect in Six Months 2021.

 

Contingent Ceding Commissions Earned

 

The structure of the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. 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 received.

 

Net Investment Income

 

Net investment income was $1,993,000 in Six Months 2022 compared to $3,461,000 in Six Months 2021, a decrease of $1,468,000, or 42.4%. The decrease in investment income is attributable to a $766,000 reversal of prior years’ estimated accrued interest income stemming from an error in third party investment reporting. The decline of investment income is also attributable to the disposal of income bearing equity securities. The average yield on invested assets was 3.51% as of June 30, 2022 compared to 3.45% as of June 30, 2021.

    

Cash and invested assets were $193,784,000 as of June 30, 2022 compared to $234,100,000 as of June 30, 2021. The $40,316,000 decrease in cash and invested assets was primarily attributable to cash paid to reinsurers at the inception of the 2021/2023 Treaty, losses paid in connection with catastrophe losses incurred in 2021 and 2022 and unrealized losses on our investment portfolio.

 

Net Gains and Losses on Investments

 

Net losses on investments were $8,916,000 in Six Months 2022 compared to net gains of $5,276,000 in Six Months 2021. Unrealized losses on our equity securities and other investments in Six Months 2022 were $8,705,000, compared to net gains of $3,431,000 in Six Months 2021. Realized losses on sales of investments were $210,900 in Six Months 2022 compared to realized gains of $1,844,000 in Six Months 2021.

 

Other Income

 

                Other income was $480,000 in Six Months 2022 compared to $296,000 in Six Months 2021, an increase of $184,000, or 62.2%.

 

Net Loss and LAE

 

Net loss and LAE was $41,597,000 for Six Months 2022 compared to $43,320,000 for Six Months 2021. The net loss ratio was 76.2% in Six Months 2022 compared to 61.9% in Six Months 2021, an increase of 14.3 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:

  

king_10qimg72.jpg

    

(Components may not sum to totals due to rounding)

   

 For Six Months 2022, the loss ratio was higher than Six Months 2021 due to water damage property claims, which were primarily driven by winter-related water damage claims resulting from freezing temperature.

 

The estimated net catastrophe losses were $3,132,000 for Six Months 2022, which contributed 5.7 points to the loss ratio. This is mostly driven by two winter events in the first quarter. There were also five minor wind catastrophe events during Six Months 2022, but the impact was not significant. As a comparison, catastrophe events had a loss ratio impact of only 0.2 point for Six Months 2021 due to a very mild winter season last year.

 

Prior years in total have unfavorable development of $270,000 for Six Months 2022, driven by large fire losses, which occurred in 2021. This contributed 0.5 point to the loss ratio.

 

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

 

 
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Table of Contents

 

Commission Expense

 

Commission expense was $16,832,000 in Six Months 2022 or 18.2% of direct earned premiums. Commission expense was $16,509,000 in Six Months 2021 or 19.5% of direct earned premiums. The increase of $323,000 was primarily due to an increase in direct earned premiums of $7,688,000 to $92,369,000 offset in part by a reduction of commission rate on our Select Products and the reduction to contingent commissions, which the producers now earn only if KICO has an operating profit.

 

 Other Underwriting Expenses

 

Other underwriting expenses were $13,441,000, or 14.6% of direct earned premiums, in Six Months 2022 compared to $13,160,000, or 15.5% of direct earned premiums, in Six Months 2021. The increase of $281,000, or 2.1%, was primarily due to increases in expenses related to our growth in direct earned premiums, and the reduction as a percentage of direct earned premiums is due to our continuing initiative to reduce expenses with the use of technology.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $5,066,000 in Six Months 2022 compared to $5,079,000 in Six Months 2021. The modest decrease of $13,000, or 0.3%, compares favorably with the 12.1% increase in direct written premiums.

    

 
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Our net underwriting expense ratio in Six Months 2022 was 37.4% compared to 41.9% in Six Months 2021. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

 Six months ended

 

 

Percentage

 

 

 

 June 30,

 

 

Point  Changes 

 

 

 

2022

 2021

 

 Other underwriting expenses

 

 

 

 

 

 

 

 

 

 Employment costs

 

 

9.3%

 

 

7.3%

 

 

2.0

 

 Underwriting fees (inspections/surveys)

 

 

1.8

 

 

 

1.4

 

 

 

0.4

 

 IT expenses

 

 

4.2

 

 

 

3.1

 

 

 

1.1

 

 Profesional fees

 

 

1.6

 

 

 

1.4

 

 

 

0.2

 

 Other expenses

 

 

7.7

 

 

 

5.5

 

 

 

2.2

 

 Total other underwriting expenses

 

 

24.6

 

 

 

18.7

 

 

 

5.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commission expense

 

 

30.8

 

 

 

23.6

 

 

 

7.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

 Provisional

 

 

(16.9)

 

 

(0.1)

 

 

(16.8

)

 Contingent

 

 

(0.3)

 

 

0.1

 

 

 

(0.4

)

 Total ceding commission revenue

 

 

(17.2)

 

 

-

 

 

 

(17.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other income

 

 

(0.9)

 

 

(0.4)

 

 

(0.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net underwriting expense ratio

 

 

37.4%

 

 

41.9%

 

 

(4.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

 

The overall 17.2 percentage point increase in the benefit from ceding commissions in Six Months 2022 was driven by the increase in provisional ceding commission revenue due to the inception of the 2021/2023 Treaty on December 31, 2021. The components of our net underwriting expense ratio related to other underwriting expenses and commissions increased due to a higher percentage of our direct earned premiums in Six Months 2022 being ceded due to the inception of the 2021/2023 Treaty.

    

 
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Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $1,548,000 for Six Months 2022 compared to $2,286,000 for Six Months 2021. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

 

 

 

 Six months ended

 

 

 

 

 

 

 

 June 30,

 

 

 

 

 

($ in thousands)

 

 2022

 

 

 2021

 

 

 Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 Employement costs

 

$(96)

 

$597

 

 

$(692)

 

na%

 

  Bonuses 

 

 

-

 

 

 

-

 

 

 

-

 

 

 na

 

  Equity compensation 

 

 

1,016

 

 

 

981

 

 

 

35

 

 

 

3.6

 

  Professional 

 

 

147

 

 

 

157

 

 

 

(10)

 

 

(6.4)

  Directors fees 

 

 

164

 

 

 

164

 

 

 

-

 

 

 

-

 

  Insurance 

 

 

77

 

 

 

120

 

 

 

(43)

 

 

(35.8)

  Other expenses 

 

 

240

 

 

 

267

 

 

 

(28)

 

 

(10.4)

 Total other operating expenses

 

$1,548

 

 

$2,286

 

 

$(738)

 

 

(32.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

The decrease in Six Months 2022 of $738,000, or 32.3%, as compared to Six Months 2021 was primarily due to a decrease in employment costs. The decrease in employment costs was due to staff reductions and fluctuations in deferred compensation liability related to changes in the underlying invested portfolio.

 

Depreciation and Amortization

 

Depreciation and amortization was $1,647,000 in Six Months 2022 compared to $1,660,000 in Six Months 2021. The decrease of $13,000, or 0.8%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years.

