UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended September 30, 2022

 

OR

 

 

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

 

For the transition period from _________to _________

 

Commission File Number 0-1665

 

KINGSTONE COMPANIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2476480

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

15 Joys Lane

Kingston, NY 12401

(Address of principal executive offices)

 

(845) 802-7900

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

KINS

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

 

 

Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 14, 2022, there were 10,684,499 shares of the registrant’s common stock outstanding.

 

 

 

 

KINGSTONE COMPANIES, INC.

INDEX

 

 

 

PAGE

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

4

 

Item 1 —

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets at September 30, 2022 (Unaudited) and December 31, 2021

 

4

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and nine months ended September 30, 2022 (Unaudited) and 2021 (Unaudited)

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months and nine months ended September 30, 2022 (Unaudited) and 2021 (Unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 (Unaudited) and 2021 (Unaudited)

 

8

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

Item 2 —

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

 

42

 

Item 3 —

Quantitative and Qualitative Disclosures About Market Risk

 

76

 

Item 4 —

Controls and Procedures

 

76

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

77

 

Item 1 —

Legal Proceedings

 

77

 

Item 1A —

Risk Factors

 

77

 

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

 

77

 

Item 3 —

Defaults Upon Senior Securities

 

77

 

Item 4 —

Mine Safety Disclosures

 

77

 

Item 5 —

Other Information

 

77

 

Item 6 —

Exhibits

 

78

 

Signatures

 

79

 

 

 
2

 

  

Forward-Looking Statements

 

This Quarterly Report contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The events described in forward‑looking statements contained in this Quarterly Report may not occur.  Generally, these statements relate to business plans or strategies, projected or anticipated results or other consequences of our plans or strategies, projected or anticipated results from acquisitions to be made by us, or projections involving anticipated revenues, earnings, costs or other aspects of our operating results.  The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward‑looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may cause actual results and outcomes to differ materially from those contained in the forward-looking statements include, but are not limited to the risks and uncertainties discussed in Part I Item 1A (“Risk Factors”) of our Annual Report under “Factors That May Affect Future Results and Financial Condition” on Form 10-K for the year ended December 31, 2021, Part I, Item 2 of this Quarterly Report and Part II, Item 1A of this Quarterly Report. 

 

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

 

 
3

Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 September 30,

 

 

 December 31,

 

 

 

2022

 

 

2021

 

 

 

 (unaudited)

 

 

 

Assets 

 

 

 

 

 

 

Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of $6,611,858 at September 30, 2022 and $8,753,159 at December 31, 2021)  

 

$7,767,183

 

 

$8,266,334

 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $165,534,467 at September 30, 2022 and $155,808,478 at December 31, 2021)  

 

 

145,305,707

 

 

 

158,080,110

 

Equity securities, at fair value (cost of $26,776,016 at September 30, 2022 and $37,470,669 at December 31, 2021) 

 

 

21,468,446

 

 

 

39,687,002

 

Other investments

 

 

2,576,272

 

 

 

7,561,415

 

Total investments 

 

 

177,117,608

 

 

 

213,594,861

 

Cash and cash equivalents 

 

 

15,111,206

 

 

 

24,290,598

 

Premiums receivable, net

 

 

12,891,464

 

 

 

12,318,336

 

Reinsurance receivables, net

 

 

59,365,937

 

 

 

40,292,438

 

Deferred policy acquisition costs

 

 

23,205,684

 

 

 

22,238,987

 

Intangible assets

 

 

500,000

 

 

 

500,000

 

Property and equipment, net

 

 

10,161,507

 

 

 

9,291,597

 

Deferred income taxes, net

 

 

8,856,948

 

 

 

192,253

 

Other assets 

 

 

8,497,592

 

 

 

8,593,205

 

Total assets 

 

$315,707,946

 

 

$331,312,275

 

 

 

 

 

 

 

 

 

 

Liabilities 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$106,928,898

 

 

$94,948,745

 

Unearned premiums 

 

 

103,789,380

 

 

 

97,759,607

 

Advance premiums

 

 

6,627,275

 

 

 

2,693,466

 

Reinsurance balances payable 

 

 

11,475,247

 

 

 

12,961,568

 

Deferred ceding commission revenue 

 

 

10,320,370

 

 

 

9,748,508

 

Accounts payable, accrued expenses and other liabilities 

 

 

7,740,737

 

 

 

7,704,396

 

Debt, net

 

 

29,955,926

 

 

 

29,823,791

 

Total liabilities 

 

 

276,837,833

 

 

 

255,640,081

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; authorized 2,500,000 shares

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; authorized 20,000,000 shares; issued 12,117,081 shares at September 30, 2022 and 11,955,660 shares at December 31, 2021; outstanding 10,645,675 shares at September 30, 2022 and 10,484,254 shares at December 31, 2021 

 

 

121,171

 

 

 

119,557

 

Capital in excess of par 

 

 

73,290,935

 

 

 

72,467,483

 

Accumulated other comprehensive (loss) income 

 

 

(15,978,570)

 

 

1,796,739

 

(Accumulated deficit) retained earnings 

 

 

(12,995,942)

 

 

6,855,896

 

 

 

 

44,437,594

 

 

 

81,239,675

 

Treasury stock, at cost, 1,471,406 shares at September 30, 2022 and December 31, 2021

 

 

(5,567,481)

 

 

(5,567,481)

Total stockholders' equity

 

 

38,870,113

 

 

 

75,672,194

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$315,707,946

 

 

$331,312,275

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

Table of Contents

 

 

 

 

 

 

 

 

 

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

Ceding commission revenue

 

 

4,886,094

 

 

 

(7,276)

 

 

14,283,077

 

 

 

37,400

 

Net investment income

 

 

1,418,521

 

 

 

1,676,596

 

 

 

3,411,946

 

 

 

5,137,867

 

Net (losses) gains on investments

 

 

(397,658)

 

 

204,534

 

 

 

(9,313,436)

 

 

5,480,202

 

Other income

 

 

269,702

 

 

 

280,869

 

 

 

750,169

 

 

 

577,261

 

Total revenues

 

 

35,537,635

 

 

 

38,957,974

 

 

 

93,068,180

 

 

 

118,061,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

22,027,516

 

 

 

35,740,235

 

 

 

63,624,755

 

 

 

79,060,117

 

Commission expense

 

 

8,702,190

 

 

 

8,201,935

 

 

 

25,534,307

 

 

 

24,711,115

 

Other underwriting expenses

 

 

7,276,101

 

 

 

6,562,743

 

 

 

20,717,047

 

 

 

19,722,705

 

Other operating expenses

 

 

809,597

 

 

 

855,499

 

 

 

2,357,367

 

 

 

3,141,077

 

Depreciation and amortization

 

 

824,975

 

 

 

820,091

 

 

 

2,472,348

 

 

 

2,480,085

 

Interest expense

 

 

456,545

 

 

 

456,545

 

 

 

1,369,635

 

 

 

1,369,635

 

Total expenses

 

 

40,096,924

 

 

 

52,637,048

 

 

 

116,075,459

 

 

 

130,484,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations before taxes

 

 

(4,559,289)

 

 

(13,679,074)

 

 

(23,007,279)

 

 

(12,423,109)

Income tax benefit

 

 

(561,668)

 

 

(3,060,809)

 

 

(4,432,507)

 

 

(2,817,108)

Net loss

 

 

(3,997,621)

 

 

(10,618,265)

 

 

(18,574,772)

 

 

(9,606,001)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross change in unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on available-for-sale-securities

 

 

(5,047,679)

 

 

(829,298)

 

 

(22,556,319)

 

 

(3,578,413)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses (gains)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net loss

 

 

4,247

 

 

 

(335,668)

 

 

55,927

 

 

 

(1,071,439)

Net change in unrealized losses

 

 

(5,043,432)

 

 

(1,164,966)

 

 

(22,500,392)

 

 

(4,649,852)

Income tax benefit related to items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of other comprehensive loss

 

 

1,059,120

 

 

 

244,643

 

 

 

4,725,083

 

 

 

976,470

 

Other comprehensive loss, net of tax

 

 

(3,984,312)

 

 

(920,323)

 

 

(17,775,309)

 

 

(3,673,382)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$(7,981,933)

 

$(11,538,588)

 

$(36,350,081)

 

$(13,279,383)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$(0.38)

 

$(1.01)

 

$(1.75)

 

$(0.90)

Diluted

 

$(0.38)

 

$(1.01)

 

$(1.75)

 

$(0.90)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,645,675

 

 

 

10,523,515

 

 

 

10,640,290

 

 

 

10,622,988

 

Diluted

 

 

10,645,675

 

 

 

10,523,515

 

 

 

10,640,290

 

 

 

10,622,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$0.04

 

 

$0.04

 

 

$0.12

 

 

$0.12

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

Table of Contents

  

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Three months ended September 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 Retained

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Earnings

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, July 1, 2021

 

 

-

 

 

$-

 

 

 

11,944,220

 

 

$119,442

 

 

$71,567,797

 

 

$7,127,003

 

 

$16,086,337

 

 

 

1,383,077

 

 

$(4,935,933)

 

$89,964,646

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

466,658

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

466,658

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

4,907

 

 

 

49

 

 

 

(49)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(1,508)

 

 

(15)

 

 

(9,371)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,386)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

88,329

 

 

 

(631,548)

 

 

(631,548)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(420,525)

 

 

-

 

 

 

-

 

 

 

(420,525)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,618,265)

 

 

-

 

 

 

-

 

 

 

(10,618,265)

Change in unrealized losses on available-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(920,323)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(920,323)

Balance, September 30, 2021

 

 

-

 

 

$-

 

 

 

11,947,619

 

 

$119,476

 

 

$72,025,035

 

 

$6,206,680

 

 

$5,047,547

 

 

 

1,471,406

 

 

$(5,567,481)

 

$77,831,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 Accumulated

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Loss

 

 

 Deficit

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, July 1, 2022

 

 

-

 

 

$-

 

 

 

12,117,081

 

 

$121,171

 

 

$73,102,513

 

 

$(11,994,258)

 

$(8,572,521)

 

 

1,471,406

 

 

$(5,567,481)

 

$47,089,424

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

188,422

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

188,422

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(425,800)

 

 

-

 

 

 

-

 

 

 

(425,800)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,997,621)

 

 

-

 

 

 

-

 

 

 

(3,997,621)

Change in unrealized losses on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,984,312)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,984,312)

Balance, September 30, 2022

 

 

-

 

 

$-

 

 

 

12,117,081

 

 

$121,171

 

 

$73,290,935

 

 

$(15,978,570)

 

$(12,995,942)

 

 

1,471,406

 

 

$(5,567,481)

 

$38,870,113

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
6

Table of Contents

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Nine months ended September 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 Retained

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Earnings

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, January 1, 2021

 

 

-

 

 

$-

 

 

 

11,871,307

 

 

$118,713

 

 

$70,769,165

 

 

$9,880,062

 

 

$15,928,345

 

 

 

1,254,492

 

 

$(3,895,883)

 

$92,800,402

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,447,725

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,447,725

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

104,030

 

 

 

1,040

 

 

 

(1,040)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(27,718)

 

 

(277)

 

 

(190,815)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(191,092)

Acquisition of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

216,914

 

 

 

(1,671,598)

 

 

(1,671,598)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,274,797)

 

 

-

 

 

 

-

 

 

 

(1,274,797)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,606,001)

 

 

-

 

 

 

-

 

 

 

(9,606,001)

Change in unrealized losses on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,673,382)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,673,382)

Balance, September 30, 2021

 

 

-

 

 

$-

 

 

 

11,947,619

 

 

$119,476

 

 

$72,025,035

 

 

$6,206,680

 

 

$5,047,547

 

 

 

1,471,406

 

 

$(5,567,481)

 

$77,831,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accumulated

 

 

 Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Capital

 

 

 Other

 

 

 Earnings

 

 

 

 

 

 

 

 

 

 Preferred Stock

 

 

 Common Stock

 

 

 in Excess

 

 

 Comprehensive

 

 

 (Accumulated

 

 

 Treasury Stock

 

 

 

 

 

 Shares

 

 

 Amount

 

 

 Shares

 

 

 Amount

 

 

 of Par

 

 

 Income (Loss)

 

 

 Deficit)

 

 

 Shares

 

 

 Amount

 

 

 Total

 

Balance, January 1, 2022

 

 

-

 

 

$-

 

 

 

11,955,660

 

 

$119,557

 

 

$72,467,483

 

 

$1,796,739

 

 

$6,855,896

 

 

 

1,471,406

 

 

$(5,567,481)

 

$75,672,194

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,204,865

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,204,865

 

Vesting of restricted stock awards

 

 

-

 

 

 

-

 

 

 

234,219

 

 

 

2,342

 

 

 

(2,342)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares deducted from restricted stock awards for payment of withholding taxes

 

 

-

 

 

 

-

 

 

 

(72,798)

 

 

(728)

 

 

(379,071)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(379,799)

Dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,277,066)

 

 

-

 

 

 

-

 

 

 

(1,277,066)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18,574,772)

 

 

-

 

 

 

-

 

 

 

(18,574,772)

Change in unrealized losses on available-for-sale securities, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,775,309)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,775,309)

Balance, September 30, 2022

 

 

-

 

 

$-

 

 

 

12,117,081

 

 

$121,171

 

 

$73,290,935

 

 

$(15,978,570)

 

$(12,995,942)

 

 

1,471,406

 

 

$(5,567,481)

 

$38,870,113

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
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KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

Nine months ended September 30,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$(18,574,772)

 

$(9,606,001)

Adjustments to reconcile net loss to net cash flows

 

 

 

 

 

 

 

 

(used in) provided by operating activities:

 

 

 

 

 

 

 

 

Net gains on investments

 

 

(599,773)

 

 

(2,793,522)

Net unrealized losses (gains) on equity investments

 

 

7,549,640

 

 

 

(592,397)

Net unrealized losses (gains) on other investments

 

 

2,363,568

 

 

 

(2,094,283)

Depreciation and amortization

 

 

2,472,348

 

 

 

2,480,085

 

Bad debt expense

 

 

43,365

 

 

 

150,024

 

Amortization of bond premium, net

 

 

922,257

 

 

 

165,413

 

Amortization of discount and issuance costs on debt

 

 

132,135

 

 

 

132,135

 

Stock-based compensation

 

 

1,204,865

 

 

 

1,447,725

 

Deferred income tax benefit

 

 

(3,939,612)

 

 

(2,642,595)

Decrease (increase) in operating assets:

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

(616,493)

 

 

360,296

 

Reinsurance receivables, net

 

 

(19,073,499)

 

 

22,498,715

 

Deferred policy acquisition costs

 

 

(966,697)

 

 

(1,119,401)

Other assets

 

 

95,613

 

 

 

(406,756)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

 

11,980,153

 

 

 

18,242,890

 

Unearned premiums

 

 

6,029,773

 

 

 

2,644,506

 

Advance premiums

 

 

3,933,809

 

 

 

2,665,160

 

Reinsurance balances payable

 

 

(1,486,321)

 

 

(2,713,643)

Deferred ceding commission revenue

 

 

571,862

 

 

 

(5,673)

Accounts payable, accrued expenses and other liabilities

 

 

36,341

 

 

 

267,109

 

Net cash flows (used in) provided by operating activities

 

 

(7,921,438)

 

 

29,079,787

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase - fixed-maturity securities held-to-maturity

 

 

(498,711)

 

 

(3,175,686)

Purchase - fixed-maturity securities available-for-sale

 

 

(24,874,443)

 

 

(32,753,786)

Purchase - equity securities

 

 

(637,897)

 

 

(17,834,076)

Purchase - other investments

 

 

-

 

 

 

(2,000,000)

Redemption - fixed-maturity securities held-to-maturity

 

 

1,000,000

 

 

 

1,312,500

 

Sale and maturity - fixed-maturity securities available-for-sale

 

 

14,213,435

 

 

 

33,335,036

 

Sale - equity securities

 

 

11,962,513

 

 

 

14,507,384

 

Sale - real estate partnership

 

 

-

 

 

 

233,798

 

Redemption - other investments

 

 

2,576,272

 

 

 

-

 

Acquisition of property and equipment

 

 

(3,342,258)

 

 

(2,923,124)

Net cash flows provided by (used in) investing activities

 

 

398,911

 

 

 

(9,297,954)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Withholding taxes paid on vested retricted stock awards

 

 

(379,799)

 

 

(191,092)

Purchase of treasury stock

 

 

-

 

 

 

(1,671,598)

Dividends paid

 

 

(1,277,066)

 

 

(1,274,797)

Net cash flows used in financing activities

 

 

(1,656,865)

 

 

(3,137,487)

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

$(9,179,392)

 

$16,644,346

 

Cash and cash equivalents, beginning of period

 

 

24,290,598

 

 

 

19,463,742

 

Cash and cash equivalents, end of period

 

$15,111,206

 

 

$36,108,088

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$-

 

 

$-

 

Cash paid for interest

 

$825,000

 

 

$825,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
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KINGSTONE COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Nature of Business and Basis of Presentation

  

Kingstone Companies, Inc. (referred to herein as "Kingstone"), through its wholly-owned subsidiary, Kingstone Insurance Company (“KICO”), underwrites property and casualty insurance exclusively through retail and wholesale agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine and New Hampshire. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts, and Connecticut. Although New Jersey, Rhode Island, Massachusetts and Connecticut continue to be growing markets for the Company,over 80% of KICO’s direct written premiums for both the three months and nine months ended September 30, 2022, came from the New York policies.  Kingstone, through its wholly-owned subsidiary, Cosi Agency, Inc. (“Cosi”), a multi-state licensed general agency, accesses alternate forms of distribution outside of the independent agent and broker network, through which KICO currently distributes its various products. Kingstone and its wholly-owned subsidiaries are collectively referred to as the “Company”. 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2021 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2022. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the nine months ended September 30, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022.

 

Certain prior year balances were reclassified to conform with the current year presentation.  The reclassification had no effect on the Company’s previously reported financial condition, results of operations or cash flows. 

 

Note 2 – Accounting Policies

 

Basis of Presentation; Going Concern

 

See Note 2 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further information.

 

Kingstone’s $30,000,000 5.5% Senior Unsecured Notes (the “Notes”) mature on December 30, 2022. The Company’s continuation as a going concern is dependent on its ability to obtain financing to satisfy the Notes at maturity unless agreements are entered into with the holders of a substantial principal amount of the Notes to extend the maturity date of the Notes or exchange the Notes for new debt and/or equity securities of Kingstone (see “Management’s Plan Related to Going Concern” below).  Management believes that KICO’s insurance operations would be able to continue in the event that the required financing by Kingstone is not obtained and agreements with the holders of the Notes are not entered into. 

 

 
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In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. Disclosures in the notes to the consolidated financial statements are required if management concludes that substantial doubt exists and if its plans alleviate the substantial doubt that was raised.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP assuming that the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

Management’s Plan Related to Going Concern

 

In order to continue as a going concern, Kingstone will need to refinance the Notes that become  due on December 30, 2022, either through (a) new debt or equity financing at Kingstone that will provide the funds necessary, together with available cash, to pay the Notes in full at maturity, (b) Kingstone entering into arrangements with holders of the Notes to exchange their Notes for new debt and/or equity securities of Kingstone  or (c) a combination of (a) and (b). No assurance can be given that Kingstone will be successful in this regard.  Management has been exploring and continues to explore a number of financing and other options and has engaged investment bankers to assist it in pursuing such options.  Subject to regulatory requirements, Kingstone can also receive dividends and/or loans from its insurance subsidiary, KICO, that could be utilized to repay a portion of the Notes.  As of September 30, 2022, the maximum distribution that KICO could pay to Kingstone without prior regulatory approval was approximately $3.0 million. Subsequent to September 30, 2022, Kingstone received a $3.0 million distribution from KICO. In addition, subsequent to September 30, 2022, Kingstone received a loan from KICO of $6.45 million without the need for prior regulatory approval and also received a Federal income tax refund of approximately $1.5 million. With the foregoing proceeds, together with liquid investments and available cash, Kingstone currently has total funds of approximately $12.0 million.   

