United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
( ) 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 Global Select Market
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 X
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 X
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 X No __
Indicate by check mark whether the registrant has submitted electronically, 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 such files). Yes X 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, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer __
Non-accelerated __
Emerging growth company__
Accelerated filer X
Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
As of June 30, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$163,449,432 based on the closing sale price as reported on the Nasdaq Global Select Market. As of March 12, 2019, there were
10,760,042 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page No.
Forward-Looking Statements
PART I
Item 1.
Business.
Item 1A.
Risk Factors.
Item 1B.
Unresolved Staff Comments.
Item 2.
Properties.
Item 3.
Legal Proceedings.
Item 4.
Mine Safety Disclosures.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Item 6.
Selected Financial Data.
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Financial Statements and Supplementary Data.
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Item 9A.
Controls and Procedures.
Item 9B.
Other Information.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Item 11.
Executive Compensation.
Item 12.
Item 13.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director
Independence.
Item 14.
Principal Accountant Fees and Services.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
Item 16.
Form 10-K Summary.
Signatures
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30
30
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30
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32
63
63
63
63
67
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72
78
80
81
82
84
Forward-Looking Statements
PART I
This Annual Report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The events described in forward-looking statements contained in this Annual
Report may not occur. Generally, these statements relate to business plans or strategies, projected or
anticipated results or other consequences of our plans or strategies, projected or anticipated results from
acquisitions to be made by us, or projections involving anticipated revenues, earnings, costs or other aspects
of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,”
“intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify
forward-looking statements. We caution you that these statements are not guarantees of future performance
or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond
our control, which may influence the accuracy of the statements and the projections upon which the
statements are based. Factors which may cause actual results and outcomes to differ materially from those
contained in the forward-looking statements include, but are not limited to the risks and uncertainties
discussed in Part I Item 1A of 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 except as required by law.
2
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 through our
wholly owned subsidiary, Kingstone Insurance Company (“KICO”), domiciled in the state of New York.
KICO is a licensed property and casualty insurance company in New York, New Jersey, Connecticut,
Massachusetts, Pennsylvania, Rhode Island, Maine, and New Hampshire. KICO is currently offering its
property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts, and
Pennsylvania. Although in 2018 KICO wrote 93.7% of its direct written premiums in New York, we believe
that New Jersey, Connecticut, Massachusetts, Pennsylvania, Rhode Island, Maine, and New Hampshire will
represent an increasing portion of the total over the coming years.
Recent Developments
Developments During 2018
•
Expanded Licensing; Connecticut, Maine, and New Hampshire Expansion
In 2018, KICO continued to expanded its regional capabilities by obtaining a license to write
insurance policies in Connecticut, Maine, and New Hampshire. Also in 2018, KICO’s homeowners
insurance product was launched in Massachusetts. We anticipate writing business in Connecticut and
Maine, in 2019.
•
Increased Rate of Dividends Declared
In February 2018, we increased the quarterly dividends on our common stock from $.08 per share
to $.10 per share.
Dividends of $.10 per share were declared on February 28, 2018, May 31, 2018, August 31, 2018,
and November 30, 2018 which were paid on March 15, 2018, June 15, 2018, September 14, 2018, and
December 14, 2018, respectively.
•
Reduced Reliance on Quota Share Reinsurance
Effective July 1, 2018, KICO reduced the ceding percentage for its personal lines quota share
reinsurance treaty from 20% to 10%. The reduction of the quota share ceding percentage allows KICO to
retain a higher portion of its premiums and resultant expected profits.
•
Increased Catastrophe Reinsurance Coverage
3
Effective July 1, 2018, KICO increased the top limit of its catastrophe reinsurance coverage to
$450,000,000, which equates to more than a 1-in-250 year storm event according to the primary industry
catastrophe model that we follow.
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
an underwritten public offering at a public offering price of $12.00 per share. We received net proceeds from
the public offering of approximately $30,137,000 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.M. Best Rating
In April 2017, A.M. Best upgraded our financial strength rating from B++ (Good) to A- (Excellent).
This upgrade means that KICO has achieved its long-standing goal of becoming an A-rated carrier. The
upgrade has resulted in increased growth from existing agents and additional opportunities with new agents
and in new markets.
•
Expanded Licensing; New Jersey, Rhode Island, and Massachusetts Expansion
In 2017, KICO expanded its ability to write property and casualty insurance by obtaining a license
to write insurance policies in Massachusetts. Also in 2017, KICO’s homeowners insurance products were
launched in New Jersey and Rhode Island. We began writing New Jersey homeowners business in May
and Rhode Island homeowners business in December.
•
Increased Rate of Dividends Declared
In May 2017, we increased the quarterly dividends on our common stock from $.0625 per share to
$.08 per share.
A dividend of $.0625 per share was declared on February 7, 2017 and was paid on March 15, 2017.
Dividends of $.08 per share were declared on May 10, 2017, August 9, 2017 and November 8, 2017 and
were paid on June 15, 2017, September 15, 2017, and December 15, 2017, respectively.
•
Reduced Reliance on Quota Share Reinsurance
Effective July 1, 2017, KICO reduced the ceding percentage for its personal lines quota share
reinsurance treaty from 40% to 20%. The reduction of the quota share ceding percentage allows KICO to
retain a higher portion of its premiums and resultant expected profits.
•
Increased Catastrophe Reinsurance Coverage
4
Effective July 1, 2017, KICO increased the top limit of its catastrophe reinsurance coverage to
$320,000,000, which equated, at that time, to more than a 1-in-250 year storm event according to the
primary industry catastrophe model that we follow.
•
Member of the Federal Home Loan Bank of New York (“FHLBNY”),
In July 2017, KICO became a member of the Federal Home Loan Bank of New York (“FHLBNY”),
which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding
through FHLBNY’s various credit products, enabling members to customize advances. Advances are to be
fully collateralized; eligible collateral to pledge includes residential and commercial mortgage backed
securities, along with U.S. Treasury and agency securities.
•
Public Debt Offering
On December 19, 2017, we issued $30,000,000 of our 5.50% Senior Unsecured Notes due December
30, 2022, in an underwritten public offering. The net proceeds to us were approximately $29,122,000. On
December 20, 2017, we used $25,000,000 of the net proceeds from the debt offering to contribute capital to
KICO, to support additional growth. The remainder of the net proceeds will be used for general corporate
purposes. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, beginning
on June 30 2018 at the rate of 5.50% per year from December 19, 2017.
(b)
Business
Property and Casualty Insurance
Overview
Property and casualty insurance companies provide 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 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 owner’s building, inventory and equipment. Casualty
insurance (also 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 that cause 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 may 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 collect a variety of policy fees including installment fees, reinstatement fees, and non-
sufficient fund fees related to situations involving extended premium payment plans. Earned premiums
represent premiums received from insureds, which are recognized as revenue over the period of time that
coverage is provided (i.e., ratably over the life of the policy). All of our policies are 12 month policies;
therefore, a significant period of time can elapse between the receipt of insurance premiums and the payment
of claims. During this time, KICO invests the premiums, earning investment income and generating net
realized and unrealized gains and losses on associated investments.
Insurance companies incur a significant amount of their total expenses from insured losses, which are
commonly referred to as claims. In settling insured losses, various loss adjustment expenses (“LAE”) are
incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy
5
acquisition expenses, such as commissions paid to producers, 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 taking the ratio of incurred loss and LAE to
earned premiums (the “loss and LAE ratio”) and adding it 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.
Business; Strategy
We are a multi-line regional property and casualty insurance company writing business exclusively
through retail and wholesale agents and brokers (“producers”) appointed by our wholly owned subsidiary,
KICO. We are licensed to write insurance policies in New York, New Jersey, Connecticut, Maine,
Massachusetts, New Hampshire, Pennsylvania, and Rhode Island.
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 insureds and
claimants. Producers also value our financial stability coupled with competitive rate and commission
structures. We offer a variety of personal and commercial lines products that further differentiate us from
other companies that distribute through our selected producers.
Our principal objectives are to grow profitably while managing risk through prudent use of
reinsurance in order to strengthen our capital base. We generate underwriting income through adequate
pricing of insurance policies and by effectively managing our other underwriting and operating expenses.
We are pursuing profitable growth by increasing the volume of business that we write with existing producers
in existing markets, by developing new geographic markets and producer relationships, and by introducing
niche products that are relevant to our producers and insureds.
For the year ended December 31, 2018, our gross written premiums totaled $146.7 million, an increase
of 20.7% from the $121.6 million in gross written premium for the year ended December 31, 2017.
Product Lines
Our product lines include the following:
Personal lines - Our largest line of business is personal lines, consisting of homeowners and dwelling
fire multi-peril, cooperative/condominiums, renters, and personal umbrella policies. Personal lines policies
accounted for 81.8% of our gross written premiums for the year ended December 31, 2018.
Commercial liability - We offer businessowners policies that consist primarily of small business
retail, service and office risks with limited 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 risks and businessowners risks, including those with limited
residential exposures. Further, we write commercial umbrella policies above our supporting commercial
6
lines policies. Commercial lines policies accounted for 11.4% of our gross written premiums for the year
ended December 31, 2018.
Livery physical damage - We write for-hire vehicle physical damage only policies for livery and car
service vehicles and taxicabs, primarily based in New York City. These policies insure only the physical
damage portion of insurance for such vehicles, with no liability coverage included. These policies accounted
for 6.7% of our gross written premiums for the year ended December 31, 2018.
Other - We write canine legal liability policies and have a small participation in mandatory state joint
underwriting associations. These policies accounted for 0.1% of our gross written premiums for the year
ended December 31, 2018.
Our Competitive Strengths
History of Growing Our Profitable Operations
KICO has been in operation in the State of New York for over 130 years. We have consistently grown
the amount of profitable business that we write by introducing new products, increasing volume written with
our selected producers in existing markets, and developing new producer relationships and markets. 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 insureds.
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. Our relationship with Selected Producers was further strengthened
by the A.M. Best upgrade to a financial strength rating of A- (Excellent) in April 2017. This has allowed us
to provide many producers with an A- rated carrier option that was not previously available to them in the
markets where we operate.
We offer our selected producers access to a variety of personal and commercial lines products,
including some that are unique to us. Many of our producers write multiple lines of business with us which
is an advantage relative to competitors that 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 our producers value the longevity of the relationship. We
believe that the excellent service provided to our selected producers, our broad product offerings, and our
consistent prices and financial stability provide a strong foundation for continued profitable growth.
Sophisticated Underwriting and Risk Management Practices
We believe that a significant underwriting advantage exists due to our local market presence and
expertise. Our underwriting process evaluates and screens out certain risks based on property reports,
7
individual insurance scoring, and 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 preferred risk profile in order to reduce adverse selection from risks seeking the lowest premiums
and minimal coverage levels.
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 for the risk of loss.
We manage coastal risk exposure through use of individual catastrophe risk scoring and 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 consistency in rates and 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 from ceding commissions earned pursuant to 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
the continued reduction in our reliance on quota share reinsurance could increase our overall net underwriting
profits.
Scalable, Low-Cost Operations
We focus on efficiently managing our expenses, and invest in tools and processes that improve the
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 low-cost operating environment. We now
have a dedicated customer service unit located in Kingston that has significantly improved the speed at which
we respond to customers.
We continue to invest in improving our online application and quoting systems for our personal lines
and commercial products. We have leveraged a paperless workflow management and document storage tool
that has improved efficiency and reduced costs. In late 2017, we introduced an online payment portal that
provides the ability for insureds to make payments and to view policy information for all of our products in
one location. 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
8
and can take advantage of market conditions. We monitor results on a regular basis and our selected
producers are reviewed by management on at least a quarterly basis.
We believe that our rates are appropriately competitive with other carriers in our target markets. We
believe that rate consistency and the reliable availability of our products is important to 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 industry claims databases, insurance scoring reports, physical inspection of
risks and other individual risk underwriting tools. We write homeowners and dwelling fire business in coastal
markets and are cognizant of our exposure to hurricanes. We have mitigated this risk through appropriate
catastrophe reinsurance and application of hurricane deductibles. We handle claims fairly while ensuring that
coverage provisions and exclusions are properly applied. Our claims and underwriting expertise supports our
ability to grow our profitable business.
Distribution
We generate business through our relationships with over 500 producers. We carefully select our
producers by evaluating numerous 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 agency
size. We only distribute through agents and have never sought to distribute our 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 and personal service received
from with their underwriters is a principal reason producers place their business with us. Our producers have
access to a KICO website portal that provides them the ability to quote risks for various products and to
review policy forms and underwriting guidelines for all lines of business. We send out frequent “Producer
Grams” in order to inform our producers of updates at KICO. In addition, we have an active Producer
Council, made up of 11 active producers, to advise us on market developments; and we have at least one
annual meeting with all of our producers.
Competition; Market
The insurance industry is highly competitive. We constantly assess and make projections for 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 the downstate regions of New York State, but we are
actively growing into other Northeast markets, including New Jersey and Rhode Island during 2017 followed
by Massachusetts in 2018. In addition, we are licensed to write insurance policies in Connecticut, Maine,
New Hampshire and Pennsylvania. We anticipate launching a homeowners product in Connecticut and
Maine in 2019. These new homeowners markets align well with the niche markets that have generated
profitable results in New York, and we believe that our market expertise can be effectively utilized in these
new markets.
In 2017, KICO was the 15th largest writer of homeowners and dwelling fire insurance in the State of
New York, according to data compiled by SNL Financial LLC. Based on the same data, in 2017, we had a
1.3% 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
and other states. We believe that many national and regional carriers have chosen to limit their rate of
9
premium growth or to decrease their presence 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 New York, New Jersey, and other northeastern states
in which we are licensed.
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:
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
reported (“IBNR”). 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; the first is a provision for claims that have occurred
but are not yet reported or known. We refer to this as ‘Pure’ IBNR, and due to the fact that we write primarily
quickly reported property lines of business, this type of IBNR does not make up a large portion of KICO’s
total IBNR. The second type of IBNR is a provision for expected future development on known claims, from
the evaluation date until the time claims are settled and closed. We refer to this as ‘Case Development’ IBNR
and it makes up the majority of the IBNR that KICO records. 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 evaluation 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 claims settlement patterns and handling procedures,
litigation trends, judicial decisions, and economic conditions, actual loss experience may not conform to the
assumptions used in determining the estimated amounts for such liabilities at the balance sheet date. As
adjustments to these estimates become necessary, they are reflected in 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
10
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, and fall
within the range of those determined as reasonable by the Appointed Actuary.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Principal Revenue and Expense Items” in Item 7 of this Annual Report and Note 2 and Note 11 in the
accompanying Financial Statements for additional information and details regarding our LAE.
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:
Years ended
December 31,
2018
2017
Balance at beginning of period
Less reinsurance recoverables
Net balance, beginning of period
$
48,799,622
(16,748,908)
32,050,714
$
41,736,719
(15,776,880)
25,959,839
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
57,143,077
1,152,128
58,295,205
34,246,081
(60,544)
34,185,537
34,025,387
15,794,673
49,820,060
18,194,860
9,899,802
28,094,662
40,525,859
15,671,247
56,197,106
$
32,050,714
16,748,908
48,799,622
$
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 of reserves held as of each calendar year-end from
2008 through 2018.
The first section of the table reflects the changes in our loss and LAE reserves after each subsequent
calendar year of development. The table displays the re-estimated values of incurred losses and LAE at each
succeeding calendar year-end, including payments made during the years indicated. The second section of
the table shows by year the cumulative amounts of loss and LAE payments, net of amounts recoverable from
reinsurers, as of the end of each succeeding year. An example with respect to the net loss and LAE reserves
of $6,001,000 as of December 31, 2009 is as follows. By December 31, 2011 (two years later), $3,992,000
had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2009. The re-
estimated ultimate reserves for those claims as of December 31, 2011 (two years later) had grown to
$6,393,000.
11
The “cumulative redundancy (deficiency)” represents, as of December 31, 2018, 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 more recent evaluation dates have
developed more favorably than those from older evaluation points, especially as a percentage of the starting
estimate.
12
(in thousands of $)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Reserve for loss and loss
adjustment expenses, net
of reinsurance recoverables 5,823
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)
6,119
6,609
6,729
6,711
7,261
7,727
7,554
7,511
7,330
7,284
(1,461)
6,001
7,280
8,520
12,065
17,139
21,663
23,170
25,960
32,051
32,051
6,235
6,393
6,486
7,182
7,766
7,602
7,615
7,455
7,406
7,483
8,289
9,170
10,128
9,925
9,932
9,779
9,676
9,261
11,022
12,968
12,552
12,440
12,367
12,307
13,886
16,875
16,624
16,767
16,985
16,959
18,903
18,332
18,687
19,386
19,449
21,200
21,501
22,576
23,243
23,107
24,413
25,509
25,899
26,970
33,203
(1,405)
(2,396)
(3,787)
(4,894)
(2,310)
(1,580)
(2,339)
(1,010)
(1,152)
(in thousands 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,
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2,533
3,974
5,054
5,373
5,717
6,224
6,718
6,853
7,103
7,190
2,307
3,992
4,659
5,238
5,997
6,562
6,749
7,022
7,298
3,201
4,947
6,199
7,737
8,585
8,941
9,275
9,559
3,237
5,661
8,221
10,100
10,903
11,417
11,725
4,804
8,833
11,873
13,785
15,479
15,882
6,156
10,629
13,571
16,166
17,262
8,500
12,853
16,564
19,838
8,503
14,456
19,533
9,900
17,187
15,795
5,823
6,001
7,280
8,520
12,065
17,139
21,663
23,170
25,960
32,051
40,526
* Reinsurance Recoverable 9,766
* Gross reserves -
December 31,
15,589
10,512
10,432
9,960
18,420
17,364
18,250
16,707
15,777
16,749
15,671
16,513
17,712
18,480
30,485
34,503
39,913
39,877
41,737
48,800
56,197
Net re-estimated reserve
Re-estimated reinsurance
recoverable
7,284
7,406
9,676
12,307
16,959
19,449
23,243
25,509
26,970
33,203
12,503
12,506
13,154
13,797
28,355
21,048
21,231
18,810
17,285
16,852
Gross re-estimated reserve 19,787
19,912
22,830
26,104
45,314
40,497
44,474
44,319
44,255
50,055
Gross cumulative
redundancy (deficiency)
Reinsurance
(4,198) (3,399) (5,118) (7,624) (14,829) (5,994) (4,561) (4,442) (2,518) (1,255)
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.
13
Reinsurance via quota share allows a carrier to write business without increasing its underwriting
leverage above a level 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, 2018 for our personal
lines business, which primarily consists of homeowners policies, were covered under the July 1, 2017/June
30, 2018 treaty year and the new treaty year that began on July 1, 2018 (“2017/2019 Treaty”) (two year
treaty). In August 2018, we terminated our contract with one of the reinsurers that was a party to the
2017/2019 Treaty. This termination was retroactive to July 1, 2018 and had the effect of reducing the quota
share ceding rate to 10% from 20%.
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, 2018 is $900,000. 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, 2018 is $750,000.
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 2017/2019 Treaty and 2016/2017 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 2017/2019 Treaty and the 2016/2017 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 2018, we purchased catastrophe reinsurance to provide coverage of up to $450,000,000 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. Effective July 1, 2018 losses on personal lines policies are subject to
the 10% quota share treaty, which results in a net retention by us of $4,500,000 of exposure per catastrophe
occurrence. Effective July 1, 2018, we have reinstatement premium protection on the first $210,000,000 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.
14
Investments
Our investment portfolio, including cash and cash equivalents, and short term investments, as of
December 31, 2018 and 2017, is summarized in the table below by type of investment.
Category
December 31, 2018
December 31, 2017
Carrying
Value
% of
Portfolio
Carrying
Value
% of
Portfolio
Cash and cash equivalents
$
21,138,403
10.8%
$
48,381,633
25.8%
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
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
729,507
0.4%
729,466
0.4%
998,803
0.5%
998,984
0.5%
2,494,545
1.3%
3,141,358
1.7%
8,220,381
4.2%
-
0.0%
6,341,608
3.2%
11,315,443
6.0%
115,750,293
59.2%
88,141,465
Residential mortgage backed securities
21,465,234
11.0%
20,531,348
Other
Preferred stocks
6,152,956
3.1%
7,000,941
Common stocks
10,419,660
5.3%
7,285,257
Other investments
Total
1,855,225
1.0%
-
$
195,566,615
100.0%
$
187,525,895
47.0%
10.9%
3.7%
3.9%
0.0%
100.0%
The table below summarizes the credit quality of our fixed-maturity securities available-for-sale as of
December 31, 2018 and 2017 as rated by Standard and Poor’s (or if unavailable from Standard and Poor’s,
then Moody’s or Fitch):
15
Rating
U.S. Treasury securities
Corporate and municipal bonds
AAA
AA
A
BBB
BB
Total corporate and municipal bonds
Residential mortgage backed securities
AAA
AA
A
CCC
CC
C
D
Non rated
Total residential mortgage backed securities
December 31, 2018
December 31, 2017
Estimated
Fair Market
Value
Percentage of
Fair Market
Value
Estimated
Fair Market
Value
Percentage of
Fair Market
Value
$
8,220,381
5.4%
$
-
0.0%
979,123
8,350,910
27,665,961
85,095,907
-
122,091,901
999,640
12,743,906
4,777,356
1,440,825
109,648
24,050
390,542
979,267
21,465,234
0.6%
5.5%
18.2%
56.1%
0.0%
80.4%
0.7%
8.5%
3.1%
0.9%
0.1%
0.0%
0.3%
0.6%
14.2%
1,358,143
11,319,057
17,199,631
68,704,768
875,310
99,456,909
2,013,010
11,021,144
3,902,768
1,420,296
120,742
28,963
1,659,479
364,945
20,531,347
1.1%
9.4%
14.3%
57.3%
0.7%
82.8%
1.7%
9.2%
3.3%
1.2%
0.1%
0.0%
1.4%
0.3%
17.2%
Total
$
151,777,516
100.0%
$
119,988,256
100.0%
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Principal Revenue and Expense Items” in Item 7 of this Annual Report and Note 2 and Note 11 in the
accompanying Financial Statements for additional information.
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 November 2016, we commenced a plan of action to upgrade KICO’s A.M. Best rating. In April
2017, A.M. Best upgraded the Financial Strength Rating (FSR) of KICO to A- (Excellent) from B++ (Good).
The A.M. Best financial strength rating of A- (Excellent) has created significant additional demand from our
existing producers, particularly for our New York homeowners business where we compete against many
carriers that are not A- rated by A.M. Best. Other ratings assigned to KICO and Kingstone by A.M. Best and
Kroll Bond Rating Agency are as follows:
16
A.M . Best Long-Term issuer credit rating (ICR)
A.M . Best Long-Term issue credit rating (IR)
KICO
Kingstone
Companies
a- (stable outlook)
bbb- (stable outlook)
$30.0 million, 5.50% senior unsecured notes due Dec. 30, 2022
Kroll Bond Rating Agency insurance financial strength rating (IFSR)
Kroll Bond Rating Agency issuer rating
$30.0 million, 5.50% senior unsecured notes due Dec. 30, 2022
n/a
A- (stable outlook)
bbb- (stable outlook)
n/a
n/a BBB- (stable outlook)
n/a BBB- (stable outlook)
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.
Catastrophe Losses
In 2018 we had catastrophe losses, which are defined as losses from an event for which a catastrophe
bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance
Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in
total insured losses and affect a significant number of policyholders and insurers. Our predominant market,
downstate New York, was affected by several events, including one large event during the winter of 2018.
These claims were primarily from losses due to frozen pipes and related water damage resulting from
abnormally low temperatures for an extended period. The effects of this catastrophe and other minor
catastrophes during the year increased our net loss ratio by 6.0 percentage points in 2018. During the
relatively mild winter of 2017, there was no catastrophe impact from large storm events.
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.
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.
17
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 reject 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 in 2015. On January 29, 2019,
KICO was granted permission by the Texas Department of Insurance to withdraw from the Texas insurance
market for which it never commenced business since receiving its certificate of authority in August 2015.
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 either have been or are 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 these 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 2017, the DFS implemented new comprehensive cybersecurity regulations, which became
effective on March 1, 2017 with transitional implementation periods. When fully implemented, in March 1,
2019, 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. Commencing February 15, 2018, and annually thereafter, KICO must certify compliance to the
DFS with the applicable cybersecurity regulatory provisions.
In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
became law. It 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
18
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. In its September
2018 Annual Report on the Insurance Industry (the “Report”), FIO provided an overview of its statutory
responsibilities and its role, as described in the October 2017 Treasury report, A Financial System That
Creates Economic Opportunities: Asset Management and Insurance (the “EO Report”). The Report then
summarizes FIO’s key activities since those described in its 2017 Annual Report on the Insurance Industry.
Next, the Report provides a summary of the EO Report. Sections II through V are organized around the four
key themes from the EO Report: (1) Systemic Risk and Solvency; (2) Efficient Regulation and Government
Processes; (3) International Engagement; and (4) Economic Growth and Informed Choices. The Report
concludes with a discussion and analysis of the insurance industry’s financial performance in calendar year
2017, its financial condition as of December 31, 2017, and the domestic insurance market outlook for 2018.
On December 22, 2017, President Donald Trump signed into law a budget reconciliation act
commonly referred to as the Tax Cuts and Jobs Act (TCJA). Overall, the reduction of the U.S. corporate tax
rate to 21 percent will generally lower the effective tax rates of insurance companies operating in the United
States.
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 December 31, 2015. The examination was completed in 2017 without any material
adverse findings.
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, 2018.
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
19
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.
