UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 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)

 

(845802-7900
(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

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of each class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No

    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐     No ☒

 

Note – Checking the box above will not relieve any registrant required to ?le reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

SEC 1673 (04-20)

 

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 June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $43,436,197 based on the closing sale price as reported on the Nasdaq Global Select Market.

 

Note.—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.Yes o No ☐

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 17, 2021, there were 10,701,407 shares of common stock outstanding. 

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 

INDEX

 

 

 

Page No.

 

Forward-Looking Statements

 

2

 

PART I

 

 

 

 

Item 1.

Business.

 

3

 

Item 1A.

Risk Factors.

 

18

 

Item 1B.

Unresolved Staff Comments.

 

29

 

Item 2.

Properties.

 

29

 

Item 3.

Legal Proceedings.

 

29

 

Item 4.

Mine Safety Disclosures.

 

29

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

30

 

Item 6.

Selected Financial Data.

 

31

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

31

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

60

 

Item 8.

Financial Statements and Supplementary Data.

 

60

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

60

 

Item 9A.

Controls and Procedures.

 

60

 

Item 9B.

Other Information.

 

61

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

62

 

Item 11.

Executive Compensation.

 

66

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

72

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

75

 

Item 14.

Principal Accountant Fees and Services.

 

77

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules.

 

78

 

Item 16.

Form 10-K Summary.

 

78

 

Signatures

 

79

 

 

 

Table of Contents

 

PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K (the “Annual Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The events described in forward‑looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated results or other consequences of our plans or strategies, projected or anticipated results from acquisitions to be made by us, or projections involving anticipated revenues, earnings, costs or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward‑looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may cause actual results and outcomes to differ materially from those contained in the forward-looking statements include, but are not limited to, the risks and uncertainties discussed in Part I Item 1A (“Risk Factors”) of this Annual Report under “Factors That May Affect Future Results and Financial Condition.”

 

Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward‑looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward‑looking statements. We undertake no obligation to publicly update or revise any forward‑looking statements, whether from new information, future events or otherwise except as required by law.

 

 
2

Table of Contents

  

ITEM 1. BUSINESS.

 

(a) Business Development

 

General

 

As used in this Annual Report, references to the “Company,” “we,” “us,” or “our” refer to Kingstone Companies, Inc. (“Kingstone”) and its subsidiaries.

 

We offer property and casualty insurance products to individuals through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”), domiciled in the state of New York. KICO is a licensed property and casualty insurance company in New York, New Jersey, Connecticut, Massachusetts, Pennsylvania, Rhode Island, Maine, and New Hampshire. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts and Connecticut. Although in 2020 KICO wrote 80% of its direct written premiums in New York, we believe that New Jersey, Connecticut, Massachusetts, and Rhode Island will represent an increasing portion of the total over the coming years.

 

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” 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. Net Cosi revenue is deducted against commission expense and Cosi related expenses are included in other operating expenses. Cosi related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, its expenses are not included in the calculation of our combined ratio as described below.

 

Recent Developments

 

Developments During 2020

 

 

·

Quota Share Reinsurance

  

            Effective December 30, 2020, KICO terminated the 25% quota share reinsurance treaty for its personal lines business, which primarily consisted of homeowners’ policies, covering the period December 15, 2019 through December 30, 2020.

 

 

·

Catastrophe Reinsurance Coverage

  

Effective July 1, 2020, KICO decreased the top limit of its catastrophe reinsurance coverage from $610,000,000 to $485,000,000, which, at the time, equated to more than a 1-in-130 year storm event according to the primary industry catastrophe model that we follow.

 

 

·

A.M. Best Rating

 

In July 2020, A.M. Best downgraded KICO’s financial strength rating from A- (excellent) to B++ (Good) as a result of KICO’s revision to its catastrophe reinsurance program effective July 1, 2020 as described above.

 

 
3

Table of Contents

 

Developments During 2019

 

 

·

Quota Share Reinsurance

 

Effective December 15, 2019, KICO entered into a 25% 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”).

 

In addition to the 2019/2020 Treaty, KICO’s quota share reinsurance treaties in effect during the year ended December 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”). Effective July 1, 2019, the 2017/2019 Treaty expired on a run-off basis.

 

 

·

Catastrophe Reinsurance Coverage

  

Effective July 1, 2019, KICO increased the top limit of its catastrophe reinsurance coverage from $450,000,000 to $610,000,000, which, at the time, equated to more than a 1-in-250 year storm event according to the primary industry catastrophe model that we follow.

 

 

·

Expansion into Connecticut

  

In the first quarter of 2019, KICO’s homeowners insurance product was launched in Connecticut.

 

 

·

Exit Commercial Liability Business

  

In July 2019, due to the poor performance of our commercial liability business, we made the decision to no longer underwrite commercial lines or commercial umbrella risks.

 

(b) Business

 

Property and Casualty Insurance

 

Overview

 

Property and casualty insurance companies provide policies in exchange for premiums paid by their customers (the “insureds”). An insurance policy is a contract between the insurance company and its insureds where the insurance company agrees to pay for losses that are covered under the contract. Such contracts are subject to legal interpretation by courts, sometimes involving legislative rulings and/or arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured’s property, such as a home and the personal property in it, or a business owner’s building, inventory and equipment. Casualty insurance (also referred to as liability insurance) generally covers the financial consequences related to the legal liability of an individual or an organization resulting from negligent acts and omissions that cause bodily injury and/or property damage to a third party. Claims for property coverage generally are reported and settled in a relatively short period of time, whereas those for casualty coverage may take many years to settle.

 

 
4

Table of Contents

 

We generate revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from our investment portfolio, and net realized gains and losses on investment securities. We also collect a variety of policy fees including installment fees, reinstatement fees, and non-sufficient fund fees related to situations involving extended premium payment plans. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that coverage is provided (i.e., ratably over the life of the policy). All of our policies are 12 month policies; therefore, a significant period of time can elapse between the receipt of insurance premiums and the payment of claims. During this time, KICO invests the premiums, earning investment income and generating net realized and unrealized gains and losses on associated investments.

 

Insurance companies incur a significant amount of their total expenses from insured losses, which are commonly referred to as claims. In settling insured losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including their employees’ compensation and benefits.

 

The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company’s combined ratio is calculated by taking the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) and adding it to the ratio of policy acquisition and other underwriting expenses to earned premiums (the “expense ratio”). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit prior to the impact of investment income. After considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can also be profitable.

 

Business; Strategy

 

We are a multi-line regional property and casualty insurance company writing business exclusively through retail and wholesale agents and brokers (“producers”) appointed by our wholly owned subsidiary, KICO. We are licensed to write insurance policies in New York, New Jersey, Connecticut, Maine, Massachusetts, New Hampshire, Pennsylvania and Rhode Island. We are actively writing business in New York, New Jersey, Rhode Island, Massachusetts and Connecticut.

 

Additionally, through our subsidiary, 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” below for a discussion of our distribution channels.

 

We seek to deliver an attractive return on capital and to provide consistent earnings growth through underwriting profits and income from our investment portfolio. Our goal is to allocate capital efficiently to those lines of business that generate sustainable underwriting profits and to avoid lines of business for which an underwriting profit is not likely. Our strategy is to be the preferred multi-line property and casualty insurance company for selected producers in the geographic markets in which we operate. We believe producers place profitable business with us because we provide excellent, consistent service to insureds and claimants. Producers also value our financial stability coupled with competitive rate and commission structures.

 

Our principal objectives are to grow profitably while managing risk through prudent use of reinsurance in order to strengthen our capital base. We generate underwriting income through adequate pricing of insurance policies and by effectively managing our other underwriting and operating expenses. We are pursuing profitable growth through existing producers in existing markets, by developing new geographic markets and producer relationships, and by introducing niche products that are relevant to our producers and insureds.

 

 
5

Table of Contents

 

 For the year ended December 31, 2020, our gross written premiums totaled $169.3 million, a decrease of 1.1% from the $171.2 million in gross written premiums for the year ended December 31, 2019. While gross written premiums were generally flat between the two years, in the year ended December 31, 2020, there was a decrease of $10.2 million of commercial lines gross written premiums as a result of our exit from this line, which was offset by an increase in the core homeowners gross written premiums of $11.2 million.

 

Product Lines

 

Our product lines include the following:

 

Personal lines - Our largest line of business is personal lines, consisting of homeowners and dwelling fire multi-peril, cooperative/condominiums, renters, and personal umbrella policies. Personal lines policies accounted for 95.7% of our gross written premiums for the year ended December 31, 2020.

 

Livery physical damage - We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs, primarily based in New York City. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included. These policies accounted for 4.2% of our gross written premiums for the year ended December 31, 2020.

 

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. Further, we offered commercial umbrella policies written above our supporting commercial lines policies. In July 2019, due to the 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 were non-renewed at the end of their annual terms. Commercial lines policies accounted for 5.9% of our gross written premiums for the year ended December 31, 2019. We have no in force commercial lines policies as of December 31, 2020.

 

Other - We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations. These policies accounted for 0.1% of our gross written premiums for the year ended December 31, 2020.

 

Our Competitive Strengths

 

History of Growing Our Profitable Operations

 

KICO has been in operation in the State of New York for over 130 years. We have consistently grown the amount of profitable business that we write by introducing new products, increasing volume written with our selected producers in existing markets, and developing new producer relationships and markets. KICO has earned an underwriting profit in eight of the past ten years, including in 2012 and 2013 when our financial results were adversely impacted by Superstorm Sandy. The extensive heritage of our insurance company subsidiary and our commitment to the markets in which we operate is a competitive advantage with producers and insureds.

 

Strong Producer Relationships

 

Within our selected producers’ offices, we compete with other property and casualty insurance carriers available to those producers. We carefully select the producers that distribute our insurance policies and continuously monitor and evaluate their performance. We believe our insurance producers value their relationships with us because we provide excellent, consistent personal service coupled with competitive rates and commission levels. We have consistently been rated by insurance producers as above average in the important areas of underwriting, claims handling and service. In the biennial performance surveys conducted by the Professional Insurance Agents of New York and New Jersey of its membership since 2010, KICO was rated as one of the top performing insurance companies in New York, twice ranking as the top rated carrier among all those surveyed.

 

 
6

Table of Contents

 

We offer our selected producers access to a variety of personal lines and specialty products, including some that are unique to us. We provide a multi-policy discount on homeowners policies in order to attract and retain more of this multi-line business. We have had a consistent presence in the New York market and our producers value the longevity of the relationship. We believe that the excellent service provided to our selected producers, our broad product offerings, and our consistent prices and financial stability provide a strong foundation for continued profitable growth.

 

Sophisticated Underwriting and Risk Management Practices

 

We believe that a significant underwriting advantage exists due to our local market presence and expertise. Our underwriting process evaluates and screens out certain risks based on property reports, individual insurance scoring, and information collected from physical property inspections and driving records. We maintain certain policy exclusions that reduce our exposure to risks that can create severe losses. We target a preferred risk profile in order to reduce adverse selection from risks seeking the lowest premiums and minimal coverage levels.

 

Our underwriting procedures, premium rates and policy terms support the underwriting profitability of our personal lines policies. We apply premium surcharges for certain coastal properties and maintain deductibles for hurricane-prone exposures in order to provide an appropriate premium for the risk of loss. We manage coastal risk exposure through use of individual catastrophe risk scoring and prudent use of reinsurance.

 

Effective Utilization of Reinsurance

 

Our reinsurance treaties allow us to limit our exposure to the financial impact of catastrophe losses and to reduce our net liability on individual risks. Our reinsurance program is structured to enable us to grow our premium volume while maintaining regulatory capital and other financial ratios within thresholds used for regulatory oversight purposes.

 

Our reinsurance program also provides income from ceding commissions earned pursuant to quota share reinsurance contracts. The income we earn from ceding commissions typically exceeds our fixed operating costs, which consist of other underwriting expenses. Quota share reinsurance treaties transfer a portion of the profit (or loss) associated with the subject insurance policies to the reinsurers.

 

Scalable, Low-Cost Operations

 

We focus on efficiently managing our expenses, and invest in tools and processes that improve the effectiveness of underwriting risks and processing claims. We evaluate the costs and benefits of each new tool or process in order to achieve optimal results. While the majority of our policies are written for risks in downstate New York, our Kingston, New York location provides a low-cost operating environment.

