SECURITIES & EXCHANGE COMMISSION EDGAR FILING
KINGSTONE COMPANIES, INC.
Form: 10-K
Date Filed: 2017-03-16
Corporate Issuer CIK: 33992
© Copyright 2017, 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, 2016
☐ 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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $54,758,366 based on the closing
sale price as reported on the NASDAQ Capital Market. As of March 13, 2017, there were 10,621,367 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Forward-Looking Statements
PART I
INDEX
Page No.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
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.
Item 16.
Signatures
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
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.
Principal Accountant Fees and Services.
Exhibits and Financial Statement Schedules.
Form 10-K Summary.
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23
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63
63
63
63
64
65
69
72
75
75
76
77
78
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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, which
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 individuals and small businesses in New York State through our wholly owned subsidiary,
Kingstone Insurance Company (“KICO”). KICO is a licensed property and casualty insurance company in New York, New Jersey, Connecticut, Pennsylvania,
Rhode Island and Texas; however, KICO writes substantially all of its business in New York.
Recent Developments
Developments During 2017
● Public Offering of Common Stock
In January and February 2017, we sold a total of 2,692,500 newly issued shares of common stock in a public offering at a public offering price of $12.00
per share. We received net proceeds from the public offering of approximately $30,230,000 after deducting underwriting discounts and commissions, and other
offering expenses. Concurrently, selling shareholders sold a total of 700,000 shares of our common stock. On March 1, 2017, we used $23,000,000 of the net
proceeds from the offering to contribute capital to KICO in support of our ratings upgrade plan and anticipated growth, including geographic and product
expansion. A registration statement relating to the shares that were sold was filed with the Securities and Exchange Commission and became effective in
January 2017.
Developments During 2016
● Expanded Licensing to Additional State; New Jersey Rate Approval
In 2016, KICO expanded its ability to write property and casualty insurance by obtaining a license to write insurance policies in Rhode Island. Also in
2016, KICO’s Homeowners insurance rate, rule, and policy form filing was approved by the New Jersey Department of Banking and Insurance. We anticipate to
start writing business in New Jersey in the first half of 2017.
● A.M. Best Rating
In 2016, A.M. Best revised the outlook to positive from stable for the issuer credit rating (“ICR”) of KICO. A.M. Best also affirmed KICO’s financial
strength rating of B++ (Good) and ICR of “bbb”, and affirmed our ICR of “bb”.
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● Increased Catastrophe Reinsurance Coverage
Effective July 1, 2016, KICO increased the top limit of its catastrophe reinsurance coverage to $252,000,000, which equates to more than a 1-in-250
year storm event according to the primary industry catastrophe model that we follow.
● Continued Quarterly Dividends
Dividends of $.0625 per share were declared on each of February 8, 2016, May 12, 2016, August 11, 2016 and November 10, 2016 and were paid on
March 15, 2016, June 15, 2016, September 15, 2016, and December 15, 2016, respectively.
● Private Placement of Common Stock
In April 2016, we sold 595,238 newly issued shares of common stock to RenaissanceRe Ventures Ltd., a subsidiary of RenaissanceRe Holdings Ltd.
(“RenaissanceRe”), for a purchase price of $8.40 per share. We received $4,808,000 in net proceeds from the sale. RenaissanceRe is a global provider of
catastrophe and specialty reinsurance and insurance.
Developments During 2015
● Reduced Reliance on Quota Share Reinsurance
Effective July 1, 2015, KICO reduced the ceding percentage for its personal lines quota share reinsurance treaty from 55% to 40%. In addition, the
treaty structure was changed from a ‘gross’ to a ‘net’ basis meaning that KICO now pays the entire cost of catastrophe reinsurance instead of sharing the cost
and benefit of this reinsurance with quota share reinsurers. The reduction of the quota share ceding percentage allows KICO to retain a higher portion of its
premiums.
● Implemented Electronic Content Management and Workflow System
In July 2015, KICO implemented Vertafore’s ImageRight® software, an insurance industry leading electronic content management and workflow system.
The new software enhancement has streamlined underwriting and claims processes and created a less paper-intensive environment, allowing for greater
efficiency and increased production to support KICO’s continued growth.
● Expanded Licensing to Additional States
In 2015, KICO expanded its ability to write property and casualty insurance by obtaining licenses to write insurance policies in New Jersey, Connecticut
and Texas.
● A.M. Best Rating
In 2015, the A.M. Best financial strength rating for KICO was upgraded from B+ (Good) to B++ (Good).
● Increased Rate of Dividends Declared
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In November 2015, we increased the quarterly dividends on our common stock from $.05 per share to $.0625 per share. Dividends of $.05 per share
were declared on each of February 6, 2015, May 12, 2015 and August 11, 2015 and were paid on March 13, 2015 and June 15, 2015 and September 14, 2015,
respectively. A dividend of $.0625 per share was declared on November 10, 2015 and was paid on December 14, 2015.
(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 “insureds”). An
insurance policy is a contract between the insurance company and its insureds where the insurance company agrees to pay for losses suffered by the insured
that are covered under the contract. Such contracts are subject to legal interpretation by courts, sometimes involving legislative rulings and/or 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 related to
the 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 for property coverage generally are reported and settled in a relatively short period of time, whereas those for casualty coverage can take many years 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 and fees charged to reinstate a policy
after it has been cancelled for non-payment. 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 can elapse 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 legal 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 is
calculated by adding the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) to 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 prior
to the impact of investment income. After considering investment income and investment gains or losses, insurance companies operating at a combined ratio of
greater than 100% can also be profitable.
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General; Strategy
We are a property and casualty insurance holding company whose principal operating subsidiary is Kingstone Insurance Company (“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 (“producers”). We are licensed to write insurance policies in New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and
Texas.
We seek to deliver an attractive return on capital and to provide consistent earnings growth through underwriting profits and income from our investment
portfolio. Our goal is to allocate capital efficiently to those lines of business that generate sustainable underwriting profits and to avoid lines of business for which
an underwriting profit is not likely. 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 place profitable business with us because we provide excellent, consistent service to policyholders and
claimants and provide a consistent market with stable and competitive rate and commission structures. We offer a wide array of personal and commercial lines
policies, which further 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 managing risk through prudent use of reinsurance in order
to preserve and grow our capital base. We seek to generate underwriting income by writing profitable insurance policies and by effectively managing our other
underwriting and operating expenses. We are pursuing profitable growth by selectively 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, 2016, our gross written premiums totaled $103.2 million, an increase of 13.4% from the $91.0 million in gross written
premium for the year ended December 31, 2015. For the year ended December 31, 2016, our gross written premiums from our continuing lines of business grew
by 14.0% compared to the year ended December 31, 2015.
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, cooperatives and
condominiums, renters, equipment breakdown, service line and personal umbrella policies. Personal lines policies accounted for 76.8% of our gross written
premiums for the year ended December 31, 2016.
Commercial liability - We offer businessowners policies which consist primarily of small business retail, service and office risks without a residential
exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees. In addition, we write special multi-peril
policies for larger and more specialized businessowners risks, including those with limited residential exposures. In the fourth quarter of 2016, we began offering
commercial umbrella policies written above our supporting commercial lines policies. Commercial lines policies accounted for 12.4% of our gross written
premiums for the year ended December 31, 2016.
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Livery physical damage - We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure
only the physical damage portion of insurance for such vehicles, with no liability coverage included. These policies accounted for 10.6% of our gross written
premiums for the year ended December 31, 2016.
Other - We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations. These policies
accounted for 0.2% of our gross written premiums for the year ended December 31, 2016.
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 130 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 selected producers and
developing new producer relationships. KICO has earned an underwriting profit in each of the past ten years, including in 2012 and 2013 when our financial
results were adversely impacted by Superstorm Sandy. The extensive heritage of our insurance company subsidiary and our commitment to the markets in which
we operate is a competitive advantage with producers and policyholders.
Strong Producer Relationships
Within our selected producers’ offices, we compete with other property and casualty insurance carriers available to those producers. 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 biennial performance surveys
conducted by the Professional Insurance Agents of New York and New Jersey of its membership since 2010, KICO was rated as one of the top performing
insurance companies in New York, twice ranking as the top rated carrier among all those surveyed.
We 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 competitors who are focused on a single product. We
provide a multi-policy discount on homeowners policies in order to attract and retain more of this multi-line business. We have had a consistent presence in the
New York market 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 offerings, and our consistent market presence provide a strong foundation for continued 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 and
screens out certain risks based on property reports, individual insurance scoring, information collected from physical property inspections, and driving records.
We maintain certain policy exclusions that reduce our exposure to risks that can create severe losses. We target a more preferred risk profile in order to reduce
adverse selection from risks seeking the lowest premiums by selecting only minimal coverage levels.
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Our underwriting procedures, premium rates and policy terms support the underwriting profitability of our personal lines policies. We apply premium
surcharges for certain coastal properties and maintain deductibles for hurricane-prone exposures in order to provide an appropriate premium rate for the risk of
loss. We manage coastal risk exposure through the use of individual catastrophe risk scoring and through prudent use of reinsurance.
Our underwriting expertise and risk management practices enable us to profitably write personal and commercial lines business in our markets without
the need for frequent rate adjustments, in contrast to many of our competitors. We believe that the consistency in rates and the reliable availability of our
insurance products are important factors in maintaining 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 grow our premium volume while maintaining regulatory capital and other financial ratios within thresholds used
for regulatory oversight purposes.
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 could increase our overall net underwriting profits and improve our ability to obtain an upgrade to our financial strength
rating from A.M. Best.
Experienced Management Team
Our management team has significant expertise in underwriting, agency management and claims management. Barry Goldstein, our Chairman and
Chief Executive Officer, has extensive experience in the insurance industry and managing public companies, serving in his current capacity since 2001.
Benjamin Walden, Executive Vice President and Chief Actuary of KICO, has 27 years of experience with both large and small insurance carriers and has also
worked for actuarial consulting firms. Throughout his career, he has specialized in many of the markets that are a primary focus for KICO. Our underwriting and
claims managers have extensive experience in the insurance industry with an average of 27 years of experience.
Scalable, Low-Cost Operations
We focus on keeping expenses low, but invest in tools and processes that improve the efficiency and effectiveness of underwriting risks and processing
claims. We evaluate the costs and benefits of each new tool or process in order to achieve optimal results. While the majority of our policies are written for risks
in downstate New York, our Kingston, New York location provides a significantly lower cost operating environment. We also take a proactive approach to settling
outstanding claims rather than engaging in protracted litigation, which results in more favorable claim outcomes and reduced reserve uncertainty.
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We have made investments to develop online application and quoting systems for many of our personal lines and commercial products. Currently, 98% of
the business submitted to KICO comes from online raters. 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 all lines of business. We have also leveraged a paperless workflow management and
document storage tool in order to further improve efficiency and reduce costs. Our ability to control the growth of our operating and other expenses while
expanding our operations and growing revenue at a higher rate 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 target niche risk segments for which we have detailed expertise and can take advantage of market conditions. We
monitor results on a regular basis and all of our selected producers are reviewed by management on a quarterly basis.
We believe that our rates are competitive with other carriers’ rates in our markets. We believe that rate 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 selected producers who understand and appreciate the consistent path we have chosen. We carefully underwrite our business utilizing the CLUE
industry claims database, insurance scoring reports, physical inspection of risks and other individual risk underwriting tools. In the event that a material
misrepresentation is discovered in the underwriting application, 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 through application of mandatory hurricane deductibles in these areas. Our claim and underwriting expertise enables us to profitably write
personal lines business in all areas of New York City and Long Island.
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 only distribute through independent agents and have never sought to distribute our products direct to the consumer.
We will not appoint any agency owned or controlled by another carrier which distributes its products direct to the consumer. 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 to a personal and commercial lines underwriter and the producer can call that underwriter directly on any matter. We believe
that the close relationship with their underwriters is a principal reason producers place their business with us. Our online application and quoting systems have
streamlined the process of placing business with KICO. Our producers have access to a KICO website portal that contains links to our policy applications,
quoting screens, policy forms and underwriting guidelines for all lines of business. We send out frequent electronic “Producer Grams” 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.
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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. Our market primarily consists of New York City, Long Island and Westchester County, which
we collectively define as downstate New York. We also offer property and casualty insurance products in other areas of New York State and in the
Commonwealth of Pennsylvania. In addition, we are licensed to write insurance policies in New Jersey, Connecticut, Rhode Island and Texas. KICO’s
Homeowners insurance rate, rule and policy form filing was approved by the New Jersey Department of Banking and Insurance in October 2016. We anticipate
we will start writing business in New Jersey in the first half of 2017. New Jersey is the eleventh largest state in the country with a current estimated population of
approximately 8.9 million, according to the U.S. Census Bureau. New Jersey is the seventh largest property and casualty insurance market in the U.S., and also
the tenth largest homeowners and dwelling fire insurance market in the U.S. The New Jersey homeowners market aligns well with the niche markets that have
generated profitable results in New York, and we believe that our market expertise can be effectively transferred to this new market.
New York State is the fourth largest property and casualty insurance market in the U.S. and also the fourth largest homeowners and dwelling fire
insurance market in the U.S. In 2015, KICO was the 16th largest writer of homeowners and dwelling fire insurance in the State of New York, according to data
compiled by SNL Financial LC. Based on the same data, in 2015, we had a 1.0% market share for this combined group of personal lines property business. 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 limit their rate of premium growth or to decrease their presence in the downstate New York property insurance market and
other similar property insurance markets in northeastern states due to the relatively high coastal population and associated catastrophe risk that exists in the
region.
Given present market conditions, we believe that we have the opportunity to significantly expand the size of our personal and commercial lines business
in both New York and in the other northeastern states in which we are licensed, beginning with New Jersey.
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 LAE associated with specific reported claims, and reserves for losses and
LAE that are incurred but not reported (“IBNR”). We establish these two categories of loss reserves as follows:
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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 we may subsequently
increase or reduce the case reserves as additional facts and information about each claim develops.
IBNR reserves - We also estimate and establish reserves for loss and LAE amounts incurred but not yet reported. IBNR reserves are calculated in bulk
as an estimate of ultimate losses and LAE less reported losses and LAE. There are two types of IBNR. One type includes a provision for claims that have
occurred but are not yet reported or known. Another type of IBNR provides a provision for expected future development on known claims from the evaluation
date until the time claims are settled and closed. Ultimate losses driving the determination of appropriate IBNR levels 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 asbestos and environmental claim liabilities.
We engage an independent external actuarial specialist (the ‘Appointed Actuary’) to opine on our recorded statutory reserves. The Appointed Actuary
estimates a range of ultimate losses, along with a range and recommended central estimate of IBNR reserve amounts. Our carried IBNR reserves are based on
an internal actuarial analysis and reflect management’s best estimate of unpaid loss and LAE liabilities.
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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,
2016
2015
$
$
39,876,500
(16,706,364)
23,170,136
39,912,683
(18,249,526)
21,663,157
27,853,010
(63,349)
27,789,661
23,642,998
(462,998)
23,180,000
16,496,648
8,503,310
24,999,958
13,172,870
8,500,151
21,673,021
25,959,839
15,776,880
41,736,719
$
23,170,136
16,706,364
39,876,500
$
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 2006 through 2016. 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.
The next section of the table sets forth the re-estimates in later years of incurred losses, including payments for the years indicated. The following
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, 2016, 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. Estimates for the liabilities in place as of December 31, 2014 and December 31, 2015 have both developed favorably relative to
initial estimates.
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(in thousands of $)
Reserve for loss
and loss
adjustment
expenses, net of
reinsurance
recoverables
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
redundancy
(deficiency)
(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
Net reserve -
December 31,
* Reinsurance
Recoverable
* Gross reserves -
December 31,
Net re-estimated
reserve
Re-estimated
reinsurance
recoverable
Gross re-estimated
reserve
Gross cumulative
redundancy
(deficiency)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
4,370
4,799
5,823
6,001
7,280
8,520 12,065 17,139 21,663 23,170 25,960
4,844
5,591
5,792
6,260
6,343
6,429
6,886
7,318
7,160
7,069
5,430
5,867
6,433
6,569
6,683
7,245
7,721
7,568
7,527
6,119
6,609
6,729
6,711
7,261
7,727
7,554
7,511
9,261 13,886 18,903 21,200 23,107
7,483
8,289 11,022 16,875 18,332 21,501
9,170 12,968 16,624 18,687
6,235
6,393
6,486
7,182 10,128 12,552 16,767
9,925 12,440
7,766
7,602
9,932
7,615
(2,699)
(2,728)
(1,688)
(1,614)
(2,652)
(3,920)
(4,702)
(1,548)
162
63
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2,018
3,303
4,036
4,471
5,079
5,305
5,594
5,966
6,377
6,468
1,855
3,339
4,339
5,146
5,424
5,738
6,247
6,740
6,875
2,533
3,974
5,054
5,373
5,717
6,224
6,718
6,853
2,307
3,992
4,659
5,238
5,997
6,562
6,749
3,237
5,661
8,221 11,873 13,571
8,500
6,156
4,804
8,833 10,629 12,853
3,201
4,947
6,199
7,737 10,100 13,785
8,585 10,903
8,941
8,503
4,370
4,799
5,823
6,001
7,280
8,520 12,065 17,139 21,663 23,170 25,960
6,523
6,693
9,766 10,512 10,432
9,960 18,420 17,364 18,250 16,707 15,777
10,893 11,492 15,589 16,513 17,712 18,480 30,485 34,503 39,913 39,877 41,737
7,069
7,527
7,511
7,615
9,932 12,440 16,767 18,687 21,501 23,107
11,183 11,151 12,849 12,833 13,486 13,884 27,970 20,218 19,450 16,674
18,252 18,678 20,360 20,448 23,418 26,324 44,737 38,905 40,951 39,781
(7,359)
(7,186)
(4,771)
(3,935)
(5,706)
(7,844)
(14,252)
(4,402)
(1,038)
96
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 remain within a target ratio of net
premiums written to policyholders’ surplus, and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our
obligations to policyholders. Our 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 ratio determined by
management. The business written under a quota share reinsurance structure obligates a reinsurer to assume some portion of the risks involved, and gives the
reinsurer the profit (or loss) associated with such in exchange for a ceding commission. 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, but will allow us to retain more net income from our profitable business.
Our quota share reinsurance treaties in effect for the year ended December 31, 2016 for our personal lines business, which primarily consists of
homeowners’ policies, were covered under the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”) and July 1, 2016/June 30, 2017 treaty year
(“2016/2017 Treaty”). The expired 2015/2016 Treaty was at a 40% quota share percentage and the current 2016/2017 Treaty remains at a 40% quota share
percentage.
Excess of loss contracts provide coverage for individual loss occurrences exceeding a certain threshold. The quota share reinsurance treaties inure to
the benefit of our excess of loss treaties, as the maximum net retention on any single risk occurrence is first limited through the excess of loss treaty, and then
that loss is shared again through the quota share reinsurance treaty. Our maximum net retention under the quota share and excess of loss treaties for any one
personal lines occurrence for dates of loss on or after July 1, 2016 is $500,000. Commercial lines policies are not subject to a quota share reinsurance treaty.
Our maximum net retention under the excess of loss treaties for any one commercial general liability occurrence for dates of loss on or after July 1, 2016 is
$500,000.
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.
Under the 2016/2017 Treaty and 2015/2016 Treaty, KICO is receiving a higher upfront fixed provisional rate than in prior years’ treaties. In exchange for
the higher provisional rate, KICO has a reduced opportunity to earn sliding scale contingent commissions.
The 2016/2017 Treaty and the 2015/2016 Treaty are on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in
prior treaties. Under a “net” arrangement, all catastrophe reinsurance coverage is purchased directly by us. Since we pay for all of the catastrophe coverage,
none of the losses covered under a catastrophic event will be included in the quota share ceded amounts, drastically reducing the adverse impact that a
catastrophic event can have on ceding commissions.
In 2016, we purchased catastrophe reinsurance to provide coverage of up to $252,000,000 for losses associated with a single event. One of the most
commonly used catastrophe forecasting models prepared for us indicates that the catastrophe reinsurance treaties provide coverage in excess of our estimated
probable maximum loss associated with a single more than one-in-250 year storm event. The direct retention for any single catastrophe event is $5,000,000.
Losses on personal lines policies are subject to the 40% quota share treaty, which results in a net retention by us of $3,000,000 of exposure per catastrophe
occurrence. Effective July 1, 2016, we have reinstatement premium protection on the first $20,000,000 layer of catastrophe coverage in excess of $5,000,000.
This protects us from having to pay an additional premium to reinstate catastrophe coverage for an event up to this level.
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Investments
Our investment portfolio, including cash and cash equivalents, and short term investments, as of December 31, 2016 and 2015, is summarized in the
table below by type of investment.
