United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission File Number 0-1665
KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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36-2476480
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1154 Broadway, Hewlett, New York
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11557
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(Address of principal executive offices)
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(Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock
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NASDAQ
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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 o No þ
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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| Non-accelerated |
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2012, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $10,376,238 based on the closing sale price as reported on the NASDAQ Capital Market. As of March 29, 2013, there were 3,840,899 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Page No.
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Forward-Looking Statements
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Forward-Looking Statements
This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Annual Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of this Annual Report under “Factors That May Affect Future Results and Financial Condition”.
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
(a) Business Development
General
As used in this Annual Report on Form 10-K (the “Annual Report”), references to the “Company”, “we”, “us”, or “our” refer to Kingstone Companies, Inc. (“Kingstone”) and its subsidiaries.
We offer property and casualty insurance products to small businesses and individuals in New York State through our wholly-owned subsidiary, Kingstone Insurance Company (“KICO”). KICO is a licensed property and casualty insurance company in the State of New York. In 2011, KICO obtained a license to write property and casualty insurance in Pennsylvania; however, KICO has only nominally commenced writing business in Pennsylvania. Payments, Inc., our wholly-owned subsidiary, is a licensed premium finance company in the State of New York and receives fees for placing contracts with a third party licensed premium finance company.
Recent Developments
Developments During 2012
● Increased Rate of Dividends Declared
In August 2012, we increased our quarterly dividends on our common stock from $.03 per share to $.04 per share. Dividends of $.03 per share were declared on each of February 6, 2012 and May 14, 2012 and were paid on March 15, 2012 and June 15, 2012, respectively. Dividends of $.04 per share were declared on each of August 13, 2012 and November 12, 2012 and were paid on September 18, 2012 and December 14, 2012, respectively.
Developments During 2011
● Debt Financing
From June 2009 through March 2010, we borrowed $1,450,000 (including $785,000 from related parties) and issued promissory notes in such aggregate principal amount (the “2009/2010 Notes”). During the quarter the ended June 30, 2011, we prepaid $703,000 (including $407,000 to related parties) of the principal amount of the 2009/2010 Notes. In June 2011, the remaining noteholders agreed to extend the maturity date of the 2009/2010 Notes for a period of three years from July 10, 2011 to July 10 2014, and, effective July 11, 2011, reduce the interest rate from 12.625% to 9.5% per annum. The remaining 2009/2010 Notes, as extended, can be prepaid without premium or penalty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” and “Certain Relationships and Related Transactions, and Director Independence – 2009/2010 Debt Financing” in Items 7 and 13, respectively, of this Annual Report.
● Line of Credit
On December 27, 2011, we obtained a $500,000 line of credit. The line of credit bears interest at a floating rate based on the bank’s prime rate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” in Item 7 of this Annual Report.
● Dividends Declared
In 2011, we declared our first quarterly dividends on our common stock. Dividends of $.03 per share were declared on each of August 11, 2011 and November 10, 2011 and were paid on September 15, 2011 and December 15, 2011, respectively.
● A.M. Best Rating
In 2011, the A.M. Best rating for KICO was upgraded from B (Fair) to B+ (Good).
Property and Casualty Insurance
Overview
Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers (the “insured”). An insurance policy is a contract between the insurance company and the insured where the insurance company agrees to pay for losses suffered by the insured that are covered under the contract. Such contracts often are subject to subsequent legal interpretation by courts, legislative action and arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured’s property, such as a home and the personal property in it, or a business’ building, inventory and equipment. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences of a legal liability of an individual or an organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party. Claims on property coverage generally are reported and settled in a relatively short period of time, whereas those on casualty coverage can take years, even decades, to settle.
KICO derives substantially all of its revenues from earned premiums, ceding commissions from quota share reinsurance, investment income and net realized and unrealized gains and losses on investment securities. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers and premium taxes, and other expenses related to the underwriting process, including their employees’ compensation and benefits.
The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company’s combined ratio under GAAP is calculated by adding the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) and the ratio of policy acquisition and other underwriting expenses to earned premiums (the “expense ratio”). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit. However, when considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can be profitable.
General
Substantially all of our operations consist of the underwriting of property and casualty insurance. KICO is a multi-line regional property and casualty insurance company writing business exclusively through independent agents and brokers (“producers”). We are licensed to write insurance in New York and Pennsylvania. KICO obtained authority to write business in Pennsylvania in February 2011; however, it has only nominally commenced writing business in Pennsylvania. KICO provides direct markets to small and medium-sized producers located primarily in downstate New York, consisting of New York City, Long Island, and Westchester County. In 2011, KICO expanded its market to include parts of western New York, primarily Buffalo, Rochester and Syracuse.
KICO’s competitive advantage in the marketplace is the service it provides to its producers, policyholders and claimants. Our insurance producers value their relationship with us since they receive excellent, consistent personal service coupled with competitive rates and commission levels. We believe there are many producers looking for an insurer like KICO, which offers the producer a potential for growth and good service. KICO consistently is rated above average in the important areas of underwriting, claims handling and service to producers. We believe that the excellent service we provide to our producers, policyholders and claimants provides a foundation for growth. In 2012 and 2010, in a bi-annual company performance survey conducted by the Professional Insurance Agents of New York and New Jersey (“PIA”), KICO was rated the top performer by PIA members in New York. Each year the PIA surveys its membership, asking them to rate the carriers with whom they do business. The survey covers 20 different performance categories such as claims, underwriting, agent support and technology. In 2012 and 2010, 115 and 81 companies, respectively, were rated along with KICO, including large national carriers.
We have developed online application raters and inquiry systems for many of our personal lines and commercial automobile products. Substantially all of our personal lines are underwritten using these tools. In 2012 some of our commercial lines were added to our online tools. We plan to expand online capabilities to our other lines of business.
Underwriting and Claims Management Philosophy
Our underwriting philosophy is to be conservative in the approach to risks that we write. We monitor results on a regular basis and all of our producers are reviewed by management on a quarterly basis. In general, we try to avoid severity by writing at lower liability limits when possible.
We believe our rates are competitive with other carriers’ rates in our markets. We believe that consistency and the reliable availability of our insurance products is important to our producers. We do not seek to grow by competing based solely upon price. We seek to develop long-term relationships with our select producers who understand and appreciate the conservative, consistent path we have chosen. We carefully underwrite all of our business utilizing the CLUE database, motor vehicle reports, credit reports, physical inspection of risks and other underwriting software. In the event that a material misrepresentation is discovered in the underwriting process, the policy is voided. If a material misrepresentation is discovered after a claim is presented, we deny the claim. We write homeowners and dwelling fire business in New York City and Long Island and are cognizant of our exposure to hurricanes. We have mitigated this risk by adding mandatory hurricane deductibles to all policies. Our claim and underwriting expertise enables us to profitably write personal lines business in all areas of New York City and Long Island.
Product Lines
Our product lines include the following:
Personal lines - Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, condominium, renters, mechanical breakdown, service line and personal umbrella policies.
General liability policies - We commenced writing business owners policies (“BOP”) in 2008. The BOP business consists primarily of small business retail risks without a cooking or residential exposure. In June 2009, we commenced writing artisan’s liability policies. In November 2010, we commenced writing special multi-peril liability policies as an option for commercial properties ineligible for our BOP due to risks exceeding the BOP limits or risk classifications not covered under BOP.
Commercial automobile – Our commercial automobile policies consist primarily of vehicles weighing less than 50,000 pounds owned by small contractors and artisans.
For-hire vehicle physical damage only policies - These policies are designed for newer vehicles utilized as black cars (livery vehicles up to four years old), silver cars (livery vehicles over four years old), yellow taxicabs and car service vehicles.
Canine legal liability policies - We commenced writing this innovative program in September 2009. These policies cover bodily injury, property damage and medical payments for damages caused by the insured’s dog.
Distribution
We generate business through independent retail and wholesale agents and brokers whom we refer to collectively as producers. These producers sell policies for KICO as well as for other insurance companies. We carefully select our producers by evaluating several factors such as their need for our products, premium production potential, loss history with other insurance companies that they represent, product and market knowledge, and the size of the agency.
We evaluate the results of each producer through periodic reviews of volume and profitability. We continuously monitor the performance of our producers by assessing leading indicators and metrics that signal the need for corrective action. Corrective action may include increased frequency of producer meetings and more detailed business planning. Producers not attaining our standards are either terminated or asked to resign.
Each producer is assigned an underwriter and the producer can call that underwriter directly on any matter. We believe that the close relationship with their underwriter is the principal reason producers place their business with us. Requests for quotes are responded to as promptly as possible. Our online application raters and inquiry systems have streamlined the process of placing business with KICO, but we accommodate all other means of producer transmissions. Our producers have access to a website which contains all of our applications, rating software, policy forms and underwriting guidelines for all lines of business. We send out our publication “KICO Producer News” in order to inform our producers of updates at KICO. In addition we have an active Producer Council and have at least one annual meeting with all of our producers.
Competition
The insurance industry is highly competitive. We constantly assess and project the market conditions and prices for our products, but we cannot fully know our profitability until all claims have been reported and settled.
We compete with large national carriers as well as regional and local carriers in the property and casualty insurance marketplace. Within our selected producers’ offices, we compete with the other carriers available to that producer. Most of our competition is from carriers with far greater capital and brand recognition. We feel we can compete with any carrier based on service, stressing the development of our personal underwriting with the producer, and the fair and expedient handling of claims.
Competition with carriers offering lower premium rates could result in fewer applications for coverage. We are unable to predict the extent to which new, proposed or potential initiatives by our competitors may affect the demand for our products or the risks that may be available for us to consider underwriting.
Loss and Loss Adjustment Expense Reserves
We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. We establish these reserves after considering all information known to us as of the date they are recorded.
Loss reserves fall into two categories: case reserves for reported losses and loss expenses associated with a specific reported insured claim, and reserves for losses incurred but not reported (“IBNR”) and LAE. We establish these two categories of loss reserves as follows:
Reserves for reported losses - When a claim is received, we establish a case reserve for the estimated amount of its ultimate settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time the claim is reported and may subsequently increase or reduce the case reserves as our claims department deems necessary based upon the development of additional facts about claims.
IBNR reserves - We also estimate and establish reserves for loss and LAE amounts incurred but not yet reported. IBNR reserves are calculated as ultimate losses and LAE less reported losses and LAE. Ultimate losses are projected by using generally accepted actuarial techniques.
The liability for loss and LAE represents our best estimate of the ultimate cost of all reported and unreported losses that are unpaid as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis valuations, statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an analysis of our historical experience, supplemented by analyses of industry loss data. We believe that the reserves for loss and LAE are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates become necessary, such adjustments are reflected in expense for the period in which the estimates are changed. Because of the nature of the business historically written, we believe that we have limited exposure to environmental claim liabilities. We recognize recoveries from salvage and subrogation when received.
We engage an independent external actuarial specialist to opine on our recorded statutory reserves. Our actuary estimates a range of ultimate losses, along with the recommended IBNR and reserve amounts.
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:
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Years ended
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December 31,
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2012
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2011
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Balance at beginning of period
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$ |
18,480,717 |
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$ |
17,711,907 |
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Less reinsurance recoverables
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(9,960,334 |
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(10,431,415 |
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Net balance, beginning of period
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8,520,383 |
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7,280,492 |
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Incurred related to:
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Current year
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10,460,000 |
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8,297,998 |
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Prior years
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774,713 |
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273,060 |
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Total incurred
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11,234,713 |
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8,571,058 |
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Paid related to:
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Current year
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4,419,000 |
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4,108,010 |
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Prior years
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3,270,258 |
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3,223,157 |
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Total paid
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7,689,258 |
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7,331,167 |
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Net balance at end of period
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12,065,838 |
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8,520,383 |
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Add reinsurance recoverables
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18,419,694 |
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9,960,334 |
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Balance at end of period
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$ |
30,485,532 |
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$ |
18,480,717 |
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Our claims reserving practices are designed to set reserves that, in the aggregate, are adequate to pay all claims at their ultimate settlement value.
Loss and Loss Adjustment Expenses Development
The table below shows the net loss development for business written each year from 2004 through 2012. We did not have accurate and reliable data for 2003, which is to be included in the required ten year period. The table reflects the changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on a GAAP basis.
The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. The next section of the table shows, by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $4,370,000 as of December 31, 2006, by December 31, 2008 (two years later), $3,303,000 had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2006.
The “cumulative redundancy (deficiency)” represents, as of December 31, 2012, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.
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As of and for the Year Ended December 31,
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2004
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2005
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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Reserve for loss and loss adjustment expenses, net of reinsurance recoverables
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3,141 |
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3,074 |
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4,370 |
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4,799 |
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5,823 |
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6,001 |
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7,280 |
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8,520 |
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12,065 |
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Net reserve estimated as of One year later
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5,122 |
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3,627 |
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4,844 |
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5,430 |
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6,119 |
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6,235 |
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7,483 |
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9,261 |
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Two years later
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5,698 |
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4,315 |
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5,591 |
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5,867 |
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6,609 |
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6,393 |
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8,289 |
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Three years later
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6,356 |
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5,101 |
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5,792 |
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6,433 |
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6,729 |
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6,486 |
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Four years later
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6,985 |
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5,094 |
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6,260 |
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6,569 |
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6,711 |
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Five years later
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7,049 |
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5,540 |
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6,343 |
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6,683 |
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Six years later
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7,476 |
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5,616 |
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6,429 |
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Seven years later
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7,561 |
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5,678 |
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|
|
|
|
|
|
|
Eight years later
|
|
|
7,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency)
|
|
|
(4,496 |
) |
|
|
(2,604 |
) |
|
|
(2,059 |
) |
|
|
(1,884 |
) |
|
|
(888 |
) |
|
|
(485 |
) |
|
|
(1,009 |
) |
|
|
(741 |
) |
|
|
|
|
| |
|
As of and for the Year Ended December 31,
|
|
| |
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Cumulative amount of reserve paid, net of reinsurance recoverable through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
3,347 |
|
|
|
1,106 |
|
|
|
2,018 |
|
|
|
1,855 |
|
|
|
2,533 |
|
|
|
2,307 |
|
|
|
3,201 |
|
|
|
3,237 |
|
|
|
|
|
Two years later
|
|
|
4,291 |
|
|
|
2,321 |
|
|
|
3,303 |
|
|
|
3,339 |
|
|
|
3,974 |
|
|
|
3,992 |
|
|
|
4,947 |
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
4,965 |
|
|
|
3,321 |
|
|
|
4,036 |
|
|
|
4,339 |
|
|
|
5,054 |
|
|
|
4,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
5,598 |
|
|
|
3,705 |
|
|
|
4,471 |
|
|
|
5,146 |
|
|
|
5,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
5,840 |
|
|
|
3,988 |
|
|
|
5,079 |
|
|
|
5,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
6,101 |
|
|
|
4,484 |
|
|
|
5,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
6,557 |
|
|
|
4,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
6,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
3,141 |
|
|
|
3,074 |
|
|
|
4,370 |
|
|
|
4,799 |
|
|
|
5,823 |
|
|
|
6,001 |
|
|
|
7,280 |
|
|
|
8,520 |
|
|
|
12,065 |
|
|
Reinsurance Recoverable
|
|
|
7,610 |
|
|
|
7,283 |
|
|
|
6,523 |
|
|
|
6,693 |
|
|
|
9,766 |
|
|
|
10,512 |
|
|
|
10,432 |
|
|
|
9,960 |
|
|
|
18,420 |
|
|
Gross reserves -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
10,751 |
|
|
|
10,357 |
|
|
|
10,893 |
|
|
|
11,492 |
|
|
|
15,589 |
|
|
|
16,513 |
|
|
|
17,712 |
|
|
|
18,480 |
|
|
|
30,485 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated reserve
|
|
|
7,637 |
|
|
|
5,678 |
|
|
|
6,429 |
|
|
|
6,683 |
|
|
|
6,711 |
|
|
|
6,486 |
|
|
|
8,289 |
|
|
|
9,261 |
|
|
|
|
|
|
Re-estimated reinsurance recoverable
|
|
|
10,513 |
|
|
|
10,682 |
|
|
|
10,825 |
|
|
|
10,621 |
|
|
|
12,365 |
|
|
|
11,879 |
|
|
|
11,780 |
|
|
|
11,018 |
|
|
|
|
|
|
Gross re-estimated reserve
|
|
|
18,150 |
|
|
|
16,360 |
|
|
|
17,254 |
|
|
|
17,304 |
|
|
|
19,076 |
|
|
|
18,365 |
|
|
|
20,069 |
|
|
|
20,279 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency)
|
|
|
(7,399 |
) |
|
|
(6,003 |
) |
|
|
(6,361 |
) |
|
|
(5,812 |
) |
|
|
(3,487 |
) |
|
|
(1,852 |
) |
|
|
(2,357 |
) |
|
|
(1,799 |
) |
|
|
|
|
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to achieve a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Our reinsurance program is structured to reflect our obligations and goals. Reinsurance via quota share allows for a carrier to write business without increasing its underwriting leverage above a management determined ratio. The business written under a reinsurance quota share obligates a reinsurer to assume the risks involved, and gives the reinsurer the profit (or loss) associated with such. We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance. This will result in higher earned premiums and a reduction in ceding commission revenue in future years. Our participation in reinsurance arrangements does not relieve us from our obligations to policyholders.
