UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________to _________
 
Commission File Number 0-1665
 
KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-2476480
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)
(845) 802-7900
 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
KINS
Nasdaq Capital Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
As of May 8, 2020, there were 10,793,260 shares of the registrant’s common stock outstanding.
 

 
 
 
KINGSTONE COMPANIES, INC.
INDEX
 
 
PAGE
 
 
PART I — FINANCIAL INFORMATION
2
2
2
3
4
5
6
34
59
59
 
 
PART II — OTHER INFORMATION
61
61
61
62
62
62
62
62
63
 
 
 
 
Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated results or other consequences of our plans or strategies, projected or anticipated results from acquisitions to be made by us, or projections involving anticipated revenues, earnings, costs or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may cause actual results and outcomes to differ materially from those contained in the forward-looking statements include, but are not limited to the risks and uncertainties discussed in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of this Quarterly Report.
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise except as required by law.
 
 
 
 
 
 
 
1
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 March 31,
 
 
 December 31,
 
 
 
2020
 
 
2019
 
 
 
 (unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
   
 
 
 
 
 
 
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of $4,136,710 at March 31, 2020 and
$4,124,767 at December 31, 2019)
 $3,826,404 
 $3,825,952 
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $152,675,779 at March 31, 2020 and
$162,202,355 at December 31, 2019)
  151,879,894 
  168,236,181 
Equity securities, at fair value (cost of $22,430,037 at March 31, 2020 and $22,624,668 at December 31, 2019)
  18,368,893 
  24,661,382 
Other investments
  1,987,522 
  2,584,913 
Total investments
  176,062,713 
  199,308,428 
Cash and cash equivalents
  25,586,789 
  32,391,485 
Premiums receivable, net
  11,913,123 
  12,706,411 
Reinsurance receivables, net
  42,709,055 
  40,750,538 
Deferred policy acquisition costs
  19,571,888 
  20,634,378 
Intangible assets
  500,000 
  500,000 
Property and equipment, net
  7,365,654 
  7,620,636 
Deferred income taxes, net
  1,347,699 
  311,052 
Other assets
  7,477,334 
  6,979,884 
Total assets
 $292,534,255 
 $321,202,812 
 
    
    
Liabilities
    
    
Loss and loss adjustment expense reserves
 $77,851,099 
 $80,498,611 
Unearned premiums
  84,478,538 
  90,383,238 
Advance premiums
  3,143,879 
  3,191,512 
Reinsurance balances payable
  5,337,287 
  11,714,724 
Deferred ceding commission revenue
  6,935,401 
  7,735,398 
Accounts payable, accrued expenses and other liabilities
  8,409,856 
  9,986,317 
Long-term debt, net
  29,515,476 
  29,471,431 
Total liabilities
  215,671,536 
  232,981,231 
 
    
    
Commitments and Contingencies (Note 11)
    
    
 
    
    
Stockholders' Equity
    
    
Preferred stock, $.01 par value; authorized 2,500,000 shares
  - 
  - 
Common stock, $.01 par value; authorized 20,000,000 shares; issued 11,851,266 shares at March 31, 2020 and 11,824,889 at December 31, 2019; outstanding 10,781,393 shares at March 31, 2020 and 10,797,450 shares at December 31, 2019
  118,512 
  118,248 
Capital in excess of par
  69,533,150 
  69,133,918 
Accumulated other comprehensive (loss) income
  (626,601)
  4,768,870 
Retained earnings
  10,792,934 
  16,913,097 
 
  79,817,995 
  90,934,133 
Treasury stock, at cost, 1,069,873 shares at March 31, 2020 and 1,027,439 shares at December 31, 2019
  (2,955,276)
  (2,712,552)
Total stockholders' equity
  76,862,719 
  88,221,581 
 
    
    
Total liabilities and stockholders' equity
 $292,534,255 
 $321,202,812 
 
See accompanying notes to condensed consolidated financial statements.
 
 
2
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
Three months ended March 31,
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 Net premiums earned
 $26,941,450 
 $29,595,889 
 Ceding commission revenue
  3,831,099 
  1,277,683 
 Net investment income
  1,665,844 
  1,623,712 
 Net (losses) gains on investments
  (6,444,418)
  2,035,363 
 Other income
  629,619 
  365,901 
 Total revenues
  26,623,594 
  34,898,548 
 
    
    
 Expenses
    
    
 Loss and loss adjustment expenses
  16,385,821 
  29,134,224 
 Commission expense
  7,899,191 
  6,853,416 
 Other underwriting expenses
  6,761,792 
  6,135,991 
 Other operating expenses
  1,563,620 
  971,172 
 Depreciation and amortization
  687,094 
  602,332 
 Interest expense
  456,545 
  456,545 
 Total expenses
  33,754,063 
  44,153,680 
 
    
    
 Loss from operations before income taxes
  (7,130,469)
  (9,255,132)
 Income tax benefit
  (1,686,266)
  (1,919,942)
 Net loss
  (5,444,203)
  (7,335,190)
 
    
    
 Other comprehensive (loss) income, net of tax
    
    
 Gross change in unrealized (losses) gains  on available-for-sale-securities
  (6,727,489)
  4,188,716 
 
    
    
 Reclassification adjustment for (gains) losses included in net loss
  (102,222)
  22,431 
 Net change in unrealized (losses) gains
  (6,829,711)
  4,211,147 

    
    
 Income tax benefit (expense) related to items of other comprehensive (loss) income
  1,434,240 
  (884,341)
 Other comprehensive (loss) income, net of tax
  (5,395,471)
  3,326,806 
 
    
    
 Comprehensive loss
 $(10,839,674)
 $(4,008,384)
 
    
    
Loss per common share:
    
    
Basic
 $(0.50)
 $(0.68)
Diluted
 $(0.50)
 $(0.68)
 
    
    
Weighted average common shares outstanding
    
    
Basic
  10,807,841 
  10,757,843 
Diluted
  10,807,841 
  10,757,843 
 
    
    
Dividends declared and paid per common share
 $0.0625 
 $0.1000 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three months ended March 31, 2020 and 2019
 
 
 Preferred Stock
 Common Stock

Accumulated Other 

 Treasury Stock
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
Capital in
Excess of Par
Comprehensive
Income (Loss)
Retained
Earnings
 
 Shares
 
 
 Amount
 
 
 Total
 
Balance, January 1, 2019
  - 
 $- 
  11,775,148 
 $117,751 
 $67,763,940 
 $(2,884,313)
 $26,380,816 
  1,027,439 
 $(2,712,552)
 $88,665,642 
Stock-based compensation
  - 
  - 
  - 
  - 
  309,882 
  - 
  - 
  - 
  - 
  309,882 
Vesting of restricted stock awards
  - 
  - 
  27,593 
  275 
  (275)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
  - 
  - 
  (6,553)
  (64)
  (115,943)
  - 
  - 
  - 
  - 
  (116,007)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (1,075,962)
  - 
  - 
  (1,075,962)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (7,335,190)
  - 
  - 
  (7,335,190)
Change in unrealized gains on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  3,326,806 
  - 
  - 
  - 
  3,326,806 
Balance, March 31, 2019
  - 
 $- 
  11,796,188 
 $117,962 
 $67,957,604 
 $442,493 
 $17,969,664 
  1,027,439 
 $(2,712,552)
 $83,775,171 
 
 
 Preferred Stock
 Common Stock
 
 
 
Accumulated Other
 
 
 
 Treasury Stock
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
Capital in
Excess of Par
Comprehensive
Income (Loss)
Retained
Earnings
 
 Shares
 
 
 Amount
 
 
 Total
 
Balance, January 1, 2020
  - 
 $- 
  11,824,889 
 $118,248 
 $69,133,918 
 $4,768,870 
 $16,913,097 
  1,027,439 
 $(2,712,552)
 $88,221,581 
Stock-based compensation
  - 
  - 
  - 
  - 
  487,450 
  - 
  - 
  - 
  - 
  487,450 
Vesting of restricted stock awards
  - 
  - 
  38,866 
  387 
  (387)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
  - 
  - 
  (12,489)
  (123)
  (87,831)
  - 
  - 
  - 
  - 
  (87,954)
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  42,434 
  (242,724)
  (242,724)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (675,960)
  - 
  - 
  (675,960)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (5,444,203)
  - 
  - 
  (5,444,203)
Change in unrealized losses on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  (5,395,471)
  - 
  - 
  - 
  (5,395,471)
Balance, March 31, 2020
  - 
 $- 
  11,851,266 
 $118,512 
 $69,533,150 
 $(626,601)
 $10,792,934 
  1,069,873 
 $(2,955,276)
 $76,862,719 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31,
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net loss
 $(5,444,203)
 $(7,335,190)
 Adjustments to reconcile net loss to net cash flows provided
by (used in) operating activities:
    
    
 Net (gains) losses on sale of investments
  (274,581)
  25,192 
 Net unrealized losses (gains) of equity investments
  6,121,608 
  (1,767,835)
 Net unrealized losses (gains) of other investments
  597,391 
  (292,720)
 Depreciation and amortization
  687,094 
  602,332 
 Bad debts
  35,737 
  36,824 
 Amortization of bond premium, net
  105,189 
  118,568 
 Amortization of discount and issuance costs on long-term debt
  44,045 
  44,045 
 Stock-based compensation
  487,450 
  309,882 
 Deferred income tax expense
  397,593 
  510,533 
 (Increase) decrease in operating assets:
    
    
 Premiums receivable, net
  757,551 
  (286,973)
 Reinsurance receivables, net
  (1,958,517)
  209,478 
 Deferred policy acquisition costs
  1,062,490 
  (246,544)
 Other assets
  (521,521)
  (3,666,830)
 Increase (decrease) in operating liabilities:
    
    
 Loss and loss adjustment expense reserves
  (2,647,512)
  12,913,165 
 Unearned premiums
  (5,904,700)
  627,872 
 Advance premiums
  (47,633)
  956,784 
 Reinsurance balances payable
  (6,377,437)
  (731,445)
 Deferred ceding commission revenue
  (799,997)
  58,710 
 Accounts payable, accrued expenses and other liabilities
  (1,576,461)
  616,556 
 Net cash flows (used in) provided by operating activities
  (15,256,414)
  2,702,404 
 
    
    
 Cash flows from investing activities:
    
    
 Purchase - fixed-maturity securities available-for-sale
  (961,000)
  (6,094,835)
 Purchase - equity securities
  (5,220,778)
  (1,604,615)
 Sale and redemption - fixed-maturity securities held-to-maturity
  - 
  400,000 
 Sale or maturity - fixed-maturity securities available-for-sale
  10,553,818 
  1,505,382 
 Sale - equity securities
  5,518,428 
  246,047 
 Acquisition of property and equipment
  (432,112)
  (1,048,604)
 Other investing activities
  - 
  (287,733)
 Net cash flows provided by (used in) investing activities
  9,458,356 
  (6,884,358)
 
    
    
 Cash flows from financing activities:
    
    
 Withholding taxes paid on vested retricted stock awards
  (87,954)
  (116,007)
 Purchase of treasury stock
  (242,724)
  - 
 Dividends paid
  (675,960)
  (1,075,962)
 Net cash flows used in financing activities
  (1,006,638)
  (1,191,969)
 
    
    
 Decrease in cash and cash equivalents
 $(6,804,696)
 $(5,373,923)
 Cash and cash equivalents, beginning of period
  32,391,485 
  21,138,403 
 Cash and cash equivalents, end of period
 $25,586,789 
 $15,764,480 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $- 
 $- 
 Cash paid for interest
 $- 
 $- 
 
See accompanying notes to condensed consolidated financial statements.
 
 
5
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Nature of Business and Basis of Presentation
 
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned subsidiary, Kingstone Insurance Company (“KICO”), underwrites property and casualty insurance exclusively through retail and wholesale agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine and New Hampshire. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts, and Connecticut. Although New Jersey, Rhode Island, Massachusetts and Connecticut continue to be growing markets for the Company, 82.7% and 91.4% of KICO’s direct written premiums for the three months ended March 31, 2020 and 2019, respectively, came from the New York policies. Kingstone, through its wholly owned subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, accesses alternate forms of distribution outside of the independent agent and broker network, through which KICO currently distributes its various products. Kingstone (through Cosi) now has the opportunity to partner with name-brand carriers and access nationwide insurance agencies.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the three months ended March 31, 2020 may not be indicative of the results that may be expected for the year ending December 31, 2020.
 
Note 2 – Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, which include the reserves for losses and loss adjustment expenses, and are subject to estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by management. On an ongoing basis, management reevaluates its assumptions and the methods for calculating these estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.
 
 
6
 
 
Principles of Consolidation
 
The accompanying condensed consolidated financial statements consist of Kingstone and its following wholly owned subsidiaries: (1) KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates, and (2) Cosi. All significant intercompany account balances and transactions have been eliminated in consolidation.
 
Accounting Changes
 
The Company has determined that it was not subject to any new accounting pronouncements that became effective during the three months ended March 31, 2020.
 
Accounting Pronouncements
 
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The revised accounting guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2023. The Company is currently evaluating the effect the updated guidance will have on its condensed consolidated financial statements.
 
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate. Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.
 
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
 
 
7
 
 
Note 3 - Investments 
 
Fixed-Maturity Securities
 
The amortized cost, estimated fair value, and unrealized gains and losses of investments in fixed-maturity securities classified as available-for-sale as of March 31, 2020 and December 31, 2019 are summarized as follows:
 
 
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
 Unrealized
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Gains/
 
Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and  obligations of U.S. government corporations and agencies
 $5,033,879 
 $102,361 
 $- 
 $- 
 $5,136,240 
 $102,361 

    
    
    
    
    
    
 Political subdivisions of States, Territories and Possessions
  9,139,221 
  275,738 
  - 
  - 
  9,414,959 
  275,738 

    
    
    
    
    
    
Corporate and other bonds Industrial and miscellaneous
  112,871,652 
  2,876,429 
  (2,258,459)
  - 
  113,489,622 
  617,970 

    
    
    
    
    
    
 Residential mortgage and other asset backed securities (1)
  25,631,027 
  292,497 
  (938,478)
  (1,145,973)
  23,839,073 
  (1,791,954)
 Total
 $152,675,779 
 $3,547,025 
 $(3,196,937)
 $(1,145,973)
 $151,879,894 
 $(795,885)
 
(1)
KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of March 31, 2020, the estimated fair value of the eligible investments was approximately $7,287,000. KICO will retain all rights regarding all securities if pledged as collateral. As of March 31, 2020, there was no outstanding balance on the FHLBNY credit line.
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
 Unrealized
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Gains/
 
Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities and obligations of U.S. government corporations and agencies
 $7,037,856 
 $23,244 
 $- 
 $- 
 $7,061,100 
 $23,244 
 
    
    
    
    
    
    
Political subdivisions of States, Territories and Possessions
  9,151,293 
  181,835 
  (11,316)
  - 
  9,321,812 
  170,519 
 
    
    
    
    
    
    
Corporate and other bonds Industrial and miscellaneous
  119,874,573 
  5,777,624 
  (16,685)
  (13,473)
  125,622,039 
  5,747,466 
 
    
    
    
    
    
    
Residential mortgage and other asset backed securities (1)
  26,138,633 
  437,841 
  (68,793)
  (276,451)
  26,231,230 
  92,597 
Total
 $162,202,355 
 $6,420,544 
 $(96,794)
 $(289,924)
 $168,236,181 
 $6,033,826 
 
(1)
KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the FHLBNY (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2019, the estimated fair value of the eligible investments was approximately $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.
 
 
8
 
 
A summary of the amortized cost and estimated fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of March 31, 2020 and December 31, 2019 is shown below:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $12,900,401 
 $12,937,879 
 $11,986,401 
 $12,025,804 
 One to five years
  44,309,018 
  44,695,085 
  49,715,422 
  51,000,025 
 Five to ten years
  65,324,015 
  66,293,522 
  69,850,104 
  74,410,275 
 More than 10 years
  4,511,318 
  4,114,335 
  4,511,795 
  4,568,847 
 Residential mortgage and other asset backed securities
  25,631,027 
  23,839,073 
  26,138,633 
  26,231,230 
 Total
 $152,675,779 
 $151,879,894 
 $162,202,355 
 $168,236,181 
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
Equity Securities
 
The cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of March 31, 2020 and December 31, 2019 are as follows:
 
 
 
March 31, 2020
 
 
 
 
 
 
Gross
 
 
Gross
 
 
 
 
  
 
 
 
 
 Unrealized
 
 
 Unrealized
 
 
 Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $7,535,068 
 $7,870 
 $(1,113,367)
 $6,429,571 
 Common stocks, mutual funds, and exchange traded funds
  14,894,969 
  137,242 
  (3,092,889)
  11,939,322 
 Total
 $22,430,037 
 $145,112 
 $(4,206,256)
 $18,368,893 
 
 
 
December 31, 2019
 
  
 
 
 
 
 Gross
 
 
 Gross
 
 
 
 
 
 
 
 
 Unrealized
 
 
 Unrealized
 
 
Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $8,374,424 
 $339,257 
 $(11,794)
 $8,701,887 
 Common stocks, mutual funds, and exchange traded funds
  14,250,244 
  1,982,878 
  (273,627)
  15,959,495 
 Total
 $22,624,668 
 $2,322,135 
 $(285,421)
 $24,661,382 
 
 
9
 
 
Other Investments
 
The cost and estimated fair value of, and gross unrealized gains and losses, on the Company’s other investments as of March 31, 2020 and December 31, 2019 are as follows:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
 
 
 
 Gross
 
 
 
 
 
 
 
 
 Gross
 
 
 
 
 
 
 
 
 
 Unrealized
 
 
 Estimated
 
 
 
 
 
 Unrealized
 
 
 Estimated
 
 Category
 
 Cost
 
 
 Losses
 
 
 Fair Value
 
 
 Cost
 
 
 Gains
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Hedge fund
 $1,999,381 
 $(11,859)
 $1,987,522 
 $1,999,381 
 $585,532 
 $2,584,913 
 Total
 $1,999,381 
 $(11,859)
 $1,987,522 
 $1,999,381 
 $585,532 
 $2,584,913 
 
Held-to-Maturity Securities
 
The cost or amortized cost and estimated fair value of, and unrealized gross gains and losses, on investments in held-to-maturity fixed-maturity securities as of March 31, 2020 and December 31, 2019 are summarized as follows:
 
 
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
 Net
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Held-to-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,561 
 $162,483 
 $- 
 $- 
 $892,044 
 $162,483 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,573 
  43,857 
  - 
  - 
  1,042,430 
  43,857 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  2,098,270 
  106,196 
  (2,230)
  - 
  2,202,236 
  103,966 
 
    
    
    
    
    
    
 Total
 $3,826,404 
 $312,536 
 $(2,230)
 $- 
 $4,136,710 
 $310,306 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
 Net
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Held-to-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,550 
 $151,002 
 $- 
 $- 
 $880,552 
 $151,002 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,619 
  51,021 
  - 
  - 
  1,049,640 
  51,021 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  2,097,783 
  97,627 
  (835)
  - 
  2,194,575 
  96,792 
 
    
    
    
    
    
    
 Total
 $3,825,952 
 $299,650 
 $(835)
 $- 
 $4,124,767 
 $298,815 
 
 
10
 
 
Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum funds requirements.
 
A summary of the amortized cost and estimated fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2020 and December 31, 2019 is shown below:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $500,000 
 $497,770 
 $500,000 
 $499,165 
 One to five years
  2,099,588 
  2,220,096 
  2,099,268 
  2,215,640 
 Five to ten years
  620,255 
  664,805 
  620,134 
  655,923 
 More than 10 years
  606,561 
  754,039 
  606,550 
  754,039 
 Total
 $3,826,404 
 $4,136,710 
 $3,825,952 
 $4,124,767 
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
Investment Income
 
Major categories of the Company’s net investment income are summarized as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2020
 
 
 2019
 
 
 
 
 
 
 
 
 Income:
 
 
 
 
 
 
 Fixed-maturity securities
 $1,447,938 
 $1,526,870 
 Equity securities
  253,073 
  207,144 
 Cash and cash equivalents
  44,223 
  40,401 
 Total
  1,745,234 
  1,774,415 
 Expenses:
    
    
 Investment expenses
  79,390 
  150,703 
 Net investment income
 $1,665,844 
 $1,623,712 
 
Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity were $-0- and $400,000 for the three months ended March 31, 2020 and 2019, respectively.
 
Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $10,553,818 and $1,505,382 for the three months ended March 31, 2020 and 2019, respectively.
 
Proceeds from the sale of equity securities were $5,518,428 and $246,047 for the three months ended March 31, 2020 and 2019, respectively.
 
 
11
 
 
The Company’s net (losses) gains on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2020
 
 
 2019
 
 Realized Gains (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities:
 
 
 
 
 
 
 Gross realized gains
 $204,225 
 $6,002 
 Gross realized losses
  (32,342)
  (28,433)
 
  171,883 
  (22,431)
 
    
    
 Equity securities:
    
    
 Gross realized gains
  316,513 
  3,200 
 Gross realized losses
  (213,815)
  (5,961)
 
  102,698 
  (2,761)
 
    
    
 Net realized gains (losses)
  274,581 
  (25,192)
 
    
    
 Unrealized (Losses) Gains
    
    
 
    
    
 Equity securities:
    
    
 Gross gains
  - 
  1,767,835 
 Gross losses
  (6,121,608)
  - 
 
  (6,121,608)
  1,767,835 
 
    
    
 Other investments:
    
    
 Gross gains
  - 
  292,720 
 Gross losses
  (597,391)
  - 
 
  (597,391)
  292,720 
 
    
    
 Net unrealized (losses) gains
  (6,718,999)
  2,060,555 
 
    
    
 Net (losses) gains on investments
 $(6,444,418)
 $2,035,363 
 
Impairment Review
 
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities to evaluate the necessity of recording impairment losses for other-than-temporary declines in the estimated fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in comprehensive loss.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.  For held-to-maturity debt securities, the amount of OTTI recorded in comprehensive loss for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security.
 
OTTI losses are recorded in the condensed consolidated statements of operations and comprehensive loss as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At March 31, 2020 and December 31, 2019, there were 80 and 39 fixed-maturity securities, respectively, that accounted for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of investments for the three months ended March 31, 2020 and 2019. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery of estimated fair value to the Company’s cost basis.
 
12
 
 
The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at March 31, 2020 as follows:
 
 
 
  March 31, 2020
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $- 
 $- 
  - 
 $- 
 $- 
  - 
 $- 
 $- 
 
    
    
    
    
    
    
    
    
 Political subdivisions of
    
    
    
    
    
    
    
    
 States, Territories and
    
    
    
    
    
    
    
    
 Possessions
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  35,409,999 
  (2,258,459)
  50 
  - 
  - 
  - 
  35,409,999 
  (2,258,459)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  6,067,674 
  (938,478)
  13 
  10,286,307 
  (1,145,973)
  17 
  16,353,981 
  (2,084,451)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $41,477,673 
 $(3,196,937)
  63 
 $10,286,307 
 $(1,145,973)
  17 
 $51,763,980 
 $(4,342,910)
 
 
13
 
 
The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2019 as follows:
 
 
 
  December 31, 2019
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $- 
 $- 
  - 
 $- 
 $- 
  - 
 $- 
 $- 
 
    
    
    
    
    
    
    
    
 Political subdivisions of
    
    
    
    
    
    
    
    
 States, Territories and
    
    
    
    
    
    
    
    
 Possessions
  3,067,428 
  (11,316)
  3 
  - 
  - 
  - 
  3,067,428 
  (11,316)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  3,730,478 
  (16,685)
  7 
  1,300,915 
  (13,473)
  3 
  5,031,393 
  (30,158)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  5,862,636 
  (68,793)
  5 
  13,534,768 
  (276,451)
  21 
  19,397,404 
  (345,244)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $12,660,542 
 $(96,794)
  15 
 $14,835,683 
 $(289,924)
  24 
 $27,496,225 
 $(386,718)
 
 
14
 
 
Note 4 - Fair Value Measurements
 
The following table presents information about the Company’s investments that are measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 indicating the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
 
 
 
March 31, 2020
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 Fixed-maturity securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $5,136,240 
 $- 
 $- 
 $5,136,240 
 
    
    
    
    
 Political subdivisions of
    
    
    
    
 States, Territories and
    
    
    
    
 Possessions
  - 
  9,414,959 
  - 
  9,414,959 
 
    
    
    
    
 Corporate and other
    
    
    
    
 bonds industrial and
    
    
    
    
 miscellaneous
  111,099,020 
  2,390,602 
  - 
  113,489,622 
 
    
    
    
    
 Residential mortgage backed securities
  - 
  23,839,073 
  - 
  23,839,073 
 Total fixed maturities
  116,235,260 
  35,644,634 
  - 
  151,879,894 
 Equity securities
  18,368,893 
  - 
  - 
  18,368,893 
 Total investments
 $134,604,153 
 $35,644,634 
 $- 
 $170,248,787 
 
 
 
 
December 31, 2019
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 Fixed-maturity securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $7,061,100 
 $- 
 $- 
 $7,061,100 
 
    
    
    
    
 Political subdivisions of
    
    
    
    
 States, Territories and
    
    
    
    
 Possessions
  - 
  9,321,812 
  - 
  9,321,812 
 
    
    
    
    
 Corporate and other
    
    
    
    
 bonds industrial and
    
    
    
    
 miscellaneous
  123,010,772 
  2,611,267 
  - 
  125,622,039 
 
    
    
    
    
 Residential mortgage backed securities
  - 
  26,231,230 
  - 
  26,231,230 
 Total fixed maturities
  130,071,872 
  38,164,309 
  - 
  168,236,181 
 Equity securities
  24,661,382 
  - 
  - 
  24,661,382 
 Total investments
 $154,733,254 
 $38,164,309 
 $- 
 $192,897,563 
 
 
15
 
 
The following table sets forth the Company’s investment in a hedge fund measured at Net Asset Value (“NAV”) per share as of March 31, 2020 and December 31, 2019. The Company measures this investment at fair value on a recurring basis. Fair value using NAV per share is as follows as of the dates indicated:
 
Category
 
March 31,
2020
 
 
December 31,
2019
 
 
 
 
 
 
 
 
 Other Investments:
 
 
 
 
 
 
 Hedge fund
 $1,987,522 
 $2,584,913 
 Total
 $1,987,522 
 $2,584,913 
 
The investment is generally redeemable with at least 45 days prior written notice. The hedge fund investment is accounted for as a limited partnership by the Company. Income is earned based upon the Company’s allocated share of the partnership's changes in unrealized gains and losses to its partners. Such amounts have been recorded in the condensed consolidated statements of operations and comprehensive loss within net gains (losses) on investments.
 
The estimated fair value and the level of the fair value hierarchy of the Company’s long-term debt as of March 31, 2020 and December 31, 2019 not measured at fair value is as follows:
 
 
 
March 31, 2020
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Senior Notes due 2022
 $- 
 $27,281,870 
 $- 
 $27,281,870 
 
 
 
December 31, 2019
 
 
 
 Level 1
 
 
 Level 2
 
 
 Level 3
 
 
 Total
 
 Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Senior Notes due 2022
 $- 
 $27,313,994 
 $- 
 $27,313,994 
 
Note 5 - Fair Value of Financial Instruments and Real Estate
 
The estimated fair values of the Company’s financial instruments and real estate as of March 31, 2020 and December 31, 2019 are as follows:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
Carrying
 
 
Estimated
 
 
Carrying
 
 
Estimated
 
 
 
Value
 
 
Fair Value
 
 
Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities-held-to maturity
 $3,826,404 
 $4,136,710 
 $3,825,952 
 $4,124,767 
 Cash and cash equivalents
 $25,586,789 
 $25,586,789 
 $32,391,485 
 $32,391,485 
 Premiums receivable, net
 $11,913,123 
 $11,913,123 
 $12,706,411 
 $12,706,411 
 Reinsurance receivables, net
 $42,709,055 
 $42,709,055 
 $40,750,538 
 $40,750,538 
 Real estate, net of accumulated depreciation
 $2,275,307 
 $2,705,000 
 $2,292,743 
 $2,705,000 
 Reinsurance balances payable
 $5,337,287 
 $5,337,287 
 $11,714,724 
 $11,714,724 
 
 
 
16
 
 
Note 6 – Property and Casualty Insurance Activity
 
Premiums Earned
 
Premiums written, ceded and earned are as follows:
 
 
 
 Direct
 
 
 Assumed
 
 
 Ceded
 
 
 Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 Premiums written
 $36,696,929 
 $- 
 $(13,506,255)
 $23,190,674 
 Change in unearned premiums
  5,904,700 
  - 
  (2,153,924)
  3,750,776 
 Premiums earned
 $42,601,629 
 $- 
 $(15,660,179)
 $26,941,450 
 
    
    
    
    
Three months ended March 31, 2019
    
    
    
    
 Premiums written
 $37,488,548 
 $(34)
 $(7,127,909)
 $30,360,605 
 Change in unearned premiums
  (628,067)
  195 
  (136,844)
  (764,716)
 Premiums earned
 $36,860,481 
 $161 
 $(7,264,753)
 $29,595,889 
 
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of March 31, 2020 and December 31, 2019 was $3,143,879 and $3,191,512, respectively.
 
Loss and Loss Adjustment Expense Reserves
 
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expense (“LAE”) reserves:
 
 
 Three months ended
 
 
 
March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Balance at beginning of period
 $80,498,611 
 $56,197,106 
 Less reinsurance recoverables
  (15,728,224)
  (15,671,247)
 Net balance, beginning of period
  64,770,387 
  40,525,859 
 
    
    
 Incurred related to:
    
    
 Current year
  16,512,475 
  24,655,975 
 Prior years
  (126,654)
  4,478,249 
 Total incurred
  16,385,821 
  29,134,224 
 
    
    
 Paid related to:
    
    
 Current year
  5,787,129 
  7,731,086 
 Prior years
  13,777,236 
  8,405,440 
 Total paid
  19,564,365 
  16,136,526 
  
    
    
 Net balance at end of period
  61,591,843 
  53,523,557 
 Add reinsurance recoverables
  16,259,256 
  15,586,714 
 Balance at end of period
 $77,851,099 
 $69,110,271 
 
 
17
 
 
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $5,866,897 and $3,135,894 for the three months ended March 31, 2020 and 2019, respectively.
 
Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the three months ended March 31, 2020 and 2019 was $126,654 favorable and $4,478,249 unfavorable, respectively. During the three months ended March 31, 2019, the Company increased case reserves for certain older open liability claims, which primarily affected the ultimate loss projections for commercial lines business. This was in response to  management’s detailed review of open liability claims that resulted in new assessments of carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.
 
Loss and LAE reserves
 
The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known including losses that have occurred but that have not yet been reported. The process relies on standard actuarial reserving methodologies, judgments relative to estimates of ultimate claim severity and frequency, the length of time before losses will develop to their ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors that are beyond the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of the best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE reserves for individual reported claims (the “case reserve”) is determined by the claims department and changes over time as new information is gathered. Such information is critical to the review of appropriate IBNR reserves and includes a review of coverage applicability, comparative liability on the part of the insured, injury severity, property damage, replacement cost estimates, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims and development on known claims (IBNR reserves) are determined using historical information aggregated by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.
 
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a quarterly basis, the Company reviews by line of business existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior periods. Several methods are used, varying by line of business and accident year, in order to select the estimated period-end loss reserves. These methods include the following:
 
Paid Loss Development – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.
 
Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.
 
 
18
 
 
Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.
 
Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.
 
Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed and assumptions are made regarding average loss and LAE development applied to remaining claims inventory. Such methods more properly reflect changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development. These methods may provide a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has occurred.
 
Frequency / Severity Based Methods – historical measurements of claim frequency and average paid claim size (severity) are reviewed for more mature accident years where a majority of claims have been reported and/or closed. These historical averages are trended forward to more recent periods in order to estimate ultimate losses for newer accident years that are not yet fully developed. These methods are useful for lines of business with slow and/or volatile loss development patterns, such as liability lines where information pertaining to individual cases may not be completely known for many years. The claim frequency and severity information for older periods can then be used as reasonable measures for developing a range of estimates for more recent immature periods.
 
Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.
 
Three key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods, the loss development factor selections used in the loss development methods, and the loss severity assumptions used in the frequency / severity method described above. The loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business. The severity assumptions used in the frequency / severity method are determined by reviewing historical average claim severity for older more mature accident periods, trended forward to less mature accident periods.
 
The Company is not aware of any claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.
 
In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (“pure” IBNR) for accident dates of March 31, 2017 and prior is limited, although there remains the possibility of adverse development on reported claims (“case development” IBNR). In certain rare circumstances states have retroactively revised a statute of limitations. The Company is not aware of any such effort that would have a material impact on the Company’s results.
 
The following is information about incurred and paid claims development as of March 31, 2020, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of March 31, 2020 included in the net incurred loss and allocated expense amounts. The historical information regarding incurred and paid claims development for the years ended December 31, 2011 to December 31, 2019 is presented as supplementary unaudited information.
  
 
19
 
  
All Lines of Business
(in thousands, except reported claims data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
March 31, 2020
 
 
 
For the Years Ended December 31,
 
 
For the three months ended
 
 
 
 
Cumulative Number of Reported Claims by
 
Accident Year
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
March 31,
2020
 
 
 IBNR
 
 
 Accident
Year
 
 
 
(Unaudited 2011 - 2019)
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 $7,603 
 $7,678 
 $8,618 
 $9,440 
 $9,198 
 $9,066 
 $9,144 
 $9,171 
 $9,127 
 $9,128 
 $(1)
  1,914 
2012
    
  9,539 
  9,344 
  10,278 
  10,382 
  10,582 
  10,790 
  10,791 
  11,015 
  10,792 
  87 
  4,704 
2013
    
    
  10,728 
  9,745 
  9,424 
  9,621 
  10,061 
  10,089 
  10,607 
  10,607 
  (12)
  1,561(1) 
2014
    
    
    
  14,193 
  14,260 
  14,218 
  14,564 
  15,023 
  16,381 
  16,376 
  289 
  2,136 
2015
    
    
    
    
  22,340 
  21,994 
  22,148 
  22,491 
  23,386 
  23,042 
  154 
  2,555 
2016
    
    
    
    
    
  26,062 
  24,941 
  24,789 
  27,887 
  27,961 
  538 
  2,877 
2017
    
    
    
    
    
    
  31,605 
  32,169 
  35,304 
  35,873 
  631 
  3,380 
2018
    
    
    
    
    
    
    
  54,455 
  56,351 
  58,073 
  2,391 
  4,188 
2019
    
    
    
    
    
    
    
    
  75,092 
  73,173 
  12,027 
  4,365 
2020
    
    
    
    
    
    
    
    
    
  15,760 
  6,202 
  731 
 
    
    
    
    
    
    
    
    
 
 Total
 
 $280,784 
    
    
 
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.
 
All Lines of Business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
        
 
 
For the three
 
 
 
 
 
         For the Years Ended December 31,
 
 
  months ended
 
 
 
Accident Year
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
  March 31, 2020
 
 
 
 
    (Unaudited 2011 - 2019) 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 $3,740 
 $5,117 
 $6,228 
 $7,170 
 $8,139 
 $8,540 
 $8,702 
 $8,727 
 $8,789 
 $8,991 
 
 
2012
    
  3,950 
  5,770 
  7,127 
  8,196 
  9,187 
  10,236 
  10,323 
  10,428 
  10,442 
 
 
2013
    
    
  3,405 
  5,303 
  6,633 
  7,591 
  8,407 
  9,056 
  9,717 
  9,728 
 
 
2014
    
    
    
  5,710 
  9,429 
  10,738 
  11,770 
  13,819 
  14,901 
  15,150 
 
 
2015
    
    
    
    
  12,295 
  16,181 
  18,266 
  19,984 
  21,067 
  21,448 
 
 
2016
    
    
    
    
    
  15,364 
  19,001 
  21,106 
  23,974 
  24,371 
 
 
2017
    
    
    
    
    
    
  16,704 
  24,820 
  28,693 
  28,969 
 
 
2018
    
    
    
    
    
    
    
  32,383 
  44,516 
  46,178 
 
 
2019
    
    
    
    
    
    
    
    
  40,933 
  50,983 
 
 
2020
    
    
    
    
    
    
    
    
    
  5,469 
 
 
 
    
    
    
    
    
    
    
    
 
Total
 
 $221,729 
 
 
 
    
    
    
    
    
    
    
    
    
    
 
 
 
  Net liability for upaid loss and allocated loss adjustment expenses for the accident years presented
 59,055 
 
 
 
All outstanding liabilities before 2011, net of reinsurance 
  100 
 
 
 
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance 
 $  59,154 
 
 
 
Reported claim counts are measured on an occurrence or per event basis.  A single claim occurrence could result in more than one loss type or claimant; however, the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved.
 
 
20
 
 
The reconciliation of the net incurred and paid loss development tables to the loss and LAE reserves in the consolidated balance sheet is as follows:
 
 
 
As of
 
(in thousands)
 
March 31,
2020
 
Liabilities for loss and loss adjustment expenses, net of reinsurance
 $59,154 
Total reinsurance recoverable on unpaid losses
  16,259 
Unallocated loss adjustment expenses
  2,437 
Total gross liability for loss and LAE reserves
 $77,851 
 
Reinsurance
 
Through June 30, 2019, the Company’s quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ policies, covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). The Company’s quota share reinsurance treaties in effect during the three months ended March 31, 2019 for its personal lines business were covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during the three months ended March 31, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).
 
Effective July 1, 2019, the 2017/2019 Treaty and the commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. The Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2019. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:
 
 
 
 Treaty Year
 
 
 
December 15, 2019
 
 
July 1, 2019
 
 
July 1, 2018
 
 
 
to
 
 
to
 
 
to
 
 Line of Business
 
December 31, 2020
 
 
December 14, 2019
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
Homeowners, dwelling fire and
    
    
    
and canine legal liability
    
    
    
 Quota share treaty:
    
    
    
 Percent ceded
  25% 
 
None
 
  10% 
 
 
 
Treaty Year
 
 Line of Business
 
December 15, 2019
to
June 30, 2020
 
 
July 1, 2019
to
December 14, 2019
 
 
July 1,  2018
to
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
Homeowners, dwelling fire and
 
 
 
 
 
 
 
 
 
and canine legal liability
 
 
 
 
 
 
 
 
 
 Quota share treaty:
 
 
 
 
 
 
 
 
 
 Risk retained on intial $1,000,000
 
 
 
 
 
 
 
 
 
 of losses
 $750,000 
 $1,000,000 
 $900,000 
 Losses per occurrence subject to
    
    
    
 quota share reinsurance coverage
 $1,000,000 
  None  
 $1,000,000 
 Excess of loss coverage and facultative
    
    
    
 facility coverage (1)
 $9,000,000 
 $9,000,000 
 $9,000,000 
 
  in excess of  
  in excess of 
  in excess of 
 
 $1,000,000 
 $1,000,000 
 $1,000,000 
 Total reinsurance coverage per occurrence
 $9,250,000 
 $9,000,000 
 $9,100,000 
 Losses per occurrence subject to
    
    
    
 reinsurance coverage
 $10,000,000 
 $10,000,000 
 $10,000,000 
 Expiration date
  June 30, 2020  
  June 30, 2020 
  June 30, 2020 
 
    
    
    
Catastrophe Reinsurance:
    
    
    
 Initial loss subject to personal lines
    
    
    
 quota share treaty
 $7,500,000 
  None 
 $5,000,000 
 Risk retained per catastrophe
    
    
    
 occurrence (2)
 $5,625,000 
 $7,500,000 
 $4,500,000 
 Catastrophe loss coverage in excess of
    
    
    
 quota share coverage (3)
 $602,500,000 
 $602,500,000 
 $445,000,000 
 Reinstatement premium
    
    
    
 protection (4) (5)
  Yes 
  Yes 
  Yes 
 
(1)
For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.
(2)
Plus losses in excess of catastrophe coverage.
(3)
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.
(4)
Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
(5)
Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.
 
 
21
 
 
 
 
 Treaty Year    
 
 
 
July 1, 2019
 
 
July 1, 2018
 
 
 
to
 
 
to
 
 Line of Business
 
June 30, 2020
 
 
June 30, 2019
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Personal Umbrella
 
 
 
 
 
 
 Quota share treaty:
 
 
 
 
 
 
 Percent ceded - first $1,000,000 of coverage
  90%
  90%
 Percent ceded - excess of $1,000,000 dollars of coverage
  100%
  100%
 Risk retained
 $100,000 
 $100,000 
 Total reinsurance coverage per occurrence
 $4,900,000 
 $4,900,000 
 Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
 $5,000,000 
 Expiration date
    June 30, 2020 
    June 30, 2019
 
    
    
Commercial Lines:
    
    
 General liability commercial policies
    
    
 Quota share treaty
  None 
  None 
 Risk retained
 $750,000 
 $750,000 
 Excess of loss coverage above risk retained
 $3,750,000 
 $3,750,000 
 
  in excess of 
  in excess of 
 
 $750,000 
 $750,000 
 Total reinsurance coverage per occurrence
 $3,750,000 
 $3,750,000 
 Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 
    
    
 Commercial Umbrella
    
    
 Quota share treaty:
  None  
    
 Percent ceded - first $1,000,000 of coverage
    
  90%
 Percent ceded - excess of $1,000,000 of coverage
    
  100%
 Risk retained
    
 $100,000 
 Total reinsurance coverage per occurrence
    
 $4,900,000 
 Losses per occurrence subject to quota share reinsurance coverage
    
 $5,000,000 
 Expiration date
    
    June 30, 2019
 
The Company’s reinsurance program has been structured to enable the Company to grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not relieve the Company of its obligations to policyholders.
 
Ceding Commission Revenue
 
The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.
 
The Company’s estimated ultimate treaty year loss ratios (the “Loss Ratio(s)”) for treaties in effect during the three months ended March 31, 2020 are attributable to contracts under the 2019/2020 Treaty. The Loss Ratios for treaties in effect for the three months ended March 31, 2019 are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was not renewed.
 
 
22
 
 
Under the 2019/2020 Treaty and the 2017/2019 Treaty for the 2018/2019 Treaty Year, the Company received an upfront fixed provisional rate that is not subject to a sliding scale contingent adjustment. In addition to the treaties that were in effect during the three months ended March 31, 2020 and 2019, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.
 
Ceding commission revenue consists of the following:
 
 
 
 Three months ended
 
 
 
March 31,
 
 
 
 2020
 
 
 2019
 
 
 
 
 
 
 
 
 Provisional ceding commissions earned
 $3,720,360 
 $1,317,751 
 Contingent ceding commissions earned
  110,739 
  (40,068)
 
 $3,831,099 
 $1,277,683 
 
Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled annually based on the Loss Ratio of each treaty year that ends on June 30. As discussed above, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned. As of March 31, 2020 and December 31, 2019, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,775,000 and $2,886,000, respectively, which is recorded in reinsurance balances payable on the accompanying condensed consolidated balance sheets.
 
Note 7 – Debt
 
Federal Home Loan Bank
 
In July 2017, KICO became a member of, and invested in, the Federal Home Loan Bank of New York (“FHLBNY”). The aggregate fair value of the investment in dividend bearing common stock was $15,500 and $15,180 as of March 31, 2020 and December 31, 2019, respectively. FHLBNY members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized. Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within one year of borrowing. The maximum allowable advance as of March 31, 2020 was approximately $12,379,000. Advances are limited to 90% of the amount of available collateral, which was approximately $6,558,000 as of March 31, 2020. There were no borrowings under this facility during the three months ended March 31, 2020 and 2019.
 
 
23
 
 
Long-term Debt
 
On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December 30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50% per annum. The net proceeds of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an effective yield of 5.67% per annum. The balance of long-term debt as of March 31, 2020 and December 31, 2019 is as follows:
 
 
 
 March 31,
 
 
 December 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 5.50% Senior Unsecured Notes
 $30,000,000 
 $30,000,000 
 Discount
  (89,244)
  (97,325)
 Issuance costs
  (395,280)
  (431,244)
 Long-term debt, net
 $29,515,476 
 $29,471,431 
 
The Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of the Company's subsidiaries. The Notes rank senior in right of payment to any of the Company's existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the Notes. The Notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, but will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes will be structurally subordinated to the indebtedness and other obligations of the Company's subsidiaries. The Company may redeem the Notes, at any time in whole or from time to time in part, at the redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed that would be due if the Notes matured on the applicable redemption date (exclusive of interest accrued to the applicable redemption date) discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points.
 
The Company has used an aggregate $28,256,335 of the net proceeds from the offering to contribute capital to KICO in order to support additional growth. The remainder of the net proceeds is being used for general corporate purposes. A registration statement relating to the debt issued in the offering was filed with the SEC, which became effective on November 28, 2017.
 
Note 8 – Stockholders’ Equity
 
Dividends Declared and Paid
 
Dividends declared and paid on Common Stock were $675,960 and $1,075,962 for the three months ended March 31, 2020 and 2019, respectively. The Company’s Board of Directors approved a quarterly dividend on May 6, 2020 of $.04 per share payable in cash on June 15, 2020 to stockholders of record as of May 29, 2020 (see Note 13 - Subsequent Events).
 
 
24
 
 
Stock Options
 
Effective August 12, 2014, the Company adopted the 2014 Equity Participation Plan (the “2014 Plan”) pursuant to which, a maximum of 700,000 shares of Common Stock of the Company are authorized to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and stock bonuses. Incentive stock options granted under the 2014 Plan expire no later than ten years from the date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Compensation Committee determines the expiration date with respect to non-statutory stock options and the vesting provisions for restricted stock granted under the 2014 Plan.
 
The results of operations for the three months ended March 31, 2020 and 2019 include stock-based compensation expense for stock options totaling approximately $17,000 and $1,000, respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of approximately 16% for the three months ended March 31 2020 and 2019. Such amounts have been included in the consolidated statements of operations and comprehensive loss within other operating expenses.
 
The weighted average estimated fair value of stock options granted during the three months ended March 31, 2020 was $1.66 per share. No options were granted during the three months ended March 31, 2019. The fair value of stock options at the grant date was estimated using the Black-Scholes option-pricing model.
 
The following weighted average assumptions were used for grants during the following periods:
 
 
  Three months ended,
 
 March 31,
 
 2020
 
 2019
 
 
 
 
Dividend Yield
3.14%
 
n/a
Volatility
37.69%
 
n/a
Risk-Free Interest Rate
1.40%
 
n/a
Expected Life
2.75 years
 
n/a
 
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
 
A summary of stock option activity under the Company’s 2014 Plan for the three months ended March 31, 2020 is as follows:
 
Stock Options
 
Number of Shares
 
 
 Weighted Average Exercise Price per Share
 
 
 Weighted Average Remaining Contractual Term
 
 
 Aggregate Intrinsic Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2020
  82,000 
 $8.61 
  3.38 
 $- 
 
    
    
    
    
Granted
  74,523 
 $7.96 
  4.84 
 $- 
Exercised
  - 
 $- 
  - 
 $- 
Forfeited
  - 
 $- 
  - 
 $- 
 
    
    
    
    
Outstanding at March 31, 2020
  156,523 
 $8.30 
  3.94 
 $- 
 
    
    
    
    
Vested and Exercisable at March 31, 2020
  50,000 
 $8.45 
  1.84 
 $- 
  
 
25
 
 
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2020 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Common Stock for the options that had exercise prices that were lower than the $5.11 closing price of the Company’s Common Stock on March 31, 2020. No options were exercised or forfeited during the three months ended March 31, 2020.
 
Participants in the 2014 Plan may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”), or by exchanging a number of shares owned for a period of greater than one year having a fair market value equal to the exercise price of the option being exercised (“Share Exchange”).
 
As of March 31, 2020, the estimated fair value of unamortized compensation cost related to unvested stock option awards was approximately $138,000. Unamortized compensation cost as of March 31, 2020 is expected to be recognized over a remaining weighted-average vesting period of 1.89 years.
 
As of March 31, 2020, there were 66,600 shares reserved for grants under the 2014 Plan.
 
Restricted Stock Awards
 
A summary of the restricted Common Stock activity under the Company’s 2014 Plan for the three months ended March 31, 2020 is as follows:
 
Restricted Stock Awards
 
Shares
 
 
 Weighted Average Grant Date Fair Value per Share
 
 
 Aggregate Fair Value
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2020
  213,929 
 $16.51 
 $3,554,174 
 
    
    
    
Granted
  199,812 
 $7.94 
 $1,586,507 
Vested
  (38,866)
 $18.90 
 $(734,467)
Forfeited
  (3,046)
 $15.15 
 $(46,135)
 
    
    
    
Balance at March 31, 2020
  371,829 
 $12.21 
 $4,360,079 
 
Fair value was calculated using the closing price of the Company’s Common Stock on the grant date. For the three months ended March 31, 2020 and 2019, stock-based compensation for these grants was approximately $472,000 and $309,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive loss. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be recognized by the directors, executives and employees.
 
 
26
 
 
Note 9 – Income Taxes
 
The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated or separate return basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the period when they are identified, generally when the tax returns are filed.  The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the consolidated financial statements taken as a whole for the respective periods.
 
Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the temporary differences are expected to be recovered. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheets reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at various rates depending on whether the temporary differences are subject to federal taxes, state taxes, or both.
 
Significant components of the Company’s deferred tax assets and liabilities are as follows:
 
 
 
 March 31,
 
 
 December 31,
 
 
 
 2020
 
 
 2019
 
 
 
 
 
 
 
 
 Deferred tax asset:
 
 
 
 
 
 
 Net operating loss carryovers (1)
 $70,381 
 $1,586,247 
 Claims reserve discount
  797,917 
  839,959 
 Unearned premium
  2,945,811 
  3,105,344 
 Deferred ceding commission revenue
  1,456,434 
  1,624,434 
 Other
  272,244 
  462,019 
 Total deferred tax assets
  5,542,787 
  7,618,003 
 
    
    
 Deferred tax liability:
    
    
 Investment in KICO (2)
  759,543 
  759,543 
 Deferred acquisition costs
  4,110,096 
  4,333,219 
 Intangibles
  105,000 
  105,000 
 Depreciation and amortization
  318,895 
  312,298 
 Net unrealized (losses) gains of securities - available-for-sale
  (1,098,446)
  1,796,891 
 Total deferred tax liabilities
  4,195,088 
  7,306,951 
 
    
    
 Net deferred income tax asset
 $1,347,699 
 $311,052 
 
(1)
The deferred tax assets from net operating loss carryovers (“NOL”) are as follows:
 
 
 
 March 31,
 
 
 December 31,
 
 
 Type of NOL
 
 2020
 
 
 2019
 
Expiration
 
 
 
 
 
 
 
 
 Federal only, current year
 $- 
 $1,517,866 
(A)
 
    
    
 
 State only (B)
  1,722,611 
  1,616,568 
December 31, 2040
 Valuation allowance
  (1,652,230)
  (1,548,187)
 
 State only, net of valuation allowance
  70,381 
  68,381 
 
 
    
    
 
 Total deferred tax asset from net operating loss carryovers
 $70,381 
 $1,586,247 
 
 
 
27
 
 
(A) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. The Company will elect on its 2019 federal income tax return to carry back the 2019 NOL to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.
 
(B) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of March 31, 2020 and December 31, 2019 was approximately $26,502,000 and $24,901,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the consolidated statements of operations and comprehensive loss within other underwriting expenses. Kingstone has recorded a valuation allowance due to the uncertainty of generating enough state taxable income to utilize 100% of the available state NOLs over their remaining lives, which expire between 2027 and 2040.
 
(2)
Deferred tax liability – Investment in KICO
 
On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition, the deferred tax liability on the Untaxed Interest was $1,169,000. A temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The deferred tax liability was reduced to $759,543 upon the reduction of federal income tax rates as of December 31, 2017. The Company is required to maintain its deferred tax liability of $759,543 related to this temporary difference until the stock of KICO is sold, or the assets of KICO are sold or KICO and the parent are merged.
 
In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. No valuation allowance against deferred tax assets has been established, except for NOL limitations, as the Company believes it is more likely than not the deferred tax assets will be realized based on the historical taxable income of KICO, or by offset to deferred tax liabilities.
 
The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the three months ended March 31, 2020 and 2019. If any had been recognized these would have been reported in income tax expense.
 
Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing. The Company’s tax returns for the years ended December 31, 2016 through December 31, 2019 remain subject to examination. The Company’s federal income tax return for the year ended December 31, 2016 has been examined by the Internal Revenue Service and was accepted as filed. 
 
 
28
 
 
Note 10 –Earnings/(Loss) Per Common Share
 
Basic net earnings/(loss) per common share is computed by dividing income/(loss) available to common shareholders by the weighted-average number of shares of Common Stock outstanding. Diluted earnings/(loss) per common share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options as well as non-vested restricted stock awards. The computation of diluted earnings/(loss) per common share excludes those options with an exercise price in excess of the average market price of the Company’s Common Stock during the periods presented.
 
The computation of diluted earnings/(loss) per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the three months March 31, 2020, no options were included in the computation of diluted earnings (loss) per common share as they would have been anti-dilutive for the relevant periods and, as a result, the weighted average number of shares of Common Stock used in the calculation of diluted earnings per common share has not been adjusted for the effect of such options.
 
 
 
The reconciliation of the weighted average number of shares of Common Stock used in the calculation of basic and diluted earnings (loss) per common share follows:
 
 
 
 Three months ended
 
 
 
 March 31,    
 
 
 
 2020
 
 
 2019
 
 
 
 
 
 
 
 
 Weighted average number of shares outstanding
  10,807,841 
  10,757,843 
 
    
    
 Effect of dilutive securities, common share equivalents:
    
    
 Stock options
  - 
  - 
 Restricted stock awards
  - 
  - 
 
    
    
 Weighted average number of shares outstanding,
    
    
 used for computing diluted earnings per share
  10,807,841 
  10,757,843 
 
Note 11 - Commitments and Contingencies
 
Litigation
 
From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim is asserted by a third party in a lawsuit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses.
 
On June 12, 2019, Phillip Woolgar filed a suit naming the Company and certain present or former officers and directors as defendants in a putative class action captioned Woolgar v. Kingstone Companies et al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  Plaintiff seeks to represent a class of persons or entities that purchased Kingstone securities between March 14, 2018, and April 29, 2019, and alleges violations of the federal securities law in connection with the Company’s April 29, 2019 announcement regarding losses related to winter catastrophe events.  The lawsuit alleges that the Company failed to disclose that it did not adequately follow industry best practices related to claims handling and thus did not record sufficient claim reserves, and that as a result, Defendants’ positive statements about the Company’s business, operations and prospects misled investors. Plaintiff seeks, among other things, an undetermined amount of money damages.  The Company believes the lawsuit to be without merit. The Company has not established an accrual for this matter as a loss is not considered to be probable and reasonably estimable. It is the opinion of management, after consulting legal counsel, that facts known at the present time do not indicate that such litigation will have a material adverse impact on the Company’s results of operations, financial position, or cash flows. On February 18, 2020, a motion to dismiss was filed with the court. On April 20, 2020, plaintiff filed an opposition to Company’s motion to dismiss.
 
 
29
 
 
Office Lease
 
The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.
 
The Company is a party to a non-cancellable operating lease, dated March 27, 2015, for its office facility for KICO located in Valley Stream, New York expiring March 31, 2024.
 
On July 8, 2019, the Company entered into a lease agreement for an additional office facility for Cosi located in Valley Stream, New York under a non-cancelable operating lease. In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments from real estate taxes and other charges. The lease has a term of seven years and two months expiring December 31, 2026.
 
Additional information regarding the Company’s office operating leases is as follows:
 
 
 Three months ended
 
 
 
 March 31,
 
Lease cost
 
2020
 
 
2019
 
 Operating leases
 $81,251 
 $41,342 
 Short-term leases
  - 
  - 
 Total lease cost (1)
 $81,251 
 $41,342 
 
    
    
Other information on operating leases
    
    
 
Cash payments included in the measurement of lease
 
    
liability reported in operating cash flows
 $82,736 
 $41,379 
Discount rate
  5.50%
  5.50%
Weighted average remaining lease term in years
  5.71 years 
  5 years 
(1)
Included in the condensed consolidated statements of operations and comprehensive loss within other underwriting expenses for KICO and within other operating expenses for Cosi.
 
The following table presents the contractual maturities of the Company’s lease liabilities as of March 31, 2020:
 
For the Year
 
 
 
 Ending
 
 
 
 December 31,
 
 Total
 
Remainder of 2020
 $102,691 
2021
  264,571 
2022
  273,831 
2023
  283,415 
2024
  140,739 
 Thereafter
  192,916 
 Total undiscounted lease payments
  1,348,314 
 Less: present value adjustment
  54,213 
 Operating lease liability
 $1,203,949 
 
Rent expense for the three months ended March 31, 2020 and 2019 amounted to $81,251 and $41,342, respectively. Rent expense is included in the accompanying condensed consolidated statements of operations and comprehensive loss within other underwriting expenses.
 
 
30
 
 
Employment Agreements
 
Barry Goldstein, President, Chief Executive Officer and Executive Chairman of the Board
 
On October 14, 2019, the Company and Barry B. Goldstein, the Company’s President, Chief Executive Officer and Executive Chairman of the Board, entered into a Second Amended and Restated Employment Agreement (the “Amended Employment Agreement”). The Amended Employment Agreement is effective as of January 1, 2020 and expires on December 31, 2022. The Amended Employment Agreement extends the expiration date of the employment agreement in effect for Mr. Goldstein from December 31, 2021 to December 31, 2022.
 
Pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 6% of the Company’s consolidated income from operations before taxes, exclusive of the Company’s consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 2.5 times his base salary. In addition, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a long-term compensation (“LTC”) award of between $945,000 and $2,835,000 based on a specified minimum increase in the Company’s adjusted book value per share (as defined in the Amended Employment Agreement) as of December 31, 2022 as compared to December 31, 2019 (with the maximum LTC payment being due if the average per annum increase is at least 14%). Further, pursuant to the Amended Employment Agreement, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason (each as defined in the Amended Employment Agreement), Mr. Goldstein would be entitled to receive his base salary, the 6% bonus and the LTC payment for the remainder of the term. In addition, in the event of Mr. Goldstein’s death, his estate would be entitled to receive his base salary, accrued bonus and accrued LTC payment through the date of death. Further, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason, or, in the event of the termination of Mr. Goldstein’s employment due to disability or death, Mr. Goldstein’s granted but unvested restricted stock awards will vest. Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to 3.82 times his then annual salary, the target LTC payment of $1,890,000 and his accrued 6% bonus in the event of the termination of his employment within eighteen months following a change of control of the Company.
 
Pursuant to the Amended Employment Agreement, in January 2020, Mr. Goldstein received a grant of 157,431 shares of restricted stock, under the terms of the Company’s 2014 Plan determined by dividing $1,250,000 by the fair market value of the Company’s Common Stock on the date of grant. This 2020 grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. Also pursuant to the Amended Employment Agreement, Mr. Goldstein will be entitled to receive a grant, under the terms of the 2014 Plan, during January 2021, of a number of shares of restricted stock determined by dividing $1,500,000 by the fair market value of the Company’s Common Stock on the date of grant. The January 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. Further, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a grant, under the terms of the 2014 Plan, during each of 2020, 2021 and 2022, of a number of shares of restricted stock determined by dividing $136,500 by the fair market value of the Company’s Common Stock on the date of grant. In January 2020, Mr. Goldstein was granted 17,191 shares of restricted stock pursuant to this provision. This grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. The 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. The 2022 grant will become vested on December 31, 2022 based on the continued provision of services through such date.
 