Category
Cash and cash equivalents
Held to maturity
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
Available for sale
Political subdivisions of states,
territories and possessions
Corporate and other bonds
Industrial and miscellaneous
December 31, 2016
December 31, 2015
Carrying
Value
% of
Portfolio
Carrying
Value
% of
Portfolio
$
12,044,520
11.2% $
13,551,372
15.0%
606,427
0.6%
606,389
1,349,916
1.3%
1,417,679
3,138,559
2.9%
3,114,804
0.7%
1.6%
3.4%
8,205,888
7.6%
12,555,098
13.9%
53,685,189
49.9%
44,956,468
49.7%
5.5%
3.2%
7.0%
100.0%
Residential backed mortgage securities
18,537,751
17.2%
4,990,498
Preferred stocks
Common stocks
Total
5,685,001
5.3%
2,915,650
4,302,685
$ 107,555,936
4.0%
100.0% $
6,288,620
90,396,578
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The table below summarizes the credit quality of our fixed-maturity securities available-for-sale as of December 31, 2016 and 2015 as rated by Standard and
Poor’s (or if unavailable from Standard and Poor’s, then Moody’s or Fitch):
Rating
U.S. Treasury securities
Corporate and municipal bonds
AAA
AA
A
BBB
Total corporate and municipal bonds
Residential mortgage backed securities
AA
A
CCC
CC
C
D
Total residential mortgage backed securities
December 31, 2016
December 31, 2015
Percentage of
Percentage of
Fair Market
Fair Market
Fair Market
Fair Market
Value
Value
Value
Value
$
-
0.0% $
-
0.0%
1,801,106
7,236,457
13,944,784
38,908,731
61,891,078
14,143,828
173,973
513,369
-
112,136
3,594,444
18,537,750
2.2%
9.0%
17.3%
48.4%
76.9%
2,218,147
9,060,781
10,639,888
35,592,750
57,511,566
17.7%
0.2%
0.6%
0.0%
0.1%
4.5%
23.1%
-
216,077
457,889
402,558
-
3,913,974
4,990,498
3.5%
14.5%
17.0%
57.1%
92.1%
0.0%
0.3%
0.7%
0.6%
0.0%
6.3%
7.9%
Total
$
80,428,828
100.0% $
62,502,064
100.0%
Additional financial information regarding our investments is presented under the subheading “Investments” in Item 7 of this Annual Report.
Ratings
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 with which they do business and 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. A.M. Best financial strength 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 financial strength 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.
In 2009, KICO, our operating subsidiary, applied for its initial A.M. Best rating, and was assigned a letter rating of B (Fair) by A.M. Best in 2010. KICO’s
financial strength rating was upgraded to B+ (Good) in 2011 and B++ (Good) in 2015. KICO’s current A.M. Best issuer credit rating is “bbb” with a positive
outlook.
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In March, 2017, we contributed $23,000,000 in capital to KICO in connection with our recently completed public offering. We also have been considering
taking certain other actions, including modifying KICO’s personal lines net quota share treaty and enhancing its catastrophe excess of loss reinsurance treaties.
We believe that such completed and contemplated actions could lead to an upgrade of KICO’s financial strength rating to “A- (Excellent)”. An A.M. Best financial
strength rating of A- (Excellent) or better could create additional demand from new producers and policyholders. No assurances can be given, however, that we
will be able to satisfy all of the conditions necessary to achieve a ratings upgrade. KICO also has a Demotech financial stability rating of A (Exceptional) which
generally makes its policies acceptable to mortgage lenders that require homeowners to purchase insurance from highly rated carriers.
Severe Winter Weather
Our predominant market, downstate New York, suffered severe weather during the winters of 2016 and 2015 . We include severe winter weather in our
definition of catastrophe. The catastrophe component of the 2016 and 2015 severe winter was determined by the number of claims in excess of our threshold of
average claims from severe winter weather. These claims were primarily from losses due to frozen pipes, weight of snow and ice, and other water-related
structural damage as a result of excess snow and below normal temperatures for an extended period. The effects of severe winter weather increased our net
loss ratio by 2.3 and 4.3 percentage points in 2016 and 2015, respectively.
The computation to determine contingent ceding commission revenue includes direct catastrophe losses and loss adjustment expenses incurred from
severe winter weather. Such losses increased our ceded loss ratio in our July 1, 2014/June 30, 2015 personal lines quota share treaties which reduced our
contingent ceding commission revenue by $1,300,000 million for the year ended December 31, 2015. Catastrophe losses for 2016 had no impact on our
contingent ceding commission revenue since the ultimate loss ratio used to determine these commissions was not affected by the 2016 severe winter weather.
Due to these impacts on ceding commission levels, the effects of severe winter weather increased our net underwriting expense ratio by 0.0 and 2.7 percentage
points in 2016 and 2015, respectively.
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 “DFS”) 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 acknowledgement
(absence of disapproval) by the DFS.
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Change of Control
The insurance holding company laws of the state of New York require approval by the DFS for 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 DFS (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.
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, and in some instances to regulate unfair trade and claims practices.
KICO is required to file detailed financial statements and other reports with the insurance regulatory authorities in the states in which it is licensed to
transact business. These financial statements are subject to periodic examination by the insurance regulators.
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 insurance regulatory authority. The state regulator 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. Such laws did not affect KICO’s ability to withdraw from the commercial auto market in
New York State.
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 2016, the DFS proposed new comprehensive cybersecurity regulations. In 2017, the regulations were finalized and became effective on March 1,
2017 with transitional implementation periods. When fully implemented, the regulations require covered entities, including KICO, to establish a cybersecurity
policy, a chief information security officer, oversight over third party service providers, penetration and vulnerability assessments, secure systems to maintain an
audit trail, risk assessments to include access privileges to nonpublic information, use of multi-factor authentication, and an incident response plan, among other
provisions. KICO has until August 28, 2017 to become compliant with many of the provisions. Commencing February 15, 2018, and annually thereafter, KICO
must certify compliance to the DFS with the applicable cybersecurity regulatory provisions.
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In 2010, President Obama 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. In December 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). In 2017, the new President indicated that the provisions of this law should be
reviewed.
State Regulatory Examinations
As part of their regulatory oversight process, state regulatory authorities 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 regulators
of other states under guidelines promulgated by the NAIC. The New York DFS commenced its examination of KICO in 2016. As of the date of this Annual
Report, the examination is still in progress.
Risk-Based Capital Regulations
State regulatory authorities impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a benchmark for the
regulation of insurance companies. 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 (“ACL”).
The RBC guidelines define specific capital levels based on a company’s ACL that are determined by the ratio of the company’s total adjusted capital
(“TAC”) to its ACL. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO’s TAC is far above the ACL and is in compliance
with New York’s RBC requirements as of December 31, 2016.
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 36 months, less dividends by KICO paid during such period.
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Insurance Regulatory Information System Ratios
The Insurance Regulatory Information System (“IRIS”) was developed by the NAIC and is intended primarily to assist state insurance regulators in
meeting 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, 2016, KICO was within the usual range for all IRIS ratios.
Accounting Principles
Statutory accounting principles (“SAP”) are a basis of accounting developed by the NAIC. They are used to prepare the statutory financial statements of
insurance companies and to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with
measuring an insurer’s policyholder surplus. 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.
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 types and 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 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 Kingstone Companies, Inc.
from which to pay dividends.
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 insurance underwriting business maintains an executive office
located at 70 East Sunrise Highway, Valley Stream, New York 11581. 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.
Employees
As of December 31, 2016, we had 80 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.
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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 12401 . Our insurance underwriting business is located
principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business also maintains an executive office located at 70 East Sunrise
Highway, Valley Stream, New York 11581, at which we lease 4,985 square feet of space.
We own the building at 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.
2016 Calendar Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015 Calendar Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
$
$
High
Low
$
9.25
9.62
9.39
14.15
High
Low
$
8.22
7.79
9.47
10.00
7.21
8.21
8.45
9.25
7.50
6.11
7.49
8.47
As of March 13, 2017, there were approximately 263 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. Since September
2011 and through December 31, 2016, we have paid quarterly dividends as follows:
Payment Date
September 2011 - June 2012
September 2012 - June 2014
September 2014 -September 2015
December 2015 - December 2016
$
$
$
$
.03
.04
.05
.0625
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.
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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. These restrictions are related to surplus and net investment income. Without the
prior approval of the DFS, dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing
36 months, less dividends paid by KICO during such period. As of December 31, 2016, the maximum distribution that KICO could pay without prior regulatory
approval was approximately $4,385,000, which is based on investment income for the trailing 36 months, net of dividends paid by KICO during such period. 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.
We declared and paid dividends on our common stock as follows:
Common stock dividends declared and paid
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
2016
2015
$
1,941,271
$
1,557,398
There were no purchases of common stock made by us or any “affiliated purchaser” during the quarter ended December 31, 2016.
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 individuals and small businesses in New York State through our wholly owned subsidiary,
Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and
Westchester County. We are also licensed in the States of New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas. In October 2016, a homeowners
rate, rule, and form filing was approved for use by the State of New Jersey. We anticipate writing business there in the first half of 2017.
We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share
reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are
for a one year period. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance
coverage is provided (i.e., ratably over the one year life of the policy). A significant period of time normally elapses between the receipt of insurance premiums
and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized
investment gains and losses on investments.
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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, various loss adjustment expenses
(“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition
costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and
benefits.
Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees, executive
employment costs, and other costs directly associated with being a public company.
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, 2016, we would earn half of the premiums in 2016 and the other half in 2017.
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 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. Through March
31, 2015, we also recognized premium finance fee income on loans financed by a third party finance company.
Loss and loss adjustment expenses incurred . Loss and 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 on
such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.
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Commission expenses and other underwriting expenses . Other underwriting expenses include policy acquisition costs and other expenses related
to the underwriting of policies. 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, and other costs directly associated with being a public company.
Stock-based 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 capital expenditures for information technology projects, office equipment and furniture.
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, cooperative and
condominium, renters, equipment breakdown and service line endorsements, and personal umbrella policies.
Commercial liability: We offer businessowners policies, which consist primarily of small business retail, service, and office risks without a residential
exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees. In addition, we write special multi-peril
policies for larger and more specialized businessowners’ risks, including those with limited residential exposures. In the fourth quarter of 2016, we began offering
commercial umbrella policies written above our supporting commercial lines policies.
Commercial automobile: Until recently we provided liability and physical damage coverage for light commercial vehicles. However, due to the poor
performance of this line, effective October 1, 2014, we decided to no longer accept new commercial auto policies. In February 2015, we decided to no longer
offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of April 30, 2016 we had no commercial
auto policies in force and we have 34 open claims remaining as of December 31, 2016.
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Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure
only the physical damage portion of insurance for such vehicles, with no liability coverage included.
Other: We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations.
Key Measures
We utilize the following key measures in analyzing the results of our insurance underwriting business:
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is
the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
Net underwriting expense ratio: The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its
business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other
underwriting expenses less ceding commission revenue less other income to net premiums earned.
Net combined ratio: The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net
underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and
may not be profitable if investment income is insufficient.
Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It
excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in
combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income,
depreciation and amortization, interest expense and income taxes.
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
consolidated financial statements, our management has utilized information 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 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.
Consolidated Results of Operations
The following table summarizes the changes in the results of our operations for the periods indicated:
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($ in thousands)
Revenues
Direct written premiums
Assumed written premiums
Ceded written premiums
Ceded to quota share treaties in force during the period
Return of premiums previously ceded to prior quota share treaties (1)
Ceded to quota share treaties
Ceded to excess of loss treaties
Ceded to catastrophe treaties
January 1 - June 30 (Net basis in 2016, Gross basis in 2015) (2)
July 1 - December 31 (Net basis in 2016 and 2015) (2)
Total ceded to catastrophe treaties
26,377
-
26,377
1,389
4,575
4,954
9,529
2016
Year ended December 31,
Change
2015
Percent
$
$
103,192
29
103,221
$
91,004
41
91,045
28,701
(5,866)
22,835
1,277
2,079
4,469
6,548
12,188
(12)
12,176
(2,324)
5,866
3,542
112
2,496
485
2,981
Total ceded written premiums
37,295
30,660
6,635
Net written premiums
65,926
60,385
5,541
Change in unearned premiums
Direct and assumed
Ceded to quota share treaties (1)
Change in net unearned premiums
Premiums earned
Direct and assumed
Ceded to quota share treaties (1)
Net premiums earned
Ceding commission revenue
Excluding the effect of catastrophes
Effect of catastrophes (3)
Total ceding commission revenue
Net investment income
Net realized gain (loss) on investments
Other income
Total revenues
(6,104)
1,586
(4,518)
97,116
(35,708)
61,408
11,268
-
11,268
3,116
529
1,115
77,436
(8,433)
(3,340)
(11,773)
82,613
(34,001)
48,612
12,754
(1,281)
11,473
2,564
(50)
1,577
64,176
2,329
4,926
7,255
14,503
(1,707)
12,796
(1,486)
1,281
(205)
552
579
(462)
13,260
13.4%
(29.3) %
13.4%
(8.1) %
(100.0) %
15.5%
8.8%
120.1%
10.9%
45.5%
21.6%
9.2%
(27.6) %
(147.5) %
(61.6) %
17.6%
5.0%
26.3%
(11.7) %
(100.0) %
(1.8) %
21.5%
(1,158.0) %
(29.3) %
20.7%
(1) Effective July 1, 2015, we decreased the quota share ceding rate in our personal lines quota share treaty from 55% to 40% (the “Cut-off”). The Cut-off on
July 1, 2015 resulted in a $5,866,000 return of unearned premiums from our reinsurers that were previously ceded under the personal lines quota share treaty
that expired on June 30, 2015. The $5,866,000 return of premiums previously ceded reduced earned premiums under our quota share, which, in turn, increased
our net premiums earned during the twelve month period after the Cut-off.
(2) Under a “gross” basis catastrophe reinsurance treaty, catastrophe reinsurance coverage is purchased by us only on the net written premiums after the quota
share. Under a “gross” basis, catastrophe losses affect the ceded loss ratio and contingent ceding commissions from quota share reinsurance. Under a “net”
basis catastrophe reinsurance treaty, all catastrophe reinsurance coverage is purchased by us directly, eliminating the impact of a catastrophe on quota share
results. The “net” basis increases our ceded premium for catastrophe reinsurance. See discussion below for Net Written Premiums, Net Premiums Earned and
Contingent Ceding Commissions Earned.
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($ in thousands)
Total revenues
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses excluding the effect of catastrophes
Losses from catastrophes (3)
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 (3)
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 (3)
Net loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Total expenses
Income from operations before taxes
Provision for income tax
Net income
$
2016
Year ended December 31,
Change
2015
Percent
77,436
64,176
13,260
20.7%
37,249
2,337
39,586
10,862
935
11,797
26,387
1,402
27,789
18,327
14,867
1,910
1,125
64,018
13,418
4,518
8,900
$
32,962
4,646
37,608
11,873
2,555
14,428
21,089
2,091
23,180
15,317
12,833
1,504
1,032
53,867
10,309
3,349
6,960
$
4,287
(2,309)
1,978
(1,011)
(1,620)
(2,631)
5,298
(689)
4,609
3,010
2,034
406
93
10,152
3,109
1,169
1,940
13.0%
(49.7) %
5.3%
(8.5) %
(63.4) %
(18.2) %
25.1%
(33.0) %
19.9%
19.7%
15.8%
27.0%
9.0%
18.8%
30.2%
34.9%
27.9%
(3) For the year ended December 31, 2016 and 2015, includes the effects of severe winter weather (which we define as a catastrophe). We define a
“catastrophe” as an event or series of related events that involve multiple first party policyholders, or an event or series of events that produce a number of claims
in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event or series of
events. Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, severe winter weather, tornadoes, hailstorms,
wildfires, tropical storms, and hurricanes.
Key ratios:
Net loss ratio
Net underwriting expense ratio
Net combined ratio
Direct Written Premiums
Year ended December 31,
2016
2015
Percentage
Point Change
Percent Change
45.3%
33.9%
79.2%
47.7%
32.3%
80.0%
(2.4)
1.6
(0.8)
(5.0) %
5.0%
(1.0) %
Direct written premiums during the year ended December 31, 2016 (“2016”) were $103,192,000 compared to $91,004,000 during the year ended
December 31, 2015 (“2015”). The increase of $12,188,000, or 13.4%, was primarily due to an increase in policies in-force during 2016 as compared to 2015.
We wrote more new policies as a result of continued demand for our products in the markets that we serve. Policies in-force increased by 11.7% as of December
31, 2016 compared to December 31, 2015.
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Our growth rate in direct written premiums was dampened somewhat due to the: (1) slowing of growth in our livery physical damage line of business,
and (2) suspension, effective October 1, 2014, of the writing of new policies in our commercial auto line of business due to a history of poor underwriting results.
In February 2015, we made the decision to no longer offer renewals on our existing commercial auto policies beginning with those that expired on or after May
1, 2015. Our direct written premiums in our continuing lines of business grew by 14.0% in 2016 compared to 2015. Policies-in-force in our continuing lines of
business increased by 12.0% as of December 31, 2016 compared to December 31, 2015.
Net Written Premiums and Net Premiums Earned
The following table details the quota share reinsurance ceding rates in effect during 2016 and 2015. For purposes of the discussion herein, the change
in quota share ceding rates on July 1 of each year will be referred to as “the Cut-off”. This table should be referred to in conjunction with the discussions for net
written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.
Quota share reinsurance rates
Personal lines
Year ended December 31, 2016
Year ended December 31, 2015
January 1,
to
June 30,
("2015/2016
Treaty")
July 1,
to
December 31,
("2016/2017
Treaty")
January 1,
to
June 30,
("2014/2015
Treaty")
July 1,
to
December 31,
("2015/2016
Treaty")
40%
40%
55%
40%
See “Reinsurance” below for changes to our personal lines quota share treaty effective July 1, 2016.
Net written premiums increased $5,541,000, or 9.2%, to $65,926,000 in 2016 from $60,385,000 in 2015. Net written premiums include direct and
assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). Our personal
lines business is currently subject to a quota share treaty. A reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded
written premiums, which will result in a corresponding increase to our net written premiums.
Change in quota share ceding rate
Effective July 1, 2015, we decreased the quota share ceding rate in our personal lines quota share treaty from 55% to 40%. The Cut-off of this treaty on
July 1, 2015 resulted in a $5,866,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring personal lines quota share
treaty. We did not change our quota share ceding rates on July 1, 2016, and accordingly, there was no return of unearned premiums from our reinsurers (in
contrast with what occurred on July 1, 2015), thus diminishing the increase in net written premiums in 2016. The table below shows the effect of the $5,866,000
return of ceded premiums on net written premiums for 2015:
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($ in thousands)
2016
Year ended December 31,
2015
Change
Percent
Net written premiums
Return of premiums previously ceded to prior quota share treaties
Net written premiums without the effect of the July 1, 2015 Cut-off
$
$
65,926
-
65,926
$
$
60,385
5,866
54,519
$
$
5,541
(5,866)
11,407
9.2%
na
20.9%
Without the $5,866,000 effect of the Cut-off in 2015, net written premiums increased by $11,407,000, or 20.9%, in 2016 compared to 2015.
The 2016/2017 Treaty and 2015/2016 Treaty are on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in
periods before July 1, 2015.
Change in catastrophe reinsurance from “gross” basis to “net” basis
Most of the premiums written under our personal lines are also subject to our catastrophe treaty. An increase in our personal lines business gives rise to
more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums for catastrophe insurance will increase. This results in an
increase in premiums ceded under our catastrophe treaty, which reduces net written premiums. With the inception of our personal lines quota share treaty being
on a “net” basis effective July 1, 2015, our catastrophe premiums are paid based on all of our direct written premiums subject to the quota share, compared to
catastrophe premiums being paid only on the amount of written premiums that we retained under the “gross” basis that expired on June 30, 2015.
For the year ended December 31, 2016, catastrophe reinsurance was on a “net” basis. For the year ended December 31, 2015, catastrophe
reinsurance was on a “gross” basis through June 30, 2015, and on a “net” basis from July 1, 2015 through December 31, 2015. As a result of the 2015 mid-year
change from “gross” to “net”, comparison between periods in 2016 and 2015 are separated between the six month periods ended June 30 and the six month
periods ended December 31. Ceded catastrophe premiums from January 1, 2016 through June 30, 2016 increased by $2,496,000, or 120.1%, to $4,575,000 for
the six months ended June 30, 2016 from $2,079,000 for the six months ended June 30, 2015. The increase was primarily due the change from “gross” to “net”.
Ceded catastrophe premiums from July 1, 2016 through December 31, 2016 increased by $485,000, or 10.9%, to $4,954,000 for the six months ended
December 31, 2016 from $4,469,000 for the six months ended December 31, 2015. The increase was primarily due to an increase in premiums subject to
catastrophe reinsurance.
Excess of loss reinsurance treaty
In general, barring reductions in rates charged for reinsurance, an increase in written premiums will also increase the premiums ceded under our excess
of loss treaties. This will incrementally reduce our net written premiums. In 2016, our ceded premiums related to excess of loss reinsurance treaties increased by
$112,000 over the ceded premiums for 2015.
Net premiums earned
Net premiums earned increased $12,796,000, or 26.3%, to $61,408,000 in 2016 from $48,612,000 in 2015. The increase was primarily due to us
retaining more earned premiums effective July 1, 2015, as a result of the reduction of the quota share percentage in our personal lines quota share treaty. The
decrease in our quota share ceding percentage from the July 1, 2015 Cut-off gave us a $5,866,000 return of premiums previously ceded, which increased our
net premiums earned during the twelve month periods after the Cut-off. In addition, as premiums written earn ratably over a twelve month period, net premiums
earned in 2016 increased due to the higher net written premiums generated for the twelve month period ended December 31, 2016 compared to the twelve
month period ended December 31, 2015.
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Ceding Commission Revenue
The following table details the quota share provisional ceding commission rates in effect during 2016 and 2015. This table should be referred to in
conjunction with the discussion for ceding commission revenue that follows.
Quota share previsional ceding commission rate
Personal lines
Year ended December 31, 2016
January 1,
to
June 30,
July 1,
to
December 31,
("2015/2016
Treaty")
("2016/2017
Treaty")
Year ended December 31, 2015
January 1,
to
June 30,
July 1,
to
December 31,
("2014/2015
Treaty")
("2015/2016
Treaty")
55%
52%
40%
55%
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:
($ in thousands)
2016
Year ended December 31,
Change
2015
Percent
Provisional ceding commissions earned
$
12,769
$
11,692
$
1,077
9.2%
Contingent ceding commissions earned
Contingent ceding commissions earned excluding
the effect of catastrophes
Effect of catastrophes on ceding commissions earned
Contingent ceding commissions earned
(1,501)
-
(1,501)
1,062
(1,281)
(219)
(2,563)
1,281
(1,282)
(241.3)%
(100.0)%
585.4%
Total ceding commission revenue
$
11,268
$
11,473
$
(205)
(1.8) %
Ceding commission revenue was $11,268,000 in 2016 compared to $11,473,000 in 2015. The decrease of $205,000, or 1.8%, was due to a decrease in
contingent ceding commissions earned, partially offset by an increase in provisional ceding commissions earned.