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described above, which the Company believes is probable, but there can be no assurance in this regard.   

 

Use of Estimates

 

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

 

 
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Principles of Consolidation

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

 
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Note 3 - Investments 

 

Fixed-Maturity Securities

 

The amortized cost, estimated fair value, and unrealized gains and losses on investments in fixed-maturity securities classified as available-for-sale as of September 30, 2022 and December 31, 2021 are summarized as follows:

 

 

 

September 30, 2022

 

 

 

Cost or

 

 

Gross

 

 

 Gross Unrealized Losses

 

 

Estimated 

 

 

Net

 

 

 

Amortized

 

 

Unrealized

 

 

 Less than 12

 

 

 More than 12

 

 

Fair

 

 

Unrealized 

 

Category 

 

 Cost

 

 

 Gains

 

 

 Months

 

 

 Months

 

 

 Value

 

 

 Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$9,946,032

 

 

$930

 

 

$(123)

 

$-

 

 

$9,946,839

 

 

$807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

17,117,473

 

 

 

-

 

 

 

(3,250,196)

 

 

(590,936)

 

 

13,276,341

 

 

 

(3,841,132)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

84,163,055

 

 

 

-

 

 

 

(9,154,182)

 

 

(269,694)

 

 

74,739,179

 

 

 

(9,423,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities (1)

 

 

54,307,907

 

 

 

68,159

 

 

 

(4,333,707)

 

 

(2,699,011)

 

 

47,343,348

 

 

 

(6,964,559)

Total fixed-maturity securities 

 

$165,534,467

 

 

$69,089

 

 

$(16,738,208)

 

$(3,559,641)

 

$145,305,707

 

 

$(20,228,760)

 

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of September 30, 2022, the estimated fair value of the eligible investments was approximately $12,393,000. KICO will retain all rights regarding all securities if pledged as collateral. As of September 30, 2022 there was no outstanding balance on the FHLBNY credit line.

 

 

 

December 31, 2021

 

 

 

 Cost or

 

 

 Gross

 

 

 Gross Unrealized Losses

 

 

 

 

 Net

 

 

 

Amortized

 

 

Unrealized

 

 

 Less than 12

 

 

More than 12

 

 

 Estimated Fair

 

 

 Unrealized Gains/

 

Category 

 

 Cost

 

 

 Gains

 

 

 Months

 

 

 Months

 

 

 Value

 

 

 (Losses) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

$17,236,750

 

 

$246,748

 

 

$(197,984)

 

$-

 

 

$17,285,514

 

 

$48,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

80,534,769

 

 

 

2,603,411

 

 

 

(126,926)

 

 

-

 

 

 

83,011,254

 

 

 

2,476,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

58,036,959

 

 

 

355,985

 

 

 

(489,258)

 

 

(120,344)

 

 

57,783,342

 

 

 

(253,617)

Total fixed-maturity securities 

 

$155,808,478

 

 

$3,206,144

 

 

$(814,168)

 

$(120,344)

 

$158,080,110

 

 

$2,271,632

 

 

 
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A summary of the amortized cost and estimated fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of  September 30, 2022 and December 31, 2021 is shown below:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$14,852,441

 

 

$14,824,136

 

 

$1,153,099

 

 

$1,156,636

 

One to five years

 

 

44,959,185

 

 

 

42,305,309

 

 

 

43,007,110

 

 

 

44,914,759

 

Five to ten years

 

 

30,271,976

 

 

 

24,680,308

 

 

 

26,808,853

 

 

 

27,332,581

 

More than 10 years

 

 

21,142,958

 

 

 

16,152,606

 

 

 

26,802,457

 

 

 

26,892,792

 

Residential mortgage and other asset backed securities

 

 

54,307,907

 

 

 

47,343,348

 

 

 

58,036,959

 

 

 

57,783,342

 

Total

 

$165,534,467

 

 

$145,305,707

 

 

$155,808,478

 

 

$158,080,110

 

 

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

 

Equity Securities

 

The cost and estimated fair value of, and gross unrealized gains and losses on, investments in equity securities as of September 30, 2022 and December 31, 2021 are as follows:

 

 

 

September 30, 2022

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Losses

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks 

 

$16,047,207

 

 

$-

 

 

$(3,488,481)

 

$12,558,726

 

Common stocks, mutual funds, and exchange traded funds

 

 

10,728,809

 

 

 

103,902

 

 

 

(1,922,991)

 

 

8,909,720

 

Total

 

$26,776,016

 

 

$103,902

 

 

$(5,411,472)

 

$21,468,446

 

 

 

 

December 31, 2021

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Losses

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks 

 

$22,019,509

 

 

$1,007,009

 

 

$(184,617)

 

$22,841,901

 

Common stocks, mutual funds, and exchange traded funds

 

 

15,451,160

 

 

 

1,573,653

 

 

 

(179,712)

 

 

16,845,101

 

Total

 

$37,470,669

 

 

$2,580,662

 

 

$(364,329)

 

$39,687,002

 

 

 
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Table of Contents

 

Other Investments

 

The cost and estimated fair value of, and gross gains on, the Company’s other investments as of September 30, 2022 and December 31, 2021 are as follows:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 Gross 

 

 

 Estimated

 

 

 

 

 Gross 

 

 

 Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Fair Value

 

 

 Cost

 

 

 Gains

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$1,987,040

 

 

$589,232

 

 

$2,576,272

 

 

$3,999,381

 

 

$3,562,034

 

 

$7,561,415

 

 

Held-to-Maturity Securities

 

The cost or amortized cost and estimated fair value of, and unrealized gross gains and losses on, investments in held-to-maturity fixed-maturity securities as of September 30, 2022 and December 31, 2021 are summarized as follows:

 

 

 

September 30, 2022

 

 

 

Cost or

 

 

Gross

 

 

 Gross Unrealized Losses

 

 

Estimated

 

 

 Net

 

 

 

Amortized

 

 

Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized Gains/

 

Category 

 

 Cost

 

 

 Gains

 

 

 Months

 

 

 Months

 

 

 Value

 

 

 (Losses) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$1,228,485

 

 

$73,468

 

 

$(36,802)

 

$-

 

 

$1,265,151

 

 

$36,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

498,508

 

 

 

-

 

 

 

(1,498)

 

 

-

 

 

 

497,010

 

 

 

(1,498)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

-

 

 

 

(43,361)

 

 

-

 

 

 

260,750

 

 

 

(43,361)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

5,736,079

 

 

 

35,503

 

 

 

(1,182,635)

 

 

-

 

 

 

4,588,947

 

 

 

(1,147,132)

Total

 

$7,767,183

 

 

$108,971

 

 

$(1,264,296)

 

$-

 

 

$6,611,858

 

 

$(1,155,325)

 

 

 

December 31, 2021

 

 

 

Cost or

 

 

Gross

 

 

 Gross Unrealized Losses

 

 

 Estimated

 

 

 Net

 

 

 

Amortized

 

 

 Unrealized

 

 

Less than 12

 

 

More than 12

 

 

Fair

 

 

Unrealized Gains/

 

Category 

 

 Cost

 

 

 Gains

 

 

 Months

 

 

 Months

 

 

 Value

 

 

 (Losses) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,642

 

 

$209,633

 

 

$-

 

 

$-

 

 

$939,275

 

 

$209,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

998,239

 

 

 

22,856

 

 

 

-

 

 

 

-

 

 

 

1,021,095

 

 

 

22,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

85

 

 

 

(13,921)

 

 

 

 

 

 

290,275

 

 

 

(13,836)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,234,342

 

 

 

280,951

 

 

 

(12,779)

 

 

-

 

 

 

6,502,514

 

 

 

268,172

 

Total

 

$8,266,334

 

 

$513,525

 

 

$(26,700)

 

$-

 

 

$8,753,159

 

 

$486,825

 

 

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

 

 
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Table of Contents

 

A summary of the amortized cost and estimated fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of September 30, 2022 and December 31, 2021 is shown below:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Less than one year 

 

$708,325

 

 

$742,533

 

 

$994,712

 

 

$1,008,180

 

One to five years 

 

 

1,120,315

 

 

 

1,082,015

 

 

 

1,205,829

 

 

 

1,290,465

 

Five to ten years 

 

 

1,399,725

 

 

 

1,177,545

 

 

 

1,513,942

 

 

 

1,648,808

 

More than 10 years 

 

 

4,538,818

 

 

 

3,609,765

 

 

 

4,551,851

 

 

 

4,805,706

 

Total 

 

$7,767,183

 

 

$6,611,858

 

 

$8,266,334

 

 

$8,753,159

 

 

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

 

Investment Income

 

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

 

 

 

 Three months ended

 

 

 Nine months ended

 

 

 

September 30

 

 

September 30

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities 

 

$1,243,177

 

 

$1,288,277

 

 

$2,841,307

 

 

$4,238,746

 

Equity securities 

 

 

247,275

 

 

 

436,833

 

 

 

872,005

 

 

 

1,145,244

 

Cash and cash equivalents 

 

 

26,630

 

 

 

9,636

 

 

 

29,796

 

 

 

11,194

 

Other investments

 

 

-

 

 

 

42,908

 

 

 

-

 

 

 

-

 

Total 

 

 

1,517,082

 

 

 

1,777,654

 

 

 

3,743,108

 

 

 

5,395,184

 

Expenses: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment expenses 

 

 

89,811

 

 

 

101,058

 

 

 

322,412

 

 

 

257,317

 

Net investment income 

 

$1,427,271

 

 

$1,676,596

 

 

$3,420,696

 

 

$5,137,867

 

 

Proceeds from the redemption of fixed-maturity securities held-to-maturity were $1,000,000 and $1,312,500 for the nine months ended September 30, 2022 and 2021, respectively.

 

Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $14,213,435 and $33,335,036 for the nine months ended September 30, 2022 and 2021, respectively.

 

Proceeds from the sale of equity securities were $11,962,513 and $14,507,384 for the nine months ended September 30, 2022 and 2021, respectively.

 

 
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Table of Contents

 

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

 

 

 

 Three months ended

 

 

 Nine months ended

 

 

 

 September 30,

 

 

 September 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

Realized Gains (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains 

 

$364

 

 

$343,773

 

 

$102,774

 

 

$1,121,068

 

Gross realized losses

 

 

(4,620)

 

 

(8,103)

 

 

(158,701)

 

 

(49,601)

 

 

 

(4,256)

 

 

335,670

 

 

 

(55,927)

 

 

1,071,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

907,089

 

 

 

639,626

 

 

 

1,384,432

 

 

 

2,015,574

 

Gross realized losses 

 

 

(92,159)

 

 

(26,031)

 

 

(728,732)

 

 

(293,519)

 

 

 

814,930

 

 

 

613,595

 

 

 

655,700

 

 

 

1,722,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

589,233

 

 

 

83,798

 

 

 

589,233

 

 

 

83,798

 

Gross realized losses 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

589,233

 

 

 

83,798

 

 

 

589,233

 

 

 

83,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains

 

 

1,399,907

 

 

 

1,033,063

 

 

 

1,189,006

 

 

 

2,877,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (Losses) Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

-

 

 

 

(1,331,675)

 

 

-

 

 

 

592,397

 

Gross losses

 

 

(1,132,596)

 

 

 

 

 

 

(7,549,640)

 

 

-

 

 

 

 

(1,132,596)

 

 

(1,331,675)

 

 

(7,549,640)

 

 

592,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

 

-

 

 

 

503,146

 

 

 

-

 

 

 

2,010,485

 

Gross losses

 

 

(664,969)

 

 

-

 

 

 

(2,952,802)

 

 

-

 

 

 

 

(664,969)

 

 

503,146

 

 

 

(2,952,802)

 

 

2,010,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains 

 

 

(1,797,565)

 

 

(828,529)

 

 

(10,502,442)

 

 

2,602,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains on investments

 

$(397,658)

 

$204,534

 

 

$(9,313,436)

 

$5,480,202

 

 

Impairment Review

 

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

 

 
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Table of Contents

 

OTTI losses are recorded in the consolidated statements of operations and comprehensive income (loss) as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At September 30, 2022 and December 31, 2021, there were 155 and 48 fixed-maturity securities, respectively, that accounted for the gross unrealized losses.  The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of investments as of September 30, 2022 and December 31, 2021.  Significant factors influencing the Company’s determination that unrealized losses were temporary included credit quality considerations, the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and interest rate environment factors, and management’s intent and ability to hold the investment for a period of time sufficient to allow for an anticipated recovery of estimated fair value to the Company’s cost basis.

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at September 30, 2022 as follows: 

 

 

 

September 30, 2022

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

Category 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$5,975,160

 

 

$(123)

 

 

1

 

 

$-

 

 

$

-

 

 

 

-

 

 

$5,975,160

 

 

$(123)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

11,461,126

 

 

 

(3,250,196)

 

 

12

 

 

 

1,815,216

 

 

 

(590,936)

 

 

2

 

 

 

13,276,342

 

 

 

(3,841,132)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

73,921,209

 

 

 

(9,154,182)

 

 

93

 

 

 

817,970

 

 

 

(269,694)

 

 

1

 

 

 

74,739,179

 

 

 

(9,423,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

27,985,270

 

 

 

(4,333,707)

 

 

31

 

 

 

18,593,599

 

 

 

(2,699,011)

 

 

15

 

 

 

46,578,869

 

 

 

(7,032,718)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities 

 

$119,342,765

 

 

$(16,738,208)

 

 

137

 

 

$21,226,785

 

 

$(3,559,641)

 

 

18

 

 

$140,569,550

 

 

$(20,297,849)

 

 
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Table of Contents

 

The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at December 31, 2021 as follows:

 

 

 

December 31, 2021

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

Category 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$

-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

6,768,123

 

 

 

(197,984)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,768,123

 

 

 

(197,984)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

17,593,707

 

 

 

(126,926)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,593,707

 

 

 

(126,926)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

45,399,451

 

 

 

(489,258)

 

 

26

 

 

 

2,923,182

 

 

 

(120,344)

 

 

2

 

 

 

48,322,633

 

 

 

(609,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities 

 

$69,761,281

 

 

$(814,168)

 

 

46

 

 

$2,923,182

 

 

$(120,344)

 

 

2

 

 

$72,684,463

 

 

$(934,512)

 

 
18

Table of Contents

 

Note 4 - Fair Value Measurements

 

The following table presents information about the Company’s investments that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 indicating the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

 

 

September 30, 2022

 

 

 

 Level 1 

 

 

 Level 2 

 

 

 Level 3 

 

 

 Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$9,946,839

 

 

$-

 

 

$-

 

 

$9,946,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

-

 

 

 

13,276,341

 

 

 

-

 

 

 

13,276,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

74,241,809

 

 

 

497,370

 

 

 

-

 

 

 

74,739,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

-

 

 

 

47,343,348

 

 

 

-

 

 

 

47,343,348

 

Total fixed maturities 

 

 

84,188,648

 

 

 

61,117,059

 

 

 

-

 

 

 

145,305,707

 

Equity securities

 

 

21,468,446

 

 

 

-

 

 

 

-

 

 

 

21,468,446

 

Total investments

 

$105,657,094

 

 

$61,117,059

 

 

$-

 

 

$166,774,153

 

 

 

 

December 31, 2021

 

 

 

 Level 1 

 

 

 Level 2 

 

 

 Level 3 

 

 

 Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

-

 

 

 

17,285,514

 

 

 

-

 

 

 

17,285,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

82,500,779

 

 

 

510,475

 

 

 

-

 

 

 

83,011,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

-

 

 

 

57,783,342

 

 

 

-

 

 

 

57,783,342

 

Total fixed maturities 

 

 

82,500,779

 

 

 

75,579,331

 

 

 

-

 

 

 

158,080,110

 

Equity securities

 

 

39,687,002

 

 

 

-

 

 

 

-

 

 

 

39,687,002

 

Total investments

 

$122,187,781

 

 

$75,579,331

 

 

$-

 

 

$197,767,112

 

 

 
19

Table of Contents

 

The following table sets forth the Company’s investment in a hedge fund measured at Net Asset Value (“NAV”) per share as of September 30, 2022 and December 31, 2021. The Company measures this investment at fair value on a recurring basis.  Fair value using NAV per share is as follows as of the dates indicated:

 

Category 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

Other Investments

 

 

 

 

 

 

Hedge fund

 

$2,576,272

 

 

$7,561,415

 

 

The hedge fund investment is generally redeemable with at least 45 days prior written notice.  The hedge fund investment is accounted for as a limited partnership by the Company. Income is earned based upon the Company’s allocated share of the partnership's changes in unrealized gains and losses to its partners. Such amounts have been recorded in the condensed consolidated statements of operations and comprehensive income (loss) within net (losses) gains on investments. As of September 30, 2022 the Company redeemed 50% of its investment in the hedge fund and recognized a realized gain of $589,233, which is recorded within net gains (losses) on investments in the condensed consolidated statements of operations and comprehensive income (loss).  

  

The estimated fair value and the level of the fair value hierarchy of the Company’s long-term debt as of September 30, 2022 and December 31, 2021 not measured at fair value is as follows:

 

 

 

September 30, 2022

 

 

 

 Level 1 

 

 

 Level 2 

 

 

 Level 3 

 

 

 Total 

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$29,601,120

 

 

$-

 

 

$29,601,120

 

 

 

 

December 31, 2021

 

 

 

 Level 1 

 

 

 Level 2 

 

 

 Level 3 

 

 

 Total 

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes due 2022

 

$-

 

 

$28,436,019

 

 

$-

 

 

$28,436,019

 

 

Note 5 - Fair Value of Financial Instruments and Real Estate

 

The estimated fair values of the Company’s financial instruments and real estate, including their fair value level as of September 30, 2022 and December 31, 2021 are as follows:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities-held-to maturity, Level 1

 

$7,767,183

 

 

$6,611,858

 

 

$8,266,334

 

 

$8,753,159

 

Cash and cash equivalents, Level 1

 

$15,111,206

 

 

$15,111,206

 

 

$24,290,598

 

 

$24,290,598

 

Premiums receivable, net, Level 3

 

$12,891,464

 

 

$12,891,464

 

 

$12,318,336

 

 

$12,318,336

 

Reinsurance receivables, net, Level 3

 

$59,365,937

 

 

$59,365,937

 

 

$40,292,438

 

 

$40,292,438

 

Real estate, net of accumulated depreciation, Level 3

 

$2,089,156

 

 

$3,025,000

 

 

$2,144,464

 

 

$3,025,000

 

Reinsurance balances payable, Level 3

 

$11,475,247

 

 

$11,475,247

 

 

$12,961,568

 

 

$12,961,568

 

 

 
20

Table of Contents

 

Note 6 – Property and Casualty Insurance Activity

 

Premiums Earned

 

Premiums written, ceded and earned are as follows:

 

 

 

 Direct 

 

 

 Assumed 

 

 

 Ceded 

 

 

 Net 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written 

 

$147,353,911

 

 

$-

 

 

$(58,743,773)

 

$88,610,138

 

Change in unearned premiums 

 

 

(6,029,774)

 

 

-

 

 

 

1,356,060

 

 

 

(4,673,714)

Premiums earned 

 

$141,324,137

 

 

$-

 

 

$(57,387,713)

 

$83,936,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written 

 

$131,609,930

 

 

$-

 

 

$(21,854,398)

 

$109,755,532

 

Change in unearned premiums 

 

 

(2,911,439)

 

 

-

 

 

 

(15,198)

 

 

(2,926,637)

Premiums earned 

 

$128,698,491

 

 

$-

 

 

$(21,869,596)

 

$106,828,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written 

 

$54,591,551

 

 

$-

 

 

$(20,925,381)

 

$33,666,170

 

Change in unearned premiums 

 

 

(5,636,421)

 

 

-

 

 

 

1,331,227

 

 

 

(4,305,194)

Premiums earned 

 

$48,955,130

 

 

$-

 

 

$(19,594,154)

 

$29,360,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums written 

 

$48,865,169

 

 

$-

 

 

$(7,223,526)

 

$41,641,643

 

Change in unearned premiums 

 

 

(4,848,145)

 

 

-

 

 

 

9,753

 

 

 

(4,838,392)

Premiums earned 

 

$44,017,024

 

 

$-

 

 

$(7,213,773)

 

$36,803,251

 

 

Premium receipts in advance of the policy effective date are recorded as advance premiums.  The balance of advance premiums as of September 30, 2022 and December 31, 2021 was $6,627,275 and $2,693,466, respectively.