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, 2018, KICO did not have any ratios outside the usual range.
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”) are concerned with a company’s solvency, but
are 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”).
Such reports and other information filed by us with the SEC are available free of charge at the investor
relations section of our website at www.kingstonecompanies.com as soon as reasonably practicable after
such reports are electronically filed with, or furnished to, the SEC. Copies are also available, without charge,
by writing to Kingstone Companies, Inc., Investor Relations, 15 Joys Lane, Kingstone, New York 12401.
The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC. The inclusion of our website
20
address in this Annual Report does not include or incorporate by reference the information on our website
into this Annual Report.
Employees
As of December 31, 2018, we had 101 employees all of whom are located in New York. None of our
employees are covered by a collective bargaining agreement. We believe that our relationship with our
employees is good.
ITEM 1A. RISK FACTORS.
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) and other severe weather events, 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 $450,000,000.
The initial $5,000,000 of losses in a catastrophe are subject to a 10% quota share reinsurance treaty, such that
we retain $4,500,000 of risk per catastrophe occurrence. With respect to any additional catastrophe losses of
up to $445,000,000, 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,
21
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.
A downgrade in our financial strength rating from A.M. Best may have a material adverse effect
on our competitive position, the marketability of our product offerings, and our liquidity, operating results
and financial condition.
In April 2017, A.M. Best upgraded the financial strength rating of KICO to A- (Excellent) from B++
(Good). 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. 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. All ratings
are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in
our financial strength rating from A.M. Best 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 our outstanding
and 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.
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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 economy in general, the
performance of the specific obligors included in our portfolio, and other factors outside our control. Our
exposure to interest rate risk relates primarily to the market price and cash flow variability associated with
changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed
income securities, which may be adversely affected by changes in interest rates from governmental monetary
policies, domestic and international economic and political conditions and other factors beyond our control.
A rise in interest rates would increase the net unrealized loss position of our investment portfolio, which
would be offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in
interest rates would decrease the net unrealized loss position of our investment portfolio, which would be
offset by lower rates of return on funds reinvested.
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 maintain our financial strength rating from A.M. Best.
We purchase reinsurance to reduce our net liability on individual risks, to protect against possible
catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus and to expand
our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations
to policyholders. Our personal lines catastrophe reinsurance program was designed, utilizing our risk
management methodology, to address our exposure to catastrophes. Market conditions beyond our control
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 maintain our financial strength rating
from A.M. Best depends, in part, on our ability to purchase a sufficient level of catastrophe reinsurance.
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
23
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 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, prevent us from making changes we believe are necessary to match
rate to risk or delay or prevent our entry into new states. 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.
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 in the absence of any change to a particular regulator's or enforcement authority's
interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take
from a legal risk management perspective, thereby necessitating changes to our practices that may, in some
cases, limit our ability to grow and/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.
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We may not be able to maintain the requisite amount of risk-based capital, which may adversely
affect our profitability and our ability to compete in the property and casualty insurance markets.
The 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 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 apply in other states
in which we 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.
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.
Over 90% 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 costlier 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 relatively 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. For the year ended December 31,
2018, twenty-four brokers provided a total of 35.4% of our total gross premiums written for the year ended
December 31, 2018. 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.
25
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.
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 (including $30,000,000 in aggregate principal amount of 5.5% Senior Unsecured Notes due December
30, 2022 (the “Notes’)), pay expenses and pay cash dividends to our shareholders.
State insurance laws limit the ability of KICO to pay dividends and require KICO to maintain
specified minimum levels of statutory capital and surplus. Maximum allowable dividends by KICO to us 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, 2018, the
maximum permissible distribution that KICO could pay without prior regulatory approval was approximately
$4,846,000. The aggregate maximum amount of dividends permitted by law to be paid by an insurance
company does not necessarily define an insurance company’s actual ability to pay dividends. The actual
ability to pay dividends may be further constrained by business and regulatory considerations, such as the
impact of dividends on surplus, by our competitive position and by the amount of premiums that we can
write. State insurance regulators have broad discretion to limit the payment of dividends by insurance
companies. Our ability to pay interest on the Notes as it comes due and the principal of the Notes at their
maturity may be limited by these regulatory constraints.
We may not be able to generate sufficient cash to service our debt obligations, including the Notes.
Our ability to make payments on and to refinance our indebtedness, including the Notes, will depend
on our financial and operating performance, which is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors beyond our control. We may be unable to
maintain a sufficient level of cash flows from operating activities to permit us to pay the principal, premium,
if any, and interest on our indebtedness, including the Notes.
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
26
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 Executive Chairman,
Dale Thatcher, our President and Chief Executive Officer, and Benjamin Walden, Executive Vice President
and Chief Actuary of KICO. The loss of Messrs. Goldstein, Thatcher, 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 prevailing in the market for qualified personnel. Mr. Goldstein entered into an
amended and restated employment agreement effective January 1, 2019 and expiring December 31, 2021 in
which Mr. Goldstein stepped down as Chief Executive Officer and became Executive Chairman of the
Board.. Mr. Thatcher entered into an amended and restated employment agreement effective January 1, 2019
and expiring on December 31, 2021, whereby Mr. Thatcher became Chief Executive Officer. 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 to purchase lower levels of insurance.
Changes in accounting standards issued by the Financial Accounting Standards Board or other
standard-setting bodies may adversely affect our reported 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:
27
• 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.
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.
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 Global Select Market (“Nasdaq”). 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 an effective registration on Form S-3 under the Securities Act of 1933, as amended (the
“Securities Act”) registering for resale 595,238 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 37,500 shares of our common
stock are outstanding under the 2014 plan and 466,124 shares are reserved for issuance thereunder. We have
also registered up to $39,290,000 of our securities pursuant to registration statements 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 our
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, by 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 12, 2019, our executive officers and directors beneficially owned 911,508 shares of our
common stock (including options to purchase 10,000 shares of our common stock and 13,295 shares of our
common stock issuable upon the vesting of restricted stock within 60 days), representing 8.5% of the
outstanding shares of our common stock.
Accordingly, our executive officers and directors, through their beneficial ownership of our common
stock, will be able to significantly influence the vote on all matters submitted to a vote of our shareholders,
including the election of directors, amendments to our restated certificate of incorporation or amended and
restated bylaws, mergers or other business combination transactions and certain sales of assets outside the
usual and regular course of business. The interests of our executive officers and directors may not coincide
with the interests of our other shareholders, and they could take actions that advance their own interests to
the detriment of our other shareholders.
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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 1B. UNRESOLVED STAFF COMMENTS.
None.
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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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on The Nasdaq Global Select Market under the symbol “KINS.”
Holders
As of March 12, 2019, there were approximately 236 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. We have paid a cash dividend in each quarter since September 2011.
Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent
upon future earnings, if any, our financial condition, capital requirements, general business conditions, and
other factors. Therefore, we can give no assurance that future dividends of any kind will continue to be paid
to holders of our common stock.
Our ability to pay dividends depends, in part, 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, 2018, the maximum distribution that KICO could pay without prior regulatory approval
was approximately $4,846,000, 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.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
There were no purchases of common stock made by us or any “affiliated purchaser” during the quarter
ended December 31, 2018.
ITEM 6.
SELECTED FINANCIAL DATA.
This item is not applicable to smaller reporting companies.
31
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 through our
wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily
in downstate New York, consisting of New York City, Long Island and Westchester County, although we
are actively writing business in New Jersey, Rhode Island, Pennsylvania and Massachusetts. We are licensed
in the States of New York, New Jersey, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine,
and New Hampshire. For the year ended December 31, 2018, 93.7% of KICO’s direct written premiums
came from the New York policies.
We derive substantially all of our revenue from KICO, which includes revenues from earned
premiums, ceding commissions from quota share reinsurance, net investment income generated from its
portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are
written for a one-year term. Earned premiums represent premiums received from insureds, which are
recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-
year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the
payment of insurance claims. During this time, KICO invests the premiums, earns investment income and
generates net realized and unrealized investment gains and losses on investments. Our holding company earns
investment income from its cash holdings and may also generate net realized and unrealized investment gains
and losses on future investments.
Our expenses include the insurance underwriting expenses of KICO and other operating expenses.
Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders,
which are 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, 2018, we would earn half of the premiums in 2018 and
the other half in 2019.
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.
32
Net investment income and net 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 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 while our equity securities and other investments report changes in fair value
through earnings. See Note 2 in the accompanying Consolidated Financial Statements for further discussion
over our accounting policies following Item 15 of this Annual Report.
Other income: We recognize installment fee income and fees charged to reinstate a policy after it
has been cancelled for non-payment.
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.
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.
Interest expense: Interest expense represents amounts we incur on our outstanding indebtedness at
the applicable interest rates. Interest expense also includes amortization of debt discount and issuance costs.
33
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 active product lines include the following:
Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling
fire, cooperative/condominium, renters, and personal umbrella policies.
Commercial liability: We offer businessowners policies, which consist primarily of small business
retail, service, and office risks, with limited residential exposure. We also write artisan’s liability policies for
small independent contractors with smaller sized workforces. In addition, we write special multi-peril
policies for larger and more specialized businessowners risks, including those with limited residential
exposures. Further, we offer commercial umbrella policies written above our supporting commercial lines
policies.
Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car
service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such
vehicles, with no liability coverage included.
Other: We write canine legal liability policies and have a small participation in mandatory state joint
underwriting associations.
Key Measures
We utilize the following key measures in analyzing the results of our insurance underwriting business:
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance
company’s business. Expressed as a percentage, this is the ratio of net losses and 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
34
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 (Summary of Significant Accounting Policies) of the Notes to
Consolidated Financial Statements following Item 15 of this Annual Report.
Outlook
Overall, we are pleased with our continuing year over year growth. We anticipate launching
homeowners products in Connecticut and Maine during 2019, which will add to our already expanding
market share in the Northeast.
Turning to 2019 expectations: Based on our current view of the marketplace, we expect the
following:
A GAAP combined ratio, excluding catastrophe losses, between 82.0% and 84.0%.
• This assumes no prior-year casualty reserve development;
• Catastrophe losses of approximately 4.0 points.
Consolidated Results of Operations
The following table summarizes the changes in the results of our operations for the periods indicated:
35
($ 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
Total ceded written premiums
Net written premiums
Change in unearned premiums
Direct and assumed
Ceded to quota share treaties
Change in net unearned premiums
Premiums earned
Direct and assumed
Ceded to reinsurance treaties
Net premiums earned
Ceding commission revenue
Excluding the effect of catastrophes
Effect of catastrophes
Total ceding commission revenue
Net investment income
Net (losses) gains on investments
Other income
Total revenues
Expenses
Loss and loss adjustment expenses
Direct and assumed:
Loss and loss adjustment expenses excluding the effect of catastrophes
Losses from catastrophes (2)
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 (2)
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 (2)
Net loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Interest expense
Total expenses
Income from operations before taxes
Income tax (benefit) expense
Net income
36
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
Years ended December 31,
2018
2017
Change
Percent
$
146,716
1
146,717
$
121,575
23
121,598
$
25,141
(22)
25,119
15,880
(4,553)
11,327
1,386
14,210
26,923
23,623
(7,140)
16,483
1,209
11,037
28,729
(7,743)
2,587
(5,156)
177
3,173
(1,806)
20.7
(95.7)
20.7
(32.8)
(36.2)
(31.3)
14.6
28.7
(6.3)
119,794
92,869
26,925
29.0
(13,384)
(2,995)
(10,653)
(4,865)
(2,731)
1,870
(16,379)
(15,518)
(861)
133,333
(29,918)
110,945
(33,594)
22,388
3,676
103,415
77,351
26,064
5,792
(459)
5,333
6,186
(2,496)
1,334
113,772
9,933
-
9,933
4,133
84
1,268
92,769
(4,141)
(459)
(4,600)
2,053
(2,580)
66
21,003
61,950
10,828
72,778
9,882
4,600
14,482
52,068
6,228
58,296
25,342
20,943
2,575
1,787
1,822
110,765
48,253
-
48,253
13,697
10,828
24,525
14,067
-
14,067
34,186
-
34,186
21,182
18,116
3,513
1,403
60
78,460
(4,185)
4,600
415
17,882
6,228
24,110
4,160
2,827
(938)
384
1,762
32,305
3,007
(86)
3,093
$
14,309
4,323
9,986
$
(11,302)
(4,409)
(6,893)
$
25.6
(38.4)
5.5
20.2
(10.9)
33.7
(41.7)
%
n/a %
%
%
%
%
%
(46.3)
49.7
(3,071.4)
5.2
22.6
28.4
%
n/a %
%
50.8
(29.8)
%
n/a %
%
3.0
52.3
%
n/a %
%
70.5
19.6
15.6
(26.7)
27.4
2,936.7
41.2
(79.0)
(102.0)
(69.0)
%
%
%
%
%
%
%
%
%
(1) Effective July 1, 2018, we decreased the quota share ceding rate in our personal lines quota share treaty from 20% to 10% (the
“2018 cut-off”). The 2018 cut-off resulted in an approximately $4,553,000 return of unearned premiums from our reinsurers that
were previously ceded under the expiring personal lines quota share treaty. Effective July 1, 2017, we decreased the quota share
ceding rate in our personal lines quota share treaty from 40% to 20% (the “2017 cut-off”). The 2017 cut-off resulted in an
approximately $7,140,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring personal
lines quota share treaty.
(2) The year ended December 31, 2018 includes catastrophe losses, which are defined as losses from an event for which a
catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services
Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a
significant number of policyholders and insurers.
Key ratios:
Net loss ratio
Net underwriting expense ratio
Net combined ratio
Direct Written Premiums
Years ended December 31,
2018
2017
Percentage
Point
Change
Percent
Change
56.4%
38.4%
94.8%
44.2%
36.4%
80.6%
12.2
2.0
14.2
27.6
5.5
17.6
%
%
%
Direct written premiums during the year ended December 31, 2018 (“Year Ended 2018”) were
$146,716,000 compared to $121,575,000 during the year ended December 31, 2017 (“Year Ended 2017”).
The increase of $25,141,000, or 20.7%, was primarily due to an increase in policies in-force during Year
Ended 2018 as compared to Year Ended 2017. 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 19.3% as of December 31, 2018
compared to December 31, 2017.
During Year Ended 2017, we started writing homeowners policies in New Jersey and Rhode Island.
In Year Ended 2018, we started writing homeowners policies in Massachusetts. We refer to our New York
business as our “Core” business and the business outside of New York as our “Expansion” business. Direct
written premiums from our Expansion business were $9,080,000 in Year Ended 2018, compared to
$1,800,000 in Year Ended 2017.
Net Written Premiums and Net Premiums Earned
The following table describes the quota share reinsurance ceding rates in effect during Year Ended
2018 and Year Ended 2017, respectively. This table should be referred to in conjunction with the discussions
for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment
expenses that follow.
37
Year ended December 31, 2018
January 1,
to
June 30,
("2017/2019
Treaty")
July 1,
to
December 31,
("2017/2019
Treaty")
Year ended December 31, 2017
January 1,
to
June 30,
("2016/2017
Treaty")
July 1,
to
December 31,
("2017/2019
Treaty")
Quota share reinsurance rates
Personal lines
20% (1)
10% (1)
40%
20% (1)
(1) 2017/2019 Treaty is a two-year treaty, quota share reinsurance rate was reduced to 10% effective July 1, 2018. See
“Reinsurance” below for changes to our personal lines quota share treaties effective July 1, 2018 and 2017.
Net written premiums increased $26,925,000, or 29.0%, to $119,794,000 in Year Ended 2018 from
$92,869,000 in Year Ended 2017. 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. The increase in net written premiums is due
to growth and the reductions of our personal lines quota share reinsurance rate to 20% and 10% on July 1,
2017 and July 1, 2018, respectively.
Change in quota share ceding rate
Effective July 1, 2018, we decreased the quota share ceding rate in our personal lines quota share
treaty from 20% to 10%. The Cut-off of this treaty on July 1, 2018 resulted in a $4,553,000 return of unearned
premiums from our reinsurers that were previously ceded under the expiring personal lines quota share treaty.
Our quota share ceding rate changed from 40% to 20% in Year Ended 2017 resulting in a $7,140,000 return
of unearned premiums from our reinsurers that were previously ceded. The table below shows the effect of
the $4,553,000 and $7,140,000 return of ceded premiums on net written premiums for Year Ended 2018 and
Year Ended 2017, respectively:
($ in thousands)
Years ended December 31,
2018
2017
Change
Percent
Net written premiums
Return of premiums previously ceded to prior quota share treaties
$
119,794
4,553
$
92,869
7,140
$
26,925
(2,587)
29.0
(36.2)
Net written premiums without the effect of the July 1, 2017 Cut-off
$
115,241
$
85,729
$
29,512
34.4
%
%
%
Without the effect of the 2018 Cut-off and 2017 Cut-off, net written premiums increased by
$29,512,000, or 34.4%, in 2018 compared to 2017.
Excess of loss reinsurance treaties
An increase in written premiums will, to a lesser extent than the change in quota share ceding rate,
increase the premiums ceded under our excess of loss treaties. In Year Ended 2018, our ceded excess of loss
reinsurance premiums increased by $177,000 over the comparable ceded premiums for Year Ended 2017.
The increase was due to an increase in premiums subject to excess of loss reinsurance.
38
Catastrophe reinsurance treaty
Most of the premiums written under our personal lines are also subject to our catastrophe treaties. An
increase in our personal lines business gives rise to more property exposure, which increases our exposure to
catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an
increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are
increasing. In Year Ended 2018, our premiums ceded under catastrophe treaties increased by $3,173,000 over
the comparable ceded premiums for Year Ended 2017. The increase was due to an increase in our catastrophe
coverage and an increase in premiums subject to catastrophe reinsurance, partially offset by more favorable
reinsurance rates in Year Ended 2018. Our ceded catastrophe premiums are paid based on the total direct
written premiums subject to the catastrophe reinsurance treaty.
Our ceded catastrophe premiums are paid based on the total direct written premiums subject to the
catastrophe reinsurance treaty.
Net premiums earned
Net premiums earned increased $26,064,000, or 33.7%, to $103,415,000 in Year Ended 2018 from
$77,351,000 in Year Ended 2017. The increase was due to the increase in written premiums discussed above
and our retaining more earned premiums effective July 1, 2017 and 2018, as a result of the reductions of the
quota share percentage in our personal lines quota share treaties.
Ceding Commission Revenue
The following table details the quota share provisional ceding commission rates in effect during Year
Ended 2018 and Year Ended 2017. This table should be referred to in conjunction with the discussion for
ceding commission revenue that follows.
Year ended December 31, 2018
January 1,
to
June 30,
("2017/2019
Treaty")
July 1,
to
December 31,
("2017/2019
Treaty")
Year ended December 31, 2017
January 1,
to
June 30,
("2015/2016
Treaty")
July 1,
to
December 31,
("2016/2017
Treaty")
Provisional ceding commission rate on quota share treaty
Personal lines
53%
53%
52%
53%
The following table summarizes the changes in the components of ceding commission revenue (in
thousands) for the periods indicated:
($ in thousands)
Years ended December 31,
2018
2017
Change
Percent
Provisional ceding commissions earned
$
6,746
$
10,677
$
(3,931)
(36.8)
%
Contingent ceding commissions earned
Contingent ceding commissions earned excluding
the effect of catastrophes
Effect of catastrophes on ceding commissions earned
Contingent ceding commissions earned
(954)
(459)
(1,413)
(744)
-
(744)
(210)
(459)
(669)
28.2
n/a
89.9
%
%
Total ceding commission revenue
$
5,333
$
9,933
$
(4,600)
(46.3)
%
39
Ceding commission revenue was $5,333,000 in Year Ended 2018 compared to $9,933,000 in Year
Ended 2017. The decrease of $4,600,000, or 46.3%, was due to a decrease in provisional ceding commissions
earned, as well as a decrease in contingent ceding commissions earned. The reduction in provisional ceding
commissions occurred due to the decision to retain more of our profitable business (see below for discussion
of provisional ceding commissions earned and contingent ceding commissions earned).
Provisional Ceding Commissions Earned
We receive a provisional ceding commission based on ceded written premiums. The $3,931,000
decrease in provisional ceding commissions earned is primarily due to the decreases in the quota share ceding
rate: (1) effective July 1, 2018 to 10%, from the 20% rate in effect from July 1, 2017 through June 30, 2018,
and (2) effective July 1, 2017 to 20%, from the 40% rate in effect from January 1, 2017 through June 30,
2017; thus there were fewer ceded premiums in 2018 available to earn ceding commissions than there were
in 2017. The decrease was partially offset by an increase in personal lines direct written premiums subject to
the quota share and by the one percentage point increase in our provisional ceding commission rate as
disclosed in the table above.
Contingent Ceding Commissions Earned
We receive a contingent ceding commission based on a sliding scale in relation to the losses incurred
under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive.
The amount of contingent ceding commissions we are eligible to receive under the 2017/2019 Treaty is
subject to change based on losses incurred from claims with accident dates beginning July 1, 2017. The
amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share
treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2017.
The 2017/2019 Treaty and 2016/2017 Treaty structures limit the amount of contingent ceding
commissions that we can receive by setting a higher provisional commission rate than the rates received in
prior years. As a result of the higher upfront provisional ceding commissions that we receive, there is only a
limited opportunity to earn contingent ceding commissions under these treaties. Under our current “net”
treaty structure, catastrophe losses in excess of the $5,000,000 retention will fall outside of the quota share
treaty and such losses will not have an impact on contingent ceding commissions. In Year Ended 2018,
catastrophe losses of $1,506,000 were ceded under our personal lines quota share treaty. These catastrophe
losses resulted in the Loss Ratios for the period July 1, 2017 through June 30, 2018 (attributable to the
2017/2019 Treaty) being higher than the contractual Loss Ratio at which provisional ceding commissions
were being earned. As a result, we incurred a negative adjustment or reduction to the contingent ceding
commissions of $459,000 relative to what would have been earned had the catastrophe losses not occurred.
See “Reinsurance” below for changes to our personal lines quota share treaty effective July 1, 2018.
Net Investment Income
Net investment income was $6,186,000 in Year Ended 2018 compared to $4,133,000 in Year Ended
2017. The increase of $2,053,000, or 49.7%, was due to an increase in average invested assets in Year Ended
2018. The average yield on invested assets was 3.79% as of December 31, 2018 compared to 3.66% as of
December 31, 2017. The pre-tax equivalent yield on invested assets was 3.44% and 3.70% as of December
31, 2018 and 2017, respectively.
Cash and invested assets were $195,567,000 as of December 31, 2018, compared to $187,526,000 as
of December 31, 2017. The $8,041,000 increase in cash and invested assets resulted primarily from increased
operating cash flows for the year ended December 31, 2018.
40
Net Gains and Losses on Investments
Net losses on investments were $2,496,000 in Year Ended 2018 compared to a net gain of $84,000 in
Year Ended 2017. The increased loss of $2,580,000, was primarily attributable to an accounting standard
change (ASU 2016-01, see Note 2 in the accompanying Consolidated Financial Statements for further
discussion over our accounting policies following Item 15 of this Annual Report) with respect to the changes
in fair value of equity securities and other investments. Historically, the change in unrealized gains (losses)
for these investments would flow through other comprehensive (loss) income. As a result of the new
accounting standard, the change in unrealized gains (losses) is now recorded in the statements of income and
comprehensive (loss) income. Unrealized losses on our equity securities and other investments in Year
Ended 2018 were $2,383,000. Realized losses on investments was $56,000 in Year Ended 2018 compared
to realized gains of $84,000 in Year Ended 2017.
Other Income
Other income was $1,334,000 in Year Ended 2018 compared to $1,268,000 in Year Ended 2017. The
increase of $66,000, or 5.2%, was primarily due to an increase in installment and other fees earned in our
insurance underwriting business.
Net Loss and LAE
Net loss and LAE was $52,068,000 in Year Ended 2018 compared to $34,186,000 in Year Ended
2017. The net loss ratio was 56.4% in Year Ended 2018 compared to 44.2% in Year Ended 2017, an increase
of 12.2 percentage points.
41
The following graphs summarize the changes in the components of net loss ratio for the periods
indicated:
During 2018, the net loss ratio increased compared to 2017 primarily due to the impact of catastrophe
losses. In 2018 there were nine catastrophic events that affected us, with most of the impact related to several
major winter storms from the first quarter. We recorded a 6.0 point impact from catastrophes in 2018 in
comparison to no impact from catastrophe events during 2017. In addition to the impact of catastrophes, we
recorded 1.1 points of unfavorable prior year loss development in 2018 compared to 0.1 points of favorable
prior year development in 2017. The underlying loss ratio excluding the impact of catastrophes and prior
year development was 49.2% in 2018, an increase of 4.9 points from the 44.3% underlying loss ratio for
2017. The underlying loss ratio rose due to an increased impact from larger fire and liability claims in 2018
compared to 2017. Average claim severity on smaller non-weather related water claims has also increased
significantly over the last year. See table below under “Additional Financial Information” summarizing net
loss ratios by line of business.
Commission Expense
Commission expense was $25,342,000 in 2018 or 19.0% of direct earned premiums. Commission
expense was $21,182,000 in 2017 or 19.1% of direct earned premiums. The increase of $4,160,000 is due to
the increase in direct written premiums in 2018 as compared to 2017.
Other Underwriting Expenses
Other underwriting expenses were $20,943,000 in Year Ended 2018 compared to $18,116,000 in Year
Ended 2017. The increase of $2,827,000, or 15.6%, was primarily due to expenses related to growth in direct
42
written premiums. We are also incurring expenses related to expansion into the states where we are newly
licensed to write business (“Expansion Expenses”). Expenses directly related to the increase in direct written
premiums primarily consist of underwriting expenses, software usage fees, and state premium taxes.