Provisional Ceding Commissions Earned
We receive a provisional ceding commission based on ceded written premiums. In 2016 our provisional ceding rate was 55% from January 1 through
June 30 under the 2015/2016 Treaty and was reduced to 52% effective July 1, 2016 under the 2016/2017 Treaty. In 2015 our provisional ceding rate was 40%
from January 1 through June 30 under the 2014/2015 Treaty and was increased to 55% effective July 1, 2015 under the 2015/2016 Treaty. The variations in the
ceding commission rate resulted in weighted average rates during 2016 and 2015 of 53.5% and 47.5%, respectively.
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The $1,077,000 increase in provisional ceding commissions earned is due to: (1) an increase in personal lines direct written premiums subject to the
quota share and (2) an increase in the weighted average provisional ceding commission rates as discussed above, partially offset by (1) a decrease in the
amount of premiums subject to provisional ceding commissions due to the reduction in quota share rates to 40% beginning July 1, 2015 and (2) a decrease in
the percentage of ceded premiums subject to quota share under the “net” quota share treaties in effect beginning July 1, 2015 compared to the “gross”
2014/2015 Treaty that expired on June 30, 2015.
Contingent Ceding Commissions Earned
As a result of the increase in the provisional ceding commission rates to 52% under the 2016/2017 Treaty and 55% under the 2015/2016 Treaty
beginning July 1, 2015, from 40% under the 2014/2015 Treaty, we do not have an opportunity to earn as much contingent ceding commissions. Under the “net”
treaty in effect as of July 1, 2015, catastrophe losses in excess of the $4,000,000 retention will fall outside of the quota share treaty and such losses will not
have an impact on contingent ceding commissions, as was the case under previous “gross” treaties. The new “net” structure eliminates the adverse impact that
catastrophe losses can have on contingent ceding commissions.
We receive a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the
ceded loss ratio, the more contingent commission we receive. The amount of contingent ceding commissions we are eligible to receive under the personal lines
quota share treaties detailed in the table above that were in effect during 2016 are subject to change based on losses incurred from claims with accident dates
beginning July 1, 2015. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change
based on losses incurred related to claims with accident dates before July 1, 2015 under those treaties.
In 2015, in addition to the 2015/2016 Treaty, which was effective as of July 1, 2015, our personal lines reinsurance quota share treaty that expired on
June 30, 2015 covered the period from July 1, 2013 to June 30, 2015 (“2013/2015 Treaty”). The computation to arrive at contingent ceding commission revenue
under the 2013/2015 Treaty included catastrophe losses and LAE incurred from severe winter weather during 2015 (see discussion of “Net Loss and LAE”
below). Such losses increased our ceded loss ratio in our 2013/2015 Treaty, which reduced our contingent ceding commission revenue in accordance with the
sliding scale discussed above in 2015 by $1,281,000. Catastrophe losses for 2016 have no impact on our contingent ceding commission revenue since the
ultimate loss ratio used to determine these commissions was not affected by the 2016 severe winter weather. See “Reinsurance” below for changes to our
personal lines quota share treaty effective July 1, 2016.
Net Investment Income
Net investment income was $3,116,000 in 2016 compared to $2,564,000 in 2015. The increase of $552,000, or 21.5%, was due to an increase in
average invested assets in 2016. The increase in cash and invested assets resulted primarily from increased operating cash flows for the period after June 30,
2015. The increase in operating cash flows is due in part from the reduction in quota share rates on July 1, 2015. The reduction in quota share rates results in a
decline in ceded premiums, which leads to more cash flow and more invested funds. The pre-tax equivalent investment yield on estimated annual income,
excluding cash, was 4.26% and 4.77% as of December 31, 2016 and 2015, respectively. The decrease in the pre-tax equivalent investment yield is due to a shift
toward shorter duration investments, which inherently have a lower yield. A reduction in interest rates resulted in an increase to unrealized gains on our portfolio,
which in turn reduced the pre-tax equivalent investment yield.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Other Income
Other income was $1,115,000 in 2016 compared to $1,577,000 in 2015. The decrease of $462,000, or 29.3%, was primarily due to: (1) the $350,000
we received in 2015 as early settlement of the termination agreement that generated placement fees in our premium finance business (see Note 18 to the
Consolidated Financial Statements), and (2) $154,000 we earned in 2015 in connection with the settlement of a liability, partially offset by an increase in
installment and finance fees earned in our insurance underwriting business.
Net Loss and LAE
Net loss and LAE was $27,789,000 in 2016 compared to $23,180,000 in 2015. The net loss ratio was 45.3% in 2016 compared to 47.7% in 2015, a
decrease of 2.4 percentage points.
The following graphs summarize the changes in the components of net loss ratio for the periods indicated:
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During 2016, the net loss ratio decreased compared to 2015 due to a combination of several factors. First, there was a reduction in the impact of severe
winter weather, defined as the losses incurred above those expected in an average winter. In 2016 we recorded 2.3 points of impact from severe winter weather,
compared to 4.3 points in 2015, or a decrease of 2.0 points. In addition, the core loss ratio excluding the impact of severe winter weather and prior year
development decreased to 43.1% in 2016 from 44.4% in 2015, or a decrease of 1.3 points. Partially offsetting these declines, we recorded 0.1 points of favorable
prior year loss development in 2016 compared to 1.0 point of favorable prior year development in 2015, or a decrease in the favorable impact of 0.9 points year-
over-year. The decrease in the core net loss ratio is driven by reduced claim frequency in both our personal and commercial lines business. See table below
under “Additional Financial Information” summarizing net loss ratios by line of business.
Commercial Auto Line of Business
Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. The action was taken following a series of
underwriting and pricing measures which were intended to improve the profitability of this line of business. The actions taken did not yield the hoped for results. In
February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of
December 31, 2016, we had no commercial auto policies in force, compared to 134 policies in force as of December 31, 2015.
The decision to exit this line of business has significantly reduced the adverse impact that associated commercial auto liability claims will have on our
overall results. The following table displays the impact that this decision has had on our loss and LAE reserves over time:
As of
(in thousands except number of
open claims)
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
Commercial Auto
Number of Open Claims
Loss and LAE Reserves
Total Loss and LAE Reserves
Commercial Auto as a
Percentage of Total Loss and
LAE Reserves
170
114
68
34
$
$
$
$
9,185
8,126
4,971
2,434
$
$
$
$
34,503
39,613
39,877
41,737
26.6%
20.5%
12.5%
5.8%
Commercial auto liability loss and LAE reserves account for a rapidly decreasing percentage of our total loss and LAE reserves, and as of December 31,
2016 comprise 5.8% of our total loss and LAE reserves. This line of business was historically subject to a high level of uncertainty and volatility in claim
emergence and loss development. The exit from this line therefore significantly decreases the uncertainty surrounding our overall reserve levels and reduces the
associated volatility in financial results.
Commission Expense
Commission expense was $18,327,000 in 2016 or 18.9 % of direct earned premiums. Commission expense was $15,317,000 in 2015 or 18.6% of direct
earned premiums. The increase of $3,010,000 is due to the increase in direct written premiums in 2016 as compared to 2015 and an increase in bonus
commissions as a result of the decrease in net loss ratio in 2016 as compared to 2015. The increase in the percentage of commission expense to direct earned
premiums to 18.9% in 2016 from 18.6% in 2015 is due the additional bonus commission described above and a change in the mix of business to lines of
business with higher commission rates.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Other Underwriting Expenses
Other underwriting expenses were $14,867,000 in 2016 compared to $12,833,000 in 2015. The increase of $2,034,000, or 15.8%, in other underwriting
expenses was primarily due to expenses directly and indirectly related to growth in direct written premiums. We are also incurring expenses related to our efforts
to expand into the other states in which we recently obtained licensing (“Expansion Expenses”). Expenses directly related to the increase in direct written
premiums primarily consist of underwriting expenses, software usage fees and state premium taxes. Expenses indirectly related to the increase in direct written
premiums primarily consist of salaries along with related other employment costs. Expansion Expenses include salaries and employment costs, professional
fees, IT and data services. Salaries and employment costs were $7,036,000 in 2016 compared to $5,857,000 in 2015. The increase of $1,179,000, or 20.1%,
was due to hiring of additional staff to service our current level of business and anticipated growth in volume. In addition, there were annual rate increases in both
salaries and the cost of employee benefits. Other underwriting expenses as a percentage of direct written premiums increased to 14.4% in 2016 from 14.1% in
2015. Other underwriting expenses as a percentage of direct earned premiums decreased to 15.3% in 2016 from 15.5% in 2015. Salaries and employment
costs, which accounted for 47.3% of other underwriting expenses in 2016, and 45.6% of other underwriting expenses in 2015, were 7.2% of direct earned
premiums in 2016 and 7.1% of direct earned premiums in 2015.
Our net underwriting expense ratio in 2016 was 33.9% compared with 32.3% in 2015. The following table shows the individual components of our net
underwriting expense ratio for the periods indicated:
Ceding commission revenue - provisional
Ceding commission revenue - contingent
Other income
Acquistion costs and other underwriting expenses:
Commission expense
Other underwriting expenses
Net underwriting expense ratio
Years ended
December 31,
2016
2015
Percentage
Point Change
(20.8)%
(24.1)%
2.4
(1.8)
0.5
(2.0)
29.9
24.2
33.9%
31.5
26.4
32.3%
3.3
1.9
0.2
(1.6)
(2.2)
1.6
The increase of 1.6 percentage points was due to the individual components of provisional ceding commission revenue, commission expense and other
underwriting expenses and their relation to the increase in net premiums earned as a result of the additional retention resulting from the Cut-off to our quota
share treaties on July 1, 2015. The increase to the net underwriting expense ratio was impacted more by reductions in the reinsurance ceding commission
revenue components than it was to changes in the acquisition costs and other underwriting expense components.
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company, were $1,910,000 in 2016 compared to $1,504,000 in 2015. The increase in
2016 of $406,000, or 27.0%, was primarily due to an increase in executive bonus compensation.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Depreciation and Amortization
Depreciation and amortization was $1,125,000 in 2016 compared to $1,032,000 in 2015. The increase of $93,000, or 9.0%, in depreciation and
amortization was primarily due to depreciation on newly purchased assets used to upgrade our systems infrastructure and the Kingston, New York home office
building from which we operate.
Income Tax Expense
Income tax expense in 2016 was $4,518,000, which resulted in an effective tax rate of 33.7%. Income tax expense in 2015 was $3,349,000, which
resulted in an effective tax rate of 32.5%. Income before taxes was $13,418,000 in 2016 compared to $10,309,000 in 2015. The increase in the effective tax
rate by 1.2 percentage points in 2016 is primarily a result of permanent tax true ups from 2015.
Net Income
Net income was $8,900,000 in 2016 compared to $6,960,000 in 2015. The increase in net income of $1,940,000, or 27.9%, was due to the
circumstances described above that caused the increase in our net premiums earned, net investment income, and a decrease in our net loss ratio, partially
offset by a decrease in ceding commission revenue and other income, and by increases in other underwriting expenses related to premium growth and other
operating expenses.
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.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Gross written premiums:
Personal lines
Commercial lines
Commercial auto(2)
Livery physical damage
Other(3)
Total
Net written premiums:
Personal lines
Excluding the effect of quota share adjustments on July 1
Return of premiums previously ceded to prior quota share treaties
Personal lines(1)
Commercial lines
Commercial auto(2)
Livery physical damage
Other(3)
Total
Net premiums earned:
Personal lines(1)
Commercial lines
Commercial auto(2)
Livery physical damage
Other(3)
Total
Net loss and loss adjustment expenses:
Personal lines
Commercial lines
Commercial auto(2)
Livery physical damage
Other(3)
Unallocated loss adjustment expenses
Total
Net loss ratio:
Personal lines
Commercial lines
Commercial auto(2)
Livery physical damage
Other(3)
Total
Year ended
December 31,
2016
2015
$
79,256,251
12,759,351
(5,023)
10,955,785
254,153
$ 103,220,517
$
$
$
$
$
$
43,485,866
-
43,485,866
11,413,717
(110,311)
10,955,785
181,130
65,926,187
40,325,585
11,120,890
(10,567)
9,783,792
188,206
61,407,906
16,116,325
5,408,168
(553,450)
4,777,308
249,046
1,792,264
27,789,661
$
$
$
$
$
$
$
$
69,227,233
12,010,892
519,920
9,032,957
253,937
91,044,939
33,899,714
5,866,300
39,766,014
10,922,649
471,135
9,032,957
192,023
60,384,778
29,498,110
10,133,600
1,722,381
7,082,843
175,148
48,612,082
12,513,907
5,931,699
653,898
2,444,555
147,789
1,488,152
23,180,000
40.0%
48.6%
na
48.8%
132.3%
45.3%
42.4%
58.5%
38.0%
34.5%
84.4%
47.7%
__________________________________
(1) See discussions above for Net Written Premiums and Net Premiums Earned, related to change in quota share ceding rate and change in catastrophe
reinsurance from “gross” basis to “net” basis.
(2) Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. In February 2015, we decided to no longer offer
renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015.
(3) “Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory state joint underwriting
association.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2016 and 2015 follows:
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain (loss) 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 underwriting expenses
Net premiums earned
Net Underwriting Expense Ratio
38
Year ended
December 31,
2016
2015
$
$
61,407,906
11,268,241
3,115,583
529,448
1,102,352
77,423,530
48,612,082
11,473,117
2,563,890
(50,546)
992,270
63,590,813
27,789,661
18,327,190
14,866,646
1,123,763
62,107,260
23,180,000
15,317,140
12,833,391
1,028,622
52,359,153
15,316,270
5,208,772
10,107,498
$
11,231,660
3,601,935
7,629,725
$
45.3%
33.9%
79.2%
47.7%
32.3%
80.0%
$
$
33,193,836
(11,268,241)
(1,102,352)
20,823,243
$
$
28,150,531
(11,473,117)
(992,270)
15,685,144
$
61,407,906
$
48,612,082
33.9%
32.3%
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, 2016
Written premiums
Change in 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, 2015
Written premiums
Change in 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
$ 103,191,995
(6,110,225)
97,081,770
$
$
$
28,522
6,091
34,613
$ (37,294,330)
1,585,853
$ (35,708,477)
$
$
65,926,187
(4,518,281)
61,407,906
$
$
37,193,657
2,337,461
39,531,118
$
$
55,257
-
55,257
$ (10,861,730)
(934,984)
$ (11,796,714)
$
$
26,387,184
1,402,477
27,789,661
38.3%
2.4%
40.7%
159.6%
0.0%
159.6%
30.4%
2.5%
32.9%
43.0%
2.3%
45.3%
$
$
91,003,968
(8,436,456)
82,567,512
$
$
40,971
4,255
45,226
$ (30,660,161)
(3,340,495)
$ (34,000,656)
$
$
60,384,778
(11,772,696)
48,612,082
$
$
32,850,817
4,645,762
37,496,579
$
$
111,618
-
111,618
$ (11,873,028)
(2,555,169)
$ (14,428,197)
$
$
21,089,407
2,090,593
23,180,000
39.8%
5.6%
45.4%
246.8%
0.0%
246.8%
34.9%
7.5%
42.4%
43.4%
4.3%
47.7%
39
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, 2016 and 2015 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 net loss ratio (2) (3)
Net loss ratio
Net underwriting expense ratio excluding the
effect of catastrophes
Effect of catastrophe loss on net underwriting
expense ratio (1) (2) (3)
Net underwriting expense ratio
Net combined ratio excluding the effect
of catastrophes
Effect of catastrophe loss on net combined
ratio (1) (2) (3)
Net combined ratio
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue (1)
Less: Other income
Net earned premium
Net Underwriting Expense Ratio
Year ended
December 31,
2016
2015
$
$
61,407,906
11,268,241
1,102,352
48,612,082
11,473,117
992,270
27,789,661
23,180,000
18,327,190
14,866,646
15,317,140
12,833,391
33,193,836
28,150,531
$
12,795,002
$
9,746,938
43.0%
2.3%
45.3%
33.9%
0.0%
33.9%
76.9%
2.3%
79.2%
43.4%
4.3%
47.7%
29.6%
2.7%
32.3%
73.0%
7.0%
80.0%
$
$
33,193,836
(11,268,241)
(1,102,352)
20,823,243
$
$
28,150,531
(11,473,117)
(992,270)
15,685,144
$
61,407,906
$
48,612,082
33.9%
32.3%
_________________________________________________
(1) For the years ended December 31, 2016 and 2015, the effect of severe winter weather, defined as a catastrophe, reduced contingent ceding commission
revenue by $-0- and $1,280,521, respectively.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(2) For the years ended December 31, 2016 and 2015, includes the sum of net catastrophe losses and loss adjustment expenses of $1,402,477 and
$2,090,593, respectively, resulting from severe winter weather.
(3) For the years ended December 31, 2016 and 2015, the effect of catastrophe loss from severe winter weather on our net combined ratio only includes the
direct effects of loss and loss adjustment expenses and ceding commission revenue and does not include the indirect effects of a $84,149 and $324,906,
respectively, decrease in other underwriting expenses.
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, 2016 and 2015:
Available-for-Sale Securities
Category
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Residential mortgage backed
securities
Total fixed-maturity securities
Equity Securities
Total
December 31, 2016
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12
Months
More than
12 Months
Fair
Value
% of
Fair
Value
$
8,053,449
$
199,028
$
(46,589)
$
-
$
8,205,888
9.1%
53,728,395
600,519
(638,113)
(5,612)
53,685,189
59.4%
18,814,784
80,596,628
9,709,385
90,306,013
$
70,682
870,229
701,641
1,571,870
$
(309,273)
(993,975)
(255,301)
(1,249,276)
$
(38,442)
(44,054)
(168,039)
(212,093)
$
18,537,751
80,428,828
9,987,686
90,416,514
$
20.5%
89.0%
11.0%
100.0%
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Category
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Residential mortgage backed
securities
Total fixed-maturity securities
Equity Securities
Total
December 31, 2015
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12
Months
More than
12 Months
Fair
Value
% of
Fair
Value
$
12,139,793
$
431,194
$
(15,889)
$
-
$
12,555,098
17.5%
45,078,044
490,444
(512,427)
(99,593)
44,956,468
62.7%
5,003,292
62,221,129
8,751,537
70,972,666
$
48,375
970,013
585,776
1,555,789
$
(61,169)
(589,485)
(103,721)
(693,206)
$
-
(99,593)
(29,322)
(128,915)
$
4,990,498
62,502,064
9,204,270
71,706,334
$
7.0%
87.2%
12.8%
100.0%
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Held-to-Maturity Securities
December 31, 2016
Category
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12
Months
More than
12 Months
Fair
Value
% of
Fair
Value
U.S. Treasury securities
$
606,427
$
147,612
$
-
$
-
$
754,039
14.2%
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
1,349,916
37,321
-
-
1,387,237
26.2%
3,138,559
72,784
(7,619)
(46,881)
3,156,843
59.6%
Total
$
5,094,902
$
257,717
$
(7,619)
$
(46,881)
$
5,298,119
100.0%
December 31, 2015
Category
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12
Months
More than
12 Months
Fair
Value
% of
Fair
Value
U.S. Treasury securities
$
606,389
$
147,650
$
-
$
-
$
754,039
14.4%
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
1,417,679
70,284
-
(54,189)
1,433,774
27.4%
3,114,804
82,265
(17,980)
(125,807)
3,053,282
58.2%
Total
$
5,138,872
$
300,199
$
(17,980)
$
(179,996)
$
5,241,095
100.0%
U.S. Treasury securities included in held-to-maturity securities are held in trust pursuant to the New York State Department of Financial Services’ minimum
funds requirement.
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of December 31, 2016
and 2015 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, 2016
December 31, 2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
-
650,000
3,838,475
606,427
5,094,902
$
$
-
642,455
3,901,625
754,039
5,298,119
$
$
-
500,000
4,032,483
606,389
5,138,872
$
$
-
496,245
3,990,811
754,039
5,241,095
43
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, 2016 and 2015 as rated by Standard
and Poor’s (or, if unavailable from Standard and Poor’s, then Moody’s or Fitch):
Rating
U.S. Treasury securities
Corporate and municipal bonds
AAA
AA
A
BBB
Total corporate and municipal bonds
Residential mortgage backed securities
AA
A
CCC
CC
C
D
Total residential mortgage backed securities
December 31, 2016
December 31, 2015
Fair Market
Value
Percentage of
Fair Market
Value
Fair Market
Value
Percentage of
Fair Market
Value
$
-
0.0% $
-
0.0%
1,801,106
7,236,457
13,944,784
38,908,731
61,891,078
14,143,828
173,973
513,369
-
112,136
3,594,444
18,537,750
2.2%
9.0%
17.3%
48.4%
76.9%
2,218,147
9,060,781
10,639,888
35,592,750
57,511,566
17.7%
0.2%
0.6%
0.0%
0.1%
4.5%
23.1%
-
216,077
457,889
402,558
-
3,913,974
4,990,498
3.5%
14.5%
17.0%
57.1%
92.1%
0.0%
0.3%
0.7%
0.6%
0.0%
6.3%
7.9%
Total
$
80,428,828
100.0% $
62,502,064
100.0%
The table below details the average yield by type of fixed-maturity security as of December 31, 2016 and 2015:
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
Residential mortgage backed securities
Total
44
December 31,
2016
December 31,
2015
3.44%
3.44%
3.87%
3.55%
3.86%
3.83%
3.85%
4.28%
6.24%
4.26%
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of December 31, 2016 and 2015:
Weighted average effective maturity
Weighted average final maturity
Effective duration
Fair Value Consideration
December 31,
2016
December 31,
2015
5.0
8.3
4.4
5.5
7.3
4.9
As disclosed in Note 4 to the Consolidated Financial Statements, with respect to “Fair Value Measurements,” we define fair value as the price that would
be received to sell an asset or paid to transfer a liability in a transaction involving identical or comparable assets or liabilities between market participants (an
“exit price”). The fair value hierarchy distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s
internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value
hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the
highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and
unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of
December 31, 2016 and December 31, 2015, 65% and 66%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted
market prices.