 

We continue to invest in improving our online application and quoting systems for our personal lines products. We have leveraged a paperless workflow management and document storage tool that has improved efficiency and reduced costs. We provide an online payment portal that allows insureds to make payments and to view policy information for all of our products in one location. Our ability to control the growth of operating and other expenses while expanding our operations and growing revenue is a key component of our business model and is important to our financial success.

 

 
7

Table of Contents

 

In 2020, we implemented the Kingstone 2.0 program which is an effort to modernize our systems. In 2020 we implemented our new claims system, filed our new homeowners program in New York, and filed our new condo/tenant and dwelling fire programs in New York, introduced a new interface for our select producers and started the conversion to our new policy management system. We have been able to make these investments without an increase in underwriting expenses.

 

Underwriting and Claims Management Philosophy

 

Our underwriting philosophy is to target niche segments for which we have detailed expertise and can take advantage of market conditions. We monitor results on a regular basis and our selected producers are reviewed by management on at least a quarterly basis.

 

We believe that our rates are appropriately competitive with other carriers in our target markets. We do not seek to grow by competing based solely upon price. We seek to develop long-term relationships with our selected producers who understand and appreciate the path we have chosen. We carefully underwrite our business utilizing industry claims databases, insurance scoring reports, physical inspection of risks and other individual risk underwriting tools. We write homeowners and dwelling fire business in coastal markets and are cognizant of our exposure to hurricanes. We have mitigated this risk through appropriate catastrophe reinsurance and application of hurricane deductibles. We handle claims fairly while ensuring that coverage provisions and exclusions are properly applied. Our claims and underwriting expertise supports our ability to grow our profitable business.

 

Distribution

 

We generate business through our relationships with over 600 producers. We carefully select our producers by evaluating numerous factors such as their need for our products, premium production potential, loss history with other insurance companies that they represent, product and market knowledge, and agency size. We only distribute through agents and have never sought to distribute our products direct to the consumer. We monitor and evaluate the performance of our producers through periodic reviews of volume and profitability. Our senior executives are actively involved in managing our producer relationships.

 

Each producer is assigned to a staff underwriter and the producer can call that underwriter directly on any matter. We believe that the close relationship and personal service received from their underwriters is a principal reason producers place their business with us. Our producers have access to a KICO website portal that provides them the ability to quote risks for various products and to review policy forms and underwriting guidelines for all lines of business. We send out frequent “Producer Grams” in order to inform our producers of updates at KICO. In addition, we have an active Producer Council, made up of 11 active producers, to advise us on market developments; and we have at least one annual meeting with all of our producers.

 

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.

 

 
8

Table of Contents

 

 

 

Year ended

 

 

Year ended

 

($ in thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Direct Written Pemiums

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Independent

 

$123,755

 

 

 

76.4%

 

$120,625

 

 

 

80.6%

Expansion Independent (1)

 

 

30,953

 

 

 

19.1%

 

 

24,253

 

 

 

16.2%

Alternative Distribution through Cosi

 

 

7,233

 

 

 

4.5%

 

 

4,799

 

 

 

3.2%

Total

 

$161,941

 

 

 

100.0%

 

$149,677

 

 

 

100.0%

 

(1)

Outside of New York

  

For the years ended December 31, 2020 and 2019, Alternative Distribution comprised of 4.5% and 3.2% respectively, of direct written premiums for our homeowners and dwelling fire components of personal lines.

 

Competition; Market

  

The insurance industry is highly competitive. We constantly assess and make projections of market conditions and appropriate prices for our products, but we cannot fully know our profitability until all claims have been reported and settled.

 

Our policyholders are located primarily in the downstate regions of New York State, but we are actively growing into other Northeast markets, including New Jersey and Rhode Island during 2017 followed by Massachusetts in 2018 and Connecticut in 2019. In addition, we are licensed to write insurance policies in Maine, New Hampshire and Pennsylvania. These homeowners markets align well with the niche markets that have generated profitable results in New York, and we believe that our market expertise can be effectively utilized in new markets.

 

In 2019, KICO was the 14th largest writer of homeowners insurance in the State of New York, according to data compiled by SNL Financial LLC. Based on the same data, in 2019, we had a 1.6% market share for this business. We compete with large national carriers as well as regional and local carriers in the property and casualty marketplace in New York and other states. We believe that many national and regional carriers have chosen to limit their rate of premium growth or to decrease their presence in Northeastern states due to the relatively high coastal population and associated catastrophe risk that exists in the region.

 

Given present market conditions, we believe that we have the opportunity to continue expanding the size of our personal lines business in New York, New Jersey, and other northeastern states in which we are licensed.

 

Loss and Loss Adjustment Expense Reserves

  

We are required to establish reserves for unpaid losses, including reserves for claims loss adjustment expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. We establish these reserves after considering all information known to us as of the date they are recorded.

  

Loss reserves fall into two categories: case reserves for reported losses and LAE associated with specific reported claims, and reserves for losses and LAE that are incurred but not reported (“IBNR”). We establish these two categories of loss reserves as follows:

 

 
9

Table of Contents

 

Reserves for reported losses - When a claim is received, we establish a case reserve for the estimated amount of its ultimate settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time it is received and we may subsequently adjust case reserves as additional facts and information about the claim develops.

  

IBNR reserves - We also estimate reserves for loss and LAE amounts incurred but not reported (“IBNR”). IBNR reserves are calculated in bulk as an estimate of ultimate losses and LAE less reported losses and LAE. There are two types of IBNR; the first is a provision for claims that have occurred but are not yet reported or known. We refer to this as ‘Pure’ IBNR, and due to the fact that we write primarily quickly reported property lines of business, this type of IBNR does not make up a large portion of KICO’s total IBNR. The second type of IBNR is a provision for expected future development on known claims, from the evaluation date until the time claims are settled and closed. We refer to this as ‘Case Development’ IBNR and it makes up the majority of the IBNR that KICO records. Ultimate losses driving the determination of appropriate IBNR levels are projected by using generally accepted actuarial techniques.

 

The liability for loss and LAE represents our best estimate of the ultimate cost of all reported and unreported losses that are unpaid as of the balance sheet evaluation date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-based valuations, statistical analyses, and various actuarial procedures. The projection of future claim payments and reporting patterns is based on an analysis of our historical experience, supplemented by analyses of industry loss data. We believe that the reserves for loss and LAE are adequate to cover the ultimate cost of losses and claims to date. However, because of uncertainty from various sources, including changes in claims settlement patterns and handling procedures, litigation trends, judicial decisions, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liabilities at the balance sheet date. As adjustments to these estimates become necessary, they are reflected in the period in which the estimates are changed. Because of the nature of the business historically written, we believe that we have limited exposure to asbestos and environmental claim liabilities.

 

We engage an independent external actuarial specialist (the ‘Appointed Actuary’) to opine on our recorded statutory reserves. The Appointed Actuary estimates a range of ultimate losses, along with a range and recommended central estimate of IBNR reserve amounts. Our carried IBNR reserves are based on an internal actuarial analysis and reflect management’s best estimate of unpaid loss and LAE liabilities, and fall within the range of those determined as reasonable by the Appointed Actuary.

  

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Principal Revenue and Expense Items” in Item 7 of this Annual Report and Note 2 and Note 11 in the accompanying Consolidated Financial Statements for additional information and details regarding loss and LAE reserves.

 

Reconciliation of Loss and Loss Adjustment Expenses

 

The table below shows the reconciliation of loss and LAE on a gross and net basis, reflecting changes in losses incurred and paid losses:

 

 
10

Table of Contents

 

 

 

 Years ended

 

 

 

 December 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

 

 

66,389,907

 

 

 

79,044,301

 

Prior years

 

 

41,165

 

 

 

11,138,023

 

Total incurred

 

 

66,431,072

 

 

 

90,182,324

 

 

 

 

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

 

 

 

Current year

 

 

41,100,578

 

 

 

42,861,207

 

Prior years

 

 

27,453,904

 

 

 

23,076,589

 

Total paid

 

 

68,554,482

 

 

 

65,937,796

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

 

62,646,977

 

 

 

64,770,387

 

Add reinsurance recoverables

 

 

20,154,251

 

 

 

15,728,224

 

Balance at end of period

 

$82,801,228

 

 

$80,498,611

 

  

Our claims reserving practices are designed to set reserves that, in the aggregate, are adequate to pay all claims at their ultimate settlement value.

 

Loss and Loss Adjustment Expenses Development

 

The table below shows the net loss development of reserves held as of each calendar year-end from 2011 through 2020.

 

The first section of the table reflects the changes in our loss and LAE reserves after each subsequent calendar year of development. The table displays the re-estimated values of incurred losses and LAE at each succeeding calendar year-end, including payments made during the years indicated. The second section of the table shows by year the cumulative amounts of loss and LAE payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. An example with respect to the net loss and LAE reserves of $7,280,000 as of December 31, 2010 is as follows. By December 31, 2012 (two years later), $4,947,000 had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2010. The re-estimated ultimate reserves for those claims as of December 31, 2012 (two years later) had grown to $8,289,000.

 

The “cumulative redundancy (deficiency)” represents, as of December 31, 2020, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.

 

 
11

Table of Contents

 

(in thousands of $)

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

Reserve for loss and loss adjustment expenses, net of reinsurance recoverables

 

 

7,280

 

 

 

8,520

 

 

 

12,065

 

 

 

17,139

 

 

 

21,663

 

 

 

23,170

 

 

 

25,960

 

 

 

32,051

 

 

 

40,526

 

 

 

64,770

 

 

 

62,647

 

Net reserve estimated as of One year later

 

 

7,483

 

 

 

9,261

 

 

 

13,886

 

 

 

18,903

 

 

 

21,200

 

 

 

23,107

 

 

 

25,899

 

 

 

33,203

 

 

 

51,664

 

 

 

64,811

 

 

 

 

 

Two years later

 

 

8,289

 

 

 

11,022

 

 

 

16,875

 

 

 

18,332

 

 

 

21,501

 

 

 

24,413

 

 

 

26,970

 

 

 

42,723

 

 

 

55,145

 

 

 

 

 

 

 

 

 

Three years later

 

 

9,170

 

 

 

12,968

 

 

 

16,624

 

 

 

18,687

 

 

 

22,576

 

 

 

25,509

 

 

 

33,298

 

 

 

43,780

 

 

 

 

 

 

 

 

 

 

 

 

 

Four years later

 

 

10,128

 

 

 

12,552

 

 

 

16,767

 

 

 

19,386

 

 

 

23,243

 

 

 

28,638

 

 

 

33,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five years later

 

 

9,925

 

 

 

12,440

 

 

 

16,985

 

 

 

19,449

 

 

 

25,442

 

 

 

28,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six years later

 

 

9,932

 

 

 

12,367

 

 

 

16,959

 

 

 

20,265

 

 

 

25,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seven years later

 

 

9,779

 

 

 

12,307

 

 

 

17,198

 

 

 

20,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eight years later

 

 

9,676

 

 

 

12,317

 

 

 

17,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine years later

 

 

9,736

 

 

 

12,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ten years later

 

 

9,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cumulative redundancy (deficiency)

 

 

(2,448)

 

 

(3,805)

 

 

(5,024)

 

 

(2,930)

 

 

(3,690)

 

 

(5,336)

 

 

(7,382)

 

 

(11,729)

 

 

(14,619)

 

 

(41)

 

 

 

 

 

(in thousands of $)

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

Cumulative amount of reserve paid, net of reinsurance recoverable through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year later

 

 

3,201

 

 

 

3,237

 

 

 

4,804

 

 

 

6,156

 

 

 

8,500

 

 

 

8,503

 

 

 

9,900

 

 

 

15,795

 

 

 

23,075

 

 

 

27,454

 

 

 

 

Two years later

 

 

4,947

 

 

 

5,661

 

 

 

8,833

 

 

 

10,629

 

 

 

12,853

 

 

 

14,456

 

 

 

17,187

 

 

 

26,168

 

 

 

35,924

 

 

 

 

 

 

 

 

Three years later

 

 

6,199

 

 

 

8,221

 

 

 

11,873

 

 

 

13,571

 

 

 

16,564

 

 

 

19,533

 

 

 

23,484

 

 

 

32,704

 

 

 

 

 

 

 

 

 

 

 

 

Four years later

 

 

7,737

 