Investments
Our investment portfolio, including cash and cash equivalents, and short term investments, as of December 31, 2012 and 2011, is summarized in the table below by type of investment.
| |
|
December 31, 2012
|
|
|
December 31, 2011
|
|
| |
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
| |
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
| |
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$ |
560,162 |
|
|
|
2.1 |
% |
|
$ |
1,079,924 |
|
|
|
4.8 |
% |
|
One to five years
|
|
|
9,569,943 |
|
|
|
36.6 |
% |
|
|
7,045,774 |
|
|
|
31.2 |
% |
|
Five to ten years
|
|
|
13,306,033 |
|
|
|
50.8 |
% |
|
|
12,680,441 |
|
|
|
56.2 |
% |
|
More than 10 years
|
|
|
2,745,800 |
|
|
|
10.5 |
% |
|
|
1,762,793 |
|
|
|
7.8 |
% |
|
Total
|
|
$ |
26,181,938 |
|
|
|
100.0 |
% |
|
$ |
22,568,932 |
|
|
|
100.0 |
% |
The table below summarizes the credit quality of our fixed-maturity securities available for sale as of December 31, 2012 and 2011 as rated by Standard and Poor’s.
| |
|
December 31, 2012
|
|
|
December 31, 2011
|
|
| |
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
| |
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
| |
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
- |
|
|
|
0.0 |
% |
|
$ |
550,188 |
|
|
|
2.4 |
% |
|
AAA
|
|
|
2,226,603 |
|
|
|
8.5 |
% |
|
|
3,041,576 |
|
|
|
13.5 |
% |
|
AA
|
|
|
4,088,304 |
|
|
|
15.6 |
% |
|
|
4,502,733 |
|
|
|
20.0 |
% |
|
A
|
|
|
6,963,380 |
|
|
|
26.6 |
% |
|
|
6,977,222 |
|
|
|
30.9 |
% |
|
BBB
|
|
|
12,903,651 |
|
|
|
49.3 |
% |
|
|
7,497,213 |
|
|
|
33.2 |
% |
|
Total
|
|
$ |
26,181,938 |
|
|
|
100.00 |
% |
|
$ |
22,568,932 |
|
|
|
100.0 |
% |
Additional financial information regarding our investments is presented under the subheading “Investments” in Item 7 of this Annual Report.
We currently have a Demotech rating of A (Excellent) which generally qualifies our policies for banks and finance companies. Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. In 2009, KICO applied for its initial A.M. Best rating, and was assigned a letter rating of “B” (Fair) by A.M. Best in 2010. Our rating was upgraded to B+ (Good) in 2011, and such rating remained in effect in 2012. KICO is beginning the process of undergoing its annual review from A.M. Best, which may result in a change to its rating. A. M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors. An A.M. Best rating could create additional demand from producers requiring a carrier to have an A.M. Best rating.
Premium Financing
Customers who purchase insurance policies are often unable to pay the premium in a lump sum or are unable to afford the payment plan offered and, therefore, require extended payment terms. Premium finance involves making a loan to the customer that is secured by the unearned portion of the insurance premiums being financed and held by the insurance carrier. Our wholly-owned subsidiary, Payments Inc. (“Payments”), is licensed as a premium finance agency in the state of New York.
Prior to February 1, 2008, Payments Inc. provided premium financing in connection with the obtaining of insurance policies. Effective February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio. The purchaser of the portfolio has agreed that, during the five year period following the closing (subject to automatic renewal for successive two year terms under certain circumstances), it will purchase, assume and service all eligible premium finance contracts originated by Payments in the state of New York. In connection with such purchases, Payments will be entitled to receive a fee generally equal to a percentage of the amount financed. Our premium financing business currently consists of the placement fees that Payments will earn from placing contracts. Placement fees earned from placing contracts constituted approximately 1.2% and 1.8% of our revenues from continuing operations during the years ended December 31, 2012 and 2011, respectively.
The regulatory framework under which our premium finance procedures are established is generally set forth in the premium finance statutes of the state in which we operate. Among other restrictions, the interest rate that may be charged to the insured for financing their premiums is limited by these state statutes. See “Government Regulation” below.
Holding Company Regulation
We, as the parent of KICO, are subject to the insurance holding company laws of the state of New York. These laws generally require an insurance company to register with the New York State Department of Financial Services (the “Department”) and to furnish annually financial and other information about the operations of companies within our holding company system. Generally under these laws, all material transactions among companies in the holding company system to which KICO is a party must be fair and reasonable and, if material or of a specified category, require prior notice and approval or non-disapproval by the Department.
In addition, in connection with the plan of conversion of CMIC, we agreed with the Department that, until July 1, 2011, no dividend could be paid by KICO to us without the approval of the Department.
Change of Control
The insurance holding company laws of the state of New York require approval by the Department of any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. Any future transactions that would constitute a change of control of KICO, including a change of control of Kingstone Companies, Inc., would generally require the party acquiring control to obtain the approval of the Department (and in any other state in which KICO may operate). Obtaining these approvals may result in the material delay of, or deter, any such transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Kingstone Companies, Inc., including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
State Insurance Regulation
Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates in some instances and regulate unfair trade and claims practices.
KICO is required to file detailed financial statements and other reports with the insurance departments in the states in which KICO is licensed to transact business. In 2011 New York was the only state in which KICO transacted business. In February 2011, KICO obtained an insurance license to transact business in Pennsylvania. These financial statements are subject to periodic examination by the insurance departments.
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations, including those in New York, that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of KICO to exit unprofitable markets.
In the aftermath of Superstorm Sandy, the New York State Department of Financial Services has adopted various regulations that could have a material adverse effect on insurance companies that operate in the state of New York. Included among the regulations are accelerated claims investigation and settlement requirements and mandatory participation in non-binding mediation proceedings funded by the insurer. In addition, the Department of Financial Services imposed a four month moratorium on property and casualty policy terminations and non-renewals notwithstanding failure to pay premiums when due. Further, in February 2013, the state of New York announced that the Department of Financial Services has commenced an investigation into the claims practices of three insurance companies, including KICO, in connection with Superstorm Sandy claims. The Department of Financial Services stated that the three insurers had a much larger than average consumer complaint rate with regard to Superstorm Sandy claims and indicated that the three insurers were being investigated for (i) failure to send adjusters in a timely manner; (ii) failure to process claims in a timely manner; and (iii) inability of homeowners to contact insurance company representatives. KICO has received a letter from the Department of Financial Services seeking information and data with regard to the foregoing. KICO is cooperating with the Department of Financial Services in connection with its investigation and we believe that such matter will not have a material adverse effect on our financial position.
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (the “NAIC”).
In December 2010, the NAIC adopted amendments to the Model Insurance Holding Company System Regulation Act and Regulation (the “Amended Model Act and Regulation”) to introduce the concept of “enterprise” risk within an insurance company holding system. If and when adopted by a particular state, the Amended Model Act and Regulation would impose more extensive informational requirements on us in order to protect the licensed insurance companies from enterprise risk, including requiring us to prepare an annual enterprise risk report that identifies the material risks within the insurance company holding system that could pose enterprise risk to the licensed insurer. The Amended Model Act and Regulation must be adopted by the individual states, and specifically states in which we are licensed, for the new requirements to apply to us. It is not clear if and when such states will adopt these changes; however, if is anticipated that the NAIC will seek to make the amendments part of its accreditation standards for state solvency regulation, which would most likely motivate the states to adopt the amendments promptly.
On July 21, 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 20l0 (the “Dodd-Frank Act”). Certain sections of the Dodd-Frank Act relate to the business of insurance. The Dodd-Frank Act creates the Federal Insurance Office (“FIO”). Initially, the FIO will have limited authority and will mainly gather information and report to Congress on the business of insurance. Many sections of the Dodd-Frank Act become effective over time, and certain provisions of the Dodd-Frank Act require the implementation of regulations that have not yet been drafted. We are unable to predict how or when these changes may be implemented, or the effect, if any, these developments would have on our operations and financial condition.
State Insurance Department Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the financial reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. The New York State Department of Financial Services commenced its examination of KICO during January 2012. As of December 31, 2012, the examination is still in progress.
Risk-Based Capital Regulations
State insurance departments impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a benchmark for the regulation of insurance companies by state insurance regulators. RBC provides for targeted surplus levels based on formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk); (c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC (“ACLC”).
The RBC guidelines define specific capital levels based on a company’s ACLC that are determined by the ratio of the company’s total adjusted capital (“TAC”) to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO was in compliance with New York’s RBC requirements as of December 31, 2012.
Dividend Limitations
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing four quarters. As of December 31, 2012, the maximum distribution that KICO could pay without prior regulatory approval was approximately $1,015,000, which is based on investment income for the last four quarters.
Insurance Regulatory Information System Ratios
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.
As of December 31, 2012, as a result of its growth, KICO had one ratio outside the usual range due to reliance on quota share reinsurance.
Accounting Principles
Statutory accounting principles (“SAP”) are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
Generally accepted accounting principles (“GAAP”) is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
Statutory accounting practices established by the NAIC and adopted in part by the New York insurance regulators, determine, among other things, the amount of statutory surplus and statutory net income of KICO and thus determine, in part, the amount of funds that are available to pay dividends to Kingstone Companies, Inc.
Premium Financing
Our premium finance subsidiary, Payments Inc., is regulated in New York by the Department of Financial Services. The regulations, which generally are designed to protect the interests of policyholders who elect to finance their insurance premiums, involve the following:
|
●
|
regulating the interest rates, fees and service charges that may be charged;
|
|
●
|
imposing minimum capital requirements for our premium finance subsidiary or requiring surety bonds in addition to or as an alternative to such capital requirements;
|
|
●
|
governing the form and content of our financing agreements;
|
|
●
|
prescribing minimum notice and cure periods before we may cancel a customer’s policy for non-payment under the terms of the financing agreement;
|
|
●
|
prescribing timing and notice procedures for collecting unearned premium from the insurance company, applying the unearned premium to our customer’s premium finance account, and, if applicable, returning any refund due to our customer;
|
|
●
|
requiring our premium finance company to qualify for and obtain a license and to renew the license each year;
|
|
●
|
conducting periodic financial and market conduct examinations and investigations of our premium finance company and its operations;
|
|
●
|
requiring prior notice to the regulating agency of any change of control of our premium finance company.
|
Legal Structure
We were incorporated in 1961 and assumed the name DCAP Group, Inc. in 1999. On July 1, 2009, we changed our name to Kingstone Companies, Inc.
Offices
Our principal executive offices are currently located at 1154 Broadway, Hewlett, New York 11557, and our telephone number at that location is (516) 374-7600. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Effective May 1, 2013, we will be moving our principal executive offices to our Kingston, New York location. Our website is www.kingstonecompanies.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report.
Employees
As of December 31, 2012, we had 54 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.
Not applicable. See, however, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
Not applicable.
Our principal executive offices are currently located at 1154 Broadway, Hewlett, New York. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York.
The current yearly aggregate base rental for our current executive offices is approximately $20,000. The lease for these premises will terminate effective April 30, 2013, at which time we will move our principal executive offices to our Kingston, New York location. We own the building from which our insurance underwriting business principally operates, free of mortgage.
None.
Not applicable.
Market Information
Our common stock is quoted on The NASDAQ Capital Market under the symbol “KINS.”
Set forth below are the high and low sales prices for our common stock for the periods indicated, as reported on The NASDAQ Capital Market.
| |
|
High
|
|
|
Low
|
|
|
2012 Calendar Year
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
3.75 |
|
|
$ |
2.98 |
|
|
Second Quarter
|
|
|
6.13 |
|
|
|
3.18 |
|
|
Third Quarter
|
|
|
6.95 |
|
|
|
4.51 |
|
|
Fourth Quarter
|
|
|
6.24 |
|
|
|
4.50 |
|
| |
|
|
|
|
|
|
|
|
| |
|
High
|
|
|
Low
|
|
|
2011 Calendar Year
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
3.90 |
|
|
$ |
3.02 |
|
|
Second Quarter
|
|
|
3.88 |
|
|
|
2.82 |
|
|
Third Quarter
|
|
|
3.68 |
|
|
|
2.47 |
|
|
Fourth Quarter
|
|
|
3.59 |
|
|
|
2.97 |
|
Holders
As of March 18, 2013, there were approximately 430 record holders of our common stock.
Dividends
Holders of our common stock are entitled to dividends when, as and if declared by our Board of Directors out of funds legally available. During 2012, we paid quarterly dividends of $0.03 per share on March 15, 2012 and June 15, 2012, and $0.04 per share on September 18, 2012 and December 14, 2012. During 2011, we paid quarterly dividends of $0.03 per share on September 15, 2011 and December 15, 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, upon on the ability of KICO to pay dividends to us. KICO, as an insurance subsidiary is subject to significant regulatory restrictions limiting its ability to declare and pay dividends. See “Business – Government Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity” in Items 1 and 7, respectively, of this Annual Report.
We declared dividends on our common stock as follows:
| |
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Common stock dividends declared
|
|
$ |
533,763 |
|
|
$ |
230,303 |
|
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table set forth certain information with respect to purchases of common stock made by us or any “affiliated purchaser” during the quarter ended December 31, 2012:
|
|
|
Total Number of Shares Purchased
|
|
|
Average Price Paid per Share
|
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
|
Maximum Number of Shares that May Be Purchased Under the Plans or Programs
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
10/1/12 – 10/31/12
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
11/1/12 – 11/30/12
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
12/1/12 – 12/31/12
|
|
|
1,915 |
|
|
$ |
4.84 |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
|
1,915 |
|
|
$ |
4.84 |
|
|
|
- |
|
|
|
- |
|
Not applicable.