 

 
21

Table of Contents

 

Loss and Loss Adjustment Expense Reserves

 

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

 

 

 

 Nine months ended

 

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$94,948,745

 

 

$82,801,228

 

Less reinsurance recoverables 

 

 

(10,637,679)

 

 

(20,154,251)

Net balance, beginning of period

 

 

84,311,066

 

 

 

62,646,977

 

 

 

 

 

 

 

 

 

 

Incurred related to: 

 

 

 

 

 

 

 

 

Current year 

 

 

62,910,967

 

 

 

79,070,646

 

Prior years

 

 

713,788

 

 

 

(10,529)

Total incurred 

 

 

63,624,755

 

 

 

79,060,117

 

 

 

 

 

 

 

 

 

 

Paid related to: 

 

 

 

 

 

 

 

 

Current year 

 

 

35,774,958

 

 

 

35,408,412

 

Prior years 

 

 

26,938,462

 

 

 

17,586,958

 

Total paid 

 

 

62,713,420

 

 

 

52,995,370

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

 

85,222,401

 

 

 

88,711,724

 

Add reinsurance recoverables 

 

 

21,706,497

 

 

 

12,332,394

 

Balance at end of period

 

$106,928,898

 

 

$101,044,118

 

 

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $27,230,814 and $1,220,970 for the nine months ended September 30, 2022 and 2021, respectively.

 

Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the nine months ended September 30, 2022 and 2021 was $713,788 unfavorable and $10,529 favorable, respectively. Management, on a quarterly basis, performs a review of open liability claims to assess carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.

 

Loss and LAE reserves

 

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

 

 
22

Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
23

Table of Contents

 

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

 

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

 

COVID-19 has introduced additional uncertainty to recent claim trends. The Company reviews the carried reserves levels on a regular basis as additional information becomes available and makes adjustments in the periods in which such adjustments are determined to be necessary. The Company is not aware of any other claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.

 

In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (“pure” IBNR) for accident dates of September 30, 2019 and prior is limited, although there remains the possibility of adverse development on reported claims (“case development” IBNR).  In certain rare circumstances states have retroactively revised a statute of limitations.  The Company is not aware of any such effort that would have a material impact on the Company’s results. 

 

 
24

Table of Contents

 

The following is information about incurred and paid claims development as of September 30, 2022, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of September 30, 2022 included in the net incurred loss and allocated expense amounts. The historical information regarding incurred and paid claims development for the years ended December 31, 2013 to December 31, 2021 is presented as supplementary unaudited information.

  

All Lines of Business

(in thousands, except reported claims data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

September 30, 2022

 

 

 

For the Years Ended December 31,

 

 

Nine

Months Ended

September 30,

 

 

 

 

Cumulative Number of Reported Claims by Accident

 

Accident Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

IBNR

Year

 

 

 

(Unaudited 2013 - 2021)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

$10,728

 

 

$9,745

 

 

$9,424

 

 

$9,621

 

 

$10,061

 

 

$10,089

 

 

$10,607

 

 

$10,495

 

 

$10,529

 

 

$10,493

 

 

$3

 

 

 

1,564

 

2014

 

 

 

 

 

 

14,193

 

 

 

14,260

 

 

 

14,218

 

 

 

14,564

 

 

 

15,023

 

 

 

16,381

 

 

 

16,428

 

 

 

16,434

 

 

 

16,496

 

 

 

34

 

 

 

2,138

 

2015

 

 

 

 

 

 

 

 

 

 

22,340

 

 

 

21,994

 

 

 

22,148

 

 

 

22,491

 

 

 

23,386

 

 

 

23,291

 

 

 

23,528

 

 

 

23,533

 

 

 

239

 

 

 

2,559

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,062

 

 

 

24,941

 

 

 

24,789

 

 

 

27,887

 

 

 

27,966

 

 

 

27,417

 

 

 

27,411

 

 

 

101

 

 

 

2,881

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,605

 

 

 

32,169

 

 

 

35,304

 

 

 

36,160

 

 

 

36,532

 

 

 

36,553

 

 

 

270

 

 

 

3,398

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,455

 

 

 

56,351

 

 

 

58,441

 

 

 

59,404

 

 

 

60,535

 

 

 

446

 

 

 

4,229

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,092

 

 

 

72,368

 

 

 

71,544

 

 

 

71,386

 

 

 

3,074

 

 

 

4,494

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,083

 

 

 

62,833

 

 

 

62,043

 

 

 

3,504

 

 

 

5,861

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,425

 

 

 

97,038

 

 

 

9,236

 

 

 

5,779

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,735

 

 

 

13,837

 

 

 

3,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total

 

 

$464,223

 

 

 

 

 

 

 

 

 

 

All Lines of Business

(in thousands)

 

 

Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

 

For the Years Ended December 31,

 

 

Nine

Months Ended

September 30,

 

Accident Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

 

(Unaudited 2013 - 2021)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

$3,405

 

 

$5,303

 

 

$6,633

 

 

$7,591

 

 

$8,407

 

 

$9,056

 

 

$9,717

 

 

$10,016

 

 

$10,392

 

 

$10,471

 

2014

 

 

 

 

 

 

5,710

 

 

 

9,429

 

 

 

10,738

 

 

 

11,770

 

 

 

13,819

 

 

 

14,901

 

 

 

15,491

 

 

 

15,770

 

 

 

16,083

 

2015

 

 

 

 

 

 

 

 

 

 

12,295

 

 

 

16,181

 

 

 

18,266

 

 

 

19,984

 

 

 

21,067

 

 

 

22,104

 

 

 

22,318

 

 

 

22,462

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,364

 

 

 

19,001

 

 

 

21,106

 

 

 

23,974

 

 

 

25,234

 

 

 

25,750

 

 

 

26,244

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,704

 

 

 

24,820

 

 

 

28,693

 

 

 

31,393

 

 

 

32,529

 

 

 

32,928

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,383

 

 

 

44,516

 

 

 

50,553

 

 

 

52,025

 

 

 

53,657

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,933

 

 

 

54,897

 

 

 

58,055

 

 

 

59,933

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,045

 

 

 

50,719

 

 

 

52,632

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,282

 

 

 

75,291

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$382,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented

 

 

$81,542

 

All outstanding liabilities before 2013, net of reinsurance

 

 

 

264

 

Liabilities for loss and allocated loss adjustment expenses, net of reinsurance

 

 

$81,806

 

 

(Components may not sum to totals due to rounding)

 

 
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Table of Contents

 

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

 

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

 

Reconciliation of the Disclosure of Incurred and Paid Loss Development

to the Liability for Loss and LAE Reserves

 

 

 

 

 

As of

 

(in thousands)

 

September 30, 2022

 

Liabilities for allocated loss and loss adjustment expenses, net of reinsurance

 

$81,806

 

Total reinsurance recoverable on unpaid losses

 

 

21,706

 

Unallocated loss adjustment expenses

 

 

3,416

 

Total gross liability for loss and LAE reserves

 

$106,929

 

 

(Components may not sum to totals due to rounding)

 

Reinsurance

 

Effective December 31, 2021, the Company entered into a quota share reinsurance treaty for its personal lines business, which primarily consists of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”).

 

 
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The Company’s excess of loss and catastrophe reinsurance treaties expired on June 30, 2022 and the Company entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2022. Effective October 20, 2021, the Company entered into a stub catastrophe reinsurance treaty covering the period from October 20, 2021 through December 31, 2021. The treaty provided reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, the Company entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for reinsurance treaties in effect for the treaty years shown below are as follows:

 

 

 

 Treaty Period

 

 

 

 

 

 (2021/2023 Treaty)

 

 

 

 

 

 

 

 January 2,

 

 

 July 1,

 

 

 December 31,

 

 

 July 1,

 

 

 December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

2020

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 

 

June 30,

 

 

 January 1,

 

 

June 30,

 

 

December 30,

 

 

June 30,

 

Line of Business

 

2023

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent ceded (9)

 

 None (8)

 

 

 

30

%

 

 

30

%

 

 None (5)

 

 

 None (5)

 

Risk retained on intial $1,000,000 of losses (5) (7) (8) (9)

 

$

1,000,000

 

 

$

700,000

 

 

$

700,000

 

 

$

1,000,000

 

 

$

1,000,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

 None (8)

 

 

$

1,000,000

 

 

$

1,000,000

 

 

 None (5)

 

 

 None (5)

 

Expiration date

 

 

(8)

 

January 1, 2023

 

 

January 1, 2023

 

 

 NA (5)

 

 

 NA (5)

 

Excess of loss coverage and facultative facility coverage (1) (7)

 

$

8,000,000

 

 

$

8,400,000

 

 

$

8,400,000

 

 

$

8,000,000

 

 

$

8,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

$

1,000,000

 

 

$

600,000

 

 

$

600,000

 

 

$

1,000,000

 

 

$

1,000,000

 

Total reinsurance coverage per occurrence (5) (7) (8)

 

$

8,000,000

 

 

$

8,500,000

 

 

$

8,500,000

 

 

$

8,000,000

 

 

$

8,000,000

 

Losses per occurrence subject to reinsurance coverage (5) (8)

 

$

8,000,000

 

 

$

9,000,000

 

 

$

9,000,000

 

 

$

9,000,000

 

 

$

9,000,000

 

Expiration date (8)

 

June 30, 2023

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial loss subject to personal lines quota share treaty

 

 

(8)

 

 

10,000,000

 

 

 

10,000,000

 

 

 None (5)

 

 

 None (5)

 

Risk retained per catastrophe occurrence (5) (8) (9) (10)

 

$

10,000,000

 

 

$

7,400,000

 

 

$

7,400,000

 

 

$

10,000,000

 

 

$

10,000,000

 

Catastrophe loss coverage in excess of quota share coverage (2) (5) (8)

 

$

335,000,000

 

 

$

335,000,000

 

 

$

490,000,000

 

 

$

490,000,000

 

 

$

475,000,000

 

Catastrophe stub coverage for the period from October 18, 2021 through December 31, 2021 (6) 

 

  NA

 

 

  NA

 

 

  NA

 

 

$

5,000,000

 

 

  NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  in excess of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

 

 

 

 

Reinstatement premium protection (3) (4)

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

(1)

For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $9,000,000 in total insured value, which covers direct losses from $3,500,000 to $9,000,000 through June 30, 2023.

(2)

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

(3)

For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

(4)

For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $9,800,000 of catastrophe coverage in excess of $10,000,000.

 

 
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Table of Contents

 

(5)

The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.

(6)

Excludes freeze and freeze related claims.

(7)

For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.

(8)

Personal lines quota share (homeowners, dwelling fire and canine liability) and underlying excess of loss reinsurance will expire on January 1, 2023; reinsurance coverage in effect from January 2, 2023 through June 30, 2023 is only for excess of loss and catastrophe reinsurance treaties.

(9)

For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

(10)

Plus losses in excess of catastrophe coverage.

 

 

 

 Treaty Year

 

 

 

July 1, 2022

 

 

July 1, 2021

 

 

July 1, 2020

 

 

 

to

 

 

to

 

 

to

 

Line of Business

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

Personal Umbrella

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

Percent ceded - first $1,000,000 of coverage

 

 

90%

 

 

90%

 

 

90%

Percent ceded - excess of $1,000,000 dollars of coverage

 

 

95%

 

 

95%

 

 

95%

Risk retained

 

$300,000

 

 

$300,000

 

 

$300,000

 

Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,700,000

 

 

$4,700,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

Expiration date

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines (1):

 

 

 

 

 

 

 

 

 

 

 

 

General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

Risk retained

 

 

 

 

 

 

 

 

 

$750,000

 

Excess of loss coverage above risk retained

 

 

 

 

 

 

 

 

 

$3,750,000

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

$750,000

 

Total reinsurance coverage per occurrence

 

 

 

 

 

 

 

 

 

$3,750,000

 

Losses per occurrence subject to reinsurance coverage

 

 

 

 

 

 

 

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

 

(1)

Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

 

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

 

 
28

Table of Contents

 

Ceding Commission Revenue

 

The Company earned ceding commission revenue under the 2021/2023 Treaty for the three months and nine months ended September 30, 2022 based on a fixed provisional commission rate at which provisional ceding commissions will be earned. There was no quota share treaty in effect during the three months and nine months ended September 30, 2021. The Company earned ceding commission revenue under its expired quota share reinsurance agreements based on: (i) a fixed provisional commission rate at which provisional ceding commissions were earned, and (ii) a continuing sliding scale of commission rates and ultimate treaty year loss ratios on the policies reinsured under each of these agreements based upon which contingent ceding commissions are earned. The sliding scale includes minimum and maximum commission rates in relation to specified ultimate loss ratios.  The commission rate and contingent ceding commissions earned increases when the estimated ultimate loss ratio decreases and, conversely, the commission rate and contingent ceding commissions earned decreases when the estimated ultimate loss ratio increases.

 

Ceding commission revenue consists of the following:

 

 

 

 Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$4,881,580

 

 

$40,578

 

 

$14,116,044

 

 

$135,666

 

Contingent ceding commissions earned

 

 

4,514

 

 

 

(47,854)

 

 

167,033

 

 

 

(98,266)

 

 

$4,886,094

 

 

$(7,276)

 

$14,283,077

 

 

$37,400

 

 

Provisional ceding commissions are settled monthly. Balances due from reinsurers for contingent ceding commissions on quota share treaties are settled periodically based on the Loss Ratio of each treaty year that ends on June 30, for the expired treaties that were subject to contingent commissions. As discussed above, the Loss Ratios from prior years’ treaties are subject to change as incurred losses from those periods develop, resulting in an increase or decrease in the commission rate and contingent ceding commissions earned.  As of September 30, 2022 and December 31, 2021, net contingent ceding commissions payable to reinsurers under all treaties was approximately $2,714,000 and $2,881,000, respectively, which is recorded in reinsurance balances payable on the accompanying condensed consolidated balance sheets.

 

Note 7 – Debt

 

Federal Home Loan Bank

  

In July 2017, KICO became a member of, and invested in the Federal Home Loan Bank of New York (“FHLBNY”).  KICO is required to maintain an investment in capital stock of FHLBNY.  Based on redemption provisions of FHLBNY, the stock has no quoted market value and is carried at cost.  At its discretion, FHLBNY may declare dividends on the stock.  Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock. At September 30, 2022 and December 31, 2021, no impairment has been recognized. FHLBNY members have access to a variety of flexible, low-cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized.  Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage-backed securities, along with U.S. Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian account available for future advances.  Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within one year of borrowing.  KICO is currently able to borrow on an overnight basis. The maximum allowable advance as of September 30, 2022 was approximately $12,414,000. Advances are limited to 85% of the amount of available collateral. As of September 30, 2022, the estimated fair value of available collateral was $12,393,000.  Accordingly, as of September 30, 2022, advances were limited to $10,534,000. As of December 31, 2021, there was no available collateral. There have been no borrowings under this facility since KICO became a member of FHLBNY.

 

 
29

Table of Contents

 

Debt

 

On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December 30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50% per annum. The net proceeds of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an effective yield of 5.67% per annum. The balance of debt as of September 30, 2022 and December 31, 2021 is as follows:

 

 

 

 September 30,

 

 

 December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

5.50% Senior Unsecured Notes

 

$30,000,000

 

 

$30,000,000

 

Discount

 

 

(8,110)

 

 

(32,442)

Issuance costs

 

 

(35,964)

 

 

(143,767)

Debt, net

 

$29,955,926

 

 

$29,823,791

 

 

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

  

Due to the Make Whole Call, management intends to retire or otherwise satisfy the Notes at or close to the scheduled maturity date in December 2022. See Note 2 – Accounting Policies - Management’s Plan Related to Going Concern for a discussion of Kingstone’s plans with regard to the satisfaction of the Notes.

 

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

 

Capital Lease

 

On October 27, 2022 KICO entered into a sale leaseback transaction, whereby KICO sold $8,096,824 of fixed assets to a bank.  The provisions of the sale leaseback require KICO to pay a monthly payment of principal and interest totaling $126,877 for a term of 60 months commencing on October 27, 2022.  The terms of the agreement provide buyout options at the end of the 60 month term, which are as follows: 

 

 

·

At the end of the lease KICO may purchase the fixed assets for a purchase price of $2,024,206, which is 25% of the original fixed asset cost of $8,096,824; or

 

 

 

 

·

KICO may renew the lease for 16 months at the same rental rate, which totals $2,030,036

 

A provision of the sale leaseback agreement requires KICO to pledge collateral for the lease obligation.  KICO pledged a total of $9,958,700 in United States Treasury Bills. See Note 13 - Subsequent Events.

 

 
30

Table of Contents

 

Note 8 – Stockholders’ Equity

 

Dividends Declared and Paid

 

Dividends declared and paid on Common Stock were $1,277,066 and $1,274,797 for the nine months ended September 30, 2022 and 2021, respectively.

 

Stock Options

 

Effective August 12, 2014, the Company adopted the 2014 Equity Participation Plan (the “2014 Plan”) pursuant to which a maximum of 700,000 shares of Common Stock of the Company were initially authorized to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and stock bonuses.  Incentive stock options granted under the 2014 Plan expire no later than ten years from the date of grant (except no later than five years for a grant to a 10% stockholder). Non-statutory stock options granted under the 2014 Plan expire no later than ten years from the date of grant.  The Board of Directors or the Compensation Committee determines the vesting provisions for stock awards granted under the 2014 Plan, subject to the provisions of the 2014 Plan.  On August 5, 2020, the Company’s stockholders approved amendments to the 2014 Plan, including an increase in the maximum number of shares of Common Stock of the Company that are authorized to be issued pursuant to the 2014 Plan to 1,400,000.

 

The results of operations for the three months ended September 30, 2022 and 2021 include stock-based compensation expense for stock options totaling approximately $2,000 and $14,000, respectively. The results of operations for the nine months ended September 30, 2022 and 2021 include stock-based compensation expense for stock options totaling approximately $9,000 and $43,000, respectively. Stock-based compensation expense related to stock options for the three months and nine months ended September 30, 2022 and 2021 is net of estimated forfeitures of approximately 18% and 16%, respectively. Such amounts have been included in the condensed consolidated statements of operations and comprehensive income (loss) within other operating expenses.  

