q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to _________

Commission File Number 0-1665

KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-2476480
(I.R.S. Employer
Identification Number)
1158 Broadway
Hewlett, NY 11557
(Address of principal executive offices)

(516) 374-7600
 
(Registrant’s telephone number, including area code)
 
(Former Name, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

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 definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
 
Accelerated filero
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ

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

As of November 23, 2009, there were 2,979,582 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, 2009 (Unaudited) and December 31, 2008
   
4
 
       
 Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 30, 2009 (Unaudited) and 2008 (Unaudited)
   
5
 
       
 Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months ended September 30, 2009 (Unaudited) and 2008 (Unaudited)
   
6
 
       
 Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2009 (Unaudited) and for the year ended December 31, 2008
   
7
 
       
 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2009 (Unaudited) and 2008  (Unaudited)
   
8
 
       
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
9
 
   
Item 2 —
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
46
 
   
Item 3 —
 
 Quantitative and Qualitative Disclosures About Market Risk
   
55
 
   
Item 4T—
 
 Controls and Procedures
   
55
 
                 
PART II — OTHER INFORMATION
   
56
 
   
Item 1 —
 
Legal Proceedings
   
56
 
   
Item 1A —
 
Risk Factors
   
56
 
   
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
   
56
 
   
Item 3 —
 
Defaults Upon Senior Securities
   
56
 
   
Item 4 —
 
Submission of Matters to a Vote of Security Holders
   
56
 
   
Item 5 —
 
Other Information
   
56
 
   
Item 6 —
 
Exhibits
   
56
 
Signatures
   
58
 
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32


2
 
 

 

Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws.  The events described in forward-looking statements contained in this Quarterly Report may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results.  The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 under “Factors That May Affect Future Results and Financial Condition” (to the extent that such factors relate to our current business through our wholly-owned subsidiary, Kingstone Insurance Company, formerly known as Commercial Mutual Insurance Company).
 
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.
 

 

 
PART I.  FINANCIAL INFORMATION
 
Item 1.                       Financial Statements.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Balance Sheets
           
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
 Assets
           
 Short term investments
  $ 438,308     $ -  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $10,742,889)
    10,939,659       -  
 Equity securities, available-for-sale, at fair value (cost of $1,221,762)
    1,354,514       -  
 Total investments
    12,732,481       -  
 Cash and cash equivalents
    2,318,141       142,949  
 Investment income receivable
    120,425       -  
 Premiums receivable, net of of provision for uncollectible amounts
    4,323,238       -  
 Receivables - reinsurance contracts
    1,183,972       -  
 Reinsurance receivables, net of of provision for uncollectible amounts
    21,088,072       -  
 Notes receivable-CMIC
    -       5,935,704  
 Notes receivable-sale of business
    1,113,919       -  
 Deferred acquisition costs
    2,800,445       -  
 Intangible assets
    4,731,100       -  
 Property and equipment, net of accumulated depreciation
    1,758,700       82,617  
 Equities in pools and associations
    207,847       -  
 Other assets
    282,387       97,143  
 Assets of discontinued operations
    -       3,178,219  
 Total assets
  $ 52,660,727     $ 9,436,632  
                 
 Liabilities
               
 Loss and loss adjustment expenses
    17,193,269       -  
 Unearned premiums
    14,220,351       -  
 Reinsurance balances payable
    1,989,602       -  
 Deferred ceding commission revenue
    2,843,703       -  
 Notes payable
    791,454       2,008,828  
 Accounts payable, accrued liabilities and other liabilities
    2,111,827       966,741  
 Income taxes payable
    140,526       -  
 Deferred income taxes
    1,283,121       200,000  
 Mandatorily redeemable preferred stock
    1,299,231       780,000  
 Liabilties of discontinued operations
    85,800       223,493  
 Total liabilities
    41,958,884       4,179,062  
                 
 Commitments
               
                 
 Stockholders' Equity:
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 3,795,607 shares
    37,957       37,888  
 Preferred stock, $.01 par value; authorized
               
 1,000,000 shares; 0 shares issued and outstanding
    -       -  
 Capital in excess of par
    12,013,769       11,962,512  
 Accumulated other comprehensive income
    217,485       -  
 Deficit
    (346,986 )     (5,522,448 )
      11,922,225       6,477,952  
 Treasury stock, at cost, 816,025 shares
    (1,220,382 )     (1,220,382 )
 Total stockholders' equity
    10,701,843       5,257,570  
                 
 Total liabilities and stockholders' equity
  $ 52,660,727     $ 9,436,632  
 

See notes to condensed consolidated financial statements.
 