Overview
We offer property and casualty insurance products to small businesses and individuals in New York State through our subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County.
We derive 99% of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from our portfolio, and net realized gains and losses on investment securities. All of our policies are for a one year period. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one year life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In addition, insurance companies incur policy acquisition expenses. 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 the corporate expenses of our holding company, Kingstone Companies, Inc. These expenses include legal and auditing fees, occupancy costs related to our corporate office, 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, 2011, we would earn half of the premiums in 2011 and the other half in 2012.
Ceding commission revenue. Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.
Net investment income and net realized gains (losses) on investments. We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, short-term investments, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities as available-for-sale. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
Other income. We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment. We also recognize premium finance fee income on loans financed by a third party finance company.
Loss and loss adjustment expenses incurred. Loss and loss adjustment expenses (“LAE”) incurred represent our largest expense item and, for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information from the claimants. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor in our profitability.
Commission expenses and other underwriting expenses. Other underwriting expenses include acquisition costs and other underwriting expenses. Acquisition costs represent the costs of writing business that vary with, and are primarily related to, the production of insurance business (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. General and administrative expenses are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.
Other operating expenses. Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc. These expenses include executive employment costs, legal and auditing fees, occupancy costs related to our corporate office and other costs directly associated with being a public company.
Non-cash equity compensation. Non-cash equity compensation includes the fair value of stock grants issued to our directors and Chief Executive Officer and amortization of stock options issued to our employees.
Depreciation and amortization. Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the office building used in KICO’s operations, as well as depreciation of office equipment and furniture.
Interest expense. Interest expense represents amounts we incur on our outstanding indebtedness at the then-applicable interest rates.
Income tax expense. We incur federal income tax expense on our consolidated operations as well as state income tax expense for our non-insurance underwriting subsidiaries.
Key Measures
We utilize the following key measures in analyzing the results of our insurance underwriting business:
Net loss ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
Net underwriting expense ratio. The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.
Net combined ratio. The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
Underwriting income. Underwriting income is net pre-tax income attributable to our insurance underwriting business except for net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.
Critical Accounting Policies and Estimates
Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, our management has utilized information available including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.
We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred ceding commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets and the valuation of stock-based compensation. See Note 2 (Accounting Policies and Basis of Presentation) of the Notes to Consolidated Financial Statements following Item 15 of this Annual Report.
Consolidated Results of Operations
The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:
| |
|
Years ended December 31,
|
|
|
($ in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
Percent
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct written premiums
|
|
$ |
49,252 |
|
|
$ |
40,735 |
|
|
$ |
8,517 |
|
|
|
20.9 |
% |
|
Net written premiums
|
|
|
19,560 |
|
|
|
16,296 |
|
|
|
3,264 |
|
|
|
20.0 |
% |
|
Change in net unearned premiums
|
|
|
(2,343 |
) |
|
|
(1,427 |
) |
|
|
(916 |
) |
|
|
64.2 |
% |
|
Net premiums earned
|
|
|
17,217 |
|
|
|
14,869 |
|
|
|
2,348 |
|
|
|
15.8 |
% |
|
Ceding commission revenue (1)
|
|
|
9,690 |
|
|
|
10,625 |
|
|
|
(935 |
) |
|
|
(8.8 |
) % |
|
Net investment income
|
|
|
1,015 |
|
|
|
754 |
|
|
|
261 |
|
|
|
34.6 |
% |
|
Net realized gain on investments
|
|
|
288 |
|
|
|
524 |
|
|
|
(236 |
) |
|
|
(45.0 |
) % |
|
Other income
|
|
|
868 |
|
|
|
921 |
|
|
|
(53 |
) |
|
|
(5.8 |
) % |
|
Total revenues
|
|
|
29,078 |
|
|
|
27,693 |
|
|
|
1,385 |
|
|
|
5.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and assumed loss and loss adjustment expenses
|
|
|
32,631 |
|
|
|
15,644 |
|
|
|
16,987 |
|
|
|
108.6 |
% |
|
Less: ceded loss and loss adjustment expenses
|
|
|
(21,396 |
) |
|
|
(7,073 |
) |
|
|
(14,323 |
) |
|
|
202.5 |
% |
|
Net loss and loss adjustment expenses
|
|
|
11,235 |
|
|
|
8,571 |
|
|
|
2,664 |
|
|
|
31.1 |
% |
|
Commission expense
|
|
|
7,246 |
|
|
|
6,230 |
|
|
|
1,016 |
|
|
|
16.3 |
% |
|
Other underwriting expenses
|
|
|
7,849 |
|
|
|
7,373 |
|
|
|
476 |
|
|
|
6.5 |
% |
|
Other operating expenses
|
|
|
1,000 |
|
|
|
1,203 |
|
|
|
(203 |
) |
|
|
(16.9 |
) % |
|
Depreciation and amortization
|
|
|
596 |
|
|
|
603 |
|
|
|
(7 |
) |
|
|
(1.2 |
) % |
|
Interest expense
|
|
|
82 |
|
|
|
121 |
|
|
|
(39 |
) |
|
|
(32.2 |
) % |
|
Total expenses
|
|
|
28,008 |
|
|
|
24,101 |
|
|
|
3,907 |
|
|
|
16.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before taxes
|
|
|
1,070 |
|
|
|
3,592 |
|
|
|
(2,522 |
) |
|
|
(70.2 |
) % |
|
Provision for income tax
|
|
|
303 |
|
|
|
1,089 |
|
|
|
(786 |
) |
|
|
(72.2 |
) % |
|
Net income
|
|
$ |
767 |
|
|
$ |
2,503 |
|
|
$ |
(1,736 |
) |
|
|
(69.4 |
) % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
59.2 |
% |
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
|
Ceding commission revenue
|
|
|
33.3 |
% |
|
|
38.4 |
% |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3.5 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
Net realized gains on investments
|
|
|
1.0 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3.0 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
| |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
(1) For the year ended December 31, 2012, includes direct catastrophe losses and loss adjustment expenses of $13,261,000, and net catastrophe losses and loss adjustment expenses of $1,143,000, incurred on October 29, 2012 from Superstorm Sandy. The computation to arrive at contingent ceding commission revenue includes direct catastrophe losses and loss adjustment expenses incurred from Superstorm Sandy. Such losses increased our ceded loss ratio which reduced our contingent ceding commission revenue by $1,919,000. For the year ended December 31, 2011, includes direct catastrophe losses and loss adjustment expenses of $1,796,000, and net catastrophe losses and loss adjustment expenses of $449,000, incurred from August 27, 2011 to August 29, 2011 from Tropical Storm Irene. The computation to arrive at contingent ceding commission revenue includes direct catastrophe losses and loss adjustment expenses incurred from Tropical Storm Irene. Such losses increased our ceded loss ratio which reduced our contingent ceding commission revenue by $200,000. We define a “catastrophe” as an event that involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event. Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
Direct written premiums during the year ended December 31, 2012 (“2012”) were $49,252,000 compared to $40,735,000 during the year ended December 31, 2011 (“2011”). The increase of $8,517,000, or 20.9%, was primarily due to an increase in policies in-force during 2012 as compared to 2011. We wrote more policies as a result of an increase in demand for the products in the markets that we serve. Policies in-force increased by 20.9% as of December 31, 2012 compared to December 31, 2011. In addition to the increase of policies in-force, we are also writing more policies which have higher premiums.
Net written premiums increased $3,264,000, or 20.0%, to $19,560,000 in 2012 from $16,296,000 in 2011. The increase in net written premiums resulted from: (1) an increase in direct written premiums in 2012 compared to direct written premiums in 2011, and (2) effective July 1, 2012, a decrease in the quota share percentage in our commercial lines quota share treaty from 60% to 40%. A decrease in the quota share percentage results in us retaining a greater amount of direct written premiums. Net written premiums grew at a lower rate than direct written premiums (20.0% compared to 20.9%) due to increases in policies written in lines of business that are subject to quota share reinsurance treaties, primarily personal lines and commercial lines, in excess of the decrease in policies written in lines of business without quota share reinsurance treaties, primarily commercial auto lines.
Net premiums earned increased $2,348,000, or 15.8%, to $17,217,000 in 2012 from $14,869,000 in 2011. As premiums written earn ratably over a twelve month period, the increase was a result of higher net written premiums for the twelve months ended December 31, 2012 compared to the twelve months ended December 31, 2011.
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:
| |
|
Years ended December 31,
|
|
|
($ in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
Percent
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisional ceding commissions earned
|
|
$ |
8,516 |
|
|
$ |
6,916 |
|
|
$ |
1,600 |
|
|
|
23.1 |
% |
|
Contingent ceding commissions earned
|
|
|
1,174 |
|
|
|
3,709 |
|
|
|
(2,535 |
) |
|
|
(68.3 |
) % |
|
Total ceding commission revenue
|
|
$ |
9,690 |
|
|
$ |
10,625 |
|
|
$ |
(935 |
) |
|
|
(8.8 |
) % |
Ceding commission revenue was $9,690,000 in 2012 compared to $10,625,000 in 2011. The decrease of $935,000, or 8.8%, was due to the increase provisional ceding commissions earned offset by a decrease in contingent ceding commissions earned. The $1,600,000 increase in provisional ceding commissions earned is due to a net increase in the amount of premiums ceded. The $2,535,000 decrease in contingent ceding commissions earned is due to the effects of Superstorm Sandy on our ceded net loss ratio which reduced our contingent ceding commission revenue by $1,918,000 and an increase in losses incurred under our personal lines quota share reinsurance treaty from prior year claims.
Net investment income was $1,015,000 in 2012 compared to $754,000 in 2011. The increase of $261,000, or 34.6%, was due to an increase in average invested assets in 2012 as compared to 2011. The increase in cash and invested assets resulted primarily from increased operating cash flows and by an adjustment to amortization of bond premium in 2011. The tax equivalent investment yield, excluding cash, was 5.14% and 5.43% at December 31, 2012 and 2011, respectively.
Net realized gains on investments were $288,000 in 2012 compared to $524,000 in 2011. The decrease of $236,000, or 45.0%, was due in part to an FDIC recovery of $133,000 in 2011 from a failed bank which was included in other than temporary impaired losses in 2009.
Net loss and loss adjustment expenses were $11,235,000 in 2012 compared to $8,571,000 in 2011. The net loss ratio was 65.3% in 2012 compared to 57.6% in 2011, an increase of 7.7 percentage points. Net losses in 2012 included the effects of Superstorm Sandy in October 2012 and Tropical Storm Irene in August 2011, which we define both as a catastrophe. As a result of Superstorm Sandy, we incurred $1,143,000 of losses and loss adjustment expenses (net of reinsurance recoverable of $12,118,000), and added 6.7 percentage points to our net loss ratio. As a result of Tropical Storm Irene, we incurred $449,000 of losses and loss adjustment expenses (net of reinsurance recoverable of $1,347,000), and added 3.0 percentage points to our net loss ratio. Our net loss ratio excluding the effect of catastrophes in 2012 was 58.6% in in 2012, compared to 54.6% in 2011, an increase of 4.0 percentage points.
Commission expense was $7,246,000 in 2012 or 14.7% of direct written premiums. Commission expense was $6,230,000 in 2011 or 15.3% of direct written premiums. The increase of $1,016,000 is due to the increase in direct written premiums in 2012 as compared to 2011, offset by a decrease in contingent commissions due to brokers as a result of the effects from Superstorm Sandy.
Other underwriting expenses were $7,849,000 in 2012 compared to $7,373,000 in 2011. The $476,000, or 6.5%, increase in other underwriting expenses was primarily due to expenses directly related to the increase in direct written premiums, increase in occupancy costs and additional employment costs due to both the hiring of additional staff needed to service our growth in written premiums and increases in annual salaries. Other underwriting expenses as a percentage of direct written premiums was 15.9% in 2012 and 18.1% in 2011. Our other underwriting expenses increased at a lower rate than the growth in our direct written premiums.
Other operating expenses, related to the corporate expenses of our holding company, were $1,000,000 in 2012 compared to $1,203,000 in 2011. The $203,000 decrease in 2012, or 16.9%, was primarily due to decreases in executive bonuses, occupancy costs, professional fees, and amortization of stock options as a result of more stock options being fully vested prior to 2012.
Interest expense was $82,000 in 2012 compared to $121,000 in 2011. The $39,000 decrease in interest expense, or 32.2%, was due to the partial redemption of $703,000 of our 2009/2010 Notes during the quarter ended September 30, 2011, and effective July 11, 2011, a reduction in the interest rate to 9.5% per annum from the previous 12.625% per annum. The decrease in interest expense from our 2009/2010 Notes was offset by $11,000 of interest paid on our bank line of credit which was opened in December 2011.
Income tax expense in 2012 was $303,000, which resulted in an effective tax rate of 28.3%. Income tax expense in 2011 was $1,089,000, which resulted in an effective tax rate of 30.3%. Income before taxes was $1,070,000 in 2012 compared to $3,592,000 in 2011. The decrease in the effective tax rate by 2.0% in 2012 is a result of permanent differences from nontaxable investment income and the dividends received deduction having a greater impact on the effective tax rate in 2012 due to a lesser amount of book income in 2012 compared to 2011. The decrease in the effective tax rate from the impact of permanent differences was offset by recording a valuation allowance in 2012 against our state net operating loss carryovers compared to no such allowance in 2011. Kingstone Companies, Inc. generates operating losses for state income tax purposes and has prior year net operating loss carryovers available. KICO, our insurance underwriting subsidiary is subject to a state tax based on premiums and is not included in our consolidated state income tax return. A valuation allowance of $42,000 was recorded by us in December 2011 and an additional valuation allowance of $105,000 was recorded in 2012. The valuation allowance was established due to the uncertainty of generating enough state taxable income to utilize 100% of our available state net operating loss carryovers over their remaining lives which expire between 2022 and 2027.
Net income was $767,000 in 2012 compared to $2,503,000 in 2011. The decrease in net income of $1,736,000 was due to the circumstances described above that caused the increase in our net loss ratio, decrease in contingent ceding commission revenues, and increases in other commission expense and underwriting expenses related to premium growth, offset by increases in our net premiums earned.