 

Interest Expense

 

Interest expense was $913,000 for both Six Months 2022 and Six Months 2021. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017.

 

Income Tax (Benefit) Expense

 

Income tax benefit in Six Months 2022 was $3,871,000, which resulted in an effective tax benefit rate of 21.0%. Income tax expense in Six Months 2021 was $244,000, which resulted in an effective tax rate of 19.4%. Loss before taxes was $18,448,000 in Six Months 2022 compared to income before taxes of $1,256,000 in Six Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Six Months 2022 compared to Six Months 2021.

     

Net (Loss) Income

 

Net loss was $14,577,000 in Six Months 2022 compared to net income of $1,012,000 in Six Months 2021. The increase in net loss of $15,589,000 was due to the circumstances described above.

     

 
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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

 

                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)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct written premiums

 

$49,778

 

 

$44,616

 

 

$5,162

 

 

 

11.6%

 Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

na%

 

 

 

 

49,778

 

 

 

44,616

 

 

 

5,162

 

 

 

11.6%

 Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded to quota share treaties (1)

 

 

11,803

 

 

 

98

 

 

 

11,705

 

 

 

11,943.9%

 Ceded to excess of loss treaties

 

 

886

 

 

 

535

 

 

 

351

 

 

 

65.6%

 Ceded to catastrophe treaties

 

 

7,063

 

 

 

6,669

 

 

 

394

 

 

 

5.9%

 Total ceded written premiums

 

 

19,752

 

 

 

7,302

 

 

 

12,450

 

 

 

170.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net written premiums

 

 

30,026

 

 

 

37,314

 

 

 

(7,288)

 

 

(19.5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

(2,786)

 

 

(1,852)

 

 

(934)

 

 

(50.4)%

 Ceded to quota share treaties (1)

 

 

663

 

 

 

(25)

 

 

688

 

 

na%

 

 Change in net unearned premiums

 

 

(2,123)

 

 

(1,877)

 

 

(246)

 

 

(13.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Premiums earned 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed

 

 

46,993

 

 

 

42,762

 

 

 

4,231

 

 

 

9.9%

 Ceded to reinsurance treaties

 

 

(19,091)

 

 

(7,326)

 

 

(11,765)

 

 

(160.6)%

 Net premiums earned 

 

 

27,902

 

 

 

35,436

 

 

 

(7,534)

 

 

(21.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceding commission revenue (1)

 

 

4,716

 

 

 

46

 

 

 

4,670

 

 

na%

 

 Net investment income 

 

 

634

 

 

 

1,678

 

 

 

(1,044)

 

 

(62.2)%

 Net (losses) gains on investments 

 

 

(4,517)

 

 

2,315

 

 

 

(6,832)

 

na%

 

 Other income

 

 

245

 

 

 

125

 

 

 

120

 

 

 

96.0%

 Total revenues 

 

 

28,979

 

 

 

39,600

 

 

 

(10,621)

 

 

(26.8)%

 Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

26,323

 

 

 

20,940

 

 

 

5,383

 

 

 

25.7%

 Losses from catastrophes (2)

 

 

195

 

 

 

(123)

 

 

318

 

 

na%

 

 Total direct and assumed loss and loss adjustment expenses 

 

 

26,519

 

 

 

20,817

 

 

 

5,701

 

 

 

27.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

7,780

 

 

 

58

 

 

 

7,722

 

 

 

13,313.8%

 Losses from catastrophes (2)

 

 

83

 

 

 

-

 

 

 

83

 

 

na%

 

 Total ceded loss and loss adjustment expenses 

 

 

7,863

 

 

 

58

 

 

 

7,805

 

 

 

13,456.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

18,544

 

 

 

20,882

 

 

 

(2,338)

 

 

(11.2)%

 Losses from catastrophes (2)

 

 

112

 

 

 

(123)

 

 

235

 

 

na%

 

 Net loss and loss adjustment expenses 

 

 

18,656

 

 

 

20,759

 

 

 

(2,103)

 

 

(10.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commission expense 

 

 

8,481

 

 

 

8,286

 

 

 

195

 

 

 

2.4%

 Other underwriting expenses 

 

 

6,625

 

 

 

6,693

 

 

 

(68)

 

 

(1.0)%

 Other operating expenses 

 

 

666

 

 

 

933

 

 

 

(267)

 

 

(28.6)%

 Depreciation and amortization

 

 

877

 

 

 

837

 

 

 

40

 

 

 

4.8%

 Interest expense

 

 

457

 

 

 

457

 

 

 

-

 

 

-%

 

 Total expenses 

 

 

35,762

 

 

 

37,965

 

 

 

(2,203)

 

 

(5.8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (Loss) income before taxes

 

 

(6,782)

 

 

1,635

 

 

 

(8,418)

 

na%

 

 Income tax (benefit) expense

 

 

(1,403)

 

 

312

 

 

 

(1,715)

 

na%

 

 Net (loss) income

 

$(5,380)

 

$1,323

 

 

$(6,703)

 

na%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Columns in the table above may not sum to totals due to rounding)

 

 
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(1)

Effective December 31, 2021, we entered into a 30% personal lines quota share treaty.

(2)

The three months ended June 30, 2022 and 2021 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.

 

 

 

Three months ended June 30,

 

 

 

2022

 

 

2021

 

 

Percentage Point Change

 

 

 Percent

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss ratio

 

 

66.9%

 

 

58.6%

 

 

8.3

 

 

 

14.2%

 Net underwriting expense ratio

 

 

36.4%

 

 

41.8%

 

 

(5.4)

 

 

(12.9)%

 Net combined ratio

 

 

103.3%

 

 

100.4%

 

 

2.9

 

 

 

2.9%

 

Direct Written Premiums

 

Direct written premiums during the three months ended June 30, 2022 (“Three Months 2022”) were $49,778,000 compared to $44,616,000 during the three months ended June 30, 2021 (“Three Months 2021”). The increase of $5,162,000, or 11.6%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Three Months 2022 were $46,792,000, an increase of $4,342,000, or 10.2%, from $42,450,000 in Three Months 2021. The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force. Direct written premiums from our livery physical damage business for Three Months 2022 were $2,954,000, an increase of $835,000, or 39.4%, from $2,119,000 in Three Months 2021. The increase in livery physical damage direct written premiums was due to the declining effect of the COVID-19 pandemic in our geographic area.

 

                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 Core business were $39,734,000 in Three Months 2022 compared to $35,614,000 in Three Months 2021. Direct written premiums from our Expansion business were $10,044,000 in Three Months 2022 compared to $9,002,000 in Three Months 2021.

 

Net Written Premiums and Net Premiums Earned

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). There was no quota share reinsurance treaty in effect in Three Months 2021. Net written premiums decreased $7,288,000, or 19.5%, to $30,026,000 in Three Months 2022 from $37,314,000 in Three Months 2021. 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). In Three Months 2022, our premiums ceded under quota share treaties increased by $12,450,000 in comparison to ceded premiums in Three Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Three Months 2022, compared to no personal lines quota share treaty in Three Months 2021.

 

 
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Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2022, our ceded excess of loss reinsurance premiums increased by $351,000 over the comparable ceded premiums for Three Months 2021. The increase was due to an increase in subject premiums and additional coverage obtained. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty.