As more fully described in Note 3 to our Consolidated Financial Statements, “Investments—Impairment Review,” we completed a detailed review of all
our securities in a continuous loss position as of December 31, 2016 and December 31, 2015. As of December 31, 2016 our held-to-maturity debt securities
included an investment in one bond issued by the Commonwealth of Puerto Rico (“PR”). In July 2016, PR defaulted on its interest payment to bondholders. Due
to the credit deterioration of PR, we recorded a credit loss component of other-than-temporary impairment (“OTTI”) on this investment as of June 30, 2016. For
the year ended December 31, 2016, the full amount of the write-down was recognized as a credit component of OTTI in the amount of $69,911 and is included
as a reduction to net realized gains in the consolidated statements of income and comprehensive income. We concluded that the other unrealized losses in
these asset classes are temporary in nature and the result of a decrease in value due to technical spread widening and broader market sentiment, rather than
fundamental collateral deterioration.
The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by length of time the
security has continuously been in an unrealized loss position as of December 31, 2016 and 2015:
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Aggregate
Fair
Value
Unrealized
Losses
December 31, 2016
$
1,067,574
$
(46,589)
3
$
-
$
-
-
$
1,067,574
$
(46,589)
19,859,293
(638,113)
15,918,090
(309,273)
34
30
239,970
(5,612)
675,316
(38,442)
1
6
20,099,263
(643,725)
16,593,406
(347,715)
$
36,844,957
$
(993,975)
67
$
915,286
$
(44,054)
7
$
37,760,243
$
(1,038,029)
$
3,759,850
288,075
$
(241,333)
(13,968)
$
8
1
660,750
424,550
$
(70,571)
(97,468)
$
1
1
4,420,600
712,625
$
(311,904)
(111,436)
Category
Fixed-Maturity Securities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage
backed securities
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
$
4,047,925
$
(255,301)
9
$
1,085,300
$
(168,039)
2
$
5,133,225
$
(423,340)
Total
$
40,892,882
$
(1,249,276)
76
$
2,000,586
$
(212,093)
9
$
42,893,468
$
(1,461,369)
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Aggregate
Fair
Value
Unrealized
Losses
December 31, 2015
$
1,432,005
$
(15,889)
4
$
-
$
-
-
$
1,432,005
$
(15,889)
18,424,609
(512,427)
2,413,980
(61,169)
32
12
636,093
(99,593)
-
-
2
-
19,060,702
(612,020)
2,413,980
(61,169)
$
22,270,594
$
(589,485)
48
$
636,093
$
(99,593)
2
$
22,906,687
$
(689,078)
$
-
2,538,900
$
-
(103,721)
$
-
6
702,000
-
$
(29,322)
-
$
1
-
702,000
2,538,900
$
(29,322)
(103,721)
Category
Fixed-Maturity Securities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage
backed securities
Total fixed-maturity
securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
$
2,538,900
$
(103,721)
6
$
702,000
$
(29,322)
1
$
3,240,900
$
(133,043)
Total
$
24,809,494
$
(693,206)
54
$
1,338,093
$
(128,915)
3
$
26,147,587
$
(822,121)
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
There were 85 securities at December 31, 2016 that accounted for the gross unrealized loss, none of which were deemed by us to be other than
temporarily impaired. There were 57 securities at December 31, 2015 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.
In April 2016 we sold 595,238 newly issued shares of our common stock to RenaissanceRe Ventures Ltd., a subsidiary of RenaissanceRe Holdings Ltd.
(NYSE:RNR) (“RenaissanceRe”), in a private placement. RenaissanceRe is a global provider of catastrophe and specialty reinsurance and insurance. The new
common shares were sold to RenaissanceRe at a price of $8.40 per share. We received net proceeds of approximately $4,808,000 from the private placement.
In June 2016, we invested $3,000,000 of the proceeds in KICO as additional surplus to support its continued growth. We intend to use the remaining net
proceeds of the offering to support the continued growth of KICO, and for general corporate purposes.
On January 31, 2017, we closed on an underwritten public offering of 2,500,000 shares of our common stock. On February 14, 2017, we closed on the
underwriters’ 30-day purchase option for an additional 192,500 shares our common stock. The public offering price for the 2,692,500 shares sold was $12.00 per
share. The aggregate net proceeds to us was approximately $30,230,000. On March 1, 2017, we used $23,000,000 of the net proceeds of the offering to
contribute capital to KICO, to support its ratings upgrade plan and additional growth. The remainder of the net proceeds will be used for general corporate
purposes.
Through December 31, 2016, the primary sources of cash flow for our holding company are dividends received from KICO, subject to statutory
restrictions. For year ended December 31, 2016, KICO paid dividends of $1,950,000 to us.
If the aforementioned sources of cash flow currently available are insufficient to cover our holding company cash requirements, we will seek to obtain
additional financing.
Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the
timing of reinsurance, issuing company settlements and loss payments.
48
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 (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2016
2015
$
$
15,201,025
(19,515,843)
2,807,966
(1,506,852)
13,551,372
12,044,520
$
$
20,401,907
(14,902,052)
(1,855,361)
3,644,494
9,906,878
13,551,372
Net cash provided by operating activities was $15,201,000 in 2016 as compared to $20,402,000 provided in 2015. The $5,201,000 decrease in cash
flows provided by operating activities in 2016 was primarily a result of an increase in cash arising from net fluctuations in assets and liabilities relating to
operating activities of KICO as affected by the growth in its operations which are described above, and an increase in net income (adjusted for non-cash items)
of $1,485,000.
Net cash used in investing activities was $19,516,000 in 2016 compared to $14,902,000 used in 2015. The $4,614,000 increase in cash used in
investing activities is the result of a $21,097,000 increase in acquisitions of invested assets, offset by a $684,000 reduction in the amount of fixed asset
acquisitions in 2016 and collection of a $250,000 note receivable included in other assets, and a $15,559,000 increase in sales or maturities of invested assets.
Net cash provided by financing activities was $2,808,000 in 2016 compared to $1,855,000 used in 2015. The $4,663,000 increase in cash provided by
financing activities is the result of the $4,808,000 net proceeds we received from the private placement of our common stock in April 2016 and a $164,000
decrease in the purchase of treasury stock, offset partially by a $384,000 increase in dividends paid due an increase in the dividend rate and shares
outstanding.
Reinsurance
The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on
paid and unpaid losses and loss adjustment expenses as of December 31, 2016:
($ in thousands)
Maiden Reinsurace Company
Swiss Reinsurance America Corporation
Others
Total
A.M.
Best Rating
A
A+
$
Amount
Recoverable
as of
December 31,
2016
8,625
4,981
13,606
4,490
$
18,096
%
47.7%
27.5%
75.2%
24.8%
100.0%
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.
Our quota share reinsurance treaties are on a July 1 through June 30 fiscal year basis; therefore, for year to date fiscal periods after June 30, two
separate treaties will be included in such periods.
Our quota share reinsurance treaties in effect for the year ended December 31, 2016 for our personal lines business, which primarily consists of
homeowners’ policies, were covered under the 2015/2016 Treaty and the 2016/2017 Treaty. Our quota share reinsurance treaties in effect for the year ended
December 31, 2015 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the 2014/2015 Treaty and the
2015/2016 Treaty.
Our personal lines quota share treaty that covered the July 1, 2013/June 30, 2014 treaty year was a two year treaty that expired on June 30, 2015.
Effective July 1, 2014, we exercised our contractual option to reduce the ceding percentage in the personal lines quota share treaty from 75% to 55%.
Our 2014/2015 Treaty, 2015/2016 Treaty and 2016/2017 Treaty provide for the following material terms:
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
July 1, 2016
to
Treaty Year
July 1, 2015
to
July 1, 2014
to
June 30, 2017
June 30, 2016
June 30, 2015
40%
$
$
$
$
$
$
$
$
$
500,000
833,333
3,666,667
in excess of
833,333
4,000,000
4,500,000
June 30, 2017
$
$
$
40%
$
$
$
450,000
750,000
3,750,000
in excess of
750,000
4,050,000
4,500,000
June 30, 2016
$
$
$
55%
360,000
800,000
3,200,000
in excess of
800,000
3,640,000
4,000,000
June 30, 2015
90%
100%
$
$
$
100,000
4,900,000
5,000,000
June 30, 2017
90%
100%
$
$
$
100,000
2,900,000
3,000,000
June 30, 2016
$
$
$
90%
100%
100,000
2,900,000
3,000,000
June 30, 2015
None
None
None
500,000
$
425,000
$
400,000
None
None
4,000,000
in excess of
500,000
4,000,000
4,500,000
$
$
$
$
4,075,000
in excess of
425,000
4,075,000
4,500,000
$
$
$
$
None
3,600,000
in excess of
400,000
3,600,000
4,000,000
$
$
$
$
$
90%
100%
$
$
$
100,000
4,900,000
5,000,000
June 30, 2017
$
$
$
300,000
1,700,000
in excess of
300,000
$
$
$
300,000
1,700,000
in excess of
300,000
5,000,000
$
$
3,000,000
$ 247,000,000
No
Yes
4,000,000
$
$
2,400,000
$ 176,000,000
Yes
Yes
4,000,000
$
$
1,800,000
$ 137,000,000
Yes
No
Line of Busines
Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded
Risk retained
Losses per occurrence subject to quota share reinsurance coverage
Excess of loss coverage above quota share coverage
Total reinsurance coverage per occurrence
Losses per occurrence subject to reinsurance coverage
Expiration date
Personal Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of coverage
Percent ceded - excess of $1,000,000 dollars of coverage
Risk retained
Total reinsurance coverage per occurrence
Losses per occurrence subject to quota share reinsurance coverage
Expiration date
Commercial Lines:
General liability commercial policies, except for commercial auto
Quota share treaty:
Percent ceded (terminated effective July 1, 2014)
Risk retained
Losses per occurrence subject to quota share reinsurance coverage
Excess of loss coverage above quota share coverage
Total reinsurance coverage per occurrence
Losses per occurrence subject to reinsurance coverage
Commercial Umbrella
Quota share treaty:
Percent ceded - first $1,000,000 of coverage
Percent ceded - excess of $1,000,000 of coverage
Risk retained
Total reinsurance coverage per occurrence
Losses per occurrence subject to quota share reinsurance coverage
Expiration date
Commercial Auto:
Risk retained
Excess of loss coverage in excess of risk retained
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty
Risk retained per catastrophe occurrence (1)
Catastrophe loss coverage in excess of quota share coverage (2) (3)
Severe winter weather aggregate (3)
Reinstatement premium protection (4)
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1. Plus losses in excess of catastrophe coverage.
2. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2016, the duration of a catastrophe
occurrence from windstorm, hail, tornado, hurricane and cyclone was extended to 168 consecutive hours from 120 consecutive hours.
3. From July 1, 2014 through June 30, 2016, catastrophe treaty also covered losses caused by severe winter weather during any consecutive 28 day
period.
4. Effective July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage in excess of $4,000,000. Effective July 1, 2016,
reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of $5,000,000.
The single maximum risks per occurrence to which we are subject under the new treaties effective July 1, 2016 are as follows:
Treaty
July 1, 2016 - June 30, 2017
Extent of Loss
Risk Retained
Personal Lines
Personal Umbrella
Commercial Lines
Commercial Umbrella
Catastrophe (2)
Initial $833,333
$833,333 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $500,000
$500,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $5,000,000
$5,000,000 - $252,000,000
Over $252,000,000
$500,000
None(1)
100%
$100,000
None(1)
100%
$500,000
None(1)
100%
$100,000
None(1)
100%
$3,000,000
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.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The single maximum risks per occurrence to which we are subject under the treaties that expired on June 30, 2016 and 2015 are as follows:
Treaty
Extent of Loss
Risk Retained
Extent of Loss
Risk Retained
July 1, 2015 - June 30, 2016
July 1, 2014 - June 30, 2015
Personal Lines
Personal Umbrella
Commercial Lines
Commercial Auto
Catastrophe (2)
_______________
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $3,000,000
Over $3,000,000
Initial $425,000
$425,000 - $4,500,000
Over $4,500,000
Initial $300,000
$300,000 - $2,000,000
Over $2,000,000
$450,000
Initial $800,000
None(1) $800,000 - $4,000,000
100% Over $4,000,000
$100,000
Initial $1,000,000
None(1) $1,000,000 - $3,000,000
100% Over $3,000,000
$425,000
Initial $400,000
None(1) $400,000 - $4,000,000
100% Over $4,000,000
$300,000
Initial $300,000
None(1) $300,000 - $2,000,000
100% Over $2,000,000
Initial $4,000,000
$4,000,000 - $180,000,000
Over $180,000,000
$2,400,000
Initial $4,000,000
None $4,000,000 - $141,000,000
100% Over $141,000,000
(1) Covered by excess of loss treaties.
(2) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
Inflation
$360,000
None(1)
100%
$100,000
None(1)
100%
$400,000
None(1)
100%
$300,000
None(1)
100%
$1,800,000
None
100%
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, or liquidity that are material to investors.
52
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. These
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, severe winter weather, storms and certain types of terrorism. We have catastrophe reinsurance coverage with regard to losses
of up to $252,000,000. The initial $5,000,000 of losses in a catastrophe are subject to a 40% quota share reinsurance treaty, such that we retain $3,000,000 of
risk per catastrophe occurrence. With respect to any additional catastrophe losses of up to $247,000,000, 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, severe winter weather, 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 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 by
litigation costs. 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.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 with which they do business or 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 (Exceptional), which generally makes its policies acceptable to mortgage lenders that require homeowners
to purchase insurance. All ratings are subject to continuous review; therefore, the retention of these ratings cannot be assured. The inability to obtain an upgrade
to our financial strength rating from A.M. Best or 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 can experience periods of volatility and disruption. In some cases, markets have exerted downward pressure on the
availability of liquidity and credit capacity. In the event that we need access to additional capital to support our operating expenses, make payments on any future
indebtedness, pay for capital expenditures, or increase the amount of insurance that we seek to underwrite or to 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.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, general economic
conditions, 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.
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 or to obtain and maintain an
upgrade to our financial strength rating from A.M. Best.
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 seek other alternatives. Our ability to obtain and maintain an upgrade to our financial strength rating from A.M.
Best depends, in part, on our ability to purchase additional catastrophe reinsurance.
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We intend to prudently reduce our reliance on quota share reinsurance, in part to obtain and maintain an upgrade to our financial strength
rating from A.M. Best; 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. Our ability to obtain
and maintain an upgrade to our financial strength rating from A.M. Best depends, in part, on reducing the amount of premium ceded to reinsurers under our
quota share reinsurance treaty. Any such reduction would result in higher earned premiums and a reduction in ceding commission revenue in future years. Such
reduction 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.
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. Some of our shareholders might consider such transactions to be desirable. Similar regulations
may apply in other states in which we may operate.
The insurance industry is subject to extensive regulation that may affect our operating costs and limit the growth of our business, and
changes within this regulatory environment may 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. These include, 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 state regulatory authorities. 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.
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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 he 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/or to 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.
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 DFS 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, reserve
and off-balance sheet risks. If the amount of our capital falls below certain thresholds, 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 and/or severity of weather events and affect 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.
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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 the 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 36.5% of our gross premiums written for the year ended December 31, 2016. 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.
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 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 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 for 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.
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As a holding company, we are dependent on the results of operations of our subsidiary KICO; 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 subsidiary, KICO. As a holding company with limited operations of
our own, currently the principal sources of our funds are dividends and other payments from KICO. Consequently, we must rely on KICO for our ability to repay
debts, pay expenses and pay cash dividends to our shareholders.
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. Maximum permissible dividends are restricted to the lesser of 10% of surplus or 100% of net investment income (on a statutory
accounting basis) for the trailing 36 months, less dividends paid by KICO during such period. As of December 31, 2016, the maximum permissible distribution
that KICO could pay without prior regulatory approval was approximately $4,385,000.
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 ability to grow our business and to maintain profitable 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 Benjamin Walden, Executive
Vice President and Chief Actuary of KICO. The loss of Mr. Goldstein, Mr. Walden 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. Mr. Goldstein
is a party to an employment agreement with us that expires on December 31, 2019. Mr. Walden is not a party to an employment agreement with KICO.
Difficult conditions in the economy generally could adversely affect our business and operating results.
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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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.
Our business could be adversely affected by a security breach or other attack involving our computer systems or those of one or more of our
vendors.
Our business requires that we develop and maintain computer systems to run our operations and to store a significant volume of confidential data. Some
of these systems rely on third-party vendors, through either a connection to, or an integration with, those third-parties’ systems. In the course of our operations,
we acquire the personal confidential information of our customers and employees. We also store our intellectual property, trade secrets, and other sensitive
business and financial information.
All of these systems are subject to “cyber attacks” by sophisticated third parties with substantial computing resources and capabilities, and to
unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to our systems. Such attacks or actions may
include attempts to:
● steal, corrupt, or destroy data, including our intellectual property, financial data or the personal information of our customers or employees
● misappropriate funds
● disrupt or shut down our systems
● deny customers, agents, brokers, or others access to our systems, or
● infect our systems with viruses or malware.
While we can take defensive measures, there can be no assurance that we will be successful in preventing attacks or detecting and stopping them once
they have begun. Our business could be significantly damaged by a security breach, data loss or corruption, or cyber attack. In addition to the potentially high
costs of investigating and stopping such an event and implementing necessary fixes, we could incur substantial liability if confidential customer or employee
information is stolen. In addition, such an event could cause a significant disruption of our ability to conduct our insurance operations. We have a cyber insurance
policy to protect against the monetary impact of some of these risks. However, the occurrence of a security breach, data loss or corruption, or cyber-attack, if
sufficiently severe, could have a material adverse effect on our business results.
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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.
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.”
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 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. Such stocks can be more volatile than stocks trading in an active public market. Therefore, shareholders have reduced liquidity and may not be
able to sell their shares at the volume, prices and times that they desire.
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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 effective registrations on Form S-3 under the Securities Act registering for resale an aggregate of 1,254,238 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 and an aggregate of 700,000 shares of our common stock issuable under our 2014 Equity Participation Plan. Options to purchase
267,750 shares of our common stock are outstanding under the 2005 plan. Options to purchase 90,000 shares of our common stock are outstanding under the
2014 plan and 578,500 shares are reserved for issuance thereunder. We have also registered up to $9,290,000 of our securities pursuant to a registration
statement on Form S-3 which we may sell from time to time in one or more offerings. The shares subject to the registration statements 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 selling shareholders in future offerings 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.
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 16, 2017, our executive officers and directors beneficially owned 1,266,659 shares of our common stock (including options to purchase
217,500 shares of our common stock), representing 11.7% of the outstanding shares of our common stock.
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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 16 hereof. As a smaller reporting company, we are not
required to provide supplementary financial information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .
None.
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.
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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, 2016.
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 GAAP including those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being
made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –
Integrated Framework (2013) 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, 2016.
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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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .
Executive Officers and Directors
PART III
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
Benjamin Walden
Floyd R. Tupper
Jay M. Haft
Jack D. Seibald
William L. Yankus
Barry B. Goldstein
Age
64
59
49
62
81
56
57
Positions and Offices Held
President, Chairman of the Board, Chief Executive Officer and Director
Chief Financial Officer and Treasurer
Executive Vice President and Chief Actuary, Kingstone Insurance Company
Secretary and Director
Director
Director
Director
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 1997 to 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 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.
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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 Executive Vice President of KICO since February 2017. He also served as
Senior Vice President of KICO from January 2012 to February 2017 and 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.
Benjamin Walden
Mr. Walden has served as Executive Vice President of KICO since February 2017 and as Chief Actuary of KICO since December 2013. From January
2015 to February 2017, he served as Senior Vice President of KICO and from December 2013 to January 2015, he served as Vice President of KICO. From
February 2010 to November 2013, Mr. Walden 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 automobile 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.
Floyd R. Tupper
Mr. Tupper is a certified public accountant in New York City. For over 30 years, Mr. Tupper has counseled high-net worth individuals by creating tax
planning strategies to achieve their goals as well as those of their families. He has also helped small businesses by developing business strategies to meet their
current and future needs. He began his career in public accounting with Ernst & Young LLP prior to becoming self-employed. Mr. Tupper holds an M.B.A. in
Taxation from the New York University Stern School of Business and a B.S. from New York University. Mr. Tupper has served as a director of KICO, and
Chairman of its Audit Committee, since 2006. He also serves as a member of its Investment Committee. From 1990 until 2010, Mr. Tupper served as a Trustee
of The Acorn School in New York City. He was also a member of the school’s Executive Committee and served as its Treasurer from 1990 to 2010. Mr. Tupper
is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He has served as one of
our directors since June 2014 and as our Secretary since June 2015. We believe that Mr. Tupper’s accounting experience, as well as his service on the Board of
KICO since 2006 (including his service as Chairman of its Audit Committee), give him the qualifications and skills to serve as one of our directors.
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Jay M. Haft
Mr. Haft served for more than 15 years as a personal advisor to Victor Vekselberg, a Russian entrepreneur with considerable interests in oil, aluminum,
utilities and other industries. Mr. Haft is 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
Neurotrope, Inc., 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 2009, give him the qualifications and skills to serve as one of our directors.
