SECURITIES & EXCHANGE COMMISSION EDGAR FILING
KINGSTONE COMPANIES, INC.
Form: 10-K
Date Filed: 2014-03-31
Corporate Issuer CIK: 33992
KINS
Symbol:
6411
SIC Code:
12/31
Fiscal Year End:
© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
❑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO _________________________
Commission File Number 0-1665
KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-2476480
(I.R.S. Employer Identification No.)
15 Joys Lane, Kingston, New York
(Address of principal executive offices)
12401
(Zip Code)
(845) 802-7900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ❑ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ❑
No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☑ No ❑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☑ No ❑
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ❑
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 ❑ (Do not check if a smaller reporting company)
Smaller reporting company ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ❑ No ☑
As of June 30, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $9,773,610
based on the closing sale price as reported on the NASDAQ Capital Market. As of March 29, 2014, there were 7,266,573 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INDEX
Page No.
Forward-Looking Statements
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
PPrincipal Accountant Fees and Services.
Exhibits and Financial Statement Schedules.
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3
4
21
21
21
21
21
22
23
23
54
54
55
56
57
58
63
66
69
70
71
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Forward-Looking Statements
PART I
This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described
in forward-looking statements contained in this Annual Report may not occur. Generally these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from
acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words
“may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar
expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future
performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that
may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our
results include, but are not limited to, the risks and uncertainties discussed in Item 7 of this Annual Report under “Factors That May Affect
Future Results and Financial Condition”.
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether
forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ
materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or otherwise.
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ITEM 1. BUSINESS.
(a) Business Development
General
As used in this Annual Report on Form 10-K (the “Annual Report”), references to the “Company”, “we”, “us”, or “our” refer to
Kingstone Companies, Inc. (“Kingstone”) and its subsidiaries.
We offer property and casualty insurance products to small businesses and individuals in New York State through our wholly-owned
subsidiary, Kingstone Insurance Company (“KICO”). KICO is a licensed property and casualty insurance company in the State of New York.
KICO also has obtained a license to write property and casualty insurance in Pennsylvania; however, KICO has only nominally commenced
writing business in Pennsylvania. Payments, Inc., our wholly-owned subsidiary, is a licensed premium finance company in the State of New
York and receives fees for placing contracts with a third party licensed premium finance company.
Recent Developments
Developments During 2013
• Public Offering
On December 13, 2013, we completed an underwritten public offering of 3,450,000 shares of our common stock, including 450,000
shares issued pursuant to the underwriter’s 30-day over-allotment option, at a public offering price of $5.95 per share. The aggregate net
proceeds to us was approximately $18,804,000, after deducting underwriting discounts and commissions and other offering expenses.
We used the net proceeds of the offering to contribute capital to our insurance subsidiary, KICO, to support growth, including
possible product expansion, and to repay indebtedness. A registration statement relating to these securities was filed with the SEC and
became effective on December 9, 2013.
• KICO Appoints its First Chief Actuary
On December 16, 2013, KICO hired Benjamin Walden, FCAS, MAAA as its first in-house actuary. Mr. Walden was
appointed KICO's Vice President and Chief Actuary.
Developments During 2012
• Increased Rate of Dividends Declared
In August 2012, we increased our quarterly dividends on our common stock from $.03 per share to $.04 per share. Dividends of
$.03 per share were declared on each of February 6, 2012 and May 14, 2012 and were paid on March 15, 2012 and June 15, 2012,
respectively. Dividends of $.04 per share were declared on each of August 13, 2012 and November 12, 2012 and were paid on September
18, 2012 and December 14, 2012, respectively. Dividends of $.04 per share continued during each quarterly period of 2013.
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(b)
Business
Property and Casualty Insurance
Overview
Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers
(the “insured”). An insurance policy is a contract between the insurance company and the insured where the insurance company agrees to
pay for losses suffered by the insured that are covered under the contract. Such contracts often are subject to subsequent legal
interpretation by courts, legislative action and arbitration. Property insurance generally covers the financial consequences of accidental
losses to the insured’s property, such as a home and the personal property in it, or a business’ building, inventory and equipment. Casualty
insurance (often referred to as liability insurance) generally covers the financial consequences of a legal liability of an individual or an
organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party. Claims on property
coverage generally are reported and settled in a relatively short period of time, whereas those on casualty coverage can take years, even
decades, to settle.
We generate revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income
generated from our investment portfolio, and net realized gains and losses on investment securities. We also receive installment fee income,
fees charged to reinstate a policy after it has been cancelled for non-payment, and fees for placing premium finance contracts with a third
party licensed premium finance company. Earned premiums represent premiums received from insureds, which are recognized as revenue
over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time normally
elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums,
earns investment income and generates net realized and unrealized investment gains and losses on investments.
Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as
claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation
expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers and premium taxes,
and other expenses related to the underwriting process, including their employees’ compensation and benefits.
The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company’s
combined ratio under GAAP is calculated by adding the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) and
the ratio of policy acquisition and other underwriting expenses to earned premiums (the “expense ratio”). A combined ratio under 100%
indicates that an insurance company is generating an underwriting profit. However, when considering investment income and investment
gains or losses, insurance companies operating at a combined ratio of greater than 100% can be profitable.
General; Strategy
We are a property and casualty insurance holding company whose principal operating subsidiary is Kingstone Insurance Company,
referred to as KICO, domiciled in the State of New York. We are a multi-line regional property and casualty insurance company writing
business exclusively through independent retail and wholesale agents and brokers, referred to collectively as producers. We are licensed to
write insurance policies in New York and Pennsylvania.
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We seek to deliver an attractive return on capital and provide consistent earnings growth through underwriting profits and income
from our investment portfolio. Our strategy is to be the preferred multi-line property and casualty insurance company for selected producers
in the geographic markets in which we operate. We believe producers prefer to place profitable business with us because we provide
excellent, consistent service to our producers, policyholders and claimants coupled with competitive rates and commission levels and a
consistent market presence. We also offer a wide array of personal and commercial lines policies, which we believe differentiates us from
other insurance companies that also distribute through our selected producers.
Our principal objectives are to increase the volume of profitable business that we write while limiting our risk of loss and preserving
our capital. We seek to generate underwriting income by writing profitable insurance policies and by managing our other underwriting and
operating expenses. We are pursuing profitable growth by expanding the geographic regions in which we operate, increasing the volume of
business that we write with existing producers, developing new selected producer relationships, and introducing niche insurance products
that are relevant to our producers and policyholders.
For the year ended December 31, 2013, our gross written premiums totaled $60.5 million, an increase of 22.8% from the $49.3
million in gross written premium for the year ended December 31, 2012.
Product Lines
Our product lines include the following:
Personal lines - Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package,
condominium, renters, mechanical breakdown, service line and personal umbrella policies. Personal lines policies accounted for 72.2% of
our gross written premiums for the year ended December 31, 2013.
Commercial liability - We offer business owners policies which consist primarily of small business retail risks without a residential
exposure. We also write artisan’s liability policies and special multi-peril property and liability policies. Commercial lines policies accounted
for 15.1% of our gross written premiums for the year ended December 31, 2013.
Commercial automobile - We provide physical damage and liability coverage for light vehicles owned by small contractors and
artisans. Commercial automobile policies accounted for 8.0% of our gross written premiums for the year ended December 31, 2013.
Livery physical damage and other - We write for-hire vehicle physical damage only policies for livery and car service vehicles and
taxicabs as well as canine legal liability policies. These policies accounted for 4.7% of our gross written premiums for the year ended
December 31, 2013.
Our Competitive Strengths
History of Growing Our Profitable Operations
Our insurance company subsidiary, KICO, has been in operation in the State of New York for over 125 years. We have consistently
increased the volume of profitable business that we write by introducing new insurance products, increasing the volume of business that we
write with our producers and developing new producer relationships. KICO has earned an underwriting profit in nine of the past ten years,
including in 2012 when our financial results were adversely impacted by Superstorm Sandy. The extensive heritage of our insurance
company subsidiary and our commitment to the New York market is a competitive advantage with producers and policyholders.
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Strong Producer Relationships
Within our selected producers’ offices, we compete with other property and casualty insurance carriers available to that producer.
We carefully select the producers that distribute our insurance policies and continuously monitor and evaluate their performance. We believe
our insurance producers value their relationships with us because we provide excellent, consistent personal service coupled with
competitive rates and commission levels. We have consistently been rated by insurance producers as above average in the important areas
of underwriting, claims handling and service. In the last two performance surveys conducted by the Professional Insurance Agents of New
York and New Jersey of its membership (2010 and 2012), KICO was rated as the top performing insurance company in New York.
We also offer our selected producers the ability to write a wide array of personal lines and commercial lines policies, including some
which are unique to us. Many of our producers write multiple lines of business with us which provides an advantage over those of our
competitors who are focused on a single product. We have had a consistent presence in the New York market for over 100 years and we
believe that producers value the longevity of our relationship with them. We believe that the excellent service we provide to our selected
producers, our broad product offering and our consistent market presence provides a foundation for profitable growth.
Sophisticated Underwriting and Risk Management Practices
We believe that we have a significant underwriting advantage due to our local market presence and expertise. Our underwriting
process evaluates property reports, driving records, the creditworthiness of the insured, and information collected from physical inspections
to determine appropriate rates. We utilize certain targeted policy exclusions to reduce our exposure to risks that can create severe losses.
We also seek to avoid severe losses by writing policies with lower liability limits when possible.
Our underwriting procedures, premium rates and policy terms support the underwriting profitability of our homeowners policies. We
have implemented premium surcharges for certain coastal properties and increased deductibles for hurricane losses to provide an
appropriate premium rate for the risk of loss. We also limit the business that we write in certain coastal counties and within close proximity to
coastlines to manage our exposure to catastrophic weather events. Through the use of sophisticated catastrophe modeling and other
software we assess individual policies to avoid geographic concentration of insured properties, to minimize fire risks associated with
adjacent properties and to manage our aggregate exposure to loss.
Our underwriting expertise and risk management practices enable us to profitably write personal and commercial lines business in
our markets. We believe that the consistency and the reliable availability of our insurance products is important to our selected producer
relationships.
Effective Utilization of Reinsurance
Our reinsurance treaties allow us to limit our exposure to the financial impact of catastrophe losses and to reduce our net liability on
individual risks. Our reinsurance program is structured to enable us to significantly grow our premium volume while maintaining regulatory
capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes.
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Our reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance
contracts. The income we earn from ceding commissions typically exceeds our fixed operating costs, which consist of other underwriting
expenses. Quota share reinsurance treaties transfer a portion of the profit (or loss) associated with the subject insurance policies to the
reinsurers. We believe that a prudent reduction in our reliance on quota share reinsurance in the future could positively impact our A.M. Best
financial strength rating and increase our underwriting profitability.
Experienced Management Team
Our management team has significant expertise in underwriting, agency management, claims management and insurance
regulatory matters. Barry Goldstein, our Chairman and Chief Executive Officer, has extensive experience in the insurance industry and
managing public companies. He has served in his current capacity since 2001 and previously served as president of an insurance agency in
Pennsylvania. John Reiersen, Executive Vice President of KICO, has over 48 years of industry and regulatory experience and previously
served as Chief Examiner in the Property and Casualty Insurance Bureau of the New York State Insurance Department, now known as the
New York State Department of Financial Services. Our underwriting and claims managers have extensive experience in the insurance
industry with an average of 36 years of experience, including over 15 years with KICO on average.
Scalable, Low-Cost Operations
We focus on keeping expenses to the minimum level required to properly underwrite our business and to effectively process claims.
While the majority of our business is written in downstate New York, our Kingston, New York location provides a significantly lower cost
operating environment. We also take an active approach to settling outstanding claims which results in substantially lower loss adjustment
expenses.
We have made investments to develop online application raters and inquiry systems for many of our personal lines and commercial
products. This has resulted in increased business submissions from our producers due to the greater ease of placing business with us. We
plan to expand these online capabilities to our other lines of business. Our ability to control the growth of our operating and other expenses
while growing revenue is a key component of our business model and is important to our future financial success.
Underwriting and Claims Management Philosophy
Our underwriting philosophy is to be conservative in the approach to risks that we write. We monitor results on a regular basis and
all of our producers are reviewed by management on a quarterly basis. In general, we try to avoid severity by writing at lower liability limits
when possible.
We believe our rates are competitive with other carriers’ rates in our markets. We believe that consistency and the reliable
availability of our insurance products is important to our producers. We do not seek to grow by competing based solely upon price. We
seek to develop long-term relationships with our select producers who understand and appreciate the conservative, consistent path we have
chosen. We carefully underwrite all of our business utilizing the CLUE database, motor vehicle reports, credit reports, physical inspection of
risks and other underwriting software. In the event that a material misrepresentation is discovered in the underwriting process, the policy is
voided. If a material misrepresentation is discovered after a claim is presented, we deny the claim. We write homeowners and dwelling fire
business in New York City and Long Island and are cognizant of our exposure to hurricanes. We have mitigated this risk by adding
mandatory hurricane deductibles to all policies. Our claim and underwriting expertise enables us to profitably write personal lines business in
all areas of New York City and Long Island.
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Distribution
We generate business through our relationships with over 350 independent producers. We carefully select our producers by
evaluating several factors such as their need for our products, premium production potential, loss history with other insurance companies
that they represent, product and market knowledge, and the size of the agency. We monitor and evaluate the performance of our producers
through periodic reviews of volume and profitability. Our senior executives are actively involved in managing our producer relationships.
Each producer is assigned an underwriter and the producer can call that underwriter directly on any matter. We believe that the
close relationship with their underwriter is the principal reason producers place their business with us. Requests for quotes are responded to
as promptly as possible. Our online application raters and inquiry systems have streamlined the process of placing business with KICO, but
we accommodate all other means of producer transmissions. Our producers have access to a website which contains all of our
applications, rating software, policy forms and underwriting guidelines for all lines of business. We send out frequent electronic
"Powergrams" in order to inform our producers of updates at KICO. In addition we have an active Producer Council and have at least one
annual meeting with all of our producers.
Competition; Market
The insurance industry is highly competitive. We constantly assess and project the market conditions and prices for our products,
but we cannot fully know our profitability until all claims have been reported and settled.
Our policyholders are located primarily in New York State. According to the U.S. Census Bureau, New York is the third largest state
in the country with a current estimated population of approximately 19.4 million. Our market primarily consists of New York City, Long Island
and Westchester County, which we collectively define as downstate New York. In 2011, we expanded our market to include parts of western
New York, primarily Buffalo, Rochester and Syracuse. We have also recently become licensed to write insurance and have commenced
underwriting policies in the Commonwealth of Pennsylvania.
New York State is the fourth largest property and casualty insurance market in the U.S. with $37.9 billion in direct premiums written
and the fourth largest state in the United States with respect to homeowners insurance written with $4.7 billion in direct premiums written,
according to 2012 data compiled by SNL Financial LC (most recent available published data). In 2012, we were the 30th largest writer of
homeowners insurance in the State of New York based on this same data. We compete with large national carriers as well as regional and
local carriers in the property and casualty marketplace in New York. We believe that many national and regional carriers have chosen to
reduce their rate of premium growth or to decrease their presence in the downstate New York property insurance market. Given present
market conditions, we believe that we have the opportunity to significantly expand the size of our business in the State of New York.
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Loss and Loss Adjustment Expense Reserves
We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment
expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities
representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance
sheet date, whether already known to us or not yet reported. We establish these reserves after considering all information known to us as of
the date they are recorded.
Loss reserves fall into two categories: case reserves for reported losses and loss expenses associated with a specific reported
insured claim, and reserves for losses incurred but not reported (“IBNR”) and LAE. We establish these two categories of loss reserves as
follows:
Reserves for reported losses - When a claim is received, we establish a case reserve for the estimated amount of its ultimate
settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time the claim
is reported and may subsequently increase or reduce the case reserves as our claims department deems necessary based upon the
development of additional facts about claims.
IBNR reserves - We also estimate and establish reserves for loss and LAE amounts incurred but not yet reported. IBNR reserves
are calculated as ultimate losses and LAE less reported losses and LAE. Ultimate losses are projected by using generally accepted actuarial
techniques.
The liability for loss and LAE represents our best estimate of the ultimate cost of all reported and unreported losses that are unpaid
as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis valuations,
statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an analysis of our
historical experience, supplemented by analyses of industry loss data. We believe that the reserves for loss and LAE are adequate to cover
the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting
patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the
assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates
become necessary, such adjustments are reflected in expense for the period in which the estimates are changed. Because of the nature of
the business historically written, we believe that we have limited exposure to environmental claim liabilities. We recognize recoveries from
salvage and subrogation when received.
We engage an independent external actuarial specialist to opine on our recorded statutory reserves. Our actuary estimates a range
of ultimate losses, along with the recommended IBNR and reserve amounts.
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Reconciliation of Loss and Loss Adjustment Expenses
The table below shows the reconciliation of loss and LAE on a gross and net basis, reflecting changes in losses incurred and paid
losses:
Balance at beginning of period
Less reinsurance recoverables
Net balance, beginning of period
Incurred related to:
Current year
Prior years
Total incurred
Paid related to:
Current year
Prior years
Total paid
Net balance at end of period
Add reinsurance recoverables
Balance at end of period
Years ended
December 31,
2013
2012
$ 30,485,532 $ 18,480,717
(9,960,334)
(18,419,694)
8,520,383
12,065,838
11,765,420 10,460,000
774,713
13,586,533 11,234,713
1,821,113
3,709,495
4,803,622
8,513,117
4,419,000
3,270,258
7,689,258
17,139,254 12,065,838
17,363,975 18,419,694
$ 34,503,229 $ 30,485,532
Our claims reserving practices are designed to set reserves that, in the aggregate, are adequate to pay all claims at their ultimate
settlement value.
Loss and Loss Adjustment Expenses Development
The table below shows the net loss development for business written each year from 2004 through 2013. The table reflects the
changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the
end of each succeeding year on a GAAP basis.
The next section of the table sets forth the re-estimates in later years of incurred losses, including payments for the years indicated.
The next section of the table shows by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts
recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $4,370,000 as of
December 31, 2006, by December 31, 2008 (two years later), $3,303,000 had actually been paid in settlement of the claims that relate to
liabilities as of December 31, 2006.
The “cumulative redundancy (deficiency)” represents, as of December 31, 2013, the difference between the latest re-estimated
liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A
deficiency means that the current estimate is higher than the original estimate.
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( in thousands of $)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Reserve for loss and loss
adjustment expenses, net
of reinsurance recoverables 3,141 3,074 4,370 4,799 5,823 6,001 7,280 8,520 12,065 17,139
Net reserve estimated as of
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net cumulative deficiency
5,122 3,627 4,844 5,430 6,119 6,235 7,483 9,261 13,837
5,698 4,315 5,591 5,867 6,609 6,393 8,289 11,022
6,356 5,101 5,792 6,433 6,729 6,486 9,170
6,985 5,094 6,260 6,569 6,711 7,182
7,049 5,540 6,343 6,683 7,261
7,476 5,616 6,429 7,245
7,561 5,678 6,886
7,637 6,140
8,093
(2,446) (1,438) (1,181) (1,890) (2,502) (1,772)
(2,516)
(3,066)
(4,952)
( in thousands of $)
Cumulative amount of
reserve paid, net of
reinsurance recoverable
through
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
3,347 1,106 2,018 1,855 2,533 2,307 3,201 3,237 4,748
4,291 2,321 3,303 3,339 3,974 3,992 4,947 5,661
4,965 3,321 4,036 4,339 5,054 4,659 6,199
5,598 3,705 4,471 5,146 5,373 5,238
5,840 3,988 5,079 5,424 5,717
6,101 4,484 5,305 5,738
6,557 4,595 5,594
6,654 4,880
6,933
Net reserve -
December 31,
3,141 3,074 4,370 4,799 5,823 6,001 7,280 8,520 12,065 17,139
Reinsurance Recoverable 7,610 7,283 6,523 6,693 9,766 10,512 10,432 9,960 18,420 17,364
Gross reserves -
December 31,
10,751 10,357 10,893 11,492 15,589 16,513 17,712 18,480 30,485 34,503
8,093 6,140 6,886 7,245 7,261 7,182 9,170 11,022 13,837
Net re-estimated reserve
Re-estimated reinsurance
recoverable
11,466 11,639 11,784 11,695 13,409 13,146 13,389 13,550 25,490
Gross re-estimated reserve 19,559 17,779 18,670 18,940 20,670 20,328 22,559 24,572 39,327
Gross cumulative
deficiency
(8,808)
(7,422)
(7,777)
(7,448) (5,081) (3,815) (4,847) (6,092) (8,842)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and
Financial Condition” in Item 7 of this Annual Report.
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Reinsurance
We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to achieve a target
ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Our reinsurance program is structured to
reflect our obligations and goals. Reinsurance via quota share allows for a carrier to write business without increasing its underwriting
leverage above a management determined ratio. The business written under a reinsurance quota share obligates a reinsurer to assume the
risks involved, and gives the reinsurer the profit (or loss) associated with such. We have determined it to be in the best interests of our
shareholders to prudently reduce our reliance on quota share reinsurance. This will result in higher earned premiums and a reduction in
ceding commission revenue in future years. Our participation in reinsurance arrangements does not relieve us from our obligations to
policyholders.
The reinsurance treaties for our personal lines business, which primarily consists of homeowners’ policies, and our commercial lines
business expired on June 30, 2013. Effective July 1, 2013, we entered into new treaties with different terms. The new personal lines quota
share treaty has a two year term expiring on June 30, 2015. Personal lines business is reinsured under a 75% quota share treaty. Effective
as of July 1, 2014, we have the option to increase the quota share percentage to a maximum of 85% or to decrease the quota share
percentage to a minimum of 55%. Excess of loss contracts provide additional coverage for individual personal lines losses. Our maximum
net retention under the quota share and excess of loss treaties for any one personal lines policy is $300,000.
Effective July 1, 2013, commercial general liability policies written by us, except for commercial auto policies, are reinsured under a
25% quota share treaty. Excess of loss contracts provide additional coverage for individual commercial general liability losses. Our
maximum net retention under the quota share and excess of loss treaties for any one commercial general liability policy is $300,000.
Commercial auto policies are covered by an excess of loss reinsurance contract that provides coverage for individual losses in excess of
$300,000.
We earn ceding commission revenue under the quota share reinsurance treaties based on a provisional commission rate on all
premiums ceded to the reinsurers as adjusted by a sliding scale based on the ultimate treaty year loss ratios on the policies reinsured under
each agreement. The sliding scale provides minimum and maximum ceding commission rates in relation to specified ultimate loss ratios.
The maximum potential ceding commission rate paid under the current personal lines quota share treaty, based on the sliding scale
of commission rates, is 57% at an ultimate loss ratio of 25% or less. The minimum provisional ceding commission rate is 40% at an ultimate
loss ratio of 48% or greater. The current treaty provides a higher minimum ceding commission rate than the prior year treaty, which began
on July 1, 2012 and ended on June 30, 2013. The previous year personal lines quota share treaty provided a minimum provisional
commission rate of 31% at an ultimate loss ratio of 57% or greater.
In 2013, we purchased catastrophe reinsurance to provide coverage of up to $90 million for losses associated with a single event.
Insurance exposure models prepared for us generally indicate that the catastrophe reinsurance treaties provide coverage in excess of our
estimated probable maximum loss associated with a single one-in-125 year storm event. Losses on personal lines policies are subject to the
75% quota share treaty, which results in a net retention by us of $1 million of exposure per catastrophe occurrence. Catastrophe coverage
is limited on an annual basis to two times the per occurrence amounts.
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Investments
Our investment portfolio, including cash and cash equivalents, and short term investments, as of December 31, 2013 and 2012, is
summarized in the table below by type of investment.
Category
December 31, 2013
December 31, 2012
Carrying
Value
% of
Portfolio
Carrying
Value
% of
Portfolio
Cash and cash equivalents
$ 19,922,506
34.6% $
2,240,012
6.5%
Held to maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Available for sale
Political subdivisions of states,
territories and possessions
Corporate and other bonds
Industrial and miscellaneous
Preferred stocks
Common stocks
Total
2,399,482
4.2%
606,281
1.8%
7,068,207
12.3%
5,474,816
16.0%
21,367,815
37.1% 20,707,122
60.3%
2,587,728
4.5%
1,484,347
4.3%
4,208,945
$ 57,554,683
7.3%
3,805,895
100.0% $ 34,318,473
11.1%
100.0%
The table below summarizes the credit quality of our fixed-maturity securities available-for-sale as of December 31, 2013 and 2012 as rated
by Standard and Poor’s (or if unavailable from Standard and Poors, then Moody’s or Fitch):
December 31, 2013
December 31, 2012
Fair Market
Value
Percentage of
Fair Market
Value
Fair Market
Value
Percentage of
Fair Market
Value
Rating
U.S. Treasury securities
AAA
AA
A
BBB
Total
$
$
-
2,075,010
4,566,384
7,680,343
14,114,285
28,436,022
0.0% $
7.3%
16.1%
27.0%
49.6%
100.0% $
-
2,226,603
4,088,304
6,963,380
12,903,651
26,181,938
0.0%
8.5%
15.6%
26.6%
49.3%
100.0%
Additional financial information regarding our investments is presented under the subheading “Investments” in Item 7 of this Annual
Report.
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Ratings
We currently have a Demotech rating of A (Excellent) which generally qualifies our policies for banks and finance companies. Many
insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial
strength and overall quality of the companies from which they are considering purchasing insurance. In 2009, KICO applied for its initial
A.M. Best rating, and was assigned a letter rating of “B” (Fair) by A.M. Best in 2010. Our rating was upgraded to B+ (Good) in 2011, and
such rating remained in effect in 2012 and 2013. KICO is beginning the process of undergoing its annual review from A.M. Best, which may
result in a change to its rating. A.M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet
strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization,
underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of
reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management,
market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to
policyholders and are not an evaluation directed at investors. An A.M. Best rating could create additional demand from producers requiring a
carrier to have an A.M. Best rating.