     

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 2022, our premiums ceded under catastrophe treaties increased by $394,000 over the comparable ceded premiums in Three Months 2021. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as of August 31, 2020. Effective July 1, 2021, and continuing through June 30, 2022, our ceded catastrophe premiums were paid based on the total insured value of our risks as of August 31, 2021. Effective July 1, 2022, and continuing through June 30, 2023, our ceded catastrophe premiums will be paid based on the total insured value of our risks as of August 31, 2022.

 

Net premiums earned

 

Net premiums earned decreased $7,534,000, or 21.3%, to $27,902,000 in Three Months 2022 from $35,436,000 in Three Months 2021. The decrease was due to the inception of the 2021/2023 Treaty on December 31, 2021. The decrease resulting from the 2021/2023 Treaty in Three Months 2022 was partially offset by an increase in direct written premium.

 

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)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$4,693

 

 

$50

 

 

$4,643

 

 

 

9,286.0%

Contingent ceding commissions earned

 

 

23

 

 

 

(4)

 

 

27

 

 

n/a

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$4,716

 

 

$46

 

 

$4,670

 

 

 

10,152.2%

 

Ceding commission revenue was $4,716,000 in Three Months 2022 compared to $46,000 in Three Months 2021. The increase of $4,670,000 was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

 

 
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Provisional Ceding Commissions Earned

 

In Three Months 2022 we earned provisional ceding commissions from personal lines earned premiums ceded under the 2021/2023 Treaty which was effective as of December 31, 2021. There was no personal lines quota share in effect in Three Months 2021.

 

Contingent Ceding Commissions Earned

 

The structure of the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. 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 received.

 

Net Investment Income

 

Net investment income was $634,000 in Three Months 2022 compared to $1,678,000 in Three Months 2021, a decrease of $1,044,000, or 62.2%. The decrease in investment income is attributable to a $766,000 reversal of prior years’ estimated accrued interest income stemming from an error in third party investment reporting. The decline of investment income is also attributable to the disposal of income bearing equity securities. The average yield on invested assets was 3.51% as of June 30, 2022 compared to 3.45% as of June 30, 2021.

    

Cash and invested assets were $193,784,000 as of June 30, 2022 compared to $234,100,000 as of June 30, 2021 The $40,316,000 decrease in cash and invested assets was primarily attributable to cash paid to reinsurers at the inception of the 2021/2023 Treaty, losses paid in connection with catastrophe losses incurred in 2021 and 2022, and unrealized losses on our investment portfolio.

 

Net Gains and Losses on Investments

 

Net losses on investments were $4,517,000 in Three Months 2022 compared to net gains of $2,315,000 in Three Months 2021. Unrealized losses on our equity securities and other investments in Three Months 2022 were $4,229,000, compared to net gains of $1,598,000 in Three Months 2021. Realized losses on sales of investments were $289,000 in Three Months 2022 compared to realized gains of $717,000 in Three Months 2021.

 

Other Income

 

                Other income was $245,000 in Three Months 2022 compared to $125,000 in Three Months 2021, an increase of $120,000, or 96.0%.

 

Net Loss and LAE

 

Net loss and LAE was $18,656,000 for Three Months 2022 compared to $20,759,000 for Three Months 2021. The net loss ratio was 66.9% in Three Months 2022 compared to 58.6% in Three Months 2021, an increase of 8.3 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:

     

king_10qimg73.jpg

    

(Components may not sum to totals due to rounding)

    

For Three Months 2022, the loss ratio was higher than Three Months 2021 mainly due to water damage property claims and fire severity. Although the water experience for Three Months 2022 was a bit worse than historical average, it is reasonably within the historical range. For fire losses, there were more large loss activities during Three Months 2022, but the year-to-date experience has been in line with the past.

 

The impact of catastrophe losses was low for Three Months 2022. There were only three minor wind events classified as a catastrophe for Three Months 2022. There was also favorable development on catastrophe losses occurring for Three Months 2022. The estimated total net catastrophe losses were $112,000, which contributed 0.4 point to the loss ratio. This compares to a -0.3 point impact from catastrophe events from the corresponding period from prior year, which also had minimal catastrophe activities.

 

Prior years in total have unfavorable development of $274,000 for Three Months 2022, driven by an emergence of large fire losses, which occurred in 2021.

 

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

 

 
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Commission Expense

 

                Commission expense increased $195,000 to $8,481,000, or 18.0% of direct earned premiums, in Three Months 2022. The increase was due to an increase in direct earned premiums of $4,231,000 to $46,993,000, offset in part by a reduction in the commission rate on our Select Products and the reduction in contingent commissions, which producers now earn only if KICO has an underwriting profit.

    

Other Underwriting Expenses

 

Other underwriting expenses were $6,625,000, or 14.1% of direct earned premiums, in Three Months 2022 compared to $6,693,000, or 15.7% of direct earned premiums, in Three Months 2021. The decrease of $68,000, or 1.0%, was primarily due to decreases in professional fees and state insurance department fees, partially offset by increases in expenses related to our growth in direct earned premiums and our continuing initiative to reduce expenses with the use of technology.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $2,518,000 in Three Months 2022 compared to $2,540,000 in Three Months 2021. The modest decrease of $22,000, or 0.9%, compares favorably with the 11.6% increase in direct written premiums.

 

Our net underwriting expense ratio in Three Months 2022 was 36.4% compared to 41.8% in Three Months 2021. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

Three months ended

Percentage  

 

 

 

June 30,

 

Point Change

 

 

 

 

2022

2021

 

 

 

 

 

Other underwriting expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employment costs

 

 

9.0%

 

 

7.2%

 

 

1.8

 

Underwriting fees (inspections/surveys)

 

 

1.7

 

 

 

1.4

 

 

 

0.3

 

IT expenses

 

 

4.2

 

 

 

3.1

 

 

 

1.1

 

Profesional fees

 

 

1.3

 

 

 

1.4

 

 

 

(0.1

Other expenses

 

 

7.6

 

 

 

5.8

 

 

 

1.8

 

Total other underwriting expenses

 

 

23.8

 

 

 

18.9

 

 

 

4.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

30.4

 

 

 

23.4

 

 

 

7.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(16.8)

 

 

(0.1)

 

 

(16.7

)

Contingent

 

 

(0.1)

 

 

-

 

 

 

(0.1

)

Total ceding commission revenue

 

 

(16.9)

 

 

(0.1)

 

 

(16.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(0.9)

 

 

(0.4)

 

 

(0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

36.4%

 

 

41.8%

 

 

(5.4

 

The overall 16.8 percentage point increase in the benefit from ceding commissions in Three Months 2022 was driven by the increase in provisional ceding commission revenue due to the inception of the 2021/2023 Treaty on December 31, 2021. The components of our net underwriting expense ratio related to other underwriting expenses and commissions increased due to a higher percentage of our direct earned premiums in Three Months 2022 being ceded due to the inception of the 2021/2023 Treaty.