 
31
 
 
Dale A. Thatcher
 
Effective July 19, 2019 (the “Separation Date”), Dale A. Thatcher retired and resigned his positions as Chief Executive Officer and President of the Company and KICO. At such time, he also resigned his positions on the Board of Directors of each of the Company and KICO.  Effective upon Mr. Thatcher’s separation from employment, the Board appointed Barry B. Goldstein, former Chief Executive Officer and Executive Chairman of the Board of Directors, to the position of Chief Executive Officer and President of each of the Company and KICO. Mr. Goldstein previously served as Chief Executive Officer and President of the Company from March 2001 through December 31, 2018, and as Chief Executive Officer and President of KICO from January 2012 through December 31, 2018.
 
In connection with his separation from employment, each of the Company and KICO entered into an Agreement and General Release (the “Separation Agreement”) with Mr. Thatcher.  Pursuant to the Separation Agreement, the Company and KICO shall collectively provide the following payments and benefits to Mr. Thatcher in full satisfaction of all payments and benefits and other amounts due to him under the terms of the existing employment agreements upon his separation from employment: (i) $381,111 (representing the amount of base salary he would have received had he remained employed through March 31, 2020), (ii) $5,000 in full satisfaction for any bonus payments payable under the existing employment agreements, (iii) continuing group health coverage commencing on the Separation Date and ending on March 31, 2020, and (iv) continued vesting of all stock awards previously granted to Mr. Thatcher in his capacity as an executive officer but which were unvested as of the Separation Date (Mr. Thatcher shall not be entitled to any further grants of stock awards after the Separation Date).  In addition, the Company and KICO agreed to provide Mr. Thatcher with a severance payment of $20,000 in consideration for a release.  Pursuant to the Separation Agreement, Mr. Thatcher agreed that, for a period of three years following the Separation Date, he shall not accept any operating executive role with another property and casualty insurance company.
 
Meryl Golden, Chief Operating Officer
 
On September 16, 2019, the Company and Meryl Golden entered into an employment agreement (the “Golden Employment Agreement”) pursuant to which Ms. Golden serves as the Company’s Chief Operating Officer. Ms. Golden also serves as KICO’s Chief Operating Officer. The Golden Employment Agreement became effective as of September 25, 2019 and expires on December 31, 2021.
 
Pursuant to the Golden Employment Agreement, Ms. Golden is entitled to receive an annual salary of $500,000 and was granted a five year option for the purchase of 50,000 shares of the Company’s Common Stock pursuant to the 2014 Plan. The options granted will vest in three equal installments, with the first installment vesting on the grant date, and the remaining installments vesting on the first and second anniversaries following the grant date, subject to the terms of the stock option agreement between the Company and Ms. Golden.
 
Note 12 – Deferred Compensation Plan
 
On June 18, 2018, the Company adopted the Kingstone Companies, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is offered to a select group (“Participants”), consisting of management and highly compensated employees as a method of recognizing and retaining such Participants. The Deferred Compensation Plan provides for eligible Participants to elect to defer up to 75% of their base compensation and up to 100% of bonuses and other compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the Participant deferrals, the Company may choose to make matching contributions to some or all of the Participants in the Deferred Compensation Plan to the extent the Participant did not receive the maximum matching or non-elective contributions permissible under the Company’s 401(k) Plan due to limitations under the Internal Revenue Code or the 401(k) Plan. Participants may elect to receive payment of their account balances in a single cash payment or in annual installments for a period of up to ten years. The first payroll subject to the Deferred Compensation Plan was in July 2018. The deferred compensation liability as of March 31, 2020 and December 31, 2019 amounted to $524,190 and $599,274, respectively, and is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. The Company did not make any voluntary contributions for the three months ended March 31, 2020 and 2019.
 
 
32
 
 
Note 13 – Subsequent Events
 
The Company has evaluated events that occurred subsequent to March 31, 2020 through the date these condensed consolidated financial statements were issued for matters that required disclosure or adjustment in these condensed consolidated financial statements.
 
Dividends Declared
 
On May 6, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.04 per share payable in cash on June 15, 2020 to stockholders of record as of the close of business on May 29, 2020 (see Note 8).
 
COVID 19
 
The recent outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well as on the Company's business activities. The extent to which COVID-19 may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. These events are highly uncertain and, as such, the Company cannot determine their financial impact at this time. No adjustments have been made to the amounts reported in these condensed consolidated financial statements as a result of this matter.
 
 
33
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
We offer property and casualty insurance products to individuals through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County, although we are actively writing business in New Jersey, Rhode Island, Connecticut and Massachusetts. We are licensed in the States of New York, New Jersey, Rhode Island, Massachusetts, Connecticut, Pennsylvania, Maine, and New Hampshire. For the three months ended March 31, 2020, 82.7% of KICO’s direct written premiums came from the New York policies.
 
 In addition, through our subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, we access alternative distribution channels. Through Cosi, we have the opportunity to partner with name-brand carriers and access nationwide insurance agencies. See “Distribution Channels” below for a discussion of our distribution channels. Cosi receives commission revenue from KICO for the policies it places with others and pays commissions to these agencies. Cosi retains the profit between the commission revenue received and the commission expense paid. Cosi revenue is included in other income and Cosi related expenses are included in other operating expenses. Cosi operations are not included in our stand-alone insurance underwriting business and, accordingly, its revenue and expenses are not included in the calculation of our combined ratio as described below.
 
We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings and may also generate net realized and unrealized investment gains and losses on future investments.
 
Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are referred to as claims. In settling these claims, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.
 
Other operating expenses include our corporate expenses as a holding company and operating expenses of Cosi. These corporate expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company. Cosi operating expenses primarily include commissions paid to brokers, employment costs, and consulting costs.
 
Product Lines
 
Our product lines include the following:
 
Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies.
 
 
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 Commercial liability: Through July 2019, we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan’s liability policies for small independent contractors with smaller sized workforces.  In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies.
 
In May 2019, due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business.  In July 2019, due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks. In force policies for these lines are being non-renewed at the end of their current annual terms. For the three months ended March 31, 2020, these policies represent approximately 6.3% of net premiums earned and as of March 31, 2020, 44.1% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.
 
Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.
 
Other: We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations.
 
Key Measures
 
We utilize the following key measures in analyzing the results of our insurance underwriting business:
 
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.
 
Net underwriting expense ratio:  The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.
 
Net combined ratio:  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.
 
 
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Distribution Channels
 
During 2019, we initiated an alternative distribution program through Cosi (“Alternative Distribution”). The goal of this program is to enhance our personal lines distribution channel to include nationally recognized name-brand carriers along with nationwide call center and digital insurance agencies. While still in early stages of development, the impact of this initiative can be measured by the amount of new premiums written compared to total premiums written, which includes renewals from our independent agency network. The table below shows premiums written by distribution channel for our homeowners and dwelling fire components of personal lines.
 
 
 
Three months ended
 
 
Three months ended
 
 ($ in thousands)
 
March 31, 2020
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Direct Written Pemiums
 
 Amount
 
 
 Percent
 
 
 Amount
 
 
 Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Core Independent
 $27,145 
  79.0%
 $26,535 
  88.3%
 Expansion Independent (1)
  5,242 
  15.3%
  3,221 
  10.7%
 Alternative Distribution through Cosi
  1,979 
  5.8%
  280 
  0.9%
 Total
 $34,366 
  100.0%
 $30,036 
  100.0%
 
(1) Outside of New York
(Percent components may not sum to totals due to rounding)
 
For the three months ended March 31, 2020 and 2019, Alternative Distribution made up 5.8% and 0.9% of direct written premiums for our homeowners and dwelling fire components of personal lines.
 
Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our condensed consolidated financial statements and related notes. In preparing these condensed consolidated financial statements, our management has utilized information including our past history, industry standards, the current economic environment, and other factors, in forming its estimates and judgments for certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of similar companies.
 
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 to the condensed consolidated financial statements - “Accounting Policies” for information related to updated accounting policies.
 
 
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Consolidated Results of Operations
 
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
 
The following table summarizes the changes in the results of our operations (in thousands) for the periods indicated:
 
 
 
Three months ended March 31,
 
($ in thousands)
 
2020
 
 
2019
 
 
Change
 
 
 Percent
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Direct written premiums
 $36,697 
 $37,489 
 $(792)
  (2.1)%
 Assumed written premiums
  - 
  - 
  - 
  n/a%
 
  36,697 
  37,489 
  (792)
  (2.1)%
 Ceded written premiums
    
    
    
    
 Ceded to quota share treaties
  7,098 
  2,659 
  4,439 
  166.9%
 Ceded to excess of loss treaties
  495 
  404 
  91 
  22.5%
 Ceded to catastrophe treaties
  5,913 
  4,065 
  1,848 
  45.5%
 Total ceded written premiums
  13,506 
  7,128 
  6,378 
  89.5%
 
    
    
    
    
 Net written premiums
  23,191 
  30,361 
  (7,170)
  (23.6)%
 
    
    
    
    
 Change in unearned premiums
    
    
    
    
 Direct and assumed
  5,905 
  (628)
  6,533 
  (1,040.3)%
 Ceded to quota share treaties
  (2,154)
  (137)
  (2,017)
  1,472.3%
 Change in net unearned premiums
  3,751 
  (765)
  4,516 
  (590.3)%
 
    
    
    
    
 Premiums earned
    
    
    
    
 Direct and assumed
  42,602 
  36,861 
  5,741 
  15.6%
 Ceded to reinsurance treaties
  (15,661)
  (7,265)
  (8,396)
  115.6%
 Net premiums earned
  26,941 
  29,596 
  (2,655)
  (9.0)%
 Ceding commission revenue
    
    
    
    
 Excluding the effect of catastrophes
  3,831 
  1,278 
  2,553 
  199.8%
 Effect of catastrophes
  - 
  - 
  - 
  n/a%
 Total ceding commission revenue
  3,831 
  1,278 
  2,553 
  199.8%
 Net investment income
  1,666 
  1,624 
  42 
  2.6%
 Net (losses) gains on investments
  (6,444)
  2,035 
  (8,479)
  (416.7)%
 Other income
  630 
  366 
  264 
  72.1%
 Total revenues
  26,624 
  34,899 
  (8,275)
  (23.7)%
 Expenses
    
    
    
    
 Loss and loss adjustment expenses
    
    
    
    
 Direct and assumed:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  21,971 
  26,643 
  (4,672)
  (17.5)%
 Losses from catastrophes (1)
  281 
  5,627 
  (5,346)
  (95.0)%
 Total direct and assumed loss and loss adjustment expenses
  22,252 
  32,270 
  (10,018)
  (31.0)%
 
    
    
    
    
 Ceded loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  5,784 
  2,572 
  3,212 
  124.9%
 Losses from catastrophes (1)
  83 
  564 
  (481)
  (85.3)%
 Total ceded loss and loss adjustment expenses
  5,867 
  3,136 
  2,731 
  87.1%
 
    
    
    
    
 Net loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  16,187 
  24,071 
  (7,884)
  (32.8)%
 Losses from catastrophes (1)
  198 
  5,063 
  (4,865)
  (96.1)%
 Net loss and loss adjustment expenses
  16,385 
  29,134 
  (12,749)
  (43.8)%
 
    
    
    
    
 Commission expense
  7,899 
  6,853 
  1,046 
  15.3%
 Other underwriting expenses
  6,762 
  6,136 
  626 
  10.2%
 Other operating expenses
  1,563 
  972 
  591 
  60.8%
 Depreciation and amortization
  687 
  602 
  85 
  14.1%
 Interest expense
  457 
  457 
  - 
  -%
 Total expenses
  33,753 
  44,154 
  (10,401)
  (23.6)%
 
    
    
    
    
 Loss before taxes
  (7,129)
  (9,255)
  2,126 
  (23.0)%
 Income tax benefit
  (1,686)
  (1,920)
  234 
  (12.2)%
 Net loss
 $(5,443)
 $(7,335)
 $1,892 
  (25.8)%
 
(1) The three months ended March 31, 2020 and 2019 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.
 
 
37
 
 
 
 
Three months ended March 31,
 
 
 
 
 
 
2020
 
 
2019
 
 
Percentage Point Change
 
 
 Percent Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Key ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 Net loss ratio
  60.8%
  98.4%
  (37.6)
  (38.2)%
 Net underwriting expense ratio
  39.3%
  38.5%
  0.8 
  2.1%
 Net combined ratio
  100.1%
  136.9%
  (36.8)
  (26.9)%
 
Direct Written Premiums
 
Direct written premiums during the three months ended March 31, 2020 (“Three Months 2020”) were $36,697,000 compared to $37,489,000 during the three months ended March 31, 2019 (“Three Months 2019”). The decrease of $792,000, or 2.1%, was primarily due to a $4,714,000 decrease in premiums from our commercial lines business as result of our decision in July 2019 to no longer underwrite this line of business. Direct written premiums from our personal lines business for Three Months 2020 were $34,435,000, an increase of $4,336,000 or 14.4% from $30,099,000 in Three Months 2019.
 
Beginning in 2017 we started writing homeowners policies in New Jersey. Through 2019 we expanded to Rhode Island, Massachusetts and Connecticut. We refer to our New York business as our “Core” business and the business outside of New York as our “Expansion” business. Direct written premiums from our Expansion business were $6,335,000 in Three Months 2020 compared to $3,232,000 in Three Months 2019.
 
Net Written Premiums and Net Premiums Earned
 
Through June 30, 2019, our quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). Our personal lines quota share reinsurance treaty in effect for Three Months 2019 was covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Three Months 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”). The following table describes the quota share reinsurance ceding rates in effect for each treaty year during Three Months 2020 and Three Months 2019 under the 2019/2020 Treaty and the 2017/2019 Treaty, respectively. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.
 
 
38
 
 
 
 
 Three months ended March 31,
 
 
 
2020
 
 
2019
 
 
 
("2019/2020
Treaty")
 
 
("2018/2019
Treaty Year")
 
 
    
    
 Quota share reinsurance rates
        
    
 Personal lines
  25%(2)
  10%(1)
 
(1)
The 2018/2019 Treaty Year, covered under the 2017/2019 Treaty, expired on a run-off basis effective July 1, 2019 through June 30, 2020 (the “2019 Run-off”).
(2)
The 2019/2020 Treaty was effective December 15, 2019 with a quota share reinsurance rate of 25%.
 
See “Reinsurance” below for changes to our personal lines quota share treaty effective December 15, 2019, and July 1, 2019 and 2018.
 
Net written premiums decreased $7,170,000, or 23.6%, to $23,191,000 in Three Months 2020 from $30,361,000 in Three Months 2019. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). The decrease in net written premiums in Three Months 2020 was attributable to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums which are not subject to a quota share treaty. In Three Months 2020, our premiums ceded under quota share treaties increased by $4,439,000 over the comparable ceded premiums in Three Months 2019. Our personal lines business was subject to the 2017/2019 Treaty under the 2018/2019 Treaty Year through June 30, 2019. Following June 30, 2019, any earned premium and associated claims for policies still in force will continue to be ceded under the 10% quota share rate until such policies expire (run-off) over the next year. The 2019 Run-off period is from July 1, 2019 through June 30, 2020 and there was no return of unearned premiums under this arrangement.
 
Excess of loss reinsurance treaties
 
An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2020, our ceded excess of loss reinsurance premiums increased by $91,000 over the comparable ceded premiums for Three Months 2019. The increase was due to an increase in premiums subject to excess of loss reinsurance.
 
Catastrophe reinsurance treaties
 
Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Three Months 2020, our premiums ceded under catastrophe treaties increased by $1,848,000 over the comparable ceded premiums in Three Months 2019. The change was due to an increase in our catastrophe limit purchased, an increase in premiums subject to catastrophe reinsurance due to continued growth of our personal lines business, and an increase in reinsurance rates effective July 1, 2019. Our ceded catastrophe premiums are paid based on the total direct written premiums subject to the catastrophe reinsurance treaty.
 
 
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Net premiums earned
 
Net premiums earned decreased $2,655,000, or 9.0%, to $26,941,000 in Three Months 2020 from $29,596,000 in Three Months 2019. The decrease was due to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums which are not subject to a quota share treaty.
 
Ceding Commission Revenue
 
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:
 
 
 
Three months ended March 31,
 
 
 
 
($ in thousands)
 
2020
 
 
2019
 
 
Change
 
 
 Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Provisional ceding commissions earned
 $3,720 
 $1,318 
 $2,402 
  182.2%
 
    
    
    
    
 Contingent ceding commissions earned
    
    
    
    
 Contingent ceding commissions earned excluding
    
    
    
    
 the effect of catastrophes
  111 
  (40)
  151 
  (377.5)%
 Effect of catastrophes on ceding commissions earned
  - 
  - 
  - 
  n/a 
 Contingent ceding commissions earned
  111 
  (40)
  151 
  (377.5)%
 
    
    
    
    
 Total ceding commission revenue
 $3,831 
 $1,278 
 $2,553 
  199.8%
 
Ceding commission revenue was $3,831,000 in Three Months 2020 compared to $1,278,000 in Three Months 2019. The increase of $2,553,000, or 199.8%, was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. The increase in provisional ceding commissions occurred due to the increase in quota share reinsurance rates effective December 15, 2019 (see below for discussion of provisional ceding commissions earned and contingent ceding commissions earned).
 
Provisional Ceding Commissions Earned
 
We receive a provisional ceding commission based on ceded written premiums. The $2,402,000 increase in provisional ceding commissions earned is primarily due to the increase in the quota share ceding rate effective December 15, 2019 to 25%, from the 10% rate in effect in Three Months 2019. There was an increase in ceded premiums in Three Months 2020 available from which to earn ceding commissions compared to Three Months 2019 due to the changes in quota share ceding rates and an increase in personal lines direct written premiums subject to the quota share.
 
Contingent Ceding Commissions Earned
 
The 2019/2020 Treaty and 2017/2019 Treaty structure calls for a higher upfront provisional ceding commission and there is not an opportunity to earn additional contingent ceding commissions under these treaties. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2017. Under our prior years’ quota share treaties, we received a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive.
 
 
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Net Investment Income
 
Net investment income was $1,666,000 in Three Months 2020 compared to $1,624,000 in Three Months 2019, an increase of $42,000, or 2.6%. The average yield on invested assets was 3.77% as of March 31, 2020 compared to 3.67% as of March 31, 2019. The pre-tax equivalent yield on invested assets was 3.45% and 3.41% as of March 31, 2020 and 2019, respectively.
 
Cash and invested assets were $201,649,000 as of March 31, 2020 compared to $201,878,000 as of March 31, 2019. The $229,000 decrease in cash and invested assets was due to various changes, the net of which are negligible.
 
Net Gains and Losses on Investments
 
Net losses on investments were $6,444,000 in Three Months 2020 compared to a net gain of $2,035,000 in Three Months 2019. Unrealized losses on our equity securities and other investments in Three Months 2020 were $6,719,000, compared to unrealized gains of $2,061,000 in Three Months 2019. Realized gains on sales of investments were $275,000 in Three Months 2020 compared to realized losses of $25,000 in Three Months 2019. Unrealized losses in Three Months 2020 were due to the market fluctuations related to the Covid-19 pandemic.
 
Other Income
 
Other income was $630,000 in Three Months 2020 compared to $366,000 in Three Months 2019. The increase of $264,000, or 72.1%, was primarily due to commission revenue from Cosi.
 
Net Loss and LAE
 
Net loss and LAE was $16,385,000 in Three Months 2020 compared to $29,134,000 in Three Months 2019. The net loss ratio was 60.8% in Three Months 2020 compared to 98.4% in Three Months 2019, an improvement of 37.6 percentage points.
 
The following graph summarizes the changes in the components of net loss ratio for the periods indicated, along with the comparable components excluding commercial lines business:
 
 
(Components may not sum to totals due to rounding)
 
 
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During Three Months 2020, the loss ratio improved for three reasons. First, the Northeast winter season was relatively mild. There were no severe freeze events during Three Months 2020, in contrast to many of the last several years including Three Months 2019. There was one minor windstorm event classified as a catastrophe loss during the quarter, which contributed 0.7 points to the loss ratio. This is in contrast with the same period of 2019 when there were three winter weather events classified as catastrophes having a net impact of $5.1 million, or 17.1 points on the loss ratio. The 0.7 point catastrophe impact for Three Months 2020 is a decrease in the impact from catastrophes of 16.4 points compared to Three Months 2019.
 
The second major impact on the loss ratio was prior year loss development. For Three Months 2020, prior year loss development was favorable by $126,000, or a favorable impact of 0.5 points on the loss ratio. This compares to adverse prior year development of $4,478,000 during Three Months 2019, which had a 15.3 point unfavorable impact. The favorable 0.5 point impact in Three Months 2020 is a decrease of 15.8 points in the impact of prior year loss development. During Three Months 2020, we continued to observe overall favorable runoff of open liability claims where case reserves had been increased throughout 2019. This marked the second straight quarter of stable prior year loss development following the adjustments made through the first three quarters of 2019.
 
Finally, the underlying loss ratio (loss ratio excluding the impact of catastrophes and prior year development) was 60.6% for Three Months 2020, a decrease of 5.5 points from the 66.1% underlying loss ratio recorded for Three Months 2019.  The underlying loss ratio decreased compared to Three Months 2019 due to a smaller impact from non-catastrophe winter claims, reduced claim frequency in personal lines and in the Auto Physical Damage program, and a shift in mix away from the high loss ratio commercial lines business which was placed into runoff starting in July 2019. Excluding commercial lines, the underlying loss ratio improved 6.2 points, from 63.3% for Three Months 2019 to 57.1% for Three Months 2020.
 
See table below under “Additional Financial Information” summarizing net loss ratios by line of business.
 
Commission Expense
 
Commission expense was $7,899,000 in Three Months 2020 or 18.5% of direct earned premiums. Commission expense was $6,853,000 in Three Months 2019 or 18.6% of direct earned premiums. The increase of $1,046,000 is primarily due to the increase in direct earned premiums for Three Months 2020 as compared to Three Months 2019.
 
Other Underwriting Expenses
 
Other underwriting expenses were $6,762,000 in Three Months 2020 compared to $6,136,000 in Three Months 2019. The increase of $626,000, or 10.2%, was primarily due to expenses related to growth in personal lines direct written premiums. Expenses directly related to the increase in personal lines direct written premiums primarily consist of underwriting expenses, software usage fees, and state premium taxes. Expenses indirectly related to the increase in personal lines direct written premiums primarily consist of salaries along with related other employment costs. The other underwriting expense increase of 10.2% was less than the 14.4% increase in personal lines direct written premiums.
 
Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $2,740,000 in Three Months 2020 compared to $2,551,000 in Three Months 2019. The increase of $188,000, or 7.4%, was less than the 14.4% increase in personal lines direct written premiums. The increase in employment costs was attributable to the hiring of additional highly experienced management, offset by staff reductions from the elimination of commercial lines staff due to that line being in run-off since July 2019. There were no annual increases in salaries during Three Months 2020.
 
 
42
 
 
Our net underwriting expense ratio in Three Months 2020 was 39.3% compared to 38.5% in Three Months 2019. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:
 
 
 
 Three months ended
 
 
 
 
 
 
 March 31,
 
 
Percentage
 
 
 
 2020
 
 
 2019
 
 
 Point Change
 
 
 
 
 
 
 
 
 
 
 
 Other underwriting expenses
 
 
 
 
 
 
 
 
 
Employment costs
  10.2%
  8.6%
  1.6 
Underwriting fees (inspections/data services)
  3.1 
  2.5 
  0.6 
Other expenses
  11.8 
  9.7 
  2.1 
Total other underwriting expenses
  25.1 
  20.8 
  4.3 
 
    
    
    
Ceding commission revenue
    
    
    
Provisional
  (13.8)
  (4.5)
  (9.3)
Contingent
  (0.4)
  0.1 
  (0.5)
Total ceding commission revenue
  (14.2)
  (4.4)
  (9.8)
 
    
    
    
Other income
  (0.9)
  (1.1)
  0.2 
Commission expense
  29.3 
  23.2 
  6.1 
 
    
    
    
Net underwriting expense ratio
  39.3%
  38.5%
  0.8 
 
The overall 9.3 percentage point increase in the benefit from provisional ceding commissions was driven entirely by the change in our quota share ceding rates and its impact on provisional ceding commission revenue due to less retention beginning with the inception of the 2019/2020 Treaty on December 15, 2019, resulting in an increase in provisional ceding commissions. The components of our net underwriting expense ratio related to other underwriting expenses, other income and commissions increased in all categories due to less retention beginning with the inception of 2019/2020 Treaty on December 15, 2019, resulting in an overall 0.8 percentage point increase in the net underwriting expense ratio.
 
Other Operating Expenses
 
Other operating expenses, related to the expenses of our holding company and Cosi, were $1,563,000 for Three Months 2020 compared to $972,000 for Three Months 2019. The increase in Three Months 2020 of $591,000, or 60.8%, as compared to Three Months 2019 was primarily due to increases in equity compensation, commissions incurred by Cosi and professional fees. The increase in equity compensation was due to an annual restricted stock award pursuant to the employment agreement with Barry B. Goldstein, our Chief Executive Officer.
 
Depreciation and Amortization
 
Depreciation and amortization was $687,000 in Three Months 2020 compared to $602,000 in Three Months 2019. The increase of $85,000, or 14.1%, in depreciation and amortization was primarily due to depreciation of our new systems platform for handling business being written in Expansion states, newly purchased assets used to upgrade our systems infrastructure and improvements to the Kingston, New York home office building from which we operate.
 
 
43
 
 
Interest Expense
 
Interest expense was $457,000 for both Three Months 2020 and Three Months 2019. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017. 
 
Income Tax Benefit
 
Income tax benefit in Three Months 2020 was $1,686,000, which resulted in an effective tax benefit rate of 23.6%. Income tax benefit in Three Months 2019 was $1,920,000, which resulted in an effective tax benefit rate of 20.7%. Loss before taxes was $7,129,000 in Three Months 2020 compared to loss before taxes of $9,255,000 in Three Months 2019. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. We will elect on our 2019 federal income tax return to carry back the 2019 NOL of $7,222,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.
 
Net Loss
 
Net loss was $5,443,000 in Three Months 2020 compared to net loss of $7,335,000 in Three Months 2019. The decrease in net loss of $1,892,000 was due to the circumstances described above, which caused the decrease in our net loss ratio, increase in ceding commission revenue and other income, partially offset by the decrease in our net premiums earned, and increases in net losses on investments, other underwriting and operating expenses, and depreciation and amortization.
 
Additional Financial Information
 
We operate our business as one segment, property and casualty insurance. Within this segment, we offer an array of property and casualty policies to our producers. The following table summarizes gross and net written premiums, net premiums earned, and net loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.
 
 
 
 Three months ended
 
 
 
March 31,
 
 
 
 2020
 
 
 2019
 
 Gross premiums written:
 
 
 
 
 
 
 Personal lines
 $34,434,836 
 $30,098,969 
 Livery physical damage
  2,314,401 
  2,730,086 
 Other(1)
  74,855 
  73,071 
 Total without commercial lines
  36,824,092 
  32,902,126 
 Commercial lines (in run-off effective July 2019)(2)
  (127,163)
  4,586,388 
 Total gross premiums written
 $36,696,929 
 $37,488,514 
 
    
    
 Net premiums written:
    
    
 Personal lines(3)
 $21,211,481 
 $23,503,863 
 Livery physical damage
  2,314,401 
  2,730,086 
 Other(1)
  58,579 
  66,295 
 Total without commercial lines
  23,584,461 
  26,300,244 
 Commercial lines (in run-off effective July 2019)(2)
  (393,787)
  4,060,361 
 Total net premiums written
 $23,190,674 
 $30,360,605 
 
    
    
 Net premiums earned:
    
    
 Personal lines(3)
 $22,599,634 
 $23,420,874 
 Livery physical damage
  2,606,579 
  2,517,682 
 Other(1)
  50,149 
  58,017 
 Total without commercial lines
  25,256,362 
  25,996,573 
 Commercial lines (in run-off effective July 2019)(2)
  1,685,088 
  3,599,316 
 Total net premiums earned
 $26,941,450 
 $29,595,889 
 
    
    
 Net loss and loss adjustment expenses(4):
    
    
 Personal lines
 $12,514,568 
 $20,402,544 
 Livery physical damage
  780,570 
  1,217,303 
 Other(1)
  48,797 
  150,504 
 Unallocated loss adjustment expenses
  769,812 
  694,650 
 Total without commercial lines
  14,113,747 
  22,465,001 
 Commercial lines (in run-off effective July 2019)(2)
  2,272,074 
  6,669,223 
 Total net loss and loss adjustment expenses
 $16,385,821 
 $29,134,224 
 
    
    
Net loss ratio(4):
    
    
Personal lines
  55.4%
  87.1%
Livery physical damage
  29.9%
  48.4%
Other(1)
  97.3%
  259.4%
Total without commercial lines
  55.9%
  86.4%
 Commercial lines (in run-off effective July 2019)(2)
  134.8%
  185.3%
 Total
  60.8%
  98.4%
 
(1)
“Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory state joint underwriting association and loss and loss adjustment expenses from commercial auto.
(2)
In July 2019, we decided that we will no longer underwrite Commercial Liability risks. See discussions above regarding the discontinuation of this line of business.
(3)
See discussion above with regard to “Net Written Premiums and Net Premiums Earned”, as to changes in quota share ceding rates, effective July 1, 2019 and 2018.
(4)
See discussion above with regard to “Net Loss and LAE”, as to catastrophe losses in the three months ended March 31, 2020 and 2019.
 