Superstorm Sandy
Superstorm Sandy made landfall in the New York City area on October 29, 2012. Our net personal lines loss incurred for the year
ended December 31, 2012 as a result of the storm was $750,000, which was our net retention pursuant to the prevailing inforce quota share
and catastrophe reinsurance treaties. Additional net losses of $393,000 were incurred in 2012 with respect to our business owners,
commercial auto and livery physical damage policies. Excluding the effects of Superstorm Sandy, the net loss ratio would have been 58.6%
for the year ended December 31, 2012. We were also required to pay $77,000 of reinstatement premiums in 2012 to catastrophe reinsurers
to obtain coverage for future catastrophe events during the reinsurance treaty period, which reduced our net premiums earned. We
incurred additional net losses of $36,000 during the year ended December 31, 2013 with respect to our participation in a state mandated
joint underwriting association. We were also required to pay $496,000 of reinstatement premiums during the year ended December 31,
2013 to catastrophe reinsurers, which reduced our net premiums earned. Excluding the effects of Superstorm Sandy, the net loss ratio
would have been 59.6% for the year ended December 31, 2013.
The computation to determine contingent ceding commission revenue includes direct catastrophe losses and loss adjustment
expenses incurred from Superstorm Sandy. Such losses increased our ceded loss ratio in our 2012 quota share treaties which reduced our
contingent ceding commission revenue by $1.9 million for the year ended December 31, 2012. Excluding the effects of Superstorm Sandy,
the net underwriting expense ratio would have been 17.5% for the year ended December 31, 2012.
As of December 31, 2013, the estimated ultimate loss ratios attributable to the 2012 quota share treaties are greater than the
contractual ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31,
2013, we have recorded negative contingent ceding commissions earned with respect to the 2012 treaties. Our contingent ceding
commission revenue for the year ended December 31, 2013 was reduced by $1.8 million as a result of losses incurred from Superstorm
Sandy. Excluding the effects of Superstorm Sandy, the net underwriting expense ratio would have been 19.2 % for the year ended
December 31, 2013.
Premium Financing
Customers who purchase insurance policies are often unable to pay the premium in a lump sum or are unable to afford the payment
plan offered and, therefore, require extended payment terms. Premium finance involves making a loan to the customer that is secured by
the unearned portion of the insurance premiums being financed and held by the insurance carrier. Our wholly-owned subsidiary, Payments
Inc. (“Payments”), is licensed as a premium finance agency in the state of New York.
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Prior to February 1, 2008, Payments Inc. provided premium financing in connection with the obtaining of insurance
policies. Effective February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio. The purchaser of the portfolio has
agreed that, during the five year period ended February 1, 2013 (which period has been extended to February 1, 2015), it will purchase,
assume and service all eligible premium finance contracts originated by Payments in the state of New York. In connection with such
purchases, Payments will be entitled to receive a fee generally equal to a percentage of the amount financed. Following any expiration or
termination of the obligation of the purchaser to purchase premium finance contracts, Payments will be entitled to receive the fees for an
additional two years with regard to contracts for policies from our producers. Our premium financing business currently consists of the
placement fees that Payments will earn from placing contracts. Placement fees earned from placing contracts constituted approximately
0.7% and 1.2% of our revenues from operations during the years ended December 31, 2013 and 2012, respectively.
The regulatory framework under which our premium finance procedures are established is generally set forth in the premium finance
statutes of the state in which we operate. Among other restrictions, the interest rate that may be charged to the insured for financing their
premiums is limited by these state statutes. See “Government Regulation” below.
Government Regulation
Holding Company Regulation
We, as the parent of KICO, are subject to the insurance holding company laws of the state of New York. These laws generally
require an insurance company to register with the New York State Department of Financial Services (the “Department”) and to furnish
annually financial and other information about the operations of companies within our holding company system. Generally under these laws,
all material transactions among companies in the holding company system to which KICO is a party must be fair and reasonable and, if
material or of a specified category, require prior notice and approval or non-disapproval by the Department.
Change of Control
The insurance holding company laws of the state of New York require approval by the Department of any change of control of an
insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management
and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to
exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that
controls a domestic insurance company. Any future transactions that would constitute a change of control of KICO, including a change of
control of Kingstone Companies, Inc., would generally require the party acquiring control to obtain the approval of the Department (and in
any other state in which KICO may operate). Obtaining these approvals may result in the material delay of, or deter, any such
transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Kingstone
Companies, Inc., including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might
consider to be desirable.
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State Insurance Regulation
Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect
individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other
things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the
nature of, and limitations on, investments and dividends, approve policy forms and rates in some instances and regulate unfair trade and
claims practices.
KICO is required to file detailed financial statements and other reports with the insurance departments in the states in which KICO is
licensed to transact business. These financial statements are subject to periodic examination by the insurance departments.
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example,
states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one
or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. The state
insurance department may disapprove a plan that may lead to market disruption. Laws and regulations, including those in New York, that
limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of KICO to exit
unprofitable markets.
In the aftermath of Superstorm Sandy, the New York State Department of Financial Services (“DFS”) adopted various emergency
regulations that affect insurance companies that operate in the state of New York. Included among the regulations is mandatory
participation in non-binding mediation proceedings funded by the insurer. Further, in February 2013, the state of New York announced that
the DFS commenced an investigation into the claims practices of three insurance companies, including KICO, in connection with
Superstorm Sandy claims. The DFS stated that the three insurers had a much larger than average consumer complaint rate with regard to
Superstorm Sandy claims and indicated that the three insurers were being investigated for (i) failure to send adjusters in a timely manner; (ii)
failure to process claims in a timely manner; and (iii) inability of homeowners to contact insurance company representatives. KICO received
a letter from the DFS seeking information and data with regard to the foregoing. KICO supplied information and data, and is cooperating
with the DFS in connection with its investigation. KICO has not received a response from the DFS and believes that such matter will not
have any effect on the Company’s financial position or results of operations.
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals
that have in the past been or at the present being considered are the possible introduction of Federal regulation in addition to, or in lieu of,
the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted)
to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance
Commissioners (the “NAIC”).
In December 2010, the NAIC adopted amendments to the Model Insurance Holding Company System Regulation Act and
Regulation (the “Amended Model Act and Regulation”) to introduce the concept of "enterprise risk" within an insurance company holding
system. Enterprise risk is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if
not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance
holding company system as a whole. If and when adopted by a particular state, the Amended Model Act and Regulation would impose more
extensive informational requirements on us in order to protect the licensed insurance companies from enterprise risk, including requiring us
to prepare an annual enterprise risk report that identifies the material risks within the insurance company holding system that could pose
enterprise risk to the licensed insurer. In addition, the Amended Model Act and Regulation requires any controlling person of a domestic
insurer seeking to divest its controlling interest to file a notice of its proposed divestiture, which may be subject to approval by the insurance
commissioner. The Amended Model Act and Regulation must be adopted by the individual states, and specifically states in which we are
licensed, for the new requirements to apply to us. The NAIC has made certain sections of the amendments part of its accreditation standards
for state solvency regulation, which may motivate more states to adopt the amendments promptly. Additional requirements are also
expected. For example, the NAIC has adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, which,
when adopted by the states, will require insurers to perform a risk and solvency assessment and, upon request of a state, file an ORSA
Summary Report with the state. The ORSA Summary Report will be required in 2015, subject to the various dates of adoption by states, and
will describe our process for assessing our own solvency.
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In 2013, New York, where KICO is domiciled, adopted its version of the Amended Model Act and Regulation. The statute requires a
holding company that directly or indirectly controls an insurer to adopt a formal enterprise risk management function and file an enterprise
risk report with the DFS by April 30 of each year commencing in 2014. The report must identify the material risks within the holding
company system that could pose enterprise risk to the insurer. In addition, any holding company seeking to divest its controlling interest in a
domestic insurer is required to file with the DFS a notice of its proposed divestiture at least thirty days prior to cessation of control.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) that established a Federal Insurance Office (the “FIO”) within the U.S. Department of the Treasury. The FIO is initially charged with
monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance),
gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. On
December 12, 2013, the FIO issued a report (as required under the Dodd-Frank Act) entitled “How to Modernize and Improve the System of
Insurance Regulation in the United States” (the “Report”), which stated that, given the “uneven” progress the states have made with several
near-term state reforms, should the states fail to accomplish the necessary modernization reforms in the near term, “Congress should
strongly consider direct federal involvement.” The FIO continues to support the current state-based regulatory regime, but will consider
federal regulation should the states fail to take steps to greater uniformity (e.g., federal licensing of insurers).
State Insurance Department Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the financial
reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out
in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC.
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Risk-Based Capital Regulations
State insurance departments impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as
a benchmark for the regulation of insurance companies by state insurance regulators. RBC provides for targeted surplus levels based on
formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived
degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the
company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk);
(c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year
(underwriting risk); and (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not
reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level
RBC (“ACLC”).
The RBC guidelines define specific capital levels based on a company’s ACLC that are determined by the ratio of the company’s
total adjusted capital (“TAC”) to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO was in
compliance with New York’s RBC requirements as of December 31, 2013.
Dividend Limitations
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions
are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on
a statutory accounting basis) for the trailing four quarters. As of December 31, 2013, the maximum distribution that KICO could pay without
prior regulatory approval was approximately $1,191,000, which is based on investment income for the last four quarters.
Insurance Regulatory Information System Ratios
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state
insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four
or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.
As of December 31, 2013, as a result of its growth and the $15 million contribution of capital we made to KICO, KICO had three
ratios outside the usual range due to reliance on quota share reinsurance, investment yield and gross change in surplus.
Accounting Principles
Statutory accounting principles (“SAP”) are a basis of accounting developed to assist insurance regulators in monitoring and
regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders.
Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with
appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
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Generally accepted accounting principles (“GAAP”) is concerned with a company’s solvency, but is also concerned with other
financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of
revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and
liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as
compared to SAP.
Statutory accounting practices established by the NAIC and adopted in part by the New York insurance regulators, determine,
among other things, the amount of statutory surplus and statutory net income of KICO and thus determine, in part, the amount of funds that
are available to pay dividends to Kingstone Companies, Inc.
Premium Financing
Our premium finance subsidiary, Payments Inc., is regulated in New York by the Department of Financial Services. The regulations,
which generally are designed to protect the interests of policyholders who elect to finance their insurance premiums, involve the following:
• regulating the interest rates, fees and service charges that may be charged;
• imposing minimum capital requirements for our premium finance subsidiary or requiring surety bonds in addition to or as an
alternative to such capital requirements;
• governing the form and content of our financing agreements;
• prescribing minimum notice and cure periods before we may cancel a customer’s policy for non-payment under the terms of
the financing agreement;
• prescribing timing and notice procedures for collecting unearned premium from the insurance company, applying the
unearned premium to our customer’s premium finance account, and, if applicable, returning any refund due to our customer;
• requiring our premium finance company to qualify for and obtain a license and to renew the license each year;
• conducting periodic financial and market conduct examinations and investigations of our premium finance company and its
operations;
• requiring prior notice to the regulating agency of any change of control of our premium finance company.
Legal Structure
We were incorporated in 1961 and assumed the name DCAP Group, Inc. in 1999. On July 1, 2009, we changed our name to
Kingstone Companies, Inc.
Offices
Our principal executive offices are located at 15 Joys Lane, Kingston, New York 12401, and our telephone number is (845) 802-
7900. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our website is
www.kingstonecompanies.com. Our internet website and the information contained therein or connected thereto are not intended to be
incorporated by reference into this Annual Report.
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Employees
As of December 31, 2013, we had 59 employees all of whom are located in New York. None of our employees are covered by a
collective bargaining agreement. We believe that our relationship with our employees is good.
ITEM 1A. RISK FACTORS.
Not applicable. See, however, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That
May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal executive offices are currently located at 15 Joys Lane, Kingston, New York. Our insurance underwriting business is
located principally at 15 Joys Lane, Kingston, New York.
We own the building from which our insurance underwriting business principally operates, free of mortgage.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
PART II
Market Information
Our common stock is quoted on The NASDAQ Capital Market under the symbol “KINS.”
Set forth below are the high and low sales prices for our common stock for the periods indicated, as reported on The NASDAQ
Capital Market.
2013 Calendar Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012 Calendar Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
$
$
High
Low
5.76 $
5.71
5.35
7.43
High
Low
3.75 $
6.13
6.95
6.24
4.69
5.11
5.01
4.59
2.98
3.18
4.51
4.50
As of March 10, 2014, there were approximately 370 record holders of our common stock.
Dividends
Holders of our common stock are entitled to dividends when, as and if declared by our Board of Directors out of funds legally
available. During 2013, we paid quarterly dividends of $0.04 per share on March 15, 2013, June 14, 2013, September 13, 2013 and
December 13, 2013. During 2012, we paid quarterly dividends of $0.03 per share on March 15, 2012 and June 15, 2012, and $0.04 per
share on September 18, 2012 and December 14, 2012. Future dividend policy will be subject to the discretion of our Board of Directors and
will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other
factors. Therefore, we can give no assurance that future dividends of any kind will continue to be paid to holders of our common stock.
Our ability to pay dividends depends, in part, upon on the ability of KICO to pay dividends to us. KICO, as an insurance subsidiary is
subject to significant regulatory restrictions limiting its ability to declare and pay dividends. See “Business – Government Regulation” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity” in Items 1 and 7, respectively, of this
Annual Report.
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We declared dividends on our common stock as follows:
Common stock dividends declared
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
2012
2011
$
533,763
$
230,303
The following table set forth certain information with respect to purchases of common stock made by us or any “affiliated purchaser”
during the quarter ended December 31, 2013:
Period
Total Number of
Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Maximum
Number of
Shares
that May Be
Purchased Under
the Plans or
Programs
10/1/13 – 10/31/13
11/1/13 – 11/30/13
12/1/13 – 12/31/13
Total
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We offer property and casualty insurance products to small businesses and individuals in New York State through our subsidiary,
Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long
Island and Westchester County.
We derive 99% of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share
reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s
insurance policies are for a one year period. Earned premiums represent premiums received from insureds, which are recognized as
revenue over the period of time that insurance coverage is provided (i.e., ratably over the one year life of the policy). A significant period of
time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the
premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
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Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a
significant amount of their total expenses from losses incurred by policyholders, which are commonly referred to as claims. In settling these
claims for losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In
addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes,
and other expenses related to the underwriting process, including employees’ compensation and benefits.
Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees,
occupancy costs related to our former corporate office, which was closed in May 2013, executive employment costs, and other costs directly
associated with being a public company.
Principal Revenue and Expense Items
Net premiums earned. Net premiums earned is the earned portion of our written premiums, less that portion of premium that is
ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a
contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of
the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in
subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy
written on July 1, 2012, we would earn half of the premiums in 2012 and the other half in 2013.
Ceding commission revenue. Commissions on reinsurance premiums ceded are earned in a manner consistent with the
recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies
reinsured.
Net investment income and net realized gains (losses) on investments. We invest our statutory surplus funds and the funds
supporting our insurance liabilities primarily in cash and cash equivalents, short-term investments, fixed maturity and equity securities. Our
net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and
losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities
are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for
less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify
equity securities as available-for-sale and our fixed maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains
(losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our
balance sheet.
Other income. We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-
payment. We also recognize premium finance fee income on loans financed by a third party finance company.
Loss and loss adjustment expenses incurred. Loss and loss adjustment expenses (“LAE”) incurred represent our largest
expense item, and for any given reporting period, include estimates of future claim payments, changes in those estimates from prior
reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount
and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations,
statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical
claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional
information from the claimants. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor
in our profitability.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Commission expenses and other underwriting expenses. Other underwriting expenses include acquisition costs and other
underwriting expenses. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily
related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition
costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and
administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as
regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.
Other operating expenses. Other operating expenses include the corporate expenses of our holding company, Kingstone
Companies, Inc. These expenses include executive employment costs, legal and auditing fees, occupancy costs related to our former
corporate office, which was closed in May 2013, and other costs directly associated with being a public company.
Non-cash equity compensation. Non-cash equity compensation includes the fair value of stock grants issued to our directors,
officers and employees, and amortization of stock options issued to the same.
Depreciation and amortization. Depreciation and amortization includes the amortization of intangibles related to the acquisition of
KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of office equipment and furniture.
Interest expense. Interest expense represents amounts we incurred on our former indebtedness at the then-applicable interest
rates.
Income tax expense. We incur federal income tax expense on our consolidated operations as well as state income tax expense for
our non-insurance underwriting subsidiaries.
Product Lines
Our product lines include the following:
Personal lines. Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package,
condominium, renters, mechanical breakdown, service line and personal umbrella policies.
Commercial liability. We offer business owners policies which consist primarily of small business retail risks without a residential
exposure. We also write artisan’s liability policies and special multi-peril property and liability policies.
Commercial automobile. We provide physical damage and liability coverage for light vehicles owned by small contractors and
artisans.
Livery physical damage and other. We write for-hire vehicle physical damage only policies for livery and car service vehicles and
taxicabs as well as canine legal liability policies.
25
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Key Measures
We utilize the following key measures in analyzing the results of our insurance underwriting business:
Net loss ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a
percentage, this is the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
Net underwriting expense ratio. The net underwriting expense ratio is a measure of an insurance company’s operational
efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant
being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net
premiums earned.
Net combined ratio. The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of
the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be
profitable without investment income, and may not be profitable if investment income is insufficient.
Underwriting income. Underwriting income is net pre-tax income attributable to our insurance underwriting business except for net
investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in
combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as
investment income, depreciation and amortization, interest expense and income taxes.
Critical Accounting Policies and Estimates
Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled
subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated
financial statements and related notes. In preparing these financial statements, our management has utilized information available including
our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of
certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize.
However, application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may
impact comparability of our results of operations to those of companies in similar businesses.
We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have
occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred ceding
commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets
and the valuation of stock-based compensation. See Note 2 (Accounting Policies and Basis of Presentation) of the Notes to Consolidated
Financial Statements following Item 15 of this Annual Report.
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Consolidated Results of Operations
The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:
($ in thousands)
Revenues
Direct written premiums
Assumed written premiums
Ceded written premiums
Ceded to quota share treaties
Ceded to excess of loss treaties
Ceded to catastrophe treaties
Catastrophe reinstatement (1)
Total ceded written premiums
Net written premiums
Change in net unearned premiums
Net premiums earned
Ceding commission revenue
Excluding the effect of catastrophes
Effect of catastrophes (1)
Total ceding commission revenue
Net investment income
Net realized gain on investments
Other income
Total revenues
Year ended December 31,
2013
2012
Change
Percent
$
60,449 $
46
60,495
49,252 $
22
49,274
11,197
24
11,221
33,614
540
1,006
496
35,656
24,839
(2,614)
22,225
13,520
(1,847)
11,673
1,170
576
922
36,566
27,285
962
1,391
77
29,715
19,559
(2,342)
17,217
11,609
(1,919)
9,690
1,015
288
868
29,078
6,329
(422)
(385)
419
5,941
5,280
(272)
5,008
1,911
72
1,983
155
288
54
7,488
22.7%
109.1%
22.8%
23.2%
(43.9) %
(27.7) %
544.2%
20.0%
27.0%
11.6%
29.1%
16.5%
(3.8) %
20.5%
15.3%
100.0%
6.2%
25.8%
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses excluding the effect of
catastrophes
Losses from catastrophes (1)
Total direct and assumed loss and loss adjustment expenses
Ceded loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of
catastrophes
Losses from catastrophes (1)
Total ceded loss and loss adjustment expenses
Net loss and loss adjustment expenses:
Loss and loss adjustment expenses excluding the effect of
catastrophes
Losses from catastrophes (1)
Net loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Interest expense
Total expenses
Income from operations before taxes
Provision for income tax
Net income
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$
27
30,529
225
30,754
19,371
13,261
32,632
11,158
(13,036)
(1,878)
57.6%
(98.3) %
(5.8) %
16,978
189
17,167
9,279
12,118
21,397
7,699
(11,929)
(4,230)
83.0%
(98.4) %
(19.8) %
13,551
36
13,587
10,092
1,143
11,235
9,363
9,019
1,099
646
76
7,246
7,849
1,000
596
82
33,790
28,008
2,776
764
2,012
$
1,070
303
767
$
3,459
(1,107)
2,352
2,117
1,170
99
50
(6)
5,782
1,706
461
1,245
34.3%
(96.9) %
20.9%
29.2%
14.9%
9.9%
8.4%
(7.3) %
20.6%
159.4%
152.1%
162.3%
(1) For the year ended December 31, 2013, includes the effects of Superstorm Sandy (which we define as a catastrophe), which occurred
on October 29, 2012. For the year ended December 31, 2012, includes the effects of Superstorm Sandy and Tropical Storm Irene (which we
define as a catastrophe), which occurred between August 27, 2011 and August 29, 2011. We define a “catastrophe” as an event that
involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of
average claims in a specific area, occurring within a certain amount of time constituting the event. Catastrophes are caused by various
natural events including high winds, excessive rain, winter storms, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
Direct written premiums during the year ended December 31, 2013 (“2013”) were $60,449,000 compared to $49,252,000 during the
year ended December 31, 2012 (“2012”). The increase of $11,197,000, or 22.7%, was primarily due to an increase in policies in-force
during 2013 as compared to 2012. We wrote more policies as a result of an increase in demand for our products in the markets that we
serve. Policies in-force increased by 21.1% as of December 31, 2013 compared to December 31, 2012. In addition to the increase of
policies in-force, we are also writing more policies, which have higher premiums. Our increase in policies in-force as of December 31, 2013
compared to December 31, 2012 resulting from the increased demand for our products in the markets that we serve was partially offset by
New York State regulations enacted to protect victims of Superstorm Sandy, which prohibited us from cancelling policies or non-renewing
existing policies beginning in the fourth quarter of 2012 and extending through various dates during the quarter ended March 31, 2013 (the
“Moratorium Period”). These regulations delayed cancellations and increased the amount of direct written premiums during the Moratorium
Period in the fourth quarter of 2012. After the expiration of the Moratorium Period in 2013, the additional cancellations and non-renewal of
existing policies reduced our growth rate in 2013.
Net written premiums increased $5,280,000, or 27.0%, to $24,839,000 in 2013 from $19,559,000 in 2012. 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). As we increase our written premiums in personal and commercial lines of business, which are both subject to quota
share treaties, our written premiums ceded under quota share treaties will increase, which will result in a corresponding reduction to net
written premiums. A reduction to the quota share percentage will reduce our ceded written premiums, which will result in a corresponding
increase to our net written premiums. Effective July 1, 2013, we decreased the quota share percentage in our commercial lines (excluding
commercial auto) quota share treaty from 40% to 25% and effective July 1, 2012, we decreased the quota share percentage in our
commercial lines (excluding commercial auto) quota share treaty from 60% to 40%.
Most of the premiums written under our personal lines are also subject to our catastrophe treaty. An increase in our personal lines
business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore our premiums for catastrophe
insurance will increase. This results in an increase in premiums ceded under our catastrophe treaty, resulting in a decrease in net written
premiums. Effective July 1, 2013, following the expiration of our catastrophe treaty on June 30, 2013, we reconciled the premiums expensed
to the actual amounts earned for the treaty year. This resulted in a reduction of $444,000 to premiums ceded to our catastrophe treaty and
the recognition of such amount in the third quarter as an addition to net premiums earned. Due to the increase in our property exposure and
the resulting increase in premiums for catastrophe insurance discussed above, effective December 31, 2013, we began to record unearned
catastrophe premiums. This resulted in a reduction of $618,000 to premiums ceded to our catastrophe treaty and the recognition of such
amount as an addition to net premiums earned. In 2013 we incurred reinstatement premiums for catastrophe coverage as a result of
Superstorm Sandy.
An increase in written premiums will also increase the premiums ceded under our excess of loss treaties, which will result in a
corresponding decrease to our net written premiums. Effective July 1, 2013, following the expiration of our excess of loss treaties on June
30, 2013, we reconciled the premiums expensed to the actual amounts earned for the treaty year. This resulted in a reduction of $138,000 to
premiums ceded to our excess of loss treaty and the recognition of such amount in the third quarter as an addition to net premiums earned.
Due to the increase in written premiums and the resulting increase in premiums ceded under our excess of loss treaties discussed above,
effective December 31, 2013, we began to record unearned excess of loss premiums. This resulted in a reduction of $206,000 to premiums
ceded to our excess of loss treaty and the recognition of such amount in the fourth quarter as an addition to net premiums earned.
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Net premiums earned increased $5,008,000, or 29.1%, to $22,225,000 in 2013 from $17,217,000 in 2012. As premiums written earn
ratably over a twelve month period, the increase was a result of higher net written premiums for the twelve months ended December 31,
2013 compared to the twelve months ended December 31, 2012. The increase in net premiums earned was also due to the effects of the
catastrophe and excess of loss ceded premium reconciliations along with the change in estimates in the recording of unearned catastrophe
and excess of loss premiums as discussed above.
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods
indicated:
($ in thousands)
Years ended December 31,
2013
2012
Change
Percent
Provisional ceding commissions earned
$
11,007 $
8,516 $
2,491
29.3%
Contingent ceding commissions earned
Contingent ceding commissions earned excluding
the effect of catastrophes
Effect of catastrophes on ceding commisions earned
Contingent ceding commissions earned
2,513
(1,847)
666
3,093
(1,919)
1,174
(580)
72
(508)
(18.8) %
(3.8) %
(43.3) %
Total ceding commission revenue
$
11,673 $
9,690 $
1,983
20.5%
Ceding commission revenue was $11,673,000 in 2013 compared to $9,690,000 in 2012. The increase of $1,983,000, or 20.5%,
was due to an increase in provisional ceding commissions earned, partially offset by a decrease in contingent ceding commissions earned.
We receive a provisional ceding commission based on ceded written premiums and a contingent ceding commission based on a sliding
scale in relation to the losses incurred under our quota share treaties. The lower the loss ratio, the more contingent commission we receive.
The amount of contingent commissions we are eligible to receive is reduced by the amount of provisional commissions previously
received. Effective July 1, 2013, our provisional ceding commission rate increased, which reduced the amount contingent ceding
commissions we can ultimately receive.