 

No options were granted during the nine months ended September 30, 2022. The fair value of stock options at the grant date are estimated using the Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

 

 
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A summary of stock option activity under the Company’s 2014 Plan for the nine months ended September 30, 2022 is as follows:

 

Stock Options

 

Number of

Shares

 

 

 Weighted Average Exercise Price per Share

 

 

 Weighted Average Remaining Contractual Term

 

 

 Aggregate

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2022

 

 

107,201

 

 

$8.31

 

 

 

2.92

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Exercised

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Expired/Forfeited

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2022

 

 

107,201

 

 

$8.31

 

 

 

2.18

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and Exercisable at September 30, 2022

 

 

94,701

 

 

$8.26

 

 

 

2.46

 

 

$-

 

  

The aggregate intrinsic value of options outstanding and options exercisable at September 30, 2022 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Common Stock for the options that had exercise prices that were lower than the $2.66 closing price of the Company’s Common Stock on September 30, 2022. No options were exercised, forfeited or expired during the nine months ended September 30, 2022. The total intrinsic value of options when forfeited are determined as of the date of forfeiture. The total intrinsic value of options when expired are determined as of the date of expiration.

 

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

 

As of September 30, 2022, there were no unvested options.

 

As of September 30, 2022, there were 364,271 shares reserved for grants under the 2014 Plan.

 

 
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Restricted Stock Awards

 

A summary of the restricted Common Stock activity under the Company’s 2014 Plan for nine months ended September 30, 2022 is as follows:

 

Restricted Stock Awards

 

Shares

 

 

 Weighted Average Grant Date Fair Value per Share

 

 

Aggregate

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

535,410

 

 

$7.01

 

 

$3,753,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

98,456

 

 

$5.53

 

 

$544,503

 

Vested

 

 

(234,219)

 

$7.32

 

 

$(1,715,220)

Forfeited

 

 

(17,605)

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2022

 

 

382,042

 

 

$6.91

 

 

$2,582,506

 

  

Fair value was calculated using the closing price of the Company’s Common Stock on the grant date. For the three months ended September 30, 2022 and 2021, stock-based compensation for these grants was approximately $186,000 and $452,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income (loss). For the nine months ended September 30, 2022 and 2021, stock-based compensation for these grants was approximately $1,180,000 and $1,405,000, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income (loss). These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be recognized by the directors, executives and employees.

 

Employee Stock Purchase Plan

On June 19, 2021, the Company’s Board of Directors adopted the Kingstone Companies, Inc. Employee Stock Purchase Plan (the “ESPP”), subject to stockholder approval. Such approval was obtained on August 10, 2021. The purpose of the ESPP is to provide eligible employees of the Company with an opportunity to use payroll deductions to purchase shares of Common Stock of the Company. The maximum number of shares of Common Stock that may be purchased under the ESPP is 750,000, subject to adjustment as provided for in the ESPP. The ESPP was effective August 10, 2021 and expires on August 10, 2031. A maximum of 5,000 shares of Common Stock may be purchased by an employee during any offering period.

  

The initial offering period under the ESPP was from November 1, 2021 through October 31, 2022 (“2021/2022 Offering”).  There is currently no offering pursuant to the ESPP subsequent to October 31, 2022. For the three months ended September 30, 2022 and 2021, stock-based compensation under the 2021/2022 Offering was approximately $5,000 and $-0-, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income (loss). For the nine months ended September 30, 2022 and 2021, stock-based compensation under the 2021/2022 Offering was approximately $16,000 and $-0-, respectively, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income (loss).

 

At the end of the 2021/2022 offering period, 33,222 shares of common stock were issued at $1.82 per share to participating employees for a total purchase of $60,464. See Note 13 - Subsequent Events.   

 

 
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Note 9 – Income Taxes

 

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

 

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

 

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

 

 

 

 September 30,

 

 

 December 31,

 

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

Deferred tax asset: 

 

 

 

 

 

 

Net operating loss carryovers (1)

 

$2,099,013

 

 

$1,112,318

 

Claims reserve discount 

 

 

1,164,002

 

 

 

1,186,789

 

Unearned premium 

 

 

3,607,880

 

 

 

3,246,364

 

Deferred ceding commission revenue

 

 

2,167,278

 

 

 

2,047,187

 

Net unrealized losses on securities

 

 

4,215,667

 

 

 

-

 

Other

 

 

1,530,488

 

 

 

1,220,898

 

Total deferred tax assets 

 

 

14,784,328

 

 

 

8,813,556

 

 

 

 

 

 

 

 

 

 

Deferred tax liability: 

 

 

 

 

 

 

 

 

Investment in KICO (2)

 

 

759,543

 

 

 

759,543

 

Deferred acquisition costs

 

 

4,873,194

 

 

 

4,670,187

 

Intangibles

 

 

105,000

 

 

 

105,000

 

Depreciation and amortization 

 

 

189,643

 

 

 

1,046,817

 

Net unrealized gains on securities

 

 

-

 

 

 

2,039,756

 

Total deferred tax liabilities 

 

 

5,927,380

 

 

 

8,621,303

 

 

 

 

 

 

 

 

 

 

Net deferred income tax asset

 

$8,856,948

 

 

$192,253

 

 

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

 

 
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September 30,

 

 

 December 31,

 

 

 

 Type of NOL

 

2022

 

 

2021

 

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

Federal only, NOL from 2022 and 2021

 

$2,099,013

 

 

$1,112,318

 

 

 

 

NOL carried back

 

 

-

 

 

 

-

 

 

 

 

Federal only, NOL from 2022 and 2021

 

 

2,099,013

 

 

 

1,112,318

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

State only (A)

 

 

2,227,702

 

 

 

2,099,239

 

 

December 2027 - December 2042

 

Valuation allowance

 

 

(2,227,702)

 

 

(2,099,239)

 

 

 

State only, net of valuation allowance

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred tax asset from net operating loss carryovers

 

$2,099,013

 

 

$1,112,318

 

 

 

 

 

(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of September 30, 2022 and December 31, 2021 was approximately $34,272,000 and $32,296,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the condensed consolidated statements of operations and comprehensive income (loss) within other underwriting expenses. Kingstone has recorded a valuation allowance due to the uncertainty of generating enough state taxable income to utilize 100% of the available state NOLs over their remaining lives, which expire between 2027 and 2042. 

 

(2)    Deferred tax liability – Investment in KICO

 

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

 

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

 

The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the nine months ended September 30, 2022 and 2021. If any had been recognized these would have been reported in income tax expense.

 

Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing.  The Company’s tax returns for the years ended December 31, 2019 through December 31, 2021 remain subject to examination. 

 

 
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Note 10 – (Loss) Earnings Per Common Share

 

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

 

The computation of diluted loss per common share excludes outstanding options in periods where the exercise of such options would be anti-dilutive. For the three months and nine months ended September 30, 2022 and 2021, no options were included in the computation of diluted loss per common share as they would have been anti-dilutive for the relevant periods and, as a result, the weighted average number of shares of Common Stock used in the calculation of diluted loss per common share has not been adjusted for the effect of such options.

 

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

 

 

 

 Three months ended

 

 

 Nine months ended

 

 

 

 September 30,

 

 

 September 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

10,645,675

 

 

 

10,523,515

 

 

 

10,640,290

 

 

 

10,622,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities, common share equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Restricted stock awards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, used for computing diluted (loss) earnings per share

 

 

10,645,675

 

 

 

10,523,515

 

 

 

10,640,290

 

 

 

10,622,988

 

 

Note 11 - Commitments and Contingencies

 

Litigation

 

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

 

Office Lease

The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. See Note 2 - Accounting Policies for additional information regarding the accounting for leases.

 

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

 

On July 8, 2019, the Company entered into a lease agreement for an additional office facility for Cosi located in Valley Stream, New York under a non-cancelable operating lease. The lease had a term of seven years and two months expiring December 31, 2026.  During January 2022, pursuant to a mutual agreement with the landlord at a cost of $40,000, the Cosi lease was terminated effective as of January 31, 2022.

 

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

 

 

 

 Three months

ended

 

 

 Nine months

ended

 

Lease cost

 

September 30,

2022

 

 

September 30,

2022

 

Operating lease (1) (2)

 

$41,342

 

 

$131,152

 

 

 

 

 

 

 

 

 

 

Other information on operating leases

 

 

 

 

 

 

 

 

Cash payments included in the measurement of lease liability reported in operating cash flows

 

$47,483

 

 

$147,969

 

Discount rate

 

 

5.50%

 

 

5.50%

Remaing lease term in years

 

 

 

 

 

 

 

 

KICO

 

 

1.50 years

 

 

 1.50 years

 

 

(1)

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

 

The following table presents the contractual maturities of the Company’s lease liabilities as of September 30, 2022:

 

For the Year

 

 

 Ending

 

 

 December 31,

 

 Total

 

Remainder of 2022

 

$47,483

 

2023

 

 

194,919

 

2024

 

 

49,145

 

Total undiscounted lease payments

 

 

291,547

 

Less:  present value adjustment

 

 

4,191

 

Operating lease liability (1)

 

$287,356

 

 

(1)

The operating lease liability is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

   

Rent expense for the three months ended September 30, 2022 and 2021 amounted to $41,342 and $57,459, respectively.  Rent expense for the nine months ended September 30, 2022 and 2021 amounted to $131,152 and $172,377, respectively.  Rent expense is included in the accompanying condensed consolidated statements of operations and comprehensive income (loss) within other underwriting expenses.

 

 
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Employment Agreements

 

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

 

Employment Agreement effective as of January 1, 2020

 

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

 

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

 

Pursuant to the Second Amended Goldstein Employment Agreement, in January 2020, Mr. Goldstein received a grant of 157,431 shares of restricted stock under the terms of the Company’s 2014 Plan determined by dividing $1,250,000 by the fair market value of the Company’s Common Stock on the date of grant. This 2020 grant vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and will vest with respect to one-sixth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates.  Also pursuant to the Second Amended Goldstein Employment Agreement, Mr. Goldstein received a grant, under the terms of the 2014 Plan, during January 2021, of 230,769 shares of restricted stock determined by dividing $1,500,000 by the fair market value of the Company’s Common Stock on the date of grant.  This 2021 grant vested with respect to one-half of the award on the first anniversary of the grant date and will vest with respect to one-fourth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates.  Further, pursuant to the Second Amended Goldstein Employment Agreement, Mr. Goldstein received in 2020, 2021, and 2022 a grant, under the terms of the 2014 Plan of a number of shares of restricted stock determined by dividing $136,500 by the fair market value of the Company’s Common Stock on the date of grant. In January 2020, Mr. Goldstein was granted 17,191 shares of restricted stock pursuant to this provision. This grant vested with respect to one-third of the award on each of the first and second anniversaries of the grant date and will vest with respect to one-sixth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates.  In January 2021, Mr. Goldstein was granted 21,000 shares of restricted stock pursuant to this provision.  This grant vested with respect to one-half of the award on the first anniversary of the grant date and will vest with respect to one-fourth of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates.  In January 2022, Mr. Goldstein was granted 27,300 shares of restricted stock pursuant to this provision.  This grant will vest with respect to one-half of the award on each of December 29, 2023 and December 30, 2024 based on the continued provision of services through such dates.  Pursuant to the 2014 Plan, Mr. Goldstein’s unvested restricted stock awards will vest in the event of a change in control of the Company.

 

 
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Employment Agreement effective as of January 1, 2023

 

On June 27, 2022, the Company and Mr. Goldstein entered into a third amended and restated employment agreement which takes effect as of January 1, 2023, and expires on December 31, 2024 (the “Third Amended Goldstein Employment Agreement”).

 

Pursuant to the Third Amended Goldstein Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 3% of our consolidated income from operations before taxes, exclusive of the Company’s consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 1.25 times his base salary.  Pursuant to the Third Amended Goldstein Employment Agreement, Mr. Goldstein would be entitled to receive, under certain circumstances, a payment equal to 1.5 times his then annual base salary and his accrued bonus in the event of the termination of his employment within eighteen months following a change of control of the Company.

 

Meryl Golden, Chief Operating Officer

 

Employment Agreement effective as of January 1, 2021

 

On September 16, 2019, the Company and Meryl Golden entered into an employment agreement (the “Golden Employment Agreement”) pursuant to which Ms. Golden serves as the Company’s Chief Operating Officer. Ms. Golden also serves as KICO’s President and Chief Operating Officer. The Golden Employment Agreement became effective as of September 25, 2019 (amended on December 24, 2020) and now expires on December 31, 2022.

 

Pursuant to the Golden Employment Agreement, Ms. Golden is entitled to receive an annual salary of $500,000. The Golden Employment Agreement also provides for the grant on the effective date of a five year option for the purchase of 50,000 shares of the Company’s Common Stock pursuant to the 2014 Plan. The options granted vest in four equal installments, with the first installment vesting on the grant date, and the remaining installments vesting on the first, second, and third anniversaries of the grant date, subject to the terms of the stock option agreement between the Company and Ms. Golden.   Pursuant to the Golden Employment Agreement, as amended, in each of January 2021 and January 2022, Ms. Golden was granted 30,000 shares of restricted Common Stock pursuant to the 2014 Plan.  Each such grant will vest in three equal installments on each of the first, second and third anniversaries of the grant date.  Pursuant to the 2014 Plan, Ms. Golden’s outstanding stock options and restricted stock awards will vest in the event of a change in control of the Company.

 

 
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Employment Agreement effective as of January 1, 2023

 

On June 27, 2022, the Company and Ms. Golden entered into a second amended and restated employment agreement which takes effect as of January 1, 2023, and expires on December 31, 2024 (the “Second Amended Golden Employment Agreement”).

 

Pursuant to the Second Amended Golden Employment Agreement, Ms. Golden is entitled to receive an annual base salary of $500,000 and an annual bonus equal to 3% of the Company’s consolidated income from operations before taxes, exclusive of our consolidated net investment income (loss), net unrealized gains (losses) on equity securities and net realized gains (losses) on investments, up to a maximum of 1.25 times her base salary. In addition, pursuant to the Second Amended Golden Employment Agreement, Ms. Golden is entitled to receive a grant, under the terms of the 2014 Plan, during each of January 2023 and January 2024, under certain circumstances, of a number of shares of restricted stock determined by dividing $136,500 by the fair market value of the Company’s common stock on the date of grant. The 2023 grant will vest with respect to one-half of the award on the first anniversary of the grant date and one-half of the award on December 31, 2024, based on the continued provision of services through such dates. The 2024 grant will vest on December 31, 2024, based on the continued provision of services through such date. In the event that we are precluded from making a grant in 2023 or 2024, then instead Ms. Golden shall be entitled to receive a cash bonus of $136,500 for such year. Further, pursuant to the Second Amended Golden Employment Agreement, Ms. Golden would be entitled to receive, under certain circumstances, a payment equal to 1.5 times her then annual base salary and her accrued bonus in the event of the termination of her employment within eighteen months following a change of control of the Company.

 

COVID-19

 

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

 

Note 12 – Employee Benefit Plans

 

Employee Bonus Plan

 

For the nine months ended September 30, 2022 and year ended December 31, 2021 the Company did not accrue for, or pay, bonuses related to the employee bonus plan. 

 

 
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401 (k) Plan

 

The Company maintains a salary reduction plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for its qualified employees. The Company matches 100% of each participant’s contribution up to 4% of the participant’s eligible contribution.  The Company incurred approximately $71,000 and $58,000 of expense for the three months ended September 30, 2022 and 2021, related to the 401(k) Plan.  The Company incurred approximately $207,000 and $189,000, respectively, of expense for the nine months ended September 30, 2022 and 2021, related to the 401(k) Plan, which is recorded in other operating expenses on the accompanying consolidated statements of operations and comprehensive income (loss). 

 

Deferred Compensation Plan

 

On June 18, 2018, the Company adopted the Kingstone Companies, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is offered to a select group (“Participants”), consisting of management and highly compensated employees as a method of recognizing and retaining such Participants. The Deferred Compensation Plan provides for eligible Participants to elect to defer up to 75% of their base compensation and up to 100% of bonuses and other compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the Participant deferrals, the Company may choose to make matching contributions to some or all of the Participants in the Deferred Compensation Plan to the extent the Participant did not receive the maximum matching or non-elective contributions permissible under the Company’s 401(k) Plan due to limitations under the Internal Revenue Code or the 401(k) Plan. Participants may elect to receive payment of their account balances in a single cash payment or in annual installments for a period of up to ten years. The deferred compensation liability as of September 30, 2022 and December 31, 2021 amounted to $1,093,136 and $907,914, respectively, and is recorded in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. The Company did not make any voluntary contributions for the nine months ended September 30, 2022 and 2021.

 

Note 13 – Subsequent Events

 

The Company has evaluated events that occurred subsequent to September 30, 2022 through the date these condensed consolidated financial statements were issued for matters that required disclosure or adjustment in these condensed consolidated financial statements. 

 

Griffin Highline

 

As previously reported, on August 5, 2022, Griffin Highline Capital LLC (“Griffin Highline”) filed Amendment No. 3 to Schedule 13D with the SEC which indicates that Griffin Highline submitted a final non-binding indication of interest to the Board of Directors of the Company proposing a transaction whereby an entity formed by Griffin Highline would acquire all of the outstanding equity of the Company.  Following delivery of the non-binding proposal, the Company agreed to extend the period of exclusivity with Griffin Highline under its previously executed exclusivity agreement for a limited time period to further pursue the proposal.  The period of exclusivity has expired.

 

Although Griffin Highline is not currently pursuing a transaction with regard to the acquisition of all of the outstanding equity of the Company, Griffin Highline and the Company are discussing a potential strategic transaction between them.  No assurance can be given that a transaction will be consummated by the Company with Griffin Highline or any third party.

 

Sale Leaseback and Capital Lease

 

On October 27, 2022 KICO entered into a sale leaseback transaction, whereby KICO sold $8,096,824 of fixed assets to a bank (see Note 7 - Debt ).

 

Employee Stock Purchase Plan

 

On October 31, 2022, the 2021/2022 offering period ended no further offering period was initiated (see Note 8 - Stockholders’ Equity).  

 

 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

We offer property and casualty insurance products to individuals through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County, although we are actively writing business in New Jersey, Rhode Island, Connecticut and Massachusetts. We are licensed in the States of New York, New Jersey, Rhode Island, Connecticut, Massachusetts, Pennsylvania, Maine, and New Hampshire. For the three months and nine months ended September 30, 2022, respectively, 80.5% and 80.3% 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. 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”). Commission expense is reduced by Net Cosi Revenue 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, Cosi’s expenses are not included in the calculation of our combined ratio as described below.

 

We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities.  All of KICO’s insurance policies are written for a one-year term. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one-year life of the policy). A significant period of time can elapse from the receipt of insurance premiums to the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments. Our holding company earns investment income from its cash holdings and may also generate net realized and unrealized investment gains and losses on future investments.

 

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

 

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

 

Product Lines

 

Our product lines include the following:

 

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

 

 
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Commercial liability: Through July 2019, we offered businessowners policies, which consist primarily of small business retail, service, and office risks, with limited property exposures. We also wrote artisan’s liability policies for small independent contractors with smaller sized workforces.  In addition, we wrote special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. Further, we offered commercial umbrella policies written above our supporting commercial lines policies.