 
44
 
 
 
Insurance Underwriting Business on a Standalone Basis
Our insurance underwriting business reported on a standalone basis for the periods indicated is as follows:
 
 
 
Three months ended
 
 
 
March 31,    
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 Net premiums earned
 $26,941,450 
 $29,595,889 
 Ceding commission revenue
  3,831,099 
  1,277,683 
 Net investment income
  1,665,393 
  1,599,932 
 Net (losses) gains on investments
  (6,309,184)
  1,993,563 
 Other income
  244,974 
  314,738 
 Total revenues
  26,373,732 
  34,781,805 
 
    
    
 Expenses
    
    
 Loss and loss adjustment expenses
  16,385,821 
  29,134,224 
 Commission expense
  7,899,191 
  6,853,416 
 Other underwriting expenses
  6,761,792 
  6,135,991 
 Depreciation and amortization
  653,902 
  578,353 
 Total expenses
  31,700,706 
  42,701,984 
 
    
    
 Loss from operations
  (5,326,974)
  (7,920,179)
 Income tax benefit
  (1,207,969)
  (1,702,971)
 Net loss
 $(4,119,005)
 $(6,217,208)
 
    
    
 Key Measures:
    
    
 Net loss ratio
  60.8%
  98.4%
 Net underwriting expense ratio
  39.3%
  38.5%
 Net combined ratio
  100.1%
  136.9%
 
    
    
 Reconciliation of net underwriting expense ratio:
    
    
 Acquisition costs and other
    
    
 underwriting expenses
 $14,660,983 
 $12,989,407 
 Less: Ceding commission revenue
  (3,831,099)
  (1,277,683)
 Less: Other income
  (244,974)
  (314,738)
 Net underwriting expenses
 $10,584,910 
 $11,396,986 
 
    
    
 Net premiums earned
 $26,941,450 
 $29,595,889 
 
    
    
 Net Underwriting Expense Ratio
  39.3%
  38.5%
  
 
45
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 Written premiums
 $36,696,929 
 $- 
 $(13,506,255)
 $23,190,674 
 Change in unearned premiums
  5,904,700 
  - 
  (2,153,924)
  3,750,776 
 Earned premiums
 $42,601,629 
 $- 
 $(15,660,179)
 $26,941,450 
 
    
    
    
    
 Loss and loss adjustment expenses exluding
    
    
    
    
 the effect of catastrophes
 $21,971,351 
 $- 
 $(5,783,990)
 $16,187,361 
 Catastrophe loss
  281,368 
  - 
  (82,908)
  198,460 
 Loss and loss adjustment expenses
 $22,252,719 
 $- 
 $(5,866,898)
 $16,385,821 
 
    
    
    
    
 Loss ratio excluding the effect of catastrophes
  51.6%
 
na
 
  36.9%
  60.1%
 Catastrophe loss
  0.7%
 
na
 
  0.5%
  0.7%
 Loss ratio
  52.2%
 
na
 
  37.5%
  60.8%
 
    
    
    
    
 Three months ended March 31, 2019
    
    
    
    
 Written premiums
 $37,488,548 
 $(34)
 $(7,127,909)
 $30,360,605 
 Change in unearned premiums
  (628,067)
  195 
  (136,844)
  (764,716)
 Earned premiums
 $36,860,481 
 $161 
 $(7,264,753)
 $29,595,889 
 
    
    
    
    
 Loss and loss adjustment expenses exluding
    
    
    
    
 the effect of catastrophes
 $26,645,777 
 $(3,002)
 $(2,571,747)
 $24,071,028 
 Catastrophe loss
  5,627,343 
  - 
  (564,147)
  5,063,196 
 Loss and loss adjustment expenses
 $32,273,120 
 $(3,002)
 $(3,135,894)
 $29,134,224 
 
    
    
    
    
 Loss ratio excluding the effect of catastrophes
  72.3%
  -1864.6%
  35.4%
  81.3%
 Catastrophe loss
  15.3%
  0.0%
  7.8%
  17.1%
 Loss ratio
  87.6%
  -1864.6%
  43.2%
  98.4%
 
(Percent components may not sum to totals due to rounding)
 
 
46
 
 
The key measures for our insurance underwriting business for the periods indicated are as follows:
 
 
 
 Three months ended
 
 
 
 March 31,    
 
 
 
 2020
 
 
 2019
 
 
 
 
 
 
 
 
 Net premiums earned
 $26,941,450 
 $29,595,889 
 Ceding commission revenue
  3,831,099 
  1,277,683 
 Other income
  244,974 
  314,738 
 
    
    
 Loss and loss adjustment expenses (1)
  16,385,821 
  29,134,224 
 
    
    
 Acquisition costs and other underwriting expenses:
    
    
 Commission expense
  7,899,191 
  6,853,416 
 Other underwriting expenses
  6,761,792 
  6,135,991 
 Total acquisition costs and other
    
    
 underwriting expenses
  14,660,983 
  12,989,407 
 
    
    
 Underwriting loss
 $(29,281)
 $(10,935,321)
 
    
    
 Key Measures:
    
    
 Net loss ratio excluding the effect of catastrophes
  60.1%
  81.3%
 Effect of catastrophe loss on net loss ratio (1)
  0.7%
  17.1%
 Net loss ratio
  60.8%
  98.4%
 
    
    
 Net underwriting expense ratio excluding the
    
    
 effect of catastrophes
  39.3%
  38.5%
 Effect of catastrophe loss on net underwriting
    
    
 expense ratio
  0.0%
  0.0%
 Net underwriting expense ratio
  39.3%
  38.5%
 
    
    
 Net combined ratio excluding the effect
    
    
 of catastrophes
  99.4%
  119.8%
 Effect of catastrophe loss on net combined
    
    
 ratio (1)
  0.7%
  17.1%
 Net combined ratio
  100.1%
  136.9%
 
    
    
 Reconciliation of net underwriting expense ratio:
    
    
 Acquisition costs and other
    
    
 underwriting expenses
 $14,660,983 
 $12,989,407 
 Less: Ceding commission revenue
  (3,831,099)
  (1,277,683)
 Less: Other income
  (244,974)
  (314,738)
   
 $10,584,910 
 $11,396,986 
 
    
    
 Net earned premium
 $26,941,450 
 $29,595,889 
 
    
    
 Net Underwriting Expense Ratio
  39.3%
  38.5%
 
(1) For the three months ended March 31, 2020 and 2019, includes the sum of net catastrophe losses and loss adjustment expenses of $198,460 and $5,063,196, respectively.
 
 
47
 
 
Investments
 
Portfolio Summary
 
Fixed-Maturity Securities
 
The following table presents a breakdown of the amortized cost, estimated fair value, and unrealized gains and losses of our investments in fixed-maturity securities classified as available-for-sale as of March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
 
 
 
 
 
 
  
 Cost or
 Gross
 Gross Unrealized Losses
 Estimated
% of
 
 Amortized
 Unrealized
 Less than 12
 More than 12
 Fair
Estimated
 Category
 Cost
 Gains
 Months
 Months
 Value
Fair Value

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 $5,033,879 
 $102,361 
 $- 
 $- 
 $5,136,240 
  3.4%
 
    
    
    
    
    
    
 
Political subdivisions of States,
        
    
    
    
    
    
 Territories and Possessions
  9,139,221 
  275,738 
  - 
  - 
  9,414,959 
  6.2%
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  112,871,652 
  2,876,429 
  (2,258,459)
  - 
  113,489,622 
  74.7%
 
    
    
    
    
    
    
 
Residential mortgage and other
       
    
    
    
    
    
 asset backed securities (1)
  25,631,027 
  292,497 
  (938,478)
  (1,145,973)
  23,839,073 
  15.7%
 Total
 $152,675,779 
 $3,547,025 
 $(3,196,937)
 $(1,145,973)
 $151,879,894 
  100.0%
 
(1)
KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY"). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of March 31, 2020, the estimated fair value of the eligible investments was approximately $7,287,000. KICO will retain all rights regarding all securities if pledged as collateral. As of March 31, 2020, there was no outstanding balance on the FHLBNY credit line.
 
 
48
 
 
 
December 31, 2019
 
 
 
 
 
 
 
  
 Cost or
 Gross
 Gross Unrealized Losses
 Estimated
% of
 
 Amortized
 Unrealized
 Less than 12
 More than 12
 Fair
Estimated
 Category
 Cost
 Gains
 Months
 Months
 Value
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 obligations of U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 corporations and agencies
 $7,037,856 
 $23,244 
 $- 
 $- 
 $7,061,100 
  4.2%
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  9,151,293 
  181,835 
  (11,316)
  - 
  9,321,812 
  5.5%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  119,874,573 
  5,777,624 
  (16,685)
  (13,473)
  125,622,039 
  74.7%
 
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
 asset backed securities (1)
  26,138,633 
  437,841 
  (68,793)
  (276,451)
  26,231,230 
  15.6%
 Total
 $162,202,355 
 $6,420,544 
 $(96,794)
 $(289,924)
 $168,236,181 
  100.0%
 
(1)
 KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its relationship with the FHLBNY. The eligible collateral would be pledged to FHLBNY if KICO draws an advance from FHLBNY. As of December 31, 2019, the estimated fair value of the eligible investments was $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.
 
Equity Securities
 
The following table presents a breakdown of the cost and estimated fair value of, and gross unrealized gains and losses, on investments in equity securities as of March 31, 2020 and December 31, 2019:
 
 
 
March 31, 2020
 
 
 
 
 
 
 Gross
 
 
 Gross
 
 
Estimated
 
 
 % of
 
  
 
 
 
 
 Unrealized
 
 
 Unrealized
 
 
 Fair
 
 
 Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Value
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $7,535,068 
 $7,870 
 $(1,113,367)
 $6,429,571 
  35.0%
 Common stocks, mutual funds,
    
    
    
    
    
 and exchange traded funds
  14,894,969 
  137,242 
  (3,092,889)
  11,939,322 
  65.0%
 Total
 $22,430,037 
 $145,112 
 $(4,206,256)
 $18,368,893 
  100.0%
 
 
49
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 Gross
 
 
 Gross
 
 
Estimated
 
 
 % of
 
  
 
 
 
 
 Unrealized
 
 
 Unrealized
 
 
 Fair
 
 
 Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Value
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $8,374,424 
 $339,257 
 $(11,794)
 $8,701,887 
  35.3%
 Common stocks, mutual funds,
    
    
    
    
    
 and exchange traded funds
  14,250,244 
  1,982,878 
  (273,627)
  15,959,495 
  64.7%
 Total
 $22,624,668 
 $2,322,135 
 $(285,421)
 $24,661,382 
  100.0%
 
Other Investments
 
The following table presents a breakdown of the cost and estimated fair value of , and gross unrealized gains and losses, on our other investments as of March 31, 2020 and December 31, 2019:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
 
 
 
 Gross
 
 
 
 
 
 
 
 
 Gross
 
 
 
 
 
 
 
 
 
 Unrealized
 
 
 Estimated
 
 
 
 
 
 Unrealized
 
 
 Estimated
 
 Category
 
 Cost
 
 
 Losses
 
 
 Fair Value
 
 
 Cost
 
 
 Gains
 
 
 Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Hedge fund
 $1,999,381 
 $(11,859)
 $1,987,522 
 $1,999,381 
 $585,532 
 $2,584,913 
 Total
 $1,999,381 
 $(11,859)
 $1,987,522 
 $1,999,381 
 $585,532 
 $2,584,913 
 
Held-to-Maturity Securities
 
The following table presents a breakdown of the amortized cost and estimated fair value of, and gross unrealized gains and losses on, investments in held-to-maturity securities as of March 31, 2020 and December 31, 2019:
 
 
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
% of
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,561 
 $162,483 
 $- 
 $- 
 $892,044 
  21.6%
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,573 
  43,857 
  - 
  - 
  1,042,430 
  25.2%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  2,098,270 
  106,196 
  (2,230)
  - 
  2,202,236 
  53.2%
 
    
    
    
    
    
    
 Total
 $3,826,404 
 $312,536 
 $(2,230)
 $- 
 $4,136,710 
  100.0%
 
 
50
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 Cost or
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 Estimated
 
 
% of
 
 
 
 Amortized
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
Estimated
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,550 
 $151,002 
 $- 
 $- 
 $880,552 
  21.3%
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,619 
  51,021 
  - 
  - 
  1,049,640 
  25.4%
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  2,097,783 
  97,627 
  (835)
  - 
  2,194,575 
  53.3%
 
    
    
    
    
    
    
 Total
 $3,825,952 
 $299,650 
 $(835)
 $- 
 $4,124,767 
  100.0%
 
Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states’ minimum fund requirements.
 
A summary of the amortized cost and fair value of our investments in held-to-maturity securities by contractual maturity as of March 31, 2020 and December 31, 2019 is shown below:
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 Remaining Time to Maturity
 
Cost 
 
 
Fair Value 
 
 
Cost 
 
 
Fair Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $500,000 
 $497,770 
 $500,000 
 $499,165 
 One to five years
  2,099,588 
  2,220,096 
  2,099,268 
  2,215,640 
 Five to ten years
  620,255 
  664,805 
  620,134 
  655,923 
 More than 10 years
  606,561 
  754,039 
  606,550 
  754,039 
 Total
 $3,826,404 
 $4,136,710 
 $3,825,952 
 $4,124,767 
 
 
51
 
 
Credit Rating of Fixed-Maturity Securities
 
The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of March 31, 2020 and December 31, 2019 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s or Fitch):
 
 
 
March 31, 2020
 
 
December 31, 2019
 
 
 
 Estimated
 
 
 Percentage of
 
 
 Estimated
 
 
 Percentage of
 
 
 
 Fair
 
 
 Fair
 
 
 Fair
 
 
 Fair
 
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Rating
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $5,136,240 
  3.4%
 $7,061,100 
  4.2%
 
    
    
    
    
 Corporate and municipal bonds
    
    
    
    
 AAA
  2,022,146 
  1.3%
  1,996,676 
  1.2%
 AA
  7,839,200 
  5.2%
  8,809,480 
  5.2%
 A
  31,511,319 
  20.7%
  34,636,236 
  20.6%
 BBB
  79,968,943 
  52.7%
  89,501,460 
  53.2%
 BB
  1,562,973 
  1.0%
  - 
  0.0%
 Total corporate and municipal bonds
  122,904,581 
  80.9%
  134,943,852 
  80.2%
 
    
    
    
    
 Residential mortgage backed securities
    
    
    
    
 AAA
  2,688,010 
  1.8%
  2,976,306 
  1.8%
 AA
  17,071,264 
  11.2%
  18,440,382 
  10.9%
 A
  2,077,613 
  1.4%
  2,471,761 
  1.5%
 CCC
  1,020,476 
  0.7%
  1,174,273 
  0.7%
 CC
  61,110 
  0.0%
  86,461 
  0.1%
 C
  16,455 
  0.0%
  17,813 
  0.0%
 D
  181,612 
  0.1%
  215,015 
  0.1%
 Non-rated
  722,533 
  0.5%
  849,218 
  0.5%
 Total residential mortgage backed securities
  23,839,073 
  15.7%
  26,231,229 
  15.6%
 
    
    
    
    
 Total
 $151,879,894 
  100.0%
 $168,236,181 
  100.0%
 
The table below summarizes the average yield by type of fixed-maturity security as of March 31, 2020 and December 31, 2019:
 
Category
 
March 31,
2020
 
 
December 31,
2019
 
 U.S. Treasury securities and
 
 
 
 
 
 
 obligations of U.S. government
 
 
 
 
 
 
 corporations and agencies
  2.42%
  2.18%
 
    
    
 Political subdivisions of States,
    
    
 Territories and Possessions
  3.23%
  3.26%
 
    
    
 Corporate and other bonds
    
    
 Industrial and miscellaneous
  3.87%
  3.73%
 
    
    
 Residential mortgage backed securities
  1.97%
  2.01%
 
    
    
 Total
  3.48%
  3.37%
  
 
52
 
 
The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of March 31, 2020 and December 31, 2019:
 
 
 
March 31,
2020
 
 
December 31,
2019
 
 Weighted average effective maturity
  4.9 
  4.8 
 
    
    
 Weighted average final maturity
  6.2 
  6.3 
 
    
    
 Effective duration
  4.2 
  4.3 
 
Fair Value Consideration
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in a transaction involving identical or comparable assets or liabilities between market participants (an “exit price”). The fair value hierarchy distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of March 31, 2020 and December 31, 2019, 79% and 80%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.
 
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 March 31, 2020 and December 31, 2019:
 
 
53
 
 
 
 
  March 31, 2020
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $- 
 $- 
  - 
 $- 
 $- 
  - 
 $- 
 $- 
 
    
    
    
    
    
    
    
    
 Political subdivisions of
    
    
    
    
    
    
    
    
 States, Territories and
    
    
    
    
    
    
    
    
 Possessions
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  35,409,999 
  (2,258,459)
  50 
  - 
  - 
  - 
  35,409,999 
  (2,258,459)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  6,067,674 
  (938,478)
  13 
  10,286,307 
  (1,145,973)
  17 
  16,353,981 
  (2,084,451)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $41,477,673 
 $(3,196,937)
  63 
 $10,286,307 
 $(1,145,973)
  17 
 $51,763,980 
 $(4,342,910)
 
 
 
December 31, 2019
 
 
 
Less than 12 months    
 
 
12 months or more    
 
 
Total    
 
  
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 No. of
 
 
 Estimated
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 
 Positions
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 Held
 
 
 Value
 
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and obligations of U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 government corporations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 and agencies
 $- 
 $- 
  - 
 $- 
 $- 
  - 
 $- 
 $- 
 
    
    
    
    
    
    
    
    
 Political subdivisions of
    
    
    
    
    
    
    
    
 States, Territories and
    
    
    
    
    
    
    
    
 Possessions
  3,067,428 
  (11,316)
  3 
  - 
  - 
  - 
  3,067,428 
  (11,316)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  3,730,478 
  (16,685)
  7 
  1,300,915 
  (13,473)
  3 
  5,031,393 
  (30,158)
 
    
    
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
    
    
 asset backed securities
  5,862,636 
  (68,793)
  5 
  13,534,768 
  (276,451)
  21 
  19,397,404 
  (345,244)
 
    
    
    
    
    
    
    
    
 Total fixed-maturity
    
    
    
    
    
    
    
    
 securities
 $12,660,542 
 $(96,794)
  15 
 $14,835,683 
 $(289,924)
  24 
 $27,496,225 
 $(386,718)
 
 
54
 
 
There were 80 securities at March 31, 2020 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed by us to be other than temporarily impaired. There were 39 securities at December 31, 2019 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
 
Liquidity and Capital Resources
 
Cash Flows
 
The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.
 
For the three months ended March 31, 2020, the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the three months ended March 31, 2020, KICO paid dividends of $1,500,000 to us.
 
KICO is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 to our condensed consolidated financial statements – Investments, for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the end of the previous quarter, which is December 31, 2019, and are due and payable within one year of borrowing. The maximum allowable advance as of March 31, 2020, based on the net admitted assets as of December 31, 2019, was approximately $12,379,000. Advances are limited to 90% of the amount of available collateral, which was approximately $6,558,000 as of March 31, 2020. There were no borrowings under this facility during the three months ended March 31, 2020.
 
As of March 31, 2020, invested assets and cash in our holding company totaled approximately $2,234,000. If the aforementioned sources of cash flow currently available are insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
 
Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.
 
 
55
 
 
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:
 
Three Months Ended March 31,
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Cash flows provided by (used in):
 
 
 
 
 
 
 Operating activities
 $(15,256,414)
 $2,702,404 
 Investing activities
  9,458,356 
  (6,884,358)
 Financing activities
  (1,006,638)
  (1,191,969)
 Net decrease in cash and cash equivalents
  (6,804,696)
  (5,373,923)
 Cash and cash equivalents, beginning of period
  32,391,485 
  21,138,403 
 Cash and cash equivalents, end of period
 $25,586,789 
 $15,764,480 
 
Net cash used in operating activities was $15,256,000 in Three Months 2020 as compared to $2,702,000 provided by operating activites in Three Months 2019. The $17,959,000 decrease in cash flows provided by operating activities in Three Months 2020 was primarily a result of a decrease in cash arising from net fluctuations in assets and liabilities, partially offset by a decrease in net income (adjusted for non-cash items) of $10,506,000. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by the growth in its operations, payments on claims and changes in quota share ceding rates which are described above.
 
Net cash provided by investing activities was $9,458,000 in Three Months 2020 compared to $6,884,000 used in investing activities in Three Months 2019. The $16,342,000 increase in net cash provided by investing activities was the result of a $13,921,000 increase in disposal of invested assets, partially offset by a $1,518,000 decrease in acquisitions of invested assets in Three Months 2020.
 
Net cash used in financing activities was $1,007,000 in Three Months 2020 compared to $1,192,000 used in Three Months 2019. The $185,000 decrease in net cash used in financing activities was attributable to higher dividends and withholding taxes paid on vesting restricted stock awards in Three Months 2019 partially offset by a purchase of treasury stock in Three Months 2020.
 
Reinsurance
 
Through June 30, 2019, our quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”).
 
Our quota share reinsurance treaties in effect during Three Months 2020 and Three Months 2019 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the 2019/2020 Treaty and under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Three Months 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).
 
Effective July 1, 2019, our 2017/2019 Treaty and commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. We entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2019. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:
 
 
56
 
 
 
 
 Treaty Year
 
 
 
December 15, 2019
 
 
July 1, 2019
 
 
July 1, 2018
 
 
 
to
 
 
to
 
 
to
 
 Line of Business
 
December 31, 2020
 
 
December 14, 2019
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
Homeowners, dwelling fire and
    
    
    
and canine legal liability
    
    
    
 Quota share treaty:
    
    
    
 Percent ceded
  25% 
 
None
 
  10% 
 
 
   Treaty Year           
 
 
December 15, 2019
 
 
July 1, 2019
 
 
July 1, 2018
 
 
 
to
 
 
to
 
 
to
 
 Line of Business
 
June 30, 2020
 
 
December 14, 2019
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
Homeowners, dwelling fire
 
 
 
 
 
 
 
 
 
and canine legal liability
 
 
 
 
 
 
 
 
 
Quota share treaty:
 
 
 
 
 
 
 
 
 
Risk retained on intial $1,000,000
 
 
 
 
 
 
 
 
 
of losses
 $750,000 
 $1,000,000 
 $900,000 
Losses per occurrence subject to
    
    
    
quota share reinsurance coverage
 $1,000,000 
 
None
 
 $1,000,000 
Excess of loss coverage and facultative
    
    
    
facility coverage (1)
 $9,000,000 
 $9,000,000 
 $9,000,000 
 
  in excess of 
 
 in excess of
 
 
 in excess of
 
 
 $1,000,000 
 $1,000,000 
 $1,000,000 
Total reinsurance coverage per occurrence
 $9,250,000 
 $9,000,000 
 $9,100,000 
Losses per occurrence subject to
    
    
    
reinsurance coverage
 $10,000,000 
 $10,000,000 
 $10,000,000 
Expiration date
  June 30, 2020 
 
June 30, 2020
 
 
June 30, 2019
 
 
    
    
    
Catastrophe Reinsurance:
    
    
    
Initial loss subject to personal lines
    
    
    
quota share treaty
 $7,500,000 
 
None
 
 $5,000,000 
Risk retained per catastrophe
    
    
    
occurrence (2)
 $5,625,000 
 $7,500,000 
 $4,500,000 
Catastrophe loss coverage in excess of
    
    
    
quota share coverage (3)
 $602,500,000 
 $602,500,000 
 $445,000,000 
Reinstatement premium
    
    
    
protection (4) (5)
  Yes 
 
 Yes
 
 
 Yes
 
 
(1)
For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.
(2)
Plus losses in excess of catastrophe coverage.
(3)
Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.
(4)
Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
(5)
Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.
 
 
57
 
 
 
 
 Treaty Year
 
 
 
July 1, 2019
 
 
July 1, 2018
 
 
 
to
 
 
to
 
 Line of Business
 
June 30, 2020
 
 
June 30, 2019
 
 
 
 
 
 
 
 
Personal Lines:
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Umbrella
 
 
 
 
 
 
Quota share treaty:
 
 
 
 
 
 
Percent ceded - first $1,000,000 of coverage
  90%
  90%
Percent ceded - excess of $1,000,000 dollars of coverage
  100%
  100%
Risk retained
 $100,000 
 $100,000 
Total reinsurance coverage per occurrence
 $4,900,000 
 $4,900,000 
Losses per occurrence subject to quota share reinsurance coverage
 $5,000,000 
 $5,000,000 
Expiration date
  June 30, 2020 
  June 30, 2019 
 
    
    
Commercial Lines:
    
    
General iability commercial policies
    
    
Quota share treaty
  None 
  None 
Risk retained
 $750,000 
 $750,000 
Excess of loss coverage above risk retained
 $3,750,000 
 $3,750,000 

  in excess of 
  in excess of 
 
 $750,000 
 $750,000 
Total reinsurance coverage per occurrence
 $3,750,000 
 $3,750,000 
Losses per occurrence subject to reinsurance coverage
 $4,500,000 
 $4,500,000 
 
    
    
Commercial Umbrella
    
    
Quota share treaty:
  None 
    
Percent ceded - first $1,000,000 of coverage
    
  90%
Percent ceded - excess of $1,000,000 of coverage
    
  100%
Risk retained
    
 $100,000 
Total reinsurance coverage per occurrence
    
 $4,900,000 
Losses per occurrence subject to quota share reinsurance coverage
    
 $5,000,000 
Expiration date
    
 
June 30, 2019
 
 
Our catastrophe reinsurance treaty expires on June 30, 2020. Our growth in personal lines premiums and the increasing coastal exposure in Expansion states has increased our risks for catastrophes. We expect our catastrophe rates to increase effective July 1, 2020 to reflect our increased risk and size of our personal lines business as well as anticipated increases in the reinsurance market related to COVID-19 exposure.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Outlook
 
The impacts of COVID-19 and related economic conditions on our results are highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not begin to affect our financial results until late in the first quarter of 2020, its impact on our results in the first quarter of 2020 is not indicative of its impact on our results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in Part II, Item 1A—“Risk Factors” in this Quarterly Report.
 
Our net premiums earned may be impacted by a number of factors. Net premiums earned are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions. As a result of COVID-19, economic conditions in the United States have rapidly deteriorated. The decreased levels of economic activity will negatively impact premium volumes generated by new business. We began to experience this impact in March 2020 and expect it to persist and be more significant in the second quarter of 2020. We also expect this impact will further persist but to a lesser extent for the remainder of 2020, but the degree of the impact will depend on the extent and duration of the economic contraction and could be material. We have also made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return. This action has lead, and will continue to lead, to a slowdown in premium growth, particularly in new business.
 
 
58
 
 
Item  3. Quantitative and Qualitative Disclosures About Market Risk.
 
This item is not applicable to smaller reporting companies.
 
Item  4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
We maintain a system of disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to assure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were not effective at the reasonable assurance level.
 
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Our management concluded that, as of March 31, 2020, our internal control over financial reporting was not effective. Management determined there was ineffective oversight over the process of setting appropriate liability case reserves, which has been assessed as a material weakness. Case reserve estimates are subject to individual judgment, and provide the primary information used as the basis for setting overall reserve levels including a provision for IBNR reserves. Notwithstanding the material weakness, management has concluded that the accompanying condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the financial position, results of operations, and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.
 
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 an entity's financial statements will not be prevented or detected and corrected on a timely basis.
 
Identification of the Material Weakness in Internal Control over Financial Reporting
 
During our assessment we determined that the following material weaknesses existed as of March 31, 2020 in the principles associated with both the control and monitoring activity components of the COSO framework:
 
The material weakness relates to the ineffective oversight over the establishment of case reserve levels, as discussed above. As of the date of this report, there have been no misstatements identified. Insurance loss reserving is an inherently judgmental process. It is dependent on individual opinions regarding specific information available at a given point in time. Reviews of our claims reserving process by multiple parties have led to the additional increase in reserves taken in prior quarters.
 
 
 
59
 
 
Remediation Plans
 
Management has been implementing and continues to implement measures designed to ensure that the control deficiency contributing to the material weakness is remediated, such that the controls are designed, implemented, and operating effectively. The remediation actions include:
 
Engaged external resources to perform a comprehensive review of our claims operations surrounding the establishment and monitoring of liability case reserves;
Hired a new Chief Claims Officer whose role includes a review of the entire population of case reserves to the policy level to ensure proper valuation, existence, and completeness;
Increased the number, experience level and skill of the personnel involved in our claims function through hiring and improved training;
Performed a thorough review of existing policies and procedures in place to facilitate the development and documentation of controls over financial reporting regarding liability case reserves. This review led to the addition of multiple controls including a quality assurance process as well as enhanced documentation of our existing controls in place;
Enhanced testing procedures performed by our outsourced internal audit to ensure adequate design and operating effectiveness of new and existing internal controls.
 
We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.
 
Changes in Internal Control over Financial Reporting
 
Except for the steps taken to remediate the material weakness identified above, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitation on Effectiveness of Controls
 
Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.  
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate. 
 
 
60
 
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
On June 12, 2019, Phillip Woolgar filed a suit naming the Company and certain present or former officers and directors as defendants in a putative class action captioned Woolgar v. Kingstone Companies et al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  Plaintiff seeks to represent a class of persons or entities that purchased Kingstone securities between March 14, 2018, and April 29, 2019, and alleges violations of the federal securities law in connection with the Company’s April 29, 2019 announcement regarding losses related to winter catastrophe events.  The lawsuit alleges that the Company failed to disclose that it did not adequately follow industry best practices related to claims handling and thus did not record sufficient claim reserves, and that as a result, Defendants’ positive statements about the Company’s business, operations and prospects misled investors. Plaintiff seeks, among other things, an undetermined amount of money damages.  The Company believes, after consulting legal counsel, the lawsuit to be without merit. On February 18, 2020, a motion to dismiss was filed with the court. On April 20, 2020, plaintiff filed an opposition to the Company’s motion to dismiss.
 
Item 1A. Risk Factors. 
 
For a discussion of the Company’s potential risks and uncertainties, see Part I, Item 1A— “Risk Factors” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Annual Report filed with the SEC, and Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company's periodic filings with the SEC. Other than as described below, there have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s 2019 Annual Report.
 
The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity.
 
Beginning in March 2020, the global pandemic related to the novel coronavirus COVID-19 began to impact the global economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include, among others, the following:
 
Revenues. We expect that the impact of COVID-19 on general economic activity will negatively impact our premium volumes. We began to experience this impact in March 2020 and expect it to persist and be more significant in the second quarter of 2020. We also expect this impact will further persist but to a lesser extent for the remainder of 2020, but the degree of the impact will depend on the extent and duration of the economic contraction and could be material.
 