 

 

10,100

 

 

 

13,785

 

 

 

16,166

 

 

 

19,838

 

 

 

22,816

 

 

 

27,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five years later

 

 

8,585

 

 

 

10,903

 

 

 

15,479

 

 

 

17,262

 

 

 

21,976

 

 

 

25,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six years later

 

 

8,941

 

 

 

11,417

 

 

 

15,882

 

 

 

18,265

 

 

 

23,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seven years later

 

 

9,275

 

 

 

11,725

 

 

 

16,152

 

 

 

18,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eight years later

 

 

9,559

 

 

 

11,864

 

 

 

16,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine years later

 

 

9,629

 

 

 

12,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ten years later

 

 

9,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net reserve -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

7,280

 

 

 

8,520

 

 

 

12,065

 

 

 

17,139

 

 

 

21,663

 

 

 

23,170

 

 

 

25,960

 

 

 

32,051

 

 

 

40,526

 

 

 

64,770

 

 

 

62,647

 

* Reinsurance Recoverable

 

 

10,432

 

 

 

9,960

 

 

 

18,420

 

 

 

17,364

 

 

 

18,250

 

 

 

16,707

 

 

 

15,777

 

 

 

16,749

 

 

 

15,671

 

 

 

15,728

 

 

 

20,154

 

* Gross reserves -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  December 31,

 

 

17,712

 

 

 

18,480

 

 

 

30,485

 

 

 

34,503

 

 

 

39,913

 

 

 

39,877

 

 

 

41,737

 

 

 

48,800

 

 

 

56,197

 

 

 

80,499

 

 

 

82,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net re-estimated reserve

 

 

9,728

 

 

 

12,325

 

 

 

17,089

 

 

 

20,069

 

 

 

25,353

 

 

 

28,506

 

 

 

33,342

 

 

 

43,780

 

 

 

55,145

 

 

 

64,811

 

 

 

 

 

Re-estimated reinsurance recoverable

 

 

13,140

 

 

 

13,577

 

 

 

28,342

 

 

 

22,512

 

 

 

23,667

 

 

 

21,667

 

 

 

21,300

 

 

 

21,264

 

 

 

19,551

 

 

 

16,496

 

 

 

 

 

Gross re-estimated reserve

 

 

22,868

 

 

 

25,902

 

 

 

45,431

 

 

 

42,581

 

 

 

49,020

 

 

 

50,173

 

 

 

54,642

 

 

 

65,044

 

 

 

74,696

 

 

 

81,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross cumulative redundancy (deficiency)

 

 

(5,156)

 

 

(7,422)

 

 

(14,946)

 

 

(8,078)

 

 

(9,107)

 

 

(10,296)

 

 

(12,905)

 

 

(16,244)

 

 

(18,499)

 

 

(808)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Components may not sum to totals due to rounding)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
12

Table of Contents

   

Reinsurance

 

We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus, and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations to policyholders. Our reinsurance program is structured to reflect our obligations and goals. 

 

Reinsurance via quota share allows a carrier to write business without increasing its underwriting leverage above a level determined by management. The business written under a quota share reinsurance structure obligates a reinsurer to assume some portion of the risks involved, and gives the reinsurer the profit (or loss) associated with such in exchange for a ceding commission.

 

Effective December 15, 2019, we entered into a quota share reinsurance treaty for our personal lines business, which primarily consists of homeowners’ policies, which covered the period from December 15, 2019 through December 30, 2020 (“2019/2020 Treaty”). Effective December 31, 2020, the 2019/2020 Treaty expired on a cut-off basis; this treaty was not renewed. In addition to the 2019/2020 Treaty, our quota share reinsurance treaties in effect during the year ended December 31, 2019 for our 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 year ended December 31, 2019 was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).

 

Excess of loss contracts provide coverage for individual loss occurrences exceeding a certain threshold. The quota share reinsurance treaties inure to the benefit of our excess of loss treaties, as the maximum net retention on any single risk occurrence is first limited through the excess of loss treaty, and then that loss is shared again through the quota share reinsurance treaty. Our maximum net retention under the quota share and excess of loss treaties for any one personal lines occurrence for dates of loss on or after December 15, 2019 through December 30, 2020 was $750,000. Effective December 31, 2020, our maximum net retention increased to $1,000,000. Our maximum net retention under the excess of loss treaties for any one commercial general liability occurrence for dates of loss on or after July 1, 2020 is $750,000.

 

We earned ceding commission revenue under the quota share reinsurance treaties based on a provisional commission rate on all premiums ceded to the reinsurers as adjusted by a sliding scale based on the ultimate treaty year loss ratios on the policies reinsured under each agreement. The sliding scale provided minimum and maximum ceding commission rates in relation to specified ultimate loss ratios.

 

Under the 2019/2020 Treaty, KICO received a fixed provisional rate with no adjustment for sliding scale contingent commissions. Under the 2017/2019 Treaty, KICO received a higher upfront fixed provisional rate than in prior years’ treaties. In exchange for the higher provisional rate, KICO had a reduced opportunity to earn sliding scale contingent commissions.

 

The 2019/2020 Treaty and 2017/2019 Treaty are on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in prior treaties. Under a “net” arrangement, all catastrophe reinsurance coverage is purchased directly by us. Since we pay for all of the catastrophe coverage, none of the losses covered under a catastrophic event will be included in the quota share ceded amounts, drastically reducing the adverse impact that a catastrophic event can have on ceding commissions.

 

 
13

Table of Contents

 

In 2020, we purchased catastrophe reinsurance to provide coverage of up to $485,000,000 for losses associated with a single event. One of the most commonly used catastrophe forecasting models prepared for us indicates that the catastrophe reinsurance treaties provide coverage in excess of our estimated probable maximum loss associated with a single more than one-in-130 year storm event. The direct retention for any single catastrophe event is $10,000,000. For the period December 15, 2019 through December 30, 2020 losses on personal lines policies were subject to the 25% quota share treaty, which resulted in a net retention by us of $5,625,000 of exposure per catastrophe occurrence. Effective July 1, 2020, we have reinstatement premium protection on the first $70,000,000 layer of catastrophe coverage in excess of $10.000,000. This protects us from having to pay an additional premium to reinstate catastrophe coverage for an event up to this level.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Principal Revenue and Expense Items” in Item 7 of this Annual Report and Note 2 and Note 11 in the accompanying Consolidated Financial Statements for additional information.

 

Ratings

 

Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies with which they do business and from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. A.M. Best financial strength ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best financial strength ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors.

 

 Kingstone has a financial strength rating from A.M. Best of B++ (Good). Other ratings assigned to KICO and Kingstone by A.M. Best and Kroll Bond Rating Agency are as follows:

 

 

 

 

 Kingstone

 

 KICO

 

 Companies

 

 

 

 

 A.M. Best Long-Term issuer credit rating (ICR)

 bbb (negative outlook)

 

 bb (negative outlook)

 A.M. Best Long-Term issue credit rating (IR)

 

 

 

 $30.0 million, 5.50% senior unsecured notes due Dec. 30, 2022 

 n/a

 

 bb (negative outlook)

 Kroll Bond Rating Agency insurance financial strength rating (IFSR)

 A- (stable outlook)

 

 n/a

 Kroll Bond Rating Agency issuer rating

 n/a

 

 BBB- (stable outlook)

 $30.0 million, 5.50% senior unsecured notes due Dec. 30, 2022 

 n/a

 

 BBB- (stable outlook)

  

KICO also has a Demotech financial stability rating of A (Exceptional) which generally makes its policies acceptable to mortgage lenders that require homeowners to purchase insurance from highly rated carriers.

 

Catastrophe Losses

 

In 2020 we had catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers. Our predominant market, downstate New York, was affected by several events, including one large event, Tropical Storm Isaias, during 2020. The effects of this catastrophe and other minor catastrophes during the year increased our net loss ratio by 10.8 percentage points in 2020. Our predominant market, downstate New York, was affected by several events, including one large event, during the winter of 2019. These claims were primarily from losses due to frozen pipes and related water damage resulting from abnormally low temperatures for an extended period. The effects of this catastrophe and other minor catastrophes during the year increased our net loss ratio by 6.0 percentage points in 2019.

 

 
14

Table of Contents

 

Government Regulation

 

Holding Company Regulation

 

We, as the parent of KICO, are subject to the insurance holding company laws of the state of New York. These laws generally require an insurance company to register with the New York State Department of Financial Services (the “DFS”) and to furnish annually financial and other information about the operations of companies within our holding company system. Generally, under these laws, all material transactions among companies in the holding company system to which KICO is a party must be fair and reasonable and, if material or of a specified category, require prior notice and approval or acknowledgement (absence of disapproval) by the DFS.

 

Change of Control

 

The insurance holding company laws of the state of New York require approval by the DFS for any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. Any future transactions that would constitute a change of control of KICO, including a change of control of Kingstone Companies, Inc., would generally require the party acquiring control to obtain the approval of the DFS (and in any other state in which KICO may operate). Obtaining these approvals may result in the material delay of, or deter, any such transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Kingstone Companies, Inc., including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.

 

State Insurance Regulation

 

Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates, and in some instances to regulate unfair trade and claims practices.

 

KICO is required to file detailed financial statements and other reports with the insurance regulatory authorities in the states in which it is licensed to transact business. These financial statements are subject to periodic examination by the insurance regulators.

 

In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the insurance regulatory authority. The state regulator may reject a plan that may lead to market disruption. Laws and regulations, including those in New York, that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of KICO to exit unprofitable markets. Such laws did not affect KICO’s ability to withdraw from the commercial liability market in New York State in 2019 and the commercial auto market in New York State in 2015. In January 2019, KICO was granted permission by the Texas Department of Insurance to withdraw from the Texas insurance market for which it never commenced business since receiving its certificate of authority in August 2015.

 

 
15

Table of Contents

 

Federal and State Legislative and Regulatory Changes

 

From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that either have been or are being considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures. Some of these proposals have been enacted to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (the “NAIC”).

 

In 2017, the DFS implemented new comprehensive cybersecurity regulations, which became effective on March 1, 2017 with transitional implementation periods. The regulations require covered entities, including KICO, to establish a cybersecurity policy, a chief information security officer, oversight over third party service providers, penetration and vulnerability assessments, secure systems to maintain an audit trail, risk assessments to include access privileges to nonpublic information, use of multi-factor authentication, and an incident response plan, among other provisions. KICO must annually certify compliance to the DFS with the applicable cybersecurity regulatory provisions. Annual certifications are due April 15.

 

In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law. It established a Federal Insurance Office (the “FIO”) within the U.S. Department of the Treasury. The FIO is initially charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. In December 2013, the FIO issued a report (as required under the Dodd-Frank Act) entitled “How to Modernize and Improve the System of Insurance Regulation in the United States”, which stated that, given the “uneven” progress the states have made with several near-term state reforms, should the states fail to accomplish the necessary modernization reforms in the near term, “Congress should strongly consider direct federal involvement.” The FIO continues to support the current state-based regulatory regime, but will consider federal regulation should the states fail to take steps to greater uniformity (e.g., federal licensing of insurers). In 2017, the new President indicated that the provisions of this law should be reviewed. In its September 2019 Annual Report on the Insurance Industry (the “Report”), the FIO provided an overview of its statutory responsibilities and its role. The Report then summarizes the FIO’s key activities since those described in its 2018 Annual Report on the Insurance Industry. Next, the Report provides a summary of the EO Report. Sections II through V are organized around the four key themes from the EO Report: (1) Systemic Risk and Solvency; (2) Efficient Regulation and Government Processes; (3) International Engagement; and (4) Economic Growth and Informed Choices. The Report concludes with a discussion and analysis of the insurance industry’s financial performance in calendar year 2018, its financial condition as of December 31, 2018, and the domestic insurance market outlook for 2019.

 

On December 22, 2017, a budget reconciliation act commonly referred to as the Tax Cuts and Jobs Act (TCJA) was signed into law. Overall, the reduction of the U.S. corporate tax rate to 21 percent generally lowers the effective tax rates of insurance companies operating in the United States.

 

On December 20, 2020, the Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA of 2019) was enacted and is now scheduled to expire on December 31, 2027. The Terrorism Risk Insurance Program serves as a federal “backstop” for insurance claims related to acts of terrorism.