 

In May 2019, due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business.  In July 2019, due to the continuing poor performance of these lines, we made the decision to no longer underwrite commercial lines or commercial umbrella risks.  In-force policies as of July 31, 2019 for these lines were non-renewed at the end of their annual terms.  As of September 30, 2022 and December 31, 2021, there were no commercial liability policies in-force. As of September 30, 2022, these expired policies represent approximately 18.0% of loss and LAE reserves net of reinsurance recoverables. See discussion below under “Additional Financial Information”.

 

Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.

 

Other:  We write canine legal liability policies and have a small participation in mandatory state joint underwriting associations.

 

Key Measures

 

We utilize the following key measures in analyzing the results of our insurance underwriting business:

 

Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business.  Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.

 

Net underwriting expense ratio:  The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.

 

Net combined ratio:  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.

 

Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.

 

 
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Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our condensed consolidated financial statements and related notes. In preparing these condensed consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, and other factors, in forming its estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize. Application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of similar companies.  See the Critical Accounting Estimates section within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 for further information.

 

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 income taxes, the impairment of investment securities, and the valuation of stock-based compensation. See Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

 

Griffin Highline

 

Reference is made to Note 13 – Subsequent Events - Griffin Highline to our condensed consolidated financial statements included in this Quarterly Report with regard to discussions between our company and Griffin Highline as to a potential strategic transaction.  TigerRisk Capital Markets & Advisory has been engaged to advise our Board of Directors regarding strategic transactions.  Our Board of Directors will carefully review any proposals received by our company from Griffin Highline or others to determine the course of action that it believes is in the best interest of our company and all of our stockholders. Due to the uncertainty as to the consummation of a transaction with Griffin Highline, nothing in this Quarterly Report, including the financial statements comprising a portion hereof, include any adjustments to reflect the possible effects of the consummation of such a transaction.

 

 
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Consolidated Results of Operations

 

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

 

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

 

 

 

Nine months ended September 30,

 

($ in thousands)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

Direct written premiums

 

$147,354

 

 

$131,610

 

 

$15,744

 

 

 

12.0%

Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

na

%

 

 

 

147,354

 

 

 

131,610

 

 

 

15,744

 

 

 

12.0%

Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded to quota share treaties (1)

 

 

34,868

 

 

 

374

 

 

 

34,494

 

 

 

9,223.0%

Ceded to excess of loss treaties

 

 

2,937

 

 

 

2,057

 

 

 

880

 

 

 

42.8%

Ceded to catastrophe treaties

 

 

20,939

 

 

 

19,423

 

 

 

1,516

 

 

 

7.8%

Total ceded written premiums

 

 

58,744

 

 

 

21,854

 

 

 

36,890

 

 

 

168.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

88,610

 

 

 

.,756

 

 

 

(21,146)

 

 

(19.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

(6,030)

 

 

(2,911)

 

 

(3,119)

 

 

(107.1)%

Ceded to quota share treaties (1)

 

 

1,356

 

 

 

(15)

 

 

1,371

 

 

na

%

Change in net unearned premiums

 

 

(4,674)

 

 

(2,926)

 

 

(1,748)

 

 

(59.7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

141,324

 

 

 

128,698

 

 

 

12,626

 

 

 

9.8%

Ceded to reinsurance treaties

 

 

(57,388)

 

 

(21,869)

 

 

(35,519)

 

 

(162.4)%

Net premiums earned 

 

 

83,936

 

 

 

106,829

 

 

 

(22,893)

 

 

(21.4)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue (1)

 

 

14,283

 

 

 

37

 

 

 

14,246

 

 

 

38,502.7%

Net investment income 

 

 

3,412

 

 

 

5,138

 

 

 

(1,726)

 

 

(33.6)%

Net (losses) gains on investments 

 

 

(9,313)

 

 

5,480

 

 

 

(14,793)

 

na

%

Other income

 

 

750

 

 

 

577

 

 

 

173

 

 

 

30.0%

Total revenues 

 

 

93,068

 

 

 

118,062

 

 

 

(24,993)

 

 

(21.2)%

Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

83,346

 

 

 

67,634

 

 

 

15,712

 

 

 

23.2%

Losses from catastrophes (2)

 

 

7,510

 

 

 

12,647

 

 

 

(5,137)

 

 

(40.6)%

Total direct and assumed loss and loss adjustment expenses 

 

 

90,856

 

 

 

80,281

 

 

 

10,575

 

 

 

13.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

23,187

 

 

 

860

 

 

 

22,327

 

 

 

2,596.2%

Losses from catastrophes (2)

 

 

4,044

 

 

 

360

 

 

 

3,684

 

 

 

1,023.3%

Total ceded loss and loss adjustment expenses 

 

 

27,231

 

 

 

1,221

 

 

 

26,011

 

 

 

2,130.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

60,159

 

 

 

66,773

 

 

 

(6,614)

 

 

(9.9)%

Losses from catastrophes (2)

 

 

3,466

 

 

 

12,287

 

 

 

(8,821)

 

 

(71.8)%

Net loss and loss adjustment expenses 

 

 

63,625

 

 

 

79,060

 

 

 

(15,435)

 

 

(19.5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense 

 

 

25,534

 

 

 

24,711

 

 

 

823

 

 

 

3.3%

Other underwriting expenses 

 

 

20,717

 

 

 

19,723

 

 

 

994

 

 

 

5.0%

Other operating expenses 

 

 

2,357

 

 

 

3,141

 

 

 

(784)

 

 

(25.0)%

Depreciation and amortization

 

 

2,472

 

 

 

2,480

 

 

 

(8)

 

 

(0.3)%

Interest expense

 

 

1,370

 

 

 

1,370

 

 

 

-

 

 

-

%

Total expenses 

 

 

116,075

 

 

 

130,485

 

 

 

(14,410)

 

 

(11.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before taxes

 

 

(23,007)

 

 

(12,423)

 

 

(10,584)

 

 

(85.2)%

Income tax benefit

 

 

(4,433)

 

 

(2,817)

 

 

(1,616)

 

 

(57.4)%

Net loss

 

$(18,575)

 

$(9,606)

 

$(8,968)

 

 

(93.4)%

 

(Columns in the table above may not sum to totals due to rounding)

 

(1)

Effective December 31, 2021, we entered into a 30% personal lines quota share treaty.

 

 

(2)

The nine months ended September 30, 2022 and 2021 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.

 

 
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Nine months ended September 30,

 

 

 

2022

 

 

2021

 

 

Percentage Point Change

 

 

 Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

75.8%

 

 

74.0%

 

 

(22.1)

 

 

(22.8)%

Net underwriting expense ratio

 

 

37.2%

 

 

41.0%

 

 

(2.4)

 

 

(6.1)%

Net combined ratio

 

 

113.0%

 

 

115.0%

 

 

(24.5)

 

 

(18.0)%

 

Direct Written Premiums

 

Direct written premiums during the nine months ended September 30, 2022 (“Nine Months 2022”) were $147,354,000 compared to $131,610,000 during the nine months ended September 30, 2021 (“Nine Months 2021”). The increase of $15,744,000, or 12.0%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Nine Months 2022 were $138,198,000, an increase of $13,605,000, or 10.9%, from $124,593,000 in Nine Months 2021.  The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force.  Direct written premiums from our livery physical damage business for Nine Months 2022 were $9,037,000, an increase of $2,200,000, or 32.2%, from $6,837,000 in Nine Months 2021. The increase in livery physical damage direct written premiums was due to the declining effect of the COVID-19 pandemic in our geographic area. 

 

                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 Core business were $118,332,000 in Nine Months 2022 compared to $101,990,000 in Nine Months 2021.   Direct written premiums from our Expansion business were $29,022,000 in Nine Months 2022 compared to $29,620,000 in Nine Months 2021.

 

Net Written Premiums and Net Premiums Earned

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). There was no quota share reinsurance treaty in effect in Nine Months 2021. Net written premiums decreased $21,146,000, or 19.3%, to $88,610,000 in Nine Months 2022 from $109,756,000 in Nine Months 2021. 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). In Nine Months 2022, our premiums ceded under quota share treaties increased by $34,494,000 in comparison to ceded premiums in Nine Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Nine Months 2022, compared to no personal lines quota share treaty in Nine Months 2021.

 

 
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Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Nine Months 2022, our ceded excess of loss reinsurance premiums increased by $880,000 over the comparable ceded premiums for Nine Months 2021. The increase was due to an increase in subject premiums and additional coverage obtained. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty.

 

Catastrophe reinsurance treaties

 

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Nine Months 2022, our premiums ceded under catastrophe treaties increased by $1,516,000 over the comparable ceded premiums in Nine Months 2021. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as of August 31, 2020. Effective July 1, 2021, and continuing through June 30, 2022, our ceded catastrophe premiums were paid based on the total insured value of our risks as of August 31, 2021. Effective July 1, 2022, and continuing through June 30, 2023, our ceded catastrophe premiums will be paid based on the total insured value of our risks as of August 31, 2022.

 

Net premiums earned

 

Net premiums earned decreased $22,893,000, or 21.4%, to $83,936,000 in Nine Months 2022 from $106,829,000 in Nine Months 2021. The decrease was due to the inception of the 2021/2023 Treaty on December 31, 2021. The decrease resulting from the 2021/2023 Treaty in Nine Months 2022 was partially offset by an increase in direct written premium.

 

Ceding Commission Revenue

 

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

 

 

 

Nine months ended September 30,

 

($ in thousands)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$14,116

 

 

$136

 

 

$13,980

 

 

 

10,279.4%

Contingent ceding commissions earned

 

 

167

 

 

 

(99)

 

 

266

 

 

n/a

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$14,283

 

 

$37

 

 

$14,246

 

 

 

38,502.7%

 

Ceding commission revenue was $14,283,000 in Nine Months 2022 compared to $37,000 in Nine Months 2021. The increase of $14,246,000 was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

 

 
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Provisional Ceding Commissions Earned

 

In Nine Months 2022 we earned provisional ceding commissions from personal lines earned premiums ceded under the 2021/2023 Treaty which was effective as of December 31, 2021. There was no personal lines quota share in effect in Nine Months 2021.

 

Contingent Ceding Commissions Earned

 

The structure of the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. 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 received.

 

Net Investment Income

 

Net investment income was $3,412,000 in Nine Months 2022 compared to $5,138,000 in Nine Months 2021, a decrease of $1,726,000, or 33.6%. The decrease in investment income is attributable to a $766,000 reversal of prior years’ estimated accrued interest income stemming from an error in third party investment reporting.  The decline of investment income is also attributable to the disposal of income bearing equity securities.  The average yield on invested assets was 3.48% as of September 30, 2022 compared to 3.42% as of September 30, 2021.

 

Cash and invested assets were $192,229,000 as of September 30, 2022 compared to $246,004,000 as of September 30, 2021. The $53,775,000 decrease in cash and invested assets was primarily attributable to cash paid to reinsurers at the inception of the 2021/2023 Treaty, losses paid in connection with catastrophe losses incurred in 2021 and 2022 and unrealized losses on our investment portfolio.

 

Net Gains and Losses on Investments

 

Net losses on investments were $9,313,000 in Nine Months 2022 compared to net gains of $5,480,000 in Nine Months 2021. Unrealized losses on our equity securities and other investments in Nine Months 2022 were $10,502,000, compared to net gains of $2,603,000 in Nine Months 2021. Realized gains on sales of investments were $1,189,000 in Nine Months 2022 compared to $2,877,000 in Nine Months 2021.

 

Other Income

 

                Other income was $750,000 in Nine Months 2022 compared to $577,000 in Nine Months 2021, an increase of $173,000, or 30.0%.

 

Net Loss and LAE

 

Net loss and LAE was $63,625,000 for Nine Months 2022 compared to $79,060,000 for Nine Months 2021. The net loss ratio was 75.8% in Nine Months 2022 compared to 74.0% in Nine Months 2021, an increase of 1.8 percentage points.

 

 
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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:

 

king_10qimg49.jpg

 

(Components may not sum to totals due to rounding)

 

For Nine Months 2022, the loss ratio was higher than Nine Months 2021 due to water damage property claims which were primarily driven by winter-related water damage claims resulting from freezing temperature earlier during the year and the impact from climbing inflation leading to higher severity.

 

The estimated net catastrophe losses were $3,466,000 for Nine Months 2022, which contributed 4.1 points to the loss ratio. This is mostly driven by two winter events in the first quarter. There were also seven other minor wind catastrophe events during Nine Months 2022, but the impact was not significant. As a comparison, catastrophe events had a loss ratio impact of 11.5 points for Nine Months 2021 due to a more active hurricane season, including the named storm Ida.

 

Prior years in total have unfavorable development of $714,000 for Nine Months 2022, driven by large fire losses which occurred in 2021 and the volatility of liability claim settlements from the discontinued Commercial lines.  This contributed 0.9 point to the loss ratio.

 

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

 

 
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Commission Expense

 

Commission expense was $25,534,000 in Nine Months 2022 or 18.1% of direct earned premiums. Commission expense was $24,711,000 in Nine Months 2021 or 19.2% of direct earned premiums. The increase of $823,000 was primarily due to an increase in direct earned premiums of $12,626,000 to $141,324,000 offset in part by a reduction of commission rate on our Select Products and the reduction to contingent commissions, which the producers now earn only if KICO has an operating profit. 

 

 Other Underwriting Expenses

 

Other underwriting expenses were $20,717,000, or 14.7% of direct earned premiums, in Nine Months 2022 compared to $19,723,000, or 15.3% of direct earned premiums, in Nine Months 2021. The increase of $994,000, or 5.0%, was primarily due to increases in expenses related to our growth in direct earned premiums, and the reduction as a percentage of direct earned premiums is due to our continuing initiative to reduce expenses with the use of technology.

 

Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $8,027,000 in Nine Months 2022 compared to $7,592,000 in Nine Months 2021. The increase of $435,000, or 5.7%, compares favorably with the 12.0% increase in direct written premiums. In the periods following Nine Months 2021, we invested in the hiring of higher-level managers and staff to implement our goals of modernization and efficiency, which we refer to as Kingstone 2.0.

 

Our net underwriting expense ratio in Nine Months 2022 was 37.2% compared to 41.0% in Nine Months 2021. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

 Nine months ended

 

 

 

 

 

 September 30,

 

 

 Percentage 

 

 

 

 2022

 

 

 2021

 

 

 Point Change

 

Other underwriting expenses

 

 

 

 

 

 

 

 

 

Employment costs

 

 

9.6%

 

 

7.1%

 

 

2.5

 

Underwriting fees (inspections/surveys)

 

 

1.7

 

 

 

1.4

 

 

 

0.3

 

IT expenses

 

 

4.2

 

 

 

3.0

 

 

 

1.2

 

Profesional fees

 

 

1.4

 

 

 

1.3

 

 

 

0.1

 

Other expenses

 

 

7.7

 

 

 

5.7

 

 

 

2.0

 

Total other underwriting expenses

 

 

24.6

 

 

 

18.5

 

 

 

6.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

30.4

 

 

 

23.1

 

 

 

7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(16.8)

 

 

(0.1)

 

 

(16.7)

Contingent

 

 

(0.2)

 

 

0.1

 

 

 

(0.3)

Total ceding commission revenue

 

 

(17.0)

 

 

-

 

 

 

(17.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(0.9)

 

 

(0.6)

 

 

(0.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

37.2%

 

 

41.0%

 

 

(3.8)

 

(Components may not sum to totals due to rounding)

 

The overall 17.0 percentage point increase in the benefit from ceding commissions in Nine Months 2022 was driven by the increase in provisional ceding commission revenue due to the inception of the 2021/2023 Treaty on December 31, 2021. The components of our net underwriting expense ratio related to other underwriting expenses and commissions increased due to a higher percentage of our direct earned premiums in Nine Months 2022 being ceded due to the inception of the 2021/2023 Treaty. 

 

 
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Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $2,357,000 for Nine Months 2022 compared to $3,141,000 for Nine Months 2021. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

 

 

 

 Nine months ended

 

 

 

 

 

 

 

 September 30,

 

 

 

 

 

($ in thousands)

 

 2022

 

 

 2021

 

 

 Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Employement costs

 

$(101)

 

$647

 

 

$(748)

 

na

%

Bonuses 

 

 

-

 

 

 

-

 

 

 

-

 

 

 na

 

Equity compensation 

 

 

1,205

 

 

 

1,448

 

 

 

(243)

 

 

(16.8)

Professional 

 

 

208

 

 

 

226

 

 

 

(18

)

 

 

(8.0

)

Griffin Highline fees

 

 

316

 

 

 

-

 

 

 

316

 

 

 

na

 

Directors fees 

 

 

245

 

 

 

245

 

 

 

-

 

 

 

-

 

Insurance 

 

 

115

 

 

 

166

 

 

 

(51)

 

 

(30.7)

Other expenses 

 

 

369

 

 

 

409

 

 

 

(40)

 

 

(9.8)

Total other operating expenses

 

$2,357

 

 

$3,141

 

 

$(784)

 

 

(25.0)%

 

(Components may not sum to totals due to rounding)

   

The decrease in Nine Months 2022 of $784,000, or 25.0%, as compared to Nine Months 2021 was primarily due to a decrease in employment costs. The decrease in employment costs was due to staff reductions and fluctuations in deferred compensation liability related to changes in the underlying invested portfolio. The decrease in employment costs was partially offset by an increase in professional fees attributable to the non-binding indication of interest from Griffin Highline, disclosed above as “Griffin Highline fees” incurred, related to a then contemplated acquisition of all of the outstanding equity of our company.

  

Depreciation and Amortization

  

Depreciation and amortization was $2,472,000 in Nine Months 2022 compared to $2,480,000 in Nine Months 2021. The decrease of $8,000, or 0.3%, in depreciation and amortization was primarily due to assets previously put into service that are currently being utilized and being fully depreciated. The decrease was partially offset by the completion of customized policy management software, now allowing us to consolidate multiple legacy systems into one efficient system.  In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years.

 

Interest Expense

 

Interest expense was $1,370,000 for both Nine Months 2022 and Nine Months 2021. 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 Nine Months 2022 was $4,433,000, which resulted in an effective tax benefit rate of 19.3%. Income tax benefit in Nine Months 2021 was $2,817,000, which resulted in an effective tax rate of 22.7%. Loss before taxes was $23,007,000 in Nine Months 2022 compared to $12,423,000 in Nine Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Nine Months 2022 compared to Nine Months 2021.

 

 
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Net Loss

 

Net loss was $18,575,000 in Nine Months 2022 compared to $9,606,000 in Nine Months 2021. The increase in net loss of $8,969,000 was due to the circumstances described above.