 

 
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Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $666,000 for Three Months 2022 compared to $933,000 for Three Months 2021. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

 

 

 

 Three months ended

 

 

 

 

 

 

 

 

 

 June 30,

 

 

 

 

 

 

 

($ in thousands)

 

 2022

 

 

 2021

 

 

 Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 Employement costs

 

$(101)

 

$153

 

 

$(254)

 

na

%

  Bonuses 

 

 

-

 

 

 

-

 

 

 

-

 

 

 na

 

  Equity compensation 

 

 

486

 

 

 

486

 

 

 

-

 

 

 

-

 

  Professional 

 

 

97

 

 

 

46

 

 

 

51

 

 

 

110.9

 

  Directors fees 

 

 

82

 

 

 

82

 

 

 

-

 

 

 

-

 

  Insurance 

 

 

37

 

 

 

44

 

 

 

(7)

 

 

(15.9)

  Other expenses 

 

 

65

 

 

 

122

 

 

 

(57)

 

 

(46.4)

 Total other operating expenses

 

$666

 

 

$933

 

 

$(267)

 

 

(28.6)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

The decrease in Three Months 2022 of $267,000, or 28.6%, as compared to Three Months 2021 was primarily due to a decrease in employment costs. The decrease in employment costs was due to staff reductions and fluctuations in deferred compensation liability related to changes in the underlying invested portfolio.

 

Depreciation and Amortization

 

Depreciation and amortization was $877,000 in Three Months 2022 compared to $837,000 in Three Months 2021. The decrease of $40,000, or 4.8%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years.

 

Interest Expense

 

Interest expense was $457,000 for both Three Months 2022 and Three Months 2021. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017.

 

Income Tax (Benefit) Expense

 

Income tax benefit in Three Months 2022 was $1,403,000, which resulted in an effective tax benefit rate of 20.7%. Income tax expense in Three Months 2021 was $312,000, which resulted in an effective tax rate of 19.1%. Loss before taxes was $6,782,000 in Three Months 2022 compared to income before taxes of $1,635,000 in Three Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Three Months 2022 compared to Three Months 2021.

  

Net (Loss) Income

 

Net loss was $5,380,000 in Three Months 2022 compared to net income of $1,323,000 in Three Months 2021. The increase in net loss of $6,703,000 was due to the circumstances described above.

    

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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Table of Contents

 

 

 

 Three Months Ended

 

 

 Six Months Ended

 

 

 

 June 30,

 

 

 June 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 Gross premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

 Personal lines(3)

 

$46,792,267

 

 

$42,449,870

 

 

$86,955,416

 

 

$78,608,363

 

 Livery physical damage

 

 

2,953,588

 

 

 

2,119,436

 

 

 

5,726,868

 

 

 

4,023,428

 

 Other(1)

 

 

32,608

 

 

 

46,719

 

 

 

80,076

 

 

 

113,826

 

 Total without commercial lines

 

 

49,778,463

 

 

 

44,616,025

 

 

 

92,762,360

 

 

 

82,745,617

 

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

 

 

-

 

 

 

(381)

 

 

-

 

 

 

(856)

 Total gross premiums written

 

$49,778,463

 

 

$44,615,644

 

 

$92,762,360

 

 

$82,744,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Personal lines(3)

 

$27,048,585

 

 

$35,149,321

 

 

$49,159,250

 

 

$63,979,133

 

 Livery physical damage

 

 

2,953,588

 

 

 

2,119,436

 

 

 

5,726,868

 

 

 

4,023,428

 

 Other(1)

 

 

23,607

 

 

 

45,903

 

 

 

57,850

 

 

 

112,184

 

 Total without commercial lines

 

 

30,025,780

 

 

 

37,314,660

 

 

 

54,943,968

 

 

 

68,114,745

 

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

 

 

-

 

 

 

(381)

 

 

-

 

 

 

(856)

 Total net premiums written

 

$30,025,780

 

 

$37,314,279

 

 

$54,943,968

 

 

$68,113,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net premiums earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Personal lines(3)

 

$25,178,854

 

 

$33,573,620

 

 

$49,339,070

 

 

$66,338,707

 

 Livery physical damage

 

 

2,687,273

 

 

 

1,804,543

 

 

 

5,161,838

 

 

 

3,569,819

 

 Other(1)

 

 

35,941

 

 

 

58,644

 

 

 

74,540

 

 

 

117,974

 

 Total without commercial lines

 

 

27,902,068

 

 

 

35,436,807

 

 

 

54,575,448

 

 

 

70,026,500

 

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

 

 

-

 

 

 

(381)

 

 

-

 

 

 

(856)

 Total net premiums earned

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss and loss adjustment expenses(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Personal lines

 

$16,356,939

 

 

$18,638,287

 

 

$36,783,580

 

 

$39,394,940

 

 Livery physical damage

 

 

1,180,223

 

 

 

1,015,064

 

 

 

2,010,792

 

 

 

1,702,476

 

 Other(1)

 

 

(967)

 

 

223,472

 

 

 

(24,367)

 

 

253,821

 

 Unallocated loss adjustment expenses

 

 

1,164,649

 

 

 

909,591

 

 

 

2,743,555

 

 

 

1,915,872

 

 Total without commercial lines

 

 

18,700,844

 

 

 

20,786,414

 

 

 

41,513,560

 

 

 

43,267,109

 

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

 

 

(44,803)

 

 

(27,204)

 

 

83,679

 

 

 

52,773

 

 Total net loss and loss adjustment expenses

 

$18,656,041

 

 

$20,759,210

 

 

$41,597,239

 

 

$43,319,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

 

65.0%

 

 

55.5%

 

 

74.6%

 

 

59.4%

Livery physical damage

 

 

43.9%

 

 

56.3%

 

 

39.0%

 

 

47.7%

Other(1)

 

 

-2.7%

 

 

381.1%

 

 

-32.7%

 

 

215.1%

Total without commercial lines

 

 

67.0%

 

 

58.7%

 

 

76.1%

 

 

61.8%

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

 

na

 

 

na

 

 

na

 

 

na

 

 Total 

 

 

66.9%

 

 

58.6%

 

 

76.2%

 

 

61.9%

 

(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 change in quota share ceding rate, effective December 31, 2021.

 

 

(4)

See discussion above with regard to “Net Loss and LAE”, as to catastrophe losses in the three months and six months ended June 30, 2022 and 2021.