Investments. The disruption in the financial markets related to COVID-19 has contributed to net realized investment losses, primarily due to the impact of changes in fair value on our equity investments and in our fixed-income investment portfolio. Our corporate fixed income portfolio may be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries. In addition, in recent years, many state and local governments have been operating under deficits or projected deficits. These deficits may be exacerbated by the costs of responding to COVID-19 and reduced tax revenues due to adverse economic conditions. The severity and duration of these deficits could have an adverse impact on the  collectability and valuation of our municipal bond portfolio. Our investment portfolio also includes mortgage-backed securities which could be adversely impacted by declines in real estate valuations and/or financial market disruption. Further disruptions in global financial markets could adversely impact our net investment income in future periods.
 
Adverse Legislative and/or Regulatory Action. Federal, state and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, we may be subject to legislative and/or regulatory action that seeks to retroactively mandate coverage for losses which our insurance policies were not designed or priced to cover. Currently, in some states there is proposed legislation to require insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage. Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel or non-renew policies and our right to collect premiums.
 
Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our producers are unable to continue to work because of illness, government directives or otherwise. In addition, the interruption of our or their system capabilities could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities.
 
Reinsurance Risks. We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations to policyholders. Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes. Market conditions beyond our control, including the effect of COVID-19 on the reinsurance market, 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 thesame terms and rates as currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for ourcurrent reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable,we will have to either accept an increase in our exposure risk, reduce our insurance writings or seek other alternatives. Our ability to maintain our financial strength rating from A.M. Best depends, in part, on our ability to purchase a sufficient level of catastrophe reinsurance.
 
 
61
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
(a)  None.
 
(b)  Not applicable.
 
(c) The following table sets forth certain information with respect to purchases of common stock made by us during the quarter ended March 31, 2020:
 
Period
 
Total
Number of Shares Purchased(1)
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1/1/20 – 1/31/20
  - 
  - 
  - 
  - 
2/1/20 – 2/29/20
  - 
  - 
  - 
  - 
3/1/20 – 3/31/20
  42,434 
 $5.66 
  - 
  - 
Total
  42,434 
 $5.66 
  - 
  - 
 
(1)
Purchases were made by us in open market transactions.
 
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
Item 5. Other Information.
 
None.
 
Item 6. Exhibits.
 
Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed on May 15, 2014).

 
3(b)
By-laws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 9, 2009). 
 
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
101.SCH XBRL Taxonomy Extension Schema.
 
 
101.CAL
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
 
 
101.DEF
101.DEF XBRL Taxonomy Extension Definition Linkbase.
 
 
101.LAB
101.LAB XBRL Taxonomy Extension Label Linkbase.
 
 
101.PRE
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
 
+
This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended.
 
 
62
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
KINGSTONE COMPANIES, INC.
 
 
 
 
 
Dated: May 11, 2020
By:  
/s/ Barry B. Goldstein  
 
 
 
Barry B. Goldstein
 
 
 
Chief Executive Officer
 
 
 
 

 
 
 
 
 
Dated: May 11, 2020
By:  
/s/ Victor Brodsky  
 
 
 
Victor Brodsky
 
 
 
Chief Financial Officer
 
 
 
 
 
 
63
kins_ex311
 
 
  Exhibit 31(a)
 
I, Barry B. Goldstein, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Kingstone Companies, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting
 
Date: May 11, 2020
 
 
/s/ Barry B. Goldstein
 
Barry B. Goldstein
Chief Executive Officer
 
 
 
kins_ex312
 
 
Exhibit 31(b)
 
CERTIFICATION
 
I, Victor Brodsky, certify that:
 
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Kingstone Companies, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date: May 11, 2020
 
 
/s/ Victor Brodsky
 
Victor Brodsky
Chief Financial Officer
 
 
 
 
 
kins_ex32
 
 
Exhibit 32
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Kingstone Companies, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 

 
 
 
 
 
Dated: May 11, 2020 
 
/s/ Barry B. Goldstein  
 
 
 
Barry B. Goldstein
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
/s/ Victor Brodsky
 
 
 
Victor Brodsky
 
 
 
Chief Financial Officer
 
 

 
 
 
 
 
 
 
 
v3.20.1
1. Nature of Business and Basis of Presentation
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
1. Nature of Business and Basis of Presentation

Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned subsidiary, Kingstone Insurance Company (“KICO”), underwrites property and casualty insurance exclusively through retail and wholesale agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine and New Hampshire. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts, and Connecticut. Although New Jersey, Rhode Island, Massachusetts and Connecticut continue to be growing markets for the Company, 82.7% and 91.4% of KICO’s direct written premiums for the three months ended March 31, 2020 and 2019, respectively, came from the New York policies. Kingstone, through its wholly owned subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, accesses alternate forms of distribution outside of the independent agent and broker network, through which KICO currently distributes its various products. Kingstone (through Cosi) now has the opportunity to partner with name-brand carriers and access nationwide insurance agencies.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the three months ended March 31, 2020 may not be indicative of the results that may be expected for the year ending December 31, 2020.

v3.20.1
9. Income Taxes (Details 1) - USD ($)
3 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Income Tax Disclosure [Abstract]    
Federal only, current year $ 0 $ 1,517,866
State only 1,722,611 1,616,568
Valuation allowance (1,652,230) (1,548,187)
State only, net of valuation allowance 70,381 68,381
Total deferred tax asset from net operating loss carryovers $ 70,381 $ 1,586,247
State only expiration date December 31, 2040  
v3.20.1
8. Stockholders' Equity (Details)
3 Months Ended
Mar. 31, 2020
Stockholders' Equity  
Dividend Yield 3.14%
Volatility 37.69%
Risk-Free Interest Rate 1.40%
Expected Life 2 years 9 months
v3.20.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Fixed-maturity securities, held-to-maturity, fair value $ 4,136,710 $ 4,124,767
Fixed-maturity securities, available-for-sale, amortized cost 152,675,779 162,202,355
Equity securities, available-for-sale, cost $ 22,430,037 $ 22,624,668
Stockholders' Equity    
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, authorized shares 2,500,000 2,500,000
Common stock, par value $ 0.01 $ 0.01
Common stock, authorized shares 20,000,000 20,000,000
Common stock, issued shares 11,851,266 11,824,889
Common stock, outstanding shares 10,781,393 10,797,450
Treasury stock, shares 1,069,873 1,027,439
v3.20.1
12. Deferred Compensation Plan
3 Months Ended
Mar. 31, 2020
Deferred Compensation Plan  
12. Deferred Compensation Plan

On June 18, 2018, the Company adopted the Kingstone Companies, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is offered to a select group (“Participants”), consisting of management and highly compensated employees as a method of recognizing and retaining such Participants. The Deferred Compensation Plan provides for eligible Participants to elect to defer up to 75% of their base compensation and up to 100% of bonuses and other compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the Participant deferrals, the Company may choose to make matching contributions to some or all of the Participants in the Deferred Compensation Plan to the extent the Participant did not receive the maximum matching or non-elective contributions permissible under the Company’s 401(k) Plan due to limitations under the Internal Revenue Code or the 401(k) Plan. Participants may elect to receive payment of their account balances in a single cash payment or in annual installments for a period of up to ten years. The first payroll subject to the Deferred Compensation Plan was in July 2018. The deferred compensation liability as of March 31, 2020 and December 31, 2019 amounted to $524,190 and $599,274, respectively, and is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. The Company did not make any voluntary contributions for the three months ended March 31, 2020 and 2019.

v3.20.1
8. Stockholders' Equity
3 Months Ended
Mar. 31, 2020
Stockholders' Equity  
8. Stockholders' Equity

Dividends Declared and Paid

 

Dividends declared and paid on Common Stock were $675,960 and $1,075,962 for the three months ended March 31, 2020 and 2019, respectively. The Company’s Board of Directors approved a quarterly dividend on May 6, 2020 of $.04 per share payable in cash on June 15, 2020 to stockholders of record as of May 29, 2020 (see Note 13 - Subsequent Events).

 

Stock Options

 

Effective August 12, 2014, the Company adopted the 2014 Equity Participation Plan (the “2014 Plan”) pursuant to which, a maximum of 700,000 shares of Common Stock of the Company are authorized to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and stock bonuses. Incentive stock options granted under the 2014 Plan expire no later than ten years from the date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Compensation Committee determines the expiration date with respect to non-statutory stock options and the vesting provisions for restricted stock granted under the 2014 Plan.

 

The results of operations for the three months ended March 31, 2020 and 2019 include stock-based compensation expense for stock options totaling approximately $17,000 and $1,000, respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of approximately 16% for the three months ended March 31 2020 and 2019. Such amounts have been included in the consolidated statements of operations and comprehensive loss within other operating expenses.

 

The weighted average estimated fair value of stock options granted during the three months ended March 31, 2020 was $1.66 per share. No options were granted during the three months ended March 31, 2019. The fair value of stock options at the grant date was estimated using the Black-Scholes option-pricing model.

 

The following weighted average assumptions were used for grants during the following periods:

 

   Three months ended 
   March 31, 
   2020     2019 
       
Dividend Yield 3.14%   n/a
Volatility 37.69%   n/a
Risk-Free Interest Rate 1.40%   n/a
Expected Life 2.75 years   n/a

 

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

 

A summary of stock option activity under the Company’s 2014 Plan for the three months ended March 31, 2020 is as follows:

Stock Options Number of Shares    Weighted Average Exercise Price per Share     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value 
               
Outstanding at January 1, 2020        82,000    $               8.61                 3.38    $                 -
               
Granted        74,523    $               7.96                 4.84    $                 -
Exercised                  -    $                  -                        -       $                 -
Forfeited                  -    $                  -                        -       $                 -
               
Outstanding at March 31, 2020      156,523    $               8.30                 3.94    $                 -
               
Vested and Exercisable at March 31, 2020        50,000    $               8.45                 1.84    $                 -

 

The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2020 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Common Stock for the options that had exercise prices that were lower than the $5.11 closing price of the Company’s Common Stock on March 31, 2020. No options were exercised or forfeited during the three months ended March 31, 2020.

Participants in the 2014 Plan may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”), or by exchanging a number of shares owned for a period of greater than one year having a fair market value equal to the exercise price of the option being exercised (“Share Exchange”).

As of March 31, 2020, the estimated fair value of unamortized compensation cost related to unvested stock option awards was approximately $138,000. Unamortized compensation cost as of March 31, 2020 is expected to be recognized over a remaining weighted-average vesting period of 1.89 years.

As of March 31, 2020, there were 66,600 shares reserved for grants under the 2014 Plan.

  

Restricted Stock Awards

 

A summary of the restricted Common Stock activity under the Company’s 2014 Plan for the three months ended March 31, 2020 is as follows:

 

Restricted Stock Awards Shares    Weighted Average Grant Date Fair Value per Share     Aggregate Fair Value 
           
Balance at January 1, 2020      213,929    $             16.51    $   3,554,174
           
Granted      199,812    $               7.94    $   1,586,507
Vested       (38,866)    $             18.90    $    (734,467)
Forfeited         (3,046)    $             15.15    $      (46,135)
           
Balance at March 31, 2020      371,829    $             12.21    $   4,360,079

 

Fair value was calculated using the closing price of the Company’s Common Stock on the grant date. For the three months ended March 31, 2020 and 2019, stock-based compensation for these grants was approximately $472,000 and $309,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive loss. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be recognized by the directors, executives and employees.

v3.20.1
4. Fair Value Measurements
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
4. Fair Value Measurements

The following table presents information about the Company’s investments that are measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 indicating the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

  March 31, 2020
   Level 1      Level 2         Level 3         Total  
   
 Fixed-maturity securities available-for-sale               
 U.S. Treasury securities               
 and obligations of U.S.               
 government corporations               
 and agencies   $     5,136,240    $                  -    $                  -    $     5,136,240
               
 Political subdivisions of               
 States, Territories and               
 Possessions                         -         9,414,959                        -           9,414,959
               
 Corporate and other               
 bonds industrial and               
 miscellaneous      111,099,020         2,390,602                        -       113,489,622
               
 Residential mortgage backed securities                         -       23,839,073                        -         23,839,073
 Total fixed maturities       116,235,260       35,644,634                        -       151,879,894
 Equity securities        18,368,893                        -                        -         18,368,893
 Total investments   $ 134,604,153    $ 35,644,634    $                  -    $ 170,248,787

  

  December 31, 2019
   Level 1      Level 2         Level 3         Total  
   
 Fixed-maturity securities available-for-sale               
 U.S. Treasury securities               
 and obligations of U.S.               
 government corporations               
 and agencies   $     7,061,100    $                  -    $                  -    $     7,061,100
               
 Political subdivisions of               
 States, Territories and               
 Possessions                         -         9,321,812                        -           9,321,812
               
 Corporate and other               
 bonds industrial and               
 miscellaneous      123,010,772         2,611,267                        -       125,622,039
               
 Residential mortgage backed securities                         -       26,231,230                        -         26,231,230
 Total fixed maturities       130,071,872       38,164,309                        -       168,236,181
 Equity securities        24,661,382                        -                        -         24,661,382
 Total investments   $ 154,733,254    $ 38,164,309    $                  -    $ 192,897,563

 

The following table sets forth the Company’s investment in a hedge fund measured at Net Asset Value (“NAV”) per share as of March 31, 2020 and December 31, 2019. The Company measures this investment at fair value on a recurring basis. Fair value using NAV per share is as follows as of the dates indicated:

 

 Category   March 31, 2020   December 31, 2019
     
 Other Investments:       
 Hedge fund   $              1,987,522    $              2,584,913
 Total    $              1,987,522    $              2,584,913

 

The investment is generally redeemable with at least 45 days prior written notice. The hedge fund investment is accounted for as a limited partnership by the Company. Income is earned based upon the Company’s allocated share of the partnership's changes in unrealized gains and losses to its partners. Such amounts have been recorded in the condensed consolidated statements of operations and comprehensive loss within net gains (losses) on investments.

 

The estimated fair value and the level of the fair value hierarchy of the Company’s long-term debt as of March 31, 2020 and December 31, 2019 not measured at fair value is as follows:

 

  March 31, 2020
   Level 1      Level 2         Level 3         Total  
 Long-term debt   
               
 Senior Notes due 2022   $                    -    $ 27,281,870    $                  -    $   27,281,870

 

  December 31, 2019
   Level 1      Level 2         Level 3         Total  
 Long-term debt   
               
 Senior Notes due 2022   $                    -    $ 27,313,994    $                  -    $   27,313,994

 

 

 

v3.20.1
3. Investments (Details 3) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Cost or amortized cost $ 3,826,404 $ 3,825,952
Gross unrealized gains 312,536 299,650
Gross unrealized losses - less than 12 months (2,230) (835)
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 4,136,710 4,124,767
Net unrealized gains 310,306 298,815
US Treasury Securities    
Cost or amortized cost 729,561 729,550
Gross unrealized gains 162,483 151,002
Gross unrealized losses - less than 12 months 0 0
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 892,044 880,552
Net unrealized gains 162,483 151,002
Fixed Maturity Securities Political Subdivisions Of States Territories And Possessions    
Cost or amortized cost 998,573 998,619
Gross unrealized gains 43,857 51,021
Gross unrealized losses - less than 12 months 0 0
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 1,042,430 1,049,640
Net unrealized gains 43,857 51,021
Fixed Maturity Securities Corporate And Other Bonds Industrial And Miscellaneous    
Cost or amortized cost 2,098,270 2,097,783
Gross unrealized gains 106,196 97,627
Gross unrealized losses - less than 12 months (2,230) (835)
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 2,202,236 2,194,575
Net unrealized gains $ 103,966 $ 96,792
v3.20.1
3. Investments (Details 7) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
U.S. Treasury Securities and Obligations of U.S. Government    
Estimated fair value - less than 12 months $ 0 $ 0
Unrealized losses - less than 12 months 0 0
Number of positions held - less than 12 months 0 0
Estimated fair value - 12 months or more 0 0
Unrealized losses - 12 months or more 0 0
Number of positions held - 12 months or more 0 0
Estimated fair value - total 0 0
Unrealized losses - total 0 0
Fixed Maturity Securities Political Subdivisions Of States Territories And Possessions    
Estimated fair value - less than 12 months 0 3,067,428
Unrealized losses - less than 12 months 0 (11,316)
Number of positions held - less than 12 months 0 3
Estimated fair value - 12 months or more 0 0
Unrealized losses - 12 months or more 0 0
Number of positions held - 12 months or more 0 0
Estimated fair value - total 0 3,067,428
Unrealized losses - total 0 (11,316)
Fixed Maturity Securities Corporate And Other Bonds Industrial And Miscellaneous    
Estimated fair value - less than 12 months 35,409,999 3,730,478
Unrealized losses - less than 12 months (2,258,459) (16,685)
Number of positions held - less than 12 months 50 7
Estimated fair value - 12 months or more 0 1,300,915
Unrealized losses - 12 months or more 0 (13,473)
Number of positions held - 12 months or more 0 3
Estimated fair value - total 35,409,999 5,031,393
Unrealized losses - total (2,258,459) (30,158)
Fixed Maturity Securities Residential Mortgage and other asset backed securities    
Estimated fair value - less than 12 months 6,067,674 5,862,636
Unrealized losses - less than 12 months (938,478) (68,793)
Number of positions held - less than 12 months 13 5
Estimated fair value - 12 months or more 10,286,307 13,534,768
Unrealized losses - 12 months or more (1,145,973) (276,451)
Number of positions held - 12 months or more 17 21
Estimated fair value - total 16,353,981 19,397,404
Unrealized losses - total (2,084,451) (345,244)
Fixed Maturity Securities Total Fixed Maturity Securities    
Estimated fair value - less than 12 months 41,477,673 12,660,542
Unrealized losses - less than 12 months (3,196,937) (96,794)
Number of positions held - less than 12 months 63 15
Estimated fair value - 12 months or more 10,286,307 14,835,683
Unrealized losses - 12 months or more (1,145,973) (289,924)
Number of positions held - 12 months or more 17 24
Estimated fair value - total 51,763,980 27,496,225
Unrealized losses - total $ (4,342,910) $ (386,718)
v3.20.1
8. Stockholders' Equity (Tables)
3 Months Ended
Mar. 31, 2020
Stockholders' Equity  
Weighted average assumptions
   Three months ended 
   March 31, 
   2020     2019 
       
Dividend Yield 3.14%   n/a
Volatility 37.69%   n/a
Risk-Free Interest Rate 1.40%   n/a
Expected Life 2.75 years   n/a
Schedule of stock options activity
Stock Options Number of Shares    Weighted Average Exercise Price per Share     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value 
               
Outstanding at January 1, 2020        82,000    $               8.61                 3.38    $                 -
               
Granted        74,523    $               7.96                 4.84    $                 -
Exercised                  -    $                  -                        -       $                 -
Forfeited                  -    $                  -                        -       $                 -
               
Outstanding at March 31, 2020      156,523    $               8.30                 3.94    $                 -
               
Vested and Exercisable at March 31, 2020        50,000    $               8.45                 1.84    $                 -
Schedule of restricted stock awards activity
Restricted Stock Awards Shares    Weighted Average Grant Date Fair Value per Share     Aggregate Fair Value 
           
Balance at January 1, 2020      213,929    $             16.51    $   3,554,174
           
Granted      199,812    $               7.94    $   1,586,507
Vested       (38,866)    $             18.90    $    (734,467)
Forfeited         (3,046)    $             15.15    $      (46,135)
           
Balance at March 31, 2020      371,829    $             12.21    $   4,360,079
v3.20.1
4. Fair Value Measurements (Tables)
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Schedule of fair value measurements

 

  March 31, 2020
   Level 1      Level 2      Level 3      Total  
   
 Fixed-maturity securities available-for-sale               
 U.S. Treasury securities               
 and obligations of U.S.               
 government corporations               
 and agencies   $     5,136,240    $                  -    $                  -    $     5,136,240
               
 Political subdivisions of               
 States, Territories and               
 Possessions                         -         9,414,959                        -           9,414,959
               
 Corporate and other               
 bonds industrial and               
 miscellaneous      111,099,020         2,390,602                        -       113,489,622
               
 Residential mortgage backed securities                         -       23,839,073                        -         23,839,073
 Total fixed maturities       116,235,260       35,644,634                        -       151,879,894
 Equity securities        18,368,893                        -                        -         18,368,893
 Total investments   $ 134,604,153    $ 35,644,634    $                  -    $ 170,248,787

 

 

  December 31, 2019
   Level 1      Level 2      Level 3      Total  
   
 Fixed-maturity securities available-for-sale               
 U.S. Treasury securities               
 and obligations of U.S.               
 government corporations               
 and agencies   $     7,061,100    $                  -    $                  -    $     7,061,100
               
 Political subdivisions of               
 States, Territories and               
 Possessions                         -         9,321,812                        -           9,321,812
               
 Corporate and other               
 bonds industrial and               
 miscellaneous      123,010,772         2,611,267                        -       125,622,039
               
 Residential mortgage backed securities                         -       26,231,230                        -         26,231,230
 Total fixed maturities       130,071,872       38,164,309                        -       168,236,181
 Equity securities        24,661,382                        -                        -         24,661,382
 Total investments   $ 154,733,254    $ 38,164,309    $                  -    $ 192,897,563
Schedule of hedge fund investments
 Category   March 31, 2020   December 31, 2019
     
 Other Investments:       
 Hedge fund   $              1,987,522    $              2,584,913
 Total    $              1,987,522    $              2,584,913
Fair value hierarchy of long-term debt

 

  March 31, 2020
   Level 1      Level 2      Level 3      Total  
 Long-term debt   
               
 Senior Notes due 2022   $                    -    $ 27,281,870    $                  -    $   27,281,870

 

  December 31, 2019
   Level 1      Level 2      Level 3      Total  
 Long-term debt   
               
 Senior Notes due 2022   $                    -    $ 27,313,994    $                  -    $   27,313,994
v3.20.1
6. Property and Casualty Insurance Activity (Details) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Premiums Written    
Direct $ 36,696,929 $ 37,488,548
Assumed 0 (34)
Ceded (13,506,255) (7,127,909)
Net 23,190,674 30,360,605
Changes In Unearned Premiums    
Direct 5,904,700 (628,067)
Assumed 0 195
Ceded (2,153,924) (136,844)
Net 3,750,776 (764,716)
Premiums Earned    
Direct 42,601,629 36,860,481
Assumed 0 161
Ceded (15,660,179) (7,264,753)
Net $ 26,941,450 $ 29,595,889
v3.20.1
6. Property and Casualty Insurance Activity (Details 4)
$ in Thousands
Mar. 31, 2020
USD ($)
Insurance [Abstract]  
Liabilities for allocated loss and loss adjustment expenses, net of reinsurance $ 59,154
Total reinsurance recoverable on unpaid losses 16,259
Unallocated loss adjustment expenses 2,437
Total gross liability for loss and LAE reserves $ 77,851
v3.20.1
11. Commitments and Contingencies (Details 1)
Mar. 31, 2020
USD ($)
Commitments and Contingencies Disclosure [Abstract]  
Remainder of 2020 $ 102,691
2021 264,571
2022 273,831
2023 283,415
2024 140,739
Thereafter 192,916
Total undiscounted lease payments 1,258,163
Less: present value adjustment 54,213
Operating lease liability $ 1,203,950
v3.20.1
9. Income Taxes (Tables)
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Schedule of deferrred tax assets and liabilities

   March 31,     December 31, 
   2020     2019 
       
 Deferred tax asset:           
 Net operating loss carryovers (1)   $              70,381    $        1,586,247
 Claims reserve discount                  797,917                 839,959
 Unearned premium               2,945,811              3,105,344
 Deferred ceding commission revenue              1,456,434              1,624,434
 Other                 272,244                 462,019
 Total deferred tax assets               5,542,787                 7,618,003
       
 Deferred tax liability:           
 Investment in KICO (2)                 759,543                 759,543
 Deferred acquisition costs              4,110,096              4,333,219
 Intangibles                 105,000                 105,000
 Depreciation and amortization                  318,895                 312,298
 Net unrealized (losses) gains of securities - available-for-sale             (1,098,446)              1,796,891
 Total deferred tax liabilities               4,195,088                 7,306,951
       
 Net deferred income tax asset   $         1,347,699    $           311,052

 

 

Losses subject to annual limitation

       
   March 31,   December 31,   
 Type of NOL   2020   2019  Expiration
       
 Federal only, current year   $                           -  $            1,517,866 (A)
       
 State only (B)                 1,722,611                1,616,568 December 31, 2040
 Valuation allowance                (1,652,230)               (1,548,187)  
 State only, net of valuation allowance                      70,381                     68,381  
       
 Total deferred tax asset from net operating loss carryovers   $                 70,381  $            1,586,247  

 

v3.20.1
5. Fair Value of Financial Instruments and Real Estate (Tables)
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Schedule of fair value of financial instruments

  March 31, 2020   December 31, 2019
  Carrying   Estimated   Carrying   Estimated
  Value   Fair Value   Value   Fair Value
           
 Fixed-maturity securities-held-to maturity   $        3,826,404    $        4,136,710    $        3,825,952    $       4,124,767
 Cash and cash equivalents   $      25,586,789    $      25,586,789    $      32,391,485    $     32,391,485
 Premiums receivable, net   $      11,913,123    $      11,913,123    $      12,706,411    $     12,706,411
 Reinsurance receivables, net   $      42,709,055    $      42,709,055    $      40,750,538    $     40,750,538
 Real estate, net of accumulated depreciation   $        2,275,307    $        2,705,000    $        2,292,743    $       2,705,000
 Reinsurance balances payable    $        5,337,287    $        5,337,287    $      11,714,724    $     11,714,724

 