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Jack D. Seibald
Mr. Seibald is Managing Director – Global Co-Head of Prime Brokerage Services of Cowen Prime Services, LLC. Mr. Seibald co-founded Concept
Capital Markets, LLC (“Concept Capital”) and, until its acquisition by Cowen Group, Inc., served as a Managing Member of the firm. During his tenure with
Concept Capital, Mr. Seibald was involved in the management of all aspects of the firm’s operations, with a particular emphasis on business and client
development and legal matters. Mr. Seibald also served as a member of the Board of Managers of Concept Capital Holdings, LLC, the former parent of Concept
Capital, Concept Capital Administration, LLC, which provided administrative services to Concept Capital and its affiliates, and ConceptONE, LLC, which provides
risk and performance analytic solutions, middle and back office support services, and regulatory reporting services to investment managers. Mr. Seibald had
been affiliated with Concept Capital and its predecessors since 1995 and has extensive experience in prime brokerage, investment management, and
investment research 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 Investment Committee), give him the qualifications and skills to serve as one of our directors.
William L. Yankus
Mr. Yankus brings to the Board over 30 years’ experience in the insurance industry. Since December 2015, Mr. Yankus has served as Managing
Director at Stonybrook Capital, a merchant banker focused on the insurance industry, and since September 2015 has provided insurance-related consulting
services through Pheasant Hill Advisors, LLC. From 2011 to 2015, he was Managing Director – Investment Banking at Stern Agee where he focused on small
and mid-sized insurers. Mr. Yankus served as Managing Director-Insurance Research at Fox-Pitt, Kelton from 1993 to 2009 and then as Head of Insurance
Research at its successor, Macquerie, from 2009 to 2010. Mr. Yankus served as Vice President, Insurance Research at Conning & Company from 1985 to
1993. He is a chartered financial analyst and a member of The CFA Institute and the American Institute of Financial Analysts. Mr. Yankus has served as one of
our directors since March 2016. He received his B.A. degree in Economics and Accounting from The College of the Holy Cross. We believe that Mr. Yankus’
executive level experience in the insurance industry gives him the qualifications and skills to serve as one of our directors.
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. Tupper, Haft, Seibald and Yankus.
Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Tupper is an “audit committee financial expert,” as that is defined in Item 407(d)(5) of Regulation S-K Mr.
Tupper 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, 2016. 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, 2016, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements
applicable to them.
Code of Ethics; Officer and Director Trading Restrictions Policy
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. Our Board of Directors has also adopted an Officer and Director Trading Restrictions Policy for our officers
and directors as well as the officers and directors of KICO. Copies of the Code of Ethics and Officer and Director Trading Restrictions Policy are 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 or Officer and Director Trading Restrictions Policy by posting such information on our website, www.kingstonecompanies.com.
ITEM 11. EXECUTIVE COMPENSATION .
Summary Compensation Table
The following table sets forth certain information concerning the compensation for the fiscal years ended December 31, 2016 and 2015 for certain
executive officers, including our Chief Executive Officer:
Salary
Bonus
575,000
575,000
$
$
200,000
$
$
Non-Equity
Incentive Plan
Compensation
Option
Awards (1)
-
$
93,719(2) $
All Other
Compensation
36,723
36,723
Total
1,464,944
1,220,412
$
$
653,221(4) $
514,970(5) $
$
294,420
280,400 $
34,553
14,377
$
$
-
-
$
$
36,295(6) $
33,521(7) $
20,592
20,041
$
$
385,860
348,339
246,800
235,000
$
$
12,000
-
$
$
28,180(3) $
$
-
42,623(6) $
40,044(7) $
12,391
13,282
$
$
341,994
288,326
69
Name and Principal Position
Barry B. Goldstein
Chief Executive Officer
Victor J. Brodsky
Chief Financial Officer
Benjamin Walden
Senior Vice President and Chief Actuary, Kingstone Insurance Company
__________
Year
2016
2015
2016
2015
2016
2015
$
$
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(1) Amounts reflect the aggregate grant date fair value of grants made in each respective fiscal year computed in accordance with stock-based accounting rules
(FASB ASC Topic 718-Stock Compensation), excluding the effect of estimated forfeitures. Assumptions used in the calculations of these amounts are included in
Note 11 to our Consolidated Financial Statements included in this Annual Report.
(2) In 2014, Mr. Goldstein was granted an option under our 2014 Equity Participation Plan (the “2014 Plan”) for the purchase of 50,000 common shares at an
exercise price of $6.73 per share, subject to stockholder approval of the 2014 Plan. In 2015, stockholder approval of the 2014 Plan was obtained. Such option is
exercisable on the third anniversary of the date of grant.
(3) During 2016, Mr. Walden was granted an option under the 2014 Plan for the purchase of 10,000 common shares at an exercise price of $7.85 per share.
Such option is exercisable to the extent of 2,500 shares as of the date of grant and each of the first, second and third anniversaries of the date of grant.
(4) Represents bonus compensation of $583,127 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2017, and $70,094 accrued pursuant
to the KICO employee profit sharing plan and paid in 2017.
(5) Represents bonus compensation of $445,686 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2016, and $69,284 accrued pursuant
to the KICO employee profit sharing plan and paid in 2016.
(6) Represents amounts accrued pursuant to the KICO employee profit sharing plan for 2016 and paid in 2017.
(7) Represents amounts accrued pursuant to the KICO employee profit sharing plan for 2015 and paid in 2016.
Employment Contract
Mr. Goldstein is employed as our President, Chairman of the Board and Chief Executive Officer pursuant to an employment agreement, dated January
20, 2017 (the “Goldstein Employment Agreement”), that expires on December 31, 2019. Pursuant to the Goldstein Employment Agreement, effective January 1,
2017, Mr. Goldstein is entitled to receive an annual base salary of $630,000 (an increase from $575,000 per annum in effect through December 31, 2016) and an
annual bonus equal to 6% of the Company's consolidated income from operations before taxes, exclusive of our consolidated net investment income (loss) and
net realized gains (losses) on investments (consistent with the bonus payable to Mr. Goldstein through December 31, 2016). In addition, pursuant to the
Goldstein Employment Agreement, Mr. Goldstein is entitled to a long-term compensation payment ("LTC") of between $945,000 and $2,835,000 in the event our
adjusted book value per share (as defined in the Goldstein Employment Agreement) has increased by at least an average of 8% per annum as of December 31,
2019 as compared to December 31, 2016 (with the maximum LTC payment being due if the average per annum increase is at least 14%). In consideration of
certain accomplishments during the three year period ended December 31, 2016, we also paid Mr. Goldstein a bonus in the amount of $200,000. See
“Termination of Employment and Change-in-Control Arrangements.”
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Barry B. Goldstein
Victor J. Brodsky
Benjamin Walden
Benjamin Walden
Option Awards
Number of
Securities
Underlying
Unexercised
Options
Number of
Securities
Underlying
Unexercised
Options
Exercisable
Unexercisable
Option Exercise
Price
Option Expiration
Date
187,500
20,000
10,000
2,500
62,500(1) $
$
-
$
-
7,500(2) $
6.73
5.09
6.60
7.85
08/12/19
08/29/18
12/16/18
3/11/2021
(1) Such options are exercisable on August 12, 2017.
(2) Such options are exercisable to the extent of 2,500 shares on each of March 11, 2017, 2018 and 2019 .
Termination of Employment and Change-in-Control Arrangements
Pursuant to the Goldstein Employment Agreement, in the event that Mr. Goldstein's employment is terminated by us without cause or he resigns for good
reason (each as defined in the Goldstein Employment Agreement), Mr. Goldstein would be entitled to receive his base salary, the 6% bonus and the LTC
payment for the remainder of the term. In addition, in such event, Mr. Goldstein’s vested options would remain exercisable until the first anniversary of the
termination date.
Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to one and one-half times his then annual salary and the target LTC
payment of $1,890,000 in the event of the termination of his employment following a change of control of the Company. Under such circumstances, Mr.
Goldstein’s outstanding options would become exercisable and would remain exercisable until the first anniversary of the termination date.
Compensation of Directors
The following table sets forth certain information concerning the compensation of our directors for the fiscal year ended December 31, 2016:
DIRECTOR COMPENSATION
Name
Jay M. Haft
Jack D. Seibald
Floyd R. Tupper
William L. Yankus
____________________
Fees Earned or
Paid in Cash
$
$
$
$
50,000
$
51,500
$
52,750
$
37,867
$
Stock Awards
Option Awards
Total
-
-
-
-
-
$
50,000
-
$
51,500
-
$
52,750
-
$
37,867
Our non-employee directors are currently entitled to receive annual compensation for their services as directors as follows:
●
●
●
$44,000 (including $6,000 for services as a director of KICO)
an additional $6,000 for services as committee chair (and $1,500 for services as KICO committee chair)
2,000 shares of our common stock which vest in one-third increments over a three year period. None of the shares were vested as of
December 31, 2016.
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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 13, 2017 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.
Number of Shares
Beneficially Owned
Approximate
Percent of Class
873,672
(1) (2)
207,821
(1) (3)
87,090
(1)
50,278
(1) (4)
31,964
(1) (5)
15,334
(1) (6)
500
(1) (7)
8.1%
2.0%
*
*
*
*
*
595,238
(8)
5.6%
1,266,659
(1) (2) (3) (4) (5) (6)
(7)
11.7%
Name and Address
of Beneficial Owner
Barry B. Goldstein
15 Joys Lane
Kingston, New York
Jack D. Seibald
1336 Boxwood Drive West
Hewlett Harbor, New York
Jay M. Haft
69 Beaver Dam Road
Salisbury, Connecticut
Floyd R. Tupper
220 East 57 th Street
New York, New York
Victor J. Brodsky
15 Joys Lane
Kingston, New York
Benjamin Walden
15 Joys Lane
Kingston, New York
William L. Yankus
10 Pheasant Hill Road
Farmington, Connecticut
RenaissanceRe Ventures Ltd.
Renaissance Other Investments
Holding II Ltd.
RenaissanceRe Holdings Ltd.
Renaissance House
12 Crow Lane
Pembrooke HM19
Bermuda
All executive officers
and directors as a group
(7 persons)
____________________
* Less than 1%.
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Based upon Schedule 13D filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and/or other information that is publicly
available.
Includes (i) 187,500 shares issuable upon the exercise of options that are exercisable currently or within 60 days and (ii) 73,168 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 (i) 57,353 shares owned jointly by Mr. Seibald and his wife, Stephanie Seibald; (ii) 88,731 shares held in a retirement trust for the benefit of Mr.
Seibald; and (iii) 50,755 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 99,713 shares and shared voting and dispositive power over 108,108 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) or 13(g) of the Exchange Act, the beneficial owner of
such shares.
Includes 31,460 shares owned by Mr. Tupper’s wife. The inclusion of the shares owned by Mr. Tupper’s wife shall not be construed as an admission that
Mr. Tupper is, for purposes of Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of such shares.
Includes (i) 20,000 shares issuable upon the exercise of currently exercisable options and (ii) 556 shares issuable upon the vesting of restricted stock
within 60 days.
Includes 10,000 shares issuable upon the exercise of options that are exercisable currently or within 60 days and (ii) 334 shares issuable upon the
vesting of restricted stock within 60 days.
Represents shares issuable upon the vesting of restricted stock within 60 days.
Pursuant to Schedule 13G, as amended, RenaissanceRe Ventures Ltd. (“RenaissanceRe Ventures”), a wholly owned subsidiary of Renaissance Other
Investments Holdings II Ltd. (“ROIHL II”), a wholly owned subsidiary of RenaissanceRe Holdings Ltd. (“RenaissanceRe Holdings”), have shared voting
and dispositive power over the 595,238 shares. RenaissanceRe Ventures, ROIHL II and RenaissanceRe Holdings each may be deemed to beneficially
own the 595,238 shares.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2016 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
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted average
exercise price of
outstanding
options, warrants
and rights
(a)
362,750
$
(b)
-
$
362,750
6.62
-
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
602,500
-
602,500
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, Jay M. Haft, Jack D. Seibald, Floyd R. Tupper and William L. Yankus. Each of
Messrs. Haft, Seibald, Tupper and Yankus 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. Tupper, Haft, Seibald and Yankus, 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.
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Nominating and Corporate Governance Committee
The members of our Board’s Nominating and Corporate Governance Committee currently are Messrs. Haft, Seibald, Tupper and Yankus, 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, Haft and Tupper, 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, 2016 and 2015.
Fee Category
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
____________________
Fiscal 2016 Fees
$
$
$
$
$
210,451 $
2,060 $
$
-
$
-
212,511 $
Fiscal 2015 Fees
203,749
-
5,379
-
209,128
(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 Forms S-3 and 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 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .
Exhibit
Number
Description of Exhibit
PART IV
3(a)
3(b)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
14(a)
14(b)
21
23
Restated Certificate of Incorporation, as amended (1)
By-laws, as amended (2)
2005 Equity Participation Plan (3)
2014 Equity Participation Plan (4)
Employment Agreement, dated as of January 20, 2017, between Kingstone Companies, Inc. and Barry B. Goldstein (5)
Employment Agreement, dated as of May 10, 2011, between Kingstone Insurance Company and Barry B. Goldstein (6)
Amendment No. 1, dated as of May 14, 2012, to Employment Agreement between Kingstone Insurance Company and Barry B. Goldstein (7)
Amendment No. 2, dated January 1, 2015, between Kingstone Insurance Company and Barry B. Goldstein
Stock Option Agreement, dated as of August 12, 2014, between Kingstone Companies, Inc. and Barry B. Goldstein (2005 Equity Participation
Plan) (4)
Stock Option Agreement, dated as of August 12, 2014, between Kingstone Companies, Inc. and Barry B. Goldstein (2014 Equity Participation
Plan) (4)
Purchase Agreement, dated April 18, 2016, by and between Kingstone Companies, Inc. and RenaissanceRe Ventures Ltd. (8)
Underwriting Agreement, dated January 25, 2017, among Kingstone Companies, Inc., the selling stockholders named therein and Sandler
O’Neill & Partners, L.P., as representative of the underwriters named therein (9)
Code of Ethics (3)
Officer and Director Trading Restrictions Policy (3)
Subsidiaries
Consent of Marcum LLP
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31(a)
31(b)
32
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)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Denotes document filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2014 and incorporated herein by
reference.
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and incorporated herein by
reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated August 12, 2014 and incorporated herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated January 20, 2017 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 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 April 18, 2016 and incorporated herein by reference.
Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated January 25, 2017 and incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
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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 16, 2017
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
/s/ Victor J. Brodsky
Victor J. Brodsky
/s/ Jay M. Haft
Jay M. Haft
/s/ Floyd R. Tupper
Floyd R. Tupper
/s/ Jack D. Seibald
Jack D. Seibald
/s/ William L. Yankus
William L. Yankus
President, Chairman of the Board,
Chief Executive Officer,
Treasurer and Director (Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
78
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
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, 2016 and
2015, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 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 financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kingstone Companies, Inc. and
Subsidiaries, as of December 31, 2016 and 2015, 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 16, 2017
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consolidated Balance Sheets
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Assets
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
$5,298,119 at December 31, 2016 and $5,241,095 at December 31, 2015)
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
$80,596,628 at December 31, 2016 and $62,221,129 at December 31, 2015)
Equity securities, available-for-sale, at fair value (cost of $9,709,385
at December 31, 2016 and $8,751,537 at December 31, 2015)
Total investments
Cash and cash equivalents
Premiums receivable, net
Reinsurance receivables, net
Deferred policy acquisition costs
Intangible assets, net
Property and equipment, net
Other assets
Total assets
Liabilities
Loss and loss adjustment expense reserves
Unearned premiums
Advance premiums
Reinsurance balances payable
Deferred ceding commission revenue
Accounts payable, accrued expenses and other liabilities
Income taxes payable
Deferred income taxes
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value; authorized 2,500,000 shares
Common stock, $.01 par value; authorized 20,000,000 shares; issued 8,896,335 shares
at December 31, 2016 and 8,289,606 at December 31, 2015; outstanding
7,921,866 shares at December 31, 2016 and 7,328,637 shares at December 31, 2015
Capital in excess of par
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost, 974,469 shares at December 31, 2016 and 960,969 shares
at December 31, 2015
Total stockholders' equity
December 31,
December 31,
2016
2015
$
5,094,902
$
5,138,872
80,428,828
62,502,064
9,987,686
95,511,416
12,044,520
11,649,398
32,197,765
12,239,781
1,350,000
3,011,373
1,442,209
$ 169,446,462
9,204,270
76,845,206
13,551,372
10,621,655
31,270,235
10,835,306
1,757,816
3,152,266
1,095,894
$ 149,129,750
$
41,736,719
54,994,375
1,421,560
2,146,017
6,851,841
5,448,448
-
166,949
112,765,909
$
39,876,500
48,890,241
1,199,376
1,688,922
6,435,068
4,826,603
263,622
672,190
103,852,522
-
-
88,963
37,950,401
72,931
20,563,720
58,676,015
82,896
32,987,082
484,220
13,605,225
47,159,423
(1,995,462)
56,680,553
(1,882,195)
45,277,228
Total liabilities and stockholders' equity
$ 169,446,462
$ 149,129,750
See accompanying notes to these consolidated financial statements.
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Years ended December 31,
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gains (losses) on sales of investments
Other income
Total revenues
Expenses
Loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Total expenses
Income from operations before taxes
Income tax expense
Net income
Other comprehensive loss, net of tax
Gross change in unrealized gains (losses)
on available-for-sale-securities
Reclassification adjustment for (gains) losses
included in net income
Net change in unrealized gains (losses)
Income tax benefit related to items
of other comprehensive income (loss)
Other comprehensive loss, net of tax
Comprehensive income
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
2016
2015
$
61,407,906
11,268,241
3,115,583
529,448
1,115,486
77,436,664
27,789,661
18,327,190
14,866,646
1,909,779
1,124,921
64,018,197
13,418,467
4,518,701
8,899,766
$
48,612,082
11,473,117
2,563,890
(50,546)
1,577,191
64,175,734
23,180,000
15,317,140
12,833,391
1,504,121
1,032,009
53,866,661
10,309,073
3,349,453
6,959,620
(93,718)
(750,716)
(529,448)
(623,166)
211,877
(411,289)
50,546
(700,170)
238,058
(462,112)
$
8,488,477
$
6,497,508
$
$
1.15
1.14
$
$
0.95
0.94
7,736,594
7,807,263
7,331,114
7,377,880
Dividends declared and paid per common share
$
0.2500
$
0.2125
See accompanying notes to these 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, 2016 and 2015
Preferred Stock
Common Stock
Capital
in Excess
Shares
Amount
Shares
Amount
of Par
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Treasury Stock
Shares
Amount
Total
8,235,095
$
82,351
$ 32,873,383
$
946,332
$
8,203,003
926,338
$ (1,604,173) $ 40,500,896
8,289,606
82,896
32,987,082
484,220
13,605,225
960,969
(1,882,195) 45,277,228
-
(462,112)
-
-
-
(462,112)
-
-
-
-
-
-
-
-
-
-
-
-
(1,557,398)
6,959,620
-
-
-
-
-
-
-
-
34,631
-
-
(278,022)
-
-
134,185
(243,662)
223,721
-
(278,022)
(1,557,398)
6,959,620
-
-
-
-
-
-
-
-
-
-
-
-
(1,941,271)
8,899,766
-
-
-
-
-
-
-
-
4,807,631
106,882
563
54,310
13,500
-
-
(113,267)
-
-
(113,267)
(1,941,271)
8,899,766
8,896,335
$
88,963
$ 37,950,401
$
72,931
$ 20,563,720
974,469
$ (1,995,462) $ 56,680,553
-
(411,289)
-
-
-
(411,289)
Balance, January 1,
2015
Stock-based
compensation
Shares deducted
from exercise of
stock
options for payment
of withholding taxes
Excess tax benefit
from exercise
of stock options
Exercise of stock
options
Acquisition of
treasury stock
Dividends
Net income
Change in
unrealized losses
on available-
for-sale securities,
net of tax
Balance,
December 31, 2015
Proceeds from
private placement,
net of
closing costs of
$192,369
Stock-based
compensation
Excess tax benefit
from exercise
of stock options
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, 2016
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
134,185
(30,755)
(308)
(243,354)
-
-
223,721
85,266
853
(853)
-
-
-
-
-
-
-
-
595,238
5,952
4,801,679
-
-
-
-
106,882
563
11,491
115
54,195
-
-
-
-
-
-
-
-
-
-
-
-
-
-
See accompanying notes to these consolidated financial statements.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows provided by operating activities:
2016
2015
$
8,899,766
$
6,959,620
Net realized (gains) losses 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
Increase (decrease) in operating liabilities:
Loss and loss adjustment expense reserves
Unearned premiums
Advance premiums
Reinsurance balances payable
Deferred ceding commission revenue
Accounts payable, accrued expenses and other liabilities
Net cash flows provided by operating activities
Cash flows from investing activities:
Purchase - fixed-maturity securities available-for-sale
Purchase - equity securities available-for-sale
Sale or maturity - fixed-maturity securities available-for-sale
Sale - equity securities available-for-sale
Acquisition of fixed assets
Other investing activities
Net cash flows used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
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
(Decrease) 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
(529,448)
1,124,921
449,632
106,882
(563)
(293,364)
(1,027,743)
-
(927,530)
(1,404,475)
(615,681)
1,860,219
6,104,134
222,184
457,095
416,773
358,223
15,201,025
(36,551,218)
(7,464,764)
17,752,130
7,073,773
(576,212)
250,448
(19,515,843)
4,807,631
54,310
-
563
(113,267)
(1,941,271)
2,807,966
50,546
1,032,009
323,773
134,185
(223,721)
(226,932)
(1,674,756)
1,301,549
4,305,041
(1,849,325)
224,211
(36,183)
8,432,200
192,794
(407,441)
478,528
1,385,809
20,401,907
(19,152,457)
(3,766,972)
6,577,943
2,689,113
(1,260,519)
10,840
(14,902,052)
-
-
(243,662)
223,721
(278,022)
(1,557,398)
(1,855,361)
$
$
(1,506,852)
13,551,372
12,044,520
$
$
3,644,494
9,906,878
13,551,372
$
6,028,671
$
3,596,754
Supplemental schedule of non-cash investing and financing activities:
Value of shares deducted from exercise of stock options for payment of withholding taxes
$
-
$
243,662
See accompanying notes to these consolidated financial statements.