 

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

 

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

 

 

 

Three months ended September 30,

 

($ in thousands)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

Direct written premiums

 

$54,592

 

 

$48,865

 

 

$5,727

 

 

 

11.7%

Assumed written premiums

 

 

-

 

 

 

-

 

 

 

-

 

 

na

%

 

 

 

54,592

 

 

 

48,865

 

 

 

5,727

 

 

 

11.7%

Ceded written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded to quota share treaties (1)

 

 

12,919

 

 

 

138

 

 

 

12,781

 

 

 

9,261.6%

Ceded to excess of loss treaties

 

 

1,194

 

 

 

998

 

 

 

196

 

 

 

19.6%

Ceded to catastrophe treaties

 

 

6,813

 

 

 

6,087

 

 

 

726

 

 

 

11.9%

Total ceded written premiums

 

 

20,925

 

 

 

7,224

 

 

 

13,703

 

 

 

189.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

33,666

 

 

 

41,642

 

 

 

(7,976)

 

 

(19.2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unearned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

(5,636)

 

 

(4,848)

 

 

(788)

 

 

(16.3)%

Ceded to quota share treaties (1)

 

 

1,331

 

 

 

10

 

 

 

1,321

 

 

 

13,210.0%

Change in net unearned premiums

 

 

(4,305)

 

 

(4,838)

 

 

533

 

 

 

11.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed

 

 

48,955

 

 

 

44,017

 

 

 

4,938

 

 

 

11.2%

Ceded to reinsurance treaties

 

 

(19,594)

 

 

(7,214)

 

 

(12,380)

 

 

(171.6)%

Net premiums earned 

 

 

29,361

 

 

 

36,803

 

 

 

(7,442)

 

 

(20.2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue (1)

 

 

4,886

 

 

 

(7)

 

 

4,893

 

 

na

%

Net investment income 

 

 

1,419

 

 

 

1,677

 

 

 

(258)

 

 

(15.4)%

Net (losses) gains on investments 

 

 

(397)

 

 

205

 

 

 

(602)

 

na

%

Other income

 

 

270

 

 

 

281

 

 

 

(11)

 

 

(3.9)%

Total revenues 

 

 

35,538

 

 

 

38,958

 

 

 

(3,421)

 

 

(8.8)%

Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

30,514

 

 

 

23,538

 

 

 

6,976

 

 

 

29.6%

Losses from catastrophes (2)

 

 

477

 

 

 

12,542

 

 

 

(12,065)

 

 

(96.2)%

Total direct and assumed loss and loss adjustment expenses 

 

 

30,991

 

 

 

36,079

 

 

 

(5,089)

 

 

(14.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceded loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

8,820

 

 

 

(21)

 

 

8,841

 

 

na

%

Losses from catastrophes (2)

 

 

143

 

 

 

360

 

 

 

(217)

 

 

(60.3)%

Total ceded loss and loss adjustment expenses 

 

 

8,963

 

 

 

339

 

 

 

8,624

 

 

 

2,544.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

 

21,694

 

 

 

23,559

 

 

 

(1,865)

 

 

(7.9)%

Losses from catastrophes (2)

 

 

334

 

 

 

12,181

 

 

 

(11,847)

 

 

(97.3)%

Net loss and loss adjustment expenses 

 

 

22,028

 

 

 

35,740

 

 

 

(13,712)

 

 

(38.4)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense 

 

 

8,702

 

 

 

8,202

 

 

 

500

 

 

 

6.1%

Other underwriting expenses 

 

 

7,276

 

 

 

6,563

 

 

 

713

 

 

 

10.9%

Other operating expenses 

 

 

810

 

 

 

855

 

 

 

(45)

 

 

(5.3)%

Depreciation and amortization

 

 

825

 

 

 

820

 

 

 

5

 

 

 

0.6%

Interest expense

 

 

457

 

 

 

457

 

 

 

-

 

 

-

%

Total expenses 

 

 

40,097

 

 

 

52,637

 

 

 

(12,539)

 

 

(23.8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before taxes

 

 

(4,559)

 

 

(13,679)

 

 

9,118

 

 

 

66.7%

Income tax benefit

 

 

(562)

 

 

(3,061)

 

 

2,499

 

 

 

81.6%

Net loss

 

$(3,998)

 

$(10,618)

 

$6,619

 

 

 

62.3%

 

(Columns in the table above may not sum to totals due to rounding)

 

(1)

Effective December 31, 2021, we entered into a 30% personal lines quota share treaty.

(2)

The three months ended September 30, 2022 and 2021 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.

 

 
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Three months ended September 30,

 

 

 

2022

 

 

2021

 

 

Percentage

Point Change

 

 

 Percent

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

75.0%

 

 

97.1%

 

 

(22.1)

 

 

(22.8)%

Net underwriting expense ratio

 

 

36.9%

 

 

39.3%

 

 

(2.4)

 

 

(6.1)%

Net combined ratio

 

 

111.9%

 

 

136.4%

 

 

(24.5)

 

 

(18.0)%

 

Direct Written Premiums

 

Direct written premiums during the three months ended September 30, 2022 (“Three Months 2022”) were $54,592,000 compared to $48,865,000 during the three months ended September 30, 2021 (“Three Months 2021”). The increase of $5,727,000, or 11.7%, was primarily due an increase in premiums from our personal lines business. Direct written premiums from our personal lines business for Three Months 2022 were $51,242,000, an increase of $5,258,000, or 11.4%, from $45,984,000 in Three Months 2021.  The increase in premiums from our personal lines business was primarily due to rate increases, and, to a lesser extent, an increase in policies in force.  Direct written premiums from our livery physical damage business for Three Months 2022 were $3,310,000, an increase of $496,000, or 17.6%, from $2,814,000 in Three Months 2021. The increase in livery physical damage direct written premiums was due to the declining effect of the COVID-19 pandemic in our geographic area. 

 

                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 Core business were $43,949,000 in Three Months 2022 compared to $35,459,000 in Three Months 2021.   Direct written premiums from our Expansion business were $10,642,000 in Three Months 2022 compared to $13,406,000 in Three Months 2021.

 

Net Written Premiums and Net Premiums Earned

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”). There was no quota share reinsurance treaty in effect in Three Months 2021. Net written premiums decreased $7,976,000, or 19.2%, to $33,666,000 in Three Months 2022 from $41,642,000 in Three Months 2021. 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). In Three Months 2022, our premiums ceded under quota share treaties increased by $12,781,000 in comparison to ceded premiums in Three Months 2021 (see table above). Our personal lines business was subject to the 2021/2023 Treaty in Three Months 2022, compared to no personal lines quota share treaty in Three Months 2021.

 

 
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Excess of loss reinsurance treaties

 

An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Three Months 2022, our ceded excess of loss reinsurance premiums increased by $196,000 over the comparable ceded premiums for Three Months 2021. The increase was due to an increase in subject premiums and additional coverage obtained. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty.

 

Catastrophe reinsurance treaties

 

Most of the premiums written under our personal lines policies are also subject to our catastrophe treaties. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums ceded under catastrophe treaties will increase. This results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing. In Three Months 2022, our premiums ceded under catastrophe treaties increased by $726,000 over the comparable ceded premiums in Three Months 2021. Effective July 1, 2020, and continuing through June 30, 2021, our ceded catastrophe premiums were paid based on the total insured value of our risks calculated as of August 31, 2020. Effective July 1, 2021, and continuing through June 30, 2022, our ceded catastrophe premiums were paid based on the total insured value of our risks as of August 31, 2021. Effective July 1, 2022, and continuing through June 30, 2023, our ceded catastrophe premiums will be paid based on the total insured value of our risks as of August 31, 2022.

 

Net premiums earned

 

Net premiums earned decreased $7,442,000, or 20.2%, to $29,361,000 in Three Months 2022 from $36,803,000 in Three Months 2021. The decrease was due to the inception of the 2021/2023 Treaty on December 31, 2021. The decrease resulting from the 2021/2023 Treaty in Three Months 2022 was partially offset by an increase in direct written premium.

 

Ceding Commission Revenue

 

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

 

 

 

Three months ended September 30,

 

($ in thousands)

 

2022

 

 

2021

 

 

Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisional ceding commissions earned

 

$4,882

 

 

$41

 

 

$4,841

 

 

 

11,807.3%

Contingent ceding commissions earned

 

 

4

 

 

 

(48)

 

 

53

 

 

n/a

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ceding commission revenue

 

$4,886

 

 

$(7)

 

$4,894

 

 

 

(61,175.0)%

  

Ceding commission revenue was $4,886,000 in Three Months 2022 compared to $(7,000) in Three Months 2021. The increase of $4,893,000 was due to an increase in provisional ceding commissions earned resulting from the 2021/2023 Treaty. See below for a discussion of provisional ceding commissions earned and contingent ceding commissions earned.

 

 
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Provisional Ceding Commissions Earned

 

In Three Months 2022 we earned provisional ceding commissions from personal lines earned premiums ceded under the 2021/2023 Treaty which was effective as of December 31, 2021. There was no personal lines quota share in effect in Three Months 2021.

 

Contingent Ceding Commissions Earned

 

The structure of the 2021/2023 Treaty calls for a fixed provisional ceding commission with no opportunity to earn additional contingent ceding commissions. 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 received.

 

Net Investment Income

  

Net investment income was $1,419,000 in Three Months 2022 compared to $1,677,000 in Three Months 2021, a decrease of $258,000, or 15.4%.  The decrease in investment income is attributable to the disposal of income bearing equity securities.  The average yield on invested assets was 3.48% as of September 30, 2022 compared to 3.42% as of September 30, 2021.

 

Cash and invested assets were $192,229,000 as of September 30, 2022 compared to $246,004,000 as of September 30, 2021 The $53,775,000 decrease in cash and invested assets was primarily attributable to cash paid to reinsurers at the inception of the 2021/2023 Treaty, losses paid in connection with catastrophe losses incurred in 2021 and 2022, and unrealized losses on our investment portfolio.

 

Net Gains and Losses on Investments

 

Net losses on investments were $398,000 in Three Months 2022 compared to net gains of $205,000 in Three Months 2021. Unrealized losses on our equity securities and other investments in Three Months 2022 were $1,798,000, compared to $829,000 in Three Months 2021. Realized gains on sales of investments were $1,400,000 in Three Months 2022 compared to $1,033,000 in Three Months 2021.

 

Other Income

 

                Other income was $270,000 in Three Months 2022 compared to $281,000 in Three Months 2021, a decrease of $11,000, or 3.9%.

 

Net Loss and LAE

 

Net loss and LAE was $22,028,000 for Three Months 2022 compared to $35,740,000 for Three Months 2021. The net loss ratio was 75.0% in Three Months 2022 compared to 97.1% in Three Months 2021, a decrease of 22.1 percentage points.

 

 
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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:

 

king_10qimg50.jpg

 

(Components may not sum to totals due to rounding)

 

For Three Months 2022, the loss ratio was lower than Three Months 2021 mainly due to a lower impact of catastrophe losses.  There were only two minor wind events classified as catastrophe for Three Months 2022. The estimated total net catastrophe losses for the calendar quarter were $334,000, which contributed 1.1 points to the loss ratio. This compares to a 33.1-point impact from catastrophe events from the corresponding period from the prior year, which had more significant named storms, including Ida.

 

 The underlying loss ratio (loss ratio excluding the impact of catastrophe and prior year development) was 72.4% for Three Months 2022, an increase of 8.4 points from the 64.0% underlying loss ratio recorded for Three Months 2021. The higher 2022 loss ratio was primarily due to a general increase in property claims severity, which is likely a result of recent increased inflation.

 

Prior years in total have unfavorable development of $443,000 for Three Months 2022, driven by the volatility of liability claim settlements from the discontinued Commercial lines.

 

See table below under “Additional Financial Information” summarizing net loss ratios by line of business.

 

 
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Commission Expense

  

Commission expense increased $500,000 to $8,702,000, or 17.8% of direct earned premiums in Three Months 2022. Commission expense was $8,202,000 in Three Months 2021 or 18.6% of direct earned premiums.  The increase was due to an increase in direct earned premiums of $5,727,000 to $54,592,000, offset in part by a reduction in the commission rate on our Select Products and the reduction in contingent commissions, which producers now earn only if KICO has an underwriting profit.

 

Other Underwriting Expenses

 

Other underwriting expenses were $7,276,000, or 14.9% of direct earned premiums, in Three Months 2022 compared to $6,563,000, or 14.9% of direct earned premiums, in Three Months 2021. The increase of $713,000, or 10.9%, was primarily due to increases in expenses related to our growth in direct earned premiums, salaries, and our continuing initiative to reduce expenses with the use of technology, partially offset by decreases in professional fees and state insurance department fees.

 

 Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $2,961,000 in Three Months 2022 compared to $2,513,000 in Three Months 2021. The increase of $448,000, or 17.8%, is greater than the 11.7% increase in direct written premiums. In the periods following Three Months 2021, we invested in the hiring of higher-level managers and staff to implement our goals of modernization and efficiency, which we refer to as Kingstone 2.0.

 

Our net underwriting expense ratio in Three Months 2022 was 36.9% compared to 39.3% in Three Months 2021. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:

 

 

 

Three months ended September 30,

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

Point Change

 

Other underwriting expenses

 

 

 

 

 

 

 

 

 

Employment costs

 

 

10.1%

 

 

6.8%

 

 

3.3

 

Underwriting fees (inspections/surveys)

 

 

1.6

 

 

 

1.3

 

 

 

0.3

 

IT expenses

 

 

4.2

 

 

 

2.9

 

 

 

1.3

 

Profesional fees

 

 

1.1

 

 

 

1.3

 

 

 

(0.2)

Other expenses

 

 

7.8

 

 

 

5.6

 

 

 

2.2

 

Total other underwriting expenses

 

 

24.8

 

 

 

17.9

 

 

 

6.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

29.6

 

 

 

22.3

 

 

 

7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceding commission revenue

 

 

 

 

 

 

 

 

 

 

 

 

Provisional

 

 

(16.6)

 

 

(0.1)

 

 

(16.5)

Contingent

 

 

-

 

 

 

0.1

 

 

 

(0.1)

Total ceding commission revenue

 

 

(16.6)

 

 

-

 

 

 

(16.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(0.9)

 

 

(0.9)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio

 

 

36.9%

 

 

39.3%

 

 

(2.4)

 

 
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The overall 16.6 percentage point increase in the benefit from ceding commissions in Three Months 2022 was driven by the increase in provisional ceding commission revenue due to the inception of the 2021/2023 Treaty on December 31, 2021. The components of our net underwriting expense ratio related to other underwriting expenses and commissions increased due to a higher percentage of our direct earned premiums in Three Months 2022 being ceded due to the inception of the 2021/2023 Treaty. 

 

Other Operating Expenses

 

Other operating expenses, related to the expenses of our holding company and Cosi, were $810,000 for Three Months 2022 compared to $855,000 for Three Months 2021. The following table shows a breakdown of the significant components of other operating expenses for the periods indicated:

 

 

 

 Three months ended

 

 

 

 

 

 

 

 September 30,

 

 

 

 

 

($ in thousands)

 

 2022

 

 

 2021

 

 

 Change

 

 

 Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Employement costs

 

$(5)

 

$50

 

 

$(55)

 

na

%

Bonuses 

 

 

-

 

 

 

-

 

 

 

-

 

 

 na

 

Equity compensation 

 

 

188

 

 

 

467

 

 

 

(279)

 

 

(59.7)

Professional 

 

 

110

 

 

 

69

 

 

 

41

 

 

 

59.4

 

Griffin Highline fees

 

 

268

 

 

 

-

 

 

 

268

 

 

 

na

 

Directors fees 

 

 

82

 

 

 

82

 

 

 

-

 

 

 

-

 

Insurance 

 

 

38

 

 

 

46

 

 

 

(8)

 

 

(17.4)

Other expenses 

 

 

129

 

 

 

141

 

 

 

(12)

 

 

(8.5)

Total other operating expenses

 

$810

 

 

$855

 

 

$(45)

 

 

(5.3)%

 

(Components may not sum to totals due to rounding)

  

The decrease in Three Months 2022 of $45,000, or 5.3%, as compared to Three Months 2021 was primarily due to a decrease in employment costs. The decrease in employment costs was due to staff reductions and fluctuations in deferred compensation liability related to changes in the underlying invested portfolio. The decrease in employment costs was partially offset by an increase in professional fees attributable to the non-binding indication of interest from Griffin Highline, disclosed above as “Griffin Highline fees” incurred, related to a then contemplated acquisition of all of the outstanding equity of our company.

 

Depreciation and Amortization

  

Depreciation and amortization was $825,000 in Three Months 2022 compared to $820,000 in Three Months 2021. The increase of $5,000, or 0.6%, in depreciation and amortization was primarily due to the completion of customized policy management software, now allowing us to consolidate multiple legacy systems into one efficient system. The increase from the assets currently placed in service in Three Months 2022 was partially offset by a decrease in depreciation and amortization from assets previously put into service that are currently being utilized and being fully depreciated. In the last quarter of 2021, due to the extended useful life of assets related to our system platforms, Management determined that such systems, currently put into service, should be depreciated over five years reflecting their expected useful lives as compared to the previous three years.

 

 
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Interest Expense

 

Interest expense was $457,000 for both Three Months 2022 and Three Months 2021. We incurred interest expense in connection with our $30.0 million issuance of long-term debt in December 2017.

 

Income Tax Benefit

  

Income tax benefit in Three Months 2022 was $562,000, which resulted in an effective tax benefit rate of 20.7%. Income tax expense in Three Months 2021 was $312,000, which resulted in an effective tax rate of 13.3%. Loss before taxes was $4,559,000 in Three Months 2022 compared to $13,679,000 in Three Months 2021. The difference in effective tax rate is due to the effect of permanent differences in Three Months 2022 compared to Three Months 2021.

 

Net Loss

  

Net loss was $3,998,000 in Three Months 2022 compared to $10,618,000 in Three Months 2021. The decrease in net loss of $6,619,000 was due to the circumstances described above.

 

Additional Financial Information

 

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

 

 
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 Three Months Ended

 

 

 Nine Months Ended

 

 

 

 September 30,

 

 

 September 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

Gross premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines(3)

 

$51,242,544

 

 

$45,984,939

 

 

$138,197,960

 

 

$124,593,302

 

Livery physical damage

 

 

3,309,845

 

 

 

2,813,571

 

 

 

9,036,713

 

 

 

6,836,999

 

Other(1)

 

 

39,162

 

 

 

66,659

 

 

 

119,238

 

 

 

180,485

 

Total without commercial lines

 

 

54,591,551

 

 

 

48,865,169

 

 

 

147,353,911

 

 

 

131,610,786

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(856)

Total gross premiums written

 

$54,591,551

 

 

$48,865,169

 

 

$147,353,911

 

 

$131,609,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines(3)

 

$30,327,951

 

 

$38,762,235

 

 

$79,487,201

 

 

$102,741,368

 

Livery physical damage

 

 

3,309,845

 

 

 

2,813,571

 

 

 

9,036,713

 

 

 

6,836,999

 

Other(1)

 

 

28,374

 

 

 

65,837

 

 

 

86,224

 

 

 

178,021

 

Total without commercial lines

 

 

33,666,170

 

 

 

41,641,643

 

 

 

88,610,138

 

 

 

109,756,388

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(856)

Total net premiums written

 

$33,666,170

 

 

$41,641,643

 

 

$88,610,138

 

 

$109,755,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines(3)

 

$26,407,939

 

 

$34,715,708

 

 

$75,747,009

 

 

$101,054,415

 

Livery physical damage

 

 

2,920,335

 

 

 

2,028,786

 

 

 

8,082,173

 

 

 

5,598,605

 

Other(1)

 

 

32,702

 

 

 

58,757

 

 

 

107,242

 

 

 

176,731

 

Total without commercial lines

 

 

29,360,976

 

 

 

36,803,251

 

 

 

83,936,424

 

 

 

106,829,751

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(856)

Total net premiums earned

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss adjustment expenses(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

$19,512,893

 

 

$32,958,728

 

 

$56,296,473

 

 

$72,353,668

 

Livery physical damage

 

 

1,716,383

 

 

 

1,766,989

 

 

 

3,727,175

 

 

 

3,469,465

 

Other(1)

 

 

9,494

 

 

 

180,995

 

 

 

(14,873)

 

 

434,816

 

Unallocated loss adjustment expenses

 

 

126,560

 

 

 

867,675

 

 

 

2,870,115

 

 

 

2,783,547

 

Total without commercial lines

 

 

21,365,330

 

 

 

35,774,387

 

 

 

62,878,890

 

 

 

79,041,496

 

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

 

 

662,186

 

 

 

(34,152)

 

 

745,865

 

 

 

18,621

 

Total net loss and loss adjustment expenses

 

$22,027,516

 

 

$35,740,235

 

 

$63,624,755

 

 

$79,060,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio(4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal lines

 

 

73.9%

 

 

94.9%

 

 

74.3%

 

 

71.6%

Livery physical damage

 

 

58.8%

 

 

87.1%

 

 

46.1%

 

 

62.0%

Other(1)

 

 

29.0%

 

 

308.0%

 

 

-13.9%

 

 

246.0%

Total without commercial lines

 

 

72.8%

 

 

97.2%

 

 

74.9%

 

 

74.0%

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

 

na

 

 

na

 

 

na

 

 

na

 

Total 

 

 

75.0%

 

 

97.1%

 

 

75.8%

 

 

74.0%

 

(1)

“Other” includes, among other things, premiums and loss and loss adjustment expenses from our participation in a mandatory state joint underwriting association and loss and loss adjustment expenses from commercial auto.