Expenses indirectly related to the increase in direct written premiums primarily consist of salaries along with
related other employment costs. Expansion Expenses were $1,653,000 in Year Ended 2018 compared to
$1,044,000 in Year Ended 2017. The increase of $619,000 includes the costs of salaries and employment
costs, professional fees, IT and data services specifically attributable to the expansion into new states.
Core salaries and employment costs were $8,444,000 in Year Ended 2018 compared to $7,385,000
in Year Ended 2017. The increase of $1,059,000, or 14.3%, was less than the 20.7% increase in total direct
written premiums. The increase in employment costs was due to hiring of additional staff to service our
current level of business and anticipated growth in volume, hiring our new Chief Operating Officer in March
2018 (Chief Executive Officer effective January 1, 2019) as well as annual increases in salaries. Growth
related to our Expansion business creates a lag in net premiums earned compared to direct written premiums
for that business. This lag in net premiums earned along with the reduction to quota share rates distorts net
underwriting expense ratio comparisons between periods. Therefore, we believe that reviewing the ratio of
Core other underwriting expenses to Core net premiums earned offers a more consistent comparison between
periods and is a more accurate indicator of our overall other underwriting expense efficiency. The following
table breaks out the Core and Expansion components of our underwriting expense ratio for the periods
indicated:
Years ended
December 31,
2018
2017
$ or
Point
Change
Net premiums earned
Core
Expansion
Total
Other underwriting expenses
Core
Expansion
Total
$
99,657
3,758
103,415
$
$
$
19,290
1,653
20,943
$
$
77,007
344
77,351
$
$
17,072
1,044
18,116
$
$
22,650
3,414
26,064
$
$
2,218
609
2,827
Other underwriting expenses as a percentage
of net premiums earned
Core
Expansion
Total
19.4%
44.0%
20.3%
22.2%
303.5%
23.4%
-2.8%
-259.5%
-3.1%
The ratio of Core other underwriting expenses to Core net premiums earned was 19.4% in Year Ended
2018 compared to 22.2% in Year Ended 2017, a decrease of 1.3 percentage points.
43
Our net underwriting expense ratio in Year Ended 2018 was 38.4% compared with 36.4% in Year
Ended 2017. The following table shows the individual components of our net underwriting expense ratio for
the periods indicated:
Years ended
December 31,
2018
2017
Percentage
Point Change
Ceding commission revenue - provisional
Ceding commission revenue - contingent
Other income
Acquisition costs and other underwriting expenses:
Commission expense
Other underwriting expenses
Core
Employment costs
Other Core Expenses
Total Core Expenses
Expansion Expenses
Total other underwriting expenses
(6.5)
1.4
(1.2)
24.5
18.2
8.2
10.4
18.6
1.6
20.2
%
%
(13.8)
1.0
(1.6)
27.4
13.0
9.5
12.6
22.1
1.3
23.4
Net underwriting expense ratio
38.4
%
36.4
%
7.3
0.4
0.4
(2.9)
5.2
(1.3)
(2.2)
(3.5)
0.3
(3.2)
2.0
The decrease in our other underwriting expense ratio excluding the impact of ceding commission
revenue and commission expense was driven by a decline of 3.5 points from the impact of employment costs
and other expenses attributable to our growing Core business.
The overall increase of 2.0 percentage points in the net underwriting expense ratio was driven almost
entirely by the change in our quota share ceding rates and its impact on provisional ceding commission
revenue as a result of the additional retention resulting from the Cut-off to our quota share treaty on July 1,
2018. The components of our net underwriting expense ratio related to commissions and other underwriting
expenses improved in nearly all categories, but this was more than offset by reductions in the reinsurance
ceding commission revenue components.
Other Operating Expenses
Other operating expenses, related to the expenses of our holding company, were $2,575,000 in Year
Ended 2018 compared to $3,513,000 in Year Ended 2018. The decrease in Year Ended 2018 of $938,000, or
26.7%, was primarily due to a decrease in accrued executive bonus compensation pursuant to the employment
agreement effective January 1, 2017 with Barry B. Goldstein, our Chief Executive Officer. The bonus is a
one-time payment computed at the end of the three-year period ended December 31, 2019, and the amount
accrued through December 31, 2018 will only be paid if the three-year computation meets the required terms
of profitability. The decrease in executive bonus computation was partially offset by an increase in salary
and equity compensation due to the hiring of Dale A. Thatcher, our new Chief Operating Officer, in March
2018 (Chief Executive Officer effective January 1, 2019).
Depreciation and Amortization
Depreciation and amortization was $1,787,000 in Year Ended 2018 compared to $1,403,000 in Year
Ended 2017. The increase of $384,000, or 27.4%, in depreciation and amortization was primarily due to
depreciation of our new systems platform for handling business being written in Expansion states. The
44
increase was also impacted by newly purchased assets used to upgrade our systems infrastructure and
improvements to the Kingston, New York home office building from which we operate.
Interest Expense
Interest expense in Year Ended 2018 was $1,822,000 and $60,000 in Year Ended 2017. We incurred
interest expense in connection with our $30.0 million issuance of long-term debt in December 2017.
Income Tax Benefit/Expense
Income tax benefit in Year Ended 2018 was $86,000, which resulted in an effective tax rate of (2.9)
%. Income tax expense in Year Ended 2017 was $4,323,000, which resulted in an effective tax rate of 30.2%.
The change in our effective tax rate includes the change in the federal tax rate from 35% to 21% (see Note 2
in the accompanying Consolidated Financial Statements for further discussion over our accounting policies
following Item 15 of this Annual Report). In addition, permanent differences in Year Ended 2018 had a
greater impact on reducing the current year effective tax rate due to a decrease in income before taxes in Year
Ended 2018 compared to the Year Ended 2017 amount. Income before taxes was $3,007,000 in Year Ended
2018 compared to income before taxes of $14,309,000 in Year Ended 2017.
Net Income
Net income was $3,093,000 in Year Ended 2018 compared to $9,986,000 in Year Ended 2017. The
decrease in net income of $6,893,000, or 69.0%, was due to the circumstances described above, which caused
the increase in our net loss ratio, decrease in ceding commission revenue, net losses on investments, increases
in other underwriting expenses, depreciation and amortization and interest expense, partially offset by the
increase in our net premiums earned, net investment income and decrease in 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.
45
Gross premiums written:
Personal lines
Commercial lines
Livery physical damage
Other(1)
Total
Net premiums written:
Personal lines
Excluding the effect of quota share adjustments on July 1
Return of premiums previously ceded to prior quota share treaties prior quota share treaties
Personal lines (2)
Commercial lines
Livery physical damage
Other(1)
Total
Net premiums earned:
Personal lines (2)
Commercial lines
Livery physical damage
Other(1)
Total
Net loss and loss adjustment expenses:
Personal lines
Commercial lines
Livery physical damage
Other(1)
Unallocated loss adjustment expenses
Total
Net loss ratio:
Personal lines
Commercial lines
Livery physical damage
Other(1)
Total
Years ended
December 31,
2018
2017
$
$
119,971,418
16,702,409
9,792,456
251,190
146,717,473
$
95,993,591
14,632,300
10,727,707
244,427
121,598,025
$
$
$
90,439,690
4,553,345
94,993,035
14,779,752
9,792,456
228,551
119,793,794
$
$
79,603,364
13,804,284
9,797,939
209,128
103,414,715
$
61,756,415
7,140,088
68,896,503
13,038,640
10,727,707
206,026
92,868,876
53,556,294
12,163,104
11,441,168
190,457
77,351,023
$
$
$
$
$
43,287,170
8,220,382
4,211,273
334,015
2,242,365
58,295,205
$
$
20,866,628
6,368,927
4,870,947
(14,686)
2,093,721
34,185,537
54.4%
59.5%
43.0%
159.7%
56.4%
39.0%
52.4%
42.6%
-7.7%
44.2%
(1) “Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory
state joint underwriting association and loss and loss adjustment expenses from commercial auto.
(2) See discussions above with regard to “Net Written Premiums and Net Premiums Earned”, as to changes in quota share ceding
rates, effective July 1, 2018 and 2017.
(3) See discussions above with regard to “Net Loss and LAE”, as to catastrophe losses in 2018.
46
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the years ended December
31, 2018 and 2017 follows:
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net (losses) gains 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
Years ended
December 31,
2018
2017
$
103,414,715
5,332,630
6,037,441
(2,439,026)
1,266,654
$
77,351,023
9,933,133
4,132,586
84,313
1,210,897
113,612,414
92,711,952
58,295,205
25,342,137
20,943,342
1,787,150
106,367,834
34,185,537
21,182,254
18,115,614
1,402,928
74,886,333
7,244,580
1,387,508
5,857,072
$
17,825,619
5,764,191
12,061,428
$
56.4%
38.4%
94.8%
44.2%
36.4%
80.6%
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
$
Less: Ceding commission revenue
Less: Other income
46,285,479
(5,332,630)
(1,266,654)
$
39,297,868
(9,933,133)
(1,210,897)
Net underwriting expenses
$
39,686,195
$
28,153,838
Net premiums earned
$
103,414,715
$
77,351,023
Net Underwriting Expense Ratio
38.4%
36.4%
47
An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses,
and loss ratios is shown below:
Direct
Assumed
Ceded
Net
Year ended December 31, 2018
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
$
$
146,716,468
(13,388,535)
133,327,933
$
$
61,921,559
10,828,121
72,749,680
$
$
1,004
4,067
5,071
$
$
28,237
-
28,237
$
$
(26,923,679)
(2,994,610)
(29,918,289)
$
$
119,793,793
(16,379,078)
103,414,715
$
(9,882,474)
(4,600,238)
(14,482,712)
$
$
$
52,067,322
6,227,883
58,295,205
Loss ratio excluding the effect of catastrophes
Catastrophe loss
Loss ratio
46.4%
8.1%
54.5%
556.8%
0.0%
556.8%
33.0%
15.4%
48.4%
50.4%
6.0%
56.4%
Year ended December 31, 2017
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
$
$
121,575,178
(10,662,744)
110,912,434
$
$
48,222,147
-
48,222,147
$
$
22,847
9,456
32,303
$
$
30,417
-
30,417
$
$
(28,729,149)
(4,864,565)
(33,593,714)
$
$
(14,067,027)
-
(14,067,027)
$
92,868,876
(15,517,853)
77,351,023
$
$
$
34,185,537
-
34,185,537
Loss ratio excluding the effect of catastrophes
Catastrophe loss
Loss ratio
43.5%
0.0%
43.5%
94.2%
0.0%
94.2%
41.9%
0.0%
41.9%
44.2%
0.0%
44.2%
48
The key measures for our insurance underwriting business for the years ended December 31, 2018
and 2017 are as follows:
Net premiums earned
Ceding commission revenue
Other income
Years ended
December 31,
2018
2017
$
103,414,715
5,332,630
1,266,654
$
77,351,023
9,933,133
1,210,897
Loss and loss adjustment expenses (1)
58,295,205
34,185,537
Acquisition costs and other underwriting expenses:
Commission expense
Other underwriting expenses
Total acquisition costs and other
underwriting expenses
25,342,137
20,943,342
21,182,254
18,115,614
46,285,479
39,297,868
Underwriting income
$
5,433,315
$
15,011,648
Key Measures:
Net loss ratio excluding the effect of catastrophes
Effect of catastrophe loss on net loss ratio (1)
Net loss ratio
Net underwriting expense ratio excluding the
effect of catastrophes
Effect of catastrophe loss on net underwriting
expense ratio (2)
Net underwriting expense ratio
Net combined ratio excluding the effect
of catastrophes
Effect of catastrophe loss on net combined
ratio (1) (2)
Net combined ratio
Reconciliation of net underwriting expense ratio:
Acquisition costs and other
underwriting expenses
Less: Ceding commission revenue (2)
Less: Other income
50.4%
6.0%
56.4%
37.9%
0.5%
38.4%
88.3%
6.5%
94.8%
44.2%
0.0%
44.2%
36.4%
0.0%
36.4%
80.6%
0.0%
80.6%
$
$
46,285,479
(5,332,630)
(1,266,654)
39,686,195
$
$
39,297,868
(9,933,133)
(1,210,897)
28,153,838
Net earned premium
$
103,414,715
$
77,351,023
Net Underwriting Expense Ratio
38.4%
36.4%
(1) The year ended December 31, 2018, includes the sum of net catastrophe losses and loss adjustment expenses of
$6,227,883.
(2) The year ended December, 2018, the effect of catastrophe loss on our net underwriting expense ratio includes the direct
effect of reduced contingent ceding commission revenue by $459,068 and does not include the indirect effects of a
$124,817 decrease in other underwriting expenses.
49
Investments
Portfolio Summary
The following table presents a breakdown of the amortized cost, aggregate estimated fair value and
unrealized gains and losses by investment type as of December 31, 2018 and 2017:
Available-for-Sale Securities
December 31, 2018
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 and other
asset backed securities (1)
Total fixed-maturity securities
Cost or
Gross
Amortized Unrealized
Cost
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
% of
Estimated
Fair Value
$
8,222,050
$
26,331
$
(28,000)
$
-
$
8,220,381
5.4%
6,339,540
50,903
(12,327)
(36,508)
6,341,608
4.2%
119,078,698
123,740
(2,775,540)
(676,605)
115,750,293
76.3%
21,790,973
155,431,261
236,502
437,476
(231,229)
(3,047,096)
(331,012)
(1,044,125)
21,465,234
151,777,516
14.1%
100.0%
(1) In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account
related to its relationship with the Federal Home Loan Bank of New York ("FHLBNY"). The eligible collateral would be pledged
to FHLBNY if KICO draws an advance from FHBLNY. As of December 31, 2018, the estimated fair value of the eligible
investments was $5,116,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2018,
there was no outstanding balance on the FHLBNY credit line.
December 31, 2017
Cost or
Gross
Amortized Unrealized
Cost
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
% of
Estimated
Fair Value
$
-
$
-
$
-
$
-
$
-
0.0%
11,096,122
250,135
(30,814)
-
11,315,443
9.4%
87,562,631
1,189,207
(269,857)
(340,516)
88,141,465
73.5%
20,463,353
119,122,106
305,499
1,744,841
(48,482)
(349,153)
(189,022)
(529,538)
20,531,348
119,988,256
17.1%
100.0%
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 and other
asset backed securities (1)
Total fixed-maturity securities
(1) In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account
related to its membership in the FHLBNY. The eligible collateral would be pledged to FHLBNY if KICO draws an advance from
50
the FHBLNY credit line. As of December 31, 2017, the estimated fair value of the eligible investments was $6,703,000. KICO
will retain all rights regarding all securities if pledged as collateral. As of December 31, 2017, there was no outstanding balance
on the FHLBNY credit line.
Equity Securities
The following table presents a breakdown of the cost, estimated fair value, and gross gains and losses
of investments in equity securities as of December 31, 2018 and 2017:
Category
Cost
December 31, 2018
Gross
Gains
Gross
Losses
Estimated
Fair
Value
% of
Estimated
Fair Value
Equity S ecurities:
Preferred stocks
Common stocks and exchange
$
6,694,754
$
-
$
(541,798)
$
6,152,956
37.1%
traded mutual funds
11,611,232
99,817
(1,291,389)
10,419,660
Total
$
18,305,986
$
99,817
$
(1,833,187)
$
16,572,616
62.9%
100.0%
Category
Cost
December 31, 2017
Gross
Gains
Gross
Losses
Estimated
Fair
Value
% of
Estimated
Fair Value
Equity S ecurities:
Preferred stocks
Common stocks and exchange
traded mutual funds
Total
$
7,081,099
$
60,867
$
(141,025)
$
7,000,941
49.0%
6,680,742
13,761,841
$
841,250
902,117
$
(236,735)
(377,760)
$
7,285,257
14,286,198
$
51.0%
100.0%
Other Investments
Pursuant to the definition of “Fair Value Measurement,” set forth in the Accounting Standards
Codification 820 (the “ASC 820”) an entity is permitted, as a practical expedient, to estimate the fair value
of an investment within the scope of ASC 820 using the net asset value (“NAV”) per share (or its equivalent)
of the investment. The following table presents a breakdown of the cost, estimated fair value, and gross
losses of our other investments as of December 31, 2018 and 2017:
Category
Cost
December 31, 2018
Gross
(Losses)
Estimated
Fair Value
December 31, 2017
Gross
Gains
Estimated
Fair Value
Cost
Other Investments:
Hedge fund
$
1,999,381
$
(144,156)
$
1,855,225
$
-
$
-
$
-
Total
$
1,999,381
$
(144,156)
$
1,855,225
$
-
$
-
$
-
51
Held-to-Maturity Securities
December 31, 2018
Category
Cost or
Gross
Amortized Unrealized
Cost
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
% of
Estimated
Fair Value
U.S. Treasury securities
$
729,507
$
147,532
$
(3,964)
$
-
$
873,075
19.7%
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
998,803
33,862
-
-
1,032,665
23.3%
2,494,545
38,461
(1,425)
(10,905)
2,520,676
57.0%
Total
$
4,222,855
$
219,855
$
(5,389)
$
(10,905)
$
4,426,416
100.0%
December 31, 2017
Category
Cost or
Gross
Amortized Unrealized
Cost
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
% of
Estimated
Fair Value
U.S. Treasury securities
$
729,466
$
147,573
$
(1,729)
$
-
$
875,310
17.0%
Political subdivisions of States,
Territories and Possessions
998,984
50,366
Corporate and other bonds
Industrial and miscellaneous
3,141,358
90,358
-
-
-
1,049,350
20.4%
(6,300)
3,225,416
62.6%
Total
$
4,869,808
$
288,297
$
(1,729)
$
(6,300)
$
5,150,076
100.0%
Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund
requirements.
A summary of the amortized cost and fair value of our investments in held-to-maturity securities by
contractual maturity as of December 31, 2018 and 2017 is shown below:
Remaining Time to Maturity
Less than one year
One to five years
Five to ten years
M ore than 10 years
Total
December 31, 2018
December 31, 2017
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
-
2,996,685
619,663
606,507
4,222,855
$
$
-
3,036,531
635,846
754,039
4,426,416
$
$
-
2,546,459
1,716,884
606,465
4,869,808
$
$
-
2,601,898
1,794,139
754,039
5,150,076
$
52
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, 2018 and 2017 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
BB
Total corporate and municipal bonds
Residential mortgage backed securities
AAA
AA
A
CCC
CC
C
D
Non rated
Total residential mortgage backed securities
December 31, 2018
December 31, 2017
Estimated
Fair Market
Value
Percentage of
Fair Market
Value
Estimated
Fair Market
Value
Percentage of
Fair Market
Value
$
8,220,381
5.4%
$
-
0.0%
979,123
8,350,910
27,665,961
85,095,907
-
122,091,901
999,640
12,743,906
4,777,356
1,440,825
109,648
24,050
390,542
979,267
21,465,234
0.6%
5.5%
18.2%
56.1%
0.0%
80.4%
0.7%
8.5%
3.1%
0.9%
0.1%
0.0%
0.3%
0.6%
14.2%
1,358,143
11,319,057
17,199,631
68,704,768
875,310
99,456,909
2,013,010
11,021,144
3,902,768
1,420,296
120,742
28,963
1,659,479
364,945
20,531,347
1.1%
9.4%
14.3%
57.3%
0.7%
82.8%
1.7%
9.2%
3.3%
1.2%
0.1%
0.0%
1.4%
0.3%
17.2%
Total
$
151,777,516
100.0%
$
119,988,256
100.0%
The table below details the average yield by type of fixed-maturity security as of December 31, 2018
and 2017:
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
December 31, 2018
December 31, 2017
2.20%
3.32%
3.62%
3.49%
4.11%
1.94%
3.68%
3.98%
1.83%
3.58%
53
The table below lists the weighted average maturity and effective duration in years on our fixed-
maturity securities as of December 31, 2018 and 2017:
Weighted average effective maturity
December 31, 2018
5.6
December 31, 2017
5.7
Weighted average final maturity
Effective duration
6.9
4.6
7.8
4.9
Fair Value Consideration
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, 2018 and December 31, 2017, 81%
and 73%, 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, 2018 and December 31, 2017. In December, 2017, we disposed of one of our held-to-maturity
debt securities that was previously included in other than temporary impairment (“OTTI”); the bond was
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 our first credit loss component of OTTI on
this investment as of June 30, 2016. As of December 31, 2016, the full amount of the write-down was
recognized as a credit component of OTTI in the amount of $69,911. In September 2017, Hurricane Maria
significantly affected Puerto Rico. The impact of this event further contributed to the credit deterioration of
PR and, as a result, we recorded an additional credit loss component of OTTI on this investment for the
amount of $50,000 during the quarter ended September 30, 2017. The total of the two OTTI write-downs of
this investment as of December 31, 2017 was $119,911. We determined that none of the other unrealized
losses were deemed to be OTTI for our portfolio of fixed-maturity investments and equity securities for the
years ended December 31, 2018 and 2017. 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 and ability to retain the investment for a period of time
sufficient to allow for an anticipated recovery of fair value to our cost basis.
54
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, 2018 and 2017:
Less than 12 months
December 31, 2018
12 months or more
Total
Estimated
Fair
Value
Unrealized
No. of
Positions
Losses
Held
Estimated
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Aggregate
Fair
Value
Unrealized
Losses
$
4,948,530
$
(28,000)
3
$
-
$
-
-
$
4,948,530
$
(28,000)
555,375
(12,327)
1
1,436,242
(36,508)
3
1,991,617
(48,835)
81,004,459
(2,775,540)
97
13,424,888
(676,605)
24
94,429,347
(3,452,145)
7,002,713
(231,229)
9
11,928,425
(331,012)
19
18,931,138
(562,241)
$
93,511,077
$
(3,047,096)
110
26,789,555
$
$
(1,044,125)
46
$
120,300,632
$
(4,091,221)
Category
Fixed-Maturity S ecurities:
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 and other
asset backed securities
Total fixed-maturity
securities
55
Less than 12 months
December 31, 2017
12 months or more
Total
Estimated
Fair
Value
No. of
Unrealized Positions
Losses
Held
Estimated
Fair
Value
No. of
Unrealized Positions
Losses
Held
Aggregate
Fair
Value
Unrealized
Losses
$
1,549,839
$
(30,814)
4
$
-
$
-
-
$
1,549,839
$
(30,814)
15,036,462
(269,857)
20
9,113,924
(340,516)
17
24,150,386
(610,373)
6,956,371
(48,482)
6
7,867,572
(189,022)
15
14,823,943
(237,504)
$
23,542,672
$
(349,153)
30
16,981,496
$
$
(529,538)
32
$
40,524,168
$
(878,691)
Category
Fixed-Maturity S ecurities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage and other
asset backed securities
Total fixed-maturity
securities
Equity S ecurities:
Preferred stocks
Common stocks and
$
1,605,217
$
(20,313)
exchange traded mutual funds
1,446,375
(222,205)
Total equity securities
$
3,051,592
$
(242,518)
5
4
9
$
1,776,675
$
(120,712)
124,900
(14,530)
$
1,901,575
$
(135,242)
3
1
4
$
3,381,892
$
(141,025)
1,571,275
(236,735)
$
4,953,167
$
(377,760)
Total
$
26,594,264
$
(591,671)
39
$
18,883,071
$
(664,780)
36
$
45,477,335
$
(1,256,451)
56
There were 156 securities at December 31, 2018 that accounted for the gross unrealized
loss, none of which were deemed by us to be other than temporarily impaired. There were 75
securities at December 31, 2017 that accounted for the gross unrealized loss, none of which were
deemed by us to be other than temporarily impaired. Significant factors influencing our
determination that unrealized losses were temporary included the magnitude of the unrealized
losses in relation to each security’s cost, the nature of the investment and management’s intent not
to sell these securities and it being not more likely than not that we will be required to sell these
investments before anticipated recovery of fair value to our cost basis.
Liquidity and Capital Resources
Cash Flows
The primary sources of cash flow are from our insurance underwriting subsidiary, KICO,
and include direct premiums written, ceding commissions from our quota share reinsurers, loss
recovery payments from our reinsurers, investment income and proceeds from the sale or maturity
of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are
paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions.
KICO also uses funds for loss payments and loss adjustment expenses on our net business,
commissions to producers, salaries and other underwriting expenses as well as to purchase
investments and fixed assets.
On January 31, 2017, we closed on an underwritten public offering of 2,500,000 shares of
our common stock. On February 14, 2017, we closed on the underwriters’ purchase option for an
additional 192,500 shares of our common stock. The public offering price for the 2,692,500 shares
sold was $12.00 per share. The aggregate net proceeds to us were approximately $30,137,000. On
March 1, 2017, we used $23,000,000 of the net proceeds of the offering to contribute capital to
KICO, to support its ratings upgrade plan and additional growth. The remainder of the net proceeds
will be used for general corporate purposes.
On December 19, 2017, we issued $30 million of our 5.50% Senior Unsecured Notes due
December 30, 2022 pursuant to an underwritten public offering. The net proceeds to us were
approximately $29,121,000. On December 20, 2017, we used $25,000,000 of the net proceeds
from the debt offering to contribute capital to KICO, to support additional growth. The remainder
of the net proceeds will be used for general corporate purposes. Interest will be payable semi-
annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at
the rate of 5.50% per year from December 19, 2017.