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2012 and 2011 follows:
| |
|
Years ended
|
|
| |
|
December 31,
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
17,216,611 |
|
|
$ |
14,868,746 |
|
|
Ceding commission revenue
|
|
|
9,690,155 |
|
|
|
10,624,714 |
|
|
Net investment income
|
|
|
1,015,156 |
|
|
|
754,630 |
|
|
Net realized gain on investments
|
|
|
288,068 |
|
|
|
523,894 |
|
|
Other income
|
|
|
476,661 |
|
|
|
430,034 |
|
|
Total revenues
|
|
|
28,686,651 |
|
|
|
27,202,018 |
|
| |
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
11,234,713 |
|
|
|
8,571,058 |
|
|
Commission expense
|
|
|
7,246,245 |
|
|
|
6,230,564 |
|
|
Other underwriting expenses
|
|
|
7,848,870 |
|
|
|
7,372,878 |
|
|
Depreciation and amortization
|
|
|
595,189 |
|
|
|
597,943 |
|
|
Total expenses
|
|
|
26,925,017 |
|
|
|
22,772,443 |
|
| |
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,761,634 |
|
|
|
4,429,575 |
|
|
Income tax expense
|
|
|
495,278 |
|
|
|
1,363,956 |
|
|
Net income
|
|
$ |
1,266,356 |
|
|
$ |
3,065,619 |
|
The effect of catastrophes by line of business on our net premiums earned and our direct, ceded and net loss and loss adjustment expenses included in our results of operations for the years ended December 31, 2012 and 2011 follows:
| |
|
Personal
|
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
| |
|
Lines
|
|
|
Lines
|
|
|
Auto
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinstatement premiums for catastrophe coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net premiums earned
|
|
$ |
77,344 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
77,344 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct loss and loss adjustment expenses
|
|
$ |
12,834,503 |
|
|
$ |
51,445 |
|
|
$ |
375,016 |
|
|
$ |
13,260,964 |
|
|
Less: ceded loss and loss adjustment expenses
|
|
|
12,084,503 |
|
|
|
- |
|
|
|
33,439 |
|
|
|
12,117,942 |
|
|
Net loss and loss adjustment expenses
|
|
$ |
750,000 |
|
|
$ |
51,445 |
|
|
$ |
341,577 |
|
|
$ |
1,143,022 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinstatement premiums for catastrophe coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net premiums earned
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct loss and loss adjustment expenses
|
|
$ |
1,796,117 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,796,117 |
|
|
Less: ceded loss and loss adjustment expenses
|
|
|
1,347,088 |
|
|
|
- |
|
|
|
- |
|
|
|
1,347,088 |
|
|
Net loss and loss adjustment expenses
|
|
$ |
449,029 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
449,029 |
|
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, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$ |
49,251,630 |
|
|
$ |
23,967 |
|
|
$ |
(29,715,971 |
) |
|
$ |
19,559,626 |
|
|
Unearned premiums
|
|
|
(4,724,193 |
) |
|
|
(5,010 |
) |
|
|
2,386,188 |
|
|
|
(2,343,015 |
) |
|
Earned premiums
|
|
$ |
44,527,437 |
|
|
$ |
18,957 |
|
|
$ |
(27,329,783 |
) |
|
$ |
17,216,611 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses exluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the effect of catastrophes
|
|
$ |
19,339,488 |
|
|
$ |
31,029 |
|
|
$ |
(9,278,826 |
) |
|
$ |
10,091,691 |
|
|
Catastrophe loss
|
|
|
13,260,964 |
|
|
|
- |
|
|
|
(12,117,942 |
) |
|
|
1,143,022 |
|
|
Loss and loss adjustment expenses
|
|
$ |
32,600,452 |
|
|
$ |
31,029 |
|
|
$ |
(21,396,768 |
) |
|
$ |
11,234,713 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio excluding the effect of catastrophes
|
|
|
43.4 |
% |
|
|
163.7 |
% |
|
|
34.0 |
% |
|
|
58.6 |
% |
|
Catastrophe loss
|
|
|
29.8 |
% |
|
|
0.0 |
% |
|
|
44.3 |
% |
|
|
6.7 |
% |
|
Loss ratio
|
|
|
73.2 |
% |
|
|
163.7 |
% |
|
|
78.3 |
% |
|
|
65.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$ |
40,734,767 |
|
|
$ |
10,990 |
|
|
$ |
(24,449,655 |
) |
|
$ |
16,296,102 |
|
|
Unearned premiums
|
|
|
(4,005,312 |
) |
|
|
(516 |
) |
|
|
2,578,472 |
|
|
|
(1,427,356 |
) |
|
Earned premiums
|
|
$ |
36,729,455 |
|
|
$ |
10,474 |
|
|
$ |
(21,871,183 |
) |
|
$ |
14,868,746 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses exluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the effect of catastrophes
|
|
$ |
13,830,599 |
|
|
$ |
17,368 |
|
|
$ |
(5,725,938 |
) |
|
$ |
8,122,029 |
|
|
Catastrophe loss
|
|
|
1,796,117 |
|
|
|
- |
|
|
|
(1,347,088 |
) |
|
|
449,029 |
|
|
Loss and loss adjustment expenses
|
|
$ |
15,626,716 |
|
|
$ |
17,368 |
|
|
$ |
(7,073,026 |
) |
|
$ |
8,571,058 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio excluding the effect of catastrophes
|
|
|
37.7 |
% |
|
|
165.8 |
% |
|
|
26.2 |
% |
|
|
54.6 |
% |
|
Catastrophe loss
|
|
|
4.9 |
% |
|
|
0.0 |
% |
|
|
6.2 |
% |
|
|
3.0 |
% |
|
Loss ratio
|
|
|
42.5 |
% |
|
|
165.8 |
% |
|
|
32.3 |
% |
|
|
57.6 |
% |
The key measures for our insurance underwriting business for the years ended December 31, 2012 and 2011 are as follows:
| |
|
Years ended
|
|
| |
|
December 31,
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
17,216,611 |
|
|
$ |
14,868,746 |
|
|
Ceding commission revenue (1)
|
|
|
9,690,155 |
|
|
|
10,624,714 |
|
|
Other income
|
|
|
476,661 |
|
|
|
430,034 |
|
| |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses (2)
|
|
|
11,234,713 |
|
|
|
8,571,058 |
|
| |
|
|
|
|
|
|
|
|
|
Acquistion costs and other underwriting expenses:
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
|
7,246,245 |
|
|
|
6,230,564 |
|
|
Other underwriting expenses
|
|
|
7,848,870 |
|
|
|
7,372,878 |
|
|
Total acquistion costs and other
|
|
|
|
|
|
|
|
|
|
underwriting expenses
|
|
|
15,095,115 |
|
|
|
13,603,442 |
|
| |
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$ |
1,053,599 |
|
|
$ |
3,748,994 |
|
| |
|
|
|
|
|
|
|
|
|
Key Measures:
|
|
|
|
|
|
|
|
|
|
Net loss ratio excluding the effect of catastrophes
|
|
|
58.6 |
% |
|
|
54.6 |
% |
|
Effect of catastrophe loss on loss ratio (2)
|
|
|
6.7 |
% |
|
|
3.0 |
% |
|
Net loss ratio
|
|
|
65.3 |
% |
|
|
57.6 |
% |
| |
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio excluding the
|
|
|
|
|
|
|
|
|
|
effect of catastrophes
|
|
|
17.5 |
% |
|
|
13.8 |
% |
|
Effect of catastrophe loss on net underwriting
|
|
|
|
|
|
|
|
|
|
expense ratio (1) (2)
|
|
|
11.1 |
% |
|
|
3.3 |
% |
|
Net underwriting expense ratio
|
|
|
28.6 |
% |
|
|
17.1 |
% |
| |
|
|
|
|
|
|
|
|
|
Net combined ratio excluding the effect
|
|
|
|
|
|
|
|
|
|
of catastrophes
|
|
|
76.1 |
% |
|
|
68.5 |
% |
|
Effect of catastrophe loss on net combined
|
|
|
|
|
|
|
|
|
|
ratio (1) (2)
|
|
|
17.8 |
% |
|
|
6.3 |
% |
|
Net combined ratio
|
|
|
93.9 |
% |
|
|
74.8 |
% |
| |
|
|
|
|
|
|
|
|
|
Reconciliation of net underwriting expense ratio:
|
|
|
|
|
|
|
|
|
|
Acquisition costs and other
|
|
|
|
|
|
|
|
|
|
underwriting expenses
|
|
$ |
15,095,115 |
|
|
$ |
13,603,442 |
|
|
Less: Ceding commission revenue (1)
|
|
|
(9,690,155 |
) |
|
|
(10,624,714 |
) |
|
Less: Other income
|
|
|
(476,661 |
) |
|
|
(430,034 |
) |
|
|
|
$ |
4,928,299 |
|
|
$ |
2,548,694 |
|
| |
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$ |
17,216,611 |
|
|
$ |
14,868,746 |
|
(1) The effect of catastrophes reduced contingent ceding commission revenue by $1,918,871 and $200,516 for the years ended December 31, 2012 and 2011, respectively. A provision in our quota share reinsurance treaty, which expired June 30, 2011, limited the maximum contingent ceding commission that could be paid to us, with the unused benefit carried forward to the treaty year which began July 1, 2011. The carry forward of the unused benefit resulted in additional contingent ceding commission revenue of approximately $264,000 for the year ended December 31, 2011.
(2) Includes (a) the sum of direct catastrophe losses and loss adjustment expenses and (b) the sum of net catastrophe losses and loss adjustment expenses of $13,260,964 and $1,143,022, respectively, for the year ended December 31, 2012. Includes (x) the sum of direct catastrophe losses and loss adjustment expenses and (y) the sum of net catastrophe losses and loss adjustment expenses of $1,796,117 and $449,029, respectively, for the year ended December 31, 2011.
Investments
Portfolio Summary
The following table presents a breakdown of the amortized cost, aggregate fair value and unrealized gains and losses by investment type as of December 31, 2012 and 2011:
Available for Sale Securities
| |
|
December 31, 2012
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
Aggregate
|
|
|
% of
|
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Less than 12
|
|
|
More than 12
|
|
|
Fair
|
|
|
Fair
|
|
|
Category
|
|
Cost
|
|
|
Gains
|
|
|
Months
|
|
|
Months
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
Political subdivisions of States,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Territories and Possessions
|
|
$ |
5,219,092 |
|
|
$ |
257,298 |
|
|
$ |
(1,574 |
) |
|
$ |
- |
|
|
$ |
5,474,816 |
|
|
|
17.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous
|
|
|
19,628,005 |
|
|
|
1,123,392 |
|
|
|
(43,553 |
) |
|
|
(722 |
) |
|
|
20,707,122 |
|
|
|
65.8 |
% |
|
Total fixed-maturity securities
|
|
|
24,847,097 |
|
|
|
1,380,690 |
|
|
|
(45,127 |
) |
|
|
(722 |
) |
|
|
26,181,938 |
|
|
|
83.2 |
% |
|
Equity Securities
|
|
|
5,073,977 |
|
|
|
373,294 |
|
|
|
(157,029 |
) |
|
|
- |
|
|
|
5,290,242 |
|
|
|
16.8 |
% |
|
Total
|
|
$ |
29,921,074 |
|
|
$ |
1,753,984 |
|
|
$ |
(202,156 |
) |
|
$ |
(722 |
) |
|
$ |
31,472,180 |
|
|
|
100.0 |
% |
| |
|
December 31, 2011
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
Aggregate
|
|
|
% of
|
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Less than 12
|
|
|
More than 12
|
|
|
Fair
|
|
|
Fair
|
|
|
Category
|
|
Cost
|
|
|
Gains
|
|
|
Months
|
|
|
Months
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations of U.S. government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporations and agencies
|
|
$ |
499,832 |
|
|
$ |
50,356 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
550,188 |
|
|
|
2.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions of States,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Territories and Possessions
|
|
|
5,868,743 |
|
|
|
301,559 |
|
|
|
- |
|
|
|
- |
|
|
|
6,170,302 |
|
|
|
23.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous
|
|
|
15,846,616 |
|
|
|
338,284 |
|
|
|
(228,792 |
) |
|
|
(107,666 |
) |
|
|
15,848,442 |
|
|
|
59.5 |
% |
|
Total fixed-maturity securities
|
|
|
22,215,191 |
|
|
|
690,199 |
|
|
|
(228,792 |
) |
|
|
(107,666 |
) |
|
|
22,568,932 |
|
|
|
84.7 |
% |
|
Equity Securities
|
|
|
3,857,741 |
|
|
|
311,300 |
|
|
|
(98,938 |
) |
|
|
(4,893 |
) |
|
|
4,065,210 |
|
|
|
15.3 |
% |
|
Total
|
|
$ |
26,072,932 |
|
|
$ |
1,001,499 |
|
|
$ |
(327,730 |
) |
|
$ |
(112,559 |
) |
|
$ |
26,634,142 |
|
|
|
100.0 |
% |
Held to Maturity Securities
| |
|
December 31, 2012
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
% of
|
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Less than 12
|
|
|
More than 12
|
|
|
Fair
|
|
|
Fair
|
|
|
Category
|
|
Cost
|
|
|
Gains
|
|
|
Months
|
|
|
Months
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
606,281 |
|
|
$ |
172,745 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
779,026 |
|
|
|
100.0 |
% |
| |
|
December 31, 2011
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
% of
|
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Less than 12
|
|
|
More than 12
|
|
|
Fair
|
|
|
Fair
|
|
|
Category
|
|
Cost
|
|
|
Gains
|
|
|
Months
|
|
|
Months
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
606,234 |
|
|
$ |
171,719 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
779,953 |
|
|
|
100.0 |
% |
All held to maturity securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.
Contractual maturities of all held to maturity securities are greater than ten years.
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, 2012 and 2011 as rated by Standard and Poor’s:
| |
|
December 31, 2012
|
|
|
December 31, 2011
|
|
| |
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
| |
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
|
Fair Market
|
|
| |
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
- |
|
|
|
0.0 |
% |
|
$ |
550,188 |
|
|
|
2.4 |
% |
|
AAA
|
|
|
2,226,603 |
|
|
|
8.5 |
% |
|
|
3,041,576 |
|
|
|
13.5 |
% |
|
AA
|
|
|
4,088,304 |
|
|
|
15.6 |
% |
|
|
4,502,733 |
|
|
|
20.0 |
% |
|
A
|
|
|
6,963,380 |
|
|
|
26.6 |
% |
|
|
6,977,222 |
|
|
|
30.9 |
% |
|
BBB
|
|
|
12,903,651 |
|
|
|
49.3 |
% |
|
|
7,497,213 |
|
|
|
33.2 |
% |
|
Total
|
|
$ |
26,181,938 |
|
|
|
100.00 |
% |
|
$ |
22,568,932 |
|
|
|
100.0 |
% |
The table below summarizes the average duration by type of fixed-maturity security as well as detailing the average yield as of December 31, 2012 and 2011:
| |
|
December 31, 2012
|
|
|
December 31, 2011
|
|
| |
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
| |
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
| |
|
Average
|
|
|
Duration in
|
|
|
Average
|
|
|
Duration in
|
|
|
Category
|
|
Yield %
|
|
|
Years
|
|
|
Yield %
|
|
|
Years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations of U.S. government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporations and agencies
|
|
|
3.33 |
% |
|
|
27.8 |
|
|
|
2.75 |
% |
|
|
17.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions of States,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Territories and Possessions
|
|
|
4.06 |
% |
|
|
6.1 |
|
|
|
3.86 |
% |
|
|
5.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous
|
|
|
4.74 |
% |
|
|
7.3 |
|
|
|
4.98 |
% |
|
|
7.1 |
|
Fair Value Consideration
As disclosed in Note 4 to the Consolidated Financial Statements, with respect to “Fair Value Measurements,” we define fair value under GAAP guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). This GAAP guidance establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of December 31, 2012 and 2011, 54% and 49%, 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, 2012 and 2011, and concluded that the unrealized losses in these asset classes are the result of a decrease in value due to technical spread widening and broader market sentiment, rather than fundamental collateral deterioration, and are temporary in nature.