F-6
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, 2016 AND 2015
Note 1 - Nature of Business
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned subsidiary, Kingstone Insurance Company (“KICO”),
underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and brokers. KICO is a licensed
insurance company in the States of New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO writes substantially all of its
business in New York. Through March 31, 2015, Kingstone, through its wholly owned subsidiary, Payments Inc., a licensed premium finance company in the
State of New York, received fees for placing contracts with a third party licensed premium finance company (see Note 18 – Premium Finance Placement Fees).
Note 2 – Summary of Significant Accounting Policies
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; (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 revenues, net of premiums ceded to reinsurers, are 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
premiums 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 the contracts are placed with the third party premium finance company. Premium finance
placement fees are included in “Other income” in the accompanying consolidated statements of income and comprehensive income (see Note 18 – Premium
Finance Placement Fees).
F-7
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, 2016 AND 2015
Liability for Loss and Loss Adjustment Expenses (“LAE”) Reserves
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 losses and LAE is estimated on an undiscounted basis, using individual case-basis valuations, statistical analyses and various
actuarial reserving methodologies. 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. Adjustments to these estimates are reflected in expense for the period in which the estimates are changed. Because of the nature of the
business historically written, management believes that the Company has limited exposure to environmental claim liabilities.
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. This is done by reinsuring certain levels of risk in various areas of exposure with a panel of financially secure reinsurance carriers.
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 recorded in the consolidated financial statements.
Adjustments to these estimates are reflected in the period in which the estimates are changed. Loss and LAE incurred as presented in the consolidated
statement of income and comprehensive income are net of reinsurance recoveries.
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.
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, 2016 and 2015. The Company
did not expense any uncollectible reinsurance for the years ended December 31, 2016 and 2015. 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 material adverse effect on the consolidated financial statements as well as KICO’s ability to meet its regulatory capital
and surplus requirements.
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, 2016 AND 2015
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.
Investments
The Company classifies 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 the consolidated statements of stockholders’
equity. Realized gains and losses are determined on the specific identification method and recognized in the consolidated statements of income and
comprehensive income.
Investment income is accrued to the date of the consolidated 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, 2016 and 2015, due and accrued investment
income was approximately $694,000 for both periods and is included in other assets on the accompanying consolidated balance sheets.
Premiums Receivable
Premiums receivable are presented net of an allowance for doubtful accounts of approximately $212,000 and $231,000 as of December 31, 2016 and 2015,
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
$98,000 and $72,000 were written off for the years ended December 31, 2016 and 2015, respectively.
Deferred Policy Acquisition Costs
Deferred 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.
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, 2016 AND 2015
Intangible Assets
The Company has recorded acquired identifiable 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. No impairment losses from intangible assets were recognized for the years ended December 31, 2016 and 2015.
Property and Equipment
Building and building improvements, furniture, computer equipment, and software are reported at cost less accumulated depreciation. Depreciation 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. At December 31, 2016 and 2015, 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. At December 31, 2016, 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 premium and
reinsurance receivables. Investments are diversified through many industries and geographic regions based upon KICO’s Investment Committee’s guidelines,
which employs a variety of investment strategies. The Company believes that no significant concentration of credit risk exists with respect to investments. At
times, cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not
experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk. Cash equivalents are not insured
by the FDIC.
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, 2016 AND 2015
As of December 31, 2016 and 2015, the Company had deposits of cash equivalents as follows:
Collateralized bank repurchase agreement (1)
Money market fund
Total
December 31,
December 31,
2016
2015
$
$
6,268,647
3,121,155
9,389,802
$
$
3,992,509
7,505,531
11,498,040
(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, 2016, the outstanding premiums receivable balance is generally diversified due to the large number of individual insureds comprising the
Company’s customer base. The Company’s customer base 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 of 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.
See Note 7 for reinsurance recoverables on unpaid and paid losses by reinsurer. 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 in excess of 10% of the total subject the Company to concentration risk for the years ended December 31, 2016
and 2015 as follows:
Personal Lines
Commercial Lines
Livery physical damage
Total premiums earned subject to concentration
Premiums earned not subject to concentration
Total premiums earned
Use of Estimates
Years ended December 31,
2016
2015
76.8%
12.8%
10.1%
99.7%
0.3%
100.0%
75.4%
13.6%
na
89.0%
11.0%
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
estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition,
estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by
management. On an on-going basis, management reevaluates its assumptions and the methods for calculating these estimates. Actual results may differ
significantly from the estimates and assumptions used in preparing the consolidated financial statements.
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, 2016 AND 2015
Earnings per share
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 is initiated. Advertising costs are included in other underwriting expenses in the accompanying
consolidated statements of income and comprehensive income, and were approximately $169,000 and $75,000 for the years ended December 31, 2016 and
2015, respectively.
Stock-based Compensation
Stock-based compensation expense in 2016 and 2015 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award less an estimate for anticipated forfeitures. The Company uses the “simplified” method to estimate the expected term of
the options because the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term.
Comprehensive Income
Comprehensive income refers to revenue, expenses, gains and losses that 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 and losses on available-for-sale securities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with
Customers (Topic 606). The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to
customers in an amount equal to the consideration the entity receives or expects to receive. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08 and ASU
2016-10, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is
permitted for annual reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The
Company does not expect these amendments to have a material effect on its consolidated financial statements.
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, 2016 AND 2015
In January 2016, FASB issued ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The primary change for the Company
is expected to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income. The updated guidance is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect the updated guidance will have on
its consolidated financial statements.
In February 2016, FASB issued ASU 2016-02 – Leases (Topic 842). Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on
the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future
minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are
discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will
vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial
portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such
leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify
as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. The guidance will be effective for the Company for
reporting periods beginning after December 15, 2018. The Company will apply the guidance using a modified retrospective approach. Early application is
permitted. The Company does not expect the adoption of ASU 2016-02 to have a significant impact on its consolidated results of operations, financial position or
cash flows.
In March 2016, FASB issued ASU 2016-09 – Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments are intended to improve the accounting for employee share-based payments. These amendments to current accounting guidance will require
all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than through additional paid in capital in
the equity section of the balance sheet. The amendments also permit an employer to repurchase an employee’s shares at the maximum statutory tax rate in the
employee’s applicable jurisdiction for tax withholding purposes without triggering liability accounting. Finally, the amendments permit entities to make a one-time
accounting policy election to account for forfeitures as they occur. Specific adoption methods depend on the issue being adopted and range from prospective to
retrospective adoption. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. Early adoption is permitted; however all amendments must be adopted in the same period. The Company is evaluating whether the
adoption of ASU 2016-09 will have a significant impact on its consolidated results of operations, financial position or cash flows.
In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The
revised accounting guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting
for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020.
The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
F-13
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, 2016 AND 2015
In August 2016, FASB issued ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The revised
ASU provides accounting guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or
lacking in specific guidance. ASU 2016-15 will be effective for the Company for reporting periods beginning after December 15, 2018. Early adoption is
permitted, including adoption in an interim period. The Company is currently evaluating the effect the updated guidance will have on its consolidated statement
of cash flows.
In December 2016, FASB issued ASU 2016-19 – Technical Corrections and Improvements (Amendment to a Number of Topics in FASB Accounting Standards
Codification). ASU 2016-19 is part of an ongoing FASB project to facilitate Codification updates for non-substantive technical corrections, clarifications, and
improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. The ASU will
apply to all reporting entities within the scope of the affected accounting guidance. The amendments that require transition guidance are effective for all entities
for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted for the amendments that require transition guidance. All
other amendments were effective on issuance. The Company does not expect the adoption of ASU 2016-19 to have a significant impact on its consolidated
results of operations, financial position or cash flows.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position,
results of operations and cash flows, or do not apply to its operations.
Note 3 - Investments
Available-for-Sale Securities
The amortized cost and fair value of investments in available-for-sale fixed-maturity securities and equity securities as of December 31, 2016 and December 31,
2015 are summarized as follows:
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, 2016 AND 2015
Cost or
Amortized
Cost
Gross
Unrealized
Gains
December 31, 2016
Gross Unrealized Losses
Less than 12
Months
More than 12
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
$ 8,053,449
$
199,028
$
(46,589)
$
-
$ 8,205,888
$
152,439
53,728,395
600,519
(638,113)
(5,612)
53,685,189
(43,206)
18,814,784
80,596,628
5,986,588
3,722,797
9,709,385
70,682
870,229
10,317
691,324
701,641
(309,273)
(993,975)
(241,333)
(13,968)
(255,301)
(38,442)
(44,054)
18,537,751
80,428,828
(277,033)
(167,800)
(70,571)
(97,468)
(168,039)
5,685,001
4,302,685
9,987,686
(301,587)
579,888
278,301
$ 90,306,013
$ 1,571,870
$ (1,249,276)
$
(212,093)
$ 90,416,514
$
110,501
Cost or
Amortized
Cost
Gross
Unrealized
Gains
December 31, 2015
Gross Unrealized Losses
Less than 12
Months
More than 12
Months
Fair
Value
Net
Unrealized
Gains/
(Losses)
$ 12,139,793
$
431,194
$
(15,889)
$
-
$ 12,555,098
$
415,305
45,078,044
490,444
(512,427)
(99,593)
44,956,468
(121,576)
5,003,292
62,221,129
2,874,173
5,877,364
8,751,537
48,375
970,013
70,799
514,977
585,776
(61,169)
(589,485)
-
(103,721)
(103,721)
-
(99,593)
4,990,498
62,502,064
(29,322)
-
(29,322)
2,915,650
6,288,620
9,204,270
(12,794)
280,935
41,477
411,256
452,733
$ 70,972,666
$ 1,555,789
$
(693,206)
$
(128,915)
$ 71,706,334
$
733,668
F-15
Category
Fixed-Maturity Securities:
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Residential mortgage backed
securities
Total fixed-maturity securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
Total
Category
Fixed-Maturity Securities:
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Residential mortgage backed
securities
Total fixed-maturity securities
Equity Securities:
Preferred stocks
Common stocks
Total equity securities
Total
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, 2016 AND 2015
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, 2016 and 2015 is shown below:
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
More than 10 years
Residential mortgage backed securities
Total
Held-to-Maturity Securities
December 31, 2016
December 31, 2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
1,752,501
29,541,568
30,487,775
-
18,814,784
$ 80,596,628
$
1,765,795
29,913,308
30,211,974
-
18,537,751
$ 80,428,828
$
827,246
17,146,349
37,877,726
1,366,516
5,003,292
$ 62,221,129
$
837,918
17,393,571
37,884,450
1,395,627
4,990,498
$ 62,502,064
The amortized cost and fair value of investments in held-to-maturity fixed-maturity securities as of December 31, 2016 and 2015 are summarized as follows:
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, 2016
U.S. Treasury securities
$
606,427
$
147,612
$
-
$
-
$
754,039
$
147,612
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
1,349,916
37,321
-
-
1,387,237
37,321
3,138,559
72,784
(7,619)
(46,881)
3,156,843
18,284
Total
$
5,094,902
$
257,717
$
(7,619)
$
(46,881)
$
5,298,119
$
203,217
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, 2016 AND 2015
December 31, 2015
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)
U.S. Treasury securities
$
606,389
$
147,650
$
-
$
-
$
754,039
$
147,650
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
1,417,679
70,284
-
(54,189)
1,433,774
16,095
3,114,804
82,265
(17,980)
(125,807)
3,053,282
(61,522)
Total
$
5,138,872
$
300,199
$
(17,980)
$
(179,996)
$
5,241,095
$
102,223
Held-to-maturity U.S. Treasury 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, 2016
and 2015 is shown below:
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
More than 10 years
Total
Investment Income
December 31, 2016
December 31, 2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
-
650,000
3,838,475
606,427
5,094,902
$
$
-
642,455
3,901,625
754,039
5,298,119
$
$
-
500,000
4,032,483
606,389
5,138,872
$
$
-
496,245
3,990,811
754,039
5,241,095
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
F-17
Year ended
December 31,
2016
2015
$ 2,668,148
557,919
19,047
794
3,245,908
$ 2,308,993
503,363
7,314
1
2,819,671
130,325
$ 3,115,583
255,781
$ 2,563,890
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, 2016 AND 2015
Proceeds from the sale and maturity of fixed-maturity securities were $17,752,130 and $6,577,943 for the years ended December 31, 2016 and 2015,
respectively.
Proceeds from the sale of equity securities were $7,073,773 and $2,689,113 for the years ended December 31, 2016 and 2015, 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
Other-than-temporary impairment losses:
Fixed-maturity securities
Net realized gains (losses)
Impairment Review
Year ended
December 31,
2016
2015
$
354,071
(302,087)
51,984
$
49,412
(152,328)
(102,916)
637,249
(89,874)
547,375
(69,911)
(69,911)
153,711
(101,341)
52,370
-
-
$
529,448
$
(50,546)
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company
regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary
declines in the fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security
prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-
temporarily impaired unless there is a credit loss. When the Company does not intend to sell the security and it is more likely than not that the Company will not
have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security
in earnings and the remaining portion in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal
cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. For held-to-maturity debt
securities, the amount of OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the
remaining life of the security on the basis of timing of future estimated cash flows of the security.
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, 2016 AND 2015
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, 2016 and 2015, there were 85 and 57 securities, respectively, that accounted for the gross unrealized loss. As of
December 31, 2016, the Company’s held-to-maturity debt securities included an investment in one bond issued by the Commonwealth of Puerto Rico (“PR”). In
July 2016, PR defaulted on its interest payment to bondholders. Due to the credit deterioration of PR, the Company recorded a credit loss component of OTTI on
this investment as of June 30, 2016. For the year ended December 31, 2016, the full amount of the write-down was recognized as a credit component of OTTI
in the amount of $69,911 and is included as a reduction to net realized gains in the consolidated statements of income and comprehensive income. The
Company determined that none of the other unrealized losses were deemed to be OTTI for its portfolio of fixed-maturity investments and equity securities for the
years ended December 31, 2016 and 2015. 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, 2016 AND 2015
The Company held securities with unrealized losses representing declines that were considered temporary at December 31, 2016 and 2015 as follows:
Less than 12 months
December 31, 2016
12 months or more
Total
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Aggregate
Fair
Value
Unrealized
Losses
$ 1,067,574
$
(46,589)
3
$
-
$
-
-
$ 1,067,574
$
(46,589)
19,859,293
(638,113)
34
239,970
(5,612)
1
20,099,263
(643,725)
Category
Fixed-Maturity
Securities:
Political
subdivisions of
States, Territories
and
Possessions
Corporate and
other
bonds industrial
and
miscellaneous
Residential
mortgage
backed securities 15,918,090
Total fixed-maturity
securities
$36,844,957
Equity Securities:
Preferred stocks
Common stocks
$ 3,759,850
288,075
(309,273)
30
675,316
(38,442)
6
16,593,406
(347,715)
$ (993,975)
67
$
915,286
$
(44,054)
7
$37,760,243
$ (1,038,029)
$ (241,333)
(13,968)
$
8
1
660,750
424,550
$
(70,571)
(97,468)
1
1
$ 4,420,600
712,625
$ (311,904)
(111,436)
Total equity
securities
Total
$ 4,047,925
$ (255,301)
9
$ 1,085,300
$ (168,039)
2
$ 5,133,225
$ (423,340)
$40,892,882
$ (1,249,276)
76
$ 2,000,586
$ (212,093)
9
$42,893,468
$ (1,461,369)
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, 2016 AND 2015
Less than 12 months
December 31, 2015
12 months or more
Total
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Aggregate
Fair
Value
Unrealized
Losses
$ 1,432,005
$
(15,889)
4
$
-
$
-
-
$ 1,432,005
$
(15,889)
18,424,609
(512,427)
32
636,093
(99,593)
2
19,060,702
(612,020)
Category
Fixed-Maturity
Securities:
Political
subdivisions of
States, Territories
and
Possessions
Corporate and
other
bonds industrial
and
miscellaneous
Residential
mortgage
backed securities 2,413,980
Total fixed-maturity
securities
$22,270,594
Equity Securities:
$
Preferred stocks
-
2,538,900
Common stocks
(61,169)
12
-
-
-
2,413,980
(61,169)
$ (589,485)
48
$
636,093
$
(99,593)
2
$22,906,687
$ (689,078)
$
-
(103,721)
$
-
6
702,000
-
$
(29,322)
-
1
-
$
702,000
2,538,900
$
(29,322)
(103,721)
Total equity
securities
Total
$ 2,538,900
$ (103,721)
6
$
702,000
$
(29,322)
1
$ 3,240,900
$ (133,043)
$24,809,494
$ (693,206)
54
$ 1,338,093
$ (128,915)
3
$26,147,587
$ (822,121)
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, 2016 AND 2015
Note 4 - Fair Value Measurements
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The valuation technique used by the Company to fair value its financial instruments is the market approach which uses prices and other
relevant information generated by market transactions involving identical or comparable assets.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the
lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the
markets in which the assets and liabilities are traded, including during period of market disruption, and the reliability and transparency of the assumptions used to
determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy and those investments included in
each are as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Included are those
investments traded on an active exchange, such as the NASDAQ Global Select Market, U.S. Treasury securities and obligations of U.S. government agencies,
together with corporate debt securities that are generally investment grade.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Municipal
and corporate bonds, and residential mortgage-backed securities, that are traded in less active markets are classified as Level 2. These securities are valued
using market price quotations for recently executed transactions.
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions
and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows, market clearing activity or liquidity
circumstances in the security or similar securities that may have occurred since the prior pricing period.
The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in
determining fair value is greatest for investments categorized as Level 3. For investments in this category, the Company considers prices and inputs that are
current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the ability to observe prices and inputs may
be reduced for many instruments. This condition could cause a security to be reclassified between levels.
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, 2016 AND 2015
The Company’s investments are allocated among pricing input levels at December 31, 2016 and 2015 as follows:
($ in thousands)
Level 1
Level 2
Level 3
Total
December 31, 2016
Fixed-maturity securities available-for-sale
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage backed securities
Total fixed maturities
Equity securities
Total investments
$
-
$
8,205,888
$
48,356,317
5,328,872
-
48,356,317
9,987,686
$ 58,344,003
18,537,751
32,072,511
-
$ 32,072,511
$
-
-
-
-
-
-
$
8,205,888
53,685,189
18,537,751
80,428,828
9,987,686
$ 90,416,514
($ in thousands)
Level 1
Level 2
Level 3
Total
December 31, 2015
Fixed-maturity securities available-for-sale
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage backed securities
Total fixed maturities
Equity securities
Total investments
Note 5 - Fair Value of Financial Instruments
$
-
$ 12,555,098
$
37,964,006
6,992,462
-
37,964,006
9,204,270
$ 47,168,276
4,990,498
24,538,058
-
$ 24,538,058
$
-
-
-
-
-
-
$ 12,555,098
44,956,468
4,990,498
62,502,064
9,204,270
$ 71,706,334
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.
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, 2016 AND 2015
Premiums receivable and 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.
Real estate: The fair value of the land and building included in property and equipment, which is used in the Company’s operations, approximates the carrying
value. The fair value was based on an appraisal prepared using the sales comparison approach and income approach, and accordingly the real estate is a Level
3 asset under the fair value hierarchy.
Reinsurance balances payable: The carrying value reported in the consolidated balance sheets for these financial instruments approximates fair value.
The estimated fair values of the Company’s financial instruments as of December 31, 2016 and 2015 are as follows:
Fixed-maturity securities held-to-maturity
Cash and cash equivalents
Premiums receivable
Reinsurance receivables
Real estate, net of accumulated depreciation
Reinsurance balances payable
Note 6 - Intangibles
December 31, 2016
December 31, 2015
Carrying Value
Fair Value
Carrying Value
Fair Value
$
5,094,902
$ 12,044,520
$ 11,649,398
$ 32,197,765
1,659,405
$
2,146,017
$
$
5,298,119
$ 12,044,520
$ 11,649,398
$ 32,197,765
1,925,000
$
2,146,017
$
$
5,138,872
$ 13,551,372
$ 10,621,655
$ 31,270,235
1,727,068
$
1,688,922
$
$
5,241,095
$ 13,551,372
$ 10,621,655
$ 31,270,235
1,925,000
$
1,688,922
$
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and other identifiable
intangibles. The insurance company license is considered an indefinite life intangible asset subject to annual impairment testing. The weighted average
amortization period of identified intangible assets of finite useful life is approximately 2.5 years as of December 31, 2016.
The components of intangible assets and their useful lives, accumulated amortization, and net carrying value as of December 31, 2016 and 2015 are summarized
as follows:
Useful
Life
(in yrs)
Gross
Carrying
Value
500,000
-
$
December 31, 2016
Accumulated
Amortization
-
$
Net
Carrying
Amount
$
500,000
$
Gross
Carrying
Value
500,000
December 31, 2015
Accumulated
Amortization
-
$
Net
Carrying
Amount
$
500,000
10
7
3,400,000
2,550,000
850,000
3,400,000
2,210,000
1,190,000
950,000
$ 4,850,000
950,000
$ 3,500,000
-
$ 1,350,000
950,000
$ 4,850,000
882,184
$ 3,092,184
67,816
$ 1,757,816
Insurance license
Customer
relationships
Other identifiable
intangibles
Total
F-24
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, 2016 AND 2015
Intangible asset impairment testing and amortization
The Company performs an analysis annually as of December 31, or sooner if there are indicators that the asset may be impaired, to identify potential impairment
of intangible assets with both finite 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, 2016 and 2015.