 

v3.20.1
5. Fair Value of Financial Instruments and Real Estate (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Reinsurance balances payable $ 5,337,287 $ 11,714,724
Long-term debt, net 29,515,476 29,471,431
Carrying Value    
Fixed-maturity securities held-to-maturity 3,826,404 3,825,952
Cash and cash equivalents 25,586,789 32,391,485
Premiums receivable, net 11,913,123 12,706,411
Reinsurance receivables, net 42,709,055 40,750,538
Real estate, net of accumulated depreciation 2,275,307 2,292,743
Reinsurance balances payable 5,337,287 11,714,724
Fair Value    
Fixed-maturity securities held-to-maturity 4,136,710 4,124,767
Cash and cash equivalents 25,586,789 32,391,485
Premiums receivable, net 11,913,123 12,706,411
Reinsurance receivables, net 42,709,055 40,750,538
Real estate, net of accumulated depreciation 2,705,000 2,705,000
Reinsurance balances payable $ 5,337,287 $ 11,714,724
v3.20.1
6. Property and Casualty Insurance Activity (Details 3)
Mar. 31, 2020
USD ($)
Net liability for unpaid claim and allocated claim adjustment expenses for the accident years presented $ 59,055
All outstanding liabilities before 2011, net of reinsurance 100
Liabilities for claims and claim adjustment expenses, net of reinsurance 59,154
2011  
2011 3,740
2012  
2011 5,117
2012 3,950
2013  
2011 6,228
2012 5,770
2013 3,405
2014  
2011 7,170
2012 7,127
2013 5,303
2014 5,710
2015  
2011 8,139
2012 8,196
2013 6,633
2014 9,429
2015 12,295
2016  
2011 8,540
2012 9,187
2013 7,591
2014 10,738
2015 16,181
2016 15,364
2017  
2011 8,702
2012 10,236
2013 8,407
2014 11,770
2015 18,266
2016 19,001
2017 16,704
2018  
2011 8,727
2012 10,323
2013 9,056
2014 13,819
2015 19,984
2016 21,106
2017 24,820
2018 32,383
2019  
2011 8,789
2012 10,428
2013 9,717
2014 14,901
2015 21,067
2016 23,974
2017 28,693
2018 44,516
2019 40,933
2020  
2011 8,991
2012 10,442
2013 9,728
2014 15,150
2015 21,448
2016 24,371
2017 28,969
2018 46,178
2019 50,983
2020 5,469
Total $ 221,729
v3.20.1
11. Commitments and Contingencies (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]    
Rent expenses $ 81,251 $ 41,342
v3.20.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash flows from operating activities:    
Net loss $ (5,444,203) $ (7,335,190)
Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities:    
Net (gains) losses on sale of investments (274,581) 25,192
Net unrealized losses (gains) of equity investments 6,121,608 (1,767,835)
Net unrealized losses (gains) of other investments 597,391 (292,720)
Depreciation and amortization 687,094 602,332
Bad debts 35,737 36,824
Amortization of bond premium, net 105,189 118,568
Amortization of discount and issuance costs on long-term debt 44,045 44,045
Stock-based compensation 487,450 309,882
Deferred income tax expense 397,593 510,533
(Increase) decrease in operating assets:    
Premiums receivable, net 757,551 (286,973)
Reinsurance receivables, net (1,958,517) 209,478
Deferred policy acquisition costs 1,062,490 (246,544)
Other assets (521,521) (3,666,830)
Increase (decrease) in operating liabilities:    
Loss and loss adjustment expense reserves (2,647,512) 12,913,165
Unearned premiums (5,904,700) 627,872
Advance premiums (47,633) 956,784
Reinsurance balances payable (6,377,437) (731,445)
Deferred ceding commission revenue (799,997) 58,710
Accounts payable, accrued expenses and other liabilities (1,576,461) 616,556
Net cash flows (used in) provided by operating activities (15,256,414) 2,702,404
Cash flows from investing activities:    
Purchase - fixed-maturity securities available-for-sale (961,000) (6,094,835)
Purchase - equity securities (5,220,778) (1,604,615)
Sale and redemption - fixed-maturity securities held-to-maturity 0 400,000
Sale or maturity - fixed-maturity securities available-for-sale 10,553,818 1,505,382
Sale - equity securities 5,518,428 246,047
Acquisition of property and equipment (432,112) (1,048,604)
Other investing activities 0 (287,733)
Net cash flows provided by (used in) investing activities 9,458,356 (6,884,358)
Cash flows from financing activities:    
Withholding taxes paid on vested retricted stock awards (87,954) (116,007)
Purchase of treasury stock (242,724) 0
Dividends paid (675,960) (1,075,962)
Net cash flows used in financing activities (1,006,638) (1,191,969)
Decrease in cash and cash equivalents (6,804,696) (5,373,923)
Cash and cash equivalents, beginning of period 32,391,485 21,138,403
Cash and cash equivalents, end of period 25,586,789 15,764,480
Supplemental disclosures of cash flow information:    
Cash paid for income taxes 0 0
Cash paid for interest $ 0 $ 0
v3.20.1
9. Income Taxes (Details Narrative) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Income Tax Disclosure [Abstract]    
Net operating loss carryover $ 26,502,000 $ 24,901,000
v3.20.1
8. Stockholders' Equity (Details 1)
3 Months Ended
Mar. 31, 2020
USD ($)
$ / shares
shares
Number of options outstanding, beginning | shares 82,000
Number of options granted | shares 74,523
Number of options exercised | shares 0
Number of options forfeited | shares 0
Number of options outstanding, ending | shares 156,523
Number of options vested and exercisable | shares 50,000
Weighted average exercise price outstanding, beginning $ 8.61
Weighted average exercise price granted 7.96
Weighted average exercise price exercised 0.00
Weighted average exercise price forfeited 0.00
Weighted average exercise price outstanding, ending 8.30
Weighted average exercise price vested and exercisable $ 8.45
Weighted average remaining contractual life (in years) outstanding, beginning 3 years 4 months 17 days
Weighted average remaining contractual life (in years) granted 4 years 10 months 2 days
Weighted average remaining contractual life (in years) outstanding, ending 3 years 11 months 8 days
Weighted average remaining contractual life (in years) vested and exercisable 1 year 10 months 2 days
Aggregate intrinsic value outstanding, beginning | $ $ 0
Aggregate intrinsic value granted $ 0
Aggregate intrinsic value exercised | $ $ 0
Aggregate intrinsic value forfeited $ 0
Aggregate intrinsic value outstanding, ending | $ $ 0
Aggregate intrinsic value vested and exercisable | $ $ 0
Restricted Stock  
Number of options outstanding, beginning | shares 213,929
Number of options granted | shares 199,812
Number of options exercised | shares (38,866)
Number of options forfeited | shares (3,046)
Number of options outstanding, ending | shares 371,829
Weighted average exercise price outstanding, beginning $ 16.51
Weighted average exercise price granted 7.94
Weighted average exercise price exercised 18.90
Weighted average exercise price forfeited 15.15
Weighted average exercise price outstanding, ending $ 12.21
Aggregate intrinsic value outstanding, beginning | $ $ 3,554,174
Aggregate intrinsic value granted $ 1,586,507
Aggregate intrinsic value exercised | $ $ (734,467)
Aggregate intrinsic value forfeited $ (46,135)
Aggregate intrinsic value outstanding, ending | $ $ 4,360,079
v3.20.1
Condensed Consolidated Balance Sheets - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Assets    
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of $4,136,710 at March 31, 2020 and $4,124,767 at December 31, 2019) $ 3,826,404 $ 3,825,952
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $152,675,779 at March 31, 2020 and $162,202,355 at December 31, 2019) 151,879,894 168,236,181
Equity securities, at fair value (cost of $22,430,037 at March 31, 2020 and $22,624,668 at December 31, 2019) 18,368,893 24,661,382
Other investments 1,987,522 2,584,913
Total investments 176,062,713 199,308,428
Cash and cash equivalents 25,586,789 32,391,485
Premiums receivable, net 11,913,123 12,706,411
Reinsurance receivables, net 42,709,055 40,750,538
Deferred policy acquisition costs 19,571,888 20,634,378
Intangible assets, net 500,000 500,000
Property and equipment, net 7,365,654 7,620,636
Deferred income taxes, net 1,347,699 311,052
Other assets 7,477,334 6,979,884
Total assets 292,534,255 321,202,812
Liabilities    
Loss and loss adjustment expense reserves 77,851,099 80,498,611
Unearned premiums 84,478,538 90,383,238
Advance premiums 3,143,879 3,191,512
Reinsurance balances payable 5,337,287 11,714,724
Deferred ceding commission revenue 6,935,401 7,735,398
Accounts payable, accrued expenses and other liabilities 8,409,856 9,986,317
Long-term debt, net 29,515,476 29,471,431
Total liabilities 215,671,536 232,981,231
Commitments and Contingencies (note 11)
Stockholders' Equity    
Preferred stock, $.01 par value; authorized 2,500,000 shares 0 0
Common stock, $.01 par value; authorized 20,000,000 shares; issued 11,851,266 shares at March 31, 2020 and 11,824,889 at December 31, 2019; outstanding 10,781,393 shares at March 31, 2020 and 10,797,450 shares at December 31, 2019 118,512 118,248
Capital in excess of par 69,533,150 69,133,918
Accumulated other comprehensive (loss) income (626,601) 4,768,870
Retained earnings 10,792,934 16,913,097
Total 79,817,995 90,934,133
Treasury stock, at cost, 1,069,873 shares at March 31, 2020 and 1,027,439 shares at December 31, 2019 (2,955,276) (2,712,552)
Total stockholders' equity 76,862,719 88,221,581
Total liabilities and stockholders' equity $ 292,534,255 $ 321,202,812
v3.20.1
9. Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
9. Income Taxes

The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated or separate return basis depending on applicable laws. The Company records adjustments related to prior years’ taxes during the period when they are identified, generally when the tax returns are filed.  The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the consolidated financial statements taken as a whole for the respective periods.

 

Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the temporary differences are expected to be recovered. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheets reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at various rates depending on whether the temporary differences are subject to federal taxes, state taxes, or both.

  

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

 

   March 31,     December 31, 
   2020     2019 
       
 Deferred tax asset:           
 Net operating loss carryovers (1)   $              70,381    $        1,586,247
 Claims reserve discount                  797,917                 839,959
 Unearned premium               2,945,811              3,105,344
 Deferred ceding commission revenue              1,456,434              1,624,434
 Other                 272,244                 462,019
 Total deferred tax assets               5,542,787                 7,618,003
       
 Deferred tax liability:           
 Investment in KICO (2)                 759,543                 759,543
 Deferred acquisition costs              4,110,096              4,333,219
 Intangibles                 105,000                 105,000
 Depreciation and amortization                  318,895                 312,298
 Net unrealized (losses) gains of securities - available-for-sale             (1,098,446)              1,796,891
 Total deferred tax liabilities               4,195,088                 7,306,951
       
 Net deferred income tax asset   $         1,347,699    $           311,052

 

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

 

       
   March 31,   December 31,   
 Type of NOL   2020   2019  Expiration
       
 Federal only, current year   $                           -  $            1,517,866 (A)
       
 State only (B)                 1,722,611                1,616,568 December 31, 2040
 Valuation allowance                (1,652,230)               (1,548,187)  
 State only, net of valuation allowance                      70,381                     68,381  
       
 Total deferred tax asset from net operating loss carryovers   $                 70,381  $            1,586,247  

(A) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. The Company will elect on its 2019 federal income tax return to carry back the 2019 NOL to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019.

(B) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of March 31, 2020 and December 31, 2019 was approximately $26,502,000 and $24,901,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the consolidated statements of operations and comprehensive loss within other underwriting expenses. Kingstone has recorded a valuation allowance due to the uncertainty of generating enough state taxable income to utilize 100% of the available state NOLs over their remaining lives, which expire between 2027 and 2040.

(2)Deferred tax liability – Investment in KICO


On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition, the deferred tax liability on the Untaxed Interest was $1,169,000. A temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The deferred tax liability was reduced to $759,543 upon the reduction of federal income tax rates as of December 31, 2017. The Company is required to maintain its deferred tax liability of $759,543 related to this temporary difference until the stock of KICO is sold, or the assets of KICO are sold or KICO and the parent are merged.

In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. No valuation allowance against deferred tax assets has been established, except for NOL limitations, as the Company believes it is more likely than not the deferred tax assets will be realized based on the historical taxable income of KICO, or by offset to deferred tax liabilities.

 

The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the three months ended March 31, 2020 and 2019. If any had been recognized these would have been reported in income tax expense.

 

Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing. The Company’s tax returns for the years ended December 31, 2016 through December 31, 2019 remain subject to examination. The Company’s federal income tax return for the year ended December 31, 2016 has been examined by the Internal Revenue Service and was accepted as filed. 

v3.20.1
5. Fair Value of Financial Instruments and Real Estate
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
5. Fair Value of Financial Instruments and Real Estate

The estimated fair values of the Company’s financial instruments and real estate as of March 31, 2020 and December 31, 2019 are as follows:

 

  March 31, 2020   December 31, 2019
  Carrying   Estimated   Carrying   Estimated
  Value   Fair Value   Value   Fair Value
           
 Fixed-maturity securities-held-to maturity   $        3,826,404    $        4,136,710    $        3,825,952    $       4,124,767
 Cash and cash equivalents   $      25,586,789    $      25,586,789    $      32,391,485    $     32,391,485
 Premiums receivable, net   $      11,913,123    $      11,913,123    $      12,706,411    $     12,706,411
 Reinsurance receivables, net   $      42,709,055    $      42,709,055    $      40,750,538    $     40,750,538
 Real estate, net of accumulated depreciation   $        2,275,307    $        2,705,000    $        2,292,743    $       2,705,000
 Reinsurance balances payable    $        5,337,287    $        5,337,287    $      11,714,724    $     11,714,724

 

 

v3.20.1
13. Subsequent Events
3 Months Ended
Mar. 31, 2020
Subsequent Events [Abstract]  
13. Subsequent Events

The Company has evaluated events that occurred subsequent to March 31, 2020 through the date these condensed consolidated financial statements were issued for matters that required disclosure or adjustment in these condensed consolidated financial statements.

 

Dividends Declared

 

On May 6, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.04 per share payable in cash on June 15, 2020 to stockholders of record as of the close of business on May 29, 2020 (see Note 8).

 

COVID 19

 

The recent outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well as on the Company's business activities. The extent to which COVID-19 may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. These events are highly uncertain and, as such, the Company cannot determine their financial impact at this time. No adjustments have been made to the amounts reported in these condensed consolidated financial statements as a result of this matter.

v3.20.1
3. Investments (Details 2) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Cost $ 1,999,381 $ 1,999,381
Unrealized gain (loss) (11,859) 585,532
Estimated fair value 1,987,522 2,584,913
Hedge Fund    
Cost 1,999,381 1,999,381
Unrealized gain (loss) (11,859) 585,532
Estimated fair value $ 1,987,522 $ 2,584,913
v3.20.1
3. Investments (Details 6) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Fixed-maturity securities:    
Gross realized gains $ 204,225 $ 6,002
Gross realized losses (32,342) (28,433)
Total fixed-maturity securities 171,883 (22,431)
Equity securities:    
Gross realized gains 316,513 3,200
Gross realized losses (213,815) (5,961)
Total equity securities 102,698 (2,761)
Net realized gains (losses) 274,581 (25,192)
Equity securities:    
Gross gains 0 1,767,835
Gross losses (6,121,608) 0
Total equity securities (6,121,608) 1,767,835
Other investments:    
Gross gains 0 292,720
Gross losses (597,391) 0
Total other investments (597,391) 292,720
Net unrealized gains (losses) (6,718,999) 2,060,555
Net gains (losses) on investments $ (6,444,418) $ 2,035,363
v3.20.1
11. Commitments and Contingencies (Tables)
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Lease cost

   Three months ended 
   March 31, 
Lease cost 2020 2019
 Operating leases   $               81,251    $               41,342
 Short-term leases                              -                               -
 Total lease cost (1)   $               81,251    $               41,342
       
Other information on operating leases      
Cash payments included in the measurement of lease      
liability reported in operating cash flows  $               82,736    $               41,379
Discount rate 5.50%   5.50%
Weighted average remaining lease term in years 5.71 years   5 years

 

(1)Included in the condensed consolidated statements of operations and comprehensive loss within other underwriting expenses for KICO and within other operating expenses for Cosi.

Schedule of lease liability maturities

 

 For the Year   
 Ending   
 December 31,   Total 
Remainder of 2020  $     102,691
2021         264,571
2022         273,831
2023         283,415
2024         140,739
 Thereafter          192,916
 Total undiscounted lease payments       1,258,163
 Less:  present value adjustment          54,213
 Operating lease liability   $  1,203,950

v3.20.1
7. Debt (Tables)
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Schedule of debt
     March 31,     December 31, 
    2020   2019
         
 5.50% Senior Unsecured Notes     $      30,000,000    $      30,000,000
 Discount                  (89,244)                 (97,325)
 Issuance costs                (395,280)               (431,244)
 Long-term debt, net     $      29,515,476    $      29,471,431
v3.20.1
3. Investments (Tables)
3 Months Ended
Mar. 31, 2020
Investments [Abstract]  
Schedule of available for sale securities
  March 31, 2020
                       Net 
   Cost or      Gross     Gross Unrealized Losses     Estimated     Unrealized  
   Amortized     Unrealized     Less than 12     More than 12     Fair     Gains/ 
 Category    Cost     Gains     Months     Months     Value     (Losses)  
   
 Fixed-Maturity Securities:                       
 U.S. Treasury securities and                       
 obligations of U.S. government                       
 corporations and agencies   $       5,033,879    $      102,361    $                  -    $                  -    $       5,136,240    $      102,361
                       
 Political subdivisions of States,                       
 Territories and Possessions            9,139,221            275,738                        -                        -             9,414,959            275,738
                       
 Corporate and other bonds                        
 Industrial and miscellaneous        112,871,652         2,876,429        (2,258,459)                        -         113,489,622            617,970
                       
 Residential mortgage and other                       
 asset backed securities (1)          25,631,027            292,497           (938,478)        (1,145,973)           23,839,073        (1,791,954)
 Total    $   152,675,779    $   3,547,025    $  (3,196,937)    $  (1,145,973)    $   151,879,894    $     (795,885)

 

  (1) KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of March 31, 2020, the estimated fair value of the eligible investments was approximately $7,287,000. KICO will retain all rights regarding all securities if pledged as collateral. As of March 31, 2020, there was no outstanding balance on the FHLBNY credit line.

 

  December 31, 2019
                       Net 
   Cost or      Gross     Gross Unrealized Losses     Estimated     Unrealized  
   Amortized     Unrealized     Less than 12     More than 12     Fair     Gains 
 Category    Cost     Gains     Months     Months     Value       
   
 Fixed-Maturity Securities:                       
 U.S. Treasury securities and                       
 obligations of U.S. government                       
 corporations and agencies   $     7,037,856    $        23,244    $                  -    $                  -    $     7,061,100    $          23,244
                       
 Political subdivisions of States,                       
 Territories and Possessions          9,151,293            181,835             (11,316)                        -           9,321,812              170,519
                       
 Corporate and other bonds                        
 Industrial and miscellaneous      119,874,573         5,777,624             (16,685)             (13,473)       125,622,039           5,747,466
                       
 Residential mortgage and other                       
 asset backed securities (1)        26,138,633            437,841             (68,793)           (276,451)         26,231,230                92,597
 Total    $ 162,202,355    $   6,420,544    $       (96,794)    $     (289,924)    $ 168,236,181    $     6,033,826

 

  (1) KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the FHLBNY (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2019, the estimated fair value of the eligible investments was approximately $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.

Schedule of available for sale securities by contractual maturity
  March 31, 2020   December 31, 2019
  Amortized   Estimated   Amortized   Estimated
 Remaining Time to Maturity   Cost    Fair Value    Cost    Fair Value 
       
 Less than one year    $    12,900,401    $    12,937,879    $    11,986,401    $        12,025,804
 One to five years          44,309,018          44,695,085          49,715,422              51,000,025
 Five to ten years          65,324,015          66,293,522          69,850,104              74,410,275
 More than 10 years            4,511,318            4,114,335            4,511,795                4,568,847
 Residential mortgage and other asset backed securities         25,631,027          23,839,073          26,138,633              26,231,230
 Total    $  152,675,779    $  151,879,894    $  162,202,355    $      168,236,181
               
Schedule of equity securities
  March 31, 2020
      Gross   Gross      
       Unrealized     Unrealized     Estimated   
 Category    Cost     Gains     Losses     Fair Value   
   
 Equity Securities:                 
 Preferred stocks    $     7,535,068    $          7,870    $  (1,113,367)    $     6,429,571  
 Common stocks, mutual funds,                 
 and exchange traded funds        14,894,969            137,242        (3,092,889)         11,939,322  
 Total    $   22,430,037    $      145,112    $  (4,206,256)    $   18,368,893  

 

  December 31, 2019
       Gross     Gross     Estimated   
       Unrealized     Unrealized       
 Category    Cost     Gains     Losses     Fair Value   
   
 Equity Securities:                 
 Preferred stocks    $     8,374,424    $      339,257    $       (11,794)    $     8,701,887  
 Common stocks, mutual funds,                 
 and exchange traded funds        14,250,244         1,982,878           (273,627)         15,959,495  
 Total    $   22,624,668    $   2,322,135    $     (285,421)    $   24,661,382  
Schedule of other investments
  March 31, 2020   December 31, 2019
       Gross              Gross      
       Unrealized     Estimated         Unrealized     Estimated 
 Category    Cost     Losses     Fair Value     Cost     Gains     Fair Value 
             
 Other Investments:                       
 Hedge fund   $ 1,999,381    $     (11,859)    $ 1,987,522    $ 1,999,381    $    585,532    $   2,584,913
 Total    $ 1,999,381    $     (11,859)    $ 1,987,522    $ 1,999,381    $    585,532    $   2,584,913
Schedule of held to maturity securities
  March 31, 2020
                       
   Cost or      Gross     Gross Unrealized Losses     Estimated     Net 
   Amortized     Unrealized     Less than 12     More than 12     Fair     Unrealized  
 Category    Cost     Gains     Months     Months     Value     Gains 
   
 Held-to-Maturity Securities:                       
 U.S. Treasury securities  $729,561   $162,483    $                  -    $                  -    $      892,044    $      162,483
                       
 Political subdivisions of States,                       
 Territories and Possessions           998,573              43,857                        -                        -         1,042,430              43,857
                       
 Corporate and other bonds                        
 Industrial and miscellaneous        2,098,270            106,196               (2,230)                        -         2,202,236            103,966
                       
 Total   $   3,826,404    $      312,536    $         (2,230)    $                  -    $   4,136,710    $      310,306

 

  December 31, 2019
                       
   Cost or      Gross     Gross Unrealized Losses     Estimated     Net 
   Amortized     Unrealized     Less than 12     More than 12     Fair     Unrealized  
 Category    Cost     Gains     Months     Months     Value     Gains 
   
 Held-to-Maturity Securities:                       
 U.S. Treasury securities   $      729,550    $      151,002    $                  -    $                  -    $      880,552    $      151,002
                       
 Political subdivisions of States,                       
 Territories and Possessions           998,619              51,021                        -                        -         1,049,640              51,021
                       
 Corporate and other bonds                        
 Industrial and miscellaneous        2,097,783              97,627                  (835)                        -         2,194,575              96,792
                       
 Total   $   3,825,952    $      299,650    $            (835)    $                  -    $   4,124,767    $      298,815

 

Schedule of held to maturity securities by contractual maturity
  March 31, 2020   December 31, 2019
  Amortized   Estimated   Amortized   Estimated
 Remaining Time to Maturity   Cost    Fair Value    Cost    Fair Value 
       
 Less than one year    $        500,000    $        497,770    $        500,000    $             499,165
 One to five years           2,099,588           2,220,096           2,099,268                2,215,640
 Five to ten years              620,255              664,805              620,134                   655,923
 More than 10 years              606,561              754,039              606,550                   754,039
 Total    $     3,826,404    $     4,136,710    $     3,825,952    $          4,124,767
               
Schedule of investment income
   Three months ended 
   March 31, 
   2020     2019 
   
 Income:       
 Fixed-maturity securities    $     1,447,938    $     1,526,870
 Equity securities              253,073              207,144
 Cash and cash equivalents                44,223                40,401
 Total           1,745,234           1,774,415
 Expenses:        
 Investment expenses                79,390              150,703
 Net investment income    $     1,665,844    $     1,623,712
       
Schedule of securities with realized gains and losses on investments
   Three months ended 
   
   March 31, 
   2020     2019 
 Realized Gains (Losses)       
   
 Fixed-maturity securities:       
 Gross realized gains    $      204,225    $          6,002
 Gross realized losses           (32,342)             (28,433)
           171,883             (22,431)
       
 Equity securities:       
 Gross realized gains           316,513                3,200
 Gross realized losses          (213,815)               (5,961)
           102,698               (2,761)
       
 Net realized gains (losses)           274,581             (25,192)
       
 Unrealized (Losses) Gains       
       
 Equity securities:       
 Gross gains                      -         1,767,835
 Gross losses       (6,121,608)                        -
      (6,121,608)         1,767,835
       
 Other investments:       
 Gross gains                      -            292,720
 Gross losses          (597,391)                        -
         (597,391)            292,720
       
 Net unrealized (losses) gains       (6,718,999)         2,060,555
       
 Net (losses) gains on investments   $ (6,444,418)    $   2,035,363
Schedule of securities with unrealized losses

    March 31, 2020                              
      Less than 12 months             12 months or more           Total      
     Estimated            No. of      Estimated            No. of      Estimated        
     Fair      Unrealized      Positions      Fair      Unrealized      Positions      Fair      Unrealized  
 Category    Value      Losses      Held      Value      Losses      Held      Value      Losses  
                                                 
Fixed-Maturity Securities:                                                
 U.S. Treasury securities                                                
 and obligations of U.S.                                                
 government corporations                                                
 and agencies   $ -     $ -       -     $ -     $ -       -     $ -     $ -  
                                                                 
 Political subdivisions of                                                                
 States, Territories and                                                                
 Possessions     -       -       -       -       -       -       -       -  
                                                                 
 Corporate and other                                                                
 bonds industrial and                                                                
 miscellaneous     35,409,999       (2,258,459 )     50       -       -       -       35,409,999       (2,258,459 )
                                                                 
 Residential mortgage and other                                                                
 asset backed securities     6,067,674       (938,478 )     13       10,286,307       (1,145,973 )     17       16,353,981       (2,084,451 )
                                                                 
 Total fixed-maturity                                                                
 securities   $ 41,477,673     $ (3,196,937 )     63     $ 10,286,307     $ (1,145,973 )     17     $ 51,763,980     $ (4,342,910 )

 

  December 31, 2019
  Less than 12 months   12 months or more   Total
   Estimated         No. of     Estimated         No. of     Estimated     
   Fair     Unrealized     Positions     Fair     Unrealized     Positions     Fair     Unrealized 
 Category    Value     Losses     Held     Value     Losses     Held     Value     Losses 
   
 Fixed-Maturity Securities:                               
 U.S. Treasury securities                               
 and obligations of U.S.                               
 government corporations                               
 and agencies   $                     -    $                  -              -    $                  -    $                  -              -    $                    -    $                  -
                               
 Political subdivisions of                               
 States, Territories and                               
 Possessions           3,067,428            (11,316)              3                        -                        -              -           3,067,428            (11,316)
                               
 Corporate and other                             
 bonds industrial and                               
 miscellaneous           3,730,478            (16,685)              7         1,300,915            (13,473)              3           5,031,393            (30,158)
                               
 Residential mortgage and other                               
 asset backed securities           5,862,636            (68,793)              5       13,534,768          (276,451)            21         19,397,404          (345,244)
                               
 Total fixed-maturity                               
 securities    $    12,660,542    $      (96,794)            15    $ 14,835,683    $    (289,924)            24    $   27,496,225    $    (386,718)
v3.20.1
4. Fair Value Measurements (Details 1) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Hedge fund investments $ 1,987,522 $ 2,584,913
Hedge Fund    
Hedge fund investments $ 1,987,522 $ 2,584,913
v3.20.1
6. Property and Casualty Insurance Activity (Details 1) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Insurance [Abstract]    
Balance at beginning of period $ 80,498,611 $ 56,197,106
Less reinsurance recoverables (15,728,224) (15,671,247)
Net balance, beginning of period 64,770,387 40,525,859
Incurred related to:    
Current year 16,512,475 24,655,975
Prior years (126,654) 4,478,249
Total incurred 16,385,821 29,134,224
Paid related to:    
Current year 5,787,129 7,731,086
Prior years 13,777,236 8,405,440
Total paid 19,564,365 16,136,526
Net balance at end of period 61,591,843 53,523,557
Add reinsurance recoverables 16,259,256 15,586,714
Balance at end of period $ 77,851,099 $ 69,110,271
v3.20.1
6. Property and Casualty Insurance Activity (Details 5) - USD ($)
5 Months Ended 12 Months Ended 13 Months Ended
Dec. 14, 2019
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2020
Personal Lines        
Percent ceded 0.00%   10.00% 25.00%
Risk retained on initial $1,000,000 of losses $ 1,000,000   $ 900,000 $ 750,000
Losses per occurrence subject to quota share reinsurance coverage 0   1,000,000 1,000,000
Excess of loss coverage above quota share coverage 9,000,000   9,000,000 9,000,000
In excess of 0   1,000,000 1,000,000
Total reinsurance coverage per occurrence 9,000,000   9,100,000 9,250,000
Losses per occurrence subject to reinsurance coverage $ 10,000,000   $ 10,000,000 $ 10,000,000
Expiration date Jun. 30, 2020   Jun. 30, 2019 Jun. 30, 2020
Catastrophe        
Initial loss subject to personal lines quota share treaty $ 0   $ 5,000,000 $ 7,500,000
Risk retained per catastrophe occurrence 7,500,000   4,500,000 5,625,000
Catastrophe loss coverage in excess of quota share coverage $ 602,500,000   $ 445,000,000 $ 602,500,000
Reinstatement premium protection Yes   Yes Yes
Personal Umbrella        
Percent ceded - first million dollars of coverage   90.00% 90.00%  
Percent ceded - excess of one million dollars of coverage   100.00% 100.00%  
Risk retained on initial $1,000,000 of losses   $ 100,000 $ 100,000  
Total reinsurance coverage per occurrence   4,900,000 4,900,000  
Losses per occurrence subject to reinsurance coverage   $ 5,000,000 $ 5,000,000  
Expiration date   Jun. 30, 2020 Jun. 30, 2019  
Commercial Lines        
Risk retained on initial $1,000,000 of losses   $ 750,000 $ 750,000  
Excess of loss coverage above quota share coverage   3,750,000 3,750,000  
In excess of   750,000 750,000  
Total reinsurance coverage per occurrence   3,750,000 3,750,000  
Losses per occurrence subject to reinsurance coverage   $ 4,500,000 $ 4,500,000  
Commercial Umbrella        
Percent ceded - first million dollars of coverage   0.00% 90.00%  
Percent ceded - excess of one million dollars of coverage   0.00% 100.00%  
Risk retained on initial $1,000,000 of losses   $ 0 $ 100,000  
Total reinsurance coverage per occurrence   0 4,900,000  
Losses per occurrence subject to reinsurance coverage   $ 0 $ 5,000,000  
Expiration date     Jun. 30, 2019  
v3.20.1
11. Commitments and Contingencies (Details) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Commitments And Contingencies    
Operating lease $ 81,251 $ 41,342
Short-term leases 0 0
Total lease cost 81,251 41,342
Cash payments included in the measurement of lease liability in operating cash flows $ 82,736 $ 41,379
Discount rate 5.50% 5.50%
Remaining lease term in years 5 years 8 months 16 days 5 years
v3.20.1
2. Accounting Policies
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
2. Accounting Policies

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, which include the reserves for losses and loss adjustment expenses, and are subject to estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by management. On an ongoing basis, management reevaluates its assumptions and the methods for calculating these estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.

 

Principles of Consolidation

 

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

Accounting Changes

The Company has determined that it was not subject to any new accounting pronouncements that became effective during the three months ended March 31, 2020.

Accounting Pronouncements

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate. Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.