The $2,491,000 increase in provisional ceding commissions earned is due to: (1) a net increase in the amount of premiums ceded
and (2) an increase in our provisional ceding commission rate effective July 1, 2013. The increases in provisional ceding commissions
earned were offset by a decrease in our commercial lines quota share percentage effective July 1, 2013. The term of our previous personal
lines reinsurance quota share treaty covered the period from July 1, 2012 to June 30, 2013 (“2012/2013 Treaty”). Our ceded written
premiums in 2013 under the 2012/2013 Treaty totaled $13,699,000, and our provisional ceding commission was $4,818,000. The treaty also
provided for contingent ceding commissions based on a sliding scale whereby we were entitled to receive between 31% - 52% of the ceded
earned premiums; the lower the ceded loss ratio, the higher the percentage we were entitled to receive. For the years ended December 31,
2013 and 2012, the computation to arrive at contingent ceding commission revenue under the 2012/2013 Treaty includes direct catastrophe
losses and loss adjustment expenses incurred from Superstorm Sandy on October 29, 2012. Such losses increased our ceded loss ratio in
our 2012/2013 Treaty, which reduced our contingent ceding commission revenue in accordance with the sliding scale discussed above for
the years ended December 31, 2013 and 2012 by $1,847,000 and $1,919,000, respectively. The $508,000 decrease in contingent ceding
commissions earned is due to: (1) the increase in our provisional ceding commission rate effective July 1, 2013, with the greater provisional
ceding commission rate resulting in less contingent commissions that we can ultimately receive, as discussed above, and (2) an increase in
losses and LAE incurred under our prior years quota share reinsurance treaties, which resulted in a reduction of contingent commissions
previously earned.
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Net investment income was $1,170,000 in 2013 compared to $1,015,000 in 2012. The increase of $155,000, or 15.3%, was due to
an increase in average invested assets in 2013 as compared to 2012 and an increased allocation to preferred shares, which generally carry
a higher yield than debt, and receive advantageous tax treatment as compared to debt instruments from the same issuer. The increase in
cash and invested assets resulted primarily from increased operating cash flows. The net proceeds of $18,804,000 that we received on
December 13, 2013 from our public offering was too late in the year to have a material effect on our investment income. The tax equivalent
investment yield, excluding cash, was 5.28% and 5.14% at December 31, 2013 and 2012, respectively.
Net loss and loss adjustment expenses were $13,587,000 in 2013 compared to $11,235,000 in 2012. The net loss ratio was 61.1%
in 2013 compared to 65.3% in 2012, a decrease of 4.2 percentage points. The decrease of 4.2 percentage points in our net loss ratio for
2013 as compared to 2012 is driven by catastrophe and excess of loss ceded premium reconciliations that increased our net earned
premiums as discussed above, and by a decrease in the current accident year loss ratios for our personal lines of business. The decreases
were offset by increases in loss and LAE reserves required for prior accident years. This was driven primarily by increases in required LAE
reserves resulting from a shift in mix of claims toward longer-tailed commercial lines business which carries a higher LAE component than
short-tailed personal lines business. In addition, prior year loss reserves were strengthened for commercial auto business as a result of re-
estimation of ultimate claim liabilities for that line of business. The calendar year loss ratio was also impacted by the effect of catastrophe
reinstatement premiums related to Superstorm Sandy that reduced 2013 calendar year net earned premiums.
Commission expense was $9,363,000 in 2013 or 17.3% of direct earned premiums. Commission expense was $7,246,000 in 2012
or 16.3% of direct earned premiums. The increase of $2,117,000, or 29.2%, is due to the increase in direct written premiums in 2013 as
compared to 2012 and an increase in contingent commissions as a result of the decrease in our direct loss ratios.
Other underwriting expenses were $9,019,000 in 2013 compared to $7,849,000 in 2012. The increase of $1,170,000, or 14.9%, in
other underwriting expenses was primarily due to expenses directly related to the increase in direct written premiums and additional salaries
due to: (1) expenses directly related to the increase in direct written premiums, (2) profit sharing compensation due to higher profitability in
2013 compared to 2012, and (3) additional salaries along with related other employment costs due to the hiring of additional staff needed to
service our growth in written premiums and rate increases in annual salaries. Other underwriting expenses as a percentage of direct written
premiums was 14.9% in 2013 and 15.9% in 2012.
Other operating expenses, related to the expenses of our holding company, were $1,099,000 in 2013 compared to $1,000,000 in
2012. The increase in 2013 of $99,000, or 9.9%, was primarily due to higher executive bonuses in 2013.
30
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Interest expense was $76,000 in 2013 compared to $82,000 in 2012. The $6,000 decrease in interest expense, or 7.3%, was due to
the $747,000 redemption of outstanding notes and $210,000 repayment of the outstanding balance on our credit line from the proceeds of
our public offering in December 2013.
Depreciation and amortization was $646,000 in 2013 compared to $596,000 in 2012. The increase of $50,000, or 8.4%, in
depreciation and amortization was primarily due to depreciation on newly purchased assets used to upgrade our systems infrastructure.
Income tax expense in 2013 was $764,000, which resulted in an effective tax rate of 27.5%. Income tax expense in 2012 was
$303,000, which resulted in an effective tax rate of 28.3%. Income before taxes was $2,776,000 in 2013 compared to $1,070,000 in 2012.
The decrease in the effective tax rate of .8% in 2013 is a result of net changes in permanent differences, tax true-ups and the state net
operating loss valuation allowance.
Net income was $2,012,000 in 2013 compared to $767,000 in 2012. The increase in net income of $1,245,000, or 162.3% was due
to the circumstances described above that caused the increase in our net premiums earned and provisional ceding commissions and
decrease in our net loss ratio, offset by decreases in our contingent ceding commission revenues, and increases in other commission
expense and underwriting expenses related to premium growth.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Additional Financial Information
We operate our business as one segment, property and casualty insurance. Within this segment, we offer a wide array of property
and casualty policies to our producers. The following table summarizes gross and net premiums written, net premiums earned, and loss and
loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of
loss.
Gross premiums written:
Personal lines
Commercial lines
Commercial auto
Livery physical damage and other(1)
Total
Net premiums written:
Personal lines
Commercial lines
Commercial auto
Livery physical damage and other(1)
Total
Net premiums earned:
Personal lines
Commercial lines
Commercial auto
Livery physical damage and other(1)
Total
Net loss and loss adjustment expenses:
Personal lines
Commercial lines
Commercial auto
Livery physical damage and other(1)
Unallocated loss adjustment expenses
Total
Net loss ratio:
Personal lines
Commercial lines
Commercial auto
Livery physical damage and other(1)
Total
(1)
Year Ended
December 31,
2013
2012
$ 43,668,704
9,128,898
4,838,894
2,858,327
$ 60,494,823
$ 33,777,692
8,002,800
5,690,828
1,804,277
$ 49,275,597
$ 10,723,294
6,599,379
4,752,169
2,763,921
$ 24,838,763
$
8,005,156
4,485,816
5,368,967
1,699,687
$ 19,559,626
$
9,112,104
5,661,318
5,203,433
2,248,312
$ 22,225,167
$
6,880,422
3,067,226
5,646,860
1,622,103
$ 17,216,611
$
4,117,696
1,586,786
5,776,363
1,200,454
905,234
$ 13,586,533
$
3,343,322
1,232,750
5,163,171
816,431
679,039
$ 11,234,713
45.2%
28.0%
111.0%
53.4%
61.1%
48.6%
40.2%
91.4%
50.3%
65.3%
Livery physical damage and other includes, among other things, premiums and loss and loss adjustment expenses from our
participation in a mandatory state joint underwriting association. For the year ended December 31, 2013, we incurred net loss
recoveries of $61,000 from Superstorm Sandy with respect to the joint underwriting association. Excluding the effects of Superstorm
Sandy with respect to the joint underwriting association, the net loss ratio for livery physical damage and other would have been
56.1% for the year ended December 31, 2013.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We have recently made changes to our commercial automobile line of business to improve underwriting performance. We are
reducing the volume of commercial automobile business that we write through certain producers that have generated higher loss ratios.
Minimum coverage levels have also been increased and proof of private passenger coverage is now required for all commercial automobile
policies. We expect that underwriting profitability will improve as a result of these actions.
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2013 and 2012 follows:
Year ended
December 31,
2013
2012
$ 22,225,167
11,673,103
1,170,051
575,792
592,865
36,236,978
$ 17,216,611
9,690,155
1,015,156
288,068
476,661
28,686,651
13,586,533
9,362,793
9,018,685
643,096
32,611,107
11,234,713
7,246,245
7,848,869
595,189
26,925,016
3,625,871
1,075,475
2,550,396
$
1,761,635
495,278
1,266,357
$
61.1%
27.5%
88.6%
65.3%
28.6%
93.9%
$ 18,381,478
(11,673,103)
(592,865)
$
6,115,510
$ 15,095,114
(9,690,155)
(476,661)
4,928,298
$
$ 22,225,167
$ 17,216,611
27.5%
28.6%
33
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain on investments
Other income
Total revenues
Expenses
Loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Depreciation and amortization
Total expenses
Income from operations
Income tax expense
Net income
Key Measures:
Net loss ratio
Net underwriting expense ratio
Net combined ratio
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue
Less: Other income
Net earned premium
Net Underwriting Expense Ratio
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:
Year ended December 31, 2013
Written premiums
Unearned premiums
Earned premiums
Loss and loss adjustment expenses exluding
the effect of catastrophes
Catastrophe loss
Loss and loss adjustment expenses
Loss ratio excluding the effect of catastrophes
Catastrophe loss
Loss ratio
Year ended December 31, 2012
Written premiums
Unearned premiums
Earned premiums
Loss and loss adjustment expenses exluding
the effect of catastrophes
Catastrophe loss
Loss and loss adjustment expenses
Loss ratio excluding the effect of catastrophes
Catastrophe loss
Loss ratio
Direct
Assumed
Ceded
Net
$ 60,449,077
(6,341,750)
$ 54,107,327
$ 30,471,599
225,324
$ 30,696,923
$
$
$
$
45,746
18,499
64,245
$ (35,656,060)
3,709,655
$ (31,946,405)
$ 24,838,763
(2,613,596)
$ 22,225,167
57,017
-
57,017
$ (16,978,316)
(189,091)
$ (17,167,407)
$ 13,550,300
36,233
$ 13,586,533
56.3%
0.4%
56.7%
88.7%
0.0%
88.7%
53.1%
0.6%
53.7%
61.0%
0.1%
61.1%
$ 49,251,630
(4,724,193)
$ 44,527,437
$ 19,339,488
13,260,964
$ 32,600,452
$
$
$
$
23,967
(5,010)
18,957
$ (29,715,971)
2,386,188
$ (27,329,783)
$ 19,559,626
(2,343,015)
$ 17,216,611
31,029
-
31,029
$ (9,278,826)
(12,117,942)
$ (21,396,768)
$ 10,091,691
1,143,022
$ 11,234,713
43.4%
29.8%
73.2%
163.7%
0.0%
163.7%
34.0%
44.3%
78.3%
58.6%
6.7%
65.3%
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The key measures for our insurance underwriting business for the years ended December 31, 2013 and 2012 are as follows:
Net premiums earned
Ceding commission revenue (1)
Other income
Loss and loss adjustment expenses (2)
Acquistion costs and other underwriting expenses:
Commission expense
Other underwriting expenses
Total acquistion costs and other
underwriting expenses
Underwriting income
Key Measures:
Net loss ratio excluding the effect of catastrophes
Effect of catastrophe loss on loss ratio (2)
Net loss ratio
Net underwriting expense ratio excluding the
effect of catastrophes
Effect of catastrophe loss on net underwriting
expense ratio (1) (2)
Net underwriting expense ratio
Net combined ratio excluding the effect
of catastrophes
Effect of catastrophe loss on net combined
ratio (1) (2)
Net combined ratio
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue (1)
Less: Other income
Years ended
December 31,
2013
2012
$ 22,225,167
11,673,103
592,865
$ 17,216,611
9,690,155
476,661
13,586,533
11,234,713
9,362,793
9,018,685
7,246,245
7,848,870
18,381,478
15,095,115
$
2,523,124
$
1,053,599
61.0%
0.1%
61.1%
58.6%
6.7%
65.3%
19.2%
17.5%
8.3%
27.5%
11.1%
28.6%
80.2%
76.1%
8.4%
88.6%
17.8%
93.9%
$ 18,381,478
(11,673,103)
(592,865)
6,115,510
$
$ 15,095,115
(9,690,155)
(476,661)
4,928,299
$
(1) The effect of Superstorm Sandy, which occurred on October 29, 2012, reduced contingent ceding commission revenue by $1,846,882
and $1,918,871 for the years ended December 31, 2013 and 2012, respectively.
(2) Includes the sum of net catastrophe losses and loss adjustment expenses of $36,233 and $1,143,022 resulting from Superstorm Sandy
for the years ended December 31, 2013 and 2012, respectively.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Investments
Portfolio Summary
The following table presents a breakdown of the amortized cost, aggregate fair value and unrealized gains and losses by investment
type as of December 31, 2013 and 2012:
Available for Sale Securities
Category
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Total fixed-maturity securities
Equity Securities
Total
Category
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Total fixed-maturity securities
Equity Securities
Total
December 31, 2013
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized Less than 12 More than 12
Gains
Months
Months
Aggregate
Fair
Value
% of
Fair
Value
$
7,000,222
$
162,617
$
(49,491) $
(45,140) $
7,068,207
20.1%
21,079,680
28,079,902
6,690,338
$ 34,770,240
$
569,138
731,755
473,109
1,204,864
$
(179,810)
(229,301)
(290,310)
(519,611) $
(101,194) 21,367,815
(146,334) 28,436,022
6,796,673
(76,464)
(222,798) $ 35,232,695
60.6%
80.7%
19.3%
100.0%
December 31, 2012
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Aggregate
Unrealized Less than 12 More than 12
Gains
Months
Months
Fair
Value
% of
Fair
Value
$
5,219,092
$
257,298
$
(1,574) $
-
$
5,474,816
17.4%
19,628,005
24,847,097
5,073,977
$ 29,921,074
$
1,123,392
1,380,690
373,294
1,753,984
$
(43,553)
(45,127)
(157,029)
(202,156) $
(722) 20,707,122
(722) 26,181,938
5,290,242
(722) $ 31,472,180
-
65.8%
83.2%
16.8%
100.0%
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Held to Maturity Securities
December 31, 2013
Category
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized Less than 12
More than 12
Gains
Months
Months
Fair
Value
% of
Fair
Value
U.S. Treasury securities
$
606,138
$
46,915
$
-
$
-
$
653,053
26.9%
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
208,697
-
(25,359)
1,584,647
4,223
-
-
-
183,338
7.6%
1,588,870
65.5%
Total
$
2,399,482
$
51,138
$
(25,359) $
-
$
2,425,261
100.0%
Category
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized Less than 12
More than 12
Gains
Months
Months
Fair
Value
% of
Fair
Value
U.S. Treasury securities
$
606,281
$
172,745
$
-
$
-
$
779,026
100.0%
December 31, 2012
U.S. Treasury securities included in held to maturity securities are held in trust pursuant to the New York State Department of Financial
Services’ minimum funds requirement.
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of
December 31, 2013 and December 31, 2012 is shown below:
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
More than 10 years
Total
December 31, 2013
December 31, 2012
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
$
$
-
-
1,793,344
606,138
2,399,482
$
$
-
-
1,772,208
653,053
2,425,261
$
$
-
-
-
606,281
606,281
$
$
-
-
-
779,026
779,026
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Credit Rating of Fixed-Maturity Securities
The table below summarizes the credit quality of our available for sale fixed-maturity securities as of December 31, 2013 and
December 31, 2012 as rated by Standard and Poor’s (or, if unavailable from Standard and Poor’s, then Moody’s or Fitch):
December 31, 2013
December 31, 2012
Fair Market
Value
Percentage of
Fair Market
Value
Fair Market
Value
Percentage of
Fair Market
Value
Rating
U.S. Treasury securities
AAA
AA
A
BBB
Total
$
$
-
2,075,010
4,566,384
7,680,343
14,114,285
28,436,022
0.0% $
7.3%
16.1%
27.0%
49.6%
100.0% $
-
2,226,603
4,088,304
6,963,380
12,903,651
26,181,938
0.0%
8.5%
15.6%
26.6%
49.3%
100.0%
The table below summarizes the average maturity by type of fixed-maturity security as well as detailing the average yield as of
December 31, 2013 and December 31, 2012:
Category
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
Political subdivisions of States, Territories and Possessions
Corporate and other bonds Industrial and miscellaneous
Fair Value Consideration
December 31, 2013
December 31, 2012
Average
Yield%
Weighted
Average
Maturity in
Years
Average
Yield %
Weighted
Average
Maturity in
Years
3.98%
4.34%
4.69%
26.8
7.3
6.9
3.33%
4.06%
4.74%
27.8
6.1
7.3
As disclosed in Note 4 to the Consolidated Financial Statements, with respect to “Fair Value Measurements,” we define
fair value under GAAP guidance as the price that would be received to sell an asset or paid to transfer a liability in a transaction
involving identical or comparable assets or liabilities between market participants (an “exit price”). This GAAP guidance
establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable
inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is
limited or unavailable (“unobservable inputs”). The fair value hierarchy in GAAP prioritizes fair value measurements into three
levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”),
followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”),
and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having
the lowest priority (“Level 3”). As of December 31, 2013 and 2012, 78% and 54%, respectively, of the investment portfolio
recorded at fair value was priced based upon quoted market prices.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As more fully described in Note 3 to our Consolidated Financial Statements, “Investments—Impairment Review,” we completed a
detailed review of all our securities in a continuous loss position as of December 31, 2013 and 2012, and concluded that the unrealized
losses in these asset classes are temporary in nature and the result of a decrease in value due to technical spread widening and broader
market sentiment, rather than fundamental collateral deterioration.
The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by
length of time the security has continuously been in an unrealized loss position as of December 31, 2013 and 2012:
Less than 12 months
12 months or more
No. of
No. of
December 31, 2013
Unrealized Positions
Unrealized
Losses
Held
Value
Losses
Total
Aggregate
Fair
Category
Value
Losses
Held
Fair
Unrealized Positions
Fair
Value
Fixed-Maturity Securities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
$ 2,015,437
$ (49,491)
6
$ 415,866
$ (45,140)
2
$ 2,431,303
$ (94,631)
6,447,605
(179,810)
24
1,430,377
(101,194)
5
7,877,982
(281,004)
$ 8,463,042
$ (229,301)
30
$1,846,243
$ (146,334)
7
$10,309,285
$ (375,635)
$ 1,835,958
879,525
$ (251,525)
(38,785)
8
4
$ 444,100
145,625
$ (62,551)
(13,913)
2
1
$ 2,280,058
1,025,150
$ (314,076)
(52,698)
Total equity securities
$ 2,715,483
$ (290,310)
12
$ 589,725
$ (76,464)
3
$ 3,305,208
$ (366,774)
Total
$11,178,525
$ (519,611)
42
$2,435,968
$ (222,798)
10
$13,614,493
$ (742,409)
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Category
Value
Losses
Held
Value
Losses
Held
Value
Losses
Fair
Unrealized Positions
Fair
Unrealized
Positions
Unrealized
Less than 12 months
12 months or more
No. of
No. of
December 31, 2012
Total
Aggregate
Fair
Fixed-Maturity Securities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
$ 202,798
$
(1,574)
1
$
-
$
-
-
$ 202,798
$
(1,574)
4,025,551
(43,553)
19
128,125
(722)
1
4,153,676
(44,275)
$4,228,349
$ (45,127)
20
$ 128,125
$
(722)
1
$4,356,474
$ (45,849)
Total equity securities
$1,924,785
$ (157,029)
12
$
$ 387,925
1,536,860
$ (11,130)
(145,899)
$
3
9
$
-
-
-
$
-
-
-
-
-
$ 387,925
1,536,860
$ (11,130)
(145,899)
-
$1,924,785
$ (157,029)
Total
$6,153,134
$ (202,156)
32
$ 128,125
$
(722)
1
$6,281,259
$ (202,878)
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
There were 52 securities at December 31, 2013 that accounted for the gross unrealized loss, none of which were deemed by us to
be other than temporarily impaired. There were 33 securities at December 31, 2012 that accounted for the gross unrealized loss, none of
which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses
were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and
management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before
anticipated recovery of fair value to our cost basis.
Liquidity and Capital Resources
Cash Flows
The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding
commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale
or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after
subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment
expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and
fixed assets.
The primary sources of cash flow for our holding company operations are in connection with the fee income we receive from the
premium finance loans and collection of principal and interest income from the notes received by us upon the sale of businesses that were
included in our former discontinued operations. We also receive cash dividends from KICO, subject to statutory restrictions. For the year
ended December 31, 2013, KICO paid dividends of $700,000 to us.
On December 13, 2013, we completed an underwritten public offering of 3,450,000 shares of our common stock, including 450,000
shares issued pursuant to the underwriter’s 30-day over-allotment option, at a public offering price of $5.95 per share. The aggregate net
proceeds we received was $18,804,000, after deducting underwriting discounts and commissions and other offering expenses. We used the
net proceeds of the offering to contribute capital to our insurance subsidiary, KICO, to support its growth, including possible product
expansion, to repay the $747,000 outstanding balance of our notes and to repay the $210,000 outstanding balance on our credit line. A
registration statement relating to these securities was filed with the SEC and became effective on December 9, 2013.
If the aforementioned is insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance
of paid losses, the timing of reinsurance, issuing company settlements and loss payments.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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:
Years Ended December 31,
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2013
2012
$
7,383,537
$
(6,577,871)
16,876,828
17,682,494
2,240,012
$ 19,922,506 $
6,375,322
(3,961,384)
(347,052)
2,066,886
173,126
2,240,012
Net cash provided by operating activities was $7,384,000 in 2013 as compared to $6,375,000 provided in 2012. The $1,009,000
increase in cash flows provided by operating activities in 2013 was primarily a result of an increase in net income (adjusted for non-cash
items) of $710,000 and the fluctuations in assets and liabilities relating to operating activities of KICO as affected by the growth in its
operations which are described above.
Net cash used in investing activities was $6,578,000 in 2013 compared to $3,961,000 used in 2012. The $2,617,000 increase in
cash flows used in investing activities is a result of the increase in acquisitions of invested assets, offset by an increase in sales of invested
assets.
Net cash provided by financing activities was $16,877,000 in 2013 compared to $347,000 used in 2012. The $17,224,000 increase
in cash flows provided by financing activities is a result of the net proceeds of $18,804,000 from our public offering on December 13, 2013,
offset by net repayments of $1,197,000 of debt in 2013 compared to $150,000 of net borrowings in 2012, and increases of $103,000 in the
purchase of treasury stock and $79,000 of dividends paid in 2013 compared to 2012.
Reinsurance
The following table summarizes each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and
unpaid losses and loss adjustment expenses as of December 31, 2013:
($ in thousands)
Maiden Reinsurace Company
SCOR Reinsurance Company
Swiss Reinsurance America Corporation
Others
Total
Amount
Recoverable
as of
December 31,
2013
A.M.
Best Rating
A-
A
A+
$
$
7,661
3,612
2,977
14,250
4,910
19,160
%
40.0%
18.9%
15.5%
74.4%
25.6%
100.00%
Reinsurance recoverable from Maiden Reinsurance Company and Motors Insurance Corporation (included in Others) are secured
pursuant to collateralized trust agreements. Assets held in the two trusts are not included in our invested assets and investment income
earned on these assets is credited to the two reinsurers respectively.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our reinsurance treaties for both our Personal Lines business, which primarily consists of homeowners’ policies, and Commercial
Lines business expired on June 30, 2013. Effective July 1, 2013, we entered into new treaties with different terms. The treaties are annual,
except for personal lines described below, and provide for the following material terms as of July 1, 2013:
Personal Lines
Our personal lines treaty has a two year term expiring on June 30, 2015. Personal lines business, which includes homeowners,
dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty, which provides coverage with respect
to losses of up to $1,200,000 per occurrence. An excess of loss contract provides 100% of coverage for the next $1,700,000 of
losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000 per occurrence. Effective as of July
1, 2014, we have the option to increase the quota share percentage to a maximum of 85% or decrease the quota share percentage
to a minimum of 55% by giving no less than 30 days advance notice. See “Catastrophe Reinsurance” below for a discussion of our
reinsurance coverage with respect to our Personal Lines business in the event of a catastrophe.
Personal umbrella policies are reinsured under a 90% quota share treaty limiting us to a maximum of $100,000 per occurrence for
the first $1,000,000 of coverage. The second $1,000,000 of coverage is 100% reinsured.
Commercial Lines
General liability commercial policies written by us, except for commercial auto policies, are reinsured under a 25% quota share
treaty, which provides coverage with respect to losses of up to $400,000 per occurrence. Excess of loss contracts provide 100% of
coverage for the next $2,500,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000
per occurrence.
Commercial Auto
Commercial auto policies are covered by an excess of loss reinsurance contract, which provides $1,700,000 of coverage in excess
of $300,000.
Catastrophe Reinsurance
We have catastrophe reinsurance coverage with regard to losses of up to $90,000,000. The initial $4,000,000 of losses in a
catastrophe are subject to a 75% quota share treaty, such that we retain $1,000,000 per catastrophe occurrence With respect to any
additional catastrophe losses of up to $86,000,000 per catastrophe, we are 100% reinsured under our catastrophe reinsurance
program. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The single maximum risks to which we are subject under these treaties per occurrence are as follows:
Personal Lines
Treaty
Personal Umbrella
Commercial Lines
Commercial Auto
Catastrophe
Extent of Loss
Initial $1,200,000
$ 1,200,000 -
$2,900,000
Over $2,900,000
Risk
Retained(1)
$
300,000
None
100%
Initial $1,000,000
$
100,000
1,000,000 -
$2,000,000
$
Over $2,000,000
Initial $400,000
400,000 -
$2,900,000
$
Over $2,900,000
Initial $300,000
300,000 -
$2,000,000
$
Over $2,000,000
None
100%
$
300,000
None
100%
$
300,000
None
100%
Initial $4,000,000
$
1,000,000
4,000,000
-$90,000,000
$
Over $90,000,000
None
100%
________________
(1) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
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.
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.