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, 2012 and 2011:
| |
|
December 31, 2012
|
|
| |
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Aggregate
|
|
|
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Positions
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Positions
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Category
|
|
Value
|
|
|
Losses
|
|
|
Held
|
|
|
Value
|
|
|
Losses
|
|
|
Held
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, Territories and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Possessions
|
|
|
202,798 |
|
|
|
(1,574 |
) |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
202,798 |
|
|
|
(1,574 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds industrial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
|
|
4,025,551 |
|
|
|
(43,553 |
) |
|
|
19 |
|
|
|
128,125 |
|
|
|
(722 |
) |
|
|
1 |
|
|
|
4,153,676 |
|
|
|
(44,275 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$ |
4,228,349 |
|
|
$ |
(45,127 |
) |
|
|
20 |
|
|
$ |
128,125 |
|
|
$ |
(722 |
) |
|
|
1 |
|
|
$ |
4,356,474 |
|
|
$ |
(45,849 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
$ |
387,925 |
|
|
$ |
(11,130 |
) |
|
|
3 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
387,925 |
|
|
$ |
(11,130 |
) |
|
Common stocks
|
|
|
1,536,860 |
|
|
|
(145,899 |
) |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,536,860 |
|
|
|
(145,899 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$ |
1,924,785 |
|
|
$ |
(157,029 |
) |
|
|
12 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
1,924,785 |
|
|
$ |
(157,029 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,153,134 |
|
|
$ |
(202,156 |
) |
|
|
32 |
|
|
$ |
128,125 |
|
|
$ |
(722 |
) |
|
|
1 |
|
|
$ |
6,281,259 |
|
|
$ |
(202,878 |
) |
| |
|
December 31, 2011
|
|
| |
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Aggregate
|
|
|
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Positions
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Positions
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Category
|
|
Value
|
|
|
Losses
|
|
|
Held
|
|
|
Value
|
|
|
Losses
|
|
|
Held
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Maturity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, Territories and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Possessions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds industrial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
miscellaneous
|
|
|
4,849,378 |
|
|
|
(228,792 |
) |
|
|
26 |
|
|
|
1,483,425 |
|
|
|
(107,666 |
) |
|
|
7 |
|
|
|
6,332,803 |
|
|
|
(336,458 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$ |
4,849,378 |
|
|
$ |
(228,792 |
) |
|
|
26 |
|
|
$ |
1,483,425 |
|
|
$ |
(107,666 |
) |
|
|
7 |
|
|
$ |
6,332,803 |
|
|
$ |
(336,458 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
$ |
368,350 |
|
|
$ |
(76,969 |
) |
|
|
12 |
|
|
$ |
189,364 |
|
|
$ |
(4,893 |
) |
|
|
5 |
|
|
$ |
557,714 |
|
|
$ |
(81,862 |
) |
|
Common stocks
|
|
|
397,268 |
|
|
|
(21,969 |
) |
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
397,268 |
|
|
|
(21,969 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$ |
765,618 |
|
|
$ |
(98,938 |
) |
|
|
26 |
|
|
$ |
189,364 |
|
|
$ |
(4,893 |
) |
|
|
5 |
|
|
$ |
954,982 |
|
|
$ |
(103,831 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,614,996 |
|
|
$ |
(327,730 |
) |
|
|
52 |
|
|
$ |
1,672,789 |
|
|
$ |
(112,559 |
) |
|
|
12 |
|
|
$ |
7,287,785 |
|
|
$ |
(440,289 |
) |
There were 33 securities at December 31, 2012 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 64 securities at December 31, 2011 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, which includes 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 July 1, 2009, we 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, we acquired a 100% equity interest in KICO. In connection with the plan of conversion of CMIC, we agreed with the Department of Financial Services (formerly known as the Insurance Department) (the “Department”) that, for a period of two years following the effective date of conversion of July 1, 2009, no dividend could be paid by KICO to us without the approval of the Department (“Dividend Restriction Period”). No such request was made by us to the Department within the Dividend Restriction Period. For year ended December 31, 2012, KICO paid dividends of $700,000 to us. We also agreed with the Department that certain intercompany transactions between KICO and us must be filed with the Department 30 days prior to implementation and not disapproved by the Department.
The primary sources of cash flow for our holding company operations are in connection with the fee income we receive from the premium finance loans and collection of principal and interest income from the notes received by us upon the sale of businesses that were included in our former discontinued operations. Effective July 1, 2011, as discussed above, we may also receive cash dividends from KICO, subject to statutory restrictions.
In December 2011, we entered into an agreement with a bank for a $500,000 line of credit to be used for general corporate needs. In January 2013, the line of credit was increased to $600,000. The principal balance is payable on demand, and must be reduced to zero for a minimum of 30 consecutive days during each year of the term of the credit line. The principal balance was reduced to zero in accordance with the terms of the credit line in 2012. The outstanding balance was $450,000 as of December 31, 2012. On March 6, 2013, the line of credit, which had an outstanding balance of $550,000, was paid in full. If the aforementioned is insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
We prepaid $703,000 of our notes payable during the year ended December 31, 2011. As of December 31, 2012, the outstanding principal balance of our notes payable was $747,000; such notes bear interest at the rate of 9.5% per annum and mature on July 10, 2014. We believe that our present cash flows as described above will be sufficient on a short-term basis and over the next 12 months to fund our company-wide working capital requirements.
Our reconciliation of net income to 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,
|
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
6,375,322 |
|
|
$ |
7,253,489 |
|
|
Investing activities
|
|
|
(3,961,384 |
) |
|
|
(6,525,524 |
) |
|
Financing activities
|
|
|
(347,052 |
) |
|
|
(881,459 |
) |
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,066,886 |
|
|
|
(153,494 |
) |
|
Cash and cash equivalents, beginning of period
|
|
|
173,126 |
|
|
|
326,620 |
|
|
Cash and cash equivalents, end of period
|
|
$ |
2,240,012 |
|
|
$ |
173,126 |
|
Net cash provided by operating activities was $6,375,000 in 2012 as compared to $7,253,000 provided in 2011. The $878,000 decrease in cash flows provided by operating activities in 2012 was primarily a result of the fluctuations in assets and liabilities relating to operating activities of KICO as affected by the growth in its operations which are described above, offset by a decrease in net income (adjusted for non-cash items) of $1,600,000.
Net cash used by investing activities was $3,961,000 in 2012 compared to $6,526,000 used in 2011. The $2,565,000 decrease in cash flows provided by investing activities is a result of the decrease in acquisitions of invested assets, offset by a decrease in sales of invested assets.
Net cash used in financing activities was $347,000 in 2012 compared to $881,000 used in 2011. The $534,000 decrease in cash flows used in financing activities is a result of principal payments on long term debt of $714,000 in 2011 compared to no such payments in 2012, and dividend payments of $534,000 in 2012 compared to $230,000 in 2011.
Superstorm Sandy
The primary location of KICO’s insureds is in the New York City area, which was struck by Superstorm Sandy on October 29, 2012. KICO purchases quota share and catastrophe reinsurance in order to reduce its net liability on insurance risks and to protect against catastrophes. KICO’s personal lines business, which includes homeowners insurance, is reinsured under a 75% quota share treaty and catastrophe insurance pursuant to which KICO’s net liability is limited to 25% of the initial $3,000,000 of direct losses incurred from a catastrophe occurrence, or $750,000. For catastrophe losses in excess of $3,000,000, KICO is 100% covered by catastrophe reinsurance with regard to the next $70,000,000 in losses. As of December 31, 2012, KICO’s net loss incurred as a result of the storm was $750,000 with respect to KICO’s personal lines business, which is the limit of loss pursuant to its quota share and catastrophe reinsurance treaties. Additional net losses of $393,000 were incurred with respect to KICO’s business owners, commercial auto and livery physical damage policies. We were also required to pay $77,000 of reinstatement premiums to catastrophe reinsurers to obtain coverage for future catastrophe events during the current reinsurance treaty period.
KICO receives ceding commissions from the reinsurers. The amount of the commissions includes contingent ceding commissions which are based upon the loss ratio experienced by the reinsurers during the treaty term (July 1 to June 30) from the ceded business over that period of time. Such contingent ceding commission revenue was reduced by $1.9 million based upon the reinsurance losses incurred as a result of Superstorm Sandy. In addition, it is expected that there will be a decline of approximately $2 million in the ceding commission revenue to be earned during the first six months of 2013 (i.e., the final six months of the 2012-2013 treaty). Further, KICO was required to pay reinstatement premiums to catastrophe reinsurers to obtain coverage for future catastrophe events during the current reinsurance treaty period. A portion of the cost of such reinstatement premiums will be expensed during the first two quarters of 2013. Accordingly, the effects of the storm will be material to our post 2012 results of operations; however, we expect that such effects will not have a material adverse impact on our financial condition. See “Factors Relating to Superstorm Sandy That May Affect Future Results and Financial Condition” below.
Reinsurance
The following table summarizes each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2012:
| |
|
|
|
|
Amount
|
|
|
|
|
| |
|
|
|
|
Recoverable
|
|
|
|
|
| |
|
A.M.
|
|
|
as of
|
|
|
|
|
|
($ in thousands)
|
|
Best Rating
|
|
|
December 31, 2012
|
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maiden Reinsurace Company
|
|
|
A- |
|
|
$ |
11,162 |
|
|
|
46.10 |
% |
|
SCOR Reinsurance Company
|
|
|
A |
|
|
|
5,932 |
|
|
|
24.50 |
% |
| |
|
|
|
|
|
|
17,094 |
|
|
|
70.60 |
% |
|
Others
|
|
|
|
|
|
|
7,118 |
|
|
|
29.40 |
% |
|
Total
|
|
|
|
|
|
$ |
24,212 |
|
|
|
100.00 |
% |
Reinsurance recoverable from Maiden Reinsurance Company and Motors Insurance Corporation (included in Others) are secured pursuant to collateralized trust agreements. Assets held in the two trusts are not included in our invested assets and investment income earned on these assets is credited to the two reinsurers respectively.
Our reinsurance treaties for both our Personal Lines business, which primarily consists of homeowners’ policies, and Commercial Lines business, other than commercial auto, were renewed as of July 1, 2012. The treaties, which are annual, provide for the following material terms as of July 1, 2012:
Personal Lines business, which includes homeowners, dwelling fire and canine legal liability insurance, is reinsured under a 75% quota share treaty which provides coverage with respect to losses of up to $1,000,000 per occurrence. An excess of loss contract provides 100% of coverage for the next $1,900,000 of losses for a total reinsurance coverage of $2,650,000 with respect to losses of up to $2,900,000 per occurrence. See “Catastrophe Reinsurance” below for a discussion of our reinsurance coverage with respect to our Personal Lines business in the event of a catastrophe.
Personal umbrella policies are reinsured under a 90% quota share treaty which provides coverage with respect to losses of up to $1,000,000 per occurrence. The second $1,000,000 of coverage is 100% reinsured.
General liability commercial policies written by us, except for commercial auto policies, are reinsured under a 40% quota share treaty, which provides coverage with respect to losses of up to $500,000 per occurrence. Excess of loss contracts provide 100% of coverage for the next $2,400,000 of losses for a total reinsurance coverage of $2,600,000 with respect to losses of up to $2,900,000 per occurrence.
Commercial Auto
Commercial auto policies are covered by an excess of loss reinsurance contract which provides $1,750,000 of coverage in excess of $250,000.
Catastrophe Reinsurance
We have catastrophe reinsurance coverage with regard to losses of up to $73,000,000. The initial $3,000,000 of losses in a catastrophe are subject to a 75% quota share treaty, such that we retain $750,000 per catastrophe occurrence With respect to any additional catastrophe losses of up to $70,000,000, we are 100% reinsured under our catastrophe reinsurance program.
Our reinsurance program is structured to enable us to write a greater amount of direct premiums than our statutory surplus could support and also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. This structure has enabled us to significantly grow our direct premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. Our participation in reinsurance arrangements does not relieve us from our obligations to policyholders.
Our reinsurance program is structured to reflect our obligations and goals. Reinsurance via quota share allows for a carrier to write business without increasing its leverage above a management determined ratio. The additional business written allows a reinsurer to assume the risks involved, but gives the reinsurer much of the profit (or loss) associated with such. We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance. Any such reduction would result in higher earned premiums and a reduction in ceding commission revenue in future years. Our participation in reinsurance arrangements do not relieve us of our obligations to policyholders.
Inflation
Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.
Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Factors That May Affect Future Results and Financial Condition
Based upon the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, such factors, among others, may affect the accuracy of certain forward-looking statements contained in this Annual Report.
As a holding company, we are dependent on the results of operations of our subsidiaries, Kingstone Insurance Company (“KICO”) and Payments, Inc.; there are restrictions on the payment of dividends by KICO.
We are a holding company and a legal entity separate and distinct from our operating subsidiaries, KICO and Payments, Inc. As a holding company with limited operations of our own, the principal sources of our funds are dividends and other payments from KICO and Payments, Inc. Consequently, we must rely on KICO and Payments, Inc. for our ability to repay debts, pay expenses and pay cash dividends to our shareholders.
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing four quarters. As of December 31, 2012, the maximum distribution that KICO could pay without prior regulatory approval was approximately $1,017,000, which is based on investment income for the last four quarters.
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 as discussed below), our operating results and financial condition may vary significantly from one period to the next. Catastrophes can be caused by various natural and man-made disasters, including earthquakes, wildfires, tornadoes, hurricanes, storms and certain types of terrorism. We may incur catastrophe losses in excess of: (1) those that we project would be incurred, (2) those that external modeling firms estimate would be incurred, (3) the average expected level used in pricing or (4) 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, we are subject to claims arising from weather events such as hurricanes, tropical storms, winter storms, rain, hail and high winds. The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity of claims when severe weather conditions occur.
Unanticipated increases in the severity or frequency of claims may adversely affect our operating results and financial condition.
Changes in the severity or frequency of claims may affect our profitability. Changes in homeowners claim severity are driven by inflation in the construction industry, in building materials and in home furnishings, and by other economic and environmental factors, including increased demand for services and supplies in areas affected by catastrophes. Changes in bodily injury claim severity are driven primarily by inflation in the medical sector of the economy and litigation. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs, auto parts prices 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. 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.
The inability to obtain an upgrade to our financial strength rating from A.M. Best, or a downgrade in our rating, may have a material adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company's business. Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. In 2009, KICO applied for its initial A.M. Best rating, and was assigned a letter rating of “B” (Fair) by A.M. Best in 2010. Our rating was upgraded to B+ (Good) in 2011. KICO is preparing for the process of undergoing its annual review by A.M. Best, which may result in a change to its rating. A. M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. 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. We currently have a Demotech rating of A (Excellent), which generally permits lenders to accept our policies. All ratings are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on our competitiveness, the marketability of our product offerings and our ability to grow in the marketplace.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms.
The capital and credit markets have been experiencing extreme volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional capital to pay our operating expenses, make payments on our indebtedness, pay for capital expenditures or increase the amount of insurance that we seek to underwrite, our ability to obtain such capital may be limited and the cost of any such capital may be significant. Our access to additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity as well as lenders' perception of our long or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors occurs, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms.
We are exposed to significant financial and capital markets risk which may adversely affect our results of operations, financial condition and liquidity, and our net investment income can vary from period to period.
We are exposed to significant financial and capital markets risk, including changes in interest rates, equity prices, market volatility, the performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would increase the net unrealized loss position of our investment portfolio, which would be offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would decrease the net unrealized loss position of our investment portfolio, which would be offset by lower rates of return on funds reinvested.
In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition. If significant, continued volatility, changes in interest rates, changes in defaults, a lack of pricing transparency, market liquidity and declines in equity prices, individually or in tandem, could have a material adverse effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business.
Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or develop or seek other alternatives.
We intend to prudently reduce our reliance on quota share reinsurance; this would lead to greater exposure to net insurance losses.
We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance. Any such reduction would result in higher earned premiums and a reduction in ceding commission revenue in future years. Such approach would also lead to increased exposure to net insurance losses.
The effects of Superstorm Sandy will be material to our post-2012 results of operations.
On October 29, 2012, the New York City area, which is the primary location of KICO’s insureds, was struck by Superstorm Sandy. Certain material effects of the storm on our post-2012 results of operations are described under “Liquidity and Capital Resources - Superstorm Sandy” above. Given the reinsurance losses that were incurred as a result of the storm, it is possible that the terms and conditions for any reinsurance that we may require following the end of our current reinsurance treaties on June 30, 2013 will be materially impacted.
Reinsurance subjects us to the credit risk of our reinsurers, which may have a material adverse effect on our operating results and financial condition.
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Since we are primarily liable to an insured for the full amount of insurance coverage, our inability to collect a material recovery from a reinsurer could have a material adverse effect on our operating results and financial condition.
Applicable insurance laws regarding the change of control of our company may impede potential acquisitions that our stockholders might consider to be desirable.
We are subject to statutes and regulations of the state of New York which generally require that any person or entity desiring to acquire direct or indirect control of KICO, our insurance company subsidiary, obtain prior regulatory approval. In addition, a change of control of Kingstone Companies, Inc. would require such approval. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some of our stockholders might consider to be desirable. Similar regulations may apply in other states in which we may operate.
The insurance industry is subject to extensive restrictive regulation that may affect our operating costs and limit the growth of our business, and changes within this regulatory environment may, too, adversely affect our operating costs and limit the growth of our business.
We are subject to extensive laws and regulations. State insurance regulators are charged with protecting policyholders and have broad regulatory, supervisory and administrative powers over our business practices, including, among other things, the power to grant and revoke licenses to transact business and the power to regulate and approve underwriting practices and rate changes, which may delay the implementation of premium rate changes or prevent us from making changes we believe are necessary to match rate to risk. In addition, many states have laws and regulations that limit an insurer’s ability to cancel or not renew policies and that prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.
Because the laws and regulations under which we operate are administered and enforced by a number of different governmental authorities, including state insurance regulators, state securities administrators and the SEC, each of which exercises a degree of interpretive latitude, we are subject to the risk that compliance with any particular regulator's or enforcement authority's interpretation of a legal issue may not result in compliance with another's interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator's or enforcement authority's interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal and regulatory environment may, even absent any particular regulator's or enforcement authority's interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thereby necessitating changes to our practices that may, in some cases, limit our ability to grow and improve the profitability of our business.
While the United States federal government does not directly regulate the insurance industry, federal legislation and administrative policies can affect us. Congress and various federal agencies periodically discuss proposals that would provide for a federal charter for insurance companies. We cannot predict whether any such laws will be enacted or the effect that such laws would have on our business. Moreover, there can be no assurance that changes will not be made to current laws, rules and regulations, or that any other laws, rules or regulations will not be adopted in the future, that could adversely affect our business and financial condition.
We may not be able to maintain the requisite amount of risk-based capital, which may adversely affect our profitability and our ability to compete in the property and casualty insurance markets.
The New York State Department of Financial Services imposes risk-based capital requirements on insurance companies to ensure that insurance companies maintain appropriate levels of surplus to support their overall business operations and to protect customers against adverse developments, after taking into account default, credit, underwriting and off-balance sheet risks. If the amount of our capital falls below this minimum, we may face restrictions with respect to soliciting new business and/or keeping existing business. Similar regulations will apply in other states in which we may operate.
Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
We recognize the scientific view that the world is getting warmer. Climate change, to the extent it produces rising temperatures and changes in weather patterns, could impact the frequency or severity of weather events and wildfires and the affordability and availability of homeowners insurance.
Our operating results and financial condition may be adversely affected by the cyclical nature of the property and casualty business.
The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. A downturn in the profitability cycle of the property and casualty business could have a material adverse effect on our operating results and financial condition.
Because substantially all of our revenue is currently derived from sources located in New York, our business may be adversely affected by conditions in such state.
Substantially all of our revenue is currently derived from sources located in the state of New York and, accordingly, is affected by the prevailing regulatory, economic, demographic, competitive and other conditions in such state. Changes in any of these conditions could make it more costly or difficult for us to conduct our business. Adverse regulatory developments in New York, which could include fundamental changes to the design or implementation of the insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition.
Recent regulatory action taken by the New York State Department of Financial Services following Superstorm Sandy may have a material adverse effect upon our operations and business.
In the aftermath of Superstorm Sandy, the New York State Department of Financial Services has adopted various regulations that could have a material adverse effect on insurance companies that operate in the state of New York. Included among the regulations are accelerated claims investigation and settlement requirements and mandatory participation in non-binding mediation proceedings funded by the insurer. In addition, the Department of Financial Services imposed a four month moratorium on property and casualty policy terminations and non-renewals notwithstanding failure to pay premiums when due. Further, in February 2013, the state of New York announced that the Department of Financial Services has commenced an investigation into the claims practices of three insurance companies, including KICO, in connection with Superstorm Sandy claims. The Department of Financial Services stated that the three insurers had a much larger than average consumer complaint rate with regard to Superstorm Sandy claims and indicated that the three insurers were being investigated for (i) failure to send adjusters in a timely manner; (ii) failure to process claims in a timely manner; and (iii) inability of homeowners to contact insurance company representatives. KICO has received a letter from the Department of Financial Services seeking information and data with regard to the foregoing. KICO is cooperating with the Department of Financial Services in connection with its investigation and we believe that such matter will not have a material adverse effect on our financial position. In settling insurance claims, including those related to Superstorm Sandy, if KICO were to pay for losses not covered by the insurance policy, such as those based on water and sewer back up claims, it could face disclaimers of coverage from its reinsurers with regard to the amounts paid.
Actual claims incurred may exceed current reserves established for claims, which may adversely affect our operating results and financial condition.
Recorded claim reserves in our business are based on our best estimates of losses after considering known facts and interpretations of circumstances. Internal and external factors are considered. Internal factors include, but are not limited to, actual claims paid, pending levels of unpaid claims, product mix and contractual terms. External factors include, but are not limited to, changes in the law, court decisions, changes in regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of losses that have occurred, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded reserves, and such variance may adversely affect our operating results and financial condition.
Our future results may be adversely affected by claims made against an underwriting pool in which KICO was a participant but over which it has no control.
KICO was a member of the New York Mutual Underwriters Pool (the “NYMU”) and is responsible for its proportionate share of losses with respect to accident dates through October 31, 1997. During 2006 and 2007, the NYMU received a disproportionately large number of lead paint claims (approximately 50) for accident dates prior to October 31, 1997. KICO’s liability for each claim is $50,000 (assuming full reinsurance recovery). Since 2007, far fewer lead paint claims have been filed against the NYMU. We believe that, as of December 31, 2012, KICO is fully reserved for all reported claims and that its provision for IBNR for future claims is adequate (in each case giving effect to the collectability of reinsurance); however, we do not have any control over the claims made against the NYMU. Accordingly, future results may be adversely affected from losses over which we have no control.
Regulations requiring us to underwrite business and participate in loss sharing arrangements may adversely affect our operating results and financial condition.
The state of New York has enacted laws that require a property liability insurer conducting business in such state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations or require the insurer to offer coverage to all consumers, often restricting an insurer's ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired rates, possibly leading to an unacceptable return on equity, which may adversely affect our operating results and financial condition.
Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive.
The insurance industry is highly competitive. Many of our competitors have well-established national reputations, substantially more capital and significantly greater marketing and management resources. Because of the competitive nature of the insurance industry, including competition for customers, agents and brokers, there can be no assurance that we will continue to effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our business, operating results or financial condition.
If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be delayed or hindered; KICO’s Chief Executive Officer transitioned his duties and responsibilities effective January 1, 2012.
Our future success will depend, in part, upon the efforts of Barry Goldstein, our President and Chief Executive Officer, and John Reiersen, who currently serves as Executive Vice President of KICO and, until January 1, 2012, served as President and Chief Executive Officer of KICO. The loss of Messrs. Goldstein and/or Reiersen or other key personnel could prevent us from fully implementing our business strategies and could materially and adversely affect our business, financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, but we may not be able to do so. Our ability to recruit and retain such personnel will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel. Effective January 1, 2012, Mr. Reiersen became Executive Vice President of KICO and provides, in a part-time capacity, advice and assistance to the President and Chief Executive Officer of KICO, and other management personnel, with regard to the management and operation of KICO. Mr. Goldstein assumed the duties and responsibilities of President and Chief Executive Officer of KICO effective January 1, 2012. Although Mr. Goldstein has served as our President and Chief Executive Officer since 2001, as KICO’s Chairman of the Board and Chairman of the Executive Committee since 2006 and as KICO’s Chief Investment Officer since 2008, prior to January 1, 2012, he had never served as President and Chief Executive Officer of an insurance company.
Difficult conditions in the economy generally could adversely affect our business and operating results.
Some economists continue to project significant negative macroeconomic trends, including relatively high and sustained unemployment, reduced consumer spending, and substantial increases in delinquencies on consumer debt, including defaults on home mortgages. Moreover, recent disruptions in the financial markets, particularly the reduced availability of credit and tightened lending requirements, have impacted the ability of borrowers to refinance loans at more affordable rates. As with most businesses, we believe that difficult conditions in the economy could have an adverse effect on our business and operating results. General economic conditions also could adversely affect us in the form of consumer behavior, which may include decreased demand for our products. As consumers become more cost conscious, they may choose lower levels of insurance.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our results of operations and financial condition.
Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted and/or expanded. Accordingly, we are required to adopt new guidance or interpretations, which may have a material adverse effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected.
We rely on our information technology and telecommunication systems, and the failure of these systems could materially and adversely affect our business.
Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to support our operations. The failure of these systems could interrupt our operations and result in a material adverse effect on our business.
We have incurred, and will continue to incur, increased costs as a result of being an SEC reporting company.
The Sarbanes-Oxley Act of 2002, as well as a variety of related rules implemented by the SEC, have required changes in corporate governance practices and generally increased the disclosure requirements of public companies. As a reporting company, we incur significant legal, accounting and other expenses in connection with our public disclosure and other obligations. Based upon SEC regulations currently in effect, we are required to establish, evaluate and report on our internal control over financial reporting. We believe that compliance with the myriad of rules and regulations applicable to reporting companies and related compliance issues will require a significant amount of time and attention from our management.
The enactment of tort reform could adversely affect our business.
Legislation concerning tort reform is from time to time considered in the United States Congress. Among the provisions considered for inclusion in such legislation are limitations on damage awards, including punitive damages. Enactment of these or similar provisions by Congress or by the states in which we operate could result in a reduction in the demand for liability insurance policies or a decrease in the limits of such policies, thereby reducing our revenues. We cannot predict whether any such legislation will be enacted or, if enacted, the form such legislation will take, nor can we predict the effect, if any, such legislation would have on our business or results of operations.
Not applicable.
The financial statements required by this Item 8 are included in this Annual Report following Item 15 hereof. As a smaller reporting company, we are not required to provide supplementary financial information.
On January 7, 2013, we engaged Marcum LLP (“Marcum”) as our independent registered public accountants to audit our consolidated financial statements as of December 31, 2012 and for the year then ended. Concurrently, we dismissed EisnerAmper LLP (“EisnerAmper”) as our independent registered public accountants. EisnerAmper had served as our independent auditors since 2009. The Audit Committee of our Board of Directors (the “Audit Committee”) approved the engagement of Marcum and the dismissal of EisnerAmper.
The report of EisnerAmper on our consolidated financial statements as of December 31, 2011 and 2010 and for the fiscal years then ended did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2011 and 2010 and the period from January 1, 2012 to January 7, 2013, (a) there were no disagreements with EisnerAmper on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of EisnerAmper, would have caused EisnerAmper to make reference thereto in its reports on the consolidated financial statements for such years; and (b) there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2012 for the reasons discussed below under “Internal Control over Financial Reporting”.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We previously reported a material weakness in our internal control over financial reporting, related to the recording of the change in ceded unearned premiums associated with the decrease in commercial lines reinsurance quota share from 60% to 40% effective as of July 1, 2012 in Amendment No. 1 on Form 10-Q/A for the quarterly period ended September 30, 2012 (filed on February 27, 2013). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, controls did not operate effectively to ensure that the entries associated with the decrease in commercial lines reinsurance quota share from 60% to 40% effective as of July 1, 2012 were accurately recorded to properly reflect the correct change in ceded unearned premiums. Based on the evaluation of the effectiveness of our internal control over financial reporting and the material weakness described above, management concluded that our internal control over financial reporting was not effective as of December 31, 2012.
The financial statements included in this Form 10-K were prepared with particular attention to the material weakness. We concluded that the financial statements included in the Form 10-K fairly present, in all material respects, the financial condition, results of operations and cash flows as of and for the years ended in accordance with U.S. generally accepted accounting principles.
We continually review our disclosure controls and procedures and makes changes, as necessary, to ensure the quality of our financial reporting.
Management’s Plan for Remediation
Management and the Board of Directors are committed to remediation of the material weakness to the consolidated financial statements as well as the continued improvement of our overall system of internal control over financial reporting. As management continues to evaluate and work to enhance the internal control over financial reporting, it may be determined that additional measures must be taken to address control deficiencies or it may be determined that we need to modify or otherwise adjust the remediation procedures described below.
Subsequent to the period covered by this report, management is implementing measures to remediate the material weakness in internal control over financial reporting. Specifically, management is implementing controls and communicating to the financial reporting personnel the importance of correctly recording the changes to unearned premiums arising from our annual changes to our reinsurance quota share treaties and ensuring that the ceded unearned premium balances are properly reconciled during the financial reporting process. We will add an item to our financial closing checklist to review that the changes to reinsurance contracts have been properly recorded to all accounts requiring adjustment.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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
|
|
Age
|
|
Positions and Offices Held
|
| |
|
|
|
|
|
Barry B. Goldstein
|
|
60 |
|
President, Chairman of the Board, Chief Executive Officer, Treasurer and Director
|
|
Victor J. Brodsky
|
|
55 |
|
Chief Financial Officer and Secretary
|
|
John D. Reiersen
|
|
70 |
|
Executive Vice President, Kingstone Insurance Company
|
|
Michael R. Feinsod
|
|
42 |
|
Director
|
|
Jay M. Haft
|
|
77 |
|
Director
|
|
David A. Lyons
|
|
63 |
|
Director
|
|
Jack D. Seibald
|
|
52 |
|
Director
|
Barry B. Goldstein
Mr. Goldstein was elected our President, Chief Executive Officer, Chairman of the Board, and a director in March 2001 and our Treasurer in May 2001. He served as our Chief Financial Officer from March 2001 to November 2007. Since January 2006, Mr. Goldstein has served as Chairman of the Board of Kingstone Insurance Company (“KICO”) (formerly known as Commercial Mutual Insurance Company), a New York property and casualty insurer, as well as Chairman of its Executive Committee. Mr. Goldstein has served as Chief Investment Officer of KICO since August 2008 and as its President and Chief Executive Officer since January 2012. He was Treasurer of KICO from March 2010 through September 2010. Effective July 1, 2009, we acquired a 100% equity interest in KICO. From April 1997 to December 2004, Mr. Goldstein served as President of AIA Acquisition Corp., which operated insurance agencies in Pennsylvania and which sold substantially all of its assets to us in May 2003. Mr. Goldstein received his B.A. and M.B.A. from State University of New York at Buffalo. We believe that Mr. Goldstein’s extensive experience in the insurance industry, including his service as Chairman of the Board of KICO since 2006 and as its Chief Investment Officer since 2008, give him the qualifications and skills to serve as one of our directors.