 

 
16

Table of Contents

 

State Regulatory Examinations

 

As part of their regulatory oversight process, state regulatory authorities conduct periodic detailed examinations of the financial reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance regulators of other states under guidelines promulgated by the NAIC. The New York DFS commenced its examination of KICO in 2019 as of December 31, 2018. The examination was completed on April 30, 2020.

 

Risk-Based Capital Regulations

 

State regulatory authorities impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a benchmark for the regulation of insurance companies. RBC provides for targeted surplus levels based on formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk); (c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC (“ACL”).

 

The RBC guidelines define specific capital levels based on a company’s ACL that are determined by the ratio of the company’s total adjusted capital (“TAC”) to its ACL. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO’s TAC is above the ACL and is in compliance with New York’s RBC requirements as of December 31, 2020.

 

Dividend Limitations

 

Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing 36 months, less dividends by KICO paid during such period.

 

Insurance Regulatory Information System Ratios

 

The Insurance Regulatory Information System (“IRIS”) was developed by the NAIC and is intended primarily to assist state insurance regulators in meeting their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. As of December 31, 2020, KICO did not have any ratios outside the usual range.

 

Accounting Principles

 

Statutory accounting principles (“SAP”) are a basis of accounting developed by the NAIC. They are used to prepare the statutory financial statements of insurance companies and to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s policyholder surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

 

 
17

Table of Contents

 

Generally accepted accounting principles (“GAAP”) are concerned with a company’s solvency, but are also concerned with other financial measurements, principally results of operations and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different types and amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.

 

Statutory accounting practices established by the NAIC and adopted in part by New York insurance regulators determine, among other things, the amount of statutory surplus and statutory net income of KICO and thus determine, in part, the amount of funds that are available to Kingstone Companies, Inc. from which to pay dividends.

 

Legal Structure

 

We were incorporated in 1961 and assumed the name DCAP Group, Inc. in 1999. On July 1, 2009, we changed our name to Kingstone Companies, Inc.

 

Employees

 

As of December 31, 2020, we had 87 employees. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is good.

 

Availability of Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). Such reports and other information filed by us with the SEC are available free of charge at the investor relations section of our website at www.kingstonecompanies.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Copies are also available, without charge, by writing to Kingstone Companies, Inc., Investor Relations, 15 Joys Lane, Kingstone, New York 12401. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The inclusion of our website address in this Annual Report does not include or incorporate by reference the information on our website into this Annual Report.

 

ITEM 1A. RISK FACTORS.

 

Factors That May Affect Future Results and Financial Condition

 

Based upon the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. These factors, among others, may affect the accuracy of certain forward-looking statements contained in this Annual Report.

 

 
18

Table of Contents

  

Risks Related to Our Business

 

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 it became more significant during the remainder of 2021. We also expect this impact will further persist but to a lesser extent for the duration 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 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.

 

 
19

Table of Contents

 

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, have impacted and may continue to impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or seek other alternatives.

 

Major public health issues could have an adverse effect on our business and operating results.

 

Major public health issues, including a large-scale pandemic, such as the novel coronavirus COVID-19, may have a material adverse effect on our workforce and business operations and cause disruptions in commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets, changes in interest rates, reduced liquidity and economic activity caused by a large-scale pandemic. Accordingly, a large-scale pandemic could have a material adverse effect on our revenue, liquidity and operating results.

 

As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events.

 

Because of the exposure of our property and casualty business to catastrophic events (such as Superstorm Sandy) and other severe weather events, our operating results and financial condition may vary significantly from one period to the next. Catastrophes can be caused by various natural and man-made disasters, including earthquakes, wildfires, tornadoes, hurricanes, severe winter weather, storms and certain types of terrorism. We currently have catastrophe reinsurance coverage with regard to losses of up to $485,000,000 ($475,000,000 in excess of $10,000,000). The initial $7,500,000 of losses in a catastrophe were subject to a 25% quota share reinsurance treaty through December 30, 2020, such that we retain $8,125,000 of risk per catastrophe occurrence. With respect to any additional catastrophe losses of up to $475.000,000, we are 100% reinsured under our catastrophe reinsurance program. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. We may incur catastrophe losses in excess of: (i) those that we project would be incurred, (ii) those that external modeling firms estimate would be incurred, (iii) the average expected level used in pricing or (iv) our current reinsurance coverage limits. Despite our catastrophe management programs, we are exposed to catastrophes that could have a material adverse effect on our operating results and financial condition. Our liquidity could be constrained by a catastrophe, or multiple catastrophes, which may result in extraordinary losses or a downgrade of our financial strength ratings. In addition, the reinsurance losses that are incurred in connection with a catastrophe could have an adverse impact on the terms and conditions of future reinsurance treaties.

 

In addition, we are subject to claims arising from non-catastrophic weather events such as hurricanes, tropical storms, severe winter weather, rain, hail and high winds. The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity of claims when severe weather conditions occur.

 

 
20

Table of Contents

 

Unanticipated increases in the severity or frequency of claims may adversely affect our operating results and financial condition.

 

Changes in the severity or frequency of claims may affect our profitability. Changes in homeowners claim severity are driven by inflation in the construction industry, in building materials and home furnishings, and by other economic and environmental factors, including increased demand for services and supplies in areas affected by catastrophes. Changes in bodily injury claim severity are driven primarily by inflation in the medical sector of the economy and by litigation costs. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs, prices of auto parts and used car prices. However, changes in the level of the severity of claims are not limited to the effects of inflation and demand surge in these various sectors of the economy. Increases in claim severity can arise from unexpected events that are inherently difficult to predict, such as a change in the law or an inability to enforce exclusions and limitations contained in our policies. Although we pursue various loss management initiatives to mitigate future increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future increases in claim severity, and a significant increase in claim frequency could have an adverse effect on our operating results and financial condition.

 

Recent decline in the financial strength rating assigned to our insurance subsidiary by A.M. Best will impact our revenues and earnings.

 

Financial strength ratings are an important factor influencing the competitive position of insurance companies. The objective of the rating agencies’ rating systems is to provide an opinion as to an insurer’s financial strength and ability to meet ongoing obligations to its policyholders. The ratings of Kingstone Insurance Company (“KICO”), our insurance subsidiary, reflect the rating agencies’ opinion as to its financial strength and are not evaluations directed to investors in our securities, nor are they recommendations to buy, sell or hold our securities.

 

Our ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, the rating agencies. Our ability to write business, particularly commercial liability lines, is influenced by our financial strength rating from A.M. Best. On July 10, 2020, A.M. Best lowered the financial strength rating of KICO from “A-” (Excellent) to “B++” (Good). The outlook of A.M. Best’s credit rating is negative. A.M. Best indicated that the ratings downgrade of KICO reflects its balance sheet strength, which A.M. Best categorizes as adequate, as well as its strong operating performance, limited business profile and appropriate enterprise risk management. It stated that the ratings action was driven by a revision in KICO’s catastrophe reinsurance program effective July 1, 2020 which significantly reduces the amount of reinsurance protection previously contemplated and purchased.

 

Management believes that A.M. Best’s financial strength rating is more significant with regard to commercial liability insurance, as opposed to personal lines business. Since we have discontinued our commercial lines business, we believe that A.M. Best’s rating action will not result in a material decrease in the amount of business that KICO will be able to write. However, the A.M Best ratings downgrade has resulted in a material decrease in the business of our subsidiary, Cosi, a multi-state licensed general agency that had partnered with name-brand carriers which require an A.M. Best “A-“ rating from its partners.

 

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms.

 

The capital and credit markets can experience periods of volatility and disruption. In some cases, markets have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional capital to support our operating expenses, make payments on our outstanding and any future indebtedness, pay for capital expenditures, or increase the amount of insurance that we seek to underwrite or to otherwise grow our business, our ability to obtain such capital may be limited and the cost of any such capital may be significant. Our access to additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity as well as lenders' perception of our long or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors occurs, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms.

 

 
21

Table of Contents

 

We are exposed to significant financial and capital markets risk which may adversely affect our results of operations, financial condition and liquidity, and our net investment income can vary from period to period.

 

We are exposed to significant financial and capital markets risk, including changes in interest rates, equity prices, market volatility, general economic conditions, the performance of the economy in general, the performance of the specific obligors included in our portfolio, and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would increase the net unrealized loss position of our investment portfolio, which would be offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would decrease the net unrealized loss position of our investment portfolio, which would be offset by lower rates of return on funds reinvested.

 

In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition. If significant, continued volatility, changes in interest rates, changes in defaults, a lack of pricing transparency, market liquidity and declines in equity prices, individually or in tandem, could have a material adverse effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.

 

Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business or maintain our financial strength rating from A.M. Best.

 

We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations to policyholders. Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or seek other alternatives. Our ability to maintain our financial strength rating from A.M. Best depends, in part, on our ability to purchase a sufficient level of catastrophe reinsurance.

 

 
22

Table of Contents

 

Reinsurance subjects us to the credit risk of our reinsurers, which may have a material adverse effect on our operating results and financial condition.

 

The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Since we are primarily liable to an insured for the full amount of insurance coverage, our inability to collect a material recovery from a reinsurer could have a material adverse effect on our operating results and financial condition.

 

Applicable insurance laws regarding the change of control of our company may impede potential acquisitions that our shareholders might consider desirable.

 

We are subject to statutes and regulations of the state of New York which generally require that any person or entity desiring to acquire direct or indirect control of KICO, our insurance company subsidiary, obtain prior regulatory approval. In addition, a change of control of Kingstone Companies, Inc. would require such approval. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions. Some of our shareholders might consider such transactions to be desirable. Similar regulations may apply in other states in which we may operate.

 

The insurance industry is subject to extensive regulation that may affect our operating costs and limit the growth of our business, and changes within this regulatory environment may adversely affect our operating costs and limit the growth of our business.

 

We are subject to extensive laws and regulations. State insurance regulators are charged with protecting policyholders and have broad regulatory, supervisory and administrative powers over our business practices. These include, among other things, the power to grant and revoke licenses to transact business and the power to regulate and approve underwriting practices and rate changes, which may delay the implementation of premium rate changes, prevent us from making changes we believe are necessary to match rate to risk or delay or prevent our entry into new states. In addition, many states have laws and regulations that limit an insurer’s ability to cancel or not renew policies and that prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by state regulatory authorities. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.

 

Because the laws and regulations under which we operate are administered and enforced by a number of different governmental authorities, including state insurance regulators, state securities administrators and the SEC, each of which exercises a degree of interpretive latitude, we are subject to the risk that compliance with any particular regulator's or enforcement authority's interpretation of a legal issue may not result in compliance with another's interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator's or enforcement authority's interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal and regulatory environment may, even in the absence of any change to a particular regulator's or enforcement authority's interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thereby necessitating changes to our practices that may, in some cases, limit our ability to grow and/or to improve the profitability of our business.

 

 
23

Table of Contents

 

While the United States federal government does not directly regulate the insurance industry, federal legislation and administrative policies can affect us. Congress and various federal agencies periodically discuss proposals that would provide for a federal charter for insurance companies. We cannot predict whether any such laws will be enacted or the effect that such laws would have on our business. Moreover, there can be no assurance that changes will not be made to current laws, rules and regulations, or that any other laws, rules or regulations will not be adopted in the future, that could adversely affect our business and financial condition.

 

We may not be able to maintain the requisite amount of risk-based capital, which may adversely affect our profitability and our ability to compete in the property and casualty insurance markets.

 

The DFS imposes risk-based capital requirements on insurance companies to ensure that insurance companies maintain appropriate levels of surplus to support their overall business operations and to protect customers against adverse developments, after taking into account default, credit, underwriting and off-balance sheet risks. If the amount of our capital falls below certain thresholds, we may face restrictions with respect to soliciting new business and/or keeping existing business. Similar regulations apply in other states in which we operate.

 

Changing climate conditions may adversely affect our financial condition, profitability or cash flows.

 

We recognize the scientific view that the world is getting warmer. Climate change, to the extent it produces rising temperatures and changes in weather patterns, could impact the frequency and/or severity of weather events and affect the affordability and availability of homeowners insurance.

 

Our operating results and financial condition may be adversely affected by the cyclical nature of the property and casualty business.

 

The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. A downturn in the profitability cycle of the property and casualty business could have a material adverse effect on our operating results and financial condition.