 

 
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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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

 Net premiums earned 

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

 Ceding commission revenue 

 

 

4,715,587

 

 

 

45,741

 

 

 

9,396,983

 

 

 

44,676

 

 Net investment income 

 

 

634,325

 

 

 

1,678,075

 

 

 

1,993,425

 

 

 

3,461,271

 

 Net (losses) gains on investments 

 

 

(4,379,853)

 

 

2,254,299

 

 

 

(8,731,597)

 

 

5,166,824

 

 Other income

 

 

242,620

 

 

 

124,243

 

 

 

471,127

 

 

 

294,552

 

 Total revenues 

 

 

29,114,747

 

 

 

39,538,784

 

 

 

57,705,386

 

 

 

78,992,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loss and loss adjustment expenses 

 

 

18,656,041

 

 

 

20,759,210

 

 

 

41,597,239

 

 

 

43,319,882

 

 Commission expense 

 

 

8,481,031

 

 

 

8,285,341

 

 

 

16,832,117

 

 

 

16,509,180

 

 Other underwriting expenses 

 

 

6,624,997

 

 

 

6,692,920

 

 

 

13,440,946

 

 

 

13,159,962

 

 Depreciation and amortization

 

 

867,186

 

 

 

804,462

 

 

 

1,627,201

 

 

 

1,593,297

 

 Total expenses 

 

 

34,629,255

 

 

 

36,541,933

 

 

 

73,497,503

 

 

 

74,582,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (Loss) income from operations

 

 

(5,514,508)

 

 

2,996,851

 

 

 

(15,792,117)

 

 

4,410,646

 

 Income tax (benefit) expense 

 

 

(1,170,034)

 

 

569,266

 

 

 

(3,357,294)

 

 

820,831

 

 Net (loss) income 

 

$(4,344,474)

 

$2,427,585

 

 

$(12,434,823)

 

$3,589,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss ratio

 

 

66.9%

 

 

58.6%

 

 

76.2%

 

 

61.9%

 Net underwriting expense ratio

 

 

36.4%

 

 

41.8%

 

 

37.4%

 

 

41.9%

 Net combined ratio

 

 

103.3%

 

 

100.4%

 

 

113.6%

 

 

103.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Acquisition costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 underwriting expenses

 

$15,106,028

 

 

$14,978,261

 

 

$30,273,063

 

 

$29,669,142

 

 Less: Ceding commission revenue

 

 

(4,715,587)

 

 

(45,741)

 

 

(9,396,983)

 

 

(44,676)

 Less: Other income

 

 

(242,620)

 

 

(124,243)

 

 

(471,127)

 

 

(294,552)

 Net underwriting expenses

 

$10,147,821

 

 

$14,808,277

 

 

$20,404,953

 

 

$29,329,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net premiums earned 

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net Underwriting Expense Ratio

 

 

36.4%

 

 

41.8%

 

 

37.4%

 

 

41.9%

 

 
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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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$92,762,360

 

 

$-

 

 

$(37,818,392)

 

$54,943,968

 

Change in unearned premiums

 

 

(393,353)

 

 

-

 

 

 

24,833

 

 

 

(368,520)

Earned premiums

 

$92,369,007

 

 

$-

 

 

$(37,793,559)

 

$54,575,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$52,832,153

 

 

$-

 

 

$(14,366,628)

 

$38,465,525

 

Catastrophe loss

 

 

7,032,470

 

 

 

-

 

 

 

(3,900,756)

 

 

3,131,714

 

Loss and loss adjustment expenses

 

$59,864,623

 

 

$-

 

 

$(18,267,384)

 

$41,597,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

57.2%

 

 

0.0%

 

 

38.0%

 

 

70.5%

Catastrophe loss

 

 

7.6%

 

 

0.0%

 

 

10.3%

 

 

5.7%

Loss ratio

 

 

64.8%

 

 

0.0%

 

 

48.3%

 

 

76.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$82,744,761

 

 

$-

 

 

$(14,630,872)

 

$68,113,889

 

Change in unearned premiums

 

 

1,936,706

 

 

 

-

 

 

 

(24,951)

 

 

1,911,755

 

Earned premiums

 

$84,681,467

 

 

$-

 

 

$(14,655,823)

 

$70,025,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$44,096,040

 

 

$-

 

 

$(881,729)

 

$43,214,311

 

Catastrophe loss

 

 

105,571

 

 

 

-

 

 

 

-

 

 

 

105,571

 

Loss and loss adjustment expenses

 

$44,201,611

 

 

$-

 

 

$(881,729)

 

$43,319,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

52.1%

 

 

0.0%

 

 

6.0%

 

 

61.8%

Catastrophe loss

 

 

0.1%

 

 

0.0%

 

 

0.0%

 

 

0.2%

Loss ratio

 

 

52.2%

 

 

0.0%

 

 

6.0%

 

 

61.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$49,778,463

 

 

$-

 

 

$(19,752,683)

 

$30,025,780

 

Change in unearned premiums

 

 

(2,786,080)

 

 

-

 

 

 

662,368

 

 

 

(2,123,712)

Earned premiums

 

$46,992,383

 

 

$-

 

 

$(19,090,315)

 

$27,902,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$26,323,489

 

 

$-

 

 

$(7,779,738)

 

$18,543,751

 

Catastrophe loss

 

 

195,070

 

 

 

-

 

 

 

(82,780)

 

 

112,290

 

Loss and loss adjustment expenses

 

$26,518,559

 

 

$-

 

 

$(7,862,518)

 

$18,656,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

56.0%

 

 

0.0%

 

 

40.8%

 

 

66.5%

Catastrophe loss

 

 

0.4%

 

 

0.0%

 

 

0.4%

 

 

0.4%

Loss ratio

 

 

56.4%

 

 

0.0%

 

 

41.2%

 

 

66.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$44,615,644

 

 

$-

 

 

$(7,301,365)

 

$37,314,279

 

Change in unearned premiums

 

 

(1,852,772)

 

 

-

 

 

 

(25,081)

 

 

(1,877,853)

Earned premiums

 

$42,762,872

 

 

$-

 

 

$(7,326,446)

 

$35,436,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$20,940,307

 

 

$-

 

 

$(57,873)

 

$20,882,434

 

Catastrophe loss

 

 

(123,224)

 

 

-

 

 

 

-

 

 

 

(123,224)

Loss and loss adjustment expenses

 

$20,817,083

 

 

$-

 

 

$(57,873)

 

$20,759,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

49.0%

 

 

0.0%

 

 

0.8%

 

 

59.0%

Catastrophe loss

 

 

-0.3%

 

 

0.0%

 

 

0.0%

 

 

-0.3%

Loss ratio

 

 

48.7%

 

 

0.0%

 

 

0.8%

 

 

58.6%

 

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

 

 
62

Table of Contents

 

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,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

Ceding commission revenue

 

 

4,715,587

 

 

 

45,741

 

 

 

9,396,983

 

 

 

44,676

 

Other income

 

 

242,620

 

 

 

124,243

 

 

 

471,127

 

 

 

294,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses (1)

 

 

18,656,041

 

 

 

20,759,210

 

 

 

41,597,239

 

 

 

43,319,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

8,481,031

 

 

 

8,285,341

 

 

 

16,832,117

 

 

 

16,509,180

 

Other underwriting expenses

 

 

6,624,997

 

 

 

6,692,920

 

 

 

13,440,946

 

 

 

13,159,962

 

Total acquisition costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

underwriting expenses

 

 

15,106,028

 

 

 

14,978,261

 

 

 

30,273,063

 

 

 

29,669,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting loss

 

$(901,794)

 

$(131,061)

 

$(7,426,744)

 

$(2,624,152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio excluding the effect of catastrophes

 

 

66.5%

 

 

58.9%

 

 

70.5%

 

 

61.7%

 Effect of catastrophe loss on net loss ratio (1)

 

 

0.4%

 

 

-0.3%

 

 

5.7%

 

 

0.2%

 Net loss ratio

 

 

66.9%

 

 

58.6%

 

 

76.2%

 

 

61.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net underwriting expense ratio excluding the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 effect of catastrophes