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

v3.20.1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenues    
Net premiums earned $ 26,941,450 $ 29,595,889
Ceding commission revenue 3,831,099 1,277,683
Net investment income 1,665,844 1,623,712
Net (losses) gains on investments (6,444,418) 2,035,363
Other income 629,619 365,901
Total revenues 26,623,594 34,898,548
Expenses    
Loss and loss adjustment expenses 16,385,821 29,134,224
Commission expense 7,899,191 6,853,416
Other underwriting expenses 6,761,792 6,135,991
Other operating expenses 1,563,620 971,172
Depreciation and amortization 687,094 602,332
Interest expense 456,545 456,545
Total expenses 33,754,063 44,153,680
Loss from operations before income taxes (7,130,469) (9,255,132)
Income tax benefit (1,686,266) (1,919,942)
Net loss (5,444,203) (7,335,190)
Other comprehensive income (loss), net of tax    
Gross change in unrealized (losses) gains on available-for-sale-securities (6,727,489) 4,188,716
Reclassification adjustment for (gains) losses included in net income (102,222) 22,431
Net change in unrealized (losses) gains (6,829,711) 4,211,147
Income tax benefit (expense) related to items of other comprehensive (loss) income 1,434,240 (884,341)
Other comprehensive (loss) income, net of tax (5,395,471) 3,326,806
Comprehensive loss $ (10,839,674) $ (4,008,384)
Loss per common share:    
Basic $ (0.50) $ (0.68)
Diluted $ (0.50) $ (0.68)
Weighted average common shares outstanding    
Basic 10,807,841 10,757,843
Diluted 10,807,841 10,757,843
Dividends declared and paid per common share $ 0.0625 $ 0.1000
v3.20.1
9. Income Taxes (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Deferred tax asset:    
Net operating loss carryovers $ 70,381 $ 1,586,247
Claims reserve discount 797,917 839,959
Unearned premium 2,945,811 3,105,344
Deferred ceding commission revenue 1,456,434 1,624,434
Other 272,244 462,019
Total deferred tax assets 5,542,787 7,618,003
Deferred tax liability:    
Investment in KICO 759,543 759,543
Deferred acquisition costs 4,110,096 4,333,219
Intangibles 105,000 105,000
Depreciation and amortization 318,895 312,298
Net unrealized (losses) gains of securities - available for sale (1,098,446) 1,796,891
Total deferred tax liabilities 4,195,088 7,306,951
Net deferred income tax asset $ 1,347,699 $ 311,052
v3.20.1
7. Debt (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Long-term debt, net $ 29,515,476 $ 29,471,431
Issuance costs    
Long-term debt, net (395,280) (431,244)
5.50% Senior Unsecured Notes    
Long-term debt, net 30,000,000 30,000,000
Discount    
Long-term debt, net $ (89,244) $ (97,325)
v3.20.1
3. Investments (Details) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
U.S. Treasury Securities and Obligations of U.S. Government    
Cost or amortized cost $ 5,033,879 $ 7,037,856
Gross unrealized gains 102,361 23,244
Gross unrealized losses - less than 12 months 0 0
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 5,136,240 7,061,100
Net unrealized gains/(losses) 102,361 23,244
Fixed Maturity Securities Political Subdivisions Of States Territories And Possessions    
Cost or amortized cost 9,139,221 9,151,293
Gross unrealized gains 275,738 181,835
Gross unrealized losses - less than 12 months 0 (11,316)
Gross unrealized loss - more than 12 months 0 0
Estimated fair value 9,414,959 9,321,812
Net unrealized gains/(losses) 275,738 170,519
Fixed Maturity Securities Corporate And Other Bonds Industrial And Miscellaneous    
Cost or amortized cost 112,871,652 119,874,573
Gross unrealized gains 2,876,429 5,777,624
Gross unrealized losses - less than 12 months (2,258,459) (16,685)
Gross unrealized loss - more than 12 months 0 (13,473)
Estimated fair value 113,489,622 125,622,039
Net unrealized gains/(losses) 617,970 5,747,466
Fixed Maturity Securities Residential Mortgage and other asset backed securities    
Cost or amortized cost 25,631,027 26,138,633
Gross unrealized gains 292,497 437,841
Gross unrealized losses - less than 12 months (938,478) (68,793)
Gross unrealized loss - more than 12 months (1,145,973) (276,451)
Estimated fair value 23,839,073 26,231,230
Net unrealized gains/(losses) (1,791,954) 92,597
Fixed Maturity Securities Total Fixed Maturity Securities    
Cost or amortized cost 152,675,779 162,202,355
Gross unrealized gains 3,547,025 6,420,544
Gross unrealized losses - less than 12 months (3,196,937) (96,794)
Gross unrealized loss - more than 12 months (1,145,973) (289,924)
Estimated fair value 151,879,894 168,236,181
Net unrealized gains/(losses) (795,885) 6,033,826
Equity Securities Preferred Stocks    
Cost or amortized cost 7,535,068 8,374,424
Gross unrealized gains 7,870 339,257
Gross unrealized losses (1,113,367) (11,794)
Estimated fair value 6,429,571 8,701,887
Equity Securities Common Stocks    
Cost or amortized cost 14,894,969 14,250,244
Gross unrealized gains 137,242 1,982,878
Gross unrealized losses (3,092,889) (273,627)
Estimated fair value 11,939,322 15,959,495
Equity Securities Total Equity Securities    
Cost or amortized cost 22,430,037 22,624,668
Gross unrealized gains 145,112 2,322,135
Gross unrealized losses (4,206,256) (285,421)
Estimated fair value $ 18,368,893 $ 24,661,382
v3.20.1
3. Investments (Details 4) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Amortized cost $ 3,826,404 $ 3,825,952
Estimated fair value 4,136,710 4,124,767
Less Than One Year    
Amortized cost 500,000 500,000
Estimated fair value 497,770 499,165
One To Five Years    
Amortized cost 2,099,588 2,099,268
Estimated fair value 2,220,096 2,215,640
Five To Ten Years    
Amortized cost 620,255 620,134
Estimated fair value 664,805 655,923
More Than 10 Years    
Amortized cost 606,561 606,550
Estimated fair value $ 754,039 $ 754,039
v3.20.1
3. Investments (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Investments [Abstract]    
Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity $ 0 $ 400,000
Proceeds from the sale or maturity of fixed-maturity securities available-for-sale 10,553,818 1,505,382
Proceeds from the sale of equity securities $ 5,518,428 $ 246,047
v3.20.1
11. Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
11. Commitments and Contingencies

Litigation

 

From time to time, the Company is involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim is asserted by a third party in a lawsuit against one of the Company’s insureds covered by a particular policy, the Company may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Such proceedings are considered in estimating the liability for loss and LAE expenses.

 

On June 12, 2019, Phillip Woolgar filed a suit naming the Company and certain present or former officers and directors as defendants in a putative class action captioned Woolgar v. Kingstone Companies et al., 19 cv 05500 (S.D.N.Y.), asserting claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  Plaintiff seeks to represent a class of persons or entities that purchased Kingstone securities between March 14, 2018, and April 29, 2019, and alleges violations of the federal securities law in connection with the Company’s April 29, 2019 announcement regarding losses related to winter catastrophe events.  The lawsuit alleges that the Company failed to disclose that it did not adequately follow industry best practices related to claims handling and thus did not record sufficient claim reserves, and that as a result, Defendants’ positive statements about the Company’s business, operations and prospects misled investors. Plaintiff seeks, among other things, an undetermined amount of money damages.  The Company believes the lawsuit to be without merit. The Company has not established an accrual for this matter as a loss is not considered to be probable and reasonably estimable. It is the opinion of management, after consulting legal counsel, that facts known at the present time do not indicate that such litigation will have a material adverse impact on the Company’s results of operations, financial position, or cash flows. On February 18, 2020, a motion to dismiss was filed with the court. On April 20, 2020, plaintiff filed an opposition to Company’s motion to dismiss.

 

Office Lease


The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.

 

The Company is a party to a non-cancellable operating lease, dated March 27, 2015, for its office facility for KICO located in Valley Stream, New York expiring March 31, 2024.

 

On July 8, 2019, the Company entered into a lease agreement for an additional office facility for Cosi located in Valley Stream, New York under a non-cancelable operating lease. In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments from real estate taxes and other charges. The lease has a term of seven years and two months expiring December 31, 2026.

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

 

   Three months ended 
   March 31, 
Lease cost 2020 2019
 Operating leases   $               81,251    $               41,342
 Short-term leases                              -                               -
 Total lease cost (1)   $               81,251    $               41,342
       
Other information on operating leases      
Cash payments included in the measurement of lease      
liability reported in operating cash flows  $               82,736    $               41,379
Discount rate 5.50%   5.50%
Weighted average remaining lease term in years 5.71 years   5 years

 

(1)Included in the condensed consolidated statements of operations and comprehensive loss within other underwriting expenses for KICO and within other operating expenses for Cosi.

 

The following table presents the contractual maturities of the Company’s lease liabilities as of March 31, 2020:

 

 For the Year   
 Ending   
 December 31,   Total 
Remainder of 2020  $     102,691
2021         264,571
2022         273,831
2023         283,415
2024         140,739
 Thereafter          192,916
 Total undiscounted lease payments       1,258,163
 Less:  present value adjustment          54,213
 Operating lease liability   $  1,203,950

Rent expense for the three months ended March 31, 2020 and 2019 amounted to $81,251 and $41,342, respectively. Rent expense is included in the accompanying condensed consolidated statements of operations and comprehensive loss within other underwriting expenses.

  

Employment Agreements

 

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

 

On October 14, 2019, the Company and Barry B. Goldstein, the Company’s President, Chief Executive Officer and Executive Chairman of the Board, entered into a Second Amended and Restated Employment Agreement (the “Amended Employment Agreement”). The Amended Employment Agreement is effective as of January 1, 2020 and expires on December 31, 2022. The Amended Employment Agreement extends the expiration date of the employment agreement in effect for Mr. Goldstein from December 31, 2021 to December 31, 2022.

 

Pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 6% of the Company’s consolidated income from operations before taxes, exclusive of the Company’s consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 2.5 times his base salary. In addition, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a long-term compensation (“LTC”) award of between $945,000 and $2,835,000 based on a specified minimum increase in the Company’s adjusted book value per share (as defined in the Amended Employment Agreement) as of December 31, 2022 as compared to December 31, 2019 (with the maximum LTC payment being due if the average per annum increase is at least 14%). Further, pursuant to the Amended Employment Agreement, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason (each as defined in the Amended Employment Agreement), Mr. Goldstein would be entitled to receive his base salary, the 6% bonus and the LTC payment for the remainder of the term. In addition, in the event of Mr. Goldstein’s death, his estate would be entitled to receive his base salary, accrued bonus and accrued LTC payment through the date of death. Further, in the event that Mr. Goldstein’s employment is terminated by the Company without cause or he resigns for good reason, or, in the event of the termination of Mr. Goldstein’s employment due to disability or death, Mr. Goldstein’s granted but unvested restricted stock awards will vest. Mr. Goldstein would be entitled, under certain circumstances, to a payment equal to 3.82 times his then annual salary, the target LTC payment of $1,890,000 and his accrued 6% bonus in the event of the termination of his employment within eighteen months following a change of control of the Company.

 

Pursuant to the Amended Employment Agreement, in January 2020, Mr. Goldstein received a grant of 157,431 shares of restricted stock, under the terms of the Company’s 2014 Plan determined by dividing $1,250,000 by the fair market value of the Company’s Common Stock on the date of grant. This 2020 grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. Also pursuant to the Amended Employment Agreement, Mr. Goldstein will be entitled to receive a grant, under the terms of the 2014 Plan, during January 2021, of a number of shares of restricted stock determined by dividing $1,500,000 by the fair market value of the Company’s Common Stock on the date of grant. The January 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. Further, pursuant to the Amended Employment Agreement, Mr. Goldstein is entitled to receive a grant, under the terms of the 2014 Plan, during each of 2020, 2021 and 2022, of a number of shares of restricted stock determined by dividing $136,500 by the fair market value of the Company’s Common Stock on the date of grant. In January 2020, Mr. Goldstein was granted 17,191 shares of restricted stock pursuant to this provision. This grant will become vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. The 2021 grant will become vested with respect to one-half of the award on each of the first anniversary of the grant date and on December 31, 2022 based on the continued provision of services through the applicable vesting date. The 2022 grant will become vested on December 31, 2022 based on the continued provision of services through such date.

 

Dale A. Thatcher

 

Effective July 19, 2019 (the “Separation Date”), Dale A. Thatcher retired and resigned his positions as Chief Executive Officer and President of the Company and KICO. At such time, he also resigned his positions on the Board of Directors of each of the Company and KICO.  Effective upon Mr. Thatcher’s separation from employment, the Board appointed Barry B. Goldstein, former Chief Executive Officer and Executive Chairman of the Board of Directors, to the position of Chief Executive Officer and President of each of the Company and KICO. Mr. Goldstein previously served as Chief Executive Officer and President of the Company from March 2001 through December 31, 2018, and as Chief Executive Officer and President of KICO from January 2012 through December 31, 2018.

 

In connection with his separation from employment, each of the Company and KICO entered into an Agreement and General Release (the “Separation Agreement”) with Mr. Thatcher.  Pursuant to the Separation Agreement, the Company and KICO shall collectively provide the following payments and benefits to Mr. Thatcher in full satisfaction of all payments and benefits and other amounts due to him under the terms of the existing employment agreements upon his separation from employment: (i) $381,111 (representing the amount of base salary he would have received had he remained employed through March 31, 2020), (ii) $5,000 in full satisfaction for any bonus payments payable under the existing employment agreements, (iii) continuing group health coverage commencing on the Separation Date and ending on March 31, 2020, and (iv) continued vesting of all stock awards previously granted to Mr. Thatcher in his capacity as an executive officer but which were unvested as of the Separation Date (Mr. Thatcher shall not be entitled to any further grants of stock awards after the Separation Date).  In addition, the Company and KICO agreed to provide Mr. Thatcher with a severance payment of $20,000 in consideration for a release.  Pursuant to the Separation Agreement, Mr. Thatcher agreed that, for a period of three years following the Separation Date, he shall not accept any operating executive role with another property and casualty insurance company.

 

Meryl Golden, Chief Operating Officer

 

On September 16, 2019, the Company and Meryl Golden entered into an employment agreement (the “Golden Employment Agreement”) pursuant to which Ms. Golden serves as the Company’s Chief Operating Officer. Ms. Golden also serves as KICO’s Chief Operating Officer. The Golden Employment Agreement became effective as of September 25, 2019 and expires on December 31, 2021.

 

Pursuant to the Golden Employment Agreement, Ms. Golden is entitled to receive an annual salary of $500,000 and was granted a five year option for the purchase of 50,000 shares of the Company’s Common Stock pursuant to the 2014 Plan. The options granted will vest in three equal installments, with the first installment vesting on the grant date, and the remaining installments vesting on the first and second anniversaries following the grant date, subject to the terms of the stock option agreement between the Company and Ms. Golden.

v3.20.1
7. Debt
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
7. Debt

Federal Home Loan Bank

 

In July 2017, KICO became a member of, and invested in, the Federal Home Loan Bank of New York (“FHLBNY”). The aggregate fair value of the investment in dividend bearing common stock was $15,500 and $15,180 as of March 31, 2020 and December 31, 2019, respectively. FHLBNY members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized. Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within one year of borrowing. The maximum allowable advance as of March 31, 2020 was approximately $12,379,000. Advances are limited to 90% of the amount of available collateral, which was approximately $6,558,000 as of March 31, 2020. There were no borrowings under this facility during the three months ended March 31, 2020 and 2019.

  

Long-term Debt

 

On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December 30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50% per annum. The net proceeds of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an effective yield of 5.67% per annum. The balance of long-term debt as of March 31, 2020 and December 31, 2019 is as follows:

 

     March 31,     December 31, 
    2020   2019
         
 5.50% Senior Unsecured Notes     $      30,000,000    $      30,000,000
 Discount                  (89,244)                 (97,325)
 Issuance costs                (395,280)               (431,244)
 Long-term debt, net     $      29,515,476    $      29,471,431

 

The Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of the Company's subsidiaries. The Notes rank senior in right of payment to any of the Company's existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the Notes. The Notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, but will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes will be structurally subordinated to the indebtedness and other obligations of the Company's subsidiaries. The Company may redeem the Notes, at any time in whole or from time to time in part, at the redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed that would be due if the Notes matured on the applicable redemption date (exclusive of interest accrued to the applicable redemption date) discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points.

 

The Company has used an aggregate $28,256,335 of the net proceeds from the offering to contribute capital to KICO in order to support additional growth. The remainder of the net proceeds is being used for general corporate purposes. A registration statement relating to the debt issued in the offering was filed with the SEC, which became effective on November 28, 2017.

v3.20.1
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($)
Preferred Stock
Common Stock
Capital in Excess of Par
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total
Beginning Balance, Shares at Dec. 31, 2018 0 11,775,148       1,027,439  
Beginning Balance, Amount at Dec. 31, 2018 $ 0 $ 117,751 $ 67,763,940 $ (2,884,313) $ 26,380,816 $ (2,712,552) $ 88,665,642
Stock-based compensation     309,882       309,882
Vesting of restricted stock awards, Shares   27,593          
Vesting of restricted stock awards, Amount   $ 275 (275)        
Shares deducted from restricted stock awards for payment of withholding taxes, Shares   (6,553)          
Shares deducted from restricted stock awards for payment of withholding taxes, Amount   $ (64) (115,943)       (116,007)
Dividends         (1,075,962)   (1,075,962)
Net income/(loss)         (7,335,190)   (7,335,190)
Change in unrealized gains/(losses) on available-for-sale securities, net of tax       3,326,806     3,326,806
Ending Balance, Shares at Mar. 31, 2019 0 11,796,188       1,027,439  
Ending Balance, Amount at Mar. 31, 2019 $ 0 $ 117,962 67,957,604 442,493 17,969,664 $ (2,712,552) 83,775,171
Beginning Balance, Shares at Dec. 31, 2019 0 11,824,889       1,027,439  
Beginning Balance, Amount at Dec. 31, 2019 $ 0 $ 118,248 69,133,918 4,768,870 16,913,097 $ (2,712,552) 88,221,581
Stock-based compensation     487,450       487,450
Vesting of restricted stock awards, Shares   38,866          
Vesting of restricted stock awards, Amount   $ 387 (387)        
Shares deducted from restricted stock awards for payment of withholding taxes, Shares   (12,489)          
Shares deducted from restricted stock awards for payment of withholding taxes, Amount   $ (123) (87,831)       (87,954)
Acquisition of treasury stock, Shares           42,434  
Acquisition of treasury stock, Amount           $ (242,724) (242,724)
Dividends         (675,960)   (675,960)
Net income/(loss)         (5,444,203)   (5,444,203)
Change in unrealized gains/(losses) on available-for-sale securities, net of tax       (5,395,471)     (5,395,471)
Ending Balance, Shares at Mar. 31, 2020 0 11,851,266       1,069,873  
Ending Balance, Amount at Mar. 31, 2020 $ 0 $ 118,512 $ 69,533,150 $ (626,601) $ 10,792,934 $ (2,955,276) $ 76,862,719
v3.20.1
8. Stockholders' Equity (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Dividends declared $ 675,960 $ 1,075,962
Stock-based compensation expense related to stock options is net of estimated forfeitures $ 17,000 1,000
Closing price of common stock $ 5.11  
Total intrinsic value of options exercised $ 0  
Stock-based compensation, restricted stock awards $ 472,000 $ 309,000
2014 Plan    
Shares reserved 66,600  
v3.20.1
6. Property and Casualty Insurance Activity (Details Narrative)
3 Months Ended
Mar. 31, 2020
USD ($)
Number
Mar. 31, 2019
USD ($)
Dec. 31, 2019
USD ($)
Number
Insurance [Abstract]      
Advance premiums $ 3,143,879   $ 3,191,512
Incurred losses and loss adjustment expenses are net of reinsurance recoveries under reinsurance contracts 5,866,897 $ 3,135,894  
Prior year loss development $ 126,654 $ 4,478,249  
Net contingent ceding commissions payable | Number 2,775,000   2,886,000
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 08, 2020
Document And Entity Information    
Entity Registrant Name KINGSTONE COMPANIES, INC.  
Entity Central Index Key 0000033992  
Document Type 10-Q  
Document Period End Date Mar. 31, 2020  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Accelerated Filer  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   10,793,260
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2020  
Entity Interactive Data Current Yes  
Entity Incorporation State Country Code DE  
Entity File Number 0-1665  
v3.20.1
10. Earnings/(Loss) Per Common Share (Details) - shares
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Loss per common share:    
Weighted average number of shares outstanding 10,807,841 10,757,843
Effect of dilutive securities, common share equivalents, stock options 0 0
Effect of dilutive securities, common share equivalents, restricted stock awards 0 0
Weighted average number of shares outstanding, used for computing diluted earnings per share 10,807,841 10,757,843
v3.20.1
3. Investments
3 Months Ended
Mar. 31, 2020
Investments [Abstract]  
3. Investments

Fixed-Maturity Securities

 

The amortized cost, estimated fair value, and unrealized gains and losses of investments in fixed-maturity securities classified as available-for-sale as of March 31, 2020 and December 31, 2019 are summarized as follows:

 

  March 31, 2020
                        Net 
      Cost or      Gross     Gross Unrealized Losses     Estimated     Unrealized  
   Amortized     Unrealized     Less than 12     More than 12     Fair     Gains/ 
 Category    Cost     Gains     Months     Months     Value     (Losses)  
   
 Fixed-Maturity Securities:                       
 U.S. Treasury securities and                       
 obligations of U.S. government                       
 corporations and agencies   $       5,033,879    $      102,361    $                  -    $                  -    $       5,136,240    $      102,361
                       
 Political subdivisions of States,                       
 Territories and Possessions            9,139,221            275,738                        -                        -             9,414,959            275,738
                       
 Corporate and other bonds                             
 Industrial and miscellaneous        112,871,652         2,876,429        (2,258,459)                        -         113,489,622            617,970
                       
 Residential mortgage and other                       
 asset backed securities (1)          25,631,027            292,497           (938,478)        (1,145,973)           23,839,073        (1,791,954)
 Total    $   152,675,779    $   3,547,025    $  (3,196,937)    $  (1,145,973)    $   151,879,894    $     (795,885)

 

(1)KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of March 31, 2020, the estimated fair value of the eligible investments was approximately $7,287,000. KICO will retain all rights regarding all securities if pledged as collateral. As of March 31, 2020, there was no outstanding balance on the FHLBNY credit line.

 

  December 31, 2019
                        Net 
      Cost or      Gross     Gross Unrealized Losses     Estimated     Unrealized  
   Amortized     Unrealized     Less than 12     More than 12     Fair     Gains/ 
 Category    Cost     Gains     Months     Months     Value     (Losses)  
   
 Fixed-Maturity Securities:                       
 U.S. Treasury securities and                       
 obligations of U.S. government                       
 corporations and agencies   $     7,037,856    $        23,244    $                  -    $                  -    $     7,061,100    $          23,244
                       
 Political subdivisions of States,                       
 Territories and Possessions          9,151,293            181,835             (11,316)                        -           9,321,812              170,519
                       
 Corporate and other bonds                             
 Industrial and miscellaneous      119,874,573         5,777,624             (16,685)             (13,473)       125,622,039           5,747,466
                       
 Residential mortgage and other                       
 asset backed securities (1)        26,138,633            437,841             (68,793)           (276,451)         26,231,230                92,597
 Total    $ 162,202,355    $   6,420,544    $       (96,794)    $     (289,924)    $ 168,236,181    $     6,033,826

 

(1)KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the FHLBNY (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2019, the estimated fair value of the eligible investments was approximately $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.

 

A summary of the amortized cost and estimated fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of March 31, 2020 and December 31, 2019 is shown below:

 

   March 31, 2020   December 31, 2019
  Amortized   Estimated   Amortized   Estimated
 Remaining Time to Maturity   Cost    Fair Value    Cost    Fair Value 
       
 Less than one year    $    12,900,401    $    12,937,879    $    11,986,401    $        12,025,804
 One to five years          44,309,018          44,695,085          49,715,422              51,000,025
 Five to ten years          65,324,015          66,293,522          69,850,104              74,410,275
 More than 10 years            4,511,318            4,114,335            4,511,795                4,568,847
 Residential mortgage and other asset backed securities         25,631,027          23,839,073          26,138,633              26,231,230
 Total    $  152,675,779    $  151,879,894    $  162,202,355    $      168,236,181
                

 

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

 

Equity Securities

 

The cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of March 31, 2020 and December 31, 2019 are as follows:

 

  March 31, 2020
      Gross   Gross      
          Unrealized     Unrealized     Estimated   
 Category    Cost     Gains     Losses     Fair Value   
   
 Equity Securities:                 
 Preferred stocks    $     7,535,068    $          7,870    $  (1,113,367)    $     6,429,571  
 Common stocks, mutual funds,                 
 and exchange traded funds        14,894,969            137,242        (3,092,889)         11,939,322  
 Total    $   22,430,037    $      145,112    $  (4,206,256)    $   18,368,893  

 

  December 31, 2019
          Gross     Gross     Estimated   
       Unrealized     Unrealized       
 Category    Cost     Gains     Losses     Fair Value   
   
 Equity Securities:                 
 Preferred stocks    $     8,374,424    $      339,257    $       (11,794)    $     8,701,887  
 Common stocks, mutual funds,                 
 and exchange traded funds        14,250,244         1,982,878           (273,627)         15,959,495  
 Total    $   22,624,668    $   2,322,135    $     (285,421)    $   24,661,382  

 

Other Investments

 

The cost and estimated fair value of, and gross unrealized gains and losses on, the Company’s other investments as of March 31, 2020 and December 31, 2019 are as follows:

 

  March 31, 2020   December 31, 2019
       Gross              Gross      
       Unrealized     Estimated         Unrealized     Estimated 
 Category    Cost     Losses     Fair Value     Cost     Gains     Fair Value 
             
 Other Investments:                       
 Hedge fund   $ 1,999,381    $     (11,859)    $ 1,987,522    $ 1,999,381    $    585,532    $   2,584,913
 Total    $ 1,999,381    $     (11,859)    $ 1,987,522    $ 1,999,381    $    585,532    $   2,584,913

 

Held-to-Maturity Securities


The cost or amortized cost and estimated fair value of, and unrealized gross gains and losses on, investments in held-to-maturity fixed-maturity securities as of March 31, 2020 and December 31, 2019 are summarized as follows:

 

   March 31, 2020
                       
      Cost or      Gross     Gross Unrealized Losses     Estimated     Net 
   Amortized     Unrealized     Less than 12     More than 12     Fair     Unrealized  
 Category    Cost     Gains     Months     Months     Value     Gains 
   
 Held-to-Maturity Securities:                       
 U.S. Treasury securities  $729,561   $162,483    $                  -    $                  -    $      892,044    $      162,483
                       
 Political subdivisions of States,                       
 Territories and Possessions           998,573              43,857                        -                        -         1,042,430              43,857
                       
 Corporate and other bonds                        
 Industrial and miscellaneous        2,098,270            106,196               (2,230)                        -         2,202,236            103,966
                       
 Total   $   3,826,404    $      312,536    $         (2,230)    $                  -    $   4,136,710    $      310,306

 

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

 

   December 31, 2019
                       
      Cost or      Gross     Gross Unrealized Losses     Estimated     Net 
   Amortized     Unrealized     Less than 12     More than 12     Fair     Unrealized  
 Category    Cost     Gains     Months     Months     Value     Gains 
   
 Held-to-Maturity Securities:                       
 U.S. Treasury securities   $      729,550    $      151,002    $                  -    $                  -    $      880,552    $      151,002
                       
 Political subdivisions of States,                       
 Territories and Possessions           998,619              51,021                        -                        -         1,049,640              51,021
                       
 Corporate and other bonds                        
 Industrial and miscellaneous        2,097,783              97,627                  (835)                        -         2,194,575              96,792
                       
 Total   $   3,825,952    $      299,650    $            (835)    $                  -    $   4,124,767    $      298,815

 

A summary of the amortized cost and estimated fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2020 and December 31, 2019 is shown below:

 

   March 31, 2020   December 31, 2019
  Amortized   Estimated   Amortized   Estimated
 Remaining Time to Maturity   Cost    Fair Value    Cost    Fair Value 
       
 Less than one year    $        500,000    $        497,770    $        500,000    $             499,165
 One to five years           2,099,588           2,220,096           2,099,268                2,215,640
 Five to ten years              620,255              664,805              620,134                   655,923
 More than 10 years              606,561              754,039              606,550                   754,039
 Total    $     3,826,404    $     4,136,710    $     3,825,952    $          4,124,767
                

 

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

 

Investment Income

 

Major categories of the Company’s net investment income are summarized as follows:

 

   Three months ended 
   March 31, 
   2020     2019 
   
 Income:             
 Fixed-maturity securities    $     1,447,938    $     1,526,870
 Equity securities              253,073              207,144
 Cash and cash equivalents                44,223                40,401
 Total           1,745,234           1,774,415
 Expenses:              
 Investment expenses                79,390              150,703
 Net investment income    $     1,665,844    $     1,623,712
          

 

Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity were $-0- and $400,000 for the three months ended March 31, 2020 and 2019, respectively.

 

Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $10,553,818 and $1,505,382 for the three months ended March 31, 2020 and 2019, respectively.

 

Proceeds from the sale of equity securities were $5,518,428 and $246,047 for the three months ended March 31, 2020 and 2019, respectively.

 

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

 

   Three months ended 
   March 31, 
   2020     2019 
 Realized Gains (Losses)       
   
 Fixed-maturity securities:       
 Gross realized gains    $      204,225    $          6,002
 Gross realized losses           (32,342)             (28,433)
           171,883             (22,431)
       
 Equity securities:       
 Gross realized gains           316,513                3,200
 Gross realized losses          (213,815)               (5,961)
           102,698               (2,761)
       
 Net realized gains (losses)           274,581             (25,192)
       
 Unrealized (Losses) Gains       
       
 Equity securities:       
 Gross gains                      -         1,767,835
 Gross losses       (6,121,608)                        -
      (6,121,608)         1,767,835
       
 Other investments:       
 Gross gains                      -            292,720
 Gross losses          (597,391)                        -
         (597,391)            292,720
       
 Net unrealized (losses) gains       (6,718,999)         2,060,555
       
 Net (losses) gains on investments   $ (6,444,418)    $   2,035,363

 

Impairment Review

 

Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities to evaluate the necessity of recording impairment losses for other-than-temporary declines in the estimated fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in comprehensive loss.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.  For held-to-maturity debt securities, the amount of OTTI recorded in comprehensive loss for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security. 

 

OTTI losses are recorded in the condensed consolidated statements of operations and comprehensive loss as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At March 31, 2020 and December 31, 2019, there were 80 and 39 fixed-maturity securities, respectively, that accounted for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of investments for the three months ended March 31, 2020 and 2019. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery of estimated fair value to the Company’s cost basis.