The Company recorded amortization expense related to intangibles of $407,816 and $475,714, respectively, for the years ended December 31, 2016 and 2015.
The estimated aggregate amortization expense for the remaining life of finite life intangibles is as follows:
2017
2018
2019
Note 7 - Reinsurance
$
$
340,000
340,000
170,000
850,000
The Company’s quota share reinsurance treaties are on a July 1 through June 30 fiscal year basis; therefore, for year to date fiscal periods after June 30, two
separate treaties will be included in such periods.
The Company’s quota share reinsurance treaties in effect for the year ended December 31 , 2016 for its personal lines business, which primarily consists of
homeowners’ policies, were covered under the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”) and the July 1, 2016/June 30, 2017 treaty year
(“2016/2017 Treaty”). The Company’s quota share reinsurance treaties in effect for the year ended December 31, 2015 were covered under the July 1,
2014/June 30, 2015 treaty year (“2014/2015 Treaty”) and the 2015/2016 Treaty.
The Company’s personal lines quota share treaty that covered the July 1, 2013/June 30, 201 5 treaty years was a two year treaty that expired on June 30, 2015.
Effective July 1, 2014, the Company exercised its contractual option to reduce the ceding percentage in the personal lines quota share treaty from 75% to 55%
for the second year of the two year treaty .
The Company’s 2014/2015 Treaty, 2015/2016 Treaty and 2016/2017 Treaty provide for the following material terms:
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, 2016 AND 2015
Line of Busines
Personal Lines:
Homeowners, dwelling fire and canine legal liability
Quota share treaty:
Percent ceded
Risk retained
Losses per occurrence subject to quota share reinsurance coverage
Excess of loss coverage above quota share coverage
Total reinsurance coverage per occurrence
Losses per occurrence subject to reinsurance coverage
Expiration date
Personal Umbrella
Quota share treaty:
July 1, 2016
to
Treaty Year
July 1, 2015
to
July 1, 2014
to
June 30, 2017
June 30, 2016
June 30, 2015
40%
40%
55%
$
$
$
500,000
833,333
3,666,667
$
$
$
450,000
750,000
3,750,000
$
$
$
360,000
800,000
3,200,000
in
excess
of
in
excess
of
in
excess
of
$
$
$
833,333
4,000,000
4,500,000
June 30, 2017
$
$
$
750,000
4,050,000
4,500,000
June 30, 2016
$
$
$
800,000
3,640,000
4,000,000
June 30, 2015
Percent ceded - first $1,000,000 of coverage
Percent ceded - excess of $1,000,000 of coverage
Risk retained
Total reinsurance coverage per occurrence
Losses per occurrence subject to quota share reinsurance coverage
Expiration date
90%
100%
90%
100%
90%
100%
$
$
$
100,000
4,900,000
5,000,000
June 30, 2017
$
$
$
100,000
2,900,000
3,000,000
June 30, 2016
$
$
$
100,000
2,900,000
3,000,000
June 30, 2015
Commercial Lines:
General liability commercial policies, except for commercial auto
Quota share treaty:
Percent ceded (terminated effective July 1, 2014)
Risk retained
Losses per occurrence subject to quota share reinsurance coverage
Excess of loss coverage above quota share coverage
Total reinsurance coverage per occurrence
Losses per occurrence subject to reinsurance coverage
Commercial Umbrella
Quota share treaty:
None
500,000
None
4,000,000
$
$
in
excess
of
$
$
$
500,000
4,000,000
4,500,000
None
425,000
None
4,075,000
in
excess
of
425,000
4,075,000
4,500,000
$
$
$
$
$
None
400,000
None
3,600,000
in
excess
of
400,000
3,600,000
4,000,000
$
$
$
$
$
Percent ceded - first $1,000,000 of coverage
Percent ceded - excess of $1,000,000 of coverage
Risk retained
Total reinsurance coverage per occurrence
Losses per occurrence subject to quota share reinsurance coverage
Expiration date
90%
100%
100,000
$
4,900,000
$
$
5,000,000
June 30, 2017
Commercial Auto:
Risk retained
Excess of loss coverage in excess of risk retained
$
$
$
300,000
1,700,000
in excess of
300,000
$
$
$
300,000
1,700,000
in excess of
300,000
Catastrophe Reinsurance:
Initial loss subject to personal lines quota share treaty
Risk retained per catastrophe occurrence (1)
Catastrophe loss coverage in excess of quota share coverage (2) (3)
Severe winter weather aggregate (3)
Reinstatement premium protection (4)
5,000,000
$
$
3,000,000
$ 247,000,000
No
Yes
4,000,000
$
$
2,400,000
$ 176,000,000
Yes
Yes
4,000,000
$
$
1,800,000
$ 137,000,000
Yes
No
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, 2016 AND 2015
1. Plus losses in excess of catastrophe coverage.
2. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2016, the duration of a catastrophe
occurrence from windstorm, hail, tornado, hurricane and cyclone was extended to 168 consecutive hours from 120 consecutive hours.
3. From July 1, 2014 through June 30, 2016, catastrophe treaty also covered losses caused by severe winter weather during any consecutive 28 day period.
4. Effective July 1, 2015, reinstatement premium protection for $16,000,000 of catastrophe coverage in excess of $4,000,000. Effective July 1, 2016,
reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of $5,000,000.
The single maximum risks per occurrence to which the Company is subject under the new treaties effective July 1, 2016 are as follows:
Treaty
Personal Lines
Personal Umbrella
Commercial Lines
Commercial Umbrella
Catastrophe (2)
Extent of Loss
Risk Retained
July 1, 2016 - June 30, 2017
Initial $833,333
$833,333 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $500,000
$500,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $5,000,000
$5,000,000 - $252,000,000
Over $252,000,000
$500,000
None(1)
100%
$100,000
None(1)
100%
$500,000
None(1)
100%
$100,000
None(1)
100%
$3,000,000
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.
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, 2016 AND 2015
The single maximum risks per occurrence to which the Company is subject under the treaties that expired on June 30, 2016 and 2015 are as follows:
Treaty
Personal Lines
Personal Umbrella
Commercial Lines
Commercial Auto
Catastrophe (2)
July 1, 2015 - June 30, 2016
July 1, 2014 - June 30, 2015
Extent of Loss
Risk Retained
Extent of Loss
Risk Retained
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $3,000,000
Over $3,000,000
Initial $425,000
$425,000 - $4,500,000
Over $4,500,000
Initial $300,000
$300,000 - $2,000,000
Over $2,000,000
$450,000
None(1)
100%
Initial $800,000
$800,000 - $4,000,000
Over $4,000,000
$100,000
None(1)
100%
Initial $1,000,000
$1,000,000 - $3,000,000
Over $3,000,000
$425,000
None(1)
100%
Initial $400,000
$400,000 - $4,000,000
Over $4,000,000
$300,000
None(1)
100%
Initial $300,000
$300,000 - $2,000,000
Over $2,000,000
Initial $4,000,000
$4,000,000 - $180,000,000
Over $180,000,000
$2,400,000
None
100%
Initial $4,000,000
$4,000,000 - $141,000,000
Over $141,000,000
$360,000
None(1)
100%
$100,000
None(1)
100%
$400,000
None(1)
100%
$300,000
None(1)
100%
$1,800,000
None
100%
________________
(1) Covered by excess of loss treaties.
(2) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
The Company’s reinsurance program is structured to enable the Company to significantly grow its premium volume while maintaining regulatory capital and
other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The reinsurance program also provides income as a
result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not
relieve the Company of its obligations to policyholders.
F-28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016 AND 2015
Approximate reinsurance recoverables on unpaid and paid losses by reinsurer at December 31, 2016 and 2015 are as follows:
($ in thousands)
December 31, 2016
Maiden Reinsurace Company
Swiss Reinsurance America Corporation
SCOR Reinsurance Company
Allied World Assurance Company
Others
Total
December 31, 2015
Maiden Reinsurace Company
Swiss Reinsurance America Corporation
SCOR Reinsurance Company
Hannover Rueck
Allied World Assurance Company
Others
Total
Unpaid
Losses
Paid
Losses
$
7,640
4,310
1,440
392
1,995
$ 15,777
$
7,979
3,662
1,982
853
940
1,290
$ 16,706
$
$
$
$
985
671
152
300
211
2,319
631
377
114
524
285
117
2,048
Total
Security
$
8,625
4,981
1,592
692
2,206
$ 18,096
$ 13,113
-
-
-
164
$ 13,277
$
8,610
4,039
2,096
1,377
1,225
1,407
$ 18,754
$ 12,201
-
-
-
-
293
$ 12,494
(1)
(2)
(1)
(3)
(1) Secured pursuant to collateralized trust agreements.
(2) Represents $161,000 secured pursuant to collateralized trust agreement and $3,000 guaranteed by an irrevocable letter of credit.
(3) Represents $248,000 secured pursuant to collateralized trust agreement and $45,000 guaranteed by an irrevocable letter of credit.
Assets held in the two trusts referred to in footnote (1) in the table 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, 2016 and 2015 include unearned ceded premiums of $14,101,745 and $12,515,892, 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 increase when the estimated ultimate loss ratio
decreases and, conversely, the commission rate and contingent ceding commissions earned decrease when the estimated ultimate loss ratio increases.
The Company’s estimated ultimate treaty year loss ratios (“Loss Ratio(s)”) for treaties in effect for the year ended December 31, 2016 are attributable to
contracts for the 2016/2017 Treaty and the 2015/2016 Treaty. The Company’s Loss Ratios for treaties in effect for the year ended December 31, 2015 are
attributable to contracts for the 2015/2016 Treaty and the 2014/2015 Treaty.
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, 2016 AND 2015
Treaties in effect for the year ended December 31, 2016
Under the 2016/2017 Treaty and 2015/2016 Treaty, the Company is receiving a higher upfront fixed provisional rate than in prior years' treaties. In
exchange for the higher provisional rate, the Company has a reduced opportunity to earn sliding scale contingent commissions. The Company’s Loss
Ratios for the period from July 1, 2016 through December 31, 2016 (attributable to the 2016/2017 Treaty) were consistent with the contractual Loss
Ratio at which provisional ceding commissions are earned and therefore no contingent commission was recorded. The Company’s Loss Ratios for the
period July 1, 2015 through June 30, 2016 (attributable to the 2015/2016 Treaty) were higher than the contractual Loss Ratio at which provisional ceding
commissions are earned and therefore the contingent commission was reduced.
Treaties in effect for the year ended December 31, 2015
The Company’s Loss Ratio for the period July 1, 2015 through December 31, 2015, which is attributable to the 2015/2016 Treaty, was higher than the
contractual Loss Ratio at which provisional ceding commissions are earned. Accordingly, for the six month period ended December 31, 2015, the
Company’s contingent ceding commission earned was reduced as a result of the estimated Loss Ratio for the 2015/2016 Treaty.
The Company’s Loss Ratio for the period July 1, 2014 through June 30, 2015, which is attributable to the 2014/2015 Treaty, was lower than the
contractual Loss Ratio at which the provisional ceding commissions are earned. As a result of severe winter weather during the six months ended June
30, 2015, the Loss Ratio attributable to this treaty as of June 30, 2015 was greater than the Loss Ratio as of December 31, 2014. Accordingly, for the six
months ended June 30, 2015, the Company’s contingent ceding commission earned was reduced as a result of the increase in the estimated Loss
Ratio for the 2014/2015 Treaty.
In addition to the treaties that were in effect for the years ended December 31, 2016 and 2015, the Loss Ratios from prior years’ treaties are subject to change as
loss reserves from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.
Ceding commissions earned consists of the following:
Provisional ceding commissions earned
Contingent ceding commissions earned
Years ended
December 31,
2016
2015
$ 12,769,404
(1,501,163)
$ 11,268,241
$ 11,692,458
(219,341)
$ 11,473,117
Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled
annually based on the Loss Ratio of each treaty year that ends on June 30. As discussed above, the Loss Ratios from prior years’ treaties are subject to change
as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned. As of
December 31, 2016 and 2015, net contingent ceding commissions payable to reinsurers under all treaties was approximately $773,000 and $1,277,000,
respectively.
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, 2016 AND 2015
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:
Net deferred policy acquisition 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
Year ended
December 31,
2016
2015
$
4,400,238
$
3,029,441
19,566,982
5,470,285
(13,186,177)
11,851,090
(10,863,388)
987,702
16,963,843
4,904,350
(12,170,986)
9,697,207
(8,326,410)
1,370,797
$
5,387,940
$
4,400,238
Ending balances for deferred policy acquisition costs and deferred ceding commission revenue as of December 31, 2016 and 2015 follows:
Deferred policy acquisition costs
Deferred ceding commission revenue
Balance at end of period
F-31
December 31,
2016
2015
$ 12,239,781
(6,851,841)
5,387,940
$
$ 10,835,306
(6,435,068)
4,400,238
$
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, 2016 AND 2015
Note 9 - Property and Equipment
The components of property and equipment are summarized as follows:
December 31, 2016
Building
Land
Furniture office equipment
Computer equipment and software
Automobile
Total
December 31, 2015
Building
Land
Furniture office equipment
Computer equipment and software
Automobile
Total
Cost
Accumulated
Depreciation
Net
$
$
$
$
1,887,347
153,097
620,440
2,602,330
81,394
5,344,608
1,887,347
153,097
518,495
2,128,063
81,394
4,768,396
$
(381,039)
-
(388,853)
(1,481,949)
(81,394)
$ (2,333,235)
$
(313,376)
-
(257,485)
(963,875)
(81,394)
$ (1,616,130)
$
$
$
$
1,506,308
153,097
231,587
1,120,381
-
3,011,373
1,573,971
153,097
261,010
1,164,188
-
3,152,266
Depreciation expense for the years ended December 31, 2016 and 2015 was $717,105 and $556,295, respectively.
Note 10 - Property and Casualty Insurance Activity
Premiums written, ceded and earned are as follows:
Year ended December 31, 2016
Premiums written
Change in unearned premiums
Premiums earned
Year ended December 31, 2015
Premiums written
Change in unearned premiums
Premiums earned
Direct
Assumed
Ceded
Net
$ 103,191,995
(6,110,225)
$ 97,081,770
$ 91,003,968
(8,436,456)
$ 82,567,512
$
$
$
$
28,522
6,091
34,613
$ (37,294,330)
1,585,853
$ (35,708,477)
$ 65,926,187
(4,518,281)
$ 61,407,906
40,971
4,255
45,226
$ (30,660,161)
(3,340,495)
$ (34,000,656)
$ 60,384,778
(11,772,696)
$ 48,612,082
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of December 31, 2016 and
2015 was $1,421,560 and $1,199,376, 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, 2016 AND 2015
The components of the liability for loss and LAE expenses and related reinsurance receivables as of December 31, 2016 and 2015 are as follows:
December 31, 2016
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, 2015
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
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and 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
Gross
Liability
Reinsurance
Receivables
$ 25,000,733
7,752,617
8,983,369
-
$ 41,736,719
$ 24,730,463
5,429,221
9,716,816
-
$ 39,876,500
$ 10,804,341
1,893,094
3,079,445
15,776,880
2,319,140
18,096,020
14,101,745
$ 32,197,765
$ 11,264,279
1,720,522
3,721,563
16,706,364
2,047,979
18,754,343
12,515,892
$ 31,270,235
Years ended
December 31,
2016
2015
$ 39,876,500
(16,706,364)
23,170,136
$ 39,912,683
(18,249,526)
21,663,157
27,853,010
(63,349)
27,789,661
23,642,998
(462,998)
23,180,000
16,496,648
8,503,310
24,999,958
13,172,870
8,500,151
21,673,021
25,959,839
15,776,880
$ 41,736,719
23,170,136
16,706,364
$ 39,876,500
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $11,796,714 and $14,428,197 for the years ended December 31, 2016
and 2015, respectively.
F-33
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, 2016 AND 2015
Prior year incurred loss and LAE development results from changes in ultimate loss and LAE estimates by line of business and accident year. Prior year loss and
LAE development incurred during the years ended December 31, 2016 and 2015 was favorable $(63,349) and favorable $(462,998), respectively. The
Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves,
giving consideration to Company and industry trends.
Loss and LAE reserves
The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses
and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known including losses that have occurred
but that have not yet been reported. The process relies on standard actuarial reserving methodologies, judgments relative to estimates of ultimate claims severity
and frequency, the length of time before losses will develop to their ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors
that are beyond the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process produces carried
reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of the best estimates made by line of business, accident
year, and loss and LAE. The amount of loss and LAE reserves for individual reported claims (the “case reserve”) is determined by the claims department and
changes over time as new information is gathered. Such information includes a review of coverage applicability, comparative liability on the part of the insured,
injury severity, property damage, replacement cost estimates, and any other information considered pertinent to estimating the exposure presented by the claim.
The amounts of loss and LAE reserves for unreported claims and development on known claims (IBNR reserves) are determined using historical information
aggregated by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best
estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such
estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Reserves are closely monitored and are
recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a 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 line of business 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.
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, 2016 AND 2015
Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the
accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that
the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can
be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.
Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed
and assumptions are made regarding average loss and LAE development applied to remaining claims inventory. Such methods more properly reflect
changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development. These methods also provide
a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has
occurred.
Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various methods
based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to
supplement the projections derived from the methods listed above.
Two key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods
described above, and the loss development factor selections used in the loss development methods described above. The loss ratio estimates used in the BF
methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business.
The Company is not aware of any claims trends that have emerged or that would cause future adverse development that have not already been considered in
existing case reserves and in its current loss development factors.
In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are
otherwise barred. Accordingly, the Company’s exposure to unreported claims (‘pure’ IBNR) for accident dates of December 31, 2013 and prior is limited although
there remains the possibility of adverse development on reported claims (‘case development’ IBNR).
The following is information about incurred and paid claims development as of December 31, 2016, net of reinsurance, as well as the cumulative reported claims
by accident year and total IBNR reserves as of December 31, 2016 included in the net incurred loss and allocated expense amounts. The historical information
regarding incurred and paid claims development for the years ended December 31, 2007 to December 31, 2015 is presented as supplementary unaudited
information.
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, 2016 AND 2015
All Lines of Business
(in thousands, except reported claims data)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Cumulative
Number of
Reported
Claims by
Accident
Accident Year
2007
2008
2009
2010
For the Years Ended December 31,
2012
2011
2013
2014
2015
2016
IBNR
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited 2007 - 2015)
$ 3,572 $3,414 $ 3,655 $ 3,710 $ 3,744 $ 3,770 $ 3,877 $ 3,913 $ 3,916 $
4,505 4,329 4,223 4,189 4,068 4,055 4,056 4,040
4,403 4,254 4,287 4,384 4,511 4,609 4,616
5,598 5,707 6,429 6,623 6,912 6,853
7,603 7,678 8,618 9,440 9,198
9,539 9,344 10,278 10,382
10,728 9,745 9,424
14,193 14,260
22,340
Total $
3,941
4,038
4,667
6,838
9,066
10,582
9,621
14,218
21,994
26,062
111,027
$
6
3
8
20
69
168
507
1,009
2,452
5,593
1,067
1,133
1,136
1,616
1,913
4,701(1)
1,551
2,117
2,508
2,688
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.
All Lines of Business
(in thousands)
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited 2007 - 2015)
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$ 1,790 $ 2,233 $ 2,924 $ 3,428 $ 3,603 $ 3,649 $ 3,670 $ 3,797 $ 3,873 $ 3,892
2,406 3,346 3,730 3,969 4,003 4,029 4,028 4,031 4,031
2,298 3,068 3,607 3,920 4,134 4,362 4,424 4,468
2,566 3,947 4,972 5,602 6,323 6,576 6,720
3,740 5,117 6,228 7,170 8,139 8,540
3,950 5,770 7,127 8,196 9,187
3,405 5,303 6,633 7,591
5,710 9,429 10,738
12,295 16,181
15,364
$ 86,712
Total
Net liability for unpaid claim and allocated claim adjustment expenses for the accident years presented
All outstanding liabilities before 2007, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance
$ 24,315
602
$ 24,917
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, 2016 AND 2015
Reported claim counts are measured on an occurrence or per event basis. A single claim occurrence could result in more than one loss type or claimant;
however the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved.
The reconciliation of the net incurred and paid claims development tables to the liability for loss and LAE reserves in the consolidated balance sheet is as
follows:
(in thousands)
Liabilities for claims and claim adjustment expenses, net of reinsurance
Total reinsurance recoverable on unpaid claims
Unallocated claims adjustment expenses
Total gross liability for loss and LAE reserves
The following is supplementary unaudited information about average historical claims duration as of December 31, 2016:
Years
1
2
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
7
5
4
6
3
As of
December 31,
2016
$
$
24,917
15,777
1,043
41,737
8
9
10
All Lines of
Business
46.1%
18.6%
12.7%
9.3%
6.7%
3.0%
1.0%
1.4%
1.0%
0.5%
The percentages in the above table do not add up to 100% because the percentages represent averages across all accident years at each development stage.
Note 11 – Stockholders’ Equity
Private Placement of Common Stock
In April 2016, the Company sold 595,238 newly issued shares of its Common Stock to RenaissanceRe Ventures Ltd., a subsidiary of RenaissanceRe Holdings
Ltd. (NYSE:RNR) (“RenaissanceRe”), in a private placement. RenaissanceRe is a global provider of catastrophe and specialty reinsurance and insurance.
The new shares of Common Stock were sold to RenaissanceRe at a price of $8.40 per share. The Company received net proceeds of approximately $4,808,000
from the private placement. In June 2016, the Company invested $3,000,000 of the proceeds in KICO as additional surplus to support its continued growth. The
Company intends to use the remaining net proceeds of the offering for general corporate purposes.
Public Offering of Common Stock
See Note 19 Subsequent Events.