Victor J. Brodsky
Mr. Brodsky has served as our Chief Financial Officer since August 2009 and as our Secretary since December 2008. He served as our Chief Accounting Officer from August 2007 through July 2009 and as our Principal Financial Officer for Securities and Exchange Commission (“SEC”) reporting purposes from November 2007 through July 2009. In addition, Mr. Brodsky has served as a director of KICO since February 2008, as Chief Financial Officer of KICO since September 2010 and as Senior Vice President of KICO since January 2012. He also served as Treasurer of KICO from September 2010 through December 2011. Mr. Brodsky served from May 2008 through March 15, 2010 as Vice President of Financial Reporting and Principal Financial Officer for SEC reporting purposes of Vertical Branding Inc. Mr. Brodsky served as Chief Financial Officer of Vertical Branding from March 1998 through May 2008 and as a director of Vertical Branding from May 2002 through November 2005. He served as its Secretary from November 2005 through May 2008 and from April 2009 to March 15, 2010. A receiver was appointed for the business of Vertical Branding in February 2010. Prior to joining Vertical Branding, Mr. Brodsky spent 16 years at the CPA firm of Michael & Adest in New York. Mr. Brodsky earned a Bachelor of Business Administration degree from Hofstra University, with a major in accounting, and is a licensed CPA in New York.
John D. Reiersen
Mr. Reiersen served as President of KICO from 1999 to 2011 and as its Chief Executive Officer from 2001 to 2011. Since January 2012, Mr. Reiersen has served as Executive Vice President of KICO. Mr. Reiersen served for 25 years with the New York State Insurance Department ending his tenure there as Chief Examiner in the Property and Casualty Insurance Bureau. At the Insurance Department, he was instrumental in the enactment of numerous statutes and regulations, including the automobile no-fault program, the photo inspection law, the Insurance Information and Enforcement System program and many other cost-containment measures. Mr. Reiersen was also instrumental in the enactment of many rules in the New York Automobile Insurance Plan. He served as President of the Eagle Insurance Group from 1990 to 2000. Mr. Reiersen served as Chairman of the New York Insurance Association and has served and continues to serve on many insurance industry association boards and committees. He holds the professional designations of Chartered Property and Casualty Underwriter, Certified Financial Examiner and Certified Insurance Examiner. Mr. Reiersen is a graduate of Brooklyn College and holds a Bachelor of Science Degree in Accounting.
Michael R. Feinsod
Mr. Feinsod is the Chairman, Chief Executive Officer and President of Ameritrans Capital Corporation, a business development company. Mr. Feinsod has been an officer of Ameritrans Capital since 2006. He serves as Chairman, Chief Executive Officer and President of Elk Associates Funding Corporation, a Small Business Investment Company and a subsidiary of Ameritrans Capital, and has served as a director of Ameritrans Capital and Elk Associates Funding Corporation since December 2005. Since January 1999, Mr. Feinsod has been Managing Member of Infinity Capital, LLC, an investment management company. He served as an investment analyst and portfolio manager at Mark Boyar & Company, Inc., a broker-dealer. He is admitted to practice law in New York and served as an associate in the Corporate Law Department of Paul, Hastings, Janofsky & Walker LLP. Mr. Feinsod holds a J.D. from Fordham University School of Law and a B.A. from George Washington University. He has served as one of our directors since October 2008. We believe that Mr. Feinsod’s corporate finance, legal and executive-level experience, as well as his service on the Board of KICO since July 2009, give him the qualifications and skills to serve as one of our directors.
Jay M. Haft
Mr. Haft is currently a personal advisor to Victor Vekselberg, a Russian entrepreneur with considerable interests in oil, aluminum, utilities and other industries. Mr. Haft is also a partner at Columbus Nova, the U.S.-based investment and operating arm of Mr. Vekselberg’s Renova Group of companies. Mr. Haft is also a strategic and financial consultant for growth stage companies. He is active in international corporate finance and mergers and acquisitions as well as in the representation of emerging growth companies. Mr. Haft has extensive experience in the Russian market, in which he has worked on growth strategies for companies looking to internationalize their business assets and enter international capital markets. He has been a founder, consultant and/or director of numerous public and private corporations, and served as Chairman of the Board of Dusa Pharmaceuticals, Inc. Mr. Haft serves on the Board of Ballantyne Cashmere, SpA, the United States-Russian Business Counsel and The Link of Times Foundation and is an advisor to Montezemolo & Partners. He has been instrumental in strategic planning and fundraising for a variety of Internet and high-tech, leading edge medical technology and marketing companies over the years. Mr. Haft is counsel to Reed Smith, an international law firm, as well as several other law and accounting firms. Mr. Haft is a past member of the Florida Commission for Government Accountability to the People, a past national trustee and Treasurer of the Miami City Ballet, and a past Board member of the Concert Association of Florida. He is also a past trustee of Florida International University Foundation and previously served on the advisory board of the Wolfsonian Museum and Florida International University Law School. Mr. Haft served as our Vice Chairman of the Board from February 1999 until March 2001. From October 1989 to February 1999, he served as our Chairman of the Board and he has served as one of our directors since 1989. Mr. Haft received B.A. and LL.B. degrees from Yale University. We believe that Mr. Haft’s corporate finance, business consultation, legal and executive-level experience, as well as his service on the Board of KICO since July 2009, give him the qualifications and skills to serve as one of our directors.
David A. Lyons
Mr. Lyons is currently Principal of Den Corporate Advisors, LLC, a consulting firm focused on business and merger and acquisition strategies for public and private companies, and, CEO of NextStep Technology Solutions, LLC, a telecommunications marketing company that is a master distributor for Samsung Telecommunications America, LLC in the sale of its VoIP product portfolio into the telecommunications network carrier market. From 2004 through 2010 he served as a principal of Den Ventures, LLC, a business management firm. From 2002 until 2004, Mr. Lyons served as a managing partner of the Nacio Investment Group, and President of Nacio Systems, Inc., a managed hosting company that provides outsourced infrastructure and communication services for mid-size businesses. Prior to forming the Nacio Investment Group, Mr. Lyons served as Vice President of Acquisitions for Expanets, Inc., a national provider of converged communications solutions. Previously, he was Chief Executive Officer of Amnex, Inc. and held various executive management positions at Walker Telephone Systems, Inc. and Inter-Tel, Inc. Mr. Lyons has served as one of our directors since July 2005. We believe that Mr. Lyons’ executive-level experience, as well as his experience in the areas of business consultation, corporate finance and mergers and acquisitions, and his service on the Board of KICO since July 2009, give him the qualifications and skills to serve as one of our directors.
Jack D. Seibald
Mr. Seibald is a Founder and Managing Member of Concept Capital Markets, LLC (“Concept Capital”) and serves Concept Capital in a variety of areas, including business and client development and legal and compliance matters. Mr. Seibald also serves as a Managing Member of Concept Capital Holdings, LLC, the parent of Concept Capital, of Concept Capital Administration, LLC, which provides administrative services to Concept Capital and its affiliates, and as a member of the Board of Managers of ConceptONE, LLC, which provides portfolio and risk analytics and reporting services as well as regulatory reporting to investment managers. Mr. Seibald has been affiliated with Concept Capital and its predecessors since 1995 and has extensive experience in equity research, investment management, and prime brokerage services dating back to 1983. From 1997 to 2005, Mr. Seibald was also a Managing Member of Whiteford Advisors, LLC, an investment management firm, where as co-founder he co-managed several pools of funds. He began his career at Oppenheimer & Co. as an equity analyst covering the retailing industry and has also been affiliated with Salomon Brothers and Morgan Stanley & Co in similar positions. Mr. Seibald also operated The Seibald Report, Inc., an independent research firm specializing in the retailing sector. He holds an M.B.A. from Hofstra University and a B.A. from George Washington University. Mr. Seibald has served as one of our directors since 2004. In January 2008, the Financial Industry Regulatory Authority (“FINRA”) imposed a $100,000 fine and 20-day suspension on Mr. Seibald in connection with the settlement of a FINRA action against Sanders Morris Harris Inc. and Mr. Seibald, among others. FINRA had found that Mr. Seibald had improperly received compensation from a profit pool derived, in part, from commissions on trading by a hedge fund for which he served as a manager. We believe that Mr. Seibald’s corporate finance and executive-level experience, as well as his service on the Board of KICO since 2006 (including his service as Chairman of its Investments Committee), give him the qualifications and skills to serve as one of our directors.
Family Relationships
There are no family relationships among any of our executive officers and directors.
Term of Office
Each director will hold office until the next annual meeting of stockholders and until his successor is elected and qualified or until his earlier resignation or removal. Each executive officer will hold office until the initial meeting of the Board of Directors following the next annual meeting of stockholders and until his successor is elected and qualified or until his earlier resignation or removal.
Audit Committee
The Audit Committee of the Board of Directors is responsible for overseeing our accounting and financial reporting processes and the audits of our financial statements. The members of the Audit Committee are Messrs. Lyons, Feinsod, Haft and Seibald.
Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Lyons is an “audit committee financial expert,” as that is defined in Item 407(d)(5) of Regulation S-K Mr. Lyons is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of The Nasdaq Stock Market.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires that reports of beneficial ownership of common shares and changes in such ownership be filed with the Securities and Exchange Commission by Section 16 “reporting persons,” including directors, certain officers, holders of more than 10% of the outstanding common shares and certain trusts of which reporting persons are trustees. We are required to disclose in this Annual Report each reporting person whom we know to have failed to file any required reports under Section 16 on a timely basis during the fiscal year ended December 31, 2012. To our knowledge, based solely on a review of copies of Forms 3, 4 and 5 filed with the Securities and Exchange Commission and written representations that no other reports were required, during the fiscal year ended December 31, 2012, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them.
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics is posted on our website, www.kingstonecompanies.com. We intend to satisfy the disclosure requirement under Item 5.05(c) of Form 8-K regarding an amendment to, or a waiver from, our Code of Ethics by posting such information on our website, www.kingstonecompanies.com.
Summary Compensation Table
The following table sets forth certain information concerning the compensation for the fiscal years ended December 31, 2012 and 2011 for certain executive officers, including our Chief Executive Officer:
|
Name and Principal Position
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
All Other
Compensation
|
|
|
Total
|
|
|
Barry B. Goldstein
Chief Executive
|
2012
|
|
$ |
450,000 |
|
|
|
- |
|
|
$ |
126,985 |
(1) |
|
$ |
33,825 |
|
|
$ |
610,810 |
|
|
Officer
|
2011
|
|
$ |
375,000 |
|
|
|
- |
|
|
$ |
216,327 |
(2) |
|
$ |
29,832 |
|
|
$ |
621,159 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor J. Brodsky
Chief Financial
|
2012
|
|
$ |
240,000 |
|
|
|
- |
|
|
$ |
6,558 |
(3) |
|
$ |
13,792 |
|
|
$ |
260,350 |
|
|
Officer
|
2011
|
|
$ |
220,000 |
|
|
$ |
10,000 |
|
|
$ |
26,893 |
(4) |
|
$ |
9,800 |
|
|
$ |
266,693 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John D. Reiersen
Executive Vice
|
2012
|
|
$ |
150,200 |
|
|
|
- |
|
|
$ |
7,392 |
(3) |
|
$ |
6,064 |
|
|
$ |
163,656 |
|
|
President, Kingstone Insurance Company
|
2011
|
|
$ |
339,524 |
|
|
|
- |
|
|
$ |
76,091 |
(4) |
|
$ |
14,949 |
|
|
$ |
430,564 |
|
__________
|
(1)
|
Represents bonus compensation of $110,540 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2013, and $16,445 accrued pursuant to the KICO employee profit sharing plan and paid in 2013.
|
|
(2)
|
Represents bonus compensation of $167,358 accrued pursuant to Mr. Goldstein’s employment agreement and paid in 2012, and $48,968 accrued pursuant to the KICO employee profit sharing plan and paid in 2012.
|
|
(3)
|
Represents amounts accrued pursuant to the KICO employee profit sharing plan and paid in 2013.
|
|
(4)
|
Represents amounts accrued pursuant to the KICO employee profit sharing plan and paid in 2012.
|
Employment Contracts
Mr. Goldstein is employed as our President, Chairman of the Board and Chief Executive Officer pursuant to an employment agreement, dated October 16, 2007, as amended (the “Goldstein Employment Agreement”), that expires on December 31, 2014. Pursuant to the Goldstein Employment Agreement, effective January 1, 2012, Mr. Goldstein is entitled to receive an annual base salary of $450,000 (“Base Salary”). Mr. Goldstein’s annual base salary had been $350,000 from January 1, 2004 through December 31, 2009 and $375,000 from January 1, 2010 through December 31, 2011. Mr. Goldstein is also entitled to receive annual bonuses based on our net income (which bonus may not be less than $10,000 per annum). A portion of the Base Salary amount payable to Mr. Goldstein is contractually shared with KICO. Since August 2008, Mr. Goldstein has served as Chief Investment Officer of KICO. Since January 2012, he has also served as President and Chief Executive Officer of KICO. See “Termination of Employment and Change-in-Control Arrangements.”
Mr. Reiersen is employed as Executive Vice President of KICO pursuant to an employment agreement, dated September 13, 2006, as amended (the “Reiersen Employment Agreement”). Pursuant to the Reiersen Employment Agreement, during 2011, Mr. Reiersen was entitled to receive an annual base salary of approximately $269,000 in his then capacity as President and Chief Executive Officer of KICO. Effective February 28, 2011, pursuant to an amendment to the Reiersen Employment Agreement, the term was extended from December 31, 2011 to December 31, 2014 and, since January 1, 2012, Mr. Reiersen has been serving as Executive Vice President of KICO. Pursuant to the amendment, in the capacity of Executive Vice President, Mr. Reiersen reports to the President and Chief Executive Officer of KICO and provides advice and assistance to the President and Chief Executive Officer of KICO, as well as other officers and management personnel of KICO, with regard to the management and operation of KICO. Pursuant to the amendment, effective January 1, 2012, Mr. Reiersen’s minimum annual salary is $100,000 in consideration of the anticipated provision of approximately 500 hours of service per year on behalf of KICO. See “Termination of Employment and Change-in-Control Arrangements.”