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at March 31, 2020 as follows:

 

    March 31, 2020                              
      Less than 12 months             12 months or more           Total      
     Estimated            No. of      Estimated            No. of      Estimated        
     Fair      Unrealized      Positions      Fair      Unrealized      Positions      Fair      Unrealized  
 Category    Value      Losses      Held      Value      Losses      Held      Value      Losses  
                                                 
Fixed-Maturity Securities:                                                
 U.S. Treasury securities                                                
 and obligations of U.S.                                                
 government corporations                                                
 and agencies   $ -     $ -       -     $ -     $ -       -     $ -     $ -  
                                                                 
 Political subdivisions of                                                                
 States, Territories and                                                                
 Possessions     -       -       -       -       -       -       -       -  
                                                                 
 Corporate and other                                                                
 bonds industrial and                                                                
 miscellaneous     35,409,999       (2,258,459 )     50       -       -       -       35,409,999       (2,258,459 )
                                                                 
 Residential mortgage and other                                                                
 asset backed securities     6,067,674       (938,478 )     13       10,286,307       (1,145,973 )     17       16,353,981       (2,084,451 )
                                                                 
 Total fixed-maturity                                                                
 securities   $ 41,477,673     $ (3,196,937 )     63     $ 10,286,307     $ (1,145,973 )     17     $ 51,763,980     $ (4,342,910 )

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2019 as follows:

 

   December 31, 2019
  Less than 12 months   12 months or more   Total
      Estimated         No. of     Estimated         No. of     Estimated     
   Fair        Unrealized     Positions     Fair        Unrealized     Positions     Fair     Unrealized 
 Category    Value        Losses     Held        Value        Losses     Held     Value        Losses 
   
 Fixed-Maturity Securities:                               
 U.S. Treasury securities                               
 and obligations of U.S.                               
 government corporations                               
 and agencies   $                     -    $                  -              -    $                  -    $                  -              -    $                    -    $                  -
                               
 Political subdivisions of                               
 States, Territories and                               
 Possessions           3,067,428            (11,316)              3                        -                        -              -           3,067,428            (11,316)
                               
 Corporate and other                                               
 bonds industrial and                               
 miscellaneous           3,730,478            (16,685)              7         1,300,915            (13,473)              3           5,031,393            (30,158)
                               
 Residential mortgage and other                               
 asset backed securities           5,862,636            (68,793)              5       13,534,768          (276,451)            21         19,397,404          (345,244)
                               
 Total fixed-maturity                               
 securities    $    12,660,542       $      (96,794)            15       $ 14,835,683    $    (289,924)            24    $   27,496,225    $    (386,718)

v3.20.1
4. Fair Value Measurements (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 5,136,240 $ 7,061,100
Political subdivisions of states, territories and possessions 9,414,959 9,321,812
Corporate and other bonds industrial and miscellaneous 113,489,622 125,622,039
Residential mortgage and other asset backed securities 23,839,073 26,231,230
Total fixed maturities 151,879,894 168,236,181
Equity securities 18,368,893 24,661,382
Total investments 170,248,787 192,897,563
Level 1    
U.S. Treasury securities and obligations of U.S. government corporations and agencies 5,136,240 7,061,100
Political subdivisions of states, territories and possessions 0 0
Corporate and other bonds industrial and miscellaneous 111,099,020 123,010,772
Residential mortgage and other asset backed securities 0 0
Total fixed maturities 116,235,260 130,071,872
Equity securities 18,368,893 24,661,382
Total investments 134,604,153 154,733,254
Level 2    
U.S. Treasury securities and obligations of U.S. government corporations and agencies 0 0
Political subdivisions of states, territories and possessions 9,414,959 9,321,812
Corporate and other bonds industrial and miscellaneous 2,390,602 2,611,267
Residential mortgage and other asset backed securities 23,839,073 26,231,230
Total fixed maturities 35,644,634 38,164,309
Equity securities 0 0
Total investments 35,644,634 38,164,309
Level 3    
U.S. Treasury securities and obligations of U.S. government corporations and agencies 0 0
Political subdivisions of states, territories and possessions 0 0
Corporate and other bonds industrial and miscellaneous 0 0
Residential mortgage and other asset backed securities 0 0
Total fixed maturities 0 0
Equity securities 0 0
Total investments $ 0 $ 0
v3.20.1
3. Investments (Details 1) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Amortized cost $ 152,675,779 $ 162,202,355
Estimated fair value 151,879,894 168,236,181
Less Than One Year    
Amortized cost 12,900,401 11,986,401
Estimated fair value 12,937,879 12,025,804
One To Five Years    
Amortized cost 44,309,018 49,715,422
Estimated fair value 44,695,085 51,000,025
Five To Ten Years    
Amortized cost 65,324,015 69,850,104
Estimated fair value 66,293,522 74,410,275
More Than 10 Years    
Amortized cost 4,511,318 4,511,795
Estimated fair value 4,114,335 4,568,847
Residential mortgage-backed securities [Member]    
Amortized cost 25,631,027 26,138,633
Estimated fair value $ 23,839,073 $ 26,231,230
v3.20.1
3. Investments (Details 5) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income:    
Fixed-maturity securities $ 1,447,938 $ 1,526,870
Equity securities 253,073 207,144
Cash and cash equivalents 44,223 40,401
Total 1,745,234 1,774,415
Expenses:    
Investment expenses 79,390 150,703
Net investment income $ 1,665,844 $ 1,623,712
v3.20.1
10. Earnings/(Loss) Per Common Share
3 Months Ended
Mar. 31, 2020
Loss per common share:  
10. Earnings/(Loss) Per Common Share

Basic net earnings/(loss) per common share is computed by dividing income/(loss) available to common shareholders by the weighted-average number of shares of Common Stock outstanding. Diluted earnings/(loss) per common share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options as well as non-vested restricted stock awards. The computation of diluted earnings/(loss) per common share excludes those options with an exercise price in excess of the average market price of the Company’s Common Stock during the periods presented.

The computation of diluted earnings/(loss) per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the three months March 31, 2020, no options were included in the computation of diluted earnings (loss) per common share as they would have been anti-dilutive for the relevant periods and, as a result, the weighted average number of shares of Common Stock used in the calculation of diluted earnings per common share has not been adjusted for the effect of such options. 

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

     Three months ended  
     March 31,      
     2020      2019  
             
 Weighted average number of shares outstanding     10,807,841       10,757,843  
                 
 Effect of dilutive securities, common share equivalents:                
 Stock options     -       -  
 Restricted stock awards     -       -  
                 
 Weighted average number of shares outstanding,                
 used for computing diluted earnings per share     10,807,841       10,757,843  

 

v3.20.1
6. Property and Casualty Insurance Activity
3 Months Ended
Mar. 31, 2020
Insurance [Abstract]  
6. Property and Casualty Insurance Activity

Premiums Earned

 

Premiums written, ceded and earned are as follows:

 

   Direct         Assumed         Ceded         Net  
               
Three months ended March 31, 2020                                
 Premiums written    $    36,696,929    $                     -       $(13,506,255)       $  23,190,674
 Change in unearned premiums            5,904,700                           -        (2,153,924)             3,750,776
 Premiums earned    $    42,601,629       $                     -       $(15,660,179)       $  26,941,450
               
Three months ended March 31, 2019                                
 Premiums written    $    37,488,548    $                (34)       $  (7,127,909)       $  30,360,605
 Change in unearned premiums             (628,067)                      195           (136,844)              (764,716)
 Premiums earned    $    36,860,481       $                161       $  (7,264,753)       $  29,595,889

  

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of March 31, 2020 and December 31, 2019 was $3,143,879 and $3,191,512, respectively.

 

Loss and Loss Adjustment Expense Reserves

 

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expense (“LAE”) reserves:

 

   Three months ended 
  March 31,
  2020 2019
   
 Balance at beginning of period   $  80,498,611  $  56,197,106
 Less reinsurance recoverables      (15,728,224)    (15,671,247)
 Net balance, beginning of period       64,770,387      40,525,859
     
 Incurred related to:      
 Current year        16,512,475      24,655,975
 Prior years          (126,654)        4,478,249
 Total incurred        16,385,821      29,134,224
     
 Paid related to:      
 Current year          5,787,129        7,731,086
 Prior years        13,777,236        8,405,440
 Total paid        19,564,365      16,136,526
        
 Net balance at end of period       61,591,843      53,523,557
 Add reinsurance recoverables        16,259,256      15,586,714
 Balance at end of period   $  77,851,099  $  69,110,271

 

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $5,866,897 and $3,135,894 for the three months ended March 31, 2020 and 2019, respectively.

 

Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the three months ended March 31, 2020 and 2019 was $126,654 favorable and $4,478,249 unfavorable, respectively. During the three months ended March 31, 2019, the Company increased case reserves for certain older open liability claims, which primarily affected the ultimate loss projections for commercial lines business. This was in response to  management’s detailed review of open liability claims that resulted in new assessments of carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.

 

Loss and LAE reserves

 

The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known including losses that have occurred but that have not yet been reported. The process relies on standard actuarial reserving methodologies, judgments relative to estimates of ultimate claim severity and frequency, the length of time before losses will develop to their ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors that are beyond the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of the best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE reserves for individual reported claims (the “case reserve”) is determined by the claims department and changes over time as new information is gathered. Such information is critical to the review of appropriate IBNR reserves and includes a review of coverage applicability, comparative liability on the part of the insured, injury severity, property damage, replacement cost estimates, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims and development on known claims (IBNR reserves) are determined using historical information aggregated by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

 

Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a quarterly basis, the Company reviews by line of business existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior periods. Several methods are used, varying by line of business and accident year, in order to select the estimated period-end loss reserves. These methods include the following:

 

Paid Loss Development – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.

 

Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.

 

Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.

 

Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.

 

Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed and assumptions are made regarding average loss and LAE development applied to remaining claims inventory. Such methods more properly reflect changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development. These methods may provide a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has occurred.

 

Frequency / Severity Based Methods – historical measurements of claim frequency and average paid claim size (severity) are reviewed for more mature accident years where a majority of claims have been reported and/or closed. These historical averages are trended forward to more recent periods in order to estimate ultimate losses for newer accident years that are not yet fully developed. These methods are useful for lines of business with slow and/or volatile loss development patterns, such as liability lines where information pertaining to individual cases may not be completely known for many years. The claim frequency and severity information for older periods can then be used as reasonable measures for developing a range of estimates for more recent immature periods.

 

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.

 

Three key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods, the loss development factor selections used in the loss development methods, and the loss severity assumptions used in the frequency / severity method described above. The loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business. The severity assumptions used in the frequency / severity method are determined by reviewing historical average claim severity for older more mature accident periods, trended forward to less mature accident periods.

 

The Company is not aware of any claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.

 

In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (“pure” IBNR) for accident dates of March 31, 2017 and prior is limited, although there remains the possibility of adverse development on reported claims (“case development” IBNR). In certain rare circumstances states have retroactively revised a statute of limitations. The Company is not aware of any such effort that would have a material impact on the Company’s results.

 

The following is information about incurred and paid claims development as of March 31, 2020, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of March 31, 2020 included in the net incurred loss and allocated expense amounts. The historical information regarding incurred and paid claims development for the years ended December 31, 2011 to December 31, 2019 is presented as supplementary unaudited information. 

 

All Lines of Business                        
(in thousands, except reported claims data)                    
                        As of  
  Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance   March 31, 2020  
  For the Years Ended December 31, For the three months ended March 31, 2020   IBNR Cumulative Number of Reported Claims by Accident Year  
Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019    
  (Unaudited 2011 - 2019) (Unaudited)        
                             
2011  $7,603  $7,678  $8,618  $9,440  $9,198  $9,066  $9,144  $9,171  $9,127  $      9,128    $      (1)             1,914  
2012      9,539    9,344  10,278  10,382  10,582  10,790  10,791  11,015        10,792            87             4,704 (1)
2013      10,728    9,745    9,424    9,621  10,061  10,089  10,607        10,607          (12)             1,561  
2014        14,193  14,260  14,218  14,564  15,023  16,381        16,376          289             2,136  
2015          22,340  21,994  22,148  22,491  23,386        23,042          154             2,555  
2016            26,062  24,941  24,789  27,887        27,961          538             2,877  
2017              31,605  32,169  35,304        35,873          631             3,380  
2018                54,455  56,351        58,073       2,391             4,188  
2019                  75,092        73,173     12,027             4,365  
2020                          15,760       6,202                731  
                   Total   $  280,784        
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.          
                             
All Lines of Business                        
(in thousands)                          
  Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance        
  For the Years Ended December 31, For the three months ended March 31, 2020        
Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019        
  (Unaudited 2011 - 2019) (Unaudited)        
                             
2011  $3,740  $5,117  $6,228  $7,170  $8,139  $8,540  $8,702  $8,727  $8,789  $      8,991        
2012      3,950    5,770    7,127    8,196    9,187  10,236  10,323  10,428        10,442        
2013        3,405    5,303    6,633    7,591    8,407    9,056    9,717          9,728        
2014          5,710    9,429  10,738  11,770  13,819  14,901        15,150        
2015          12,295  16,181  18,266  19,984  21,067        21,448        
2016            15,364  19,001  21,106  23,974        24,371        
2017              16,704  24,820  28,693        28,969        
2018                32,383  44,516        46,178        
2019                  40,933        50,983        
2020                            5,469        
                  Total  $  221,729        
                             
Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented  $    59,055        
All outstanding liabilities before 2011, net of reinsurance             100        
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance  $    59,154        

 

Reported claim counts are measured on an occurrence or per event basis.  A single claim occurrence could result in more than one loss type or claimant; however, the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved.

 

The reconciliation of the net incurred and paid loss development tables to the loss and LAE reserves in the consolidated balance sheet is as follows:

 

  As of
(in thousands) March 31, 2020
Liabilities for loss and loss adjustment expenses, net of reinsurance  $                   59,154
Total reinsurance recoverable on unpaid losses                       16,259
Unallocated loss adjustment expenses                         2,437
Total gross liability for loss and LAE reserves  $                   77,851

 

Reinsurance

Through June 30, 2019, the Company’s quota share reinsurance treaties were on a July 1 through June 30 fiscal year basis. Effective December 15, 2019, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ policies, covering the period from December 15, 2019 through December 31, 2020 (“2019/2020 Treaty”). The Company’s quota share reinsurance treaties in effect during the three months ended March 31, 2019 for its personal lines business were covered under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during the three months ended March 31, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).

 

Effective July 1, 2019, the 2017/2019 Treaty and the commercial umbrella treaty expired on a run-off basis; these treaties were not renewed. The Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2019. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

 

   Treaty Year 
  December 15, 2019   July 1, 2019   July 1, 2018
  to   to   to
 Line of Business  December 31, 2020   December 14, 2019   June 30, 2019
           
Personal Lines:          
Homeowners, dwelling fire and          
and canine legal liability          
 Quota share treaty:           
 Percent ceded  25%   None   10%
           
           
   Treaty Year 
  December 15, 2019   July 1, 2019   July 1, 2018
  to   to   to
 Line of Business  June 30, 2020   December 14, 2019   June 30, 2019
           
Personal Lines:          
Homeowners, dwelling fire and          
and canine legal liability          
 Quota share treaty:           
 Risk retained on intial $1,000,000           
 of losses   $                750,000    $             1,000,000    $               900,000
 Losses per occurrence subject to           
 quota share reinsurance coverage   $             1,000,000   None    $            1,000,000
 Excess of loss coverage and facultative           
 facility coverage (1)     $             9,000,000    $             9,000,000      $            9,000,000
   in excess of     in excess of     in excess of 
                  1,000,000      $             1,000,000      $            1,000,000
 Total reinsurance coverage per occurrence     $             9,250,000      $             9,000,000      $            9,100,000
 Losses per occurrence subject to           
 reinsurance coverage     $           10,000,000      $           10,000,000      $          10,000,000
 Expiration date  June 30, 2020   June 30, 2020   June 30, 2019
           
Catastrophe Reinsurance:          
 Initial loss subject to personal lines           
 quota share treaty     $             7,500,000   None    $            5,000,000
 Risk retained per catastrophe           
 occurrence (2)     $             5,625,000    $             7,500,000    $            4,500,000
 Catastrophe loss coverage in excess of           
 quota share coverage (3)     $         602,500,000    $         602,500,000    $        445,000,000
 Reinstatement premium           
 protection (4) (5)   Yes     Yes     Yes 

 

(1)For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.
(2)Plus losses in excess of catastrophe coverage.
(3)Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.
(4)Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
(5)Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

 

   Treaty Year 
  July 1, 2019   July 1, 2018
  to   to
 Line of Business  June 30, 2020   June 30, 2019
       
Personal Lines:      
       
 Personal Umbrella       
 Quota share treaty:       
 Percent ceded - first $1,000,000 of coverage  90%   90%
 Percent ceded - excess of $1,000,000 dollars of coverage  100%   100%
 Risk retained   $        100,000    $        100,000
 Total reinsurance coverage per occurrence   $     4,900,000    $     4,900,000
 Losses per occurrence subject to quota share reinsurance coverage   $     5,000,000    $     5,000,000
 Expiration date  June 30, 2020   June 30, 2019
       
Commercial Lines:      
 General liability commercial policies       
 Quota share treaty  None   None
 Risk retained   $        750,000    $        750,000
 Excess of loss coverage above risk retained   $     3,750,000    $     3,750,000
   in excess of     in excess of 
   $        750,000    $        750,000
 Total reinsurance coverage per occurrence   $     3,750,000    $     3,750,000
 Losses per occurrence subject to reinsurance coverage   $     4,500,000    $     4,500,000
       
 Commercial Umbrella       
 Quota share treaty:  None    
 Percent ceded - first $1,000,000 of coverage      90%
 Percent ceded - excess of $1,000,000 of coverage      100%
 Risk retained       $        100,000
 Total reinsurance coverage per occurrence       $     4,900,000
 Losses per occurrence subject to quota share reinsurance coverage       $     5,000,000
 Expiration date      June 30, 2019

  

The Company’s reinsurance program has been structured to enable the Company to grow its premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes. The reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The Company’s participation in reinsurance arrangements does not relieve the Company of its obligations to policyholders.

Ceding Commission Revenue

 

The Company earns ceding commission revenue under its quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions are earned, and (ii) a sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios. The commission rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.

 

The Company’s estimated ultimate treaty year loss ratios (the “Loss Ratio(s)”) for treaties in effect during the three months ended March 31, 2020 are attributable to contracts under the 2019/2020 Treaty. The Loss Ratios for treaties in effect for the three months ended March 31, 2019 are attributable to contracts under the 2017/2019 Treaty for the 2018/2019 Treaty Year, which expired on June 30, 2019 and was not renewed.

Under the 2019/2020 Treaty and the 2017/2019 Treaty for the 2018/2019 Treaty Year, the Company received an upfront fixed provisional rate that is not subject to a sliding scale contingent adjustment. In addition to the treaties that were in effect during the three months ended March 31, 2020 and 2019, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods increase or decrease, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.

 

Ceding commission revenue consists of the following:

 

    Three months ended 
  March 31,
   2020     2019 
   
 Provisional ceding commissions earned   $   3,720,360    $   1,317,751
 Contingent ceding commissions earned           110,739            (40,068)
   $   3,831,099    $   1,277,683

  

Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled annually based on the Loss Ratio of each treaty year that ends on June 30. As discussed above, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned. As of March 31, 2020 and December 31, 2019, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,775,000 and $2,886,000, respectively, which is recorded in reinsurance balances payable on the accompanying condensed consolidated balance sheets.

v3.20.1
6. Property and Casualty Insurance Activity (Tables)
3 Months Ended
Mar. 31, 2020
Insurance [Abstract]  
Schedule of earned premiums
   Direct      Assumed      Ceded      Net  
               
Three months ended March 31, 2020              
 Premiums written    $    36,696,929    $                     -    $(13,506,255)    $  23,190,674
 Change in unearned premiums            5,904,700                           -        (2,153,924)          3,750,776
 Premiums earned    $    42,601,629    $                     -    $(15,660,179)    $  26,941,450
               
Three months ended March 31, 2019              
 Premiums written    $    37,488,548    $                (34)    $  (7,127,909)    $  30,360,605
 Change in unearned premiums             (628,067)                      195           (136,844)           (764,716)
 Premiums earned    $    36,860,481    $                161    $  (7,264,753)    $  29,595,889
Schedule of loss and loss adjustment expenses
   Three months ended 
  March 31,
  2020 2019
   
 Balance at beginning of period   $  80,498,611  $  56,197,106
 Less reinsurance recoverables      (15,728,224)    (15,671,247)
 Net balance, beginning of period       64,770,387      40,525,859
     
 Incurred related to:      
 Current year        16,512,475      24,655,975
 Prior years          (126,654)        4,478,249
 Total incurred        16,385,821      29,134,224
     
 Paid related to:      
 Current year          5,787,129        7,731,086
 Prior years        13,777,236        8,405,440
 Total paid        19,564,365      16,136,526
     
 Net balance at end of period       61,591,843      53,523,557
 Add reinsurance recoverables        16,259,256      15,586,714
 Balance at end of period   $  77,851,099  $  69,110,271
Allocated claim adjustment expenses
All Lines of Business                        
(in thousands, except reported claims data)                    
                        As of  
  Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance   March 31, 2020  
  For the Years Ended December 31, For the three months ended March 31, 2020   IBNR Cumulative Number of Reported Claims by Accident Year  
Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019    
  (Unaudited 2011 - 2019) (Unaudited)        
                             
2011  $7,603  $7,678  $8,618  $9,440  $9,198  $9,066  $9,144  $9,171  $9,127  $      9,128    $      (1)             1,914  
2012      9,539    9,344  10,278  10,382  10,582  10,790  10,791  11,015        10,792            87             4,704 (1)
2013      10,728    9,745    9,424    9,621  10,061  10,089  10,607        10,607          (12)             1,561  
2014        14,193  14,260  14,218  14,564  15,023  16,381        16,376          289             2,136  
2015          22,340  21,994  22,148  22,491  23,386        23,042          154             2,555  
2016            26,062  24,941  24,789  27,887        27,961          538             2,877  
2017              31,605  32,169  35,304        35,873          631             3,380  
2018                54,455  56,351        58,073       2,391             4,188  
2019                  75,092        73,173     12,027             4,365  
2020                          15,760       6,202                731  
                   Total   $  280,784        
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.          
                             
All Lines of Business                        
(in thousands)                          
  Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance        
  For the Years Ended December 31, For the three months ended March 31, 2020        
Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019        
  (Unaudited 2011 - 2019) (Unaudited)        
                             
2011  $3,740  $5,117  $6,228  $7,170  $8,139  $8,540  $8,702  $8,727  $8,789  $      8,991        
2012      3,950    5,770    7,127    8,196    9,187  10,236  10,323  10,428        10,442        
2013        3,405    5,303    6,633    7,591    8,407    9,056    9,717          9,728        
2014          5,710    9,429  10,738  11,770  13,819  14,901        15,150        
2015          12,295  16,181  18,266  19,984  21,067        21,448        
2016            15,364  19,001  21,106  23,974        24,371        
2017              16,704  24,820  28,693        28,969        
2018                32,383  44,516        46,178        
2019                  40,933        50,983        
2020                            5,469        
                  Total  $  221,729        
                             
Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented  $    59,055        
All outstanding liabilities before 2011, net of reinsurance             100        
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance  $    59,154        
Reconciliation of the net incurred and paid claims
  As of
(in thousands) March 31, 2020
Liabilities for loss and loss adjustment expenses, net of reinsurance  $                   59,154
Total reinsurance recoverable on unpaid losses                       16,259
Unallocated loss adjustment expenses                         2,437
Total gross liability for loss and LAE reserves  $                   77,851
Schedule of line of business
   Treaty Year 
  December 15, 2019   July 1, 2019   July 1, 2018
  to   to   to
 Line of Business  December 31, 2020   December 14, 2019   June 30, 2019
           
Personal Lines:          
Homeowners, dwelling fire and          
and canine legal liability          
 Quota share treaty:           
 Percent ceded  25%   None   10%
           
           
   Treaty Year 
  December 15, 2019   July 1, 2019   July 1, 2018
  to   to   to
 Line of Business  June 30, 2020   December 14, 2019   June 30, 2019
           
Personal Lines:          
Homeowners, dwelling fire and          
and canine legal liability          
 Quota share treaty:           
 Risk retained on intial $1,000,000           
 of losses   $                750,000    $             1,000,000    $               900,000
 Losses per occurrence subject to           
 quota share reinsurance coverage   $             1,000,000   None    $            1,000,000
 Excess of loss coverage and facultative           
 facility coverage (1)     $             9,000,000      $             9,000,000      $            9,000,000
   in excess of     in excess of     in excess of 
     $             1,000,000      $             1,000,000      $            1,000,000
 Total reinsurance coverage per occurrence     $             9,250,000      $             9,000,000      $            9,100,000
 Losses per occurrence subject to           
 reinsurance coverage     $           10,000,000      $           10,000,000      $          10,000,000
 Expiration date  June 30, 2020   June 30, 2020   June 30, 2019
           
Catastrophe Reinsurance:          
 Initial loss subject to personal lines           
 quota share treaty     $             7,500,000   None    $            5,000,000
 Risk retained per catastrophe           
 occurrence (2)     $             5,625,000    $             7,500,000    $            4,500,000
 Catastrophe loss coverage in excess of           
 quota share coverage (3)     $         602,500,000    $         602,500,000    $        445,000,000
 Reinstatement premium           
 protection (4) (5)   Yes     Yes     Yes 

 

  (1) For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.

 

  (2) Plus losses in excess of catastrophe coverage.

 

  (3) Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Duration of 168 consecutive hours for a catastrophe occurrence from windstorm, hail, tornado, hurricane and cyclone.

 

  (4) Effective July 1, 2018, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.

 

  (5) Effective July 1, 2019, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.

 

   Treaty Year 
  July 1, 2019   July 1, 2018
  to   to
 Line of Business  June 30, 2020   June 30, 2019
       
Personal Lines:      
       
 Personal Umbrella       
 Quota share treaty:       
 Percent ceded - first $1,000,000 of coverage  90%   90%
 Percent ceded - excess of $1,000,000 dollars of coverage  100%   100%
 Risk retained   $        100,000    $        100,000
 Total reinsurance coverage per occurrence   $     4,900,000    $     4,900,000
 Losses per occurrence subject to quota share reinsurance coverage   $     5,000,000    $     5,000,000
 Expiration date  June 30, 2020   June 30, 2019
       
Commercial Lines:      
 General liability commercial policies       
 Quota share treaty  None   None
 Risk retained   $        750,000    $        750,000
 Excess of loss coverage above risk retained   $     3,750,000    $     3,750,000
   in excess of     in excess of 
   $        750,000    $        750,000
 Total reinsurance coverage per occurrence   $     3,750,000    $     3,750,000
 Losses per occurrence subject to reinsurance coverage   $     4,500,000    $     4,500,000
       
 Commercial Umbrella       
 Quota share treaty:  None    
 Percent ceded - first $1,000,000 of coverage      90%
 Percent ceded - excess of $1,000,000 of coverage      100%
 Risk retained       $        100,000
 Total reinsurance coverage per occurrence       $     4,900,000
 Losses per occurrence subject to quota share reinsurance coverage       $     5,000,000
 Expiration date      June 30, 2019
Schedule of ceding commission revenue
    Three months ended 
  March 31,
   2020     2019 
   
 Provisional ceding commissions earned   $   3,720,360    $   1,317,751
 Contingent ceding commissions earned           110,739            (40,068)
   $   3,831,099    $   1,277,683
v3.20.1
2. Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, which include the reserves for losses and loss adjustment expenses, and are subject to estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by management. On an ongoing basis, management reevaluates its assumptions and the methods for calculating these estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.

Principles of Consolidation

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

Accounting Changes

The Company has determined that it was not subject to any new accounting pronouncements that became effective during the three months ended March 31, 2020.

Accounting Pronouncements

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate. Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.

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

v3.20.1
10. Earnings/(Loss) Per Common Share (Tables)
3 Months Ended
Mar. 31, 2020
Loss per common share:  
Schedule of net earnings/(loss) per common share
     Three months ended  
     March 31,      
     2020      2019  
             
 Weighted average number of shares outstanding     10,807,841       10,757,843  
                 
 Effect of dilutive securities, common share equivalents:                
 Stock options     -       -  
 Restricted stock awards     -       -  
                 
 Weighted average number of shares outstanding,                
 used for computing diluted earnings per share     10,807,841       10,757,843  
v3.20.1
6. Property and Casualty Insurance Activity (Details 6) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Insurance [Abstract]    
Provisional ceding commissions earned $ 3,720,360 $ 1,317,751
Contingent ceding commissions earned 110,739 (40,068)
Total commissions earned $ 3,831,099 $ 1,277,683
v3.20.1
4. Fair Value Measurements (Details 2) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Senior Notes due 2022 $ 27,281,870 $ 27,313,994
Level 1    
Senior Notes due 2022 0 0
Level 2    
Senior Notes due 2022 27,281,870 27,313,994
Level 3    
Senior Notes due 2022 $ 0 $ 0
v3.20.1
6. Property and Casualty Insurance Activity (Details 2)
3 Months Ended
Mar. 31, 2020
USD ($)
Number
2011  
2011 $ 7,603
IBNR $ (1)
Cumulative number of reported claims | Number 1,914
2012  
2011 $ 7,678
2012 9,539
IBNR $ 87
Cumulative number of reported claims | Number 4,704 [1]
2013  
2011 $ 8,618
2012 9,344
2013 10,728
IBNR $ (12)
Cumulative number of reported claims | Number 1,561
2014  
2011 $ 9,440
2012 10,278
2013 9,745
2014 14,193
IBNR $ 289
Cumulative number of reported claims | Number 2,136
2015  
2011 $ 9,198
2012 10,382
2013 9,424
2014 14,260
2015 22,340
IBNR $ 154
Cumulative number of reported claims | Number 2,555
2016  
2011 $ 9,066
2012 10,582
2013 9,621
2014 14,218
2015 21,994
2016 26,062
IBNR $ 538
Cumulative number of reported claims | Number 2,877
2017  
2011 $ 9,144
2012 10,790
2013 10,061
2014 14,564
2015 22,148
2016 24,941
2017 31,605
IBNR $ 631
Cumulative number of reported claims | Number 3,380
2018  
2011 $ 9,171
2012 10,791
2013 10,089
2014 15,023
2015 22,491
2016 24,789
2017 32,169
2018 54,455
IBNR $ 2,391
Cumulative number of reported claims | Number 4,188
2019  
2011 $ 9,127
2012 11,015
2013 10,607
2014 16,381
2015 23,386
2016 27,887
2017 35,304
2018 56,351
2019 75,092
IBNR $ 12,027
Cumulative number of reported claims | Number 4,365
2020  
2011 $ 9,128
2012 10,792
2013 10,607
2014 16,376
2015 23,042
2016 27,961
2017 35,873
2018 58,073
2019 73,173
2020 15,760
Total 280,784
IBNR $ 6,202
Cumulative number of reported claims | Number 731
[1] Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.