(2)

In July 2019, we decided that we will no longer underwrite Commercial Liability risks. See discussions above regarding the discontinuation of this line of business.

(3)

See discussion above with regard to “Net Written Premiums and Net Premiums Earned”, as to change in quota share ceding rate, effective December 31, 2021.

(4)

See discussion above with regard to “Net Loss and LAE”, as to catastrophe losses in the three months and nine months ended September 30, 2022 and 2021.

 

 
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Insurance Underwriting Business on a Standalone Basis

 

Our insurance underwriting business reported on a standalone basis for the periods indicated is as follows:

 

 

 

 Three Months ended

 

 

 Nine Months ended

 

 

 

 September 30,

 

 

 September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned 

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

Ceding commission revenue 

 

 

4,886,094

 

 

 

(7,276)

 

 

14,283,077

 

 

 

37,400

 

Net investment income 

 

 

1,418,521

 

 

 

1,676,596

 

 

 

3,411,946

 

 

 

5,137,867

 

Net (losses) gains on investments 

 

 

(366,411)

 

 

214,085

 

 

 

(9,098,008)

 

 

5,380,909

 

Other income

 

 

269,297

 

 

 

322,705

 

 

 

740,424

 

 

 

617,257

 

Total revenues 

 

 

35,568,477

 

 

 

39,009,361

 

 

 

93,273,863

 

 

 

118,002,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses 

 

 

22,027,516

 

 

 

35,740,235

 

 

 

63,624,755

 

 

 

79,060,117

 

Commission expense 

 

 

8,702,190

 

 

 

8,201,935

 

 

 

25,534,307

 

 

 

24,711,115

 

Other underwriting expenses 

 

 

7,276,101

 

 

 

6,562,743

 

 

 

20,717,047

 

 

 

19,722,705

 

Depreciation and amortization

 

 

803,568

 

 

 

780,906

 

 

 

2,430,769

 

 

 

2,374,203

 

Total expenses 

 

 

38,809,375

 

 

 

51,285,819

 

 

 

112,306,878

 

 

 

125,868,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

 

(3,240,898)

 

 

(12,276,458)

 

 

(19,033,015)

 

 

(7,865,812)

Income tax (benefit) expense 

 

 

(345,080)

 

 

(2,633,026)

 

 

(3,702,374)

 

 

(1,812,195)

Net (loss) income 

 

$(2,895,818)

 

$(9,643,432)

 

$(15,330,641)

 

$(6,053,617)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio

 

 

75.0%

 

 

97.1%

 

 

75.8%

 

 

74.0%

Net underwriting expense ratio

 

 

36.9%

 

 

39.3%

 

 

37.2%

 

 

41.0%

Net combined ratio

 

 

111.9%

 

 

136.4%

 

 

113.0%

 

 

115.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses

 

$15,978,291

 

 

$14,764,678

 

 

$46,251,354

 

 

$44,433,820

 

Less: Ceding commission revenue

 

 

(4,886,094)

 

 

7,276

 

 

 

(14,283,077)

 

 

(37,400)

Less: Other income

 

 

(269,297)

 

 

(322,705)

 

 

(740,424)

 

 

(617,257)

Net underwriting expenses

 

$10,822,900

 

 

$14,449,249

 

 

$31,227,853

 

 

$43,779,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned 

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

36.9%

 

 

39.3%

 

 

37.2%

 

 

41.0%

 

 
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                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

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$147,353,911

 

 

$-

 

 

$(58,743,773)

 

$88,610,138

 

Change in unearned premiums

 

 

(6,029,774)

 

 

-

 

 

 

1,356,060

 

 

 

(4,673,714)

Earned premiums

 

$141,324,137

 

 

$-

 

 

$(57,387,713)

 

$83,936,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

$83,345,972

 

 

$-

 

 

$(23,186,898)

 

$60,159,074

 

Catastrophe loss

 

 

7,509,597

 

 

 

-

 

 

 

(4,043,916)

 

 

3,465,681

 

Loss and loss adjustment expenses

 

$90,855,569

 

 

$-

 

 

$(27,230,814)

 

$63,624,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

59.0%

 

 

0.0%

 

 

40.4%

 

 

71.7%

Catastrophe loss

 

 

5.3%

 

 

0.0%

 

 

7.0%

 

 

4.1%

Loss ratio

 

 

64.3%

 

 

0.0%

 

 

47.4%

 

 

75.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$131,609,930

 

 

$-

 

 

$(21,854,398)

 

$109,755,532

 

Change in unearned premiums

 

 

(2,911,439)

 

 

-

 

 

 

(15,198)

 

 

(2,926,637)

Earned premiums

 

$128,698,491

 

 

$-

 

 

$(21,869,596)

 

$106,828,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

$67,633,915

 

 

$-

 

 

$(860,490)

 

$66,773,425

 

Catastrophe loss

 

 

12,647,172

 

 

 

-

 

 

 

(360,480)

 

 

12,286,692

 

Loss and loss adjustment expenses

 

$80,281,087

 

 

$-

 

 

$(1,220,970)

 

$79,060,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

52.6%

 

 

0.0%

 

 

3.9%

 

 

62.5%

Catastrophe loss

 

 

9.8%

 

 

0.0%

 

 

1.6%

 

 

11.5%

Loss ratio

 

 

62.4%

 

 

0.0%

 

 

5.5%

 

 

74.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$54,591,551

 

 

$-

 

 

$(20,925,381)

 

$33,666,170

 

Change in unearned premiums

 

 

(5,636,421)

 

 

-

 

 

 

1,331,227

 

 

 

(4,305,194)

Earned premiums

 

$48,955,130

 

 

$-

 

 

$(19,594,154)

 

$29,360,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

$30,513,819

 

 

$-

 

 

$(8,820,270)

 

$21,693,549

 

Catastrophe loss

 

 

477,127

 

 

 

-

 

 

 

(143,160)

 

 

333,967

 

Loss and loss adjustment expenses

 

$30,990,946

 

 

$-

 

 

$(8,963,430)

 

$22,027,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

62.3%

 

 

0.0%

 

 

45.0%

 

 

73.9%

Catastrophe loss

 

 

1.0%

 

 

0.0%

 

 

0.7%

 

 

1.1%

Loss ratio

 

 

63.3%

 

 

0.0%

 

 

45.7%

 

 

75.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums

 

$48,865,169

 

 

$-

 

 

$(7,223,526)

 

$41,641,643

 

Change in unearned premiums

 

 

(4,848,145)

 

 

-

 

 

 

9,753

 

 

 

(4,838,392)

Earned premiums

 

$44,017,024

 

 

$-

 

 

$(7,213,773)

 

$36,803,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses excluding the effect of catastrophes

 

$23,537,875

 

 

$-

 

 

$21,239

 

 

$23,559,114

 

Catastrophe loss

 

 

12,541,601

 

 

 

-

 

 

 

(360,480)

 

 

12,181,121

 

Loss and loss adjustment expenses

 

$36,079,476

 

 

$-

 

 

$(339,241)

 

$35,740,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio excluding the effect of catastrophes

 

 

53.5%

 

 

0.0%

 

 

-0.3%

 

 

64.0%

Catastrophe loss

 

 

28.5%

 

 

0.0%

 

 

5.0%

 

 

33.1%

Loss ratio

 

 

82.0%

 

 

0.0%

 

 

4.7%

 

 

97.1%

 

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

 

 
62

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The key measures for our insurance underwriting business for the periods indicated are as follows:

 

 

 

 Three Months ended

 

 

 Nine Months ended

 

 

 

 September 30,

 

 

 September 30,

 

 

 

 2022

 

 

 2021

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned 

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

Ceding commission revenue

 

 

4,886,094

 

 

 

(7,276)

 

 

14,283,077

 

 

 

37,400

 

Other income

 

 

269,297

 

 

 

322,705

 

 

 

740,424

 

 

 

617,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses (1)

 

 

22,027,516

 

 

 

35,740,235

 

 

 

63,624,755

 

 

 

79,060,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense 

 

 

8,702,190

 

 

 

8,201,935

 

 

 

25,534,307

 

 

 

24,711,115

 

Other underwriting expenses 

 

 

7,276,101

 

 

 

6,562,743

 

 

 

20,717,047

 

 

 

19,722,705

 

Total acquisition costs and other underwriting expenses

 

 

15,978,291

 

 

 

14,764,678

 

 

 

46,251,354

 

 

 

44,433,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting loss

 

$(3,489,440)

 

$(13,386,233)

 

$(10,916,184)

 

$(16,010,385)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss ratio excluding the effect of catastrophes

 

 

73.9%

 

 

64.0%

 

 

71.7%

 

 

62.5%

Effect of catastrophe loss on net loss ratio (1)

 

 

1.1%

 

 

33.1%

 

 

4.1%

 

 

11.5%

Net loss ratio

 

 

75.0%

 

 

97.1%

 

 

75.8%

 

 

74.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net underwriting expense ratio excluding the effect of catastrophes

 

 

36.9%

 

 

39.3%

 

 

37.2%

 

 

41.0%

Effect of catastrophe loss on net underwriting expense ratio

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

Net underwriting expense ratio

 

 

36.9%

 

 

39.3%

 

 

37.2%

 

 

41.0%

Net combined ratio excluding the effect of catastrophes

 

 

110.8%

 

 

103.3%

 

 

108.9%

 

 

103.5%

Effect of catastrophe loss on net combined ratio (1)

 

 

1.1%

 

 

33.1%

 

 

4.1%

 

 

11.5%

Net combined ratio

 

 

111.9%

 

 

136.4%

 

 

113.0%

 

 

115.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net underwriting expense ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs and other underwriting expenses

 

$15,978,291

 

 

$14,764,678

 

 

$46,251,354

 

 

$44,433,820

 

Less: Ceding commission revenue

 

 

(4,886,094)

 

 

7,276

 

 

 

(14,283,077)

 

 

(37,400)

Less: Other income

 

 

(269,297)

 

 

(322,705)

 

 

(740,424)

 

 

(617,257)

 

 

$10,822,900

 

 

$14,449,249

 

 

$31,227,853

 

 

$43,779,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premium

 

$29,360,976

 

 

$36,803,251

 

 

$83,936,424

 

 

$106,828,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Underwriting Expense Ratio

 

 

36.9%

 

 

39.3%

 

 

37.2%

 

 

41.0%

 

(1)

For the three months ended September 30, 2022 and 2021, includes the sum of net catastrophe losses and loss adjustment expenses of $333,967 and $12,181,121, respectively. For the nine months ended September 30, 2022 and 2021, includes the sum of net catastrophe losses and loss adjustment expenses of $3,465,681 and $12,286,692, respectively.

 

 
63

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Investments

 

Portfolio Summary

 

Fixed-Maturity Securities

 

The following table presents a breakdown of the amortized cost, estimated fair value, and unrealized gains and losses of our investments in fixed-maturity securities classified as available-for-sale as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

 

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

 

$9,946,032

 

 

$930

 

 

$(123)

 

$-

 

 

$9,946,839

 

 

 

6.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

17,117,473

 

 

 

-

 

 

 

(3,250,196)

 

 

(590,936)

 

 

13,276,341

 

 

 

9.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds Industrial and miscellaneous

 

 

84,163,055

 

 

 

-

 

 

 

(9,154,182)

 

 

(269,694)

 

 

74,739,179

 

 

 

51.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities (1)

 

 

54,307,907

 

 

 

68,159

 

 

 

(4,333,707)

 

 

(2,699,011)

 

 

47,343,348

 

 

 

32.7%

Total fixed-maturity securities

 

$165,534,467

 

 

$69,089

 

 

$(16,738,208)

 

$(3,559,641)

 

$145,305,707

 

 

 

100.0%

 

 

(1)

KICO has placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in the Federal Home Loan Bank of New York ("FHLBNY") (see Note 7 to the condensed consolidated financial statements). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of September 30, 2022, the estimated fair value of the eligible investments was approximately $12,393,000. KICO will retain all rights regarding all securities if pledged as collateral. As of September 30, 2022, there was no outstanding balance on the FHLBNY credit line.

 

 

 

December 31, 2021

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

$17,236,750

 

 

$246,748

 

 

$(197,984)

 

$-

 

 

$17,285,514

 

 

 

10.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

80,534,769

 

 

 

2,603,411

 

 

 

(126,926)

 

 

-

 

 

 

83,011,254

 

 

 

52.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

58,036,959

 

 

 

355,985

 

 

 

(489,258)

 

 

(120,344)

 

 

57,783,342

 

 

 

36.6%

Total fixed-maturity securities 

 

$155,808,478

 

 

$3,206,144

 

 

$(814,168)

 

$(120,344)

 

$158,080,110

 

 

 

100.0%

 

 
64

Table of Contents

 

Equity Securities

 

The following table presents a breakdown of the cost and estimated fair value of, and gross gains and losses on, investments in equity securities as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 Estimated

 

 

Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Losses

 

 

 Fair Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks 

 

$16,047,207

 

 

$-

 

 

$(3,488,481)

 

$12,558,726

 

 

 

58.5%

Common stocks and exchange traded funds

 

 

10,728,809

 

 

 

103,902

 

 

 

(1,922,991)

 

 

8,909,720

 

 

 

41.5%

Total

 

$26,776,016

 

 

$103,902

 

 

$(5,411,472)

 

$21,468,446

 

 

 

100.0%

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 Gross

 

 

 Gross

 

 

 Estimated

 

 

Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Losses

 

 

 Fair Value

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks 

 

$22,019,509

 

 

$1,007,009

 

 

$(184,617)

 

$22,841,901

 

 

 

57.6%

Common stocks and exchange traded funds

 

 

15,451,160

 

 

 

1,573,653

 

 

 

(179,712)

 

 

16,845,101

 

 

 

42.4%

Total

 

$37,470,669

 

 

$2,580,662

 

 

$(364,329)

 

$39,687,002

 

 

 

100.0%

 

Other Investments

 

The following table presents a breakdown of the cost and estimated fair value of, and gross gains on, our other investments as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 Gross 

 

 

 Estimated

 

 

 

 

 Gross 

 

 

 Estimated

 

Category 

 

 Cost

 

 

 Gains

 

 

 Fair Value

 

 

 Cost

 

 

 Gains

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge fund

 

$1,987,040

 

 

$589,232

 

 

$2,576,272

 

 

$3,999,381

 

 

$3,562,034

 

 

$7,561,415

 

 

 
65

Table of Contents

 

After providing notice, we redeemed 50% of our investment in the hedge fund as of September 30, 2022 for a realized gain of $589,000, which is recorded in the accompanying condensed consolidated statements of operations and comprehensive income (loss).  

 

Held-to-Maturity Securities

 

The following table presents a breakdown of the amortized cost and estimated fair value of, and gross unrealized gains and losses on, investments in held-to-maturity securities as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

 

 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$1,228,485

 

 

$73,468

 

 

$(36,802)

 

$-

 

 

$1,265,151

 

 

 

19.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

498,508

 

 

 

-

 

 

 

(1,498)

 

 

-

 

 

 

497,010

 

 

 

7.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

-

 

 

 

(43,361)

 

 

-

 

 

 

260,750

 

 

 

3.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

5,736,079

 

 

 

35,503

 

 

 

(1,182,635)

 

 

-

 

 

 

4,588,947

 

 

 

69.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$7,767,183

 

 

$108,971

 

 

$(1,264,296)

 

$-

 

 

$6,611,858

 

 

 

100.0%

 

 

 

December 31, 2021

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$729,642

 

 

$209,633

 

 

$-

 

 

$-

 

 

$939,275

 

 

 

10.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

998,239

 

 

 

22,856

 

 

 

-

 

 

 

-

 

 

 

1,021,095

 

 

 

11.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange traded debt

 

 

304,111

 

 

 

85

 

 

 

(13,921)

 

 

 

 

 

 

290,275

 

 

 

3.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

6,234,342

 

 

 

280,951

 

 

 

(12,779)

 

 

-

 

 

 

6,502,514

 

 

 

74.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$8,266,334

 

 

$513,525

 

 

$(26,700)

 

$-

 

 

$8,753,159

 

 

 

100.0%

 

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

 

 
66

Table of Contents

 

A summary of the amortized cost and fair value of our investments in held-to-maturity securities by contractual maturity as of September 30, 2022 and December 31, 2021 is shown below:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

Remaining Time to Maturity 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than one year 

 

$708,325

 

 

$742,533

 

 

$994,712

 

 

$1,008,180

 

One to five years 

 

 

1,120,315

 

 

 

1,082,015

 

 

 

1,205,829

 

 

 

1,290,465

 

Five to ten years 

 

 

1,399,725

 

 

 

1,177,545

 

 

 

1,513,942

 

 

 

1,648,808

 

More than 10 years 

 

 

4,538,818

 

 

 

3,609,765

 

 

 

4,551,851

 

 

 

4,805,706

 

Total 

 

$7,767,183

 

 

$6,611,858

 

 

$8,266,334

 

 

$8,753,159

 

 

Credit Rating of Fixed-Maturity Securities

 

The table below summarizes the credit quality of our available-for-sale fixed-maturity securities as of September 30, 2022 and December 31, 2021 as rated by Standard & Poor’s (or, if unavailable from Standard & Poor’s, then Moody’s, Fitch, or Kroll):

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 Estimated

 

 

 Percentage of

 

 

 Estimated

 

 

 Percentage of

 

 

 

 Fair

 

 

 Estimated

 

 

 Fair

 

 

 Estimated

 

 

 

 Value

 

 

 Fair Value

 

 

 Value

 

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$9,946,840

 

 

 

6.8%

 

$-

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and municipal bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

990,819

 

 

 

0.7%

 

 

1,321,809

 

 

 

0.8%

AA

 

 

16,410,900

 

 

 

11.3%

 

 

11,532,572

 

 

 

7.3%

A

 

 

32,163,411

 

 

 

22.2%

 

 

38,272,571

 

 

 

24.2%

BBB+

 

 

11,938,310

 

 

 

8.2%

 

 

17,936,359

 

 

 

11.3%

BBB

 

 

20,414,670

 

 

 

14.0%

 

 

25,161,776

 

 

 

15.9%

BBB-

 

 

4,461,056

 

 

 

3.1%

 

 

4,193,401

 

 

 

2.7%

Total corporate and municipal bonds

 

 

86,379,166

 

 

 

59.4%

 

 

98,418,488

 

 

 

62.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed, asset backed, and other collateralized obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

16,860,463

 

 

 

11.6%

 

 

17,350,192

 

 

 

11.0%

AA

 

 

24,290,742

 

 

 

16.7%

 

 

34,241,907

 

 

 

21.7%

A

 

 

6,793,094

 

 

 

4.7%

 

 

6,306,161

 

 

 

4.0%

BBB

 

 

20,763

 

 

 

0.0%

 

 

24,254

 

 

 

0.0%

CCC

 

 

495,227

 

 

 

0.3%

 

 

664,628

 

 

 

0.4%

CC

 

 

105,761

 

 

 

0.1%

 

 

125,412

 

 

 

0.1%

D

 

 

42,159

 

 

 

0.0%

 

 

55,306

 

 

 

0.0%

Non rated 

 

 

371,492

 

 

 

0.3%

 

 

893,762

 

 

 

0.6%

Total residential mortgage backed, asset backed, and other collateralized obligations

 

 

48,979,701

 

 

 

33.7%

 

 

59,661,622

 

 

 

37.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$145,305,707

 

 

 

100.0%

 

$158,080,110

 

 

 

100.0%

 

 
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The table below summarizes the average yield by type of fixed-maturity security as of September 30, 2022 and December 31, 2021:

 

Category 

 

September 30, 2022

 

 

December 31, 2021

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

 

2.40%

 

 

3.06%

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

3.54%

 

 

2.77%

 

 

 

 

 

 

 

 

 

Corporate and other bonds 

 

 

 

 

 

 

 

 

Industrial and miscellaneous

 

 

3.64%

 

 

3.23%

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities

 

 

2.43%

 

 

2.77%

 

 

 

 

 

 

 

 

 

Total

 

 

3.16%

 

 

2.92%

 

The table below lists the weighted average maturity and effective duration in years on our fixed-maturity securities as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Weighted average effective maturity

 

 

6.2

 

 

 

8.0

 

 

 

 

 

 

 

 

 

 

Weighted average final maturity

 

 

14.5

 

 

 

13.8

 

 

 

 

 

 

 

 

 

 

Effective duration

 

 

4.8

 

 

 

5.1

 

 

Fair Value Consideration

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in a transaction involving identical or comparable assets or liabilities between market participants (an “exit price”). The fair value hierarchy distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”). As of September 30, 2022 and December 31, 2021, 63% and 84%, respectively, of the investment portfolio recorded at fair value was priced based upon quoted market prices.