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Factors That May Affect Future Results and Financial Condition
Based upon the following factors, as well as other factors affecting our operating results and financial condition, past financial
performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to
anticipate results or trends in future periods. In addition, such factors, among others, may affect the accuracy of certain forward-looking
statements contained in this Annual Report.
Risks Related to Our Business
As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events.
Because of the exposure of our property and casualty business to catastrophic events (such as Superstorm Sandy), our
operating results and financial condition may vary significantly from one period to the next. Catastrophes can be caused by
various natural and man-made disasters, including earthquakes, wildfires, tornadoes, hurricanes, storms and certain types of
terrorism. We have catastrophe reinsurance coverage with regard to losses of up to $90,000,000. The initial $4,000,000 of losses
in a catastrophe are subject to a 75% quota share reinsurance treaty, such that we retain $1,000,000 of risk per catastrophe
occurrence. With respect to any additional catastrophe losses of up to $86,000,000, we are 100% reinsured under our
catastrophe reinsurance program. Catastrophe coverage is limited on an annual basis to two times the per occurrence
amounts. We may incur catastrophe losses in excess of: (i) those that we project would be incurred, (ii) those that external
modeling firms estimate would be incurred, (iii) the average expected level used in pricing or (iv) our current reinsurance
coverage limits. Despite our catastrophe management programs, we are exposed to catastrophes that could have a material
adverse effect on our operating results and financial condition. Our liquidity could be constrained by a catastrophe, or multiple
catastrophes, which may result in extraordinary losses or a downgrade of our financial strength ratings. In addition, the
reinsurance losses that are incurred in connection with a catastrophe could have an adverse impact on the terms and conditions
of future reinsurance treaties.
In addition, we are subject to claims arising from non-catastrophic weather events such as hurricanes, tropical storms, winter storms, rain,
hail and high winds. The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the
frequency and severity of claims when severe weather conditions occur.
Unanticipated increases in the severity or frequency of claims may adversely affect our operating results and financial condition.
Changes in the severity or frequency of claims may affect our profitability. Changes in homeowners claim severity are
driven by inflation in the construction industry, in building materials and in home furnishings, and by other economic and
environmental factors, including increased demand for services and supplies in areas affected by catastrophes. Changes in
bodily injury claim severity are driven primarily by inflation in the medical sector of the economy and litigation. Changes in auto
physical damage claim severity are driven primarily by inflation in auto repair costs, prices of auto parts and used car prices.
However, changes in the level of the severity of claims are not limited to the effects of inflation and demand surge in these various
sectors of the economy. Increases in claim severity can arise from unexpected events that are inherently difficult to predict, such
as a change in the law or an inability to enforce exclusions and limitations contained in our policies. Although we pursue various
loss management initiatives to mitigate future increases in claim severity, there can be no assurances that these initiatives will
successfully identify or reduce the effect of future increases in claim severity, and a significant increase in claim frequency could
have an adverse effect on our operating results and financial condition.
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The inability to obtain an upgrade to our financial strength rating from A.M. Best, or a downgrade in our rating, may have
a material adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating
results and financial condition.
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect
on an insurance company's business. Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best
and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering
purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold.
KICO currently has an A.M. Best financial strength rating of B+ (Good). A.M. Best ratings are derived from an in-depth evaluation of an
insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the
company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of
reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market
position, management, market risk and event risk. On an ongoing basis, rating agencies such as A.M. Best review the financial performance
and condition of insurers and can downgrade or change the outlook on an insurer's ratings due to, for example, a change in an insurer's
statutory capital, a reduced confidence in management or a host of other considerations that may or may not be under the insurer's control.
KICO currently has a Demotech financial stability rating of A (Excellent), which generally permits lenders to accept our policies. All ratings
are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have
a material adverse effect on our competitiveness, the marketability of our product offerings and our ability to grow in the marketplace.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain
credit on acceptable terms.
The capital and credit markets have been experiencing extreme volatility and disruption. In some cases, the markets
have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional
capital to pay our operating expenses, make payments on our indebtedness, pay for capital expenditures or increase the amount
of insurance that we seek to underwrite or otherwise grow our business, our ability to obtain such capital may be limited and the
cost of any such capital may be significant. Our access to additional financing will depend on a variety of factors, such as market
conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity as
well as lenders' perception of our long or short-term financial prospects. Similarly, our access to funds may be impaired if
regulatory authorities or rating agencies take negative actions against us. If a combination of these factors occurs, our internal
sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing
on favorable terms.
We are exposed to significant financial and capital markets risk which may adversely affect our results of operations, financial
condition and liquidity, and our net investment income can vary from period to period.
We are exposed to significant financial and capital markets risk, including changes in interest rates, equity prices, market volatility, the
performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors outside our
control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest
rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely
affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and
other factors beyond our control. A rise in interest rates would increase the net unrealized loss position of our investment portfolio, which
would be offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would decrease the
net unrealized loss position of our investment portfolio, which would be offset by lower rates of return on funds reinvested.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such,
valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse
effect on our consolidated results of operations or financial condition. If significant, continued volatility, changes in interest rates, changes in
defaults, a lack of pricing transparency, market liquidity and declines in equity prices, individually or in tandem, could have a material
adverse effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in
unrealized positions.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business.
Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to
catastrophes. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be
given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available.
For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for
its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future.
If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient
and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or
develop or seek other alternatives.
We intend to prudently reduce our reliance on quota share reinsurance; this would lead to greater exposure to net insurance
losses.
We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share
reinsurance. Any such reduction would result in higher earned premiums and a reduction in ceding commission revenue in future
years. Such approach would also lead to increased exposure to net insurance losses.
Reinsurance subjects us to the credit risk of our reinsurers, which may have a material adverse effect on our operating results
and financial condition.
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including
changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether
reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty
or contract. Since we are primarily liable to an insured for the full amount of insurance coverage, our inability to collect a material
recovery from a reinsurer could have a material adverse effect on our operating results and financial condition.
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Applicable insurance laws regarding the change of control of our company may impede potential acquisitions that our
shareholders might consider to be desirable.
We are subject to statutes and regulations of the state of New York which generally require that any person or entity
desiring to acquire direct or indirect control of KICO, our insurance company subsidiary, obtain prior regulatory approval. In
addition, a change of control of Kingstone Companies, Inc. would require such approval. These laws may discourage potential
acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in
particular unsolicited transactions, that some of our shareholders might consider to be desirable. Similar regulations may apply in
other states in which we may operate.
The insurance industry is subject to extensive restrictive regulation that may affect our operating costs and limit the growth of our
business, and changes within this regulatory environment may, too, adversely affect our operating costs and limit the growth of
our business.
We are subject to extensive laws and regulations. State insurance regulators are charged with protecting policyholders
and have broad regulatory, supervisory and administrative powers over our business practices, including, among other things, the
power to grant and revoke licenses to transact business and the power to regulate and approve underwriting practices and rate
changes, which may delay the implementation of premium rate changes or prevent us from making changes we believe are
necessary to match rate to risk. In addition, many states have laws and regulations that limit an insurer’s ability to cancel or not
renew policies and that prohibit an insurer from withdrawing from one or more lines of business written in the state, except
pursuant to a plan that is approved by the state insurance department. Laws and regulations that limit cancellation and non-
renewal and that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.
Because the laws and regulations under which we operate are administered and enforced by a number of different
governmental authorities, including state insurance regulators, state securities administrators and the SEC, each of which
exercises a degree of interpretive latitude, we are subject to the risk that compliance with any particular regulator's or
enforcement authority's interpretation of a legal issue may not result in compliance with another's interpretation of the same issue,
particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator's or enforcement
authority's interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal and regulatory
environment may, even absent any particular regulator's or enforcement authority's interpretation of a legal issue changing, cause
us to change our views regarding the actions we need to take from a legal risk management perspective, thereby necessitating
changes to our practices that may, in some cases, limit our ability to grow and improve the profitability of our business.
While the United States federal government does not directly regulate the insurance industry, federal legislation and administrative policies
can affect us. Congress and various federal agencies periodically discuss proposals that would provide for a federal charter for insurance
companies. We cannot predict whether any such laws will be enacted or the effect that such laws would have on our business. Moreover,
there can be no assurance that changes will not be made to current laws, rules and regulations, or that any other laws, rules or regulations
will not be adopted in the future, that could adversely affect our business and financial condition.
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We may not be able to maintain the requisite amount of risk-based capital, which may adversely affect our profitability
and our ability to compete in the property and casualty insurance markets.
The New York State Department of Financial Services imposes risk-based capital requirements on insurance companies
to ensure that insurance companies maintain appropriate levels of surplus to support their overall business operations and to
protect customers against adverse developments, after taking into account default, credit, underwriting and off-balance sheet
risks. If the amount of our capital falls below this minimum, we may face restrictions with respect to soliciting new business and/or
keeping existing business. Similar regulations will apply in other states in which we may operate.
Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
We recognize the scientific view that the world is getting warmer. Climate change, to the extent it produces rising temperatures and changes
in weather patterns, could impact the frequency or severity of weather events and wildfires and the affordability and availability of
homeowners insurance.
Our operating results and financial condition may be adversely affected by the cyclical nature of the property and casualty
business.
The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price
competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels
of competition, more selective underwriting standards and relatively high premium rates. A downturn in the profitability cycle of
the property and casualty business could have a material adverse effect on our operating results and financial condition.
Because substantially all of our revenue is currently derived from sources located in New York, our business may be adversely
affected by conditions in such state.
Substantially all of our revenue is currently derived from sources located in the state of New York and, accordingly, is affected by the
prevailing regulatory, economic, demographic, competitive and other conditions in such state. Changes in any of these conditions could
make it more costly or difficult for us to conduct our business. Adverse regulatory developments in New York, which could include
fundamental changes to the design or implementation of the insurance regulatory framework, could have a material adverse effect on our
results of operations and financial condition.
We are highly dependent on a small number of insurance brokers for a large portion of our revenues.
We market our insurance products primarily through insurance brokers. A large percentage of our gross premiums written are sourced
through a limited number of brokers. These brokers provided a total of 33.5% of our gross premiums written for the year ended December
31, 2013. The nature of our dependency on these brokers relates to the high volume of business they consistently refer to us. Our
relationship with these brokers is based on the quality of the underwriting and claims services we provide to our clients and on our financial
strength ratings. Any deterioration in these factors could result in these brokers advising clients to place their risks with other insurers rather
than with us. A loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse
effect on our financial condition and results of operations.
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Recent regulatory action taken by the New York State Department of Financial Services following Superstorm Sandy may
affect our operations and business.
In the aftermath of Superstorm Sandy, the New York State Department of Financial Services (the “DFS”) has adopted various regulations
that affect insurance companies that operate in the state of New York. Included among the regulations are accelerated claims investigation
and settlement requirements and mandatory participation in non-binding mediation proceedings funded by the insurer. In addition, in
February 2013, the state of New York announced that the DFS has commenced an investigation into the claims practices of three insurance
companies, including KICO, in connection with Superstorm Sandy claims. The DFS stated that the three insurers had a much larger than
average consumer complaint rate with regard to Superstorm Sandy claims and indicated that the three insurers were being investigated for
(i) failure to send adjusters in a timely manner; (ii) failure to process claims in a timely manner; and (iii) inability of homeowners to contact
insurance company representatives. KICO received a letter from the DFS seeking information and data with regard to the foregoing. KICO
provided information and data to the DFS and is cooperating with the DFS in connection with its investigation. KICO has not received a
response from the DFS and believes that such matter will not have any effect on our financial position or results of operations. In settling
insurance claims, including those related to Superstorm Sandy, if KICO were to pay for losses not covered by the insurance policy, such as
those based on water and sewer back up claims, it could face disclaimers of coverage from its reinsurers with regard to the amounts paid.
Actual claims incurred may exceed current reserves established for claims, which may adversely affect our operating results and
financial condition.
Recorded claim reserves in our business are based on our best estimates of losses after considering known facts and interpretations of
circumstances. Internal and external factors are considered. Internal factors include, but are not limited to, actual claims paid, pending levels
of unpaid claims, product mix and contractual terms. External factors include, but are not limited to, changes in the law, court decisions,
changes in regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of losses that have
occurred, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process.
The ultimate cost of losses may vary materially from recorded reserves, and such variance may adversely affect our operating results and
financial condition.
Regulations requiring us to underwrite business and participate in loss sharing arrangements may adversely affect our operating
results and financial condition.
The state of New York has enacted laws that require a property liability insurer conducting business in such state to
participate in assigned risk plans, reinsurance facilities and joint underwriting associations or require the insurer to offer coverage
to all consumers, often restricting an insurer's ability to charge the price it might otherwise charge. In these markets, we may be
compelled to underwrite significant amounts of business at lower than desired rates, possibly leading to an unacceptable return
on equity, which may adversely affect our operating results and financial condition.
As a holding company, we are dependent on the results of operations of our subsidiaries; there are restrictions on the payment of
dividends by KICO.
We are a holding company and a legal entity separate and distinct from our operating subsidiaries, KICO and Payments, Inc. As a holding
company with limited operations of our own, the principal sources of our funds are dividends and other payments from KICO and Payments,
Inc. Consequently, we must rely on KICO and Payments, Inc. for our ability to repay debts, pay expenses and pay cash dividends to our
shareholders.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions
are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on
a statutory accounting basis) for the trailing four quarters. As of December 31, 2013, the maximum distribution that KICO could pay without
prior regulatory approval was approximately $1,191,000, which is based on investment income for the last four quarters.
Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive.
The insurance industry is highly competitive. Many of our competitors have well-established national reputations,
substantially more capital and significantly greater marketing and management resources. Because of the competitive nature of
the insurance industry, including competition for customers, agents and brokers, there can be no assurance that we will continue
to effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our
business, operating results or financial condition.
If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business
strategies could be delayed or hindered.
Our future success will depend, in part, upon the efforts of Barry Goldstein, our President and Chief Executive Officer, and John Reiersen,
who currently serves as Executive Vice President of KICO and, until January 1, 2012, served as President and Chief Executive Officer of
KICO. The loss of Messrs. Goldstein and/or Reiersen or other key personnel could prevent us from fully implementing our business
strategies and could materially and adversely affect our business, financial condition and results of operations. As we continue to grow, we
will need to recruit and retain additional qualified management personnel, but we may not be able to do so. Our ability to recruit and retain
such personnel will depend upon a number of factors, such as our results of operations and prospects and the level of competition then
prevailing in the market for qualified personnel. Effective January 1, 2012, Mr. Reiersen became Executive Vice President of KICO and
provides, in a part-time capacity, advice and assistance to the President and Chief Executive Officer of KICO, and other management
personnel, with regard to the management and operation of KICO. KICO and Mr. Reiersen are parties to an employment agreement that
expires on December 31, 2016. Mr. Goldstein assumed the duties and responsibilities of President and Chief Executive Officer of KICO
effective January 1, 2012. Mr. Goldstein is a party to an employment agreement with us that expires on December 31, 2014.
Difficult conditions in the economy generally could adversely affect our business and operating results.
Some economists continue to project significant negative macroeconomic trends, including relatively high and sustained unemployment,
reduced consumer spending, and substantial increases in delinquencies on consumer debt, including defaults on home mortgages.
Moreover, recent disruptions in the financial markets, particularly the reduced availability of credit and tightened lending requirements, have
impacted the ability of borrowers to refinance loans at more affordable rates. As with most businesses, we believe that difficult conditions in
the economy could have an adverse effect on our business and operating results. General economic conditions also could adversely affect
us in the form of consumer behavior, which may include decreased demand for our products. As consumers become more cost conscious,
they may choose lower levels of insurance.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies
may adversely affect our results of operations and financial condition.
Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted
and/or expanded. Accordingly, we are required to adopt new guidance or interpretations, which may have a material adverse effect on our
results of operations and financial condition that is either unexpected or has a greater impact than expected.
We rely on our information technology and telecommunication systems, and the failure of these systems could materially and
adversely affect our business.
Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications
systems. We rely on these systems to support our operations. The failure of these systems could interrupt our operations and result in a
material adverse effect on our business.
We have incurred, and will continue to incur, increased costs as a result of being an SEC reporting company.
The Sarbanes-Oxley Act of 2002, as well as a variety of related rules implemented by the SEC, have required changes in corporate
governance practices and generally increased the disclosure requirements of public companies. As a reporting company, we incur
significant legal, accounting and other expenses in connection with our public disclosure and other obligations. Based upon SEC regulations
currently in effect, we are required to establish, evaluate and report on our internal control over financial reporting. We believe that
compliance with the myriad of rules and regulations applicable to reporting companies and related compliance issues will require a
significant amount of time and attention from our management.
The enactment of tort reform could adversely affect our business.
Legislation concerning tort reform is from time to time considered in the United States Congress. Among the provisions considered for
inclusion in such legislation are limitations on damage awards, including punitive damages. Enactment of these or similar provisions by
Congress or by the states in which we operate could result in a reduction in the demand for liability insurance policies or a decrease in the
limits of such policies, thereby reducing our revenues. We cannot predict whether any such legislation will be enacted or, if enacted, the form
such legislation will take, nor can we predict the effect, if any, such legislation would have on our business or results of operations.
Risks Related to Our Common Stock
Our stock price may fluctuate significantly and be highly volatile and this may make it difficult for shareholders to resell shares of
our common stock at the volume, prices and times they find attractive.
The market price of our common stock could be subject to significant fluctuations and be highly volatile, which may make it difficult for
shareholders to resell shares of our common stock at the volume, prices and times they find attractive. There are many factors that will
impact our stock price and trading volume, including, but not limited to, the factors listed above under “Risks Related to Our Business.”
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Stock markets, in general, have experienced in recent years, and continue to experience, significant price and volume volatility, and
the market price of our common stock may continue to be subject to similar market fluctuations that may be unrelated to our operating
performance and prospects. Increased market volatility and fluctuations could result in a substantial decline in the market price of our
common stock.
The trading volume in our common stock has been limited. As a result, shareholders may not experience liquidity in their
investment in our common stock, thereby potentially limiting their ability to resell their shares at the volume, times and prices
they find attractive.
Our common stock is currently traded on The NASDAQ Capital Market. Our common stock is currently thinly traded and has substantially
less liquidity than the average trading market for many other publicly-traded insurance and other companies. An active trading market for
our common stock may not develop or, if developed, may not be sustained. Thinly traded stocks can be more volatile than stock trading in
an active public market. Therefore, shareholders have very little liquidity and may not be able to sell their shares at the volume, prices and
times that they desire.
There may be future issuances or resales of our common stock which may materially and adversely affect the market price of our
common stock.
Subject to any required state insurance regulatory approvals, we are not restricted from issuing additional shares of our common stock in
the future, including securities convertible into, or exchangeable or exercisable for, shares of our common stock. Our issuance of additional
shares of common stock in the future will dilute the ownership interests of our then existing shareholders.
We have an effective registration on Form S-3 under the Securities Act registering for resale 659,100 shares of our common stock and
effective registration statements on Form S-8 under the Securities Act registering an aggregate of 700,000 shares of our common stock
issuable under our 2005 Equity Participation Plan. Options to purchase 321,365 shares of our common stock are outstanding under this
plan and 201,135 shares are reserved for issuance thereunder. The shares subject to the registration statement on Form S-3 will be freely
tradeable in the public market. In addition, the shares issuable pursuant to the registration statements on Form S-8 will be freely tradable in
the public market, except for shares held by affiliates.
The sale of a substantial number of shares of our common stock or securities convertible into, or exchangeable or exercisable for, shares of
our common stock, whether directly by us or by our existing shareholders in the secondary market, the perception that such issuances or
resales could occur or the availability for future issuances or resale of shares of our common stock or securities convertible into, or
exchangeable or exercisable for, shares of our common stock could materially and adversely affect the market price of our common stock
and our ability to raise capital through future offerings of equity or equity-related securities on attractive terms or at all.
In addition, our board of directors is authorized to designate and issue preferred stock without further shareholder approval, and we may
issue other equity and equity-related securities that are senior to our common stock in the future for a number of reasons, including, without
limitation, to support operations and growth, to maintain our capital ratios, and to comply with any future changes in regulatory standards.
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Our executive officers and directors own a substantial number of shares of our common stock. This will enable them to
significantly influence the vote on all matters submitted to a vote of our shareholders.
As of March 19, 2014, our executive officers and directors beneficially owned 2,244,446 shares of our common stock (including options to
purchase 218,865 shares of our common stock, all of which options are currently exercisable), representing 30% of the outstanding shares
of our common stock.
Accordingly, our executive officers and directors, through their beneficial ownership of our common stock, will be able to significantly
influence the vote on all matters submitted to a vote of our shareholders, including the election of directors, amendments to our restated
certificate of incorporation or amended and restated bylaws, mergers or other business combination transactions and certain sales of assets
outside the usual and regular course of business. The interests of our executive officers and directors may not coincide with the interests of
our other shareholders, and they could take actions that advance their own interests to the detriment of our other shareholders.
Anti-takeover provisions and the regulations to which we may be subject may make it more difficult for a third party to acquire
control of us, even if the change in control would be beneficial to our shareholders.
We are a holding company incorporated in Delaware. Anti-takeover provisions in Delaware law and our restated certificate of incorporation
and bylaws, as well as regulatory approvals required under state insurance laws, could make it more difficult for a third party to acquire
control of us and may prevent shareholders from receiving a premium for their shares of common stock. Our certificate of incorporation
provides that our board of directors may issue up to 2,500,000 shares of preferred stock, in one or more series, without shareholder
approval and with such terms, preferences, rights and privileges as the board of directors may deem appropriate. These provisions, the
control of our executive officers and directors over the election of our directors, and other factors may hinder or prevent a change in control,
even if the change in control would be beneficial to, or sought by, our shareholders.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item 8 are included in this Annual Report following Item 15 hereof. As a smaller reporting
company, we are not required to provide supplementary financial information.
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Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6 – F-7
F-8
F-1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of Kingstone Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kingstone Companies, Inc. and Subsidiaries (the “Company”) as
of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in stockholders’
equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Kingstone Companies, Inc. and Subsidiaries, as of December 31, 2013 and 2012, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 31, 2014
F-2
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Consolidated Balance Sheets
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Assets
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
$2,425,261 at December 31, 2013 and $779,026 at December 31, 2012)
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
December 31,
December 31,
2013
2012
$
2,399,482
$
606,281
$28,079,902 at December 31, 2013 and $24,847,097 at December 31, 2012)
28,436,022
26,181,938
Equity securities, available-for-sale, at fair value (cost of $6,690,338
at December 31, 2013 and $5,073,977 at December 31, 2012)
Total investments
Cash and cash equivalents
Premiums receivable, net of provision for uncollectible amounts
Receivables - reinsurance contracts
Reinsurance receivables, net of provision for uncollectible amounts
Deferred policy acquisition costs
Intangible assets, net
Property and equipment, net of accumulated depreciation
Other assets
Total assets
Liabilities
Loss and loss adjustment expenses
Unearned premiums
Advance premiums
Reinsurance balances payable
Advance payments from catastrophe reinsurers
Deferred ceding commission revenue
Notes payable (includes payable to related parties of $-0- at December 31, 2013
and $378,000 at December 31, 2012)
Accounts payable, accrued expenses and other liabilities
Deferred income taxes
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value; authorized 2,500,000 shares at December 31, 2013
and 1,000,000 shares at December 31, 2012; -0- shares issued and outstanding
Common stock, $.01 par value; authorized 20,000,000 shares at December 31, 2013
and 10,000,000 shares at December 31, 2012; issued 8,186,031 shares at
December 31, 2013 and 4,730,357 shares at December 31, 2012; outstanding
7,266,573 shares at December 31, 2013 and 3,840,899 shares at December 31, 2012
Capital in excess of par
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost, 919,458 shares at December 31, 2013 and 889,458 shares
at December 31, 2012
Total stockholders' equity
6,796,673
37,632,177
19,922,506
7,590,074
974,989
37,560,825
6,860,263
2,709,244
2,038,755
1,494,989
$ 116,783,822
5,290,242
32,078,461
2,240,012
7,766,825
-
38,902,782
5,569,878
3,184,958
1,868,422
1,887,060
$ 93,498,398
$ 34,503,229
32,335,614
776,099
2,566,729
-
6,984,166
$ 30,485,532
26,012,363
610,872
1,820,527
7,358,391
4,877,030
-
3,215,487
693,087
81,074,411
1,197,000
3,067,586
1,787,281
77,216,582
-
-
81,860
32,692,568
305,219
4,187,209
37,266,856
47,304
13,851,036
1,023,729
2,787,292
17,709,361
(1,557,445)
35,709,411
(1,427,545)
16,281,816
Total liabilities and stockholders' equity
$ 116,783,822
$ 93,498,398
See notes to accompanying consolidated financial statements.
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consolidated Statements of Income and Comprehensive Income
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Years ended December 31,
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain on sale of investments
Other income
Total revenues
Expenses
Loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Interest expense
Total expenses
Income from operations before taxes
Income tax expense
Net income
Other comprehensive income, net of tax
Gross unrealized investment holding (losses)
gains arising during period
Income tax benefit (expense) related to items of
other comprehensive income
Comprehensive income
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
2013
2012
$ 22,225,167 $ 17,216,611
9,690,155
11,673,103
1,015,156
1,170,051
288,068
575,792
867,724
922,072
29,077,714
36,566,185
13,586,533 11,234,713
7,246,245
7,848,870
1,000,308
596,347
81,616
28,008,099
9,362,793
9,018,685
1,099,370
646,483
75,734
33,789,598
2,776,587
764,269
2,012,318
1,069,615
302,909
766,706
(1,088,651)
989,895
370,141
$
1,293,808
(336,565)
1,420,036
$
$
$
0.51 $
0.50 $
0.20
0.20
3,975,115
3,806,697
4,059,724
3,871,760
Dividends declared and paid per common share
$
0.16 $
0.14
See notes to accompanying consolidated financial statements.