 

 

36.4%

 

 

41.8%

 

 

37.4%

 

 

41.9%

 Effect of catastrophe loss on net underwriting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 expense ratio

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 Net underwriting expense ratio

 

 

36.4%

 

 

41.8%

 

 

37.4%

 

 

41.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net combined ratio excluding the effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 of catastrophes

 

 

102.9%

 

 

100.7%

 

 

107.9%

 

 

103.6%

 Effect of catastrophe loss on net combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 ratio (1)

 

 

0.4%

 

 

-0.3%

 

 

5.7%

 

 

0.2%

 Net combined ratio

 

 

103.3%

 

 

100.4%

 

 

113.6%

 

 

103.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Acquisition costs and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 underwriting expenses

 

$15,106,028

 

 

$14,978,261

 

 

$30,273,063

 

 

$29,669,142

 

 Less: Ceding commission revenue

 

 

(4,715,587)

 

 

(45,741)

 

 

(9,396,983)

 

 

(44,676)

 Less: Other income

 

 

(242,620)

 

 

(124,243)

 

 

(471,127)

 

 

(294,552)

 

 

$10,147,821

 

 

$14,808,277

 

 

$20,404,953

 

 

$29,329,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net earned premium

 

$27,902,068

 

 

$35,436,426

 

 

$54,575,448

 

 

$70,025,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net Underwriting Expense Ratio

 

 

36.4%

 

 

41.8%

 

 

37.4%

 

 

41.9%

 

(1)

For the three months ended June 30, 2022 and 2021, includes the sum of net catastrophe losses and loss adjustment expenses of $112,290 and $(123,224), respectively. For the six months ended June 30, 2022 and 2021, includes the sum of net catastrophe losses and loss adjustment expenses of $3,131,714 and $105,571, 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, 2022 and December 31, 2021:

  

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Territories and Possessions

 

$17,218,274

 

 

$-

 

 

$(3,020,486)

 

$-

 

 

$14,197,788

 

 

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Industrial and miscellaneous

 

 

84,235,861

 

 

 

9,782

 

 

 

(6,562,506)

 

 

-

 

 

 

77,683,137

 

 

 

54.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 asset backed securities

 

 

55,228,980

 

 

 

114,844

 

 

 

(5,387,294)

 

 

(339,668)

 

 

49,616,862

 

 

 

35.1%

 Total fixed-maturity securities 

 

$156,683,115

 

 

$124,626

 

 

$(14,970,286)

 

$(339,668)

 

$141,497,787

 

 

 

100.0%

  

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 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

 

 

 

 

 

 

 

 

 

 

 Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Territories and Possessions

 

$17,236,750

 

 

$246,748

 

 

$(197,984)

 

$-

 

 

$17,285,514

 

 

 

10.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Industrial and miscellaneous

 

 

80,534,769

 

 

 

2,603,411

 

 

 

(126,926)

 

 

-

 

 

 

83,011,254

 

 

 

52.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Residential mortgage and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 asset backed securities

 

 

58,036,959

 

 

 

355,985

 

 

 

(489,258)

 

 

(120,344)

 

 

57,783,342

 

 

 

36.6%

 Total fixed-maturity securities 

 

$155,808,478

 

 

$3,206,144

 

 

$(814,168)

 

$(120,344)

 

$158,080,110

 

 

 

100.0%

 

 
64

Table of Contents

 

Equity Securities

 

The following table presents a breakdown of the cost and estimated fair value of, and gross gains and losses on, investments in equity securities as of June 30, 2022 and December 31, 2021:

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$18,430,554

 

 

$175,745

 

 

$(3,347,910 )

 

$15,258,389

 

 

 

58.5%

Common stocks and exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

traded funds

 

 

11,808,966

 

 

 

392,745

 

 

 

(1,395,555 )

 

 

10,806,156

 

 

 

41.5%

Total

 

$30,239,520

 

 

$568,490

 

 

$(4,743,465 )

 

$26,064,545

 

 

 

100.0%

  

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 Estimated

 

 

Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Losses

 

 

 Fair Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks 

 

$22,019,509

 

 

$1,007,009

 

 

$(184,617)

 

$22,841,901

 

 

 

57.6%

Common stocks and exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

traded funds

 

 

15,451,160

 

 

 

1,573,653

 

 

 

(179,712)

 

 

16,845,101

 

 

 

42.4%

Total

 

$37,470,669

 

 

$2,580,662

 

 

$(364,329)

 

$39,687,002

 

 

 

100.0%

 

Other Investments

 

The following table presents a breakdown of the cost and estimated fair value of, and gross gains on, our other investments as of June 30, 2022 and December 31, 2021:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

Gross

 

 

Estimated

 

 

 

 

 

Gross

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Fair Value

 

 

Cost

 

 

Gains

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$3,999,381

 

 

$1,254,201

 

 

$5,253,582

 

 

$3,999,381

 

 

$3,562,034

 

 

$7,561,415

 

 

 
65

Table of Contents

 

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, 2022 and December 31, 2021:

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 Cost or 

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

 Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Fair

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Value

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$1,228,410

 

 

$86,141

 

 

$(10,175)

 

$-

 

 

$1,304,376

 

 

18.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

498,378

 

 

 

4,637

 

 

 

-

 

 

 

-

 

 

 

503,015

 

 

 

7.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

-

 

 

 

(29,111)

 

 

-

 

 

 

275,000

 

 

 

4.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

5,737,319

 

 

 

39,429

 

 

 

(945,603)

 

 

-

 

 

 

4,831,145

 

 

 

69.9%

Total

 

$7,768,218

 

 

$130,207

 

 

$(984,889)

 

$-

 

 

$6,913,536

 

 

100.0%

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 Cost or 

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

 Estimated  

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Fair

 

Category

 

Cost

 

 

Gains

 

 

Months

 

 

Months

 

 

Value

 

 

Value

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,642

 

 

$209,633

 

 

$-

 

 

$-

 

 

$939,275

 

 

10.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,239

 

 

 

22,856

 

 

 

-

 

 

 

-

 

 

 

1,021,095

 

 

 

11.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

85

 

 

 

(13,921)

 

 

 

 

 

 

290,275

 

 

 

3.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,234,342

 

 

 

280,951

 

 

 

(12,779)

 

 

-

 

 

 

6,502,514

 

 

 

74.3

%

Total

 

$8,266,334

 

 

$513,525

 

 

$(26,700)

 

$-

 

 

$8,753,159

 

 

100.0

%

 

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

 

 
66

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A summary of the amortized cost and fair value of our investments in held-to-maturity securities by contractual maturity as of June 30, 2022 and December 31, 2021 is shown below:

  

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$459,032

 

 

$497,110

 

 

$994,712

 

 

$1,008,180

 

One to five years

 

 

1,246,206

 

 

 

1,246,690

 

 

 

1,205,829

 

 

 

1,290,465

 

Five to ten years

 

 

1,519,749

 

 

 

1,370,950

 

 

 

1,513,942

 

 

 

1,648,808

 

More than 10 years

 

 

4,543,231

 

 

 

3,798,786

 

 

 

4,551,851

 

 

 

4,805,706

 

Total

 