For the year ended December 31, 2018, the primary source of cash flow for our holding
company was the dividends received from KICO, subject to statutory restrictions. For the year
ended December 31, 2018, KICO paid dividends of $3,600,000 to us.
KICO is a member of the Federal Home Loan Bank of New York, which provides
additional access to liquidity. Members have access to a variety of flexible, low cost funding
through FHLBNY’s credit products, enabling members to customize advances. Advances are to
be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and
commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note
3 to our Consolidated Financial Statements, – “Investments”, for eligible collateral held in a
designated custodian account available for future advances. Advances are limited to 5% of KICO’s
57
net admitted assets as of December 31, 2018 and are due and payable within one year of borrowing.
The maximum allowable advance as of December 31, 2018, based on the net admitted assets as of
December 31, 2018, was approximately $10,960,000. Advances are limited to the amount of
available collateral, which was approximately $5,116,000 as of December 31, 2018. There were
no borrowings under this facility during the year ended December 31, 2018.
As of December 31, 2018, invested assets and cash in our holding company was
approximately $4,212,000. If the aforementioned sources of cash flow currently available are
insufficient to cover our holding company cash requirements, we will seek to obtain additional
financing.
Our reconciliation of net income to net cash provided by operations is generally influenced
by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing
company settlements and loss payments.
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
2018
2017
$
$
22,295,366
(43,401,314)
(6,137,282)
(27,243,230)
48,381,633
21,138,403
28,046,140
(47,626,330)
55,917,303
36,337,113
12,044,520
48,381,633
$
$
Net cash provided by operating activities was $22,295,000 in 2018 as compared to
$28,046,000 in 2017. The $5,751,000 decrease in cash flows provided by operating activities in
2018 was primarily a result of a decrease in net income (adjusted for non-cash items) of
$3,513,000, fluctuations in other assets, accounts payable, accrued expenses and other liabilities
of $4,679,000, partially offset by an increase in net cash arising from insurance related items from
KICO of $2,441,000.
Net cash used in investing activities was $43,401,000 in 2018 compared to $47,626,000 in
2017. The $4,225,000 decrease in net cash used in investing activities was the result of a
$16,012,000 increase in sales or maturities of invested assets and $92,000 decrease in fixed asset
acquisitions in 2018, which offset the $15,879,000 increase in acquisitions of invested assets.
Net cash provided by financing activities was $6,137,000 in 2018 compared to $55,917,000
provided in 2017. The $62,055,000 decrease in net cash provided by financing activities is the
result of the $30,137,000 net proceeds we received from the public offering of our common stock
in January/February 2017 and the $29,122,000 net proceeds we received from the issuance of long-
term debt pursuant to the public offering in December 2017 and a $1,065,000 increase in dividends
paid due to an increase in the shares outstanding and dividend paid per share.
58
Reinsurance
The following table provides summary information with respect to each reinsurer that
accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss
adjustment expenses as of December 31, 2018:
($ in thousands)
Cavello Bay Reinsurance Limited
Swiss Reinsurance America Corporation
Hannover Rueck SE
Others
Total
A.M.
Best Rating
A-
A+
A+
Amount
Recoverable
as of
December 31, 2018
6,596
$
5,750
3,909
16,255
3,870
20,125
$
%
32.8%
28.6%
19.4%
80.8%
19.2%
100.0%
Reinsurance recoverable from Cavello Bay Reinsurance Limited 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 treaty in effect for 2018 for our personal lines business, which
primarily consists of homeowners policies, was covered under the 2017/2019 Treaty. Our quota
share reinsurance treaty in effect for 2017 for our personal lines business, which primarily consists
of homeowners policies, was covered under the 2017/2019 Treaty and 2016/2017 Treaty.
In March 2017, we bound our personal lines quota share reinsurance treaty effective July
1, 2017. The treaty provides for a reduction in the quota share ceding rate to 20%, from 40% in
the 2016/2017 Treaty, and an increase in the provisional ceding commission rate to 53%, from
52% in the 2016/2017 Treaty. The 2017/2019 Treaty covers a two year period from July 1, 2017
through June 30, 2019. In August 2018, we reduced our quota share ceding rate under the
2017/2019 Treaty to 10%, from 20%, effective July 1, 2018.
We entered into new excess of loss and catastrophe reinsurance treaties effective July 1,
2018. Material terms for our reinsurance treaties in effect for the treaty years shown below are as
follows:
59
Line of Business
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 and facultative facility above quota share coverage (1)
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
Quota share treaty
Risk retained
Excess of loss coverage above risk retained
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
Catastrophe Reinsurance:
July 1, 2018
to
June 30, 2019
Treaty Year
July 1, 2017
to
June 30, 2018
July 1, 2016
to
June 30, 2017
10%
900,000
$
1,000,000
$
$
9,000,000
in excess of
$
1,000,000
$
9,100,000
$
10,000,000
June 30, 2019
20%
800,000
$
1,000,000
$
$
9,000,000
in excess of
$
1,000,000
$
9,200,000
$
10,000,000
June 30, 2019
40%
500,000
$
833,333
$
$
3,666,667
in excess of
$
833,333
$
4,000,000
$
4,500,000
June 30, 2017
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2019
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2018
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2017
None
$
$
750,000
3,750,000
in excess of
$
$
$
750,000
3,750,000
4,500,000
None
$
$
750,000
3,750,000
in excess of
$
$
$
750,000
3,750,000
4,500,000
None
$
$
500,000
4,000,000
in excess of
$
$
$
500,000
4,000,000
4,500,000
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2019
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2018
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2017
Initial loss subject to personal lines quota share treaty
Risk retained per catastrophe occurrence (2)
Catastrophe loss coverage in excess of quota share coverage (3) (4)
Reinstatement premium protection (5)
$
$
$
5,000,000
4,500,000
445,000,000
Yes
$
$
$
5,000,000
4,000,000
315,000,000
Yes
$
$
$
5,000,000
3,000,000
247,000,000
Yes
(1) For personal lines, the 2017/2019 Treaty includes the addition of an automatic facultative facility allowing KICO
to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses
from $3,500,000 to $10,000,000.
(2) Plus losses in excess of catastrophe coverage.
(3) 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.
(4) Effective July 1, 2018, the top $50,000,000 layer of catastrophe reinsurance coverage has a two-year term expiring
on June 30, 2020.
(5) Effective July 1, 2016, reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of
$5,000,000.
60
Effective July 1, 2017, reinstatement premium protection for $145,000,000 of catastrophe coverage in excess of
$5,000,000.
Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of
$5,000,000.
The single maximum risks per occurrence to which the Company is subject under the
treaties effective July 1, 2018 are as follows:
July 1, 2018 - June 30, 2019
Treaty
Personal Lines (1)
Personal Umbrella
Commercial Lines
Commercial Umbrella
Extent of Loss
Initial $1,000,000
$1,000,000 - $10,000,000
Over $10,000,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Risk
Retained
$900,000
None(2)
100%
$100,000
None
100%
$750,000
None(3)
100%
$100,000
None
100%
Catastrophe (4)
Initial $5,000,000
$5,000,000 - $450,000,000
Over $450,000,000
$4,500,000
None
100%
(1) Treaty for July 1, 2018 – June 30, 2019 (the “2017/2019 Treaty”) is a two-year treaty with expiration date of June
30, 2019.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
61
The single maximum risks per occurrence to which the Company is subject under the treaty
years shown below are as follows:
July 1, 2017 - June 30, 2018
July 1, 2016 - June 30, 2017
Treaty
Personal Lines (1)
Range of Loss
Initial $1,000,000
$1,000,000 - $10,000,000
Over $10,000,000
Risk
Retained
$800,000
None(2)
100%
Range of Loss
Initial $833,333
$833,333 - $4,500,000
Over $4,500,000
Personal Umbrella
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
$100,000
None
100%
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Commercial Lines
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
$750,000
None(3)
100%
Initial $500,000
$500,000 - $4,500,000
Over $4,500,000
Commercial Umbrella
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
$100,000
None
100%
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Risk
Retained
$500,000
None(3)
100%
$100,000
None
100%
$500,000
None(3)
100%
$100,000
None
100%
Catastrophe (4)
Initial $5,000,000
$5,000,000 - $320,000,000
Over $320,000,000
$4,000,000
None
100%
Initial $5,000,000
$5,000,000 - $252,000,000
Over $252,000,000
$3,000,000
None
100%
(1) Treaty for July 1, 2017 – June 30, 2018 is a two-year treaty with expiration date of June 30, 2019.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
Inflation
Premiums are established before we know the amount of losses and loss adjustment
expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the
potential impact of inflation in establishing our reserves, especially as it relates to medical and
hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation
in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher
than we anticipated, which would require us to increase reserves and reduce earnings.
Fluctuations in rates of inflation also influence interest rates, which in turn impact the
market value of our investment portfolio and yields on new investments. Operating expenses,
including salaries and benefits, generally are impacted by inflation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, or liquidity that are material to investors.
62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
This item is not applicable to smaller reporting companies.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item 8 are included in this Annual Report
following Item 15 hereof. As a first year accelerated filer, 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 a system of disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act that are designed to assure that information required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that,
as of the end of such period, our disclosure controls and procedures are: (i) effective in recording,
processing, summarizing, and reporting information on a timely basis that we are required to
disclose in the reports that we file or submit under the Exchange Act, and (ii) effective in ensuring
that information that we are required to disclose in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
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
63
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 as of December 31, 2018 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, 2018. The independent registered public accounting firm of the
Company also reported on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2018. Management’s report and the independent registered public
accounting firm’s report are included under Item 8 of this Report under the captions entitled
“Management’s Annual Report on Internal Control Over Financial Reporting” and “Report of
Independent Registered Public Accounting Firm.”
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.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Kingstone Companies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Kingstone Companies, Inc. and Subsidiaries’ (the “Company”) internal control
over financial reporting as of December 31, 2018, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets as of December
31, 2018 and 2017 and the related consolidated statements of income and comprehensive
income (loss), stockholders’ equity, and cash flows for the years then ended of the Company and
our report dated March 18, 2019 expressed an unqualified opinion with explanatory language
related to the Company’s change in accounting for equity securities in 2018 on those financial
statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
1
MarcumLLPnCityPlace IIn185 Asylum Street n17th Floor nHartford, Connecticut06103nPhone860.760.0600nFax860.760.0601 nwww.marcumllp.com Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the 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 the policies or procedures may deteriorate.
Marcum LLP
Hartford, CT
March 18, 2019
s:\business\word_processing\common\finalized\kingstone companies, inc\2018\letters\105832 rep ind reg public acct firm - icfr. - 1218docx.docx
2
ITEM 9B. OTHER INFORMATION.
On March 14, 2018, the Company and Dale A. Thatcher, a director of the Company,
entered into an employment agreement (the “2018 Thatcher Employment Agreement”) pursuant
to which Mr. Thatcher would serve as the Company’s Chief Operating Officer. The 2018 Thatcher
Employment Agreement became effective as of March 15, 2018 and expired on December 31,
2018. Pursuant the 2018 Thatcher Employment Agreement, Mr. Thatcher was entitled to receive
a base salary of $500,000 per annum and a minimum bonus equal to 15% of his base salary.
Concurrently with the execution of the 2018 Thatcher Employment Agreement, the Company
granted to Mr. Thatcher 35,715 shares of restricted common stock under the 2014 Equity Plan (the
“Stock Grant Agreement”). Subject to the terms of the Stock Grant Agreement, such shares will
vest in three equal installments on each of the three annual anniversaries following the grant date.
The foregoing description of the 2018 Thatcher Employment Agreement and the Stock Grant
Agreement is qualified in its entirety by reference to the full text of the 2018 Thatcher Employment
Agreement filed as Exhibit 10(k) and the Stock Grant Agreement filed as Exhibit 10(j) to this
Annual Report, which are incorporated by reference herein.
There were no arrangements or understandings between Mr. Thatcher and any other
persons pursuant to which he was appointed as Chief Operating Officer. There were also no family
relationships between Mr. Thatcher and any director or executive officer of the Company, and the
Company did not enter into any transactions with Mr. Thatcher that reportable pursuant to Item
404(a) of Regulation S-K. The foregoing information is being disclosed under Item 9B of this
Annual Report in lieu of providing such disclosure in Item 5.02 of a Current Report on Form 8-K.
As disclosed elsewhere in this Annual Report, on October 16, 2018, the Company and Mr.
Thatcher entered into an employment agreement, effective as of January 1, 2019 and expiring on
December 31, 2021, pursuant to which Mr. Thatcher was promoted to succeed Mr. Goldstein as
Chief Executive Officer.
PART III
ITEM 10.
DIRECTORS,
GOVERNANCE.
EXECUTIVE
OFFICERS
AND
CORPORATE
Executive Officers and Directors
The following table sets forth the positions and offices presently held by each of our current
directors and executive officers and their ages:
Name
Barry B. Goldstein
Dale A. Thatcher
Victor J. Brodsky
Benjamin Walden
Floyd R. Tupper
Jay M. Haft
Age
65
57
61
51
64
83
Positions and Offices Held
Executive Chairman of the Board and Director
Chief Executive Officer and Director
Chief Financial Officer and Treasurer
Executive Vice President and Chief Actuary,
Kingstone Insurance Company
Secretary and Director
Director
67
William L. Yankus
Carla A. D’Andre
Timothy P. McFadden
Barry B. Goldstein
59
63
56
Director
Director
Director
On October 16, 2018, the Company announced that Mr. Goldstein would step down as
Chief Executive Officer, effective January 1, 2019. Additionally, the Company announced that
Mr. Goldstein, current Chairman of the Board of Directors of the Company, had been named
Executive Chairman. Mr. Goldstein 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 executive-level service
with KICO since 2006, give him the qualifications and skills to serve as one of our directors.
Dale A. Thatcher
On October 16, 2018, the Company announced that Mr. Thatcher would succeed Mr.
Goldstein as Chief Executive Officer, effective January 1, 2019. Mr. Thatcher was elected our
Chief Operating Officer and KICO’s President in March 2018. Mr. Thatcher is the founder of
Atherstone Partners, a consulting practice in insurance and investments. Prior to starting
Atherstone, Mr. Thatcher was Executive Vice President and Chief Financial Officer for Selective
Insurance Group, Inc. and previously Chief Accounting Officer for the Ohio Casualty Group. He
is a certified public accountant (inactive), a chartered property and casualty underwriter and a
chartered life underwriter. Mr. Thatcher has served as one of our directors since August 2017 and
currently serves as Co-Chair of our Finance Committee. He is an alumnus of the University of
Cincinnati and Harvard University. We believe that Mr. Thatcher’s executive-level experience in
the insurance industry gives him the qualifications and skills to serve as one of our directors.
Victor J. Brodsky
Mr. Brodsky has served as our Chief Financial Officer since August 2009 and as our
Treasurer since August 2013. He served as our Chief Accounting Officer from August 2007
through July 2009, as our Principal Financial Officer for Securities and Exchange Commission
(“SEC”) reporting purposes from November 2007 through July 2009 and as our Secretary from
December 2008 to August 2013. In addition, Mr. Brodsky has served as a director of KICO since
February 2008, as Chief Financial Officer of KICO since September 2010 and as 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
68
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 and Chairman of our Audit
Committee 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.
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
69
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 The Link
of Times Foundation and The Mariinski 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 served
as counsel to Reed Smith, an international law firm. 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 (serving as Chariman of our Nominating and Corporate Governance
Committee since 2010). 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.
William L. Yankus
Mr. Yankus brings to the Board over 30 years’ experience in the insurance industry. Since
September 2015, Mr. Yankus 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 and Chairman of our Compensation
Committee since April 2017. 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.
Carla A. D’Andre
Ms. D’Andre has more than 40 years of experience in the insurance industry. Since 2009,
Ms. D’Andre has been Chairman, CEO and President of D’Andre Insurance Group, Inc., which
she co-founded. D’Andre Insurance Group, Inc. is the parent of two independent insurance
agencies. Prior to co-founding D’Andre Insurance Group, Ms. D’Andre held executive-level roles
at several companies in the insurance industry, including Executive Vice President, Head – Global
Corporate Practice and Member – Partner’s Council at Willis Group Holdings plc, a multinational
risk advisor, insurance brokerage and reinsurance brokerage company; Managing Director and
Strategic Account Manager at AON Risk Services, a global provider of risk management solutions;
Chief Operating Officer at XL Capital’s insurance and technology start-up firm, Inquis Logic Inc.;
Member of Senior Management and Managing Director of Swiss Re New Markets and Director
of Alternative Markets at Swiss ReAmerica, affiliates of Swiss Reinsurance Company Ltd, a global
70
reinsurance company; Senior Vice President of Sedgwick North America, an insurance brokerage
firm; and Vice President of Johnson & Higgins, an insurance brokerage firm. Ms. D’Andre serves
in senior capacities in several insurance industry groups. In January 2019 she was elected by her
peers to a three-year term as a member of The Institutes’ CPCU Society Leadership Council., She
also serves as a member of the Executive Advisory Council of St. John’s University School of
Risk Management, Insurance and Actuarial Science. She has served as one of our directors since
May 2017 and currently serves as Co-Chair of our Finance Committee. Ms. D’Andre has an
M.B.A. from Pace University’s Lubin School of Business and a B.B.A. from St. John’s
University’s School of Risk Management, Insurance and Actuarial Science. We believe that Ms.
D’Andre’s extensive experience in multiple capacities in the insurance industry gives her the
qualifications and skills to serve as one of our directors.
Timothy P. McFadden
Mr. McFadden has more than 27 years of experience in the insurance industry. Since 2012,
Mr. McFadden has served as CEO and President of State Farm Indemnity Auto Insurance
Company and Senior Vice President of State Farm Insurance, Eastern Market Area. Since 2015,
he has also served as CEO and President of State Farm Florida Fire Company. Mr. McFadden
served as Senior Vice President of State Farm Insurance Companies, Southern Zone from 2008 to
2011 and Senior Vice President of State Farm Insurance Companies, Southern & Mid Atlantic
Zones from 2011 to 2013. He is a member of the Board of State Farm Indemnity Auto Insurance
Company, Local Initiatives Support Corporation, American College Ethics Board, State Farm
Florida Fire Company, Top Layer Reinsurance and Florida Council of 100. Mr. McFadden
received his B.S. degree from the United States Military Academy at West Point and his J.D. from
Stetson College of Law. He also completed the General Management Program at Harvard
Business School and received his Chartered Life Underwriter Designation from The American
College of Financial Services. We believe that Mr. McFadden's 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 and Yankus.
Audit Committee Financial Expert
71
Our Board of Directors has determined that Mr. Tupper qualifies as an “audit committee
financial expert,” as defined in applicable Nasdaq listing standards and federal securities rules and
regulations, and that Mr. Tupper is independent under applicable and federal securities rules and
regulations on independence of Audit Committee members.
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 SEC 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, 2018. To our
knowledge, based solely on a review of copies of Forms 3, 4 and 5 filed with the SEC and written
representations that no other reports were required, during the fiscal year ended December 31,
2018, our officers, directors and 10% stockholders complied with all Section 16(a) filing
requirements applicable to them, except that Mr. Walden filed one Form 4 late reporting one
transaction.
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, 2018 and 2017 for certain executive officers, including our Chief
Executive Officer through the end of 2018:
Name and
Principal Position
Barry B. Goldstein
Chief Executive
Officer
Dale A. Thatcher
Chief Operating
Officer
Victor J. Brodsky
Chief Financial
Officer
Year
2018
2017
Salary
$630,000
$630,000
Bonus
$ -
$ -
Stock
Awards(1)
$ -
$ -
Option
Awards(1)
$ -
$ -
Non-Equity
Incentive Plan
Compensation
$ 21,887(3) $ 43,784(4) $ 695,671
$2,324,263
$ 24,152
$ 1,670,111(2)
All Other
Compensation
Total
2018
$398,630
$ -
$750,000
$ -
$ 59,795(3)
$ 79,157(4)
$1,287,582
2018
2017
$350,000 $ -
$320,000 $ 30,000
$140,009
$149,500
$ -
$ -
$ 17,573(3)
$ 49,832(3)
$ 27,759(4) $ 535,341
$ 573,832
$ 24,500
72
(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 12 to our Consolidated Financial Statements included in this
Annual Report.
(2) Represents bonus compensation of $660,446 accrued pursuant to Mr. Goldstein’s
employment agreement for 2017 and paid in 2018, $945,000 of long-term bonus compensation
accrued pursuant to Mr. Goldstein’s employment agreement and payable in 2020 if incentive goals
are maintained through December 31, 2019 and $64,655 accrued pursuant to the KICO employee
profit sharing plan and paid in 2018. As of the date of this Annual Report, the above referenced
long-term bonus compensation accrued and payable in 2020, if incentive goals are maintained
through December 31, 2019 has been reduced by $247,311.
(3) Represents amounts earned pursuant to the KICO employee profit sharing plan for 2018 and
2017.
(4) For 2018, all other compensation consists of the following items for each named executive
officer above.
• For Mr. Goldstein, the amount in the table above includes employer matching contributions
under our deferred compensation plan of $15,018, employer matching contributions under
our defined compensation plan of $10,266, a car allowance of $12,000 and KICO director
fees.
• For Mr. Thatcher, the amount in the table above includes compensation paid to him for his
service as a non-employee director during 2018 comprised of a cash retainer of $11,458
and restricted shares of our common stock with a grant date fair value of $41,300, matching
contributions under our defined compensation plan of $10,615, a car allowance of $9,567
and KICO director fees.
• For Mr. Brodsky, the amount in the table above includes employer matching contributions
under our defined contribution plan of $10,847, a car allowance of $7,200 and KICO
director fees.
Employment Contracts
Barry Goldstein
(1) Agreement in effect for the years ended December 31, 2017 and 2018.
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 expired 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
73
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%). Accrued LTC compensation expense (credit) of $(247,311) and
$945,000 for the years ended December 31, 2018 and 2017 is included in other operating expenses
on the accompanying consolidated statements of income and comprehensive (loss) income.
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.
(2) Agreement in effect as of January 1, 2019
On October 16, 2018, the Company entered into an amended and restated employment
agreement with Barry Goldstein, its President, Chairman of the Board and Chief Executive Officer,
effective as of January 1, 2019 and expiring on December 31, 2021 (the “Amended Employment
Agreement”). Pursuant to the Amended Employment Agreement, Mr. Goldstein will step down as
Chief Executive Officer on January 1, 2019 and has currently been named Executive Chairman of
the Board.
Mr. Goldstein will be entitled to receive an annual base salary of $636,500 for the calendar
year 2019 and $500,000 for each of the calendar years 2020 and 2021. In addition, Mr. Goldstein
is eligible to receive an annual performance bonus equal to 3% 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. In addition, pursuant to the Amended
Employment Agreement, Mr. Goldstein will continue to be entitled to a long-term compensation
award (“LTC”) (which is a continuation of the previous terms under the 2017 Goldstein
Employment Agreement) of between $945,000 and $2,835,000 based on a specified minimum
increase in the Company’s adjusted book value per share (as defined in the Amended Employment
Agreement) as of December 31, 2019 as compared to December 31, 2016 (with the maximum LTC
payment being due if the average per annum increase is at least 14%). Further, pursuant to the
Amended Employment Agreement, in the event that Mr. Goldstein’s employment is terminated by
the Company without cause or he resigns for good reason (each as defined in the Amended
Employment Agreement), Mr. Goldstein would be entitled to receive separation payments equal
to his then applicable base salary, the 3% bonus and the LTC payment for the remainder of the
term. Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to three
times his then annual salary and the target LTC payment in the event of the termination of his
employment within eighteen months following a change of control of the Company. Pursuant to
the Amended Employment Agreement, Mr. Goldstein will be entitled to receive a grant, under the
terms of the 2014 Plan, during the first 30 days of January 2020, with respect to a number of shares
of restricted stock determined by dividing $436,500 by the fair market value of the Company stock
74
on the date of grant. The January 2020 grant will become vested with respect to fifty percent (50%)
of the award on each of December 31, 2020 and December 31, 2021 based on continued provision
of services on each vesting date. Also pursuant to the Amended Employment Agreement, Mr.
Goldstein will be entitled to receive a grant, under the 2014 Plan, during the first 30 days of 2021,
with respect to a number of shares of restricted stock determined by dividing $236,500 by the fair
market value of the Company stock on the date of grant. The January 2021 grant will become
vested as of December 31, 2021 based on continued provision of services on the vesting date.
Dale A. Thatcher
(1) Agreement in effect for the year ended December 31, 2018
On March 14, 2018, the Company and Dale A. Thatcher, a director of the Company,
entered into the 2018 Thatcher Employment Agreement pursuant to which Mr. Thatcher would
serve as the Company’s Chief Operating Officer. The 2018 Thatcher Employment Agreement
became effective as of March 15, 2018 and expired on December 31, 2018. Pursuant the 2018
Thatcher Employment Agreement, Mr. Thatcher was entitled to receive a base salary of $500,000
per annum and a minimum bonus equal to 15% of his base salary. Concurrently with the execution
of the 2018 Thatcher Employment Agreement, the Company granted to Mr. Thatcher 35,715
shares of restricted common stock under the 2014 Equity Plan. Subject to the terms of the Stock
Grant Agreement, such shares will vest in three equal installments on each of the three annual
anniversaries following the grant date.
(2) Agreement in effect as of January 1, 2019
On October 16, 2018, the Company and Mr. Thatcher entered into an Employment
Agreement effective as of January 1, 2019 and expiring on December 31, 2021 (the “2019 Thatcher
Employment Agreement”). Pursuant to the 2019 Thatcher Employment Agreement, Mr. Thatcher
will succeed Mr. Goldstein as Chief Executive Officer. Mr. Thatcher will continue to serve as a
director and will remain President of KICO.