F-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years ended December 31, 2013 and 2012
Capital
Accumulated
Other
Comprehensive
Income
(Loss)
Preferred Stock Common Stock
Shares Amount Shares Amount
in Excess
of Par
Retained
Earnings Shares Amount
Treasury Stock
Total
Balance,
January 1,
2012
Stock-based
compensation
Exercise of
stock options
Shares
deducted from
exercise of
stock
options for
payment of
withholding
taxes
Excess tax
benefit from
exercise
of stock
options
Acquisition of
treasury stock
Dividends
Net income
Change in
unrealized
gains on
available for
sale
securities, net
of tax
Balance,
December 31,
2012
Proceeds from
public offering,
net of
offering
costs of
$1,723,121
Stock-based
compensation
Exercise of
stock options
Acquisition of
treasury stock
Dividends
Net income
Change in
unrealized
gains on
available
for sale
securities, net
of tax
- $
- 4,643,122 $46,432 $13,739,792 $
370,399 $2,554,349 883,222 $(1,400,417) $15,310,555
-
-
-
-
-
48,277
- 112,391 1,125
45,950
-
-
-
-
-
-
-
48,277
-
47,075
-
-
(25,156)
(253)
(142,999)
-
-
-
-
(143,252)
-
-
-
-
-
-
-
-
-
-
-
-
-
160,016
-
-
-
-
-
-
-
-
-
-
-
-
-
160,016
-
(533,763)
766,706
6,236
-
-
(27,128)
-
-
(27,128)
(533,763)
766,706
-
-
-
-
-
653,330
-
-
-
653,330
-
- 4,730,357 47,304 13,851,036
1,023,729 2,787,292 889,458 (1,427,545) 16,281,816
-
-
-
-
-
-
- 3,450,000 34,500 18,769,879
-
-
-
59,959
-
5,674
56
11,694
-
-
-
-
-
-
-
-
-
- 18,804,379
-
59,959
-
11,750
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(612,401)
- 2,012,318
- 30,000
-
-
(129,900)
(129,900)
-
(612,401)
- 2,012,318
-
-
-
-
-
(718,510)
-
-
-
(718,510)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Balance,
December 31,
2013
- $
- 8,186,031 $81,860 $32,692,568 $
305,219 $4,187,209 919,458 $(1,557,445) $35,709,411
See notes to accompanying consolidated financial statements.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
2013
2012
$
2,012,318 $
766,706
(575,792)
646,483
203,851
59,959
-
(724,053)
(288,068)
596,347
128,443
48,277
(160,016)
(338,723)
176,751
(974,989)
1,341,957
(1,290,385)
358,414
(1,987,740)
1,734,535
(15,021,968)
(1,034,105)
(742,756)
4,017,697
6,323,251
165,227
746,202
(7,358,391)
2,107,136
147,901
7,383,537
12,004,815
4,729,203
66,081
(941,301)
7,358,391
894,631
(1,437,430)
6,375,322
(1,791,702)
(9,124,949)
(6,073,138)
5,850,770
4,868,193
(307,045)
(6,577,871)
-
(6,902,429)
(2,835,076)
4,322,120
1,726,345
(272,344)
(3,961,384)
18,804,379
310,000
(760,000)
(747,000)
11,750
-
-
(129,900)
(612,401)
16,876,828
-
640,000
(490,000)
-
47,075
(143,252)
160,016
(27,128)
(533,763)
(347,052)
Consolidated Statements of Cash Flows
Years ended December 31,
Cash flows provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gain on sale of investments
Depreciation and amortization
Amortization of bond premium, net
Stock-based compensation
Excess tax benefit from exercise of stock options
Deferred income tax expense
(Increase) decrease in operating assets:
Premiums receivable, net
Receivables - reinsurance contracts
Reinsurance receivables, net
Deferred policy acquisition costs
Other assets
(Decrease) increase in operating liabilities:
Loss and loss adjustment expenses
Unearned premiums
Advance premiums
Reinsurance balances payable
Advance payments from catastrophe reinsurers
Deferred ceding commission revenue
Accounts payable, accrued expenses and other liabilities
Net cash flows provided by operating activities
Cash flows used in investing activities:
Purchase - fixed-maturity securities held-to-maturity
Purchase - fixed-maturity securities available-for-sale
Purchase - equity securities
Sale or maturity - fixed-maturity securities available-for-sale
Sale - equity securities
Other investing activities
Net cash flows used in investing activities
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of common stock
Proceeds from line of credit
Principal payments on line of credit
Principal payments on notes payable (includes$378,000 to related parties)
Proceeds from exercise of stock options
Withholding taxes paid on net exercise of stock options
Excess tax benefit from exercise of stock options
Purchase of treasury stock
Dividends paid
Net cash flows provided by (used in) financing activities
See notes to accompanying consolidated financial statements.
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consolidated Statements of Cash Flows
Years ended December 31,
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental schedule of non-cash investing and financing activities:
Shares deducted from exercise of stock options for payment of withholding taxes
See notes to accompanying consolidated financial statements.
F-7
2013
2012
$ 17,682,494 $
2,240,012
$ 19,922,506 $
2,066,886
173,126
2,240,012
$
$
2,174,000 $
108,839 $
1,863,000
81,716
$
- $
143,252
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Note 1 - Nature of Business
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its subsidiary Kingstone Insurance Company
(“KICO”), underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and
brokers. KICO is a licensed insurance company in the State of New York. In February 2011, KICO’s application for an insurance license to
write insurance in the Commonwealth of Pennsylvania was approved; however, KICO has only nominally commenced writing business in
Pennsylvania. Kingstone, through its subsidiary, Payments, Inc., a licensed premium finance company in the State of New York, receives
fees for placing contracts with a third party licensed premium finance company.
Note 2 – Accounting Policies and Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements consist of Kingstone and its wholly-owned subsidiaries. Subsidiaries include: (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) Payments, Inc. All significant inter-company transactions have been eliminated in consolidation.
Revenue Recognition
Net Premiums Earned
Insurance policies issued by the Company are short-duration contracts. Accordingly, premium revenue, net of premiums ceded to
reinsurers, is recognized as earned in proportion to the amount of insurance protection provided, on a pro-rata basis over the terms of the
underlying policies. Unearned premiums represent premium applicable to the unexpired portions of in-force insurance contracts at the end of
each year.
Ceding Commission Revenue
Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the costs of the reinsurance,
generally on a pro-rata basis over the terms of the policies reinsured. Unearned amounts are recorded as deferred ceding commission
revenue. Certain reinsurance agreements contain provisions whereby the ceding commission rates vary based on the loss experience
under the agreements. The Company records ceding commission revenue based on its current estimate of subject losses. The Company
records adjustments to the ceding commission revenue in the period that changes in the estimated losses are determined.
Premium Finance Placement Fees
Premium finance placement fees are earned in the period when contracts are placed with a third party premium finance company. Premium
finance placement fees are included in “Other income” in the accompanying consolidated statements of income and comprehensive income.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Liability for Loss and Loss Adjustment Expenses (“LAE”)
The liability for loss and LAE represents management’s best estimate of the ultimate cost of all reported and unreported losses that are
unpaid as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis
valuations, statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an
analysis of the Company’s historical experience, supplemented by analyses of industry loss data. Management believes that the reserves for
loss and LAE are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various
sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual
loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date.
As adjustments to these estimates become necessary, such adjustments are reflected in expense for the period in which the estimates are
changed. Because of the nature of the business historically written, the Company’s management believes that the Company has limited
exposure to environmental claim liabilities. The Company recognizes recoveries from salvage and subrogation when received.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or
reinsurers.
Reinsurance receivables represents management’s best estimate of paid and unpaid loss and LAE recoverable from reinsurers, and ceded
losses receivable and unearned ceded premiums under reinsurance agreements. Ceded losses receivable are estimated using techniques
and assumptions consistent with those used in estimating the liability for loss and LAE. Management believes that reinsurance receivables
as recorded represent its best estimate of such amounts; however, as changes in the estimated ultimate liability for loss and LAE are
determined, the estimated ultimate amount receivable from the reinsurers will also change. Accordingly, the ultimate receivable could be
significantly in excess of or less than the amount indicated in the consolidated financial statements. As adjustments to these estimates
become necessary, such adjustments are reflected in current operations. Loss and LAE incurred as presented in the consolidated
statement of income and comprehensive income are net of reinsurance recoveries.
The Company accounts for reinsurance in accordance with GAAP guidance for accounting and reporting for reinsurance of short-duration
contracts. Management has evaluated its reinsurance arrangements and determined that significant insurance risk is transferred to the
reinsurers. Reinsurance agreements have been determined to be short-duration prospective contracts and, accordingly, the costs of the
reinsurance are recognized over the life of the contract in a manner consistent with the earning of premiums on the underlying policies
subject to the reinsurance contract.
In preparing financial statements, management estimates uncollectible amounts receivable from reinsurers based on an assessment of
factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. There was no allowance
for uncollectible reinsurance as of December 31, 2013 and 2012. The Company did not expense any uncollectible reinsurance for the years
ended December 31, 2013 and 2012. Significant uncertainties are inherent in the assessment of the creditworthiness of reinsurers and
estimates of any uncollectible amounts due from reinsurers. Any change in the ability of the Company’s reinsurers to meet their contractual
obligations could have a detrimental impact on the consolidated financial statements and KICO’s ability to meet their regulatory capital and
surplus requirements.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Cash and Cash Equivalents
Cash and cash equivalents are presented at cost, which approximates fair value. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. The Company maintains its cash balances at several financial institutions.
The Federal Deposit Insurance Corporation (“FDIC”) secures accounts up to $250,000 at these institutions.
Investments
The Company accounts for its investments in accordance with GAAP guidance for investments in debt and equity securities, which requires
that fixed-maturity and equity securities that have readily determined fair values be segregated into categories based upon the Company’s
intention for those securities.
In accordance with this guidance, the Company has classified its fixed-maturity securities as either held to maturity or available-for-sale and
its equity securities as available-for-sale. The Company may sell its available-for-sale securities in response to changes in interest rates,
risk/reward characteristics, liquidity needs or other factors. Fixed maturity securities that the Company has the specific intent and ability to
hold until maturity are classified as such and carried at amortized cost.
Available-for-sale securities are reported at their estimated fair values based on quoted market prices from a recognized pricing service,
with unrealized gains and losses, net of tax effects, reported as a separate component of accumulated other comprehensive income in
stockholders’ equity. Realized gains and losses are determined on the specific identification method and recognized in the statement of
income and comprehensive income.
Investment income is accrued to the date of the financial statements and includes amortization of premium and accretion of discount on
fixed maturities. Interest is recognized when earned, while dividends are recognized when declared. As of December 31, 2013 and 2012,
due and accrued investment income was $414,210 and $343,521, respectively.
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 and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management
considers, among other criteria, the following: the current fair value compared to amortized cost or cost, as appropriate; the length of time
the security’s fair value has been below amortized cost or cost; management’s intent and ability to retain the investment for a period of time
sufficient to allow for any anticipated recovery in fair value to cost or amortized cost; specific credit issues related to the issuer; and current
economic conditions. Other-than-temporary impairment (“OTTI”) losses result in a permanent reduction of the cost basis of the underlying
investment. As of December 31, 2013 and 2012, none of the Company’s investments were deemed to be OTTI.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Fair Value
The fair value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in
active markets for identical assets or liabilities 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 assumptions that market participants would use, having the lowest priority (“Level 3”).
For investments in active markets, the Company uses quoted market prices to determine fair value. In circumstances where quoted market
prices are unavailable, the Company utilizes fair value estimates based upon other observable inputs including matrix pricing, benchmark
interest rates, market comparables and other relevant inputs. The Company’s process to validate the market prices obtained from the
outside pricing sources include, but are not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain
prices.
Premiums Receivable
Premiums receivable are presented net of an allowance for doubtful accounts of approximately $145,000 and $85,000 as of December 31,
2013 and 2012, respectively. The allowance for uncollectible amounts is based on an analysis of amounts receivable giving consideration to
historical loss experience and current economic conditions and reflects an amount that, in management’s judgment, is adequate.
Uncollectible premiums receivable balances of approximately $88,000 and $54,000 were written off for the years ended December 31, 2013
and 2012, respectively.
Deferred Policy Acquisition Costs
Deffered policy acquisition costs represent the costs of writing business that vary with, and are primarily related to, the successful production
of insurance business (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and
recognized as expense as related premiums are earned.
Intangible Assets
The Company has recorded acquired identifiable intangible assets. In accounting for such assets, the Company follows GAAP guidance for
intangible assets. The cost of a group of assets acquired in a transaction is allocated to the individual assets including identifiable intangible
assets based on their relative fair values. Identifiable intangible assets with a finite useful life are amortized over the period that the asset is
expected to contribute directly or indirectly to the future cash flows of the Company. Intangible assets with an indefinite life are not
amortized, but are subject to annual impairment testing. All identifiable intangible assets are tested for recoverability whenever events or
changes in circumstances indicate that a carrying amount may not be recoverable. Based on the results of our annual impairment testing,
no impairment losses from intangible assets were recognized for the years ended December 31, 2013 and 2012.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Property and Equipment
Building and building improvements, furniture, leasehold improvements, computer equipment, and software are reported at cost less
accumulated depreciation and amortization. Depreciation and amortization is provided using the straight-line method over the estimated
useful lives of the assets. The Company estimates the useful life for computer equipment, computer software, automobile, furniture and
other equipment is three years, and building and building improvements is 39 years.
The Company reviews its real estate assets used as its headquarters to evaluate the necessity of recording impairment losses for market
changes due to declines in the fair value of the property. In evaluating potential impairment, management considers the current estimated
fair value compared to the carrying value of the asset. The fair value of the real estate assets is estimated to be in excess of the carrying
value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company files a consolidated tax return with its subsidiaries. The Company
follows the relevant provisions of GAAP concerning uncertainties in income taxes and through December 31, 2013, the Company had no
material unrecognized tax benefits and no adjustments to liabilities or operations were required.
Assessments
Insurance related assessments are accrued in the period in which they have been incurred. A typical obligating event would be the issuance
of an insurance policy or the occurrence of a claim. The Company is subject to a variety of assessments.
Concentration and Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk are primarily cash and cash equivalents,
investments and accounts receivable. Investments are diversified through many industries and geographic regions based upon KICO’s
Investment Committee’s guidelines, which employs different investment strategies. The Company believes that no significant concentration
of credit risk exists with respect to investments. As of December 31, 2013 and 2012, the Company had cash deposits in excess of the FDIC
secured limit of $250,000 per account at financial institutions of approximately $2,129,000 and $4,162,000, respectively. Cash equivalents
are not insured by the FDIC.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
As of December 31, 2013 and 2012, the Company had deposits of cash equivalents as follows:
Collateralized bank repurchase agreement (1)
Money market fund
Total
December 31, December 31,
2013
2012
$ 17,280,027 $
953,504
$ 18,233,531 $
-
1,184,109
1,184,109
(1) The Company has a security interest in certain of the bank's holdings of direct obligations of the United States or one or more agencies
thereof. The collateral is held in a hold-in-custody arrangement with a third party who maintains physical possession of the collateral on
behalf of the bank.
At December 31, 2013, the outstanding premiums receivable balance is generally diversified due to the number of insureds comprising the
Company’s customer base, which is largely concentrated in the area of New York City and adjacent Long Island. The Company also has
receivables from its reinsurers. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the Company. The Company periodically evaluates the financial condition of its reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies. Management’s policy is to review all outstanding receivables at
period end as well as the bad debt write-offs experienced in the past and establish an allowance for doubtful accounts, if deemed
necessary.
Direct premiums earned from lines of business that subject the Company to concentration risk for the years ended December 31, 2013 and
2012 are as follows:
Personal Lines
Commercial Lines
Commercial Automobile
Total premiums earned subject to concentration
Premiums earned not subject to concentration
Total premiums earned
Use of Estimates
Years ended December 31,
2013
2012
70.0%
16.0%
n/a
86.0%
14.0%
100.0%
68.4%
16.2%
11.6%
96.2%
3.8%
100.0%
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions, which
include the reserves for losses and loss adjustment expenses, are subject to considerable estimation error due to the inherent uncertainty in
projecting ultimate claim amounts that will be reported and settled over a period of several years. In addition, estimates and assumptions
associated with receivables under reinsurance contracts related to contingent ceding commission revenue require considerable judgment by
management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results
may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Earnings per share
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of
common shares outstanding. Diluted earnings per common share reflect, in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options. The computation of diluted earnings per share excludes those with an exercise
price in excess of the average market price of the Company’s common shares during the periods presented.
Advertising Costs
Advertising costs are charged to operations when the advertising first takes place. Included in other underwriting expenses in the
accompanying consolidated statements of income and comprehensive income are advertising costs approximating $55,000 and $35,000 for
the years ended December 31, 2013 and 2012, respectively.
Stock-based Compensation
The Company records compensation expense associated with stock options and other equity-based compensation in accordance with
guidance established by GAAP. Stock-based compensation expense in 2013 and 2012 is the estimated fair value of options granted
amortized on a straight-line basis over the requisite service period for the entire portion of the award less an estimate for anticipated
forfeitures.
Comprehensive Income
Comprehensive income refers to revenue, expenses, gains and losses that under GAAP are included in comprehensive income but are
excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity, primarily from changes in
unrealized gains/losses on available-for-sale securities.
Recent Accounting Pronouncements
Accounting guidance adopted in 2013
In February 2013, Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts
Reclassified out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 supersedes and replaces the presentation
requirements for the reclassifications out of accumulated other comprehensive income. None of the other requirements of previously issued
ASUs related to comprehensive income are affected by ASU 2013-02. The Company adopted ASU 2013-02 on January 1, 2013 and the
implementation of the standard did not have a material impact on the Company's results of operations, financial position or liquidity.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite Lived Intangible Assets for
Impairment (“ASU 2012-02”). ASU 2012-02 updated guidance regarding the impairment test applicable to indefinite-lived intangible assets
that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such
as changes in management, strategy, technology or customers) that may impact the fair value of the indefinite-lived intangible asset and
lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines
that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed.
The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the
indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess. The
Company adopted this guidance on January 1, 2013 and it did not have any effect on the Company's results of operations, financial position
or liquidity.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated
financial position, results of operations and cash flows, or do not apply to its operations.
Note 3 - Investments
Available-for-Sale Securities
The amortized cost and fair value of investments in available-for-sale fixed-maturity securities and equity securities as of December 31,
2013 and December 31, 2012 are summarized as follows:
Category
Fixed-Maturity Securities:
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Total fixed-maturity securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
December 31, 2013
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized
Less than 12 More than 12
Gains
Months
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
$
7,000,222
$
162,616
$
(49,491)
$
(45,140) $
7,068,207
$
67,985
21,079,680
28,079,902
569,139
731,755
(179,810)
(229,301)
(101,194) 21,367,815
(146,334) 28,436,022
288,135
356,120
2,899,301
3,791,037
6,690,338
2,503
470,606
473,109
(251,525)
(38,785)
(290,310)
(62,551)
(13,913)
(76,464)
2,587,728
4,208,945
6,796,673
(311,573)
417,908
106,335
Total
$ 34,770,240
$
1,204,864
$
(519,611)
$
(222,798) $ 35,232,695
$
462,455
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
December 31, 2012
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized
Less than 12 More than 12
Gains
Months
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
$
5,219,092
$
257,298
$
(1,574)
$
-
$
5,474,816
$
255,724
19,628,005
24,847,097
1,123,392
1,380,690
(43,553)
(45,127)
(722) 20,707,122
(722) 26,181,938
1,079,117
1,334,841
1,475,965
3,598,012
5,073,977
19,512
353,782
373,294
(11,130)
(145,899)
(157,029)
-
-
-
1,484,347
3,805,895
5,290,242
8,382
207,883
216,265
Category
Fixed-Maturity Securities:
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Total fixed-maturity securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
Total
$ 29,921,074
$
1,753,984
$
(202,156)
$
(722) $ 31,472,180
$
1,551,106
A summary of the amortized cost and fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual
maturity as of December 31, 2013 and 2012 is shown below:
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
More than 10 years
Total
December 31, 2013
December 31, 2012
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
$
758,281
9,025,386
14,070,003
4,226,232
$ 28,079,902
$
768,954
9,466,973
14,114,271
4,085,824
$ 28,436,022
$
546,952
9,031,248
12,605,798
2,663,099
$ 24,847,097
$
560,162
9,569,943
13,306,033
2,745,800
$ 26,181,938
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or
without penalties.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Held-to-Maturity Securities
The amortized cost and fair value of investments in held to maturity fixed-maturity securities as of December 31, 2013 and 2012 are
summarized as follows:
Category
December 31, 2013
Cost or
Amortized
Cost
Gross
Gross Unrealized Losses
Unrealized Less than 12
More than 12
Gains
Months
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
U.S. Treasury securities
$
606,138
$
46,915
$
-
$
-
$
653,053
$
46,915
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
208,697
-
(25,359)
-
183,338
(25,359)
1,584,647
8,934
-
-
1,588,870
4,223
Total
$
2,399,482
$
55,849
$
(25,359) $
-
$
2,425,261
$
25,779
Category
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12
Months
More than 12
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
December 31, 2012
U.S. Treasury securities
$ 606,281
$ 172,745
$ -
$ -
$ 779,026
$ 172,745
U.S. Treasury securities included in held-to-maturity securities are held in trust pursuant to the New York State Department of Financial
Services’ minimum funds requirement.
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of
December 31, 2013 and 2012 is shown below:
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
More than 10 years
Total
December 31, 2013
December 31, 2012
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
$
$
-
-
1,793,344
606,138
2,399,482
$
$
-
-
1,772,208
653,053
2,425,261
$
$
-
-
-
606,281
606,281
$
$
-
-
-
779,026
779,026
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Investment Income
Major categories of the Company’s net investment income are summarized as follows:
Income:
Fixed-maturity securities
Equity securities
Cash and cash equivalents
Other
Total
Expenses:
Investment expenses
Net investment income
Years ended
December 31,
2013
2012
$
$
1,018,857
390,818
41
16,507
1,426,223
951,895
268,034
134
23,857
1,243,920
256,172
1,170,051
$
228,764
1,015,156
$
Proceeds from the sale and maturity of fixed-maturity securities were $5,850,770 and $4,322,120 for the years ended December 31, 2013
and 2012, respectively.
Proceeds from the sale of equity securities were $4,868,193 and $1,726,345 for the years ended December 31, 2013 and 2012,
respectively.
The Company’s net realized gains and losses on investments are summarized as follows:
Fixed-maturity securities
Gross realized gains
Gross realized losses
Equity securities
Gross realized gains
Gross realized losses
Net realized gains
Impairment Review
Year ended
December 31,
2013
2012
$
237,886 $
(73,910)
163,976
233,299
(52,933)
180,366
551,912
(140,096)
411,816
137,271
(29,569)
107,702
$
575,792 $
288,068
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-
temporary. The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management
considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the
security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating,
reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the
investment for a period of time sufficient to allow for any anticipated recovery in value to cost; and (v) current economic conditions. Other-
than-temporary impairment (“OTTI”) losses result in a permanent reduction of the cost basis of the underlying investment.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
OTTI losses are recorded in the consolidated statements of income and comprehensive income as net realized losses on investments and
result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and
different judgments and assumptions could affect the timing of loss realization. At December 31, 2013, there were 52 securities that account
for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of fixed
maturity investments and equity securities for the years ended December 31, 2013 and 2012. Significant factors influencing the Company’s
determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the
nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for an anticipated
recovery of fair value to the Company’s cost basis.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company held securities with unrealized losses representing declines that were considered temporary at December 31, 2013 and 2012
as follows:
Category
Value
Losses
Held
Fair
Unrealized Positions
Fair
Value
Unrealized Positions
Unrealized
Losses
Held
Value
Losses
Less than 12 months
12 months or more
No. of
No. of
December 31, 2013
Total
Aggregate
Fair
Fixed-Maturity Securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
$
-
$
-
-
$
-
$
-
-
$
-
$
-
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
2,015,437
(49,491)
6
415,866
(45,140)
2
2,431,303
(94,631)
6,447,605
(179,810)
24
1,430,377
(101,194)
5
7,877,982
(281,004)
$ 8,463,042
$ (229,301)
30
$1,846,243
$ (146,334)
7
$10,309,285
$ (375,635)
$ 1,835,958
879,525
$ (251,525)
(38,785)
8
4
$ 444,100
145,625
$ (62,551)
(13,913)
2
1
$ 2,280,058
1,025,150
$ (314,076)
(52,698)
Total equity securities
$ 2,715,483
$ (290,310)
12
$ 589,725
$ (76,464)
3
$ 3,305,208
$ (366,774)
Total
$11,178,525
$ (519,611)
42
$2,435,968
$ (222,798)
10
$13,614,493
$ (742,409)
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Less than 12 months
12 months or more
No. of
No. of
December 31, 2012
Total
Aggregate
Fair
Category
Value
Losses
Held
Value
Losses
Held
Value
Losses
Fair
Unrealized Positions
Fair
Unrealized
Positions
Unrealized
Fixed-Maturity Securities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
$ 202,798
$
(1,574)
1
$
-
$
-
-
$ 202,798
$
(1,574)
4,025,551
(43,553)
19
128,125
(722)
1
4,153,676
(44,275)
$4,228,349
$ (45,127)
20
$ 128,125
$
(722)
1
$4,356,474
$ (45,849)
Total equity securities
$1,924,785
$ (157,029)
12
$
$ 387,925
1,536,860
$ (11,130)
(145,899)
$
3
9
$
-
-
-
$
-
-
-
-
-
$ 387,925
1,536,860
$ (11,130)
(145,899)
-
$1,924,785
$ (157,029)
Total
$6,153,134
$ (202,156)
32
$ 128,125
$
(722)
1
$6,281,259
$ (202,878)
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Note 4 - Fair Value Measurements
The Company follows GAAP guidance regarding fair value measurements. The valuation technique used to fair value the financial
instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or
comparable assets.
This guidance establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the
classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of
assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during period of
market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of
observable market data when available. The levels of the hierarchy and those investments included in each are as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Included are those investments traded on an active exchange, such as the NASDAQ Global Select Market, U.S. Treasury securities and
obligations of U.S. government agencies, together with corporate debt securities that are generally investment grade.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability and market-corroborated inputs. Municipal and corporate bonds that are traded in less active markets are classified as Level 2.
These securities are valued using market price quotations for recently executed transactions.
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
Material assumptions and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows,
market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period.