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
| |
|
|
|
|
Name
|
|
Number of Securities Underlying
Unexercised Options
|
|
|
Number of Securities Underlying
Unexercised Options
|
|
|
Option Exercise
Price
|
|
|
Option Expiration Date
|
|
| |
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry B. Goldstein
|
|
|
141,648 |
|
|
|
47,217 |
(1) |
|
$ |
2.50 |
|
|
03/24/15
|
|
|
Victor J. Brodsky
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
John D. Reiersen
|
|
|
15,000 |
|
|
|
5,000 |
(2) |
|
$ |
2.35 |
|
|
07/30/14
|
|
________________
|
(1)
|
Such options became exercisable on March 24, 2013.
|
|
(2)
|
Such options are exercisable on July 30, 2013.
|
Termination of Employment and Change-in-Control Arrangements
Pursuant to the Goldstein Employment Agreement and as provided for in his prior employment agreement which expired on April 1, 2007, Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to one and one-half times his then annual salary in the event of the termination of his employment following a change of control of Kingstone Companies, Inc. Under such circumstances, Mr. Goldstein’s outstanding options would become exercisable and would remain exercisable until the first anniversary of the termination date. In addition, in the event Mr. Goldstein’s employment is terminated by Kingstone Companies, Inc. without cause or he resigns with good reason (each as defined in the Goldstein Employment Agreement), Mr. Goldstein would be entitled to receive his base salary and bonuses from Kingstone Companies, Inc. for the remainder of the term, and his outstanding options would become exercisable and would remain exercisable until the first anniversary of the termination date. In addition, in the event Mr. Goldstein’s employment with KICO is terminated by KICO with or without cause, he would be entitled to receive a lump sum payment from KICO equal to six months base salary.
Pursuant to the Reiersen Employment Agreement, in the event of the termination of Mr. Reiersen’s employment with KICO, he would be entitled to severance in an amount equal to the lesser of $50,000 or the remaining salary payable to him through the term of his agreement.
Compensation of Directors
The following table sets forth certain information concerning the compensation of our directors for the fiscal year ended December 31, 2012:
DIRECTOR COMPENSATION
|
Name
|
|
Fees Earned or
Paid in Cash
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Feinsod
|
|
$ |
29,675 |
|
|
|
- |
|
|
|
- |
|
|
$ |
29,675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay M. Haft
|
|
$ |
29,650 |
|
|
|
- |
|
|
|
- |
|
|
$ |
29,650 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Lyons
|
|
$ |
30,250 |
|
|
|
- |
|
|
|
- |
|
|
$ |
30,250 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack D. Seibald
|
|
$ |
31,750 |
|
|
|
- |
|
|
|
- |
|
|
$ |
31,750 |
|
Our non-employee directors are entitled to receive compensation for their services as directors as follows:
|
·
|
$25,000 per annum (including $5,000 per annum for service as a director of KICO)
|
|
·
|
up to an additional $5,000 per annum for committee chair (and $1,500 per annum for KICO committee chair)
|
|
·
|
$500 per Board meeting attended ($250 if telephonic)
|
|
·
|
$350 per committee meeting attended ($175 if telephonic)
|
Security Ownership
The following table sets forth certain information as of March 15, 2013 regarding the beneficial ownership of our shares of common stock by (i) each person who we believe to be the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each present director, (iii) each person listed in the Summary Compensation Table under “Executive Compensation,” and (iv) all of our present executive officers and directors as a group.
|
Name and Address
of Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
|
Approximate
Percent of Class
|
|
| |
|
|
|
|
|
|
|
Barry B. Goldstein
1154 Broadway
Hewlett, New York
|
|
|
931,648 |
(1)(2) |
|
|
23.4 |
% |
| |
|
|
|
|
|
|
|
|
|
Michael R. Feinsod
c/o Infinity Capital
50 Jericho Quadrangle
Jericho, New York
|
|
|
504,490 |
(1)(3) |
|
|
13.1 |
% |
| |
|
|
|
|
|
|
|
|
|
Jack D. Seibald
1336 Boxwood Drive West
Hewlett Harbor, New York
|
|
|
311,147 |
(1)(4) |
|
|
8.0 |
% |
| |
|
|
|
|
|
|
|
|
|
Jay M. Haft
69 Beaver Dam Road
Salisbury, Connecticut
|
|
|
170,275 |
(1)(5) |
|
|
4.4 |
% |
| |
|
|
|
|
|
|
|
|
|
David A. Lyons
252 Brookdale Road
Stamford, Connecticut
|
|
|
16,660 |
(1) |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
John D. Reiersen
15 Joys Lane
Kingston, New York
|
|
|
19,600 |
(1)(6) |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
Victor J. Brodsky
1154 Broadway
Hewlett, New York
|
|
|
11,408 |
(1) |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
All executive officers
and directors as a group
(7 persons)
|
|
|
1,962,228 |
(1)(2)(3)(4)(5)(6) |
|
|
49.1 |
% |
__________
* Less than 1%.
|
(1)
|
Based upon Schedule 13D filed under the Securities Exchange Act of 1934, as amended, and other information that is publicly available.
|
| |
|
|
(2)
|
Includes (i) 30,000 shares held in retirement trusts for the benefit of Mr. Goldstein and (ii) 141,648 shares issuable upon the exercise of options that are exercisable currently or within 60 days. Excludes shares owned by members of Mr. Goldstein’s family. Mr. Goldstein disclaims beneficial ownership of the shares owned by such family members.
|
| |
|
|
(3)
|
Includes 487,495 shares owned by Infinity Capital Partners, L.P. (“Partners”). Each of (i) Infinity Capital, LLC (“Capital”), as the general partner of Partners, (ii) Infinity Management, LLC (“Management”), as the Investment Manager of Partners, and (iii) Michael Feinsod, as the Managing Member of Capital and Management, the General Partner and Investment Manager, respectively, of Partners, may be deemed to be the beneficial owners of the shares held by Partners. Pursuant to the Schedule 13D filed under the Securities Exchange Act of 1934, as amended, by Partners, Capital, Management and Mr. Feinsod, each has sole voting and dispositive power over the shares. Also includes 10,000 shares held in a retirement trust for the benefit of Mr. Feinsod.
|
| |
|
|
(4)
|
Includes (i) 113,000 shares owned jointly by Mr. Seibald and his wife, Stephanie Seibald and (ii) 174,824 shares held in a retirement trust for the benefit of Mr. Seibald.
|
| |
|
|
(5)
|
Includes 576 shares held in a retirement trust for the benefit of Mr. Haft.
|
| |
|
|
(6)
|
Includes 15,000 shares issuable upon the exercise of currently exercisable options.
|
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2012 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))
|
|
|
Equity compensation plans approved by security holders
|
|
|
235,115 |
|
|
$ |
2.58 |
|
|
|
143,635 |
|
|
Equity compensation plans not approved by security holders
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
Total
|
|
|
235,115 |
|
|
|
|
|
|
|
143,635 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
2009/2010 Debt Financing
Between June 2009 and March 2010, we borrowed an aggregate $1,450,000 and issued promissory notes in such aggregate principal amount (the “2009/2010 Notes”). The 2009/2010 Notes provided for interest at the rate of 12.625% per annum and were payable on July 10, 2011. The 2009/2010 Notes were prepayable by us without premium or penalty; provided, however, that, under any circumstances, the holders of the 2009/2010 Notes were entitled to receive an aggregate of six months interest from the issue date of the 2009/2010 Notes with respect to the amount prepaid.
Kidstone purchased a 2009/2010 Note in the principal amount of $120,000. Jay M. Haft, one of our principal stockholders and directors, purchased a 2009/2010 Note in the principal amount of $50,000. A member of the family of Michael Feinsod, one of our principal stockholders and directors, purchased a 2009/2010 Note in the principal amount of $100,000. Mr. Yedid and members of his family purchased 2009/2010 Notes in the aggregate principal amount of $295,000. A member of the family of Floyd Tupper, a director of KICO, purchased a 2009/2010 Note in the principal amount of $70,000. Mr. Goldstein’s retirement account purchased a 2009/2010 Note in the principal amount of $150,000.
In June 2011, we repaid $703,000 of the principal amount borrowed pursuant to the above 2009 and 2010 debt financing, including $120,000 to Kidstone, $20,000 to Mr. Haft, $40,000 to the Feinsod family member, $139,000 to the Yedid family members, $28,000 to the Tupper family member and $60,000 to Mr. Goldstein’s retirement account. With regard to the remaining $747,000 principal amount borrowed, we agreed with the lenders, including Mr. Haft, the Feinsod family member, the Yedid family members, the Tupper family member and Mr. Goldstein’s retirement account, that the maturity date for the debt will be extended to July 10, 2014 and that interest at the rate of 9.5% per annum will be payable.
Director Independence
Board of Directors
Our Board of Directors is currently comprised of Barry B. Goldstein, Michael R. Feinsod, Jay M. Haft, David A. Lyons and Jack D. Seibald. Each of Messrs. Feinsod, Haft, Lyons and Seibald is currently an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of the listing standards at The Nasdaq Stock Market.
Audit Committee
The members of our Board’s Audit Committee currently are Messrs. Lyons, Feinsod, Haft and Seibald, each of whom is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of the listing standards of The Nasdaq Stock Market and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934.
Nominating Committee
The members of our Board’s Nominating Committee currently are Messrs. Feinsod, Haft, Lyons and Seibald, each of whom is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of the listing standards of The Nasdaq Stock Market.
Compensation Committee
The members of our Board’s Compensation Committee currently are Messrs. Seibald, Feinsod, Haft and Lyons, each of whom is an “independent director” based on the definition of independence in Listing Rule 5605(a)(2) of the listing standards of The Nasdaq Stock Market.
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, 2012 and by EisnerAmper LLP, our former independent auditors, for professional services rendered for the fiscal year ended December 31, 2011.
|
Fee Category
|
|
Fiscal 2012 Fees
|
|
|
Fiscal 2011 Fees
|
|
|
Audit Fees(1)
|
|
$ |
121,000 |
|
|
$ |
177,549 |
|
|
Audit-Related Fees(2)
|
|
|
- |
|
|
|
4,500 |
|
|
Tax Fees(3)
|
|
$ |
46,164 |
|
|
|
- |
|
|
All Other Fees(4)
|
|
|
- |
|
|
|
- |
|
| |
|
$ |
167,164 |
|
|
$ |
182,048 |
|
__________
|
(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 and services provided in connection with other statutory or regulatory filings.
|
|
(2)
|
Audit-Related Fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”
|
| |
|
|
(3)
|
Tax Fees consist of fees billed by our independent auditors for professional services related to preparation of our U.S. federal and state income tax returns, representation for the examination of our 2009 federal tax return, and tax advice.
|
| |
|
|
(4)
|
All Other Fees consist of aggregate fees billed for products and services provided by our independent auditors, other than those disclosed above.
|
The Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent auditors and approves in advance any services to be performed by the independent auditors, whether audit-related or not. The Audit Committee reviews each proposed engagement to determine whether the provision of services is compatible with maintaining the independence of the independent auditors. Substantially all of the fees shown above were pre-approved by the Audit Committee.
|
Exhibit Number
|
|
Description of Exhibit
|
| |
|
|
|
3(a)
|
|
Restated Certificate of Incorporation, as amended (1)
|
| |
|
|
|
3(b)
|
|
By-laws, as amended (2)
|
| |
|
|
|
|
|
2005 Equity Participation Plan
|
| |
|
|
|
10(b)
|
|
Employment Agreement, dated as of October 16, 2007, between DCAP Group, Inc. and Barry B. Goldstein (3)
|
| |
|
|
|
10(c)
|
|
Amendment No. 1, dated as of August 25, 2008, to Employment Agreement between DCAP Group, Inc. and Barry B. Goldstein (4)
|
| |
|
|
|
10(d)
|
|
Amendment No. 2, dated as of March 24, 2010, to Employment Agreement between Kingstone Companies, Inc. (formerly DCAP Group, Inc.) and Barry B. Goldstein (5)
|
| |
|
|
|
10(e)
|
|
Amendment No. 3, dated as of May 10, 2011, to Employment Agreement between Kingstone Companies, Inc. (formerly DCAP Group, Inc.) and Barry B. Goldstein (6)
|
| |
|
|
|
10(f)
|
|
Amendment No. 4, dated as of April 16, 2012, to Employment Agreement between Kingstone Companies, Inc. (formerly DCAP Group, Inc.) and Barry B. Goldstein (7)
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10(g)
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Employment Contract, effective on July 1, 2008, between Commercial Mutual Insurance Company and Barry B. Goldstein (8)
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10(h)
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Employment Agreement, dated as of May 10, 2011, between Kingstone Insurance Company and Barry B. Goldstein (6)
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Amendment No. 1, dated as of May 14, 2012, to Employment Agreement between Kingstone Insurance Company and Barry B. Goldstein
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10(j)
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Employment Contract, dated as of September 13, 2006, between Commercial Mutual Insurance Company and Successor Companies and John D. Reiersen (8)
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10(k)
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Amendment No. 1, dated as of January 25, 2008, to Employment Contract between Commercial Mutual Insurance Company and Successor Companies and John D. Reiersen (8)
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10(l)
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Amendment No. 2, dated as of July 18, 2008, to Employment Contract between Commercial Mutual Insurance Company and Successor Companies and John D. Reiersen (8)
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10(m)
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Amendment No. 3, dated as of February 28, 2011, to Employment Contract between Kingstone Insurance Company (as successor in interest to Commercial Mutual Insurance Company) and John D. Reiersen (9)
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10(n)
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Stock Option Agreement, dated as of March 24, 2010, between Kingstone Companies, Inc. and Barry B. Goldstein (5)
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10(o)
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Letter agreement, dated February 23, 2012, between Kingstone Companies, Inc. and Barry Goldstein with regard to outstanding options (10)
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14
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Code of Ethics (11)
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Subsidiaries
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23(a)
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Consent of Marcum LLP
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23(b)
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Consent of EisnerAmper LLP
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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
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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
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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
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101.INS
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XBRL Instance Document
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101.SCH
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101.SCH XBRL Taxonomy Extension Schema.
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101.CAL
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101.CAL XBRL Taxonomy Extension Calculation Linkbase.
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101.DEF
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101.DEF XBRL Taxonomy Extension Definition Linkbase.
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101.LAB
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101.LAB XBRL Taxonomy Extension Label Linkbase.
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101.PRE
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101.PRE XBRL Taxonomy Extension Presentation Linkbase.
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__________
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(1)
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Denotes document filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2012 and incorporated herein by reference.
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(2)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated November 5, 2009 and incorporated herein by reference.
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(3)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated October 16, 2007 and incorporated herein by reference.
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(4)
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Denotes document filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2008 and incorporated herein by reference.
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(5)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated March 24, 2010 and incorporated herein by reference.
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(6)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated May 10, 2011 and incorporated herein by reference.
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(7)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated April 16, 2012 and incorporated herein by reference.
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(8)
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Denotes document filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference.
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(9)
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Denotes document filed as an exhibit to our Current Report on Form 8-K for an event dated February 28, 2011 and incorporated herein by reference.
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(10)
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Denotes document filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference.
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(11)
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Denotes document filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and incorporated herein by reference.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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KINGSTONE COMPANIES, INC.
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Dated: April 1, 2013
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By:
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/s/ Barry B. Goldstein |
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Barry B. Goldstein |
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Chief Executive Officer |
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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.
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Signature
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Capacity
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Date
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/s/ Barry B. Goldstein
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President, Chairman of the Board, Chief Executive Officer, Treasurer and Director (Principal Executive Officer)
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April 1, 2013
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| Barry B. Goldstein |
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/s/ Victor J. Brodsky
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Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
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April 1, 2013
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| Victor J. Brodsky |
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/s/ Michael R. Feinsod
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Director
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April 1, 2013
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| Michael R. Feinsod |
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/s/ Jay M. Haft
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Director
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April 1, 2013
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| Jay M. Haft |
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/s/ David A. Lyons
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Director
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April 1, 2013
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| David A. Lyons |
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/s/ Jack D. Seibald
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Director
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April 1, 2013
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| Jack D. Seibald |
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