Mr. Thatcher will be entitled to receive an annual base salary of $500,000 for 2019,
$630,000 for 2020 and no increase in 2021. In addition, Mr. Thatcher is eligible to receive an
annual performance bonus equal to 3% 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. Pursuant to the 2019 Thatcher Employment Agreement, in
the event that Mr. Thatcher’s employment is terminated by the Company without cause or he
resigns for good reason (each as defined in the 2019 Thatcher Employment Agreement), Mr.
Thatcher would be entitled to receive separation payments equal to his then applicable base salary
and the 3% bonus for the remainder of the term. Pursuant to the 2019 Thatcher Employment
Agreement, Mr. Thatcher will be entitled to receive a grant, under the terms of the 2014 Equity
Plan, with respect to a number of shares of restricted stock in each of 2019, 2020 and 2021
determined by dividing $750,000, $1,250,000 and $1,500,000, respectively, by the fair market
value of the Company stock on the date of grant. Each grant vests ratably over a three-year period
from the date of grant.
75
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information concerning unexercised options held by
the above named executive officers as of December 31, 2018.
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Exercisable
-
-
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
-
-
Name
Dale A. Thatcher
Victor J. Brodsky
Option
Exercise
Price
Option
Expiration
Date
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares
That
Have Not
Vested
-
-
-
-
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares
That
Have Not
Vested
$-
$-
$-
$-
Number
of
Shares
of Stock
That
Have
Not
Vested
Market
Value of
Shares
of Stock
That
Have
Not
Vested
530(1) $ 9,376
2,000(2) $ 35,380
35,715(3) $631,798
3,889(4) $ 68,794
6,983(5) $123,529
(1) Such shares vest to the extent of 265 shares on each of August 9, 2019 and 2020.
(2) Such shares vest to the extent of 667 shares on each of January 16, 2019 and 2020, and 666 shares on January
16, 2021.
(3) Such shares vest to the extent of 11,905 shares on each of March 14, 2019, 2020 and 2021.
(4) Such shares vest in 14 as nearly equal as possible monthly installments through February 23, 2020.
(5) Such shares vest to the extent of 2,328 shares on each of February 22, 2019 and 2020, and 2,327 shares on
February 22, 2021.
Termination of Employment and Change-in-Control Arrangements
Barry Goldstein
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 within eighteen months 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.
Dale A. Thatcher
Pursuant to the 2019 Thatcher Employment Agreement, in the event that Mr. Thatcher’s
employment is terminated by the Company without cause or he resigns for good reason (each as
76
defined in the 2019 Thatcher Employment Agreement), Mr. Thatcher would be entitled to receive
separation payments equal to his then applicable base salary and the 3% bonus for the remainder
of the term.
In the event of the termination of Mr. Thatcher's employment within eighteen months
following a change of control of the Company, Mr. Thatcher would be entitled, under certain
circumstances, to (i) a payment equal to one and one-half times the sum of his then annual salary
and annual performance bonus and (ii) payment of health insurance premiums for the remainder
of the term. In the event of Mr. Thatcher's retirement from the Company, all stock grants previously
granted to Mr. Thatcher will continue to vest in accordance with the original schedule as of Mr.
Thatcher was still employed by the Company.
Compensation of Directors
The following table sets forth certain information concerning the compensation of our
directors for the fiscal year ended December 31, 2018:
DIRECTOR COMPENSATION
Name
Jay M. Haft
Floyd R. Tupper
William L. Yankus
Carla A. D’Andre
Timothy P.
McFadden(1)
Fees Earned or
Paid in Cash
Stock Awards(2)
Option Awards
Total
$ 61,000
$ 72,500
$ 67,500
$ 61,000
$ 41,300
$ 41,300
$ 41,300
$ 41,300
$ -
$ -
$ -
$ -
$ 102,300
$ 113,800
$ 108,800
$ 102,300
$ 18,437
$ 12,362
$ -
$ 30,799
(1) Mr. McFadden was appointed a director in August 2018.
Amounts reflect the aggregate grant date fair value of grants made in the fiscal year
(2)
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 12 to our Consolidated Financial Statements included in this
Annual Report. The aggregate number of unvested restricted stock awards outstanding as of fiscal
year end for each non-employee director is as follows:
Name
Unvested Restricted
Stock Awards (#)
Jay M. Haft
Floyd R. Tupper
William L. Yankus
Carla A. D’Andre
Timothy P. McFadden
1,999
3,999
3,833
2,833
795
Our non-employee directors are currently entitled to receive annual compensation for their
services as directors as follows:
77
•
•
•
Effective January 1, 2019, $60,000
Effective January 1, 2019, an additional $25,000 for service as audit committee
chair, an additional $20,000 for service as compensation committee chair, and an
additional $15,000 for services as chair for other committees
Effective January 1, 2019, $40,000 of our common stock determined by the closing
stock price on the first business day of the year, which vest on December 31 of the
same year.
During 2018, our non-employee directors were entitled to receive annual compensation
for their services as directors as follows:
•
•
•
$50,000 (including $6,000 for services as a director of KICO)
An additional $11,000 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 (the initial grant of shares having been made in January 2016)
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 12, 2018 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) named executive officer and (iv) all of our present executive officers and directors as
a group.
Name and Address
of Beneficial Owner
Barry B. Goldstein
15 Joys Lane
Kingston, New York
Jay M. Haft
69 Beaver Dam Road
Salisbury, Connecticut
Floyd R. Tupper
220 East 57th Street
New York, New York
Dale A. Thatcher
212 Third Street
Milford, Pennsylvania
Victor J. Brodsky
15 Joys Lane
Kingston, New York
Number of Shares
Beneficially Owned
Approximate
Percent of Class
658,194
(1)
90,424
58,897
(2)
37,837
(3)
29,796
(4)
6.1%
*
*
*
*
78
Benjamin Walden
15 Joys Lane
Kingston, New York
Carla A. D’Andre
3561 Avocado Avenue
Miami, Florida
William L. Yankus
10 Pheasant Hill Road
Farmington, Connecticut
Timothy P. McFadden
310 8th Avenue N.
Saint Petersburg, Florida
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
(9 persons)
*
Less than 1%.
15,458
(5)
11,401
7,501
(6)
2,000
*
*
*
*
595,238
(7)
5.5%
911,508
(1) (2) (3) (4) (5) (6)
8.5%
(1) The information regarding Mr. Goldstein is based solely on publicly available information
filed with the SEC. Includes 73,168 shares of common stock owned by Mr. Goldstein's wife.
Mr. Goldstein has sole voting and dispositive power over 585,026 shares of common stock
and shared voting and dispositive power over 73,168 shares of common stock.
(2)
Includes 31,460 shares owned by Mr. Tupper’s wife. Mr. Tupper has sole voting and
dispositive power over 27,437 shares of common stock and shared voting and dispositive
power over 31,460 shares of common stock.
(3)
Includes 11,905 shares issuable upon the vesting of restricted stock within 60 days.
(4)
Includes 556 shares issuable upon the vesting of restricted stock within 60 days.
(5)
Includes 10,000 shares issuable upon the exercise of options that are exercisable currently and
334 shares issuable upon the vesting of restricted stock within 60 days.
(6)
Includes 500 shares issuable upon the vesting of restricted stock within 60 days.
(7) The information regarding RenaissanceRe Ventures Ltd. (“RenaissanceRe Ventures”),
79
Renaissance Other Investments Holding II Ltd. (“ROIHL II”) and RenaissanceRe Holdings
Ltd. (“RenaissanceRe Holdings”) is based solely on a Schedule 13G/A filed by such reporting
persons with the SEC on February 14, 2019 (the “Renaissance 13G/A”). According to the
Renaissance 13G/A, RenaissanceRe Ventures, ROIHL II and RenaissanceRe Holdings each
have shared voting and dispositive power over the 595,238 shares of common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2018 with respect to
compensation plans (including individual compensation arrangements) under which our common
shares are authorized for issuance, aggregated as follows:
•
•
All compensation plans previously approved by security holders; and
All compensation plans not previously approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(a)
(b)
(c)
37,500
$
8.60
466,124
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
37,500
$
8.36
466,124
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, Dale A. Thatcher,
Jay M. Haft, Floyd R. Tupper, William L. Yankus, Carla A. D’Andre, and Timothy P. McFadden.
Our board of directors has determined that each of Messrs. Haft, Tupper, Yankus, McFadden, and
Ms. D’Andre are independent under applicable Nasdaq listing standards and federal securities
rules and regulations.
Audit Committee
The members of our Board’s Audit Committee currently are Messrs. Tupper, Haft, and
Yankus, each of whom is independent under applicable Nasdaq listing standards and federal
80
securities rules and regulations on independence of Audit Committee members.
Nominating and Corporate Governance Committee
The members of our Board’s Nominating and Corporate Governance Committee currently
are Mr. Haft and Ms. D’Andre, each of whom is independent under applicable Nasdaq listing
standards and federal securities rules and regulations on independence.
Compensation Committee
The members of our Board’s Compensation Committee currently are Messrs. Yankus,
Haft, and Tupper and Ms. D’Andre, each of whom is independent under applicable Nasdaq listing
standards and federal securities rules and regulations on independence.
Related Party Transactions
The daughter of Barry Goldstein, Amanda Goldstein, is employed as Investor Relations
Director by the Company and serves as vice president of a subsidiary of the Company. For the
fiscal year ending December 31, 2018, she earned $142,629 in compensation.
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, 2018 and 2017.
Fee Category
Fiscal 2018 Fees
Fiscal 2017 Fees
Audit Fees(1)
Tax Fees(2)
Audit-Related Fees(3)
All Other Fees(4)
$ 392,214
$ 309,684
-
-
$
$
-
-
$
$
$
$
-
-
$ 392,214
$ 309,684
(1)
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 services provided in connection with other statutory or regulatory
filings.
(2) Marcum did not provide any tax services during the period.
(3) Marcum did not provide any “Audit-Related Fees” during the period.
(4) Marcum did not provide any “other services” during the period.
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
81
independence of the independent auditors. Substantially all of the fees shown above were pre-
approved by the Audit Committee.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Exhibit
Number
3(a)
3(b)
4(a)
4(b)
4(c)
10(a)
10(b)
10(c)
10(d)
10(e)
Description of Exhibit
Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3(a) to the Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2014 filed on May 15, 2014).
By-laws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s
current Report on Form 8-K filed on November 9, 2009).
Indenture, dated as of December 19, 2017, between Kingstone Companies, Inc. and
Wilmington Trust, National Association (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed December 20, 2017).
First Supplemental Indenture, dated as of December 19, 2017, between Kingstone
Companies, Inc. and Wilmington Trust, National Association (incorporated by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed December
20, 2017).
Form of Global Note representing $30,000,000 aggregate principal amount of 5.50%
Senior Unsecured Notes due 2022 (incorporated by reference to Exhibit 4.3 to the
Company’s Current Report on Form 8-K filed December 20, 2017).
2005 Equity Participation Plan (incorporated by reference to Exhibit 10(a) to the
Company’s Annual Report on Form 10-K filed March 25, 2015).
2014 Equity Participation Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed August 14, 2014).
Amended and Restated Employment Agreement, dated as of October 16, 2018, by and
between Kingstone Companies, Inc. and Barry B. Goldstein (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 22,
2018).
Stock Option Agreement, dated as of August 12, 2014, between Kingstone Companies,
Inc. and Barry B. Goldstein (2005 Equity Participation Plan) (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed August 14, 2014).
Stock Option Agreement, dated as of August 12, 2014, between Kingstone Companies,
Inc. and Barry B. Goldstein (2014 Equity Participation Plan) (incorporated by reference
to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed August 14, 2014).
82
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
21
23
31(a)
31(b)
32
Purchase Agreement, dated April 18, 2016, by and between Kingstone Companies, Inc.
and RenaissanceRe Ventures Ltd. (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed April 19, 2016).
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 (incorporated by reference to Exhibit
1.1 to the Company’s Current Report on Form 8-K filed January 27, 2017).
Underwriting Agreement, dated December 14, 2017, between Kingstone Companies,
Inc. and Sandler O’Neill & Partners, L.P. (incorporated by reference to Exhibit 1.1 to
the Company’s Current Report on Form 8-K filed December 18, 2017).
Employment Agreement, dated as of October 16, 2018, by and between Kingstone
Companies, Inc. and Dale A. Thatcher (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on October 22, 2018).
Stock Grant Agreement, dated as of March 14, 2018, between Kingstone Companies,
Inc. and Dale A. Thatcher.
Employment Agreement, dated March 14, 2018, between Kingstone Insurance
Company and Dale A. Thatcher.
Deferred Compensation Plan, dated as of June 18, 2018 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 20, 2018).
Subsidiaries (incorporated by reference to Exhibit 21 to the Company’s Annual Report
on Form 10-K filed March 16, 2017).
Consent of Marcum LLP.
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS XBRL Instance Document.
101.SCH 101.SCH XBRL Taxonomy Extension Schema.
101.CAL 101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF 101.DEF XBRL Taxonomy Extension Definition Linkbase.
83
101.LAB 101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE 101.PRE XBRL Taxonomy Extension Presentation Linkbase.
ITEM 16.
FORM 10-K SUMMARY.
Not applicable.
84
SIGNATURES
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.
Dated: March 18, 2019
By: /s/ Dale A. Thatcher
KINGSTONE COMPANIES, INC.
Dale A. Thatcher
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
Chief Executive Officer, and Director
(Principal Executive Officer)
March 18, 2019
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
March 18, 2019
Executive Chairman of the Board
March 18, 2019
Director
March 18, 2019
/s/ Dale A. Thatcher
Dale A. Thatcher
/s/ Victor J. Brodsky
Victor J. Brodsky
/s/ Barry B. Goldstein
Barry B. Goldstein
/s/ Jay M. Haft
Jay M. Haft
/s/ Floyd R. Tupper
Floyd R. Tupper
Director
March 18, 2019
/s/ William L. Yankus
William L. Yankus
/s/ Carla D’Andre
Carla D’Andre
Director
March 18, 2019
Director
March 18, 2019
/s/ Timothy P. McFadden
Timothy P. McFadden
Director
March 18, 2019
Index to Consolidated Financial Statements
Page
F-2
Report of Independent Registered Public Accounting Firm
F-3
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended F-4
December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018
and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Kingstone Companies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kingstone Companies, Inc. and
Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated
statements of income and comprehensive income (loss), stockholders’ equity and cash flows for
the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, 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.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (the "PCAOB"), the Company's internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 18, 2019, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of
accounting for the recognition and measurement of equity securities in 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
1
MarcumLLPnCityPlace IIn185 Asylum Street n17th Floor nHartford, Connecticut06103nPhone860.760.0600nFax860.760.0601 nwww.marcumllp.com We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Marcum LLP
Hartford, CT
March 18, 2019
We have served as the Company’s auditor since 2012.
s:\business\word_processing\common\finalized\kingstone companies, inc\2018\letters\105832 - rep ind reg public acct firm - 1218.docx
2
Consolidated Balance Sheets
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Assets
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
$4,426,416 at December 31, 2018 and $5,150,076 at December 31, 2017)
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
$155,431,261 at December 31, 2018 and $119,122,106 at December 31, 2017)
Equity securities, at fair value (cost of $18,305,986 at December 31, 2018 and
$13,761,841 at December 31, 2017)
Other investments
Total investments
Cash and cash equivalents
Investment subscription receivable
Premiums receivable, net
Reinsurance receivables, net
Deferred policy acquisition costs
Intangible assets, net
Property and equipment, net
Deferred income tax
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 tax
Long-term debt, net
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 11,775,148 shares
at December 31, 2018 and 11,618,646 at December 31, 2017; outstanding
10,747,709 shares at December 31, 2018 and 10,631,837 shares at December 31, 2017
Capital in excess of par
Accumulated other comprehensive (loss) income
Retained earnings
Treasury stock, at cost, 1,027,439 shares at December 31, 2018
and 986,809 shares at December 31, 2017
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, December 31,
2018
2017
$
4,222,855
$
4,869,808
151,777,516
119,988,256
16,572,616
1,855,225
174,428,212
21,138,403
-
13,961,599
26,367,115
17,907,737
670,000
6,056,929
354,233
5,867,850
266,752,078
$
14,286,198
-
139,144,262
48,381,633
2,000,000
13,217,698
28,519,130
14,847,236
1,010,000
4,772,577
-
2,655,527
254,548,063
$
$
56,197,106
79,032,131
2,107,629
1,933,376
2,686,677
6,819,231
15,035
-
29,295,251
178,086,436
$
48,799,622
65,647,663
1,477,693
2,563,966
4,266,412
7,487,654
-
600,342
29,126,965
159,970,317
-
-
117,751
67,763,940
(2,884,313)
26,380,816
91,378,194
116,186
68,380,390
1,100,647
27,152,822
96,750,045
(2,712,552)
88,665,642
(2,172,299)
94,577,746
$
266,752,078
$
254,548,063
______________________________________________________________________________________
See accompanying notes to these consolidated financial statements.
F-3
Consolidated Statements of Income and Comprehensive Income (Loss)
Years ended December 31,
2018
2017
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Revenues
Net premiums earned
Ceding commission revenue
Net investment income
Net (losses) gains on investments
Other income
Total revenues
Expenses
Loss and loss adjustment expenses
Commission expense
Other underwriting expenses
Other operating expenses
Depreciation and amortization
Interest expense
Total expenses
Income from operations before taxes
Income tax (benefit) expense
Net income
Other comprehensive (loss) income, net of tax
Gross change in unrealized (losses) gains
on available-for-sale-securities
Reclassification adjustment for losses (gains)
included in net income
Net change in unrealized (losses) gains
Income tax benefit (expense) related to items
of other comprehensive (loss) income
Other comprehensive (loss) income, net of tax
Comprehensive (loss) income
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
$
103,414,715
5,332,630
6,186,248
(2,495,857)
1,334,162
113,771,898
$
77,351,023
9,933,133
4,132,586
84,313
1,268,255
92,769,310
58,295,205
25,342,137
20,943,342
2,575,404
1,787,150
1,821,597
110,764,835
3,007,063
(86,183)
3,093,246
34,185,537
21,182,254
18,115,614
3,512,927
1,402,928
60,335
78,459,595
14,309,715
4,323,230
9,986,485
(4,984,149)
1,364,319
464,254
(4,519,895)
949,177
(3,570,718)
(84,313)
1,280,006
(435,202)
844,804
$
(477,472)
$
10,831,289
$
$
0.29
0.29
$
$
0.96
0.94
10,686,813
10,716,886
10,388,440
10,581,577
Dividends declared and paid per common share
$
0.4000
$
0.3025
______________________________________________________________________________________
See accompanying notes to these consolidated financial statements.
F-4
Consolidated S tatements of S tockholders' Equity
Years ended December 31, 2018 and 2017
Preferred Stock
Common Stock
Amount
$
-
Shares
8,896,335
Amount
$
88,963
KINGS TONE COMPANIES , INC. AND S UBS IDIARIES
Capital
in Excess
of Par
$
37,950,401
Accumulated
Other
Comprehensive
Income (Loss)
$
72,931
Retained
Earnings
20,563,720
$
Treasury Stock
Shares
974,469
Amount
(1,995,462)
$
Total
$
56,680,553
Balance, January 1, 2017
Proceeds from public offering, net of
offering costs of $2,173,000
Stock-based compensation
Vesting of restricted stock awards
Shares deducted from restricted stock
awards for payment of withholding taxes
Exercise of stock options
Acquisition of treasury stock
Dividends
Net income
Other comprehensive income
Reclassify stranded tax effects from
accumulated other comprehensive income
to retained earnings
Balance, December 31, 2017, as reported
Cumulative effect of adoption of updated
accounting guidance for equity
financial instruments at January 1, 2018
Balance, January 1, 2018, as adjusted
Stock-based compensation
Shares deducted from exercise of stock
options for payment of withholding taxes
Vesting of restricted stock awards
Shares deducted from restricted stock
awards for payment of withholding taxes
Exercise of stock options
Acquisition of treasury stock
Dividends
Net income
Other comprehensive loss
Balance, December 31, 2018
Shares
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,692,500
-
12,311
26,925
-
123
30,109,774
270,231
(123)
-
-
-
-
-
-
(1,730)
19,230
-
-
-
-
(18)
193
-
-
-
-
(27,627)
77,734
-
-
-
-
-
-
-
-
-
844,804
-
-
-
(3,214,471)
9,986,485
-
-
-
-
-
-
12,340
-
-
-
-
-
-
30,136,699
270,231
-
-
-
(176,837)
-
-
-
(27,645)
77,927
(176,837)
(3,214,471)
9,986,485
844,804
-
11,618,646
-
116,186
-
68,380,390
182,912
1,100,647
(182,912)
27,152,822
-
986,809
-
(2,172,299)
-
94,577,746
-
11,618,646
-
-
116,186
-
-
68,380,390
702,650
(414,242)
686,405
-
414,242
27,567,064
-
-
986,809
-
-
(2,172,299)
-
-
94,577,746
702,650
(72,063)
19,482
(719)
190
(1,356,452)
(190)
-
-
-
-
-
-
-
-
(1,357,171)
-
-
-
-
-
-
-
$
-
(2,877)
211,960
-
-
-
-
11,775,148
(29)
2,123
-
-
-
-
117,751
$
(50,975)
88,517
-
-
-
-
67,763,940
$
-
-
-
-
-
(3,570,718)
(2,884,313)
$
-
-
-
(4,279,494)
3,093,246
-
26,380,816
$
-
-
40,630
-
-
-
1,027,439
-
-
(540,253)
-
-
-
(2,712,552)
$
(51,004)
90,640
(540,253)
(4,279,494)
3,093,246
(3,570,718)
88,665,642
$
See accompanying notes to these consolidated financial statements.
F-5
Consolidated Statements of Cash Flows
Years ended December 31,
2018
2017
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows provided by operating activities:
$
3,093,246
Net losses (gains) on sale of investments
Net unrealized losses of equity investments
Net unrealized losses of other investments
Depreciation and amortization
Amortization of bond premium, net
Amortization of discount and issuance costs on long-term debt
Stock-based compensation
Deferred income tax benefit
(Increase) decrease in operating assets:
Premiums receivable, net
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, held-to-maturity
Purchase - fixed-maturity securities, available-for-sale
Purchase - equity securities
Sale and redemption - fixed-maturity securities, held-to-maturity
Sale or maturity - fixed-maturity securities, available-for-sale
Sale - equity securities
Investment subscription receivable
Acquisition of fixed assets
Net cash flows used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
Net proceeds from issuance of long-term debt
Proceeds from exercise of stock options
Withholding taxes paid on net exercise of stock options
Withholding taxes paid on vested retricted stock awards
Purchase of treasury stock
Dividends paid
Net cash flows (used in) provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
93,974
2,257,727
144,156
1,787,150
373,014
168,286
702,650
(5,398)
(743,901)
2,152,015
(3,060,501)
(3,215,227)
7,397,484
13,384,468
629,936
(630,590)
(1,579,735)
(653,388)
22,295,366
-
(58,542,741)
(13,380,542)
624,963
21,381,668
9,246,840
-
(2,731,502)
(43,401,314)
-
-
90,640
(1,357,171)
(51,004)
(540,253)
(4,279,494)
(6,137,282)
(27,243,230)
48,381,633
21,138,403
$
$
$
9,986,485
(84,313)
-
-
1,402,928
548,846
5,335
270,231
(1,809)
(1,568,300)
3,678,635
(2,607,455)
(1,228,493)
7,062,903
10,653,288
56,133
417,949
(2,585,429)
2,039,206
28,046,140
(121,271)
(50,396,228)
(7,526,326)
247,500
11,132,000
3,862,127
(2,000,000)
(2,824,132)
(47,626,330)
30,136,699
29,121,630
77,927
-
(27,645)
(176,837)
(3,214,471)
55,917,303
$
$
36,337,113
12,044,520
48,381,633
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
______________________________________________________________________________________
See accompanying notes to these consolidated financial statements.
$
5,773,000
$
-
2,201,000
1,700,417
$
$
F-6
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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, Rhode Island, Massachusetts, Pennsylvania, Connecticut,
Maine and New Hampshire. KICO is currently offering its property and casualty insurance products in New
York, New Jersey, Rhode Island, Massachusetts and Pennsylvania. Although New Jersey, Rhode Island and
Massachusetts are now growing expansion markets for the Company, 93.7% and 98.5% of KICO’s direct
written premiums for the years ended December 31, 2018 and 2017, respectively, came from the New York
policies.
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 the financials for Kingstone and its wholly owned
subsidiaries: KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys
Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All
significant inter-company account balances and transactions have been eliminated in consolidation.
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 ceding commission revenue in the period that changes in the estimated
losses are determined.
F-7
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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 loss 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 statements of income and
comprehensive income (loss) 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, 2018 and 2017. The Company did
not expense any uncollectible reinsurance for the years ended December 31, 2018 and 2017. 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
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Cash and Cash Equivalents
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.
Effective January 1, 2018, the Company adopted ASU 2016-01, which resulted in changes in the estimated
fair value of equity securities and other investments held at December 31, 2018 being reported in net income
instead of other comprehensive income (loss). For additional discussion, see Note 2, Accounting Policies.
The Company may sell its available-for-sale securities, equity securities, and other investments 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 (loss). Realized gains and losses are determined on
the specific identification method and reported in net income in the consolidated statements of income and
comprehensive income (loss).