$7,768,218

 

 

$6,913,536

 

 

$8,266,334

 

 

$8,753,159

 

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, 2022 and December 31, 2021 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s, Fitch, or Kroll):

  

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

 Estimated

 

 

 Percentage of

 

 

 Estimated

 

 

 Percentage of

 

 

 

 Fair

 

 

 Estimated

 

 

 Fair

 

 

 Estimated

 

 

 

 Value

 

 

 Fair Value

 

 

 Value

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

Rating

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$-

 

 

 

0.0%

 

$-

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and municipal bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

2,471,838

 

 

 

1.7%

 

 

1,321,809

 

 

 

0.8%

AA

 

 

11,076,880

 

 

 

7.8%

 

 

11,532,572

 

 

 

7.3%

A

 

 

34,119,838

 

 

 

24.1%

 

 

38,272,571

 

 

 

24.2%

BBB+

 

 

16,901,741

 

 

 

11.9%

 

 

17,936,359

 

 

 

11.3%

BBB

 

 

23,676,363

 

 

 

16.7%

 

 

25,161,776

 

 

 

15.9%

BBB-

 

 

1,926,040

 

 

 

1.4%

 

 

4,193,401

 

 

 

2.7%

Total corporate and municipal bonds

 

 

90,172,700

 

 

 

63.6%

 

 

98,418,488

 

 

 

62.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed, asset backed, and other collateralized obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

18,165,288

 

 

 

12.8%

 

 

17,350,192

 

 

 

11.0%

AA

 

 

25,008,366

 

 

 

17.7%

 

 

34,241,907

 

 

 

21.7%

A

 

 

7,023,595

 

 

 

5.0%

 

 

6,306,161

 

 

 

4.0%

BBB

 

 

21,608

 

 

 

0.0%

 

 

24,254

 

 

 

0.0%

CCC

 

 

520,237

 

 

 

0.4%

 

 

664,628

 

 

 

0.4%

CC

 

 

115,309

 

 

 

0.1%

 

 

125,412

 

 

 

0.1%

D

 

 

63,629

 

 

 

0.0%

 

 

55,306

 

 

 

0.0%

Non rated

 

 

407,055

 

 

 

0.3%

 

 

893,762

 

 

 

0.6%

Total residential mortgage backed, asset backed,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and other collateralized obligations

 

 

51,325,087

 

 

 

36.3%

 

 

59,661,622

 

 

 

37.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$141,497,787

 

 

 

99.9%

 

$158,080,110

 

 

 

100.0%

 

 
67

Table of Contents

 

The table below summarizes the average yield by type of fixed-maturity security as of June 30, 2022 and December 31, 2021:

 

Category

June 30, 2022

 

 

December 31, 2021

U.S. Treasury securities and

obligations of U.S. government

corporations and agencies

3.26%3.06%

Political subdivisions of States,

Territories and Possessions

3.35%2.77%

Corporate and other bonds

Industrial and miscellaneous

3.38%3.23%

Residential mortgage backed securities

2.74%2.77%

Total

3.16%2.92%

 

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of June 30, 2022 and December 31, 2021:

 

June 30, 2022

December 31, 2021

Weighted average effective maturity

7.08.0

Weighted average final maturity

15.513.8

Effective duration

5.55.1

 

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, 2022 and December 31, 2021, 62% 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, 2022 and December 31, 2021:

  

 

 

June 30, 2022

 

 

 

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

 

 

14,197,788

 

 

 

(3,020,486)

 

 

14

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,197,788

 

 

 

(3,020,486)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

76,672,772

 

 

 

(6,562,506)

 

 

92

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

76,672,772

 

 

 

(6,562,506)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other asset backed securities

 

 

45,843,567

 

 

 

(5,387,294)

 

 

37

 

 

 

2,724,188

 

 

 

(339,668)

 

 

3

 

 

 

48,567,755

 

 

 

(5,726,962)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$136,714,127

 

 

$(14,970,286)

 

 

143

 

 

$2,724,188

 

 

$(339,668)

 

 

3

 

 

$139,438,315

 

 

$(15,309,954)

 

 
69

Table of Contents

 

 

 

December 31, 2021

 

 

 

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

 

 

6,768,123

 

 

 

(197,984)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,768,123

 

 

 

(197,984)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds industrial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

miscellaneous

 

 

17,593,707

 

 

 

(126,926)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,593,707

 

 

 

(126,926)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other asset backed securities

 

 

45,399,451

 

 

 

(489,258)

 

 

26

 

 

 

2,923,182

 

 

 

(120,344)

 

 

2

 

 

 

48,322,633

 

 

 

(609,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$69,761,281

 

 

$(814,168)

 

 

46

 

 

$2,923,182

 

 

$(120,344)

 

 

2

 

 

$72,684,463

 

 

$(934,512)

 

 
70

Table of Contents

 

There were 146 securities at June 30, 2022 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 48 securities at December 31, 2021 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 credit quality considerations, the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and interest rate environment factors, 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, 2022, 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, 2022, KICO paid dividends of $1,500,000 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. KICO currently does not have any securities pledged to FHLBNY; as such, there were no borrowings under this facility during the six months ended June 30, 2022 and 2021. On August 10, 2022, KICO transferred and pledged ten FNMA bonds to the FHLBNY. As of August 8, 2022 the book value of these bonds is $15,144,568 and their fair value is $13,567,331. KICO will have a credit facility with respect to the transferred bonds and the maximum advance KICO will be able to receive is approximately $12,000,000

 

On December 19, 2017, we issued $30 million of our 5.50% Senior Unsecured Notes due December 30, 2022. As of June 30, 2022, invested assets and cash in our holding company was approximately $2,780,000. If the aforementioned sources of cash flow currently available are insufficient to cover our holding company debt service and other cash requirements, we will seek to obtain additional financing. See Notes 2 and 7 to our Condensed Consolidated Financial Statements included in this Quarterly Report for a discussion of our plans in this regard.

 

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.

 

 
71

Table of Contents

 

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,

2022

2021

Cash flows (used in) provided by:

Operating activities

$(13,716,630)$14,364,315

Investing activities

3,857,22511,307,718

Financing activities

(1,231,065)(2,076,028)

Net (decrease) increase in cash and cash equivalents

(11,090,470)23,596,005

Cash and cash equivalents, beginning of period

24,290,59819,463,742

Cash and cash equivalents, end of period

$13,200,128$43,059,747

  

Net cash used in operating activities was $13,717,000 in Six Months 2022 as compared to $14,364,000 provided by operating activities in Six Months 2021. The $28,081,000 decrease in cash flows provided by operating activities in Six Months 2022 was primarily the result of a decrease in cash arising from net fluctuations in operating assets and liabilities, partially offset by net loss (adjusted for non-cash items) of $5,394,000. The increase in cash used in operating activities is also attributable to the payment of $13,245,000 to reinsurers in Six Months 2022 pursuant to the inception of our quota share reinsurance treaty, effective December 31, 2021. In addition, the increase of reinsurance recoverables by $14,360,000 also contributed to the increase in cash used during Six Months 2022. 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 other changes, which are described above.