 

Because substantially all of our revenue is currently derived from sources located in New York, our business may be adversely affected by conditions in such state.

 

Approximately 80% of our revenue is currently derived from sources located in the State of New York and, accordingly, is affected by the prevailing regulatory, economic, demographic, competitive and other conditions in the state. Changes in any of these conditions could make it costlier or difficult for us to conduct our business. Adverse regulatory developments in New York, which could include fundamental changes to the design or implementation of the insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition.

 

We are highly dependent on a relatively small number of insurance brokers for a large portion of our revenues.

 

We market our insurance products primarily through insurance brokers. A large percentage of our gross premiums written are sourced through a limited number of brokers. For the year ended December 31, 2020, thirty brokers provided a total of 36.3% of our total gross premiums written. The nature of our dependency on these brokers relates to the high volume of business they consistently refer to us. Our relationship with these brokers is based on the quality of the underwriting and claims services we provide to our clients and on our financial strength ratings. Any deterioration in these factors could result in these brokers advising clients to place their risks with other insurers rather than with us. A loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our financial condition and results of operations.

 

 
24

Table of Contents

  

Actual claims incurred may exceed current reserves established for claims, which may adversely affect our operating results and financial condition.

 

Recorded claim reserves for our business are based on our best estimates of losses after considering known facts and interpretations of circumstances. Internal and external factors are considered. Internal factors include, but are not limited to, actual claims paid, pending levels of unpaid claims, product mix and contractual terms. External factors include, but are not limited to, changes in the law, court decisions, changes in regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of losses that have occurred, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded reserves, and such variance may adversely affect our operating results and financial condition.

 

As a holding company, we are dependent on the results of operations of our subsidiary, KICO; there are restrictions on the payment of dividends by KICO.

 

We are a holding company and a legal entity separate and distinct from our operating subsidiary, KICO. As a holding company with limited operations of our own, currently the principal sources of our funds are dividends and other payments from KICO. Consequently, we must rely on KICO for our ability to repay debts (including $30,000,000 in aggregate principal amount of 5.5% Senior Unsecured Notes due December 30, 2022 (the “Notes’)), pay expenses and pay cash dividends to our shareholders.

 

State insurance laws limit the ability of KICO to pay dividends and require KICO to maintain specified minimum levels of statutory capital and surplus. Maximum allowable dividends by KICO to us are restricted to the lesser of 10% of surplus or 100% of net investment income (on a statutory accounting basis) for the trailing 36 months, less dividends paid by KICO during such period. As of December 31, 2020, the maximum permissible distribution that KICO could pay without prior regulatory approval was approximately $2,560,000. The aggregate maximum amount of dividends permitted by law to be paid by an insurance company does not necessarily define an insurance company’s actual ability to pay dividends. The actual ability to pay dividends may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums that we can write. State insurance regulators have broad discretion to limit the payment of dividends by insurance companies. Our ability to pay interest on the Notes as it comes due and the principal of the Notes at their maturity may be limited by these regulatory constraints.

 

We may not be able to generate sufficient cash to service our debt obligations, including the Notes.

 

Our ability to make payments on and to refinance our indebtedness, including the Notes, will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a sufficient level of cash flows from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the Notes.

 

 
25

Table of Contents

 

Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive.

 

The insurance industry is highly competitive. Many of our competitors have well-established national reputations, substantially more capital and significantly greater marketing and management resources. Because of the competitive nature of the insurance industry, including competition for customers, agents and brokers, there can be no assurance that we will continue to effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our ability to grow our business and to maintain profitable operating results or financial condition.

 

If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be delayed or hindered.

 

Our future success will depend, in part, upon the efforts of Barry Goldstein, our President, Chief Executive Officer and Executive Chairman, and Meryl Golden, our Chief Operating Officer. The loss of Mr. Goldstein or Ms. Golden or other key personnel could prevent us from fully implementing our business strategies and could materially and adversely affect our business, financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, but we may not be able to do so. Our ability to recruit and retain such personnel will depend upon a number of factors, such as our results of operations and prospects and the level of competition prevailing in the market for qualified personnel. Mr. Goldstein entered into an amended and restated employment agreement effective January 1, 2020 and expiring December 31, 2022. Ms. Golden entered into an amended and restated employment agreement effective January 1, 2021 and expiring on December 31, 2022.

 

Difficult conditions in the economy generally could adversely affect our business and operating results.

 

As with most businesses, we believe that difficult conditions in the economy could have an adverse effect on our business and operating results. General economic conditions also could adversely affect us in the form of consumer behavior, which may include decreased demand for our products. As consumers become more cost conscious, they may choose to purchase lower levels of insurance.

 

Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our reported results of operations and financial condition.

 

Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted and/or expanded. Accordingly, we are required to adopt new guidance or interpretations, which may have a material adverse effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected.

 

Our business could be adversely affected by a security breach or other attack involving our computer systems or those of one or more of our vendors.

 

Our business requires that we develop and maintain computer systems to run our operations and to store a significant volume of confidential data. Some of these systems rely on third-party vendors, through either a connection to, or an integration with, those third-parties’ systems. In the course of our operations, we acquire the personal confidential information of our customers and employees. We also store our intellectual property, trade secrets, and other sensitive business and financial information.

 

 
26

Table of Contents

 

All of these systems are subject to “cyber attacks” by sophisticated third parties with substantial computing resources and capabilities, and to unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to our systems. Such attacks or actions may include attempts to:

 

 

·

steal, corrupt, or destroy data, including our intellectual property, financial data or the personal information of our customers or employees

 

·

misappropriate funds

 

·

disrupt or shut down our systems

 

·

deny customers, agents, brokers, or others access to our systems, or

 

·

infect our systems with viruses or malware.

  

While we can take defensive measures, there can be no assurance that we will be successful in preventing attacks or detecting and stopping them once they have begun. Our business could be significantly damaged by a security breach, data loss or corruption, or cyber attack. In addition to the potentially high costs of investigating and stopping such an event and implementing necessary fixes, we could incur substantial liability if confidential customer or employee information is stolen. In addition, such an event could cause a significant disruption of our ability to conduct our insurance operations. We have a cyber insurance policy to protect against the monetary impact of some of these risks. However, the occurrence of a security breach, data loss or corruption, or cyber-attack, if sufficiently severe, could have a material adverse effect on our business results.

 

We rely on our information technology and telecommunication systems, and the failure of these systems could materially and adversely affect our business.

 

Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to support our operations. The failure of these systems could interrupt our operations and result in a material adverse effect on our business.

 

Risks Related to Our Common Stock

 

Our stock price may fluctuate significantly and be highly volatile and this may make it difficult for shareholders to resell shares of our common stock at the volume, prices and times they find attractive.

 

The market price of our common stock could be subject to significant fluctuations and be highly volatile, which may make it difficult for shareholders to resell shares of our common stock at the volume, prices and times they find attractive. There are many factors that will impact our stock price and trading volume, including, but not limited to, the factors listed above under “Risks Related to Our Business.”

 

Stock markets, in general, have experienced in recent years, and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject to similar market fluctuations that may be unrelated to our operating performance and prospects. Increased market volatility and fluctuations could result in a substantial decline in the market price of our common stock.

 

The trading volume in our common stock has been limited. As a result, shareholders may not experience liquidity in their investment in our common stock, thereby potentially limiting their ability to resell their shares at the volume, times and prices they find attractive.

 

Our common stock is currently traded on The Nasdaq Capital Market (“Nasdaq”). Our common stock has substantially less liquidity than the average trading market for many other publicly traded insurance and other companies. An active trading market for our common stock may not develop or, if developed, may not be sustained. Such stocks can be more volatile than stocks trading in an active public market. Therefore, shareholders have reduced liquidity and may not be able to sell their shares at the volume, prices and times that they desire.

 

 
27

Table of Contents

 

There may be future issuances or resales of our common stock which may materially and adversely affect the market price of our common stock.

 

Subject to any required state insurance regulatory approvals, we are not restricted from issuing additional shares of our common stock in the future, including securities convertible into, or exchangeable or exercisable for, shares of our common stock. Our issuance of additional shares of common stock in the future will dilute the ownership interests of our then existing shareholders.

 

We have an effective registration statements on Form S-8 under the Securities Act of 1933, as amended (the “Securities Act”), an aggregate of 1,400,000 shares of our common stock issuable under our 2014 Equity Participation Plan (the “2014 Plan”).

 

As of December 31, 2020, options to purchase 119,966 shares of our common stock, and 370,964 shares subject to unvested restricted stock grants, were outstanding under the 2014 Plan and 843,316 shares were reserved for issuance thereunder.  We have also registered up to $39,290,000 of our securities pursuant to registration statements on Form S-3, which we may sell from time to time in one or more offerings.  The shares subject to the registration statements on Form S-3 will be freely tradeable in the public market. In addition, the shares issuable pursuant to the registration statements on Form S-8 will be freely tradable in the public market, except for shares held by our affiliates.

  

The sale of a substantial number of shares of our common stock or securities convertible into, or exchangeable or exercisable for, shares of our common stock, whether directly by us, by selling shareholders in future offerings or by our existing shareholders in the secondary market, the perception that such issuances or resales could occur or the availability for future issuances or resale of shares of our common stock or securities convertible into, or exchangeable or exercisable for, shares of our common stock could materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity-related securities on attractive terms or at all.

 

In addition, our board of directors is authorized to designate and issue preferred stock without further shareholder approval, and we may issue other equity and equity-related securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios, and to comply with any future changes in regulatory standards.

 

Our executive officers and directors own a substantial number of shares of our common stock. This will enable them to significantly influence the vote on all matters submitted to a vote of our shareholders.

 

As of March 17, 2021, our executive officers and directors beneficially owned 881,383 shares of our common, representing 8.2% of the outstanding shares of our common stock.

 

Accordingly, our executive officers and directors, through their beneficial ownership of our common stock, will be able to significantly influence the vote on all matters submitted to a vote of our shareholders, including the election of directors, amendments to our restated certificate of incorporation or amended and restated bylaws, mergers or other business combination transactions and certain sales of assets outside the usual and regular course of business. The interests of our executive officers and directors may not coincide with the interests of our other shareholders, and they could take actions that advance their own interests to the detriment of our other shareholders.

 

 
28

Table of Contents

 

Anti-takeover provisions and the regulations to which we may be subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to our shareholders.

 

We are a holding company incorporated in Delaware. Anti-takeover provisions in Delaware law and our restated certificate of incorporation and bylaws, as well as regulatory approvals required under state insurance laws, could make it more difficult for a third party to acquire control of us and may prevent shareholders from receiving a premium for their shares of common stock. Our certificate of incorporation provides that our board of directors may issue up to 2,500,000 shares of preferred stock, in one or more series, without shareholder approval and with such terms, preferences, rights and privileges as the board of directors may deem appropriate. These provisions, the control of our executive officers and directors over the election of our directors, and other factors may hinder or prevent a change in control, even if the change in control would be beneficial to, or sought by, our shareholders.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

Our principal executive offices are currently located at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business also maintains an executive office located at 70 East Sunrise Highway, Valley Stream, New York 11581, at which we lease 4,985 square feet of space. Our licensed general agency business maintains an office located at 70 East Sunrise Highway, Valley Stream, New York 11581, at which we lease 2,323 square feet of space.

 

We own the building at which our insurance underwriting business principally operates, free of mortgage.

 

ITEM 3. None.

 

ITEM 4. MINE SAFETY DISCLOSURE.

 

Not applicable.

 

 
29

Table of Contents

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is quoted on The Nasdaq Capital Market under the symbol “KINS.”

 

Holders

 

As of March 17, 2021, there were 199 record holders of our common stock.

  

Dividends

 

Holders of our common stock are entitled to dividends when, as and if declared by our Board of Directors out of funds legally available. We have paid a cash dividend in each quarter since September 2011.

 

Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that future dividends of any kind will continue to be paid to holders of our common stock.

 

Our ability to pay dividends depends, in part, on the ability of KICO to pay dividends to us. KICO, as an insurance subsidiary, is subject to significant regulatory restrictions limiting its ability to declare and pay dividends. These restrictions are related to surplus and net investment income. Without the prior approval of the DFS, dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing 36 months, less dividends paid by KICO during such period. As of December 31, 2020, the maximum distribution that KICO could pay without prior regulatory approval was approximately $2,560,000, which is based on investment income for the trailing 36 months, net of dividends paid by KICO during such period. See “Business – Government Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity” in Items 1 and 7, respectively, of this Annual Report.