Equity securities are reported at their estimated fair values based on quoted market prices from recognized
pricing services, with unrealized gains and losses reported in net income. Other investments are reported at
their estimated fair values using the net asset value (“NAV”) per share (or its equivalent) of the instrument
with unrealized gains and losses reported in net income. See Note 3, Investments for additional discussion.
Investment income is accrued to the balance sheet dates of the consolidated financial statements and includes
amortization of premium and accretion of discount on fixed-maturity securities. Interest is recognized when
earned, while dividends are recognized when declared. Due and accrued investment income totaled
approximately $1,721,000 and $1,136,000 as of December 31, 2018 and 2017, respectively, and is included
in other assets on the accompanying consolidated balance sheets.
Premiums Receivable
Premiums receivable include balances due currently or in the future and are presented net of an allowance
for doubtful accounts of approximately $255,000 and $291,000 as of December 31, 2018 and 2017,
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
$252,000 and $138,000 were written off for the years ended December 31, 2018 and 2017, respectively.
Deferred Policy Acquisition Costs
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
F-9
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
underwriting salaries). Policy acquisition costs are deferred and recognized as expense as related premiums
are earned.
Intangible Assets
The Company has recorded acquired identifiable intangible assets. The cost of a group of assets acquired in
a transaction is allocated to the individual assets including identifiable intangible assets based on their 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 impairment testing if events or changes in circumstances
indicate that it is more likely than not the asset is impaired. 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,
2018 and 2017.
Property and Equipment
Building and building improvements, automobiles, furniture, computer equipment, and computer 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, automobiles, 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 estimated 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, 2018 and 2017, 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, 2018, the Company had no material unrecognized tax
benefits and no adjustments to liabilities or operations were required.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted (see Note 15 - Income Taxes).
Assessments
Insurance related assessments are accrued in the period in which they have been incurred. A typical obligating
F-10
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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.
As of December 31, 2018 and 2017, the Company’s cash equivalents were as follows:
December 31,
2018
December 31,
2017
Collateralized bank repurchase agreement (1)
M oney market funds
$
568,123
15,012,559
$
10,249,985
35,874,700
Total
$
15,580,682
$
46,124,685
(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, 2018, 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
concentrated in the New York City metropolitan area. 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 quarterly as well as the bad debt write-offs experienced in the past and
establish an allowance for doubtful accounts, if deemed necessary.
F-11
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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, 2018 and 2017 are as follows:
Personal Lines
Commercial Lines
Livery physical damage
Total premiums earned subject to concentration
Premiums earned not subject to concentration
Total premiums earned
Years ended December 31,
2018
2017
80.7%
11.6%
n/a
92.3%
7.7%
100.0%
77.2%
12.2%
10.3%
99.7%
0.3%
100.0%
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The actual results could differ from these estimates and assumptions,
which include the reserves for losses and loss adjustment expenses, which are subject to estimation errors
due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a
period of many years. In addition, estimates and assumptions associated with receivables under reinsurance
contracts related to contingent ceding commission revenue require judgments by management. On an 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.
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 the exercise of stock
options as well as non-vested restricted stock awards. The computation of diluted earnings per share excludes
those options with an exercise price in excess of the average market price of the Company’s common shares
during the periods presented. Additionally, the computation of diluted earnings per share excludes unvested
restricted stock awards as calculated using the treasury stock method.
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 (loss), and were approximately $173,000 and $202,000 for the years ended December 31, 2018 and
2017, respectively.
Stock-based Compensation
Stock-based compensation expense in 2018 and 2017 is the estimated fair value of restricted stock awards and
options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the
F-12
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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.
Compensated Absences
Employees of the Company are entitled to paid vacations, sick days, and other time off depending on job
classification, length of service and other factors. It is impracticable to estimate the amount of compensation
of future absences and, accordingly, no liability has been recorded in the accompanying consolidated
financial statements. The Company’s policy is to recognize the cost of compensated absences when paid to
employees.
Comprehensive Income (Loss)
Comprehensive income (loss) refers to revenues, expenses, gains and losses that are included in comprehensive
income (loss) 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, and
related income taxes.
Accounting Changes
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09 – Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). 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. The
Company adopted ASU 2014-09 effective January 1, 2018. The standard excludes from its scope the
accounting for insurance contracts, financial instruments, and certain other agreements that are governed
under other GAAP guidance. Accordingly, the adoption of ASU 2014-09, as amended, did not have a
material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). Effective
January 1, 2018, the Company adopted the provisions of ASU 2016-01. The updated guidance requires
equity investments, including limited partnership interests, except those accounted for under the equity
method of accounting, that have a readily determinable fair value to be measured at fair value with any
changes in fair value recognized in net income. Equity securities that do not have readily determinable fair
values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent
observable price changes, with changes in the carrying value recognized in net income. A qualitative
assessment for impairment is required for equity investments without readily determinable fair values. The
updated guidance also eliminates the requirement to disclose the method and significant assumptions used to
estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The adoption
of this guidance resulted in the recognition of approximately $414,000 of net after-tax unrealized gains on
equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018
and decreased accumulated other comprehensive income (loss) (“AOCI”) by the same amount. The Company
elected to report changes in the fair value of equity investments in net gains (losses) on investments in the
consolidated statements of income and comprehensive income (loss). At December 31, 2017, equity
F-13
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
investments were classified as available-for-sale on the Company's consolidated balance sheet. However,
upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity
investments. Furthermore, for the year ended December 31, 2018, net loss on investments of approximately
$2,496,000 recorded in the consolidated statements of income and comprehensive income (loss) includes net
losses of approximately $2,402,000 from the estimated fair value change of equity securities and other
investments.
In August 2016, the FASB issued ASU 2016-15 – Statement of Cash Flows (Topic 320): Classification of
Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The revised ASU provides accounting
guidance for eight specific cash flow issues. The FASB issued the standard to clarify areas where GAAP has
been either unclear or lacking in specific guidance. The Company adopted this ASU effective January 1,
2018, and it did not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of
Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies when to account for a change to the terms
or conditions of a share-based payment award as a modification. Under the new guidance, modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award (as
equity or liability) changes as a result of the change in terms or conditions. The Company adopted this ASU
effective January 1, 2018 on a prospective basis and it did not have a material impact on the Company’s
consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02 - Income Statement – Reporting Comprehensive Income
(Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(“ASU 2018-02”). The deferred income tax liability for unrealized gains on available-for-sale securities that
were re-measured due to the reduction in corporate income tax rates under the Tax Cuts and Jobs Act of 2017
(the “Tax Act”) resulted in a stranded tax effect within AOCI. This is due to the effect of the tax rate change
being recorded through continuing operations as required under Accounting Standards Codification 740
(“ASC 740”). The revised ASU allows for the reclassification of the stranded tax effects as a result of the
Act from AOCI to retained earnings and requires certain other disclosures. Effective December 31, 2017, the
Company chose to early adopt the provisions of ASU 2018-02 and recorded a one-time reclassification of
$182,912 from AOCI to retained earnings for the stranded tax effects resulting from the newly enacted
corporate tax rate. The amount of the reclassification was the difference between the historical corporate tax
rate and the newly enacted 21% corporate tax rate.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 – Leases (Topic 842) (“ASU 2016-02”). 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
F-14
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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 Company will be adopting
ASU 2016-02 effective January 1, 2019. Under the new lease guidance, the Company’s assets and liabilities
will increase by approximately $960,000 primarily related to an operating lease for office space. The
Company does not expect material changes to the consolidated statements of income and comprehensive
income (loss).
In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (“ASU 2016-13”). The revised accounting guidance requires the
measurement of all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures
related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality
and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting
for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration.
ASU 2016-13 will be effective on January 1, 2020. The Company is currently evaluating the effect the
updated guidance will have on its consolidated financial statements.
In August 2018, the Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC
Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements
that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under
the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet
must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning
balance to the ending balance of each period for which a statement of comprehensive income is required to
be filed. This final rule is effective on November 5, 2018. The Company is evaluating the impact of this
guidance on its consolidated financial statements. The Company anticipates its first presentation of changes
in stockholders’ equity will be included in its Form 10-Q for the quarter ending March 31, 2019.
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.
F-15
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Note 3 - Investments
Available-for-Sale Securities
The amortized cost and estimated fair value of investments in available-for-sale fixed-maturity securities as
of December 31, 2018 and December 31, 2017 are summarized as follows:
December 31, 2018
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
Net
Unrealized
Gains/
(Losses)
$
8,222,050
$
26,331
$
(28,000)
$
-
$
8,220,381
$
(1,669)
6,339,540
50,903
(12,327)
(36,508)
6,341,608
2,068
119,078,698
123,740
(2,775,540)
(676,605)
115,750,293
(3,328,405)
21,790,973
155,431,261
$
236,502
437,476
$
(231,229)
(3,047,096)
$
(331,012)
(1,044,125)
$
21,465,234
151,777,516
$
(325,739)
(3,653,745)
$
Category
Fixed-Maturity S ecurities:
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 and other
asset backed securities (1)
Total
(1) In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian
account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (See Note 9). The eligible
collateral would be pledged to FHLBNY if KICO draws an advance from the FHBLNY credit line. As of December 31,
2018, the estimated fair value of the eligible investments was approximately $5,116,000. KICO will retain all rights
regarding all securities if pledged as collateral. As of December 31, 2018, there was no outstanding balance on the
FHLBNY credit line.
F-16
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
December 31, 2017
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
Net
Unrealized
Gains/
(Losses)
$
11,096,122
$
250,135
$
(30,814)
$
-
$
11,315,443
$
219,321
87,562,631
1,189,207
(269,857)
(340,516)
88,141,465
578,834
20,463,353
305,499
(48,482)
(189,022)
20,531,348
67,995
Category
Fixed-Maturity S ecurities:
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Residential mortgage and other
asset backed securities (1)
Total
$
119,122,106
$
1,744,841
$
(349,153)
$
(529,538)
$
119,988,256
$
866,150
(1) In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian
account related to its membership in the FHLBNY (see Note 9). The eligible collateral would be pledged to FHLBNY if
KICO draws an advance from the FHBLNY credit line. As of December 31, 2017, the estimated fair value of the eligible
investments was approximately $6,703,000. KICO will retain all rights regarding all securities if pledged as collateral. As
of December 31, 2017, there was no outstanding balance on the FHLBNY credit line.
A summary of the amortized cost and estimated fair value of the Company’s investments in available-for-
sale fixed-maturity securities by contractual maturity as of December 31, 2018 and 2017 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
M ore than ten years
Residential mortgage and other asset backed securities
Total
Equity Securities
December 31, 2018
December 31, 2017
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
6,742,519
47,038,838
76,884,505
2,974,426
21,790,973
155,431,261
$
$
6,738,014
46,640,012
74,290,076
2,644,180
21,465,234
151,777,516
$
$
2,585,479
31,716,345
62,702,945
1,653,984
20,463,353
119,122,106
$
$
2,595,938
32,065,197
63,129,543
1,666,230
20,531,348
119,988,256
$
The cost, estimated fair value, and gross gains and losses of investments in equity securities as of December
31, 2018 and 2017 are as follows:
F-17
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Category
Cost
December 31, 2018
Gross
Losses
Gross
Gains
Estimated
Fair Value
Equity S ecurities:
Preferred stocks
Common stocks and exchange
$
6,694,754
$
-
$
(541,798)
$
6,152,956
traded mutual funds
11,611,232
99,817
(1,291,389)
10,419,660
Total
$
18,305,986
$
99,817
$
(1,833,187)
$
16,572,616
Category
Cost
December 31, 2017
Gross
Losses
Gross
Gains
Estimated
Fair Value
Equity S ecurities:
Preferred stocks
Common stocks and exchange
traded mutual funds
Total
$
7,081,099
$
60,867
$
(141,025)
$
7,000,941
6,680,742
13,761,841
$
841,250
902,117
$
(236,735)
(377,760)
$
7,285,257
14,286,198
$
Other Investments
The cost, estimated fair value, and gross losses of the Company’s other investments as of December 31, 2018
and, 2017 are as follows:
Category
Cost
December 31, 2018
Gross
Losses
Estimated
Fair Value
December 31, 2017
Gross
Estimated
Gains/(Losses) Fair Value
Cost
Other Investments:
Hedge fund
Total
$
$
1,999,381
1,999,381
$
$
(144,156)
(144,156)
$
$
1,855,225
1,855,225
$
-
$
-
$
-
$
-
$
-
$
-
Held-to-Maturity Securities
The amortized cost and estimated fair value of investments in held-to-maturity fixed-maturity securities as
of December 31, 2018 and 2017 are summarized as follows:
F-18
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
December 31, 2018
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
Net
Unrealized
Gains/(Losses)
$
729,507
$
147,532
$
(3,964)
$
-
$
873,075
$
143,568
998,803
33,862
-
-
1,032,665
33,862
2,494,545
38,461
(1,425)
(10,905)
2,520,676
26,131
Category
Held-to-Maturity S ecurities:
U.S. Treasury securities
Political subdivisions of States,
Territories and Possessions
Corporate and other bonds
Industrial and miscellaneous
Total
$
4,222,855
$
219,855
$
(5,389)
$
(10,905)
$
4,426,416
$
203,561
December 31, 2017
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized Losses
Less than 12 More than 12
Months
Months
Estimated
Fair
Value
Net
Unrealized
Gains/(Losses)
$
729,466
$
147,573
$
(1,729)
$
-
$
875,310
$
145,844
Category
Held-to-Maturity S ecurities:
U.S. Treasury securities
Political subdivisions of States,
Territories and Possessions
998,984
50,366
Corp orate and other bonds
Industrial and miscellaneous
3,141,358
90,358
-
-
-
1,049,350
50,366
(6,300)
3,225,416
84,058
Total
$
4,869,808
$
288,297
$
(1,729)
$
(6,300)
$
5,150,076
$
280,268
Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund
requirements.
A summary of the amortized cost and the estimated fair value of the Company’s investments in held-to-
maturity securities by contractual maturity as of December 31, 2018 and 2017 is shown below:
F-19
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Remaining Time to Maturity
December 31, 2018
December 31, 2017
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Less than one year
One to five years
Five to ten years
M ore than ten years
Total
$
-
2,996,685
619,663
606,507
4,222,855
$
$
-
3,036,531
635,846
754,039
4,426,416
$
-
$
2,546,459
1,716,884
606,465
4,869,808
$
$
-
2,601,898
1,794,139
754,039
5,150,076
$
The actual maturities may differ from contractual maturities because certain borrowers have the right to call
or prepay obligations with or without penalties.
Investment Income
Major categories of the Company’s net investment income are summarized as follows:
Income:
Fixed-maturity securities
Equity securities
Cash and cash equivalents
Total
Expenses:
Investment expenses
Net investment income
Years ended
December 31,
2018
2017
$
5,316,970
820,827
219,238
6,357,035
$
3,664,577
564,071
56,075
4,284,723
170,787
6,186,248
$
152,137
4,132,586
$
Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity were $624,963 and
$247,500 for the years ended December 31, 2018 and 2017, respectively. Proceeds from the sale and
redemption of fixed-maturity securities held-to-maturity for the year ended December 31, 2017 includes one
redemption of $200,000 and one sale of $47,500. The sale was to dispose of a bond issued by the
Commonwealth of Puerto Rico that was deemed to have a permanent credit impairment by the Company (see
F-20
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Impairment Review Below).
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $21,381,668 and
$11,132,000 for the years ended December 31, 2018 and 2017, respectively.
Proceeds from the sale of equity securities were $9,246,840 and $3,862,127 for the years ended December
31, 2018 and 2017, respectively.
The Company’s net (losses) gains on investments are summarized as follows:
Realized (Losses) Gains
Fixed-maturity securities:
Gross realized gains
Gross realized losses (1)
Equity securities:
Gross realized gains
Gross realized losses
Net realized (losses) gains
Other-than-temporary impairment losses:
Fixed-maturity securities
Unrealized (Losses) Gains
Equity S ecurities:
Gross gains
Gross losses
Other investments:
Gross gains
Gross losses
Net unrealized losses
Years ended
December 31,
2018
2017
$
117,186
(618,699)
(501,513)
$
70,478
(309,247)
(238,769)
992,012
(584,473)
407,539
636,880
(263,798)
373,082
(93,974)
134,313
-
(50,000)
-
(2,257,727)
(2,257,727)
-
(144,156)
(144,156)
(2,401,883)
-
-
-
-
-
-
-
Net (losses) gains on investments
$
(2,495,857)
$
84,313
(1) Gross realized losses for the year ended December 31, 2018 includes a $23,912 loss from the redemption of a fixed-
maturity security held-to-maturity. Gross realized losses for the year ended December 31, 2017 includes a $59,916 loss
from the sale of a fixed-maturity security held-to-maturity issued by the Commonwealth of Puerto Rico (see impairment
review below).
Impairment Review
The Company regularly reviews its fixed-maturity securities (and reviewed its equity securities portfolios
prior to January 1, 2018) to evaluate the necessity of recording impairment losses as charges to operations
F-21
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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 comprehensive income (loss). The
credit loss component recognized in earnings is identified as the amount of principal cash flows not expected
to be received over the remaining term of the security based on cash flow projections. For held-to-maturity
fixed-maturity securities, the amount of OTTI recorded in comprehensive income (loss) for the noncredit
portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of
timing of future estimated cash flows of the security.
OTTI losses are recorded in the consolidated statements of income and comprehensive income (loss) as net
realized losses on investments and result in a permanent reduction of the cost basis of the underlying
investment. The determination of OTTI is a subjective process and different judgments and assumptions
could affect the timing of loss realization. At December 31, 2018 and December 31, 2017, there were 156
and 62 fixed-maturity securities, respectively, and 13 equity securities at December 31, 2017 that accounted
for the gross unrealized loss. In December 2017, the Company disposed of one of its held-to-maturity debt
securities that was previously recorded in OTTI, which was a bond issued by the Commonwealth of Puerto
Rico. In July 2016, Puerto Rico defaulted on its interest payment to bondholders. Due to the credit
deterioration of Puerto Rico, the Company recorded its first credit loss component of OTTI on this investment
as of June 30, 2016. As of December 31, 2016, the full amount of the write-down was recognized as a credit
component of OTTI in the amount of $69,911. In September 2017, Hurricane Maria significantly affected
Puerto Rico. The impact of this event further contributed to the credit deterioration of Puerto Rico and, as a
result, the Company recorded an additional credit loss component of OTTI on this investment for the amount
of $50,000 during the quarter ended September 30, 2017. The total of the two OTTI write-downs of this
investment through December 31, 2017 was $119,911. The Company determined that none of the other
unrealized losses were deemed to be OTTI for its portfolio of investments for the years ended December 31,
2018 and 2017. 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-22
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2018
and 2017 as follows:
Less than 12 months
December 31, 2018
12 months or more
Total
Estimated
Fair
Value
Unrealized
No. of
Positions
Losses
Held
Estimated
Fair
Value
Unrealized
Losses
No. of
Positions
Held
Estimated
Fair
Value
Unrealized
Losses
$
4,948,530
$
(28,000)
3
$
-
$
-
-
$
4,948,530
$
(28,000)
555,375
(12,327)
1
1,436,242
(36,508)
3
1,991,617
(48,835)
81,004,459
(2,775,540)
97
13,424,888
(676,605)
7,002,713
(231,229)
9
11,928,425
(331,012)
24
19
94,429,347
(3,452,145)
18,931,138
(562,241)
$
93,511,077
$
(3,047,096)
110
26,789,555
$
$
(1,044,125)
46
$
120,300,632
$
(4,091,221)
Category
Fixed-Maturity S ecurities:
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 and other
asset backed securities
Total fixed-maturity
securities
F-23
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Less than 12 months
December 31, 2017
12 months or more
Total
Estimated
Fair
Value
No. of
Unrealized Positions
Losses
Held
Estimated
Fair
Value
No. of
Unrealized Positions
Losses
Held
Estimated
Fair
Value
Unrealized
Losses
$
1,549,839
$
(30,814)
4
$
-
$
-
-
$
1,549,839
$
(30,814)
15,036,462
(269,857)
20
9,113,924
(340,516)
17
24,150,386
(610,373)
6,956,371
(48,482)
6
7,867,572
(189,022)
15
14,823,943
(237,504)
$
23,542,672
$
(349,153)
30
16,981,496
$
$
(529,538)
32
$
40,524,168
$
(878,691)
Category
Fixed-Maturity S ecurities:
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
Residential mortgage and other
asset backed securities
Total fixed-maturity
securities
Equity S ecurities:
Preferred stocks
Common stocks and
$
1,605,217
$
(20,313)
exchange traded mutual funds
1,446,375
(222,205)
Total equity securities
$
3,051,592
$
(242,518)
5
4
9
$
1,776,675
$
(120,712)
124,900
(14,530)
$
1,901,575
$
(135,242)
3
1
4
$
3,381,892
$
(141,025)
1,571,275
(236,735)
$
4,953,167
$
(377,760)
Total
$
26,594,264
$
(591,671)
39
$
18,883,071
$
(664,780)
36
$
45,477,335
$
(1,256,451)
F-24
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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 estimate the fair value of 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-25
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The Company’s investments measured at fair value on a recurring basis are allocated among fair value
levels at December 31, 2018 and 2017 as follows:
Level 1
Level 2
Level 3
Total
December 31, 2018
Fixed-maturity securities available-for-sale
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
$
8,220,381
$
-
$
-
$
8,220,381
-
6,341,608
112,076,270
3,674,023
-
-
6,341,608
115,750,293
Residential mortgage backed securities
Total fixed maturities
Equity securities
Total investments
-
120,296,651
16,572,616
136,869,267
$
21,465,234
31,480,865
-
31,480,865
$
-
-
-
$
-
21,465,234
151,777,516
16,572,616
168,350,132
$
Level 1
Level 2
Level 3
Total
December 31, 2017
Fixed-maturity securities available-for-sale
Political subdivisions of
States, Territories and
Possessions
Corporate and other
bonds industrial and
miscellaneous
$
-
$
11,315,443
$
-
$
11,315,443
83,597,300
4,544,165
-
88,141,465
Residential mortgage backed securities
Total fixed maturities
Equity securities
Total investments
-
83,597,300
14,286,198
97,883,498
$
20,531,348
36,390,956
-
36,390,956
$
-
-
-
$
-
20,531,348
119,988,256
14,286,198
134,274,454
$
F-26
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Pursuant to ASC 820 “Fair Value Measurement,” an entity is permitted, as a practical expedient, to estimate
the fair value of an investment within the scope of ASC 820 using the net asset value (“NAV”) per share (or
its equivalent) of the investment. The following table sets forth the Company’s investment in a hedge fund
investment measured at NAV per share (or its equivalent) as of December 31, 2018 and 2017. The Company
measures this investment at fair value on a recurring basis. Fair value using NAV per share is as follows as
of the dates indicated:
Category
December 31, 2018 December 31, 2017
Other Investments:
Hedge fund
Total
$
$
1,855,225
1,855,225
$
-
$
-
The investment is generally redeemable with at least 45 days prior written notice. The hedge fund investment
is accounted for as a limited partnership by the Company. Revenue is earned based upon the Company’s
allocated share of the partnership's changes in unrealized gains and losses to its partners. Such amounts have
been recorded in the 2018 consolidated statement of income and comprehensive income (loss) within net
(losses) gains on investments.
The estimated fair value and the level of the fair value hierarchy of the Company’s long-term debt as of
December 31, 2018 and 2017, which is not measured at fair value is as follows:
Long-term debt
Level 1
Level 2
Level 3
Total
December 31, 2018
Senior Notes due 2022
$
-
$
28,521,734
$
-
$
28,521,734
Long-term debt
Level 1
Level 2
Level 3
Total
December 31, 2017
Senior Notes due 2022
$
-
$
28,943,251
$
-
$
28,943,251
The fair value of long-term debt is estimated based on observable market prices when available. When
observable market prices were not available, the fair values of debt were based on observable market prices
of comparable instruments adjusted for differences between the observed instruments and the instruments
being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing
rates for similar types of borrowing arrangements.
Note 5 - Fair Value of Financial Instruments and Real Estate
The Company uses the following methods and assumptions in estimating the fair value of financial
instruments and real estate:
F-27
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Equity securities, available-for-sale fixed income securities, and other investments: Fair value disclosures
for these investments are included in “Note 3 - Investments” and “Note 4 – Fair Value Measurements”.
Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their fair values
because of the short-term nature of these instruments.
Premiums receivable, reinsurance receivables, and investment subscription receivable: 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 estimated 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 estimated fair value was based on
an appraisal prepared using the sales comparison approach, and accordingly the real estate is a Level 3 asset
under the fair value hierarchy.
Reinsurance balances payable: The carrying value reported in the consolidated balance sheets for these
financial instruments approximates fair value.
Long-term debt: The estimated fair value of long-term debt is based on observable market interest rates
when available. When observable market interest rates were not available, the estimated fair values of debt
were based on observable market interest rates of comparable instruments adjusted for differences between
the observed instruments and the instruments being valued or is estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
The estimated fair values of the Company’s financial instruments as of December 31, 2018 and 2017 are as
follows:
December 31, 2018
December 31, 2017
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
4,222,855
$
21,138,403
$
-
$
13,961,599
$
26,367,115
$
2,300,827
$
1,933,376
$
29,295,251
$
4,426,416
$
21,138,403
$
-
$
13,961,599
$
26,367,115
$
2,705,000
$
1,933,376
$
28,521,734
$
$
$
$
$
$
$
$
4,869,808
48,381,633
2,000,000
13,217,698
28,519,130
2,261,829
2,563,966
29,126,965
$
$
$
$
$
$
$
$
5,150,076
48,381,633
2,000,000
13,217,698
28,519,130
2,705,000
2,563,966
28,943,251
Fixed-maturity securities-held-to maturity
Cash and cash equivalents
Investment subscription receivable
Premiums receivable, net
Reinsurance receivables, net
Real estate, net of accumulated depreciation
Reinsurance balances payable
Long-term debt, net
Note 6 - Intangibles
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 remaining weighted average
amortization period of identified intangible assets of finite useful life is approximately 0.5 years as of
December 31, 2018.