 

Net cash provided by investing activities was $3,857,000 in Six Months 2022 compared to $11,308,000 provided by investing activities in Six Months 2021. The $7,451,000 decrease in net cash provided by investing activities was the result of a $10,598,000 decrease in disposals of invested assets and a $345,000 increase in the acquisition of property and equipment in Six Months 2022.

 

Net cash used in financing activities was $1,231,000 in Six Months 2022 compared to $2,076,000 used in Six Months 2021. The $845,000 decrease in net cash used in financing activities was attributable to the purchase of treasury stock of $1,040,000 in Six Months 2021 partially offset by an increase in withholding taxes paid on the vesting of restricted stock awards in Six Months 2022 compared to Six Months 2021.

 

Reinsurance

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business, which primarily consists of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”).

 

Our excess of loss and catastrophe reinsurance treaties expired on June 30, 2022 and we entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2022. Effective October 18, 2021, we entered into a stub catastrophe reinsurance treaty covering the period from October 18, 2021 through December 31, 2021. The treaty provides reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:

  

 
72

Table of Contents

 

 

 

 Treaty Period

 

 

 

 

 

 

 (2021/2023 Treaty)

 

 

 

 

 

 

 

 

 

 January 2,

 

 

 July 1,

 

 

 December 31,

 

 

 July 1,

 

 

 December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

2020

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 

 

June 30,

 

 

 January 1,

 

 

June 30,

 

 

December 30,

 

 

June 30,

 

 Line of Business

 

2023

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Percent ceded (9)

 

 None (8)

 

 

 

30%

 

 

30%

 

 None (5)

 

 

 None (5)

 

 Risk retained on intial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $1,000,000 of losses (5) (7) (8) (9)

 

$1,000,000

 

 

$700,000

 

 

$700,000

 

 

$1,000,000

 

 

$1,000,000

 

 Losses per occurrence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 subject to quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 reinsurance coverage

 

 None (8)

 

 

$1,000,000

 

 

$1,000,000

 

 

 None (5)

 

 

 None (5)

 

 Expiration date

 

 

(8)

 

January 1, 2023

 

 

January 1, 2023

 

 

 NA (5)

 

 

 NA (5)

 

 Excess of loss coverage and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 facultative facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (1) (7)

 

$8,000,000

 

 

$8,400,000

 

 

$8,400,000

 

 

$8,000,000

 

 

$8,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

$1,000,000

 

 

$600,000

 

 

$600,000

 

 

$1,000,000

 

 

$1,000,000

 

 Total reinsurance coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per occurrence (5) (7) (8)

 

$8,000,000

 

 

$8,500,000

 

 

$8,500,000

 

 

$8,000,000

 

 

$8,000,000

 

 Losses per occurrence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 subject to reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (5) (8)

 

$8,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 Expiration date (8)

 

June 30, 2023

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Initial loss subject to personal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 lines quota share treaty

 

 

(8)

 

 

10,000,000

 

 

 

10,000,000

 

 

 None (5)

 

 

 None (5)

 

 Risk retained per catastrophe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occurrence (5) (8) (9) (10)

 

$10,000,000

 

 

$7,400,000

 

 

$7,400,000

 

 

$10,000,000

 

 

$10,000,000

 

 Catastrophe loss coverage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 in excess of quota share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 coverage (2) (5) (8)

 

$335,000,000

 

 

$335,000,000

 

 

$490,000,000

 

 

$490,000,000

 

 

$475,000,000

 

 Catastrophe stub coverage for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 the period from October 18,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 2021 through December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 2021 (6) 

 

  NA 

 

 

  NA  

 

 

  NA 

 

 

$5,000,000

 

 

  NA 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  in excess of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$5,000,000

 

 

 

 

 

 Reinstatement premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 protection (3) (4)

 

 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 $9,000,000 in total insured value, which covers direct losses from $3,500,000 to $9,000,000 through June 30, 2023.

 

 

(2)

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.

 

 

(3)

For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

 

 
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(4)

For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $9,800,000 of catastrophe coverage in excess of $10,000,000.

 

 

(5)

The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.

 

 

(6)

Excludes freeze and freeze related claims.

 

 

(7)

For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.

 

 

(8)

Personal lines quota share (homeowners, dwelling fire and canine liability) and underlying excess of loss reinsurance will expire on January 1, 2023; reinsurance coverage in effect from January 2, 2023 through June 30, 2023 is only for excess of loss and catastrophe reinsurance treaties.

 

 

(9)

For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

 

 

(10)

Plus losses in excess of catastrophe coverage.

 

 

 

 Treaty Year

 

 

 

July 1, 2022

 

 

July 1, 2021

 

 

July 1, 2020

 

 

 

to

 

 

to

 

 

to

 

 Line of Business

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

95%

 

 

95%

 Risk retained

 

$300,000

 

 

$300,000

 

 

$300,000

 

 Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,700,000

 

 

$4,700,000

 

 Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

 Expiration date

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines (1):

 

 

 

 

 

 

 

 

 

 

 

 

 General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

 Risk retained

 

 

 

 

 

 

 

 

 

$750,000

 

 Excess of loss coverage above risk retained

 

 

 

 

 

 

 

 

 

$3,750,000

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

$750,000

 

 Total reinsurance coverage per occurrence

 

 

 

 

 

 

 

 

 

$3,750,000

 

 Losses per occurrence subject to reinsurance coverage

 

 

 

 

 

 

 

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

 Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

 

(1)

Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

 

 
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Inflation

 

Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.

 

                Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.

    

Six Months 2022 included elevated economic inflation, which resulted in a significant increase in interest rates, a widening of credit spreads, lower public equity valuations, and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the value of our fixed income securities, which lowered our stockholders’ equity materially for Six Months 2022. The higher economic inflation impacted our loss and loss adjustment expenses as well; should these trends continue in the near-term, it would in all likelihood negatively impact our profitability.

 

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 COVID-19 pandemic caused significant financial market volatility, economic uncertainty, and interruptions to normal business activities. As of the date of this report, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity, capital position, the value of investments we hold in our investment portfolio, premiums and the demand for our products and our ability to collect premiums or requirement to return premiums to our policyholders will ultimately be impacted. 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 I, Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC.

 

                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 rapidly deteriorated. The decreased levels of economic activity have negatively impacted, and may continue to 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 and third quarters of 2020. While we are now seeing a reversal of this impact, it may resume in the future, but the degree of any new impact will depend on the extent and duration of any 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 led, and may 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 Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of June 30, 2022, our disclosure controls and procedures were: (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 Principal 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 Principal Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.

      

Changes in Internal Control over Financial Reporting

 

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 Principal 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.

 

None.

 

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 2021 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. Except as discussed under Part I, Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Preliminary Non-binding Indication of Interest” herein, there have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s 2021 Annual Report.

 

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

 

 

(a)

None.

 

 

 

 

(b)

Not applicable.

 

 

 

 

(c)

None.

 

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 Chief 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 Principal 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 15, 2022

By:

/s/ Barry B. Goldstein

 

 

 

Barry B. Goldstein

Chief Executive Officer

 

 

 

 

 

Dated: August 15, 2022

By:

/s/ Richard Swartz

 

 

 

Richard Swartz

Principal Financial Officer

 

 

 
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