 

Recent Sales of Unregistered Securities

 

None.

 

 
30

Table of Contents

  

Issuer Purchases of Equity Securities

 

The following table sets forth certain information with respect to purchases of common stock made by us during the quarter ended December 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10/1/20 – 10/31/20

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

11/1/20 – 11/30/20

 

 

9,000

 

 

$6.66

 

 

 

-

 

 

 

-

 

12/1/20 – 12/31/20

 

 

49,383

 

 

$6.48

 

 

 

-

 

 

 

-

 

Total

 

 

58,383

 

 

$6.54

 

 

 

-

 

 

 

-

 

 

(1)

Purchases were made by us in open market transactions.

  

ITEM 6. SELECTED FINANCIAL DATA.

 

This item is not applicable to smaller reporting companies.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

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, Connecticut, Massachusetts, Pennsylvania, Maine, and New Hampshire. For the year ended December 31, 2020, 80.0% 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. Net Cosi revenue is eliminated against commission expense and Cosi related operating expenses are included in other operating expenses. Cosi related operating expenses are not included in our stand-alone insurance underwriting business and, accordingly, its expenses are not included in the calculation of our combined ratio as described below.

 

 
31

Table of Contents

 

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 employment, occupancy and consulting costs.

 

Principal Revenue and Expense Items

 

Net premiums earned: Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written on July 1, 2020, we would earn half of the premiums in 2020 and the other half in 2021.

 

Ceding commission revenue: Commissions on reinsurance premiums ceded to quota share treaties are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.

 

Net investment income and net gains (losses) on investments: We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities, and other investments. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet while our equity securities and other investments report changes in fair value through earnings. See Note 2 in the accompanying consolidated financial statements for further discussion over our accounting policies following Item 16 of this Annual Report.

 

Other income: We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment.

 

 
32

Table of Contents

 

Loss and loss adjustment expenses incurred: Loss and LAE incurred represent our largest expense item, and for any given reporting period include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.

 

Commission expenses and other underwriting expenses: Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.

 

Other operating expenses: Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc., and operating expenses of Cosi. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company. Cosi operating expenses primarily include employment costs, occupancy costs and consulting costs.

 

Stock-based compensation: Non-cash equity compensation includes the fair value of stock grants issued to our directors, officers and employees, and amortization of stock options issued to the same.

 

Depreciation and amortization: Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of capital expenditures for information technology projects, office equipment and furniture.

 

Interest expense: Interest expense represents amounts we incur on our outstanding indebtedness at the applicable interest rates. Interest expense also includes amortization of debt discount and issuance costs.

 

Income tax expense: We incur federal income tax expense on our consolidated statement of operations as well as state income tax expense for our non-insurance underwriting subsidiaries.

 

Product Lines

 

Our product lines include the following:

 

Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, cooperative/condominium, renters, and personal umbrella policies.

 

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.

 

 
33

Table of Contents

 

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 as of July 31, 2019 for these lines were non-renewed at the end of their annual terms. As of December 31, 2020 there are no commercial liability policies in-force. For the year ended December 31, 2020, these expired policies represent approximately 2.5% of net premiums earned and 33.7% 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.

 

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.

 

 
34

Table of Contents

 

 

 

Year ended

 

 

Year ended

 

($ in thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Direct Written Pemiums

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Independent

 

$123,755

 

 

 

76.4%

 

$120,625

 

 

 

80.6%

Expansion Independent (1)

 

 

30,953

 

 

 

19.1%

 

 

24,253

 

 

 

16.2%

Alternative Distribution through Cosi

 

 

7,233

 

 

 

4.5%

 

 

4,799

 

 

 

3.2%

Total

 

$161,941

 

 

 

100.0%

 

$149,677

 

 

 

100.0%

 

(1)

Outside of New York

  

(Percent components may not sum to totals due to rounding)

 

For the years ended December 31, 2020 and 2019, Alternative Distribution made up 4.5% and 3.2%, respectively, of direct written premiums for our homeowners and dwelling fire components of personal lines. As discussed above, on July 10, 2020, KICO’s A.M. Best Financial Strength Rating was downgraded from A- (Excellent) to B++ (Good). This action has resulted in and will continue to result in a decrease in the business from Cosi, a multi-state licensed general agent that had partnered with name-brand carriers, some of which require an A.M. Best rating of A- (Excellent) from its partners.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates 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 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 Consolidated Financial Statements following Item 16 of this Annual Report.

 

 
35

Table of Contents

 

Consolidated Results of Operations

 

The following table summarizes the changes in the results of our operations for the periods indicated:

 

 

 

Years ended December 31,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Percent

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Direct written premiums

 

$169,318

 

 

$171,214

 

 

$(1,896)

 

 

(1.1)%

Assumed written premiums

 

 

-

 

 

 

1

 

 

 

(1)

 

na

%

 

 

 

169,318

 

 

 

171,215

 

 

 

(1,897)

 

 

(1.1)%

Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded to quota share treaties in force during the period

 

 

33,250

 

 

 

7,623

 

 

 

25,627

 

 

 

336.2%

Unearned premiums ceded to new quota share treaty (1)

 

 

-

 

 

 

16,320

 

 

 

(16,320)

 

 

(100.0)%

Return of premiums previously ceded to prior quota share treaties (1)

 

 

(17,440)

 

 

-

 

 

 

(17,440)

 

na

%

Ceded to quota share treaties

 

 

15,810

 

 

 

23,943

 

 

 

(8,133)

 

 

(34.0)%

Ceded to excess of loss treaties

 

 

2,007

 

 

 

1,879

 

 

 

128

 

 

 

6.8%

Ceded to catastrophe treaties

 

 

24,438

 

 

 

19,814

 

 

 

4,624

 

 

 

23.3%

Total ceded written premiums

 

 

42,255

 

 

 

45,636

 

 

 

(3,381)

 

 

(7.4)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

127,063

 

 

 

125,579

 

 

 

1,484

 

 

 

1.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

374

 

 

 

(11,351)

 

 

11,725

 

 

 

(103.3)%

Ceded to quota share treaties

 

 

(19,356)

 

 

13,395

 

 

 

(32,751)

 

 

244.5%

Change in net unearned premiums

 

 

(18,982)

 

 

2,044

 

 

 

(21,026)

 

 

1,028.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

169,692

 

 

 

159,864

 

 

 

9,828

 

 

 

6.1%

Ceded to reinsurance treaties

 

 

(61,611)

 

 

(32,240)

 

 

(29,371)

 

 

(91.1)%

Net premiums earned

 

 

108,081

 

 

 

127,624

 

 

 

(19,543)

 

 

(15.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

14,202

 

 

 

4,651

 

 

 

9,551

 

 

 

205.4%

Net investment income

 

 

6,506

 

 

 

6,869

 

 

 

(363)

 

 

(5.3)%

Net gains on investments

 

 

1,591

 

 

 

4,591

 

 

 

(3,000)

 

 

(65.3)%

Other income

 

 

990

 

 

 

1,385

 

 

 

(395)

 

 

(28.5)%

Total revenues

 

 

131,370

 

 

 

145,120

 

 

 

(13,750)

 

 

(9.5)%

 Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

72,842

 

 

 

94,775

 

 

 

(21,933)

 

 

(23.1)%

Losses from catastrophes, tropical storm Isaias (2)(3)

 

 

16,857

 

 

 

-

 

 

 

16,857

 

 

na

%

Losses from catastrophes, all others (2)

 

 

4,683

 

 

 

8,177

 

 

 

(3,494)

 

 

(42.7)%

Total direct and assumed loss and loss adjustment expenses

 

 

94,382

 

 

 

102,952

 

 

 

(8,570)

 

 

(8.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

18,013

 

 

 

12,287

 

 

 

5,726

 

 

 

46.6%

Losses from catastrophes, tropical storm Isaias (2)(3)

 

 

8,732

 

 

 

-

 

 

 

8,732

 

 

na

%

Losses from catastrophes, all others (2)

 

 

1,206

 

 

 

482

 

 

 

724

 

 

 

150.2

%

Total ceded loss and loss adjustment expenses

 

 

27,951

 

 

 

12,769

 

 

 

15,182

 

 

 

118.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

54,829

 

 

 

82,488

 

 

 

(27,659)

 

 

(33.5)%

Losses from catastrophes, tropical storm Isaias (2)(3)

 

 

8,125

 

 

 

-

 

 

 

8,125

 

 

na

%

Losses from catastrophes, all others (2)

 

 

3,477

 

 

 

7,695

 

 

 

(4,218)

 

 

(54.8)%

Net loss and loss adjustment expenses

 

 

66,431

 

 

 

90,183

 

 

 

(23,752)

 

 

(26.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

31,828

 

 

 

30,093

 

 

 

1,735

 

 

 

5.8%

Other underwriting expenses

 

 

25,425

 

 

 

24,420

 

 

 

1,005

 

 

 

4.1%

Other operating expenses

 

 

4,283

 

 

 

3,835

 

 

 

448

 

 

 

11.7%

Depreciation and amortization

 

 

2,865

 

 

 

2,546

 

 

 

319

 

 

 

12.5%

Interest expense

 

 

1,826

 

 

 

1,826

 

 

 

-

 

 

-

%

Total expenses

 

 

132,659

 

 

 

152,903

 

 

 

(20,245)

 

 

(13.2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before taxes

 

 

(1,288)

 

 

(7,783)

 

 

6,495

 

 

 

83.5%

Income tax benefit

 

 

(2,260)

 

 

(1,816)

 

 

(444)

 

 

(24.4)%

Net income (loss)

 

$972

 

 

$(5,967)

 

$6,939

 

 

 

116.3%

 

 
36

Table of Contents

   

(1)

Effective July 1, 2019, our personal lines 10% quota share treaty expired on a run-off basis. Effective December 15, 2019, we entered into a 25% quota share treaty. Effective December 31, 2020, our personal lines 25% quota share treaty expired on a cut-off basis.

(2)

The years ended December 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.

(3)

The year ended December 31, 2020 includes catastrophe losses from Tropical Storm Isaias, which has been designated PCS Storm 2044.

  

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

Percentage Point Change

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

61.5%

 

 

70.7%

 

 

(9.2)

 

 

(13.0)%

Net underwriting expense ratio

 

 

38.9%

 

 

38.0%

 

 

0.9

 

 

 

2.4%

Net combined ratio

 

 

100.4%

 

 

108.7%

 

 

(8.3)

 

 

(7.6)%

 

Direct Written Premiums

 

Direct written premiums during the year ended December 31, 2020 (“Year Ended 2020”) were $169,318,000 compared to $171,214,000 during the year ended December 31, 2019 (“Year Ended 2019”). The decrease of $1,896,000, or 1.1%, was primarily due to the 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 in Year Ended 2020 were $162,184,000, an increase of $12,264,000, or 8.2%, from $149,920,000 in Year Ended 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 $33,914,000 in Year Ended 2020, an increase of $8,267,000, or 32.2% compared to $25,647,000 in Year Ended 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 30, 2020 (“2019/2020 Treaty”). Our personal lines quota share reinsurance treaty in effect for Year Ended 2019 was covered through June 30, 2019 (together with the run-off period) under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The treaty in effect during Year Ended 2019 was covered through June 30, 2019 (together with the run-off period) 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 Year ended 2020 and Year Ended 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.

 

 
37

Table of Contents

  

 

 

Years ended December 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 increased $1,484,000, or 1.2%, to $127,063,000 in Year Ended 2020 from $125,579,000 in Year Ended 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 increase in net written premiums in Year Ended 2020 was attributable to the inception of the 2019/2020 Treaty on December 15, 2019 on a cut-off basis (see table above) and the decrease in commercial lines premiums, which are not subject to a quota share treaty. In Year Ended 2020, our premiums ceded under quota share treaties in force increased by $25,627,000 over the comparable ceded premiums in Year Ended 2019. Our personal lines business was subject to the 2019/2020 Treaty from December 15, 2019 through December 30, 2020. 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 continued to be ceded under the 10% quota share rate until such policies expired (run-off) over the next year. The 2019 run-off period was 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 Year Ended 2020, our ceded excess of loss reinsurance premiums increased by $128,000 over the comparable ceded premiums for Year Ended 2019. The increase was due to an increase in premiums subject to excess of loss reinsurance.