The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that
are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of
judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this
category, the Company considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as
characterized by current market conditions, the observability of prices and inputs may be reduced for many instruments. This condition could
cause a security to be reclassified between levels.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company’s investments are allocated among pricing input levels at December 31, 2013 and 2012 as follows:
($ in thousands)
Level 1
Level 2
Level 3
Total
December 31, 2013
Fixed-maturity investments available for sale
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed maturities
Equity investments
Total investments
$
- $
7,068 $
- $
7,068
20,731
20,731
6,797
27,528 $
637
7,705
-
7,705 $
$
-
-
-
- $
21,368
28,436
6,797
35,233
($ in thousands)
Level 1
Level 2
Level 3
Total
December 31, 2012
Fixed-maturity investments available for sale
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Total fixed maturities
Equity investments
Total investments
Note 5 - Fair Value of Financial Instruments
$
- $
5,475 $
- $
5,475
11,600
11,600
5,290
16,890 $
9,107
14,582
-
14,582 $
$
-
-
-
- $
20,707
26,182
5,290
31,472
GAAP requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the
balance sheet, for which it is practicable to estimate fair value. The Company uses the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
Equity securities and fixed income securities available-for-sale: Fair value disclosures for these investments are included in “Note 3 -
Investments.”
Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their fair values because of the short-term
nature of these instruments.
Premiums receivable, reinsurance receivables: The carrying values reported in the accompanying consolidated balance sheets for
these financial instruments approximate their fair values due to the short term nature of the assets.
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Real Estate: The fair value of the land and building included in property and equipment, which is used in the Company’s operations,
approximates the carrying value. The fair value was based on an appraisal prepared using the sales comparison approach, and accordingly
the real estate is a Level 3 asset under the fair value hierarchy.
Reinsurance balances payable: The carrying value reported in the consolidated balance sheets for these financial instruments
approximates fair value.
Notes payable (including related parties): The Company estimates that the carrying amount of notes payable at December 31, 2012
approximates fair value because of the negotiated interest rates, which are based on the terms of the loans, risk and guaranty.
The estimated fair values of the Company’s financial instruments are as follows:
December 31, 2013
December 31, 2012
Carrying Value
Fair Value
Carrying Value
Fair Value
Fixed-maturity investments held to maturity
Cash and cash equivalents
Premiums receivable
Receiveables- reinsurance contracts
Reinsurance receivables
Real estate, net of accumulated depreciation
Reinsurance balances payable
Advance payments from catastrophe reinsurers
Notes payable (including related parties)
Note 6 - Intangibles
2,399,482
7,590,074
974,989
606,281 $
2,240,012
7,766,825
-
$
2,425,261 $
$
19,922,506 19,922,506
7,590,074
974,989
779,026
2,240,012
7,766,825
-
38,535,814 38,535,814 38,902,782 38,902,782
1,720,000
1,820,527
7,358,391
1,197,000
1,816,122
2,566,729
-
-
1,777,942
2,566,729
-
-
1,696,924
1,820,527
7,358,391
1,197,000
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships
and assembled workforce. Insurance company license is considered indefinite life intangible assets subject to annual impairment testing.
The weighted average amortization period of identified intangible assets of finite useful life is approximately 5.0 years as of December 31,
2013.
The components of intangible assets and their useful lives, accumulated amortization, and net carrying value as of December 31, 2013 and
2012 are summarized as follows:
December 31, 2013
December 31, 2012
Useful Life
(in yrs)
Gross
Carrying
Value
Accmulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Amount
- $
500,000 $
- $
500,000 $
500,000 $
- $
500,000
10
7
$
3,400,000
950,000
4,850,000 $
1,530,000
610,756
2,140,756 $
1,870,000
339,244
2,709,244 $
3,400,000
950,000
4,850,000 $
1,190,000
475,042
1,665,042 $
2,210,000
474,958
3,184,958
Insurance license
Customer
relationships
Assembled workforce
Total
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Intangible asset impairment testing and amortization
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company performs an analysis annually as of December 31 to identify potential impairment of intangible assets with both definite and
indefinite lives and measures the amount of any impairment loss that may need to be recognized. Intangible asset impairment testing
requires an evaluation of the estimated fair value of each identified intangible asset to its carrying value. An impairment charge would be
recorded if the estimated fair value is less than the carrying amount of the intangible asset. No impairments have been identified in the years
ended December 31, 2013 and 2012.
The Company recorded amortization expense, related to intangibles, of $475,714 for each of the years ended December 31, 2013 and
2012. The estimated aggregate amortization expense for the remaining life of finite life intangibles is as follows:
2014
2015
2016
2017
2018
Thereafter
Note 7 - Reinsurance
$
$
475,714
475,714
407,816
340,000
340,000
170,000
2,209,244
The Company’s reinsurance treaties for both its Personal Lines business, which primarily consists of homeowners’ policies, and Commercial
Lines business expired on June 30, 2013. Effective July 1, 2013, the Company entered into new treaties with different terms. The treaties
are annual, except for personal lines described below, and provide for the following material terms as of July 1, 2013:
Personal Lines
The personal lines treaty was renewed with a two year term expiring on June 30, 2015. Personal lines business, which includes
homeowners, dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty, which provides
coverage with respect to losses of up to $1,200,000 per occurrence. An excess of loss contract provides 100% of coverage for the
next $1,700,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000 per occurrence.
Effective as of July 1, 2014, the Company has the option to increase the quota share percentage to a maximum of 85% or decrease
the quota share percentage to a minimum of 55% by giving no less than 30 days advance notice. See “Catastrophe Reinsurance”
below for a discussion of the Company’s reinsurance coverage with respect to its Personal Lines business in the event of a
catastrophe.
Personal umbrella policies are reinsured under a 90% quota share treaty limiting the Company to a maximum of $100,000 per
occurrence for the first $1,000,000 of coverage. The second $1,000,000 of coverage is 100% reinsured.
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Commercial Lines
General liability commercial policies written by the Company, except for commercial auto policies, are reinsured under a 25% quota
share treaty, which provides coverage with respect to losses of up to $400,000 per occurrence. Excess of loss contracts provide
100% of coverage for the next $2,500,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to
$2,900,000 per occurrence.
Commercial Auto
Commercial auto policies are covered by an excess of loss reinsurance contract, which provides $1,700,000 of coverage in excess
of $300,000.
Catastrophe Reinsurance
The Company has catastrophe reinsurance coverage with regard to losses of up to $90,000,000. The initial $4,000,000 of losses in
a catastrophe are subject to a 75% quota share treaty, such that the Company retains $1,000,000 per catastrophe occurrence With
respect to any additional catastrophe losses of up to $86,000,000 per catastrophe, the Company is 100% reinsured under its
catastrophe reinsurance program. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
F-26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The single maximum risks to which the Company is subject under these treaties per occurrence are as follows:
Personal Lines
Treaty
Personal Umbrella
Commercial Lines
Commercial Auto
Catastrophe (2)
________________
Risk
Extent of Loss
Initial $1,200,000
$
Retained
300,000
1,200,000 -
$2,900,000
$
Over $2,900,000
None(1)
100%
Initial $1,000,000
$
100,000
1,000,000 -
$2,000,000
$
Over $2,000,000
Initial $400,000
400,000 -
$2,900,000
$
Over $2,900,000
Initial $300,000
300,000 -
$2,000,000
$
Over $2,000,000
None(1)
100%
$
300,000
None(1)
100%
$
300,000
None(1)
100%
Initial $4,000,000
$
1,000,000
4,000,000 -
$90,000,000
$
Over $90,000,000
None
100%
(1) Covered by excess of loss treaties.
(2) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
The reinsurance treaties, which expired on June 30, 2013, provided for the following material terms:
Personal Lines
Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, was reinsured under a 75%
quota share treaty which provided coverage with respect to losses of up to $1,000,000 per occurrence. An excess of loss contract
provided 100% of coverage for the next $1,900,000 of losses for a total reinsurance coverage of $2,650,000 with respect to losses of
up to $2,900,000 per occurrence. See “Catastrophe Reinsurance” below for a discussion of the Company’s reinsurance coverage
with respect to its Personal Lines business in the event of a catastrophe.
Personal umbrella policies were reinsured under a 90% quota share treaty limiting the Company to a maximum of $100,000 per
occurrence for the first $1,000,000 of coverage. The second $1,000,000 of coverage was 100% reinsured.
F-27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Commercial Lines
General liability commercial policies written by the Company, except for commercial auto policies, were reinsured under a 40%
quota share treaty, which provided coverage with respect to losses of up to $500,000 per occurrence. Excess of loss contracts
provided 100% of coverage for the next $2,400,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of
up to $2,900,000 per occurrence.
Commercial Auto
Commercial auto policies were covered by an excess of loss reinsurance contract, which provided $1,750,000 of coverage in
excess of $250,000.
Catastrophe Reinsurance
The Company had catastrophe reinsurance coverage with regard to losses of up to $73,000,000. The initial $3,000,000 of losses in
a catastrophe were subject to a 75% quota share treaty, such that the Company retained $750,000 per catastrophe occurrence With
respect to any additional catastrophe losses of up to $70,000,000, the Company was 100% reinsured under its catastrophe
reinsurance program.
The Company’s reinsurance program is structured to enable the Company to significantly grow its premium volume while maintaining
regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The
reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts.
The Company’s participation in reinsurance arrangements does not relieve the Company from its obligations to policyholders.
The Company’s new reinsurance programs on July 1, 2013 and 2012 resulted in adjustments to ceded written premiums, net written
premiums and provisional ceding commissions earned. These adjustments were the result of the annual treaty changes and are not
recurring on a quarterly basis:
Personal Lines Quota Share
On July 1, 2013, the Company’s provisional ceding commissions rate increased from 35% to 40%, and, as a result, the reinsurers
were obligated to pay to the Company 5% of the ceded unearned premiums as of June 30, 2013. The additional provisional ceding
commissions received will increase provisional ceding commission revenue as they are earned.
Commercial Lines Quota Share
On July 1, 2013, the change from a 40% quota share to a 25% quota share resulted in a decrease to ceded written premiums, as the
quota share carriers were obligated to return to the Company 37.50% of the previously ceded unearned premiums. On July 1, 2012,
the change from a 60% quota share to a 40% quota share resulted in a decrease to ceded written premiums, as the quota share
carriers were obligated to return to the Company 33.33% of the previously ceded unearned premiums. The returned unearned
premiums are then earned over the remaining life of the policies to which they relate. On July 1, 2013 and 2012, along with the
increase to net written premiums and net earned premiums, the Company was obligated to return to the reinsurers 37.50% and
33.33%, respectively, of the unearned provisional ceding commission previously received, which will reduce future ceding
commission revenues as they are earned.
F-28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company received advance payments from catastrophe reinsurers related to Superstorm Sandy. As of December 31, 2013 and 2012,
the balance of advance payments from catastrophe reinsurers which were applied against unpaid losses when paid was $-0- and
$7,358,391, respectively, and are included in “Advance payments from catastrophe reinsurers” in the consolidated balance sheets.
Approximate reinsurance recoverables on unpaid and paid losses by reinsurer are as follows:
($ in thousands)
December 31, 2013
Maiden Reinsurace Company
SCOR Reinsurance Company
Swiss Reinsuarnace America Corporation
Motors Insurance Corporation
Sirius American Insurance Company
Allied World Assurance Company
Others
Total
December 31, 2012
Maiden Reinsurace Company
SCOR Reinsurance Company
Motors Insurance Corporation
Sirius American Insurance Company
Swiss Reinsurance America Corporation
Allied World Assurance Company
Others
Total
Unpaid
Losses
Paid
Losses
Total
Security
$
$
$
$
6,929 $
3,318
2,523
1,536
1,410
665
983
17,364 $
8,173 $
4,437
1,550
1,406
1,705
808
341
18,420 $
732 $
294
454
48
44
39
246
1,857 $
2,989 $
1,495
49
18
756
372
113
5,792 $
$
7,661
3,612
2,977
1,584
1,454
704
1,229
19,221 $
11,162 $
5,932
1,599
1,424
2,461
1,180
454
24,212 $
13,868 (1)
-
-
792 (1)
-
-
135 (2)
14,795
6,503 (1)
-
1,214 (1)
-
-
-
91 (2)
7,808
(1) Secured pursuant to collateralized trust agreements.
(2) Guaranteed by an irrevocable letter of credit.
Assets held in the two trusts referred to in footnote (1) above are not included in the Company’s invested assets and investment income
earned on these assets is credited to the two reinsurers respectively. In addition to reinsurance recoverables on unpaid and paid losses,
reinsurance receivables as of December 31, 2013 and 2012 include unearned ceded premiums of $18,400,338 and $14,690,683,
respectively.
Ceding Commission Revenue
The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional
commission rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year
loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The
sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and
contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate
and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.
F-29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
As of December 31, 2013, the Company’s estimated ultimate loss ratios are attributable to contracts for the July 1, 2012/June 30, 2013
treaty year (“2012/2013 Treaties”) and the July 1, 2013/June 30, 2014 treaty year (“2013/2014 Treaties”). As of December 31, 2012, the
Company’s estimated ultimate loss ratios are attributable to contracts for the July 1, 2011/June 30, 2012 treaty year (“2011/2012 Treaties”)
and the 2012/2013 Treaties.
Treaties in effect as of December 31, 2013
The Company’s estimated ultimate loss ratios attributable to the 2012/2013 Treaties are greater than the contractual ultimate loss
ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2013, the Company
has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaties.
The Company’s estimated ultimate loss ratios attributable to contracts for the 2013/2014 Treaties are lower than the contractual
ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2013,
the Company has recorded contingent ceding commissions earned with respect to the 2013/2014 Treaties.
Treaties in effect as of December 31, 2012
The Company’s estimated ultimate loss ratios attributable to contracts for the 2011/2012 Treaties are lower than the contractual
ultimate loss ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2012,
the Company has recorded contingent ceding commissions earned with respect to the 2011/2012 Treaties.
The Company’s estimated ultimate loss ratios attributable to the 2012/2013 Treaties are greater than the contractual ultimate loss
ratios at which the provisional ceding commissions are earned. Accordingly, for the year ended December 31, 2012, the
Company has recorded negative contingent ceding commissions earned with respect to the 2012/2013 Treaties.
In addition to the treaties that were in effect as of December 31, 2013 and 2012, the estimated ultimate loss ratios from prior years’ treaties
are subject to change as loss reserves from those periods increase or decrease, resulting in an increase or decrease in the commission
rate and contingent ceding commissions earned.
F-30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Ceding commissions earned consists of the following:
Provisional ceding commissions earned
Contingent ceding commissions earned
Years ended
December 31,
2013
2012
$ 11,007,342 $
665,761
$ 11,673,103 $
8,516,240
1,173,915
9,690,155
Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share
treaties are settled annually based on the loss ratio of each treaty year that ends on June 30. As discussed above, for the years ended
December 31, 2013 and 2012, respectively, the Company has recorded negative contingent ceding commissions earned with respect to the
2012/2013 Treaties, which results in ceding commissions payable to reinsurers. Net contingent ceding commissions payable to reinsurers
as of December 31, 2013 and 2012 was $-0- and $807,415, respectively, and is included in “Reinsurance balances payable” in the
consolidated balance sheets.
Note 8 - Deferred Policy Acquisition Costs and Deferred Ceding Commission Revenue
Policy acquisition costs incurred and policy-related ceding commission revenue are deferred, and amortized to income on property and
casualty insurance business as follows:
Year ended
December 31,
2013
2012
$
692,848 $
553,374
10,500,068
3,193,910
(13,114,478)
579,500
(1,396,251)
(816,751)
8,087,355
3,012,611
(9,410,871)
1,689,095
(1,549,621)
139,474
$
(123,902) $
692,848
Net deferred policyacquisition costs net of ceding
commission revenue, beginning of year
Cost incurred and deferred:
Commissions and brokerage
Other underwriting and policy acquisition costs
Ceding commission revenue
Net deferred policy acquisition costs
Amortization
Net deferred policy acquisition costs net of ceding
commission revenue, end of year
F-31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Ending balances for deferred policy acquisition costs and deferred ceding commission revenue as of December 31, 2013 and 2012 follows:
Deferred policy acquisition costs
Deferred ceding commission revenue
Balance at end of period
Note 9 - Property and Equipment
The components of property and equipment are summarized as follows:
December 31, 2013
Building
Land
Furniture
Computer equipment and software
Automobile
Total
December 31, 2012
Building
Land
Furniture
Computer equipment and software
Automobile
Total
December 31,
2013
2012
$
$
6,860,263 $
(6,984,166)
(123,903) $
5,569,878
(4,877,030)
692,848
Accumulated
Depreciation
Net
Cost
$
$
$
$
1,760,435
153,097
170,505
533,966
81,394
2,699,397
$
(195,363) $
-
(79,885)
(307,382)
(78,012)
(660,642) $
$
1,565,072
153,097
90,620
226,584
3,382
2,038,755
1,648,838
153,097
138,115
336,851
81,394
2,358,295
$
(152,976) $
-
(66,570)
(219,447)
(50,880)
(489,873) $
$
1,495,862
153,097
71,545
117,404
30,514
1,868,422
Depreciation expense for the years ended December 31, 2013 and 2012 was $170,769 and $120,633, respectively.
Note 10 - Property and Casualty Insurance Activity
Premiums written, ceded and earned are as follows:
Year ended December 31, 2013
Premiums written
Change in unearned premiums
Premiums earned
Year ended December 31, 2012
Premiums written
Change in unearned premiums
Premiums earned
Direct
Assumed
Ceded
Net
$ 60,449,077 $
(6,341,750)
$ 54,107,327 $
45,746 $ (35,656,060) $ 24,838,763
(2,613,596)
3,709,655
18,499
64,245 $ (31,946,405) $ 22,225,167
$ 49,251,630 $
(4,724,193)
$ 44,527,437 $
23,967 $ (29,715,971) $ 19,559,626
(5,010)
(2,343,015)
2,386,188
18,957 $ (27,329,783) $ 17,216,611
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of
December 31, 2013 and 2012 was approximately $776,000 and $611,000, respectively.
F-32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The components of the liability for loss and LAE expenses and related reinsurance receivables as of December 31, 2013 and 2012 are as
follows:
Gross
Liability
Reinsurance
Receivables
$ 22,489,240
4,200,675
7,813,314
$ 12,078,399
1,226,763
4,058,813
17,363,975
1,796,512
-
$ 34,503,229 19,160,487
18,400,338
$ 37,560,825
2,502,169
6,793,222
$ 21,190,141 $ 13,284,613
1,064,420
4,070,661
18,419,694
5,792,405
-
$ 30,485,532 24,212,099
14,690,683
$ 38,902,782
F-33
December 31, 2013
Case-basis reserves
Loss adjustment expenses
IBNR reserves
Recoverable on unpaid losses
Recoverable on paid losses
Total loss and loss adjustment expenses
Unearned premiums
Total reinsurance receivables
December 31, 2012
Case-basis reserves
Loss adjustment expenses
IBNR reserves
Recoverable on unpaid losses
Recoverable on paid losses
Total loss and loss adjustment expenses
Unearned premiums
Total reinsurance receivables
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):
Balance at beginning of period
Less reinsurance recoverables
Net balance, beginning of period
Incurred related to:
Current year
Prior years
Total incurred
Paid related to:
Current year
Prior years
Total paid
Net balance at end of period
Add reinsurance recoverables
Balance at end of period
Years ended
December 31,
2013
2012
$ 30,485,532 $ 18,480,717
(9,960,334)
(18,419,694)
8,520,383
12,065,838
11,765,420 10,460,000
774,713
13,586,533 11,234,713
1,821,113
3,709,495
4,803,622
8,513,117
4,419,000
3,270,258
7,689,258
17,139,254 12,065,838
17,363,975 18,419,694
$ 34,503,229 $ 30,485,532
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $17,167,407 and $21,396,768 for the years ended
December 31, 2013 and 2012, respectively.
Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s
management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to
Company and industry trends.
Loss and loss adjustment expense reserves
The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the
ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on
facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using
actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the
length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often
beyond the Company’s control. 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 result of numerous best estimates made
by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for
reported claims ("case reserve") is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other
information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense
reserves for unreported claims and development on known claims (incurred but not reported reserves) are determined using historical
information by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based
upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.
F-34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original
estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results.
Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of
statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims,
changes to existing case reserves and paid losses with respect to the current and prior years. Several methods are used, varying by product
line and accident year, in order to select the estimated year-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.
Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the
various methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from
industry sources are employed to supplement the projections derived from the methods listed above.
Two key assumptions that materially impact the estimate of loss reserves are the loss ratio estimate for the current accident year used in
the BF methods described above, and the loss development factor selections used in the loss development methods described above. The
loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend,
and mix of business.
The Company is not aware of any claims trends that have emerged or that would cause future adverse development that have not already
been considered in existing case reserves and in its current loss development factors.
F-35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
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 ‘pure’ IBNR for accident years 2010 and prior is limited although
there remains the possibility of adverse development on reported claims (‘case development’ IBNR).
The Company was previously a one-third participant in a pool arrangement. Effective November 1, 1997, the Company withdrew from its
participation in the pool arrangement. Accordingly, the Company will only be participating in losses and allocated loss adjustment expenses
that occurred prior to that date.
Note 11 - Long-Term Debt
Long-term debt and capital lease obligations consist of:
Total
Debt
Notes payable
Bank line of credit
Notes Payable
$
$
- $
-
- $
- $
-
- $
December 31, 2013
Less
Current
Long-Term
Total
December 31, 2012
Less
Current
Maturities
Debt
Debt
747,000 $
450,000
1,197,000 $
- $
-
- $
Maturities
- $
450,000
450,000 $
Long-Term
Debt
747,000
-
747,000
From June 2009 through March 2010, the Company borrowed $1,450,000 (including $785,000 from related parties as disclosed below) and
issued promissory notes in such aggregate principal amount (the “2009/2010 Notes”). The 2009/2010 Notes provided for interest at the rate
of 12.625% per annum through the maturity date of July 10, 2011. During the quarter the ended June 30, 2011, the Company prepaid
$703,000 (including $407,000 to related parties) of the principal amount of the 2009/2010 Notes. In June 2011, the remaining note holders
agreed to extend the maturity date for a period of three years from July 10, 2011 to July 10, 2014, and, effective July 11, 2011, reduce the
interest rate from 12.625% to 9.5% per annum. The reduction in the interest rate and the extension of the maturity date did not significantly
change the fair value of the 2009/2010 Notes. The remaining 2009/2010 Notes, as extended, were prepaid on December 13, 2013 without
premium or penalty. Interest expense on the 2009/2010 Notes for years ended December 31 2013 and 2012 was approximately $69,000
and $71,000, respectively.
F-36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Related party balances as of December 31, 2013 and 2012, and principal prepayments as described above for the year ended December
31, 2013 under the 2009/2010 Notes are as follows:
Less
Principal
Prepayments
Year Ended
December 31,
2013
Balance
December 31,
2012
Balance
December 31,
2013
Barry Goldstein IRA (Mr. Goldstein is Chairman of the Board, President
and Chief Executive Officer, and principal stockholder of the Company)
$
Jay Haft, a director of the Company
A member of the family of Michael Feinsod, a director of the Company
Mr. Yedid and members of his family
A member of the family of Floyd Tupper, a director of KICO
Total related party transactions
$
90,000 $
30,000
60,000
156,000
42,000
378,000 $
90,000 $
30,000
60,000
156,000
42,000
378,000 $
-
-
-
-
-
-
Interest expense on related party borrowings for the years ended December 31, 2013 and 2012 was approximately $35,000 and $36,000,
respectively.
Bank Line of Credit
On December 27, 2011, Kingstone executed a Promissory Note pursuant to a line of credit (together, the “Trustco Agreement”) with Trustco
Bank (“Lender”). Under the Trustco Agreement, Kingstone may receive advances from Lender not to exceed an unpaid principal balance of
$500,000 (the “Credit Limit”). On January 25, 2013, the Credit Limit was increased to $600,000. Advances extended under the Trustco
Agreement will bear interest at a floating rate based on the Lender’s prime rate, which was 3.75% at December 31, 2013.
Interest only payments are due monthly. The principal balance is payable on demand, and must be reduced to zero for a minimum of thirty
consecutive days during each year of the term of the Trustco Agreement. The line of credit is subject to annual renewal at the discretion of
the Lender. Lender may set off any depository accounts maintained by Kingstone that are held by Lender. Payment of amounts due
pursuant to the Trustco Agreement is secured by all of Kingstone’s cash and deposit accounts, receivables, inventory and fixed assets, and
is guaranteed by Kingstone’s subsidiary, Payments, Inc.
The line of credit is being used for general corporate purposes.
The weighted average interest rate on the amount outstanding during the years ended December 31, 2013 and 2012 was 3.75%. There are
no other fees in connection with this credit line. Interest expense on the line of credit for years ended December 31 2013 and 2012 was
approximately $7,000 and $10,000, respectively.
Note 12 – Stockholders’ Equity
Dividend Declared
Dividends declared and paid on Common Stock were $612,401 and $533,763 for the years ended December 31, 2013 and 2012,
respectively. The Company’s Board of Directors approved a quarterly dividend on February 20, 2014 of $.04 per share payable in cash on
March 14, 2014 to stockholders of record as of March 6, 2014 (See Note 19).
Preferred Stock
On August 13, 2013, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company to increase
the number of authorized shares of Preferred Stock from 1,000,000 to 2,500,000. The Board of Directors has the authority to issue shares of
Preferred Stock from time to time in a series and to fix, before the issuance of each series, the number of shares in each series and the
designation, liquidation preferences, conversion privileges, rights and limitations of each series. There was no preferred stock issued as of
December 31, 2013 and 2012.
F-37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Common Stock
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
On August 13, 2013, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company to increase
the number of authorized shares of Common Stock from 10,000,000 to 20,000,000.
On December 13, 2013, the Company closed on an underwritten public offering of 3,450,000 shares of its Common Stock, including
450,000 shares issued pursuant to the underwriter’s 30-day over-allotment option, at a public offering price of $5.95 per share. The
aggregate net proceeds to the Company was approximately $18,804,000, after deducting underwriting discounts and commissions and
other offering expenses of $1,723,000.