F-28
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The components of intangible assets and their useful lives, accumulated amortization, and net carrying value
as of December 31, 2018 and 2017 are summarized as follows:
December 31, 2018
December 31, 2017
Useful
Life
(in yrs)
-
10
Gross
Carrying
Value
500,000
3,400,000
$
Accumulated
Amortization
$
-
3,230,000
Net
Carrying
Amount
$
500,000
170,000
Gross
Carrying
Value
500,000
3,400,000
$
Accumulated
Amortization
-
$
2,890,000
Net
Carrying
Amount
$
500,000
510,000
7
950,000
4,850,000
$
950,000
4,180,000
$
-
670,000
$
950,000
4,850,000
$
950,000
3,840,000
$
-
1,010,000
$
Insurance license
Customer relationships
Other identifiable
intangibles
Total
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 for the years ended December 31, 2018
and 2017.
The Company recorded amortization expense related to intangibles of $340,000, for each of the years ended
December 31, 2018 and 2017. The $170,000 remaining net carrying amount of finite life intangibles will be
amortized during the year ending December 31, 2019.
Note 7 - Reinsurance
The Company’s quota share reinsurance treaties are on a July 1 through June 30 fiscal year basis; therefore,
for year to date fiscal periods after June 30, two separate treaties will be included in such periods.
The Company’s quota share reinsurance treaties in effect for the year ended December 31, 2018 for its
personal lines business, which primarily consists of homeowners’ policies, were covered under the July 1,
2017 through June 30, 2018 treaty year and the new treaty year that began on July 1, 2018 (“2017/2019
Treaty”). The Company’s quota share reinsurance treaties in effect for the year ended December 31, 2017
were covered under the 2017/2019 Treaty and July 1, 2016 through June 30, 2017 treaty year (“2016/2017
Treaty”).
In March 2017, the Company bound its personal lines quota share reinsurance treaty effective July 1, 2017.
The treaty provided for a reduction in the quota share ceding rate to 20%, from 40% in the 2016/2017 Treaty,
and an increase in the provisional ceding commission rate to 53%, from 52% in the 2016/2017 Treaty. The
2017/2019 Treaty covered a two-year period from July 1, 2017 through June 30, 2019. In August 2018, the
Company terminated its contract with one of the reinsurers that was a party to the 2017/2019 Treaty. This
termination was retroactive to July 1, 2018 and had the effect of reducing the quota share ceding rate to 10%
from 20%.
F-29
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2018.
Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:
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 and facultative facility above quota share coverage (1)
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
Quota share treaty
Risk retained
Excess of loss coverage above risk retained
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
Catastrophe Reinsurance:
July 1, 2018
to
June 30, 2019
Treaty Year
July 1, 2017
to
June 30, 2018
July 1, 2016
to
June 30, 2017
10%
$
900,000
$
1,000,000
9,000,000
$
in excess of
$
1,000,000
$
9,100,000
10,000,000
$
June 30, 2019
20%
$
800,000
$
1,000,000
$
9,000,000
in excess of
$
1,000,000
$
9,200,000
$
10,000,000
June 30, 2019
40%
$
500,000
$
833,333
3,666,667
$
in excess of
$
833,333
$
4,000,000
4,500,000
$
June 30, 2017
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2019
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2018
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2017
None
$
$
750,000
3,750,000
in excess of
$
$
$
750,000
3,750,000
4,500,000
None
$
$
750,000
3,750,000
in excess of
$
$
$
750,000
3,750,000
4,500,000
None
$
$
500,000
4,000,000
in excess of
$
$
$
500,000
4,000,000
4,500,000
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2019
90%
100%
$
100,000
$
4,900,000
$
5,000,000
June 30, 2018
90%
100%
$
100,000
$
4,900,000
5,000,000
$
June 30, 2017
Initial loss subject to personal lines quota share treaty
Risk retained per catastrophe occurrence (2)
Catastrophe loss coverage in excess of quota share coverage (3) (4)
Reinstatement premium protection (5)
$
$
$
5,000,000
4,500,000
445,000,000
Yes
$
$
$
5,000,000
4,000,000
315,000,000
Yes
$
$
$
5,000,000
3,000,000
247,000,000
Yes
(1) For personal lines, the 2017/2019 Treaty includes the addition of an automatic facultative facility allowing KICO to obtain
homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to
$10,000,000.
(2) Plus losses in excess of catastrophe coverage.
(3) 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
F-30
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
hours from 120 consecutive hours.
(4) Effective July 1, 2018, the top $50,000,000 layer of catastrophe reinsurance coverage has a two year term expiring on June
30, 2020.
(5) Effective July 1, 2016, reinstatement premium protection for $20,000,000 of catastrophe coverage in excess of $5,000,000.
Effective July 1, 2017, reinstatement premium protection for $145,000,000 of catastrophe coverage in excess of $5,000,000.
Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
The single maximum risks per occurrence to which the Company is subject under the treaties effective July
1, 2018 are as follows:
July 1, 2018 - June 30, 2019
Treaty
Personal Lines (1)
Personal Umbrella
Commercial Lines
Commercial Umbrella
Extent of Loss
Initial $1,000,000
$1,000,000 - $10,000,000
Over $10,000,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
Risk
Retained
$900,000
None(2)
100%
$100,000
None
100%
$750,000
None(3)
100%
$100,000
None
100%
Catastrophe (4)
Initial $5,000,000
$5,000,000 - $450,000,000
Over $450,000,000
$4,500,000
None
100%
(1) Treaty for July 1, 2018 – June 30, 2019 is a two year treaty with expiration date of June 30, 2019.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
F-31
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The single maximum risks per occurrence to which the Company is subject under the treaty years shown
below are as follows:
July 1, 2017 - June 30, 2018
July 1, 2016 - June 30, 2017
Treaty
Personal Lines (1)
Range of Loss
Initial $1,000,000
$1,000,000 - $10,000,000
Over $10,000,000
Risk
Retained
$800,000
None(2)
Range of Loss
Initial $833,333
$833,333 - $4,500,000
100% Over $4,500,000
Personal Umbrella
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
$100,000
None
100% Over $5,000,000
Initial $1,000,000
$1,000,000 - $5,000,000
Commercial Lines
Initial $750,000
$750,000 - $4,500,000
Over $4,500,000
$750,000
None(3)
Initial $500,000
$500,000 - $4,500,000
100% Over $4,500,000
Commercial Umbrella
Initial $1,000,000
$1,000,000 - $5,000,000
Over $5,000,000
$100,000
None
100% Over $5,000,000
Initial $1,000,000
$1,000,000 - $5,000,000
Risk
Retained
$500,000
None(3)
100%
$100,000
None
100%
$500,000
None(3)
100%
$100,000
None
100%
Catastrophe (4)
Initial $5,000,000
$5,000,000 - $320,000,000
Over $320,000,000
$4,000,000
None
100% Over $252,000,000
Initial $5,000,000
$5,000,000 - $252,000,000
$3,000,000
None
100%
(1) Treaty for July 1, 2017 – June 30, 2018 is a two year treaty with expiration date of June 30, 2019.
(2) Covered by excess of loss treaties up to $3,500,000 and by facultative facility from $3,500,000 to $10,000,000.
(3) Covered by excess of loss treaties.
(4) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts.
The Company’s reinsurance program is structured to enable the Company to significantly grow its premium
volume while maintaining regulatory capital and other financial ratios generally within or below the expected
ranges used for regulatory oversight purposes. The reinsurance program also provides income as a result of
ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation
in reinsurance arrangements does not relieve the Company of its obligations to policyholders.
F-32
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Approximate reinsurance recoverables on unpaid and paid losses by reinsurer at December 31, 2018 and
2017 are as follows:
($ in thousands)
December 31, 2018
Cavello Bay Reinsurance Limited (1)
Swiss Reinsurance America Corporation
Hanover Rueck SE
SCOR Reinsurance Company
Allied World Assurance Company
Others
Total
December 31, 2017
M aiden Reinsurace Company (1)
Swiss Reinsurance America Corporation
Hanover Rueck SE
SCOR Reinsurance Company
Allied World Assurance Company
Others
Total
Unpaid
Losses
Paid
Losses
Total
S ecurity
$
$
$
$
$
$
$
$
$
$
$
$
1,277
1,251
1,181
89
373
282
4,453
968
600
420
209
188
148
2,533
6,596
5,750
3,909
617
679
2,573
20,124
9,128
4,899
1,277
1,060
1,837
1,080
19,281
7,548
-
-
-
-
58
7,606
10,583
-
-
-
-
205
10,788
(2)
(3)
(2)
(4)
5,319
4,499
2,728
528
306
2,291
15,671
8,160
4,299
857
851
1,649
932
16,748
$
$
$
$
(1) On December 27, 2018, Enstar Group Limited announced that one of its wholly owned subsidiaries, Cavello Bay Reinsurance Limited
acquired Maiden Reinsurance North America, Inc.
(2) Secured pursuant to collateralized trust agreements.
(3) Represents $53,000 secured pursuant to collateralized trust agreement and $5,000 guaranteed by an irrevocable letter of credit.
(4) Represents $202,000 secured pursuant to collateralized trust agreement and $3,000 guaranteed by an irrevocable letter of credit.
Assets held in the trusts referred to in footnotes (2), (3), and (4) in the table above are not included in the
Company’s invested assets and investment income earned on these assets is credited to the reinsurers
respectively. In addition to reinsurance recoverables on unpaid and paid losses, reinsurance receivables in
the accompanying consolidated balance sheets as of December 31, 2018 and 2017 include unearned ceded
premiums of approximately $6,243,000 and $9,237,000, respectively.
Ceding Commission Revenue
The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i)
a fixed provisional commission rate at which provisional ceding commissions are earned, and (ii) a sliding
scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these
agreements based upon which contingent ceding commissions are earned. The sliding scale includes
minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate
and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and,
conversely, the commission rate and contingent ceding commissions earned decreases when the estimated
ultimate loss ratio increases.
The Company’s estimated ultimate treaty year loss ratios (the “Loss Ratio(s)”) for treaties in effect for the
year ended December 31, 2018 are attributable to contracts for the 2017/2019 Treaty. The Company’s
estimated ultimate treaty year Loss Ratios for treaties in effect for the year ended December 31, 2017 are
F-33
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
attributable to contracts for the 2017/2019 Treaty and 2016/2017 Treaty.
Treaties in effect for the year ended December 31, 2018
Under the 2017/2019 Treaty, the Company receives an upfront fixed provisional rate that is subject
to a sliding scale contingent adjustment based upon the Loss Ratio. Under this arrangement, the
Company earns and earned provisional ceding commissions that are subject to later adjustment
dependent on changes to the estimated Loss Ratio for the 2017/2019 Treaty. The Company’s Loss
Ratios for the period July 1, 2018 through December 31, 2018 attributable to the 2017/2019 Treaty
were consistent with the contractual Loss Ratio at which provisional ceding commissions were
earned, and therefore no contingent commission adjustment was recorded for the six-month period
ended December 31, 2018. The Company’s Loss Ratios for the period July 1, 2017 through June 30,
2018 attributable to the 2017/2019 Treaty were higher than the contractual Loss Ratio at which
provisional ceding commissions were earned. Accordingly, for the six months ended June 30, 2018,
the Company incurred negative contingent ceding commissions as a result of the estimated Loss Ratio
for the 2017/2019 Treaty, which reduced contingent ceding commissions earned.
Treaties in effect for the year ended December 31, 2017
Under the 2017/2019 Treaty and the 2016/2017 Treaty, the Company received, an upfront fixed
provisional rate that was subject to a sliding scale contingent adjustment based upon the Loss Ratio.
Under this arrangement, the Company earned provisional ceding commissions that were subject to
later adjustment dependent on changes to the estimated Loss Ratio for the 2017/2019 Treaty and
2016/2017 Treaty. The Company’s Loss Ratios for the period July 1, 2017 through December 31,
2017 attributable to the 2017/2019 Treaty, and from July 1, 2016 through December 31, 2017
attributable to the 2016/2017 Treaty, were consistent with the contractual Loss Ratio at which the
provisional ceding commissions were earned and therefore no additional contingent commission was
recorded for the year ended December 31, 2017 with respect to these treaties.
In addition to the treaties that were in effect for the years ended December 31, 2018 and 2017, 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 commission revenues earned consists of the following:
Years ended
December 31,
2018
2017
Provisional ceding commissions earned
Contingent ceding commissions earned
$
6,745,928
(1,413,298)
$
10,677,214
(744,081)
$
5,332,630
$
9,933,133
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
F-34
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
ceding commissions earned. As of December 31, 2018 and 2017, net contingent ceding commissions payable
to reinsurers under all treaties was approximately $1,581,000 and $1,850,000, respectively, which are
recorded in reinsurance balances payable on the accompanying consolidated balance sheets.
Note 8 - Deferred Policy Acquisition Costs and Deferred Ceding Commission Revenue
Deferred policy acquisition costs incurred and policy-related ceding commission revenue are deferred and
amortized to income on property and casualty insurance business as follows:
Years ended
December 31,
2018
2017
Net deferred policy acquisition costs, net of ceding
commission revenue, beginning of year
$
10,580,824
$
5,387,940
Cost incurred and deferred:
Commissions and brokerage
Other underwriting and policy acquisition costs
Ceding commission revenue
Net deferred policy acquisition costs
Return of deferred ceding commission revenue
due to reduction of quota share
Amortization
27,687,907
8,227,992
(5,166,193)
30,749,706
23,093,880
6,669,904
(8,091,785)
21,671,999
(2,413,273)
(23,696,197)
4,640,236
(3,648,859)
(12,830,256)
5,192,884
Net deferred policy acquisition costs, net of ceding
commission revenue, end of year
$
15,221,060
$
10,580,824
Ending balances for deferred policy acquisition costs and deferred ceding commission revenue as of
December 31, 2018 and 2017 follows:
December 31,
2018
2017
Deferred policy acquisition costs
Deferred ceding commission revenue
Balance at end of period
Note 9 – Debt
Federal Home Loan Bank
$
$
17,907,737
(2,686,677)
15,221,060
$
$
14,847,236
(4,266,412)
10,580,824
In July 2017, KICO became a member of, and invested in, the Federal Home Loan Bank of New York
(“FHLBNY”). The aggregate investment in dividend bearing common stock was $18,400 as of December
31, 2018. FHLBNY members have access to a variety of flexible, low cost funding through FHLBNY’s credit
products, enabling members to customize advances, which are to be fully collateralized. Eligible collateral
to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S.
Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian
account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of
December 31 of the previous year and are due and payable within one year of borrowing. The maximum
F-35
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
allowable advance as of December 31, 2018 was approximately $9,849,000. Advances are limited to the
amount of available collateral, which was approximately $5,116,000 as of December 31, 2018. There were
no borrowings under this facility during the year ended December 31, 2018.
Long-term Debt
On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December
30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on
June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50%. The net proceeds
of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an
effective yield of 5.67%. The balance of long-term debt as of December 31, 2018 and 2017 is as follows:
December 31,
2018
December 31,
2017
5.50% Senior Unsecured Notes
Discount
Issuance costs
Long-term debt, net
$
$
30,000,000
(129,796)
(574,953)
29,295,251
30,000,000
(162,209)
(710,826)
29,126,965
$
$
The Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of
the Company's subsidiaries. The Notes rank senior in right of payment to any of the Company's existing and
future indebtedness that is by its terms expressly subordinated or junior in right of payment to the Notes. The
Notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, but
will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral
securing such secured indebtedness. In addition, the Notes will be structurally subordinated to the
indebtedness and other obligations of the Company's subsidiaries. The Company may redeem the Notes, at
any time in whole or from time to time in part, at the redemption price equal to the greater of: (i) 100% of
the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest on the Notes to be redeemed that would be due if the Notes
matured on the applicable redemption date (exclusive of interest accrued to the applicable redemption date)
discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points.
On December 20, 2017, the Company used $25,000,000 of the net proceeds from the offering to contribute
capital to KICO, to support additional growth. The remainder of the net proceeds are being used for general
corporate purposes. A registration statement relating to the debt issued in the offering was filed with the SEC
which became effective on November 28, 2017.
F-36
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Note 10 - Property and Equipment
The components of property and equipment are summarized as follows:
Cost
Accumulated
Depreciation
Net
December 31, 2018
Building
Land
Furniture office equipment
Computer equipment and software
Total
December 31, 2017
Building
Land
Furniture office equipment
Computer equipment and software
Total
$
$
$
$
$
$
2,231,967
622,937
723,217
7,240,613
10,818,734
2,146,950
575,698
707,524
4,657,174
8,087,346
(554,077)
-
(586,010)
(3,621,718)
(4,761,805)
(460,819)
-
(493,558)
(2,360,392)
(3,314,769)
1,677,890
622,937
137,207
3,618,895
6,056,929
1,686,131
575,698
213,966
2,296,782
4,772,577
$
$
$
$
$
$
Depreciation expense for the years ended December 31, 2018 and 2017 was $1,447,150 and $1,062,928,
respectively.
Note 11 - Property and Casualty Insurance Activity
Premiums written, ceded and earned are as follows:
Direct
Assumed
Ceded
Net
Year ended December 31, 2018
Premiums written
Change in unearned premiums
Premiums earned
Year ended December 31, 2017
Premiums written
Change in unearned premiums
Premiums earned
$
$
146,716,468
(13,388,535)
133,327,933
$
$
121,575,178
(10,662,744)
110,912,434
$
$
1,004
4,067
5,071
$
$
22,847
9,456
32,303
$
(26,923,679)
(2,994,610)
(29,918,289)
$
$
119,793,793
(16,379,078)
103,414,715
$
$
(28,729,149)
(4,864,565)
(33,593,714)
$
$
92,868,876
(15,517,853)
77,351,023
$
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of
advance premiums as of December 31, 2018 and 2017 was $2,107,629 and $1,477,693, respectively.
F-37
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The components of the liability for loss and LAE expenses and related reinsurance receivables as of
December 31, 2018 and 2017 are as follows:
Gross
Liability
Reinsurance
Receivables
December 31, 2018
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, 2017
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
$
35,812,037
9,102,862
11,282,207
-
56,197,106
$
$
30,499,592
8,635,199
9,664,831
-
48,799,622
$
$
$
$
$
12,283,616
1,433,170
1,954,461
15,671,247
4,453,298
20,124,545
6,242,570
26,367,115
11,987,693
1,990,506
2,770,709
16,748,908
2,533,042
19,281,950
9,237,180
28,519,130
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and
LAE:
Years ended
December 31,
2018
2017
Balance at beginning of period
Less reinsurance recoverables
Net balance, beginning of period
$
48,799,622
(16,748,908)
32,050,714
$
41,736,719
(15,776,880)
25,959,839
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
57,143,077
1,152,128
58,295,205
34,246,081
(60,544)
34,185,537
34,025,387
15,794,673
49,820,060
18,194,860
9,899,802
28,094,662
40,525,859
15,671,247
56,197,106
$
32,050,714
16,748,908
48,799,622
$
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $14,482,712 and
F-38
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
$14,067,027 for the years ended December 31, 2018 and 2017, respectively.
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, 2018 and 2017 was unfavorable $1,152,128 and favorable $(60,544) 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 period’s results. Reserves are closely monitored and are
recomputed periodically using the most recent information on reported claims and a variety of statistical
techniques. On at least a quarterly basis, the Company reviews by line of business existing reserves, new
claims, changes to existing case reserves and paid losses with respect to the current and prior periods. Several
methods are used, varying by line of business and accident year, in order to select the estimated period-end
loss reserves. These methods include the following:
Paid Loss Development – historical patterns of paid loss development are used to project future paid
loss emergence in order to estimate required reserves.
Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid
losses and changes in case reserves, are used to project future incurred loss emergence in order to
estimate required reserves.
Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is
F-39
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
determined, and is weighted against the portion of the accident year claims that have been paid, based
on historical paid loss development patterns. The estimate of required reserves assumes that the
remaining unpaid portion of a particular accident year will pay out at a rate consistent with the
estimated loss ratio for that year. This method can be useful for situations where an unusually high
or low amount of paid losses exists at the early stages of the claims development process.
Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is
determined, and is weighted against the portion of the accident year claims that have been reported,
based on historical incurred loss development patterns. The estimate of required reserves assumes
that the remaining unreported portion of a particular accident year will pay out at a rate consistent
with the estimated loss ratio for that year. This method can be useful for situations where an unusually
high or low amount of reported losses exists at the early stages of the claims development process.
Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE
during various stages of development are reviewed and assumptions are made regarding average loss
and LAE development applied to remaining claims inventory. Such methods more properly reflect
changes in the speed of claims closure and the relative adequacy of case reserve levels at various
stages of development. These methods 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 claim 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, 2015 and prior is limited, although
there remains the possibility of adverse development on reported claims (“case development” IBNR). In
certain rare circumstances states have retroactively revised a statute of limitations. The Company is not
aware of any such effort that would have a material impact on the Company’s results.
The following is information about incurred and paid claims development as of December 31, 2018, net of
reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of
December 31, 2018 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, 2009 to
F-40
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
December 31, 2017 is presented as supplementary unaudited information.
Reported claim counts are measured on an occurrence or per event basis. A single claim occurrence could
result in more than one loss type or claimant; however, the Company counts claims at the occurrence level
as a single claim regardless of the number of claimants or claim features involved.
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2018
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For the Years Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
(Unaudited 2009 - 2017)
Cumulative
Number of
Reported
Claims by
$
4,403
$
4,254
5,598
$
4,287
5,707
7,603
$
4,384
6,429
7,678
9,539
$
4,511
6,623
8,618
9,344
10,728
$
4,609
6,912
9,440
10,278
9,745
14,193
$
4,616
6,853
9,198
10,382
9,424
14,260
22,340
$
4,667
6,838
9,066
10,582
9,621
14,218
21,994
26,062
$
4,690
6,840
9,144
10,790
10,061
14,564
22,148
24,941
31,605
Total
$
4,672
6,787
9,171
10,791
10,089
15,023
22,491
24,789
32,169
54,455
190,437
$
-$
-
(3)
(4)
38
238
537
1,096
2,697
9,079
(1)
1,136
1,617
1,914
4,702
1,560
2,131
2,552
2,862
3,335
3,935
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.
All Lines of Business
(in thousands)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
(Unaudited 2009 - 2017)
$
2,298
$
3,068
2,566
$
3,607
3,947
3,740
$
3,920
4,972
5,117
3,950
$
4,134
5,602
6,228
5,770
3,405
$
4,362
6,323
7,170
7,127
5,303
5,710
$
4,424
6,576
8,139
8,196
6,633
9,429
12,295
$
4,468
6,720
8,540
9,187
7,591
10,738
16,181
15,364
$
4,487
6,772
8,702
10,236
8,407
11,770
18,266
19,001
16,704
Total
$
4,659
6,780
8,727
10,323
9,056
13,819
19,984
21,106
24,820
32,383
151,657
$
Net liability for unpaid loss and allocated loss adjustment expenses for the accident years
presented
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and allocted loss adjustment expenses, net of reinsurance
$
$
38,780
93
38,873
Reported claim counts are measured on an occurrence or per event basis. A single claim occurrence could
F-41
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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 loss and loss adjustment expenses, net of reinsurance
Total reinsurance recoverable on unpaid losses
Unallocated loss adjustment expenses
Total gross liability for loss and LAE reserves
As of
December 31, 2018
38,873
$
15,671
1,653
56,197
$
The following is supplementary unaudited information about average historical claims duration as of
December 31, 2018:
Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by
Age, Net of Reinsurance (unadited)
3
7
5
10
1
6
2
8
9
4
Years
All Lines
of
Business
46.4% 18.8% 11.4% 8.6%
9.5%
5.8%
1.5%
0.7%
0.3%
3.7%
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 12 – Stockholders’ Equity
Public Offering of Common Stock
On January 31, 2017, the Company closed on an underwritten public offering of 2,500,000 shares of its
Common Stock. On February 14, 2017, the Company closed on the underwriters’ purchase option for an
additional 192,500 shares of its Common Stock. The public offering price for the 2,692,500 shares sold was
$12.00 per share. The aggregate net proceeds to the Company were approximately $30,137,000, after
deducting underwriting discounts and commissions and other offering expenses in the aggregate amount of
approximately $2,173,000.
On March 1, 2017, the Company used $23,000,000 of the net proceeds from the offering to contribute capital
to its insurance subsidiary, KICO, to support its ratings upgrade plan and additional growth. The remainder
of the net proceeds will be used for general corporate purposes. A shelf registration statement relating to the
shares sold in the offering was filed with the SEC and became effective on January 19, 2017.
Dividends Declared
Dividends declared and paid on Common Stock were $4,279,494 and $3,214,471 for the years ended
December 31, 2018 and 2017, respectively. The Company’s Board of Directors approved a quarterly
dividend on February 14, 2019 of $.10 per share payable in cash on March 15, 2019 to stockholders of record
as of February 28, 2019 (see Note 19 - Subsequent Events).