 

 
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The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by length of time the security has continuously been in an unrealized loss position as of September 30, 2022 and December 31, 2021:

 

 

 

September 30, 2022

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

Category 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$5,975,160

 

 

$(123)

 

 

1

 

 

$-

 

 

$

-

 

 

 

-

 

 

$5,975,160

 

 

$(123)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

11,461,126

 

 

 

(3,250,196)

 

 

12

 

 

 

1,815,216

 

 

 

(590,936)

 

 

2

 

 

 

13,276,342

 

 

 

(3,841,132)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

73,921,209

 

 

 

(9,154,182)

 

 

93

 

 

 

817,970

 

 

 

(269,694)

 

 

1

 

 

 

74,739,179

 

 

 

(9,423,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

27,985,270

 

 

 

(4,333,707)

 

 

31

 

 

 

18,593,599

 

 

 

(2,699,011)

 

 

15

 

 

 

46,578,869

 

 

 

(7,032,718)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities 

 

$119,342,765

 

 

$(16,738,208)

 

 

137

 

 

$21,226,785

 

 

$(3,559,641)

 

 

18

 

 

$140,569,550

 

 

$(20,297,849)

 

 
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Table of Contents

 

 

 

December 31, 2021

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 No. of

 

 

 Estimated

 

 

 

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

 

 Positions

 

 

 Fair

 

 

 Unrealized

 

Category 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 Held

 

 

 Value

 

 

 Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

 

$-

 

 

$-

 

 

 

-

 

 

$-

 

 

$

-

 

 

 

-

 

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Political subdivisions of States, Territories and Possessions

 

 

6,768,123

 

 

 

(197,984)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,768,123

 

 

 

(197,984)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other bonds industrial and miscellaneous

 

 

17,593,707

 

 

 

(126,926)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,593,707

 

 

 

(126,926)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage and other asset backed securities

 

 

45,399,451

 

 

 

(489,258)

 

 

26

 

 

 

2,923,182

 

 

 

(120,344)

 

 

2

 

 

 

48,322,633

 

 

 

(609,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed-maturity securities 

 

$69,761,281

 

 

$(814,168)

 

 

46

 

 

$2,923,182

 

 

$(120,344)

 

 

2

 

 

$72,684,463

 

 

$(934,512)

 

There were 155 securities at September 30, 2022 that accounted for the gross unrealized loss of our fixed-maturity securities available-for-sale, none of which were deemed by us to be other than temporarily impaired. There were 48 securities at December 31, 2021 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included credit quality considerations, the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and interest rate environment factors, and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.

 

 
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Liquidity and Capital Resources

 

Cash Flows

 

The primary sources of cash flow are from our insurance underwriting subsidiary, KICO, and include direct premiums written, ceding commissions from our quota share reinsurers, loss recovery payments from our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.

  

For the nine months ended September 30, 2022, the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions.  For the nine months ended September 30, 2022, KICO paid dividends of $1,500,000 to us.  On October 27, 2022, KICO entered a sale-leaseback transaction whereby KICO sold substantially all its fixed assets for approximately $8,100,000. Subsequent to the closing of the sale-leaseback transaction, KICO paid a dividend of $3,000,000 to us.  In addition, on October 17, 2022 we entered into a seven year loan agreement with KICO with regard to a loan from KICO to us in the amount of $6,450,000. 

 

KICO is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides additional access to liquidity. Members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances. Advances are to be fully collateralized; eligible collateral to pledge to FHLBNY includes residential and commercial mortgage backed securities, along with U.S. Treasury and agency securities. See Note 3 to our condensed consolidated financial statements – Investments, for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the end of the previous quarter, which is June 30, 2022, and are due and payable within 90 days of borrowing. The maximum allowable advance as of September 30, 2022, based on the net admitted assets as of June 30, 2022, was approximately $12,414,000. Advances are limited to 85% of the amount of available collateral, which was approximately $10,534,000 as of September 30, 2022. There were no borrowings under this facility during the nine months ended September 30, 2022.

 

On December 19, 2017, we issued $30 million of our 5.50% Senior Unsecured Notes due December 30, 2022. As of September 30, 2022, invested assets and cash in our holding company was approximately $2,416,000. See Notes 2 and 7 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our plans with regard to the satisfaction of the debt.

 

Our reconciliation of net income to net cash provided by operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.

 

 
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Cash flow and liquidity are categorized into three sources: (1) operating activities; (2) investing activities; and (3) financing activities, which are shown in the following table:

 

Nine months ended June 30,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cash flows (used in) provided by: 

 

 

 

 

 

 

Operating activities

 

$(7,921,438)

 

$29,079,787

 

Investing activities

 

 

398,911

 

 

 

(9,297,954)

Financing activities

 

 

(1,656,865)

 

 

(3,137,487)

Net (decrease) increase in cash and cash equivalents 

 

 

(9,179,392)

 

 

16,644,346

 

Cash and cash equivalents, beginning of period

 

 

24,290,598

 

 

 

19,463,742

 

Cash and cash equivalents, end of period

 

$15,111,206

 

 

$36,108,088

 

 

Net cash used in operating activities was $7,921,000 in Nine Months 2022 as compared to $29,080,000 provided by operating activities in Nine Months 2021. The $37,001,000 decrease in cash flows provided by operating activities in Nine Months 2022 as compared to Nine Months 2021 was primarily the result of a decrease in cash arising from net fluctuations in operating assets and liabilities, partially offset by net loss (adjusted for non-cash items) of $4,927,000. The increase in cash used in operating activities is also attributable to the payment of $13,245,000 to reinsurers in Nine Months 2022 pursuant to the inception of our quota share reinsurance treaty, effective December 31, 2021. In addition, the increase of reinsurance recoverables by $19,073,000 also contributed to the increase in cash used during Nine Months 2022.  The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and other changes, which are described above.

 

Net cash provided by investing activities was $399,000 in Nine Months 2022 compared to $9,298,000 used in investing activities in Nine Months 2021. In Nine Months 2022, we had net investing activity provided by our investment portfolio of $3,741,000, compared to $6,375,000 used in Nine Months 2021 resulting in a $10,116,000 increase in net cash provided by investing activities.  In addition, we increased our acquisition of fixed assets by $419,000 in Nine Months 2022 compared to Nine Months 2021.

 

Net cash used in financing activities was $1,657,000 in Nine Months 2022 compared to $3,137,000 used in Nine Months 2021. The $1,481,000 decrease in net cash used in financing activities was attributable to the purchase of treasury stock of $1,672,000 in Nine Months 2021 partially offset by an increase in withholding taxes paid on the vesting of restricted stock awards in Nine Months 2022 compared to Nine Months 2021.

 

Reinsurance

 

Effective December 31, 2021, we entered into a quota share reinsurance treaty for our personal lines business, which primarily consists of homeowners’ and dwelling fire policies, covering the period from December 31, 2021 through January 1, 2023 (“2021/2023 Treaty”).

 

 
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Table of Contents

 

Our excess of loss and catastrophe reinsurance treaties expired on June 30, 2022 and we entered into new excess of loss and catastrophe reinsurance treaties effective July 1, 2022. Effective October 20, 2021, we entered into a stub catastrophe reinsurance treaty covering the period from October 20, 2021 through December 31, 2021. The treaty provides reinsurance coverage for catastrophe losses of $5,000,000 in excess of $5,000,000. Effective January 1, 2022, we entered into an underlying excess of loss reinsurance treaty covering the period from January 1, 2022 through January 1, 2023. The treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Losses from named storms are excluded from the treaty. Material terms for our reinsurance treaties in effect for the treaty years shown below are as follows:

 

 

 

 Treaty Period

 

 

 

 

 

 (2021/2023 Treaty)

 

 

 

 

 

 

 

 January 2,

 

 

 July 1,

 

 

 December 31,

 

 

 July 1,

 

 

 December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

2020

 

 

 

to

 

 

to

 

 

to

 

 

to

 

 

to

 

 

 

June 30,

 

 

 January 1,

 

 

June 30,

 

 

December 30,

 

 

June 30,

 

Line of Business

 

2023

 

 

2023

 

 

2022

 

 

2021

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners, dwelling fire and and canine legal liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent ceded (9)

 

 None (8)

 

 

 

30%

 

 

30%

 

 None (5)

 

 

 None (5)

 

Risk retained on intial $1,000,000 of losses (5) (7) (8) (9)

 

$1,000,000

 

 

$700,000

 

 

$700,000

 

 

$1,000,000

 

 

$1,000,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

 None (8)

 

 

$1,000,000

 

 

$1,000,000

 

 

 None (5)

 

 

 None (5)

 

Expiration date

 

 

(8)

 

January 1, 2023

 

 

January 1, 2023

 

 

 NA (5)

 

 

 NA (5)

 

Excess of loss coverage and facultative facility coverage (1) (7)

 

$8,000,000

 

 

$8,400,000

 

 

$8,400,000

 

 

$8,000,000

 

 

$8,000,000

 

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 in excess of

 

 

 

$1,000,000

 

 

$600,000

 

 

$600,000

 

 

$1,000,000

 

 

$1,000,000

 

Total reinsurance coverage per occurrence (5) (7) (8)

 

$8,000,000

 

 

$8,500,000

 

 

$8,500,000

 

 

$8,000,000

 

 

$8,000,000

 

Losses per occurrence subject to reinsurance coverage (5) (8)

 

$8,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

 

$9,000,000

 

Expiration date (8)

 

June 30, 2023

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe Reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial loss subject to personal lines quota share treaty

 

 

(8)

 

 

10,000,000

 

 

 

10,000,000

 

 

 None (5)

 

 

 None (5)

 

Risk retained per catastrophe occurrence (5) (8) (9) (10)

 

$10,000,000

 

 

$7,400,000

 

 

$7,400,000

 

 

$10,000,000

 

 

$10,000,000

 

Catastrophe loss coverage in excess of quota share coverage (2) (5) (8)

 

$335,000,000

 

 

$335,000,000

 

 

$490,000,000

 

 

$490,000,000

 

 

$475,000,000

 

Catastrophe stub coverage for the period from October 18, 2021 through December 31, 2021 (6) 

 

  NA

 

 

  NA

 

 

  NA

 

 

$5,000,000

 

 

  NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  in excess of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$5,000,000

 

 

 

 

 

Reinstatement premium protection (3) (4)

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

 Yes

 

 

(1)

For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $9,000,000 in total insured value, which covers direct losses from $3,500,000 to $9,000,000 through June 30, 2023.

(2)

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

 

 
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(3)

For the period July 1, 2020 through June 30, 2021, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000. For the period July 1, 2021 through June 30, 2022, reinstatement premium protection for $70,000,000 of catastrophe coverage in excess of $10,000,000.

(4)

For the period July 1, 2022 through June 30, 2023, reinstatement premium protection for $9,800,000 of catastrophe coverage in excess of $10,000,000.

(5)

The personal lines quota share (homeowners, dwelling fire and canine legal liability) expired on December 30, 2020; reinsurance coverage from December 31, 2020 through December 30, 2021 is only for excess of loss and catastrophe reinsurance.

(6)

Excludes freeze and freeze related claims.

(7)

For the period January 1, 2022 through January 1, 2023, underlying excess of loss treaty provides 50% reinsurance coverage for losses of $400,000 in excess of $600,000. Reduces retention to $500,000 from $700,000 under the 2021/2023 Treaty. Excludes losses from named storms.

(8)

Personal lines quota share (homeowners, dwelling fire and canine liability) and underlying excess of loss reinsurance will expire on January 1, 2023; reinsurance coverage in effect from January 2, 2023 through June 30, 2023 is only for excess of loss and catastrophe reinsurance treaties.

(9)

For the 2021/2023 Treaty, 4% of the 30% total of losses ceded under this treaty are excluded from a named catastrophe event.

(10)

Plus losses in excess of catastrophe coverage.

 

 

 

 Treaty Year

 

 

 

July 1, 2022

 

 

July 1, 2021

 

 

July 1, 2020

 

 

 

to

 

 

to

 

 

to

 

Line of Business

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Personal Lines:

 

 

 

 

 

 

 

 

 

Personal Umbrella

 

 

 

 

 

 

 

 

 

Quota share treaty:

 

 

 

 

 

 

 

 

 

Percent ceded - first $1,000,000 of coverage

 

 

90%

 

 

90%

 

 

90%

Percent ceded - excess of $1,000,000 dollars of coverage

 

 

95%

 

 

95%

 

 

95%

Risk retained

 

$300,000

 

 

$300,000

 

 

$300,000

 

Total reinsurance coverage per occurrence

 

$4,700,000

 

 

$4,700,000

 

 

$4,700,000

 

Losses per occurrence subject to quota share reinsurance coverage

 

$5,000,000

 

 

$5,000,000

 

 

$5,000,000

 

Expiration date

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Lines (1):

 

 

 

 

 

 

 

 

 

 

 

 

General liability commercial policies

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

Risk retained

 

 

 

 

 

 

 

 

 

$750,000

 

Excess of loss coverage above risk retained

 

 

 

 

 

 

 

 

 

$3,750,000

 

 

 

 

 

 

 

 

 

 

 

 in excess of

 

 

 

 

 

 

 

 

 

 

 

$750,000

 

Total reinsurance coverage per occurrence

 

 

 

 

 

 

 

 

 

$3,750,000

 

Losses per occurrence subject to reinsurance coverage

 

 

 

 

 

 

 

 

 

$4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Umbrella

 

 

 

 

 

 

 

 

 

 

 

 

Quota share treaty

 

 

 

 

 

 

 

 

 

None

 

 

(1)

Coverage on all commercial lines policies expired in September 2020; reinsurance coverage is based on treaties in effect on the date of loss.

 

 
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Inflation

 

Premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.

 

                Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.

 

Nine Months 2022 included elevated economic inflation, which resulted in a significant increase in interest rates, a widening of credit spreads, lower public equity valuations, and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the value of our fixed income securities, which lowered our stockholders’ equity materially for Nine Months 2022. The higher economic inflation impacted our loss and loss adjustment expenses as well; should these trends continue in the near-term, it would in all likelihood negatively impact our profitability.

 

Off-Balance Sheet Arrangements

 

                We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Outlook

 

                The COVID-19 pandemic caused significant financial market volatility, economic uncertainty, and interruptions to normal business activities. As of the date of this report, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity, capital position, the value of investments we hold in our investment portfolio, premiums and the demand for our products and our ability to collect premiums or requirement to return premiums to our policyholders will ultimately be impacted.  For additional information on the risks posed by COVID-19, see “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in Part I, Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC.

 

                Our net premiums earned may be impacted by a number of factors.  Net premiums earned are a function of net written premium volume.  Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. Net written premiums from both renewal and new business are impacted by competitive market conditions as well as general economic conditions.  As a result of COVID-19, economic conditions in the United States rapidly deteriorated. The decreased levels of economic activity have negatively impacted, and may continue to negatively impact, premium volumes generated by new business. We began to experience this impact in March 2020 and it became more significant in the second and third quarters of 2020. While we are now seeing a reversal of this impact, it may resume in the future, but the degree of any new impact will depend on the extent and duration of any economic contraction and could be material. We have also made underwriting changes to emphasize profitability over growth and have culled out the type of risks that do not generate an acceptable level of return.  This action has led, and may continue to lead, to a slowdown in premium growth, particularly in new business.

 

 
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Item  3. Quantitative and Qualitative Disclosures About Market Risk.

 

This item is not applicable to smaller reporting companies.

 

Item  4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to assure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures were: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act, and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.

 

s of the date of this report, there have been no misstatements identified. nd the g that were assessed as a material weakness

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitation on Effectiveness of Controls

 

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Principal Financial Officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.  

 

                Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.  

 

 
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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

For a discussion of the Company’s potential risks and uncertainties, see Part I, Item 1A— “Risk Factors” and Part II, Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2021 Annual Report filed with the SEC, and Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company's periodic filings with the SEC.  Except as discussed under Part I, Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Preliminary Non-binding Indication of Interest” herein, there have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s 2021 Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) None.

 

(b) Not applicable.

 

(c) None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 
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Table of Contents

 

Item 6. Exhibits.

 

3(a)

 

Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed on May 15, 2014).

 

 

 

3(b)

 

By-laws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 9, 2009).

 

 

 

31(a)

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31(b)

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32+

 

Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

   101.INS

 

XBRL Instance Document 

 

 

 

101.SCH

 

101.SCH  XBRL Taxonomy Extension Schema.

 

 

 

101.CAL

 

101.CAL   XBRL Taxonomy Extension Calculation Linkbase.

 

 

 

101.DEF

 

101.DEF   XBRL Taxonomy Extension Definition Linkbase.

 

 

 

101.LAB

 

101.LAB   XBRL Taxonomy Extension Label Linkbase.

 

 

 

101.PRE

 

101.PRE  XBRL Taxonomy Extension Presentation Linkbase.

 

 

 

+

 

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

KINGSTONE COMPANIES, INC.

 

 

 

 

 

Dated: November 14, 2022

By:

/s/ Barry B. Goldstein

 

 

 

Barry B. Goldstein

 

 

 

Chief Executive Officer

 

 

 

 

 

Dated: November 14, 2022

By:

/s/ Richard Swartz

 

 

 

Richard Swartz

 

 

 

Principal Financial Officer

 

 

 
79

 

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