 

Catastrophe reinsurance treaty

 

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 Year Ended 2020, our premiums ceded under catastrophe treaties increased by $4,624,000 over the comparable ceded premiums in Year Ended 2019. The change was due to an increase in our catastrophe limit purchased through June 30, 2020, partially offset by a decrease in our limit effective July 1, 2020and an increase in reinsurance rates effective July 1, 2019. Through June 30, 2020, our ceded catastrophe premiums were paid based on the total direct written premiums subject to the catastrophe reinsurance treaty. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums will be paid based on the total insured value of our risks calculated as of August 31, 2021.

 

 
38

Table of Contents

 

Net premiums earned

 

Net premiums earned decreased $19,543,000, or 15.3%, to $108,081,000 in Year Ended 2020 from $127,624,000 in Year Ended 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. The expired 2017/2019 Treaty under the 2018/2019 Treaty Year was in run-off through June 30, 2020.

 

Ceding Commission Revenue

 

The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:

 

 

 

Years ended December 31,

 

($ in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$14,119

 

 

$5,446

 

 

$8,673

 

 

 

159.3%

Contingent ceding commissions earned

 

 

83

 

 

 

(795)

 

 

878

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$14,202

 

 

$4,651

 

 

$9,551

 

 

 

205.4%

  

Ceding commission revenue was $14,202,000 in Year Ended 2020 compared to $4,651,000 in Year Ended 2019. The increase of $9,551,000, or 205.4%, 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 $8,673,000 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 for part of Year Ended 2019. There was an increase in ceded premiums in Year Ended 2020 available from which to earn ceding commissions compared to Year Ended 2019 due to the changes in quota share ceding rates, the elimination of the 10% quota share treaty on effective July 1, 2019, 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.

 

Net Investment Income

 

Net investment income was $6,506,000 in Year Ended 2020 compared to $6,869,000 in Year Ended 2019, a decrease of $363,000, or 5.3%. The average yield on invested assets was 3.39% as of December 31, 2020 compared to 3.51% as of December 31, 2019.

 

 
39

Table of Contents

 

Cash and invested assets were $222,314,000 as of December 31, 2020 compared to $231,700,000 as of December 31, 2019. The $9,386,000 decrease in cash and invested assets was primarily attributable to a decrease in operating cash flows for the Year Ended 2020.

 

Net Gains and Losses on Investments

 

Net gains on investments were $1,591,000 in Year Ended 2020 compared to net gains of $4,591,000 in Year Ended 2019. Unrealized gains on our equity securities and other investments in Year Ended 2020 were $758,000, compared to unrealized gains of $4,562,000 in Year Ended 2019. Realized gains on sales of investments were $832,000 in Year Ended 2020 compared to realized gains of $29,000 in Year Ended 2019.

 

Other Income

 

Other income was $990,000 in Year Ended 2020 compared to $1,385,000 in Year Ended 2019. The decrease of $395,000, or 28.5%, was primarily due to a decrease in finance and service charges during Year Ended 2020.

 

Net Loss and LAE

 

Net loss and LAE was $66,431,000 in Year Ended 2020 compared to $90,182,000 in Year Ended 2019. The net loss ratio was 61.5% in Year Ended 2020 compared to 70.7% in Year Ended 2019, a decrease of 9.2 percentage points.

 

 
40

Table of Contents

  

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:

 

 

kins_10kimg10.jpg

 

(Percent components may not sum to totals due to rounding)

 

The net loss ratio was 61.5% for Year Ended 2020. Despite the significant impact from Tropical Storm Isaias in August, the loss ratio for Year Ended 2020 still improved 9.2 points, from 70.7% in Year Ended 2019. The loss ratio improved due to several factors, including a reduced impact from prior year loss development and an improvement in underlying loss ratio driven by reduced severity.

 

Prior year development was stable for Year Ended 2020, with minimal impact on the overall loss ratio. This compared to 8.7 points of unfavorable impact in Year Ended 2019, which was primarily related to adverse loss development from commercial lines business of which there were no in-force policies as of December 31, 2020.

 

The impact of catastrophe losses was larger in Year Ended 2020. The total catastrophe loss ratio for Year Ended 2020 was 10.7 points, compared to 6.0 points for Year Ended 2019. During Tropical Storm Isaias we incurred $8.125 million of losses, or a 7.5-point impact on the overall loss ratio. There were 13 PCS catastrophe events (excluding Tropical Storm Isaias) during Year Ended 2020, with a 3.2-point impact on the overall loss ratio compared to 9 PCS catastrophe events during Year Ended 2019 with a 6.0-point impact on the overall loss ratio as noted above.

 

The underlying loss ratio (loss ratio excluding impact of catastrophe and prior year development) was 50.7% for Year Ended 2020, a decrease of 5.3 points from the 56.0% underlying loss ratio for Year Ended 2019. The improvement was primarily due to reduced severity and our exit from the commercial liability lines of business. Excluding commercial lines, the underlying loss ratio improved 3.3 points to 49.8% for Year Ended 2020 compared to from 53.1% for Year Ended 2019.

 

 
41

Table of Contents

 

Commission Expense

 

Commission expense was $31,828,000 in Year Ended 2020 or 18.8% of direct earned premiums. Commission expense was $30,093,000 in Year Ended 2019 or 18.8% of direct earned premiums. The increase of $1,735,000 is primarily due to the increase in direct earned premiums in Year Ended 2020 as compared to Year Ended 2019.

 

Other Underwriting Expenses

 

Other underwriting expenses were $25,425,000 in Year Ended 2020 compared to $24,420,000 in Year Ended 2019. The increase of $1,005,000, or 4.1%, was primarily due to expenses related to growth in personal lines direct written premiums and salaries. 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.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $10,830,000 in Year Ended 2020 compared to $10,358,000 in Year Ended 2019. The increase of $472,000, or 4.6%, was less than the 8.2% increase in personal lines direct written premiums. The increase in employment costs was attributable to the hiring of additional highly experienced management and separation payments to terminated employees, offset by staff reductions.

 

Our net underwriting expense ratio in Year Ended 2020 was 38.9% compared to 38.0% in Year Ended 2019. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

Year ended

 

 

 

 

 

 

December 31,

 

 

Percentage

 

 

 

2020

 

 

2019

 

 

Point Change

 

 

 

 

 

 

 

 

 

 

 

Other underwriting expenses

 

 

 

 

 

 

 

 

 

Employment costs

 

 

10.0%

 

 

8.1%

 

 

1.9

 

Underwriting fees (inspections/data services)

 

 

2.6

 

 

 

2.4

 

 

 

0.2

 

Other expenses

 

 

11.0

 

 

 

8.6

 

 

 

2.4

 

Total other underwriting expenses

 

 

23.6

 

 

 

19.1

 

 

 

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

29.4

 

 

 

23.6

 

 

 

5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(13.1)

 

 

(4.3)

 

 

(8.8)

Contingent

 

 

(0.1)

 

 

0.6

 

 

 

(0.7)

Total ceding commission revenue

 

 

(13.2)

 

 

(3.7)

 

 

(9.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(0.9)

 

 

(1.0)

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

38.9%

 

 

38.0%

 

 

0.9

 

 

The overall 9.5 percentage point increase in the benefit from ceding commissions was driven entirely by the change in our quota share ceding rates and its impact on provisional ceding commission revenue. 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 the 2019/2020 Treaty on December 15, 2019, resulting in an overall 0.9 percentage point increase in the net underwriting expense ratio.

 

 
42

Table of Contents

 

Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $4,283,000 for Year Ended 2020 compared to $3,835,000 for Year Ended 2019. The increase in Year Ended 2020 of $448,000, or 11.7%, as compared to Year Ended 2019 was primarily due to increases in equity compensation. 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. Executive bonus compensation is accrued pursuant to the employment agreement in effect through December 31, 2022, however, no bonus expense was accrued for Year Ended 2020.The bonus, when applicable, is a one-time payment computed at the end of the three-year period ended December 31, 2019, and as of December 31, 2019 the three-year computation did not meet the required terms of profitability, resulting in no payment and a reversal of the $698,000 previously accrued.

  

Depreciation and Amortization

 

Depreciation and amortization was $2,865,000 in Year Ended 2020 compared to $2,546,000 in Year Ended 2019. The increase of $319,000, or 12.5%, 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.

 

Interest Expense

 

Interest expense in Year Ended 2020 and Year Ended 2019 was $1,826,000. 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 Year Ended 2020 was $2,260,000, which resulted in an effective tax benefit rate of 175.5%. Income tax benefit in Year Ended 2019 was $1,816,000, which resulted in an effective tax benefit rate of 23.3%. Loss before taxes was $1,288,000 in Year Ended 2020 compared to loss before taxes of $7,783,000 in Year Ended 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 elected on our 2019 federal income tax return to carry back the 2019 NOL of $9,737,000 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. We will also elect on our 2020 federal income tax return to carry back the 2020 NOL of $5,715,000 to tax year 2015. The corporate tax rate in 2015 was 34%, compared to the corporate tax rate of 21% in 2020.

 

Net Income (Loss)

 

Net income was $972,000 in Year Ended 2020 compared to a net loss of $5,967,000 in Year Ended 2019. The increase in net income of $6,939,000, or 116.3%, was due to the circumstances described above, which caused the decrease in our net loss ratio and increase in ceding commission, partially offset by the decrease in our net premiums earned, other underwriting and operating expenses, depreciation and amortization.

 

Additional Financial Information

 

We operate our business as one segment, property and casualty insurance. Within this segment, we offer a wide array of property and casualty policies to our producers. The following table summarizes gross and net premiums written, net premiums earned, and loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.

 

 
43

Table of Contents

 

 

 

 Years ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Gross premiums written:

 

 

 

 

 

 

Personal lines

 

$162,184,437

 

 

$149,920,020

 

Livery physical damage

 

 

7,055,668

 

 

 

10,576,156

 

Other(1)

 

 

245,842

 

 

 

593,945

 

Total without commercial lines

 

 

169,485,947

 

 

 

161,090,121

 

Commercial lines (in run-off effective July 2019)(2)

 

 

(168,043)

 

 

10,124,908

 

Total gross premiums written

 

$169,317,904

 

 

$171,215,029

 

 

 

 

 

 

 

 

 

 

Net premiums written:

 

 

 

 

 

 

 

 

Personal lines(3)

 

$120,362,688

 

 

$105,774,168

 

Livery physical damage

 

 

7,055,668

 

 

 

10,576,156

 

Other(1)

 

 

218,853

 

 

 

549,978

 

Total without commercial lines

 

 

127,637,209

 

 

 

116,900,302

 

Commercial lines (in run-off effective July 2019)(2)

 

 

(574,688)

 

 

8,678,829

 

Total net premiums written

 

$127,062,521

 

 

$125,579,131

 

 

 

 

 

 

 

 

 

 

Net premiums earned:

 

 

 

 

 

 

 

 

Personal lines(3)

 

$96,463,184

 

 

$102,943,699

 

Livery physical damage

 

 

8,706,984

 

 

 

10,565,739

 

Other(1)

 

 

198,853

 

 

 

518,671

 

Total without commercial lines

 

 

105,369,021

 

 

 

114,028,109

 

Commercial lines (in run-off effective July 2019)(2)

 

 

2,711,608

 

 

 

13,595,333

 

Total net premiums earned

 

$108,080,629

 

 

$127,623,442

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses(4):

 

 

 

 

 

 

 

 

Personal lines

 

$56,312,702

 

 

$62,157,739

 

Livery physical damage

 

 

2,641,801

 

 

 

5,209,065

 

Other(1)

 

 

27,425

 

 

 

605,994

 

Unallocated loss adjustment expenses

 

 

4,304,095

 

 

 

2,846,248

 

Total without commercial lines

 

 

63,286,023

 

 

 

70,819,046

 

Commercial lines (in run-off effective July 2019)(2)

 

 

3,145,049

 

 

 

19,363,278

 

Total net loss and loss adjustment expenses

 

$66,431,072

 

 

$90,182,324

 

 

 

 

 

 

 

 

 

 

Net loss ratio(4):

 

 

 

 

 

 

 

 

Personal lines

 

 

58.4%

 

 

60.4%

Livery physical damage

 

 

30.3%

 

 

49.3%

Other(1)

 

 

22.4%

 

 

116.8%

Total without commercial lines

 

 

60.1%

 

 

62.1%

 

 

 

 

 

 

 

 

 

Commercial lines (in run-off effective July 2019)(2)

 

 

116.0%

 

 

142.4%

Total

 

 

61.5%

 

 

70.7%

  

(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 discussions above with regard to “Net Written Premiums and Net Premiums Earned”, as to changes in quota share ceding rates effective December 31, 2020, December 15, 2019 and July 1, 2019.