Dividend Declared
Dividends declared and paid on Common Stock were $1,941,271 and $1,557,398 for the years ended December 31, 2016 and 2015, respectively. The
Company’s Board of Directors approved a quarterly dividend on February 7, 2017 of $.0625 per share payable in cash on March 15, 2017 to stockholders of
record as of February 28, 2017 (see Note 19 Subsequent Events).
F-37
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, 2016 AND 2015
Stock Options
Pursuant to the Company’s 2005 Equity Participation Plan (the “2005 Plan”), which provides for the issuance of incentive stock options, non-statutory stock
options and restricted stock, a maximum of 700,000 shares of the Company’s Common Stock are permitted to be issued pursuant to options granted and
restricted stock issued. Effective August 12, 2014, the Company adopted the 2014 Equity Participation Plan (the “2014 Plan”) pursuant to which, subject to
stockholder approval on or before August 12, 2015, a maximum of 700,000 shares of Common Stock of the Company are authorized to be issued pursuant to
the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and stock bonuses. The stockholders approved the
2014 Plan on August 11, 2015. Incentive stock options granted under the 2014 Plan and 2005 Plan expire no later than ten years from the date of grant (except
no later than five years for a grant to a 10% stockholder). The Board of Directors or the Stock Option Committee determines the expiration date with respect to
non-statutory stock options and the vesting provisions for restricted stock granted under the 2014 Plan and 2005 Plan.
The results of operations for the years ended December 31, 2016 and 2015 include stock-based compensation expense totaling $106,882 and $134,185,
respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of 17% for the years ended December 31, 2016 and
2015. Such amounts have been included in the consolidated statements of income and comprehensive income within other operating expenses.
Stock-based compensation expense in 2016 and 2015 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award less an estimate for anticipated forfeitures. The Company uses the “simplified” method to estimate the expected term of
the options because the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term. The
weighted average estimated fair value of stock options granted during the year ended December 31, 2016 and 2015 was $1.87 per share. The fair value of
stock options at the grant date was estimated using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants during the following periods:
Dividend Yield
Volatility
Risk-Free Interest Rate
Expected Life
Years ended
December 31,
2016
2.74% - 3.18%
31.61% - 31.81%
1.01% - 1.11%
3.25 years
2015
2.62%
34.54%
1.03%
3.0 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.
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, 2016 AND 2015
A summary of stock option activity under the Company’s 2014 Plan and 2005 Plan for the year ended December 31, 2016 is as follows:
Stock Options
Number of
Shares
Weighted
Average
Exercise Price
per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
Outstanding at January 1, 2016
339,750
$
6.34
3.36
$
904,775
Granted
Exercised
Forfeited
40,000
(12,000)
(5,000)
$
$
$
8.33
4.96
5.09
$
$
$
216,950
80,985
17,600
Outstanding at December 31, 2016
362,750
$
6.62
2.61
$ 2,586,748
Vested and Exercisable at December 31, 2016
270,250
$
6.40
2.39
$ 1,985,285
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2016 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 $13.75 closing
price of the Company’s Common Stock on December 31, 2016. The total intrinsic value of options exercised in the year ended December 31, 2016 was
$80,985, determined as of the date of exercise.
Participants in the 2005 Plan and 2014 Plan may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of
shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”). The
Company received cash proceeds of $54,310 from the exercise of options for the purchase of 11,000 shares of Common Stock during the year ended
December 31, 2016. The remaining 1,000 options exercised during the year ended December 31, 2016 were Net Exercises. All of the 127,750 options
exercised during the year ended December 31, 2015 were Net Exercises.
As of December 31, 2016, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $45,000. Unamortized
compensation cost as of December 31, 2016 is expected to be recognized over a remaining weighted-average vesting period of 1.04 years.
As of December 31, 2016, there were 602,500 shares reserved under the 2014 Plan.
Other Equity Compensation
In January 2016, the Company granted a total of 6,000 shares of restricted Common Stock under the 2014 Plan to its three then non-employee directors. In
March 2016, the Company granted 1,500 shares of restricted Common Stock under the 2014 Plan to a newly elected non-employee director. One-third of the
shares granted will vest on each of the three following anniversaries following the grant date. The fair value of the shares are determined at grant date.
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, 2016 AND 2015
Note 12 - Statutory Financial Information and Accounting Policies
For regulatory purposes, KICO prepares its statutory basis financial statements in accordance with Statements of Statutory Accounting Principles (“statutory
basis” or “SAP”) as promulgated by the National Association of Insurance Commissioners (the “NAIC”) and the prescribed or permitted practices of the New
York State Department of Financial Services (the “DFS”). 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 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.
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 36 months, net of dividends paid by
KICO during such period. 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. For the years ended December 31, 2016 and 2015, KICO
paid dividends to Kingstone of $1,950,000 and $1,650,000, respectively. On February 23, 2017, KICO’s Board of Directors approved a cash dividend of $500,000
to Kingstone, which was paid on February 24, 2017. For the years ended December 31, 2016 and 2015, KICO had statutory basis net income of $9,212,125 and
$6,632,042, respectively. At December 31, 2016 and 2015, KICO had reported statutory basis surplus as regards policyholders of $49,962,415 and $39,072,962,
respectively, as filed with the DFS.
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, 2016 AND 2015
Note 13 - 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 (“ACL”).
The RBC guidelines define specific capital levels based on a company’s ACL that are determined by the ratio of the company’s total adjusted capital (“TAC”) to
its ACL. TAC is equal to statutory capital, plus or minus certain other specified adjustments. The Company’s TAC is far above the ACL for each of the last two
years and is in compliance with RBC requirements as of December 31, 2016 and 2015.
Note 14 – Income Taxes
The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated or
separate return basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the period when they are identified,
generally when the tax returns are filed. The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated
based upon quantitative and qualitative factors and are considered in relation to the condensed consolidated financial statements taken as a whole for the
respective periods.
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 (benefit)
Provision for income taxes
F-41
2016
2015
$ 4,824,655
(12,590)
(293,364)
$ 4,518,701
$ 3,557,385
19,000
(226,932)
$ 3,349,453
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, 2016 AND 2015
A reconciliation of the federal statutory rate to the effective tax rate is as follows:
Years ended December 31,
Computed expected tax expense
State taxes, net of Federal benefit
State valuation allowance
Benefit of lower tax brackets
Permanent differences
Dividends received deduction
Non-taxable investment income
Other permanent differences
Prior year tax matters
Other
Total tax
2016
2015
$ 4,696,463
(71,428)
85,714
(100,000)
35.0% $ 3,505,085
(74,827)
171,532
-
(0.5)
0.6
(0.7)
(136,690)
(110,784)
48,139
123,976
(16,689)
$ 4,518,701
(1.0)
(0.8)
0.3
0.9
(0.1)
(121,960)
(177,487)
55,623
(49,139)
40,626
33.7% $ 3,349,453
34.0%
(0.7)
1.7
-
(1.2)
(1.7)
0.5
(0.5)
0.4
32.5%
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:
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
Net unrealized appreciation of securities - available for sale
Total deferred tax liabilities
Net deferred income tax liability
(1) The deferred tax assets from net operating loss carryovers are as follows:
F-42
December 31,
December 31,
2016
2015
$
131,626
417,349
2,877,365
2,329,626
188,675
5,944,641
1,169,000
4,161,526
459,000
265,671
56,393
6,111,590
$
150,492
405,709
2,555,012
2,187,923
151,250
5,450,386
1,169,000
3,684,004
597,657
415,938
255,977
6,122,576
$
(166,949)
$
(672,190)
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, 2016 AND 2015
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,
2016
December 31,
2015
$
$
655,719
(534,293)
121,426
10,200
131,626
$
$
540,865
(403,973)
136,892
13,600
150,492
Expiration
December 31, 2036
December 31, 2019
(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of December 31, 2016 and 2015 was
approximately $10,088,000 and $8,321,000, 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 NOLs over their remaining lives, which expire between 2027 and 2036.
(B) The Company has an NOL of $30,000 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, 2016:
Change in net deferred income tax liabilities
Deferred tax expense (benefit) allocated to other comprehensive income
Deferred income tax provision (benefit)
$ (505,241)
(211,877)
$ (293,364)
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, 2016 AND 2015
The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no material interest or penalties
related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2016 and 2015. If any had been recognized these
would be reported in income tax expense.
The tax returns for years ended December 31, 2013 through 2016 are subject to examination, generally for three years after filing.
Note 15 - Employee Benefit Plans
KICO maintains a salary reduction plan under Section 401(k) of the Internal Revenue Code (the “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 $483,000 and $422,000 of expense for the years ended
December 31, 2016 and 2015, respectively, related to the 401(k) Plan. For the years ended December 31, 2016 and 2015, Additional Contributions totaled
approximately $309,000 and $263,000, respectively.
Note 16 - Commitments and Contingencies
Litigation
From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim asserted by a
third party in a lawsuit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against
the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in
estimating the liability for loss and LAE expenses. The Company is not subject to any other pending legal proceedings that management believes are likely to
have a material adverse effect on the financial statements.
Office Lease
In June 2016, the Company entered into a lease modification agreement for its office facility for KICO located in Valley Stream, NY under a non-cancelable
operating lease dated March 27, 2015. The original lease had a term of seven years and nine months. The lease modification increased the space occupied by
KICO and extended the lease term to seven years and nine months to be measured from the additional premises commencement date. The additional premises
commencement date was September 19, 2016, and additional rent will be payable beginning March 19, 2017. The original lease commencement date was July
1, 2015 and rent commencement began January 1, 2016.
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, 2016 AND 2015
In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments from real estate
taxes and other charges. Rent expense under the lease will be recognized on a straight-line basis over the lease term. At December 31, 2016, cumulative rent
expense exceeded cumulative rent payments by $71,221. This difference is recorded as deferred rent and is included in accounts payable, accrued expenses
and other liabilities in the accompanying consolidated balance sheets.
As of December 31, 2016, aggregate future minimum rental commitments under this agreement are as follows:
For the Year
Ending
December 31,
2017
2018
2019
2020
2021
Thereafter
Total
$
Total
146,008
164,117
169,861
175,806
181,959
432,392
$ 1,270,143
Rent expense for the years ended December 31, 2016 and 2015 amounted to $119,720 and $52,252, respectively, and is included in the consolidated
statements of income and comprehensive income within other underwriting expenses.
Employment Agreements
Chief Executive Officer (Kingstone)
Effective August 12, 2014, the Company entered into an amendment to its employment agreement with Barry Goldstein, its President, Chairman of the Board
and Chief Executive Officer (as amended, the “Goldstein Employment Agreement”), pursuant to which the term of the employment agreement was extended
from December 31, 2014 to December 31, 2016 and, effective July 1, 2014 and continuing through the term of the agreement, Mr. Goldstein’s annual base
salary was increased to $575,000 and his bonus was revised to equal 6% of the Company’s consolidated income from operations before taxes, net of the
Company’s consolidated net investment income and net realized gains on sales of investments. In addition, in consideration of Mr. Goldstein entering into the
amendment, the Company paid him a bonus in the amount of $62,500.
Concurrently with the amendment, the Company granted to Mr. Goldstein, pursuant to the 2005 Plan, a five year option for the purchase of 200,000 shares of
common stock at an exercise price of $6.73 per share, exercisable to the extent of 62,500 shares on the date of grant and each of the initial two anniversary
dates of the grant and 12,500 shares on the third anniversary date of the grant. In addition, the Company granted to Mr. Goldstein, pursuant to the 2014 Plan, a
five year option for the purchase of 50,000 shares of common stock at an exercise price of $6.73 per share, exercisable on the third anniversary of the date of
the grant. The 50,000 share option grant was subject to stockholder approval of the 2014 Plan. The stockholders approved the 2014 Plan on August 11, 2015.
Pursuant to the stock option agreements with Mr. Goldstein, the Company agreed that, under certain circumstances following a change of control of the
Company, and the termination of his employment, or in the event Mr. Goldstein’s employment with the Company is terminated by the Company without cause or
he resigns with good reason (each as defined in his employment agreement), all of the options granted to Mr. Goldstein would become exercisable and would
remain exercisable until the first anniversary of the termination date.
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. In
the event of termination of Mr. Goldstein’s employment by the Company without cause or he resigns with good reason (as each term is defined in the Goldstein
Employment Agreement), 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.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016 AND 2015
The Goldstein Employment Agreement expired on December 31, 2016 and in January 2017, Mr. Goldstein entered into a new employment agreement with the
Company. See Note 19 Subsequent Events for the new employment agreement in effect as of January 1, 2017.
Executive Vice President (KICO)
John D. Reiersen, KICO’s Executive Vice President, was employed through December 31, 2016 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 Employment Agreement”). The
Reiersen Employment Agreement expired on December 31, 2016 and was terminable by KICO at any time with or without cause upon written notice. In the
event of termination by KICO, Mr. Reiersen was 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 Employment Agreement, Mr. Reiersen’s minimum annual salary effective from January 1, 2012
through December 31, 2014 was $100,000. His minimum annual salary effective January 1, 2015 was $105,000. His minimum salary in both periods was subject
to increase based upon the provision of more than 500 hours of service per year on behalf of KICO. Mr. Reiersen also received additional customary benefits
and a $5,000 annual fee for his position as a director of KICO.
The Reiersen Employment Agreement expired on December 31, 2016 and was not renewed upon his retirement. In 2017, Mr. Reiersen’s annual fee for his
position as a non-employee director of KICO was increased to $10,000.
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 DFS that any intercompany transaction between itself and KICO must be filed with the DFS 30 days prior to implementation.
F-46
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, 2016 AND 2015
Note 17 - Earnings Per Common Share
Basic net earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per common share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of
stock options. The computation of diluted earnings per common share excludes those options with an exercise price in excess of the average market price of the
Company’s common shares during the periods presented.
The computation of diluted earnings per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For
the years ended December 31, 2016 and 2015, the inclusion of 7,715 and -0- options, respectively, in the computation of diluted earnings per common share
would have been anti-dilutive for the periods and, as a result, the weighted average number of common shares used in the calculation of diluted earnings per
common share has not been adjusted for the effect of such options.
The reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per common share 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
Note 18 – Premium Finance Placement Fees
Year ended
December 31,
2016
2015
7,736,594
70,669
7,331,114
46,766
7,807,263
7,377,880
The Company’s wholly owned subsidiary, Payments Inc. (“Payments”), is licensed as a premium finance agency in the state of New York. Prior to February 1,
2008, Payments provided premium financing in connection with the obtaining of insurance policies. Effective February 1, 2008, Payments sold its outstanding
premium finance loan portfolio. The purchaser of the portfolio (the “Purchaser”) agreed that, during the five year period ended February 1, 2013 (which period
was extended to February 1, 2015), it would purchase, assume and service all eligible premium finance contracts originated by Payments in the state of New
York (the “Payments Agreement”). In connection with such purchases, Payments was entitled to receive a fee generally equal to a percentage of the amount
financed.
In July 2014, the Purchaser terminated the Payments Agreement effective February 1, 2015. Following any expiration or termination of the obligation of the
Purchaser to purchase premium finance contracts, Payments was entitled to receive the fees for an additional two years (“Termination Period”) with regard to
contracts for policies from the Company’s producers. On March 26, 2015, the Company and the Purchaser agreed to amend the Termination Period to end as of
March 31, 2015. The Company received a one-time payment of $350,000 in exchange for the fees that the Company would have received during the
Termination Period. The Company’s premium financing business consisted of the placement fees that Payments earned from placing contracts.
F-47
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, 2016 AND 2015
Placement fee revenue included in other income and the related direct expenses included in other operating expenses in the consolidated statements of net
income and comprehensive income are as follows:
Placement fee revenue
Termination fee
Direct expenses
Net income before taxes from placement fees
Note 19 - Subsequent Events
For the Year Ended
December 31,
2016
2015
$
$
-
-
-
-
$
$
54,343
350,000
(12,989)
391,354
The Company has evaluated events that occurred subsequent to December 31, 2016 through March 16, 2017, the date these consolidated financial statements
were issued for matters that required disclosure or adjustment in these consolidated financial statements.
Dividends Declared and Paid
On February 7, 2017, the Company’s Board of Directors approved a dividend of $.0625 per share, or $663,837, payable in cash on March 15, 2017 to
stockholders of record as of February 28, 2017.
Public Offering of Common Stock
On January 31, 2017, the Company closed on an underwritten public offering of 2,500,000 shares of its Common Stock. On February 14, 2017, the Company
closed on the underwriters’ 30-day purchase option for an additional 192,500 shares of its Common Stock. The public offering price for the 2,692,500 shares
sold was $12.00 per share. The aggregate net proceeds to the Company was approximately $30,230,000, after deducting underwriting discounts and
commissions and other offering expenses of $2,080,000.
On March 1, 2017, the Company used $23,000,000 of the net proceeds of the offering to contribute capital to its insurance subsidiary, KICO, to support its
ratings upgrade plan and additional growth. The remainder of the net proceeds will be used for general corporate purposes. A shelf registration statement
relating to the shares sold in the offering was filed with the SEC and became effective on January 19, 2017.
Employment Agreement
On January 20, 2017, the Company and Barry Goldstein, the Company's President, Chief Executive Officer and Chairman of the Board, entered into a new
employment agreement (the “2017 Goldstein Employment Agreement”). The 2017 Goldstein Employment Agreement is effective as of January 1, 2017 and
expires on December 31, 2019.
Pursuant to the 2017 Goldstein Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $630,000 (an increase from $575,000 per
annum in effect through December 31, 2016) and an annual bonus equal to 6% of the Company's consolidated income from operations before taxes, exclusive
of the Company's consolidated net investment income (loss) and net realized gains (losses) on investments (consistent with the bonus payable to Mr. Goldstein
through December 31, 2016). In addition, pursuant to the 2017 Goldstein Employment Agreement, Mr. Goldstein is entitled to a long-term compensation
payment ("LTC") of between $945,000 and $2,835,000 in the event the Company's adjusted book value per share (as defined in the 2017 Goldstein Employment
Agreement) has increased by at least an average of 8% per annum as of December 31, 2019 as compared to December 31, 2016 (with the maximum LTC
payment being due if the average per annum increase is at least 14%).
F-48
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, 2016 AND 2015
Further, pursuant to the 2017 Goldstein Employment Agreement, in the event that Mr. Goldstein's employment is terminated by the Company without cause or
he resigns for good reason (each as defined in the 2017 Goldstein Employment Agreement), Mr. Goldstein would be entitled to receive his base salary, the 6%
bonus and the LTC payment for the remainder of the term. Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to one and one-half
times his then annual salary and the target LTC payment of $1,890,000 in the event of the termination of his employment following a change of control of the
Company.
In consideration of certain accomplishments during the three year period ended December 31, 2016, the Company also paid Mr. Goldstein a bonus in the
amount of $200,000.
Note 20 – Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2016 and 2015:
F-49
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, 2016 AND 2015
March 31,
June 30,
September 30,
December 31,
Total
2016
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain (loss) on sale of investments
Total revenues
Loss and loss adjustment expenses
Commission expense and
other underwriting expenses
Net income
Basic earnings per share
Diluted earnings per share
$ 14,531,675
2,770,337
813,057
80,436
18,444,852
9,483,855
$ 15,010,875
2,569,025
764,070
283,432
18,911,910
5,786,836
$ 15,646,181
2,934,928
709,072
241,035
19,828,397
5,134,854
$ 16,219,175
2,993,951
829,384
(75,455)
20,251,505
7,384,116
$ 61,407,906
11,268,241
3,115,583
529,448
77,436,664
27,789,661
7,616,507
541,032
0.07
0.07
$
$
8,122,342
2,842,261
0.36
0.36
$
$
8,642,964
3,460,626
0.44
0.43
$
$
8,812,023
2,055,847
0.26
0.26
$
$
33,193,836
8,899,766
1.15
1.14
$
$
March 31,
June 30,
September 30,
December 31,
Total
2015
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain (loss) on sale of investments
Total revenues
Loss and loss adjustment expenses
Commission expense and
other underwriting expenses
Net income
Basic earnings per share
Diluted earnings per share
$ 10,385,799
3,089,404
574,656
(67,494)
14,613,556
7,063,217
$ 10,865,715
3,655,522
625,972
2,263
15,542,512
4,770,813
$ 13,129,604
2,643,531
649,441
(40,487)
16,657,369
5,050,194
$ 14,230,964
2,084,660
713,821
55,172
17,362,297
6,295,776
$ 48,612,082
11,473,117
2,563,890
(50,546)
64,175,734
23,180,000
6,411,482
382,499
0.05
0.05
$
$
6,561,827
2,379,182
0.32
0.32
$
$
7,410,407
2,345,654
0.32
0.32
$
$
7,766,815
1,852,285
0.25
0.25
$
$
28,150,531
6,959,620
0.95
0.94
$
$
Due to changes in number of shares outstanding from quarter to quarter, the total earnings per share of the four quarters may not necessarily equal the earnings
per share for the year.
F-50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 21
SUBSIDIARIES
Name of Subsidiary
State of Incorporation
Cosi Agency, Inc.
Payments Inc.
Kingstone Insurance Company
CMIC Properties, Inc. (1)
15 Joys Lane, LLC (2)
Comutual Services LLC (1)
New York
New York
New York
New York
New York
New York
_________________________________
(1) A wholly-owned subsidiary of Kingstone Insurance Company
(2) A wholly-owned subsidiary of CMIC Properties, Inc.
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 No. 333-215426)
and Form S-8 (No. 333-132898, No. 333-173351, No. 333-191366 and No. 333-207986) of our report dated March 16, 2017, with respect to our audits of the
consolidated financial statements of Kingstone Companies, Inc. and Subsidiaries as of December 31, 2016 and 2015 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, 2016.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 16, 2017
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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 16, 2017
/s/ Barry B. Goldstein
Barry B. Goldstein
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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 16, 2017
/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, 2016 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 16, 2017
/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.