F-42
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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, a maximum of 700,000 shares of Common Stock of the Company are authorized
to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation
rights, restricted stock and stock bonuses. Incentive stock options granted under the 2014 Plan and 2005
Plan expire no later than ten years from the date of grant (except no later than five years for a grant to a 10%
stockholder). The Board of Directors or the Compensation Committee 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, 2018 and 2017 include stock-based compensation
expense totaling approximately $6,000 and $38,000, respectively. Stock-based compensation expense related
to stock options is net of estimated forfeitures of approximately 17% for the years ended December 31, 2018
and 2017. Such amounts have been included in the consolidated statements of income and comprehensive
income (loss) within other operating expenses.
Stock-based compensation expense in 2018 and 2017 is the estimated fair value of options granted, amortized
on a straight-line basis over the requisite service period, for the entire portion of the award less an estimate
for anticipated forfeitures. The Company uses the “simplified” method to estimate the expected term of the
options because the Company’s historical share option exercise experience does not provide a reasonable
basis upon which to estimate expected term. No options were granted during the years ended December 31,
2018 and 2017.
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-43
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
A summary of stock option activity under the Company’s 2014 Plan and 2005 Plan for the year ended
December 31, 2018 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, 2018
341,150
$
6.69
1.67
$
4,131,028
Granted
Exercised
Forfeited
-
(303,650)
-
$
-
$
6.48
$
-
-
-
-
$
-
3,794,505
$
$
-
Outstanding at December 31, 2018
37,500
$
8.36
2.24
$
349,950
Vested and Exercisable at December 31, 2018
27,500
$
8.37
2.26
$
256,313
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2018 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 $17.69 closing
price of the Company’s Common Stock on December 31, 2018. The total intrinsic value of options exercised
in the year ended December 31, 2018 was $3,794,505, determined as of the date of exercise.
Participants in the 2005 and 2014 Plans may exercise their outstanding vested options, in whole or in part,
by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair
market value equal to the exercise price of the option being exercised (“Net Exercise”), or by exchanging a
number of shares owned for a period of greater than one year having a fair market value equal to the exercise
price of the option being exercised (“Share Exchange”). The Company received cash proceeds of $90,640
from the exercise of options for the purchase of 15,250 shares of common stock during the year ended
December 31, 2018. The Company received 7,855 shares from the exercise of options under a Share
Exchange for the purchase of 30,000 shares of common stock during the year ended December 31, 2018. The
remaining 258,400 options exercised during the year ended December 31, 2018 were Net Exercises, resulting
in the issuance of 94,647 shares of common stock. The Company received cash proceeds of $77,927 from
the exercise of options for the purchase of 13,750 shares of common stock during the year ended December
31, 2017. The remaining 7,850 options exercised during the year ended December 31, 2017 were Net
Exercises.
As of December 31, 2018, the estimated fair value of unamortized compensation cost related to unvested
stock option awards was approximately $1,000. Unamortized compensation cost as of December 31, 2018 is
expected to be recognized over a remaining weighted-average vesting period of 0.19 years.
As of December 31, 2018, there were 466,124 shares reserved for grants under the 2014 Plan.
F-44
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
Restricted Stock Awards
A summary of the restricted common stock activity under the Company’s 2014 Plan for the year ended
December 31, 2018 is as follows:
Restricted Stock Awards
Shares
Weighted
Average Grant
Date Fair Value
per Share
Aggregate
Fair Value
Balance at January 1, 2018
47,337
$
14.35
$
679,180
Granted
Vested
Forfeited
92,004
(15,752)
(3,090)
$
$
$
18.67
14.07
15.00
$
$
$
1,717,958
(221,613)
(46,350)
Balance at December 31, 2018
120,499
$
17.66
$
2,129,175
Fair value was calculated using the closing price of the Company’s Common Stock on the grant date. For the
year ended December 31, 2018 and 2017, stock-based compensation for these grants was approximately
$697,000 and $232,000, respectively, which is included in other operating expenses on the accompanying
consolidated statements of income and comprehensive income (loss). These amounts reflect the Company’s
accounting expense and do not correspond to the actual value that will be recognized by the directors,
executives and employees.
Note 13 - 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
F-45
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
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,
2018 and 2017, KICO paid dividends to Kingstone of $3,600,000 and $2,900,000, respectively. On February
19, 2019, KICO’s Board of Directors approved a cash dividend of $2,000,000 to Kingstone, which was paid
on February 20, 2019. For the years ended December 31, 2018 and 2017, KICO recorded statutory basis net
income of $3,801,498 and $7,907,743, respectively. At December 31, 2018 and 2017, KICO reported
statutory basis surplus as regards policyholders of $98,745,944 and $101,290,282, respectively, as filed with
the DFS.
Note 14 - Risk Based Capital
State insurance departments impose risk-based capital (“RBC”) requirements on insurance enterprises. The
RBC Model serves as a benchmark for the regulation of insurance companies by state insurance regulators.
RBC provides for targeted surplus levels based on formulas, which specify various weighting factors that are
applied to financial balances or various levels of activity based on the perceived degree of risk, and are set
forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to
the company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers,
policyholders, or other creditors (credit risk); (c) the risk of underestimating liabilities from business already
written or inadequately pricing business to be written in the coming year (underwriting risk); and, (d) the risk
associated with items such as excessive premium growth, contingent liabilities, and other items not reflected
on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the
authorized control level RBC (“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 was above the ACL for each of the last two years
and is in compliance with RBC requirements as of December 31, 2018 and 2017.
Note 15 – Income Taxes
The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries.
State tax returns are filed on a consolidated or separate return basis depending on applicable laws. The
Company records adjustments related to prior years’ taxes during the period when they are identified,
F-46
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
generally when the tax returns are filed. The effect of these adjustments on the current and prior periods
(during which the differences originated) is evaluated based upon quantitative and qualitative factors and are
considered in relation to the consolidated financial statements taken as a whole for the respective periods.
The provision for income taxes is comprised of the following:
Years ended December 31,
2018
2017
Current federal income tax (benefit) expense
Current state income tax (benefit) expense
Deferred federal and state income tax benefit
$
(74,001)
(6,784)
(5,398)
$
4,317,686
7,353
(1,809)
Income tax (benefit) expense
$
(86,183)
$
4,323,230
A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
Years ended December 31,
Computed expected tax expense
Change in enacted tax rates on net deferred tax liabilities
State taxes, net of Federal benefit
State valuation allowance
Benefit of lower tax brackets
Permanent differences
Dividends received deduction
Non-taxable investment income
Excess benefit from stock-based compensation
Stock-based compensation
Other permanent differences
Prior year tax matters
Other
$
2018
631,483
-
(377,884)
390,976
-
(85,703)
(40,861)
(569,459)
(16,960)
42,496
(61,415)
1,144
21.0
-
(12.6)
13.0
-
(2.9)
(1.4)
(18.9)
(0.5)
1.4
(2.0)
-
%
$
2017
5,008,400
(405,218)
(101,858)
124,486
(100,000)
(138,197)
(85,684)
-
(25,821)
46,962
4,172
(4,012)
%
35.0
(2.8)
(0.7)
0.9
(0.7)
(1.0)
(0.6)
-
(0.2)
0.3
-
-
Income tax (benefit) expense, as reported
$
(86,183)
(2.9)
%
$
4,323,230
30.2
%
Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the
temporary differences are expected to be recovered. Accordingly, the current period income tax provision
can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheets reflect
temporary differences between the carrying amounts of the assets and liabilities for financial reporting
purposes and income tax purposes, tax effected at various rates depending on whether the temporary
differences are subject to federal taxes, state taxes, or both.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. federal
government. The Company has accounted for the material impacts of the Tax Act by re-measuring its
deferred tax assets/(liabilities) at the 21% enacted tax rate as of December 31, 2017. As of December 31,
2017, the impact of the change in tax rate was a decrease in net deferred income tax liabilities of $405,218
with a corresponding increase in deferred income tax benefit. Upon completion of the 2017 U.S. income tax
return in 2018, the Company did not identify any additional re-measurement adjustments to its recorded
deferred tax liabilities and the one-time transition tax.
Deferred income tax liability for unrealized gains on available-for-sale securities that were re-measured due
to the Act resulted in a stranded tax effect within AOCI. Due to the effect of the tax rate change being
F-47
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
recorded through continuing operations as required under ASC 740. On February 14, 2018, the FASB issued
ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for
the reclassification of the stranded tax effects as a result of the Act from AOCI to retained earnings and
requires certain other disclosures. The Company chose to early adopt the provisions of ASU 2018-02 and
recorded a one-time reclassification of $182,912 from AOCI to retained earnings as of December 31, 2017
for the stranded tax effects resulting from the newly enacted corporate tax rate. The amount of the
reclassification was the difference between the historical corporate tax rate and the newly enacted 21%
corporate tax rate (see the accompanying consolidated statement of stockholders’ equity for reclassification
of the stranded tax effects).
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:
December 31,
2018
December 31,
2017
$
90,438
343,905
3,145,682
564,202
383,733
4,527,960
$
103,655
300,005
2,431,301
895,947
382,522
4,113,430
Investment in KICO (2)
Deferred acquisition costs
Intangibles
Depreciation and amortization
Net unrealized (losses) gains of securities - available-for-sale
Total deferred tax liabilities
759,543
3,760,625
140,700
664,194
(1,151,335)
4,173,727
759,543
3,117,920
212,100
328,735
295,474
4,713,772
Net deferred income tax asset (liability)
$
354,233
$
(600,342)
(1) The deferred tax assets from net operating loss carryovers are as follows:
Type of NOL
State only (A)
Valuation allowance
State only, net of valuation allowance
Amount subject to Annual Limitation, federal only (B)
Total deferred tax asset from net operating loss carryovers
December 31,
2018
$
December 31,
2017
$
1,305,365
(1,217,027)
88,338
2,100
90,438
$
$
Expiration
December 31, 2038
December 31, 2019
824,996
(725,541)
99,455
4,200
103,655
(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The
state NOL as of December 31, 2018 and 2017 was approximately $20,083,000 and $12,692,000,
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 (loss) within other underwriting
expenses. Kingstone has recorded a valuation allowance due to the uncertainty of generating enough
F-48
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
state taxable income to utilize 100% of the available state NOLs over their remaining lives, which
expire between 2027 and 2038.
(B) The Company has a remaining NOL of $10,000 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 remaining loss subject to the Annual Limitation will expire on 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 insurance company 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 (collectively
the “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 company has a lower carrying value of its subsidiary for income tax
purposes. The deferred tax liability was reduced to $759,543 upon the reduction of federal income tax
rates as of December 31, 2017. The Company is required to maintain its deferred tax liability of $759,543
related to this temporary difference until the stock of KICO is sold, or the assets of KICO are sold or
KICO and the parent are merged.
The table below reconciles the changes in net deferred income tax assets (liabilities) to the deferred income
tax provision for the year ended December 31, 2018:
Change in net deferred income tax assets
Deferred tax benefit allocated to other comprehensive (loss) income
Deferred income tax benefit
$
(954,575)
(949,177)
(5,398)
$
In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. No valuation allowance against deferred tax assets has been established,
except for NOL limitations, as the Company believes it is more likely than not the deferred tax assets will be
realized based on the historical taxable income of KICO, or by offset to deferred tax liabilities.
The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were
required. There were no material interest or penalties related to income taxes that have been accrued or
recognized as of and for the years ended December 31, 2018 and 2017. If any had been recognized these
would be reported in income tax expense.
Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of
filing. The Company’s tax returns for the years ended December 31, 2014 through December 31, 2017
remain subject to examination. The Company’s federal income tax return for the year ended December 31,
F-49
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
2016 has been examined by the Internal Revenue Service and was accepted as filed.
Note 16 - Employee Benefit Plans
Employee Profit Sharing Plan
The Company maintained a discretionary employee profit sharing plan (the “Profit Sharing Plan”) available
to full-time employees who were employed as of December 31. For the years ended December 31, 2018 and
2017, the Profit Sharing Plan called for a bonus to be paid based on a formula that is tied to the annual GAAP
combined ratio (“Combined Ratio”). The maximum the bonus can be is 25% of eligible wages at a Combined
Ratio of 70%. The bonus decreased by 1% for each percentage point increase in the Combined Ratio. There
is a minimum bonus of 5% at a Combined Ratio of 90% and above. The bonus is allocated 35% to the
employees’ 401(k) account and 65% as cash through payroll. The Company incurred approximately
$445,000 and $989,000 of expense for the years ended December 31, 2018 and 2017, respectively, related to
the Profit Sharing Plan, which is recorded in other operating expenses on the accompanying consolidated
statements of income and comprehensive income (loss).
Employee Bonus Plan
In November 2018, the Company’s Board of Directors approved a new discretionary employee bonus plan
(“Bonus Plan”) to replace the existing Profit Sharing Plan to be effective as of January 1, 2019. Eligible
employees can receive a target bonus rate of between 12% and 30% of base salary depending on their
position. The target bonus rate is subject to adjustment depending on annual performance evaluation scores.
The Bonus Plan is funded through a point system whereby up to 60 points are funded by a target return on
investment (“Target ROE”) sliding scale and up to 40 points are funded by achieving various annual
corporate goals as approved in advance by the Company’s Board of Directors. A maximum of 60 points can
be achieved with a Target ROE of 14%. The bonus is decreased by six points for each percentage point
decease in Target ROE. The minimum of six points can be achieved with Target ROE of 5%.
401 (k) Plan
The Company maintains a salary reduction plan under Section 401(k) of the Internal Revenue Code (the
“401(k) Plan”) for its qualified employees. The Company matches 100% of each participant’s contribution
up to 4% of the participant’s eligible contribution. The Company, at its discretion, may allocate an amount
for additional contributions (“Additional Contributions”) to the 401(k) Plan included in the Profit Sharing
Plan as discussed above. The Company incurred approximately $247,000 and $545,000 of expense for the
years ended December 31, 2018 and 2017, respectively, related to the 401(k) Plan, which is recorded in other
operating expenses on the accompany consolidated statements of income and comprehensive income (loss).
For the years ended December 31, 2018 and 2017, Additional Contributions totaled approximately $-0- and
$309,000, respectively.
Deferred Compensation Plan
On June 18, 2018, the Company adopted the Kingstone Companies, Inc. Deferred Compensation Plan (the
"Deferred Compensation Plan"). The Deferred Compensation Plan is offered to a select group
(“Participants”), consisting of management and highly compensated employees as a method of recognizing
and retaining such Participants. The Deferred Compensation Plan provides for eligible Participants to elect
F-50
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
to defer up to 75% of their base compensation and up to 100% of bonuses and other compensation and to
have such deferred amounts deemed to be invested in specified investment options. In addition to the
Participant deferrals, the Company may choose to make matching contributions to some or all of the
Participants in the Deferred Compensation Plan to the extent the Participant did not receive the maximum
matching or non-elective contributions permissible under the Company’s 401(k) Plan due to limitations under
the Internal Revenue Code or the 401(k) Plan. Participants may elect to receive payment of their account
balances in a single cash payment or in annual installments for a period of up to ten years. The first payroll
subject to the Deferred Compensation Plan was in July 2018. The deferred compensation liability as of
December 31, 2018 amounted to $298,638 and is recorded in accounts payable, accrued expenses and other
liabilities in the consolidated balance sheets. The Company made voluntary contributions of $24,957 for the
year ended December 31, 2018, which are recorded in other operating expenses in the consolidated statements
of income and comprehensive income (loss).
Note 17 - Commitments and Contingencies
Litigation
From time to time, the Company may be 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 currently not subject to any other pending legal proceedings that management believes are
likely to have a material adverse effect on the consolidated financial statements.
Office Lease
The Company is a party to a non-cancellable operating lease, dated March 27, 2015, for its office facility for
KICO located in Valley Stream, New York. In June 2016, the Company entered into a lease modification
agreement. The original lease had a term of seven years and nine months. The lease modification increased
the space occupied by KICO and extended the lease term to seven years and nine months to be measured
from the additional premises commencement date. The additional premises commencement date was
September 19, 2016, and additional rent was payable beginning March 19, 2017. The original lease
commencement date was July 1, 2015 and rent commencement began January 1, 2016.
In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations
resulting from increased assessments from real estate taxes and other charges. Rent expense under the lease
is recognized on a straight-line basis over the lease term. At December 31, 2018, cumulative rent expense
exceeded cumulative rent payments by $91,800. This difference is recorded as deferred rent and is included
in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets.
F-51
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
As of December 31, 2018, aggregate future minimum rental commitments under this agreement are as
follows:
For the Year
Ending
December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
Total
169,861
175,806
181,959
188,328
194,919
49,145
960,018
$
Rent expense for the years ended December 31, 2018 and 2017 amounted to $165,368, and is included in the
consolidated statements of income and comprehensive income (loss) within other underwriting expenses.
Employment Agreements
Barry Goldstein
(1) Agreement in effect for the years ended December 31, 2017 and 2018
On January 20, 2017, the Company and Mr. Goldstein, the Company’s President, Chairman of the Board and
Chief Executive Officer through December 31, 2018, entered into a new employment agreement (the “2017
Goldstein Employment Agreement”). The 2017 Goldstein Employment Agreement was effective as of
January 1, 2017 and was originally scheduled to expire on December 31, 2019 (see below for Agreement in
effect as January 1, 2019).
Pursuant to the 2017 Goldstein Employment Agreement, Mr. Goldstein was entitled to receive an annual
base salary of $630,000 and an annual bonus equal to 6% of the Company's consolidated income from
operations before taxes, exclusive of net investment income (loss) and net realized gains (losses) on
investments. In addition, pursuant to the 2017 Goldstein Employment Agreement, Mr. Goldstein was 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, 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%). Accrued LTC compensation expense (credit) of $(247,311) and
$945,000 for the years ended December 31, 2018 and 2017 is included in other operating expenses on the
accompanying consolidated statements of income and comprehensive income (loss).
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, 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.
F-52
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
(2) Agreement in effect as of January 1, 2019
On October 16, 2018, the Company entered into an amended and restated employment agreement with Mr.
Goldstein effective as of January 1, 2019 and expiring on December 31, 2021 (the “Amended Employment
Agreement”). Pursuant to the Amended Employment Agreement, Mr. Goldstein stepped down as Chief
Executive Officer on January 1, 2019 and was named Executive Chairman of the Board.
Mr. Goldstein will be entitled to receive an annual base salary of $636,500 for the calendar year 2019 and
$500,000 for each of the calendar years 2020 and 2021. In addition, Mr. Goldstein is eligible to receive an
annual performance bonus equal to 3% of the Company’s consolidated income from operations before taxes,
exclusive of net investment income (loss) and net realized gains (losses) on investments. In addition, Mr.
Goldstein will continue to be entitled to a long-term compensation award (“LTC”) (which is a continuation
of the previous terms under the 2017 Goldstein Employment Agreement) of between $945,000 and
$2,835,000 based on a specified minimum increase in the Company’s adjusted book value per share, as
defined, 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%). Furthermore, in the event that Mr. Goldstein’s
employment is terminated by the Company without cause or he resigns for good reason, each as defined, Mr.
Goldstein would be entitled to receive separation payments equal to his then applicable base salary, the 3%
bonus and the LTC payment for the remainder of the term. Mr. Goldstein would be entitled, under certain
circumstances, to a payment equal to three times his then annual salary and the target LTC payment in the
event of the termination of his employment within eighteen months following a change of control of the
Company. Mr. Goldstein will also be entitled to receive a grant, under the terms of the 2014 Plan, during the
first 30 days of January 2020, with respect to a number of shares of restricted stock determined by dividing
$436,500 by the fair market value of the Company stock on the date of grant. The January 2020 grant will
become vested with respect to 50% of the award on each of December 31, 2020 and December 31, 2021
based on continued provision of services on each vesting date. In addition, Mr. Goldstein will be entitled to
receive a grant, under the 2014 Plan, during the first 30 days of 2021, with respect to a number of shares of
restricted stock determined by dividing $236,500 by the fair market value of the Company stock on the date
of grant. The January 2021 grant will become vested as of December 31, 2021 based on continued provision
of services on the vesting date.
Dale A. Thatcher
(1) Agreement in effect for the year ended December 31, 2018
On March 14, 2018, the Company and Dale A. Thatcher, a director of the Company, entered into an
employment agreement (the “Thatcher Employment Agreement”) pursuant to which Mr. Thatcher serves as
the Company’s Chief Operating Officer. Mr. Thatcher also serves as KICO’s President. The Thatcher
Employment Agreement became effective as of March 15, 2018 and expired on December 31, 2018.
Pursuant to the Thatcher Employment Agreement, Mr. Thatcher is entitled to receive a base salary of
$500,000 per annum and a minimum bonus equal to 15% of his base salary. Concurrently with the execution
of the Thatcher Employment Agreement, the Company granted to Mr. Thatcher 35,715 shares of restricted
Common Stock under the 2014 Plan. The shares granted will vest in three equal installments on each of the
three anniversaries following the grant date, subject to the terms of the restricted stock grant agreement
F-53
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
between the Company and Mr. Thatcher.
(2) Agreement in effect as of January 1, 2019
On October 16, 2018, the Company and Mr. Thatcher entered into an Employment Agreement effective as
of January 1, 2019 and expiring on December 31, 2021 (the “2019 Thatcher Employment Agreement”).
Pursuant to the 2019 Thatcher Employment Agreement, Mr. Thatcher will succeed Mr. Goldstein as Chief
Executive Officer effective January 1, 2019. Mr. Thatcher will continue to serve as a director and will remain
President of KICO.
Mr. Thatcher will be entitled to receive an annual base salary of $500,000 for 2019, $630,000 for 2020 and
no increase in 2021. In addition, Mr. Thatcher is eligible to receive an annual performance bonus equal to
3% of the Company’s consolidated income from operations before taxes, exclusive of the net investment
income (loss) and net realized gains (losses) on investments. In the event that Mr. Thatcher’s employment is
terminated by the Company without cause or he resigns for good reason, each as defined, Mr. Thatcher would
be entitled to receive separation payments equal to his then applicable base salary and the 3% bonus for the
remainder of the term. Mr. Thatcher will also be entitled to receive a grant, under the terms of the 2014
Equity Plan, with respect to a number of shares of restricted stock in each of 2019, 2020 and 2021 determined
by dividing $750,000, $1,250,000 and $1,500,000, respectively, by the fair market value of the Company’s
stock on the date of grant. Each grant vests ratably over a three-year period from the date of grant.
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.
Note 18 - 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 as well as non-vested restricted stock awards. 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, 2018 and 2017, the
inclusion of -0- options, 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.
F-54
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
The reconciliation of the weighted average number of common shares used in the calculation of basic and
diluted earnings per common share follows:
Years ended
December 31,
2018
2017
Weighted average number of shares outstanding
10,686,813
10,388,440
Effect of dilutive securities, common share equivalents:
Stock options
Restricted stock awards
19,823
10,250
188,983
4,154
Weighted average number of shares outstanding,
used for computing diluted earnings per share
10,716,886
10,581,577
Note 19 - Subsequent Events
The Company has evaluated events that occurred subsequent to December 31, 2018 through March 18, 2019,
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 14, 2019, the Company’s Board of Directors approved a dividend of $.10 per share payable in
cash on March 15, 2019 to stockholders of record as of February 28, 2019.
Note 20 – Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December 31,
2018 and 2017:
F-55
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
March 31,
June 30,
S eptember 30, December 31,
Total
2018
Net premiums earned
Ceding commission revenue
Net investment income
Net (losses) gains on investments
Total revenues
Loss and loss adjustment expenses
Commission expense and
other underwriting expenses
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
22,837,617
1,695,158
1,383,989
(523,127)
25,701,870
17,266,330
$
24,104,614
1,691,168
1,556,866
(106,733)
27,546,186
11,176,085
$
27,533,907
1,044,529
1,602,371
352,025
30,885,909
13,296,708
$
28,938,577
901,775
1,643,022
(2,218,022)
29,637,933
16,556,082
$
103,414,715
5,332,630
6,186,248
(2,495,857)
113,771,898
58,295,205
10,831,451
(2,717,934)
(0.28)
(0.28)
$
$
11,093,175
2,757,297
0.26
0.25
$
$
11,788,002
3,933,730
0.37
0.36
$
$
12,572,851
(879,847)
(0.08)
(0.08)
$
$
46,285,479
3,093,246
0.29
0.29
$
$
March 31,
June 30,
S eptember 30, December 31,
Total
2017
Net premiums earned
Ceding commission revenue
Net investment income
Net realized gain (loss) on investments
Total revenues
Loss and loss adjustment expenses
Commission expense and
other underwriting expenses
Net income
Basic earnings per share
Diluted earnings per share
$
16,369,748
3,184,452
857,800
(54,506)
20,647,194
8,292,996
$
16,953,727
3,305,938
1,026,004
130,423
21,724,251
7,454,922
$
21,514,408
1,717,610
1,033,307
20,998
24,614,653
7,073,323
$
22,513,140
1,725,133
1,215,475
(12,602)
25,783,212
11,364,296
$
77,351,023
9,933,133
4,132,586
84,313
92,769,310
34,185,537
9,101,395
1,470,580
0.15
0.15
$
$
9,301,182
2,510,392
0.24
0.23
$
$
9,975,938
4,073,921
0.38
0.38
$
$
10,919,353
1,931,592
0.18
0.18
$
$
39,297,868
9,986,485
0.96
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-56
I, Dale A. Thatcher, 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 registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 18, 2019
/s/ Dale A. Thatcher
Dale A. Thatcher
Chief Executive Officer
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 registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 18, 2019
/s/ Victor Brodsky
Victor Brodsky
Chief Financial Officer
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, 2018 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 18, 2019
/s/ Dale A. Thatcher
Dale A. Thatcher
Chief Executive Officer
/s/ Victor Brodsky
Victor Brodsky
Chief Financial Officer