(4)

See discussions above with regard to “Net Loss and LAE”, as to catastrophe losses in the years ended December 31, 2020 and 2019.

 

 

 
44

Table of Contents

 

Insurance Underwriting Business on a Standalone Basis

 

Our insurance underwriting business reported on a standalone basis for the years ended December 31, 2020 and 2019 follows:

 

 

 

Years ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Net premiums earned

 

$108,080,629

 

 

$127,623,442

 

Ceding commission revenue

 

 

14,202,353

 

 

 

4,650,851

 

Net investment income

 

 

6,504,983

 

 

 

6,821,248

 

Net gains on investments

 

 

1,549,099

 

 

 

4,495,230

 

Other income

 

 

970,595

 

 

 

1,306,820

 

Total revenues

 

 

131,307,659

 

 

 

144,897,591

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

66,431,072

 

 

 

90,182,324

 

Commission expense

 

 

31,828,174

 

 

 

30,093,106

 

Other underwriting expenses

 

 

25,424,779

 

 

 

24,420,208

 

Depreciation and amortization

 

 

2,732,128

 

 

 

2,446,959

 

Total expenses

 

 

126,416,153

 

 

 

147,142,597

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

4,891,506

 

 

 

(2,245,006)

Income tax expense (benefit)

 

 

200,339

 

 

 

(785,784)

Net income (loss)

 

$4,691,167

 

 

$(1,459,222)

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

Net loss ratio

 

 

61.5%

 

 

70.7%

Net underwriting expense ratio

 

 

38.9%

 

 

38.0%

Net combined ratio

 

 

100.4%

 

 

108.7%

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses

 

$57,252,953

 

 

$54,513,314

 

Less: Ceding commission revenue

 

 

(14,202,353)

 

 

(4,650,851)

Less: Other income

 

 

(970,595)

 

 

(1,306,820)

Net underwriting expenses

 

$42,080,005

 

 

$48,555,643

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$108,080,629

 

 

$127,623,442

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

38.9%

 

 

38.0%

 

 
45

Table of Contents

 

            An analysis of our direct, assumed and ceded earned premiums, loss and loss adjustment expenses, and loss ratios is shown below:

 

 

 

 Direct

 

 

Assumed

 

 

Ceded

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$169,317,904

 

 

$-

 

 

$(42,255,383)

 

$127,062,521

 

Change in unearned premiums

 

 

373,966

 

 

 

-

 

 

 

(19,355,858)

 

 

(18,981,892)

Earned premiums

 

$169,691,870

 

 

$-

 

 

$(61,611,241)

 

$108,080,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the effect of catastrophes

 

$72,841,957

 

 

$-

 

 

$(18,012,645)

 

$54,829,312

 

Catastrophe loss

 

 

21,540,120

 

 

 

-

 

 

 

(9,938,360)

 

 

11,601,760

 

Loss and loss adjustment expenses

 

$94,382,077

 

 

$-

 

 

$(27,951,005)

 

$66,431,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

42.9%

 

 

0.0%

 

 

29.2%

 

 

50.7%

Catastrophe loss

 

 

12.7%

 

 

0.0%

 

 

16.2%

 

 

10.8%

Loss ratio

 

 

55.5%

 

 

0.0%

 

 

45.4%

 

 

61.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$171,214,091

 

 

$939

 

 

$(45,635,899)

 

$125,579,131

 

Change in unearned premiums

 

 

(11,350,864)

 

 

(243)

 

 

13,395,418

 

 

 

2,044,311

 

Earned premiums

 

$159,863,227

 

 

$696

 

 

$(32,240,481)

 

$127,623,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses exluding the effect of catastrophes

 

$94,776,624

 

 

$(1,813)

 

$(12,287,304)

 

$82,487,507

 

Catastrophe loss

 

 

8,176,529

 

 

 

-

 

 

 

(481,712)

 

 

7,694,817

 

Loss and loss adjustment expenses

 

$102,953,153

 

 

$(1,813)

 

$(12,769,016)

 

$90,182,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

59.3%

 

 

-260.5%

 

 

38.1%

 

 

64.6%

Catastrophe loss

 

 

5.1%

 

 

0.0%

 

 

1.5%

 

 

6.1%

Loss ratio

 

 

64.4%

 

 

-260.5%

 

 

39.6%

 

 

70.7%

  

 
46

Table of Contents

 

The key measures for our insurance underwriting business for the years ended December 31, 2020 and 2019 are as follows:

 

 

 

Years ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Net premiums earned

 

$108,080,629

 

 

$127,623,442

 

Ceding commission revenue

 

 

14,202,353

 

 

 

4,650,851

 

Other income

 

 

970,595

 

 

 

1,306,820

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses (1)

 

 

66,431,072

 

 

 

90,182,324

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses:

 

 

 

 

 

 

 

 

Commission expense

 

 

31,828,174

 

 

 

30,093,106

 

Other underwriting expenses

 

 

25,424,779

 

 

 

24,420,208

 

 

 

 

 

 

 

 

 

 

Total acquisition costs and other underwriting expenses

 

 

57,252,953

 

 

 

54,513,314

 

 

 

 

 

 

 

 

 

 

Underwriting loss

 

$(430,448)

 

$(11,114,525)

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

Net loss ratio excluding the effect of catastrophes

 

 

50.7%

 

 

64.6%

Effect of catastrophe loss on net loss ratio (1)

 

 

10.8%

 

 

6.1%

Net loss ratio

 

 

61.5%

 

 

70.7%

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio excluding the effect of catastrophes

 

 

38.9%

 

 

38.0%

Effect of catastrophe loss on net underwriting expense ratio

 

 

0.0%

 

 

0.0%

Net underwriting expense ratio

 

 

38.9%

 

 

38.0%

 

 

 

 

 

 

 

 

 

Net combined ratio excluding the effect of catastrophes

 

 

89.6%

 

 

102.6%

 

 

 

 

 

 

 

 

 

Effect of catastrophe loss on net combined ratio (1)

 

 

10.8%

 

 

6.1%

Net combined ratio

 

 

100.4%

 

 

108.7%

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses

 

$57,252,953

 

 

$54,513,314

 

Less: Ceding commission revenue

 

 

(14,202,353)

 

 

(4,650,851)

Less: Other income

 

 

(970,595)

 

 

(1,306,820)

 

 

$42,080,005

 

 

$48,555,643

 

 

 

 

 

 

 

 

 

 

Net earned premium

 

$108,080,629

 

 

$127,623,442

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

38.9%

 

 

38.0%

 

(1)

For the years ended December 31, 2020 and 2019, includes the sum of net catastrophe losses and loss adjustment expenses of $11,601,760 and $7,694,817, respectively.

  

 
47

Table of Contents

  

Investments

 

Portfolio Summary

 

The following table presents a breakdown of the amortized cost, aggregate estimated fair value and unrealized gains and losses by investment type as of December 31, 2020 and 2019:

 

Available-for-Sale Securities

 

 

 

December 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

 

$3,020,710

 

 

$29,190

 

 

$-

 

 

$-

 

 

$3,049,900

 

 

 

1.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

5,287,561

 

 

 

355,541

 

 

 

-

 

 

 

-

 

 

 

5,643,102

 

 

 

3.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

108,573,422

 

 

 

11,634,123

 

 

 

(13,216)

 

 

-

 

 

 

120,194,329

 

 

 

76.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other

asset backed securities (1)

 

 

28,163,891

 

 

 

617,368

 

 

 

(7,371)

 

 

(111,947)

 

 

28,661,941

 

 

 

18.2%

Total fixed-maturity securities

 

$145,045,584

 

 

$12,636,222

 

 

$(20,587)

 

$(111,947)

 

$157,549,272

 

 

 

100.0%

  

(1)

KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") see Note 9, in the accompanying consolidated financial statements following Item 16 of this Annual Report). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2020, the estimated fair value of the eligible investments was approximately $11,391,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2020, there was no outstanding balance on the FHLBNY credit line.

 

 

 

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 fixed-maturity securities

 

$162,202,355

 

 

$6,420,544

 

 

$(96,794)

 

$(289,924)

 

$168,236,181

 

 

 

100.0%

 

(1) KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in FHLBNY (see note 9, in the accompanying consolidated financial statements following Item 16 of this Annual Report). 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.

  

 
48

Table of Contents

  

Equity Securities

 

The following table presents a breakdown of the cost, estimated fair value, and gross gains and losses of investments in equity securities as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

Estimated

 

 

% of

 

 

 

 

 

Gross

 

 

Gross

 

 

Fair

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

$18,097,942

 

 

$853,277

 

 

$(426,942)

 

$18,524,277

 

 

 

53.8%

Common stocks and exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

traded mutual funds

 

 

14,473,224

 

 

 

1,820,512

 

 

 

(404,700)

 

 

15,889,036

 

 

 

46.2%

Total

 

$32,571,166

 

 

$2,673,789

 

 

$(831,642)

 

$34,413,313

 

 

 

100.0%

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

Estimated

 

 

 % of

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 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 and exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

traded mutual 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

 

                Pursuant to the definition of “Fair Value Measurement,” set forth in the Accounting Standards Codification 820 “Fair Value Measurement” (“ASC 820”), an entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of ASC 820 using the net asset value (“NAV”) per share (or its equivalent) of the investment. The following table presents a breakdown of the cost, estimated fair value, and gross gain of our other investments as of December 31, 2020 and 2019:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

Gross

 

 

Estimated

 

 

 

 

Gross

 

 

Estimated

 

Category

 

Cost

 

 

Gains

 

 

Fair Value

 

 

Cost

 

 

Gains

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$1,999,381

 

 

$1,519,245

 

 

$3,518,626

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

Total

 

$1,999,381

 

 

$1,519,245

 

 

$3,518,626

 

 

$1,999,381

 

 

$585,532

 

 

$2,584,913

 

  

 
49

Table of Contents

 

Held-to-Maturity Securities

 

The following table presents a breakdown of the amortized cost, aggregate estimated fair value and unrealized gains and losses by investment type as of December 31, 2020 and 2019:

 

 

 

December 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

 

$729,595

 

 

$319,714

 

 

$-

 

 

$-

 

 

$1,049,309

 

 

 

12.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Territories and Possessions

 

 

998,428

 

 

 

50,917

 

 

 

-

 

 

 

-

 

 

 

1,049,345

 

 

 

12.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

5,640,792

 

 

 

455,378

 

 

 

-

 

 

 

-

 

 

 

6,096,170

 

 

 

74.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$7,368,815

 

 

$826,009

 

 

$-

 

 

$-

 

 

$8,194,824

 

 

 

100.0%

 

 

 

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 estimated fair value of our investments in held-to-maturity securities by contractual maturity as of December 31, 2020 and 2019 is shown below:

 

 

 

December 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

 

 

$499,165

 

One to five years

 

 

2,598,193

 

 

 

2,777,936

 

 

 

2,099,268

 

 

 

2,215,640

 

Five to ten years

 

 

1,502,603

 

 

 

1,727,316

 

 

 

620,134

 

 

 

655,923

 

More than 10 years

 

 

3,268,019

 

 

 

3,689,572

 

 

 

606,550

 

 

 

754,039

 

Total

 

$7,368,815

 

 

$8,194,824

 

 

$3,825,952

 

 

$4,124,767

 

  

 
50

Table of Contents

  

Credit Rating of Fixed-Maturity Securities

 

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of December 31, 2020 and 2019 as rated by Standard and Poor’s (or, if unavailable from Standard and Poor’s, then Moody’s or Fitch):

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 Estimated

 

 

 Percentage of

 

 

 Estimated

 

 

 Percentage of

 

 

 

 Fair Market

 

 

 Fair Market

 

 

 Fair Market

 

 

 Fair Market

 

 

 

 Value

 

 

 Value

 

 

 Value

 

 

 Value

 

 

 

 

 

 

 

 

 

 

Rating