The Company used the net proceeds of the offering to contribute capital to its insurance subsidiary, KICO, to support growth, including
possible product expansion, and to repay indebtedness. A registration statement relating to these securities was filed with the SEC and
became effective on December 9, 2013.
Other Equity Compensation
For the years ended December 31, 2013 and 2012, there was no other equity compensation.
Stock Options
Pursuant to the Company’s 2005 Equity Participation Plan (the “2005 Plan”), which provides for the issuance of incentive stock options, non-
statutory stock options and restricted stock, a maximum of 550,000 shares of Common Stock were permitted to be issued pursuant to
options granted and restricted stock issued. On August 13, 2013, the Company’s stockholders approved an increase in the number of
shares authorized to be issued pursuant to the 2005 Plan from 550,000 to 700,000. Incentive stock options granted under the 2005 Plan
expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or
the Stock Option Committee determines the expiration date with respect to non-statutory options, and the vesting provisions for restricted
stock, granted under the 2005 Plan.
The results of operations for the years ended December 31, 2013 and 2012 include stock-based stock option compensation expense
totaling approximately $60,000 and $48,000, respectively. Stock-based compensation expense related to stock options is net of estimated
forfeitures of 21% for the years ended December 31, 2013 and 2012. Such amounts have been included in the consolidated statements of
income and comprehensive income within other operating expenses.
F-38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Stock-based compensation expense in 2013 and 2012 is the estimated fair value of options granted amortized on a straight-line basis over
the requisite service period for the entire portion of the award. The weighted average estimated fair value of stock options granted during the
years ended December 31, 2013 and 2012 were $1.43 and $2.47 per share respectively. The fair value of options at the grant date was
estimated using the Black-Scholes option-pricing method. The following weighted average assumptions were used for grants during the
years ended December 31, 2013 and 2012:
Dividend Yield
Volatility
Risk-Free Interest Rate
Expected Life
Years ended
December 31,
2013
2.42% -
2012
3.14%
0.00%
45.73% -
50.89% -
46.71%
89.27%
0.61% -
0.68%
3.25 years
0.61%
5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the
expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of our stock options.
A summary of option activity under the Company’s 2005 Plan for the year ended December 31, 2013 is as follows:
Stock Options
Weighted
Average
Exercise Price
per Share
Weighted
Average
Remaining
Contractual
Term
Number of
Shares
Aggregate
Intrinsic Value
Outstanding at January 1, 2013
235,115 $
2.58
2.24 $
539,485
Granted
Exercised
Forfeited
92,500 $
(6,250) $
- $
5.27
2.35
-
- $
- $
- $
184,900
18,175
-
Outstanding at December 31, 2013
321,365 $
3.36
2.26 $
1,257,936
Vested and Exercisable at December 31, 2013
244,490 $
2.77
1.49 $
1,100,811
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2013 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 $7.27 closing price of the Company’s Common Stock on December 31, 2013. The total intrinsic value of options
exercised in year ended December 31, 2013 was $18,175, determined as of the date of exercise.
F-39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
Participants in the 2005 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”). The Company received cash proceeds of $11,750 from the exercise of options for the purchase of 5,000 shares of Common
Stock in the year ended December 31, 2013. The remaining 1,250 options exercised in 2013 were Net Exercises. The Company received
cash proceeds of $47,075 from the exercise of options for the purchase of 22,500 shares of Common Stock in the year ended December 31,
2012. The remaining 146,250 options exercised in 2012 were Net Exercises.
As of December 31, 2013 and 2012, the fair value of unamortized compensation cost related to unvested stock option awards was
approximately $71,000 and $26,000, respectively. Unamortized compensation cost as of December 31, 2013 is expected to be recognized
over a remaining weighted-average vesting period of 1.47 years.
As of December 31, 2013, there were 201,135 shares reserved under the 2005 Plan.
Note 13 - Statutory Financial Information and Accounting Policies
For regulatory purposes, the Company’s Insurance Subsidiaries prepare their statutory basis financial statements in accordance with
practices prescribed or permitted by the state in which they are domiciled (“statutory basis” or “SAP”). The more significant SAP variances
from GAAP are as follows:
•
•
•
•
•
•
Policy acquisition costs are charged to operations in the year such costs are incurred, rather than being deferred and amortized as
premiums are earned over the terms of the policies.
Ceding commission revenues are earned when ceded premiums are written except for ceding commission revenues in excess of
anticipated acquisition costs, which are deferred and amortized as ceded premiums are earned. GAAP requires that all ceding
commission revenues be earned as the underlying ceded premiums are earned over the term of the reinsurance agreements.
Certain assets including certain receivables, a portion of the net deferred tax asset, prepaid expenses and furniture and equipment are
not admitted.
Investments in fixed-maturity securities are valued at National Association of Insurance Commissioners (“NAIC”) value for statutory
financial purposes, which is primarily amortized cost. GAAP requires certain investments in fixed-maturity securities classified as
available for sale, to be reported at fair value.
Certain amounts related to ceded reinsurance are reported on a net basis within the statutory basis financial statements. GAAP
requires these amounts to be shown gross.
For SAP purposes, changes in deferred income taxes relating to temporary differences between net income for financial reporting
purposes and taxable income are recognized as a separate component of gains and losses in surplus rather than included in income
tax expense or benefit as required under GAAP.
F-40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
State insurance laws restrict the ability of KICO to declare dividends. These restrictions are related to surplus and net investment income.
Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing four
quarters. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. Generally,
dividends may only be paid out of unassigned surplus, and the amount of an insurer’s unassigned surplus following payment of any
dividends must be reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial needs. KICO paid
dividends of $700,000 for each of the years ended December 31, 2013 and 2012. On February 27, 2014, KICO’s board of directors approved
a cash dividend of $375,000 to Kingstone, which was paid on February 28, 2014. For the years ended December 31, 2013 and 2012, KICO
had statutory basis net income of $3,057,740 and $1,142,493, respectively. At December 31, 2013 and 2012, KICO had reported statutory
basis surplus as regards policyholders of $31,829,876 and $14,345,729, respectively, as filed with the Department.
Note 14 - Risk Based Capital
State insurance departments impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a
benchmark for the regulation of insurance companies by state insurance regulators. RBC provides for targeted surplus levels based on
formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived
degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the
company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk);
(c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year
(underwriting risk); and, (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not
reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level
RBC (“ACLC”).
The RBC guidelines define specific capital levels based on a company’s ACLC that are determined by the ratio of the company’s total
adjusted capital (“TAC”) to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. The Company is in
compliance with RBC requirements as of December 31, 2013 and 2012.
Note 15 – Income Taxes
The Company files a consolidated U.S. federal income tax return that includes all wholly-owned subsidiaries. State tax returns are filed on a
consolidated or separate basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the
period when they are identified, generally when the tax returns are filed. The effect of these adjustments on the current and prior periods
(during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the
financial statements taken as a whole for the respective periods. The Company has evaluated this year’s amounts in relation to the current
and prior reporting periods and determined that a restatement of those prior reporting periods is not appropriate.
The provision for income taxes is comprised of the following:
Years ended December 31,
Current federal income tax expense
Current state income tax expense
Deferred federal and state income tax expense
Provision for income taxes
F-41
2013
2012
$
$
1,473,370 $
14,952
(724,053)
764,269 $
641,857
(225)
(338,723)
302,909
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
A reconciliation of the federal statutory rate to our effective tax rate is as follows:
Years ended December 31,
Computed expected tax expense
State taxes, net of Federal benefit
State valuation allowance
Permanent differences
Dividends received deduction
Non-taxable investment income
Stock-based compensation expense
Other permanent differences
Prior year tax matters
Other
Total tax
2013
944,040
(48,411)
85,821
(91,163)
(43,905)
-
25,709
(52,145)
(55,677)
764,269
34.0% $
(1.8)
3.1
(3.3)
(1.5)
-
0.9
(1.9)
(2.0)
27.5% $
$
$
2012
363,669
(44,687)
104,325
(64,274)
(68,667)
16,414
25,956
(46,906)
17,079
302,909
34.0%
(4.2)
9.8
(6.0)
(6.4)
1.5
2.4
(4.4)
1.6
28.3%
Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the temporary differences are
expected to be recovered. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net
deferred income taxes on the balance sheet reflect temporary differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and income tax purposes, tax effected at a various rates depending on whether the temporary differences are
subject to federal taxes, state taxes, or both. Significant components of the Company’s deferred tax assets and liabilities are as follows:
December 31, December 31,
2013
2012
$
246,476 $
445,384
1,000,372
2,374,616
17,087
4,083,935
264,648
313,544
811,413
1,658,190
10,921
3,058,716
1,169,000
2,332,489
921,143
197,223
-
157,167
-
4,777,022
1,169,000
1,893,759
1,082,886
152,576
20,400
527,376
-
4,845,997
$
(693,087) $ (1,787,281)
Deferred tax asset:
Net operating loss carryovers (1)
Claims reserve discount
Unearned premium
Deferred ceding commission revenue
Other
Total deferred tax assets
Deferred tax liability:
Investment in KICO (2)
Deferred acquisition costs
Intangibles
Depreciation and amortization
Reinsurance recoverable
Net unrealized appreciation of securities - available for sale
Investment income
Total deferred tax liabilities
Net deferred income tax liability
F-42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
(1) The deferred tax assets from net operating loss carryovers are as follows:
Type of NOL
State only (A)
Valuation allowance
State only, net of valuation allowance
Amount subject to Annual Limitation, federal only (B)
Total deferred tax asset from net operating loss carryovers
December 31, December 31,
2013
459,989 $
(240,713)
219,276
27,200
246,476 $
Expiration
2012
380,810 December 31, 2032
(146,762)
234,048
30,600 December 31, 2019
264,648
$
$
(A) Kingstone generates operating losses for state purposes and has prior year net operating loss carryovers available. The state net
operating loss carryover as of December 31, 2013 and December 31, 2012 was approximately $5,482,000 and $4,588,000, respectively.
KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a
gross premiums tax, which is included in the consolidated statements of income and comprehensive income within other underwriting
expenses. A valuation allowance has been recorded due to the uncertainty of generating enough state taxable income to utilize 100% of the
available state net operating loss carryovers over their remaining lives, which expire between 2027 and 2033.
(B) The Company has an NOL of $60,000 that is subject to Internal Revenue Code Section 382, which places a limitation on the utilization of
the federal net operating loss to approximately $10,000 per year (“Annual Limitation”) as a result of a greater than 50% ownership change of
the Company in 1999. The losses subject to the Annual Limitation will be available for future years, expiring through December 31, 2019.
(2) Deferred tax liability - investment in KICO
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. Under GAAP guidance for business combinations,
a temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The
Company is required to maintain its deferred tax liability of $1,169,000 related to this temporary difference until the stock of KICO is sold, or
the assets of KICO are sold or KICO and the parent are merged.
The table below reconciles the changes in net deferred income tax liability to the deferred income tax provision for the year ended
December 31, 2013:
Change in net deferred income tax liabilities
Deferred tax expense allocated to other comprehensive income
Deferred income tax provision
$ (1,094,194)
(370,141)
(724,053)
$
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.
F-43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
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 years ended December 31, 2013 and 2012. If
any had been recognized these would be reported in income tax expense.
IRS Tax Audit
The Company’s federal income tax return for the year ended December 31, 2009 was examined by the Internal Revenue Service and was
accepted as filed. The tax returns for years ended December 31, 2010 through 2012 are subject to examination, generally for three years
after filing.
In March 2014, the Company received a notice that its Federal income tax return for the years ended December 31, 2011 and 2012 has
been selected for examination by the Internal Revenue Service. The audit has not yet commenced. The final results of this audit are
unknown, although management believes the outcome of this examination will not have a material effect on these financial statements
though the actual outcome may differ from this belief.
Note 16 - Employee Benefit Plans
The Company’s insurance subsidiary, KICO, maintains a salary reduction plan under Section 401(k) of the Internal Revenue Code (“401(k)
Plan”) for its qualified employees. KICO matches 100% of each participant’s contribution up to 4% of the participant’s eligible contribution.
The Company, at its discretion, may allocate an amount for additional contributions (“Additional Contributions”) to the 401(k) Plan. The
Company incurred approximately $270,000 and $139,000 of expense for the years ended December 31, 2013 and 2012, respectively,
related to the 401(k) Plan. For the years ended December 31, 2013 and 2012, Additional Contributions consisted of approximately $156,000
and $31,000, respectively.
Note 17 - Commitments and Contingencies
Litigation
From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a
claim asserted by a third party in a law suit against one of the Company’s insureds covered by a particular policy, the Company may have a
duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries
as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses. The Company is not subject
to any other pending legal proceedings that management believes are likely to have a material adverse effect on the financial statements.
F-44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
State Insurance Regulation
In the aftermath of Superstorm Sandy, the New York State Department of Financial Services (“DFS”) has adopted various regulations that
affect insurance companies that operate in the state of New York. Included among the regulations are accelerated claims investigation and
settlement requirements and mandatory participation in non-binding mediation proceedings funded by the insurer. Further, in February 2013,
the state of New York announced that the DFS commenced an investigation into the claims practices of three insurance companies,
including KICO, in connection with Superstorm Sandy claims. The DFS stated that the three insurers had a much larger than average
consumer complaint rate with regard to Superstorm Sandy claims and indicated that the three insurers were being investigated for (i) failure
to send adjusters in a timely manner; (ii) failure to process claims in a timely manner; and (iii) inability of homeowners to contact insurance
company representatives. KICO received a letter from the DFS seeking information and data with regard to the foregoing. KICO has
supplied information and data, and is cooperating with the DFS in connection with its investigation. KICO has not received a response from
the DFS and believes that such matter will not have any effect on the Company’s financial position or results of operations.
Employment Agreements
Chief Executive Officer (Kingstone)
The Company’s President, Chairman of the Board and Chief Executive Officer, Barry B. Goldstein, is employed pursuant to an employment
agreement, dated October 16, 2007, as amended (the “Goldstein Employment Agreement”), that expires on December 31, 2014. Pursuant
to the Goldstein Employment Agreement, effective January 1, 2010, Mr. Goldstein was entitled to receive an annual base salary of $375,000
(“Base Salary”) and annual bonuses based on the Company’s net income (which bonus, commencing for 2010, may not be less than
$10,000 per annum). Effective January 1, 2012, Mr. Goldstein assumed the positions of President and Chief Executive Officer of KICO.
Effective April 16, 2012, the Company entered into an amendment to its employment agreement with Mr. Goldstein, pursuant to which,
effective January 1, 2012 and continuing through the term of the agreement, Mr. Goldstein’s annual base salary was increased to $450,000
from $375,000 in consideration for his additional responsibilities to KICO. On August 25, 2008, the Company and Mr. Goldstein entered into
an amendment (the “2008 Amendment”) to the Goldstein Employment Agreement. The 2008 Amendment entitles Mr. Goldstein to devote
certain time to KICO to fulfill his duties and responsibilities as Chairman of the Board, Chief Investment Officer, and effective January 1,
2012, President and Chief Executive Officer of KICO. Such permitted activity is subject to a reduction in Base Salary under the Goldstein
Employment Agreement on a dollar-for-dollar basis to the extent of the salary payable by KICO to Mr. Goldstein pursuant to his KICO
employment contract, which, effective July 1, 2013 and 2012, is $385,875 and $367,500 per year, respectively. Pursuant to the Goldstein
Employment Agreement, the Company also agreed that, under certain circumstances following a change of control of Kingstone
Companies, Inc. and the termination of his employment, Mr. Goldstein would be entitled to a payout equal to one and one-half times his then
annual salary and all of Mr. Goldstein’s outstanding options would become exercisable. In the event of termination by the Company, without
cause or he resigns with good reason Mr. Goldstein would be entitled to receive his base salary and bonuses from the Company for the
remainder of the term, and his outstanding options would become exercisable and would remain exercisable until the first anniversary of the
termination date. In addition, in the event Mr. Goldstein’s employment with KICO is terminated by KICO with or without cause, he would be
entitled to receive a lump sum payment from KICO equal to six months base salary.
F-45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Executive Vice President (KICO)
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
John D. Reiersen, KICO’s Executive Vice President, is employed pursuant to an employment agreement effective as of November 13, 2006
and amended as of January 25, 2008, February 28, 2011 and October 14, 2013 (together, the “Reiersen Agreement”). The Reiersen
Agreement expires on December 31, 2016 and may be terminated by KICO at any time with or without cause upon written notice. In the
event of termination by KICO, Mr. Reiersen will be entitled to receive severance in an amount equal to the lesser of $50,000 or the
remaining salary payable to him through the term of his agreement. Pursuant to the Reiersen Agreement, Mr. Reiersen’s minimum annual
salary effective from January 1, 2012 through December 31, 2014 is $100,000. His minimum annual salary effective January 1, 2015 will be
$105,000. His minimum salary in both periods is subject to increase based upon the provision of more than 500 hours of service per year on
behalf of KICO. Mr. Reiersen also receives additional customary benefits and a $2,000 annual fee for his position as a director of KICO.
Approval Required for Transactions with Subsidiary
On July 1, 2009, Kingstone 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, Kingstone acquired a 100% equity interest in KICO. In
connection with the plan of conversion of CMIC, the Company has agreed with the Department of Financial Services that any intercompany
transaction between itself and KICO must be filed with the Department 30 days prior to implementation.
Note 18 - Net Income Per Common Share
Basic net earnings per common share is computed by dividing income available to common shareholders by the weighted-average number
of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common
shares issuable upon exercise of stock options. The computation of diluted earnings per share excludes those options with an exercise
price in excess of the average market price of the Company’s common shares during the periods presented.
The computation of diluted earnings per share excludes outstanding options in periods where the exercise of such options would be anti-
dilutive. For the years ended December 31, 2013 and 2012, the inclusion of 27,094 and 10,000 options in the computation of diluted
earnings per share would have been anti-dilutive for the periods and, as a result, the weighted average number of common shares used in
the calculation of diluted earnings per common 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 earnings per
common share for the years ended December 31, 2013 and 2012 follows:
Weighted average number of shares outstanding
Effect of dilutive securities, common share equivalents
Weighted average number of shares outstanding,
used for computing diluted earnings per share
F-46
Year ended
December 31,
2013
2012
3,975,115
84,609
3,806,697
65,063
4,059,724
3,871,760
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 19 - Subsequent Events
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
The Company has evaluated events that occurred subsequent to December 31, 2013 through the date these financial statements were
issued for matters that required disclosure or adjustment in these financial statements.
Dividends Declared and Paid
On February 20, 2014, the Company’s board of directors approved a dividend of $.04 per share, $290,664, payable in cash on March 14,
2014 to stockholders of record as of March 6, 2014.
F-47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision and
with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2013.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to
rules of the SEC that permit us to provide only management’s report in this Annual Report.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer, and effected by the board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with US 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 US 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.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the
evaluation of the effectiveness of our internal control over financial reporting management concluded that our internal control over financial
reporting was effective as of December 31, 2013.
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
The following table sets forth the positions and offices presently held by each of our current directors and executive officers and their
ages:
Name
Barry B. Goldstein
Victor J. Brodsky
John D. Reiersen
Michael R. Feinsod
Jay M. Haft
David A. Lyons
Jack D. Seibald
Benjamin Walden
Barry B. Goldstein
Age
61
56
71
43
78
64
53
46
Positions and Offices Held
President, Chairman of the Board, Chief Executive Officer and Director
Chief Financial Officer and Treasurer
Executive Vice President, Kingstone Insurance Company
Secretary and Director
Director
Director
Director
Vice President and Chief Actuary, Kingstone Insurance Company
Mr. Goldstein has served as our President, Chief Executive Officer, Chairman of the Board, and a director since March 2001. He
served as our Chief Financial Officer from March 2001 to November 2007 and as our Treasurer from May 2001 to August 2013. Since
January 2006, Mr. Goldstein has served as Chairman of the Board of Kingstone Insurance Company (“KICO”) (formerly known as
Commercial Mutual Insurance Company), a New York property and casualty insurer, as well as Chairman of its Executive Committee. Mr.
Goldstein has served as Chief Investment Officer of KICO since August 2008 and as its President and Chief Executive Officer since January
2012. He was Treasurer of KICO from March 2010 through September 2010. Effective July 1, 2009, we acquired a 100% equity interest in
KICO. From April 1997 to December 2004, Mr. Goldstein served as President of AIA Acquisition Corp., which operated insurance agencies
in Pennsylvania and which sold substantially all of its assets to us in May 2003. Mr. Goldstein received his B.A. and M.B.A. from State
University of New York at Buffalo. We believe that Mr. Goldstein’s extensive experience in the insurance industry, including his service as
Chairman of the Board of KICO since 2006 and as its Chief Investment Officer since 2008, give him the qualifications and skills to serve as
one of our directors.
Victor J. Brodsky
Mr. Brodsky has served as our Chief Financial Officer since August 2009 and as our Treasurer since August 2013. He served as
our Chief Accounting Officer from August 2007 through July 2009, as our Principal Financial Officer for Securities and Exchange
Commission (“SEC”) reporting purposes from November 2007 through July 2009 and as our Secretary from December 2008 to August
2013. In addition, Mr. Brodsky has served as a director of KICO since February 2008, as Chief Financial Officer of KICO since September
2010 and as Senior Vice President of KICO since January 2012. He also served as Treasurer of KICO from September 2010 through
December 2011. Mr. Brodsky served from May 2008 through March 15, 2010 as Vice President of Financial Reporting and Principal
Financial Officer for SEC reporting purposes of Vertical Branding Inc. Mr. Brodsky served as Chief Financial Officer of Vertical Branding from
March 1998 through May 2008 and as a director of Vertical Branding from May 2002 through November 2005. He served as its Secretary
from November 2005 through May 2008 and from April 2009 to March 15, 2010. A receiver was appointed for the business of Vertical
Branding in February 2010. Prior to joining Vertical Branding, Mr. Brodsky spent 16 years at the CPA firm of Michael & Adest in New
York. Mr. Brodsky earned a Bachelor of Business Administration degree from Hofstra University, with a major in accounting, and is a
licensed CPA in New York.
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John D. Reiersen
Mr. Reiersen served as President of KICO from 1999 to 2011 and as its Chief Executive Officer from 2001 to 2011. Since January
2012, Mr. Reiersen has served as Executive Vice President of KICO. Mr. Reiersen served for 25 years with the New York State Insurance
Department ending his tenure there as Chief Examiner in the Property and Casualty Insurance Bureau. At the Insurance Department, he
was instrumental in the enactment of numerous statutes and regulations, including the automobile no-fault program, the photo inspection
law, the Insurance Information and Enforcement System program and many other cost-containment measures. Mr. Reiersen was also
instrumental in the enactment of many rules in the New York Automobile Insurance Plan. He served as President of the Eagle Insurance
Group from 1990 to 2000. Mr. Reiersen served as Chairman of the New York Insurance Association and has served and continues to serve
on many insurance industry association boards and committees. He holds the professional designations of Chartered Property and
Casualty Underwriter, Certified Financial Examiner and Certified Insurance Examiner. Mr. Reiersen is a graduate of Brooklyn College and
holds a Bachelor of Science Degree in Accounting.
Michael R. Feinsod
Mr. Feinsod is Managing Member of Infinity Capital, LLC, an investment management company he founded in 1999. From 2006
through 2013, he served in various executive positions at Ameritrans Capital Corporation, a business development company. Mr. Feinsod
served as a director of Ameritrans Capital from December 2005 until July 2013 and served as a director of its subsidiary, Elk Associates
Funding Corporation, from December 2005 until April 25, 2013. On April 25, 2013, in connection with a settlement agreement, the United
States Small Business Administration, was appointed as the receiver of Elk Associates Funding Corporation for the purpose of marshaling
and liquidating all of its assets and satisfying the claims of creditors therefrom. Mr. Feinsod served as an investment analyst and portfolio
manager at Mark Boyar & Company, Inc., a broker-dealer. He is admitted to practice law in New York and served as an associate in the
Corporate Law Department of Paul, Hastings, Janofsky & Walker LLP. Mr. Feinsod holds a J.D. from Fordham University School of Law and
a B.A. from George Washington University. He has served as one of our directors since October 2008 and as our Secretary since August
2013. We believe that Mr. Feinsod’s corporate finance, legal and executive-level experience, as well as his service on the Board of KICO
since July 2009, give him the qualifications and skills to serve as one of our directors.
Jay M. Haft
Mr. Haft is currently a personal advisor to Victor Vekselberg, a Russian entrepreneur with considerable interests in oil, aluminum,
utilities and other industries. Mr. Haft is also a partner at Columbus Nova, the U.S.-based investment and operating arm of Mr. Vekselberg’s
Renova Group of companies. Mr. Haft is also a strategic and financial consultant for growth stage companies. He is active in international
corporate finance and mergers and acquisitions as well as in the representation of emerging growth companies. Mr. Haft has extensive
experience in the Russian market, in which he has worked on growth strategies for companies looking to internationalize their business
assets and enter international capital markets. He has been a founder, consultant and/or director of numerous public and private
corporations, and served as Chairman of the Board of Dusa Pharmaceuticals, Inc. Mr. Haft serves on the Board of Ballantyne Cashmere,
SpA, the United States-Russian Business Counsel and The Link of Times Foundation and is an advisor to Montezemolo & Partners. He has
been instrumental in strategic planning and fundraising for a variety of Internet and high-tech, leading edge medical technology and
marketing companies over the years. Mr. Haft is counsel to Reed Smith, an international law firm, as well as several other law and
accounting firms. Mr. Haft is a past member of the Florida Commission for Government Accountability to the People, a past national trustee
and Treasurer of the Miami City Ballet, and a past Board member of the Concert Association of Florida. He is also a past trustee of Florida
International University Foundation and previously served on the advisory board of the Wolfsonian Museum and Florida International
University Law School. Mr. Haft served as our Vice Chairman of the Board from February 1999 until March 2001. From October 1989 to
February 1999, he served as our Chairman of the Board and he has served as one of our directors since 1989. Mr. Haft received B.A. and
LL.B. degrees from Yale University. We believe that Mr. Haft’s corporate finance, business consultation, legal and executive-level
experience, as well as his service on the Board of KICO since July 2009, give him the qualifications and skills to serve as one of our
directors.
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David A. Lyons
Mr. Lyons is currently Principal of Den Corporate Advisors, LLC, a consulting firm focused on business and merger and acquisition
strategies for public and private companies, and, CEO of NextStep Technology Solutions, LLC, a telecommunications marketing company
that is a master distributor for Samsung Telecommunications America, LLC in the sale of its VoIP product portfolio into the
telecommunications network carrier market. From 2004 through 2010 he served as a principal of Den Ventures, LLC, a business
management firm. From 2002 until 2004, Mr. Lyons served as a managing partner of the Nacio Investment Group, and President of Nacio
Systems, Inc., a managed hosting company that provides outsourced infrastructure and communication services for mid-size
businesses. Prior to forming the Nacio Investment Group, Mr. Lyons served as Vice President of Acquisitions for Expanets, Inc., a national
provider of converged communications solutions. Previously, he was Chief Executive Officer of Amnex, Inc. and held various executive
management positions at Walker Telephone Systems, Inc. and Inter-Tel, Inc. Mr. Lyons has served as one of our directors since July 2005.
We believe that Mr. Lyons’ executive-level experience, as well as his experience in the areas of business consultation, corporate finance
and mergers and acquisitions, and his service on the Board of KICO since July 2009, give him the qualifications and skills to serve as one of
our directors.
Jack D. Seibald
Mr. Seibald is a Founder and Managing Member of Concept Capital Markets, LLC (“Concept Capital”) and serves Concept Capital in
a variety of areas, including business and client development and legal and compliance matters. Mr. Seibald also serves as a Managing
Member of Concept Capital Holdings, LLC, the parent of Concept Capital, of Concept Capital Administration, LLC, which provides
administrative services to Concept Capital and its affiliates, and as a member of the Board of Managers of ConceptONE, LLC, which
provides portfolio and risk analytics and reporting services as well as regulatory reporting to investment managers. Mr. Seibald has been
affiliated with Concept Capital and its predecessors since 1995 and has extensive experience in equity research, investment management
and prime brokerage services dating back to 1983. From 1997 to 2005, Mr. Seibald was also a Managing Member of Whiteford Advisors,
LLC, an investment management firm, where as co-founder he co-managed several pools of funds. He began his career at Oppenheimer &
Co. as an equity analyst covering the retailing industry and has also been affiliated with Salomon Brothers and Morgan Stanley & Co in
similar positions. Mr. Seibald also operated The Seibald Report, Inc., an independent research firm specializing in the retailing sector. He
holds an M.B.A. from Hofstra University and a B.A. from George Washington University. Mr. Seibald has served as one of our directors
since 2004. In January 2008, the Financial Industry Regulatory Authority (“FINRA”) imposed a $100,000 fine and 20-day suspension on Mr.
Seibald in connection with the settlement of a FINRA action against Sanders Morris Harris Inc. and Mr. Seibald, among others. FINRA had
found that Mr. Seibald had improperly received compensation from a profit pool derived, in part, from commissions on trading by a hedge
fund for which he served as a manager. We believe that Mr. Seibald’s corporate finance and executive-level experience, as well as his
service on the Board of KICO since 2006 (including his service as Chairman of its Investments Committee), give him the qualifications and
skills to serve as one of our directors.
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Benjamin Walden
Mr. Walden has served as Vice President and Chief Actuary of KICO since December 2013. From February 2010 to November
2013, he served as Chief Actuary for Interboro Insurance Company, a personal lines carrier. From July 2008 to February 2010, Mr. Walden
was President of Assigned Risk Consulting, Inc., an independent actuarial consulting firm. From October 2001 to April 2009, he served as
Vice President and Chief Actuary of AutoOne Insurance, an assigned risk servicing carrier. Mr. Walden was also an actuarial consultant at
Milliman, Inc., an independent provider of actuarial and consulting services, from January 1998 to October 2001. Mr. Walden has been a
Fellow of the Casualty Actuarial Society since 1999 and holds a Bachelor of Science Degree in Mathematics from Villanova University.
Family Relationships
There are no family relationships among any of our executive officers and directors.
Term of Office
Each director will hold office until the next annual meeting of stockholders and until his successor is elected and qualified or until his
earlier resignation or removal. Each executive officer will hold office until the initial meeting of the Board of Directors following the next
annual meeting of stockholders and until his successor is elected and qualified or until his earlier resignation or removal.
Audit Committee
The Audit Committee of the Board of Directors is responsible for overseeing our accounting and financial reporting processes and
the audits of our financial statements. The members of the Audit Committee are Messrs. Lyons, Feinsod, Haft and Seibald.
Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Lyons is an “audit committee financial expert,” as that is defined in Item 407(d)(5) of
Regulation S-K Mr. Lyons is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of The Nasdaq
Stock Market.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires that reports of beneficial ownership of common shares and changes in such ownership be
filed with the Securities and Exchange Commission by Section 16 “reporting persons,” including directors, certain officers, holders of more
than 10% of the outstanding common shares and certain trusts of which reporting persons are trustees. We are required to disclose in this
Annual Report each reporting person whom we know to have failed to file any required reports under Section 16 on a timely basis during the
fiscal year ended December 31, 2013. To our knowledge, based solely on a review of copies of Forms 3, 4 and 5 filed with the Securities
and Exchange Commission and written representations that no other reports were required, during the fiscal year ended December 31,
2013, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them, except that Mr.
Lyons filed one Form 4 late (reporting one transaction).
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics is posted on our website,
www.kingstonecompanies.com. We intend to satisfy the disclosure requirement under Item 5.05(c) of Form 8-K regarding an amendment
to, or a waiver from, our Code of Ethics by posting such information on our website, www.kingstonecompanies.com.
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ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth certain information concerning the compensation for the fiscal years ended December 31, 2013 and
2012 for certain executive officers, including our Chief Executive Officer:
Name and Principal
Position
Barry B. Goldstein
Chief Executive
Officer
Victor J. Brodsky
Chief Financial
Officer
John D. Reiersen
Executive Vice
President,
Kingstone
Insurance Company
__________
Year
Salary
Bonus
Option Awards
Non-Equity
Incentive Plan
Compensation
All Other
Compensation
Total
2013
2012
2013
2012
$
$
$
$
450,000
$
450,000
100,000
-
$
$
- $
- $
120,750(1) $
126,985(2) $
35,857 $
33,825 $
706,607
610,810
249,600
$
240,000
28,000(3) $
$
-
27,672 $
- $
18,405(4) $
6,558(5) $
17,603 $
13,792 $
341,280
260,350
2013
$
149,200
-
$
13,836 $
21,002(4) $
6.000 $
190,038
2012
$
150,200
-
$
- $
7,392(5) $
6,064 $
163,656
(1) Represents bonus compensation of $67,429 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2014, and $53,321
accrued pursuant to the KICO employee profit sharing plan and paid in 2014.
(2) Represents bonus compensation of $110,540 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2013, and
$16,445 accrued pursuant to the KICO employee profit sharing plan and paid in 2013.
(3) Represents bonus compensation of $8,000 for 2012 paid in 2013 and $20,000 accrued in 2013 and paid in 2014.
(4) Represents amounts accrued pursuant to the KICO employee profit sharing plan and paid in 2014.
(5) Represents amounts accrued pursuant to the KICO employee profit sharing plan and paid in 2013.
Employment Contracts
Mr. Goldstein is employed as our President, Chairman of the Board and Chief Executive Officer pursuant to an employment
agreement, dated October 16, 2007, as amended (the “Goldstein Employment Agreement”), that expires on December 31, 2014. Pursuant
to the Goldstein Employment Agreement, effective January 1, 2012, Mr. Goldstein is entitled to receive an annual base salary of $450,000
(“Base Salary”). Mr. Goldstein’s annual base salary had been $350,000 from January 1, 2004 through December 31, 2009 and $375,000
from January 1, 2010 through December 31, 2011. Mr. Goldstein is also entitled to receive annual bonuses based on our net income (which
bonus may not be less than $10,000 per annum). He is also entitled to increases in the Base Salary and other potential additional
compensation as may be determined from time to time by the Board in its sole discretion. A portion of the Base Salary amount payable to
Mr. Goldstein is contractually shared with KICO. Since August 2008, Mr. Goldstein has served as Chief Investment Officer of KICO. Since
January 2012, he has also served as President and Chief Executive Officer of KICO. See “Termination of Employment and Change-in-
Control Arrangements.”
Mr. Reiersen is employed as Executive Vice President of KICO pursuant to an employment agreement, dated September 13, 2006,
as amended (the “Reiersen Employment Agreement”). Pursuant to the Reiersen Employment Agreement, during 2011, Mr. Reiersen was
entitled to receive an annual base salary of approximately $269,000 in his then capacity as President and Chief Executive Officer of
KICO. Pursuant to an amendment to the Reiersen Employment Agreement dated February 28, 2011, the term was extended to December
31, 2014 and Mr. Reiersen has served as Executive Vice President of KICO since January 1, 2012. In such capacity, Mr. Reiersen reports
to the President and Chief Executive Officer of KICO and provides advice and assistance to the President and Chief Executive Officer of
KICO, as well as other officers and management personnel of KICO, with regard to the management and operation of KICO. Since January
1, 2012, Mr. Reiersen’s minimum annual salary has been $100,000 (subject to increase based upon the provision of more than 500 hours of
service per year on behalf of KICO). Pursuant to an amendment to the Reiersen Employment Agreement dated October 14, 2013, the term
was extended from December 31, 2014 to December 31, 2016 and, effective January 1, 2015, Mr. Reiersen will be entitled to receive an
annual base salary of $105,000 (subject to increase based upon the provision of more than 500 hours of service per year on behalf of
KICO). See “Termination of Employment and Change-in-Control Arrangements.”
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number of
Securities
Underlying
Unexercised
Options
Number of
Securities
Underlying
Unexercised
Options
Exercisable Unexercisable
Option Awards
Option
Exercise
Price
188,865
5,000
20,000
2,500
-
$
15,000(1) $
-
7,500(2)
2.50
5.09
$2.35
$5.09
Option
Expiration
Date
03/24/15
08/29/18
07/30/14
08/29/18
Name
Barry B. Goldstein
Victor J. Brodsky
John D. Reiersen
______________________________________
(1) Such options are exercisable to the extent of 5,000 shares effective as of each of August 29, 2014, 2015 and 2016.
(2) Such options are exercisable to the extent of 2,500 shares effective as of each of August 29, 2014, 2015 and 2016.
Termination of Employment and Change-in-Control Arrangements
Pursuant to the Goldstein Employment Agreement and as provided for in his prior employment agreement which expired on April 1,
2007, Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to one and one-half times his then annual salary in
the event of the termination of his employment following a change of control of Kingstone Companies, Inc. Under such circumstances, Mr.
Goldstein’s outstanding options would become exercisable and would remain exercisable until the first anniversary of the termination
date. In addition, in the event Mr. Goldstein’s employment is terminated by Kingstone Companies, Inc. without cause or he resigns with
good reason (each as defined in the Goldstein Employment Agreement), Mr. Goldstein would be entitled to receive his base salary and
bonuses from Kingstone Companies, Inc. for the remainder of the term, and his outstanding options would become exercisable and would
remain exercisable until the first anniversary of the termination date. In addition, in the event Mr. Goldstein’s employment with KICO is
terminated by KICO with or without cause, he would be entitled to receive a lump sum payment from KICO equal to six months base salary.
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Pursuant to the Reiersen Employment Agreement, in the event of the termination of Mr. Reiersen’s employment with KICO, he
would be entitled to severance in an amount equal to the lesser of $50,000 or the remaining salary payable to him through the term of his
agreement.
Compensation of Directors
The following table sets forth certain information concerning the compensation of our directors for the fiscal year ended December
31, 2013:
Name
Michael R. Feinsod
Jay M. Haft
David A. Lyons
Jack D. Seibald
DIRECTOR COMPENSATION
Fees Earned or
Paid in Cash Stock Awards Option Awards
Total
$
$
$
$
35,600
33,950
34,275
37,525
-
-
-
-
- $
35,600
- $
33,950
- $
34,275
- $
37,525
Our non-employee directors are currently entitled to receive compensation for their services as directors as follows:
• $30,000 per annum (including $5,000 per annum for service as a director of KICO)
• up to an additional $5,000 per annum for committee chair (and $1,500 per annum for KICO committee chair)
• $750 per Board meeting attended ($375 if telephonic)
• $500 per committee meeting attended ($250 if telephonic)
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
Security Ownership
The following table sets forth certain information as of March 19, 2014 regarding the beneficial ownership of our shares of common
stock by (i) each person who we believe to be the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each
present director, (iii) each person listed in the Summary Compensation Table under “Executive Compensation,” and (iv) all of our present
executive officers and directors as a group.
Name and Address
of Beneficial Owner
Barry B. Goldstein
15 Joys Lane
Kingston, New York
Michael R. Feinsod
c/o Infinity Capital
200 South Service Road
Roslyn, New York
Jack D. Seibald
1336 Boxwood Drive West
Hewlett Harbor, New York
Jay M. Haft
69 Beaver Dam Road
Salisbury, Connecticut
David A. Lyons
252 Brookdale Road
Stamford, Connecticut
John D. Reiersen
15 Joys Lane
Kingston, New York
Victor J. Brodsky
15 Joys Lane
Kingston, New York
Number of Shares
Beneficially Owned
Approximate
Percent of Class
15.0%
6.9%
5.6%
2.3%
*
*
*
1,115,526
(1)(2)
504,490
(1)(3)
408,147
(1)(4)
170,275
(1)(5)
-0-
27,100
(6)
16,408
(7)
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Benjamin Walden
11 Mill Pond Lane
Centerport, New York
Ronin Capital, LLC
350 N. Orleans Street, Suite 2N
Chicago, Illinois
Wedbush Opportunity Capital, LLC
Wedbush Opportunity Partners, LP
1000 Wilshire Boulevard
Los Angeles, California
Stieven Financial Investors, L.P.
Stieven Financial Offshore Investors, Ltd.
Stieven Capital GP, LLC
Stieven Capital Advisors, L.P.
Stieven Capital Advisors GP, LLC
Joseph A. Stieven
Stephen L. Covington
Daniel M. Ellefson
12412 Powerscourt Drive, Suite 250
St. Louis, Missouri
All executive officers
and directors as a group
(8 persons)
__________
* Less than 1%.
2,500
(8)
584,100
(9)
448,104
(9)(10)
400,000
(9)(11)
*
8.0%
6.2%
5.5%
2,244,446
(1)(2)(3)(4)(5)(6)(7)(8)
30.0%
(1) Based upon Schedule 13D filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
other information that is publicly available.
(2)
(3)
Includes (i) 32,500 shares held in retirement trusts for the benefit of Mr. Goldstein, (ii) 188,865 shares issuable upon
the exercise of currently exercisable options and (iii) 144,161 shares owned by Mr. Goldstein’s wife. The inclusion of
the shares owned by Mr. Goldstein’s wife shall not be construed as an admission that Mr. Goldstein is, for purposes
of Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of such shares.
Includes 487,495 shares owned by Infinity Capital Partners, L.P. (“Partners”). Each of (i) Infinity Capital, LLC
(“Capital”), as the general partner of Partners, (ii) Infinity Management, LLC (“Management”), as the Investment
Manager of Partners, and (iii) Michael Feinsod, as the Managing Member of Capital and Management, the General
Partner and Investment Manager, respectively, of Partners, may be deemed to be the beneficial owners of the shares
held by Partners. Pursuant to Schedule 13D, as amended, filed under the Exchange Act, by Partners, Capital,
Management and Mr. Feinsod, each has sole voting and dispositive power over the shares. Also includes 10,000
shares held in a retirement trust for the benefit of Mr. Feinsod.
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(4)
Pursuant to Schedule 13D filed under the Exchange Act, includes (i) 113,000 shares owned jointly by Mr. Seibald and
his wife, Stephanie Seibald; (ii) 174,824 shares held in a retirement trust for the benefit of Mr. Seibald; and (iii)
100,000 shares owned by SDS Partners I, Ltd. for which Mr. Seibald serves as a general partner. Mr. Seibald has
sole voting and dispositive power over 195,147 shares and shared voting and dispositive power over 213,000
shares. The inclusion of shares that Mr. Seibald does not directly own shall not be deemed an admission that Mr.
Seibald is, for purposes of Section 13(d) of the Exchange Act, the beneficial owner of such shares.
(5)
Includes 576 shares held in a retirement trust for the benefit of Mr. Haft.
(6)
Includes 22,500 shares issuable upon the exercise of currently exercisable options.
(7)
Includes 5,000 shares issuable upon the exercise of currently exercisable options.
(8)
Represents shares issuable upon the exercise of currently exercisable options.
(9)
Based upon Schedule 13G, as amended, filed under the Exchange Act.
(10) Pursuant to Schedule 13G: (i) Wedbush Opportunity Partners, L.P. (the “Fund”) and Wedbush Opportunity Capital,
LLC (the “General Partner”), as the general partner of the Fund, each have shared voting and dispositive power over
448,104 shares; (ii) 448,104 shares are held directly by Jeremy Zhu and the Fund for the benefit of the Fund’s
investors; (iii) the 448,104 shares may be deemed to be indirectly beneficially owned by the General Partner, as the
general partner of the Fund, and Jeremy Q. Zhu, as a Managing Director of the General Partner and lead member of
the General Partner’s investment team that manages the Fund’s portfolio; and (iv) the General Partner and Jeremy
Zhu disclaim beneficial ownership of the shares owned by the Fund, except to the extent of any pecuniary interest
therein.
(11) Pursuant to Schedule 13G: (i) Stieven Financial Investors, L.P. (“SFI”) and Stieven Capital GP, LLC (“SCGP”), the
general partner of SFI, each have shared voting and dispositive power over 326,640 shares; (ii) Stieven Financial
Offshore Investors, Ltd. (“SFOI”) has shared voting and dispositive power over 73,360 shares; and (iii) Stieven Capital
Advisors, L.P. (“SCA”), which serves as the investment manager to SFI and SFOI, Stieven Capital Advisors GP, LLC
(“SCAGP”), which serves as the general partner of SCA, Joseph A. Stieven, as managing member of SCAGP and
SCGP and Chief Executive Officer of SCA, Stephen L. Covington, as managing director of SCA, and Daniel M.
Ellefson, as managing director of SCA, each have shared voting and dispositive power over 400,000 shares.
68
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2013 with respect to compensation plans (including individual
compensation arrangements) under which our common shares are authorized for issuance, aggregated as follows:
• All compensation plans previously approved by security holders; and
• All compensation plans not previously approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
321,365 $
-0-
321,365
Weighted
average
exercise price of
outstanding
options,
warrants and
rights
(b)
3.36
-
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
201,135
-0-
201,135
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Director Independence
Board of Directors
Our Board of Directors is currently comprised of Barry B. Goldstein, Michael R. Feinsod, Jay M. Haft, David A. Lyons and Jack D.
Seibald. Each of Messrs. Feinsod, Haft, Lyons and Seibald is currently an “independent director” based on the definition of independence in
Listing Rule 5605(a)(2) of The Nasdaq Stock Market.
Audit Committee
The members of our Board’s Audit Committee currently are Messrs. Lyons, Feinsod, Haft and Seibald, each of whom is an
“independent director” based on the definition of independence in Listing Rule 5605(a)(2) of The Nasdaq Stock Market and Rule 10A-3(b)(1)
under the Exchange Act.
69
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Nominating and Corporate Governance Committee
The members of our Board’s Nominating and Corporate Governance Committee currently are Messrs. Haft, Feinsod, Lyons and
Seibald, each of whom is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of The Nasdaq Stock
Market.
Compensation Committee
The members of our Board’s Compensation Committee currently are Messrs. Seibald, Feinsod, Haft and Lyons, each of whom is an
“independent director” based on the definition of independence in Listing Rule 5605(a)(2) of The Nasdaq Stock Market.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a summary of the fees billed to us by Marcum LLP, our independent auditors, for professional services
rendered for the fiscal year ended December 31, 2013 and 2012.
Fee Category
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
__________
Fiscal 2013
Fees
254,128 $
1,660
40,359 $
-
296,147 $
Fiscal 2012
Fees
132,500
-
46,164
-
178,664
$
$
$
$
(1)
(2)
(3)
(4)
Audit Fees consist of fees billed for services rendered for the audit of our consolidated financial statements and review of our
condensed consolidated financial statements included in our quarterly reports on Form 10-Q, services rendered in connection with
the filing of Form S-1 (and the related prospectus), Form S-8, and services provided in connection with other statutory or regulatory
filings.
Audit-Related Fees consist of aggregate fees billed for assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under “Audit Fees.”
Tax Fees consist of fees billed by our independent auditors for professional services related to preparation of our U.S. federal and
state income tax returns, representation for the examination of our 2009 federal tax return, and tax advice.
All Other Fees consist of aggregate fees billed for products and services provided by our independent auditors, other than those
disclosed above.
The Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent auditors and
approves in advance any services to be performed by the independent auditors, whether audit-related or not. The Audit Committee reviews
each proposed engagement to determine whether the provision of services is compatible with maintaining the independence of the
independent auditors. Substantially all of the fees shown above were pre-approved by the Audit Committee.
70
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Exhibit
Number
Description of Exhibit
3(a)
3(b)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
Restated Certificate of Incorporation, as amended
By-laws, as amended (1)
2005 Equity Participation Plan
Employment Agreement, dated as of October 16, 2007, between DCAP Group, Inc. and Barry B. Goldstein (2)
Amendment No. 1, dated as of August 25, 2008, to Employment Agreement between DCAP Group, Inc. and Barry B.
Goldstein (3)
Amendment No. 2, dated as of March 24, 2010, to Employment Agreement between Kingstone Companies, Inc. (formerly
DCAP Group, Inc.) and Barry B. Goldstein (4)
Amendment No. 3, dated as of May 10, 2011, to Employment Agreement between Kingstone Companies, Inc. (formerly
DCAP Group, Inc.) and Barry B. Goldstein (5)
Amendment No. 4, dated as of April 16, 2012, to Employment Agreement between Kingstone Companies, Inc. (formerly
DCAP Group, Inc.) and Barry B. Goldstein (6)
Employment Contract, effective on July 1, 2008, between Commercial Mutual Insurance Company and Barry B. Goldstein
(7)
Employment Agreement, dated as of May 10, 2011, between Kingstone Insurance Company and Barry B. Goldstein (5)
Amendment No. 1, dated as of May 14, 2012, to Employment Agreement between Kingstone Insurance Company and
Barry B. Goldstein (8)
Employment Contract, dated as of September 13, 2006, between Commercial Mutual Insurance Company and Successor
Companies and John D. Reiersen (7)
Amendment No. 1, dated as of January 25, 2008, to Employment Contract between Commercial Mutual Insurance Company
and Successor Companies and John D. Reiersen (7)
Amendment No. 2, dated as of July 18, 2008, to Employment Contract between Commercial Mutual Insurance Company
and Successor Companies and John D. Reiersen (7)
71
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10(m)
Amendment No. 3, dated as of February 28, 2011, to Employment Contract between Kingstone Insurance Company (as
successor in interest to Commercial Mutual Insurance Company) and John D. Reiersen (9)
10(n)
10(o)
10(p)
14
23
31(a)
31(b)
32
Amendment No. 4, dated as of October 14, 2013, to Employment Contract between Kingstone Insurance Company (as
successor in interest to Commercial Mutual Insurance Company) and John D. Reiersen (10)
Stock Option Agreement, dated as of March 24, 2010, between Kingstone Companies, Inc. and Barry B. Goldstein (4)
Letter agreement, dated February 23, 2012, between Kingstone Companies, Inc. and Barry Goldstein with regard to
outstanding options (11)
Code of Ethics (12)
Consent of Marcum LLP
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
101.SCH XBRL Taxonomy Extension Schema.
101.CAL
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF
101.DEF XBRL Taxonomy Extension Definition Linkbase.
101.LAB
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE
__________
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
(1)
(2)
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated November 5, 2009 and incorporated
herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated October 16, 2007 and incorporated
herein by reference.
72
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Denotes document filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2008 and
incorporated herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated March 24, 2010 and incorporated
herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated May 10, 2011 and incorporated herein
by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated April 16, 2012 and incorporated
herein by reference.
Denotes document filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and
incorporated herein by reference.
Denotes document filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and
incorporated herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated February 28, 2011 and incorporated
herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated October 14, 2013 and incorporated
herein by reference.
Denotes document filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and
incorporated herein by reference.
Denotes document filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and
incorporated herein by reference.
73
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated: March 31, 2014
KINGSTONE COMPANIES, INC.
By: /s/ Barry B. Goldstein
Barry B. Goldstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Barry B. Goldstein
Barry B. Goldstein
President, Chairman of the Board, Chief Executive Officer,
Treasurer and Director (Principal Executive Officer)
March 31, 2014
/s/ Victor J. Brodsky
Victor J. Brodsky
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
March 31, 2014
/s/ Michael R. Feinsod
Michael R. Feinsod
Jay M. Haft
/s/ David A. Lyons
David A. Lyons
/s/ Jack D. Seibald
Jack D. Seibald
Director and Secretary
March 31, 2014
Director
Director
Director
74
March 31, 2014
March 31, 2014
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
Exhibit 23
We consent to the incorporation by reference in the Registration Statements of Kingstone Companies, Inc. on Form S-3 (No. 333-134102)
and Form S-8 (No. 333-132898, No. 333-173351 and No. 333-191366) of our report dated March 31, 2014, with respect to our audits of the
consolidated financial statements of Kingstone Companies, Inc. and Subsidiaries as of December 31, 2013 and 2012 and for the years then
ended, which report is included in this Annual Report on Form 10-K of Kingstone Companies, Inc. for the year ended December 31, 2013.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 31, 2014
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31a
I, Barry B. Goldstein, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Kingstone Companies, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 31, 2014
/s/ Barry B. Goldstein
Barry B. Goldstein
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31b
I, Victor Brodsky, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Kingstone Companies, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 31, 2014
/s/ Victor Brodsky
Victor Brodsky
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Kingstone Companies, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 31, 2014
/
/s/ Barry B. Goldstein
Barry B. Goldstein
Chief Executive Officer
/s/ Victor Brodsky
Victor Brodsky
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.