4
 

 
 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Operations (Unaudited)
 
Nine Months Ended September 30,
 
2009
   
2008
 
             
 Revenues
           
 Net premiums earned
  $ 2,262,819     $ -  
 Ceding commission revenue
    1,483,249       -  
 Net investment income
    115,657       -  
 Net realized gains on investments
    99,856       -  
 Other income
    518,288       332,545  
 Total revenues
    4,479,869       332,545  
                 
 Expenses
               
 Loss and loss adjustment expenses
    1,087,276       -  
 Commission expense
    1,091,638       -  
 Other underwriting expenses
    1,077,318       -  
 Other operating expenses
    952,570       890,435  
 Depreciation and amortization
    103,113       26,533  
 Interest expense
    150,571       187,221  
 Interest expense - mandatorily
               
 redeemable preferred stock
    89,805       47,125  
 Total expenses
    4,552,291       1,151,314  
                 
 Loss from operations
    (72,422 )     (818,769 )
 Gain on acquistion of Kingstone Insurance Company
    5,401,860       -  
 Interest income-CMIC note receivable
    60,757       730,915  
 Income (loss) from continuing operations before taxes
    5,390,195       (87,854 )
 Benefit from tax
    (25,590 )     (288,634 )
 Income from continuing operations
    5,415,785       200,780  
 Loss from discontinued operations, net of taxes
    (240,323 )     (642,443 )
 Net income (loss)
    5,175,462       (441,663 )
                 
 Gross unrealized investment holding gains
               
 arising during period
    329,522       -  
 Income tax expense related to items of
               
 other comprehensive income
    (112,037 )     -  
 Comprehensive income (loss)
  $ 5,392,947     $ (441,663 )
                 
Basic and diluted earnings (loss) per common share:
               
Income from continuing operations
  $ 1.82     $ 0.07  
Loss from discontinued operations
  $ (0.08 )   $ (0.22 )
Income (loss) per common share
  $ 1.74     $ (0.15 )
                 
Basic and diluted weighted average shares outstanding
    2,974,349       2,972,547  
 

See notes to condensed consolidated financial statements.
 
5
 

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Operations (Unaudited)
 
Three Months Ended September 30,
 
2009
   
2008
 
             
 Revenues
           
 Net premiums earned
  $ 2,262,819     $ -  
 Ceding commission revenue
    1,483,249       -  
 Net investment income
    115,657       -  
 Net realized gains on investments
    99,856       -  
 Other income
    153,867       111,970  
 Total revenues
    4,115,448       111,970  
                 
 Expenses
               
 Loss and loss adjustment expenses
    1,087,276       -  
 Commission expense
    1,091,638       -  
 Other underwriting expenses
    1,077,318       -  
 Other operating expenses
    285,674       245,764  
 Depreciation and amortization
    94,519       11,161  
 Interest expense
    17,220       56,924  
 Interest expense - mandatorily
               
 redeemable preferred stock
    37,353       19,500  
 Total expenses
    3,690,998       333,349  
                 
 Income (loss) from operations
    424,450       (221,379 )
 Gain on acquistion of Kingstone Insurance Company
    5,401,860       -  
 Interest income-CMIC note receivable
    -       129,193  
 Income (loss) from continuing operations before taxes
    5,826,310       (92,186 )
 Income tax expense (benefit)
    184,162       (9,112 )
 Income (loss) from continuing operations
    5,642,148       (83,074 )
 Loss from discontinued operations, net of taxes
    (56,550 )     (16,951 )
 Net income (loss)
    5,585,598       (100,025 )
                 
 Gross unrealized investment holding gains
               
 arising during period
    329,522       -  
 Income tax expense related to items of
               
 other comprehensive income
    (112,037 )     -  
 Comprehensive income (loss)
  $ 5,803,083     $ (100,025 )
                 
Basic earnings (loss) per common share:
               
Income (loss) from continuing operations
  $ 1.89     $ (0.03 )
Loss from discontinued operations
  $ (0.02 )   $ -  
Income (loss) per common share
  $ 1.87     $ (0.03 )
                 
Diluted earnings (loss) per common share:
               
Income (loss) from continuing operations
  $ 1.56     $ (0.03 )
Loss from discontinued operations
  $ (0.02 )   $ -  
Income (loss) per common share
  $ 1.54     $ (0.03 )
                 
Weighted average common shares outstanding
               
Basic
    2,977,501       2,971,521  
Diluted
    3,627,117       2,971,521  
 

See notes to condensed consolidated financial statements.
 

 

 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity
                                                 
Year Ended December 31, 2008 and Nine Months Ended September 30, 2009
                               
                                                             
                                 
Accumulated
                         
                           
Capital
   
Other
                         
   
Common Stock*
   
Preferred Stock
   
in Excess
    Comprehensive    
 
   
Treasury Stock*
       
   
Shares
   
Amount
   
Shares
   
Amount
   
of Par
   
Income
   
(Deficit)
   
Shares
   
Amount
   
Total
 
Balance, December 31, 2007
    3,750,447     $ 37,505       -     $ -     $ 11,850,872     $ -     $ (4,545,242 )     (781,423 )   $ (1,185,780 )   $ 6,157,355  
Stock-based payments
    38,324       383       -       -       111,640               -       -       -       112,023  
Return of stock as settlement of liability
    -       -       -       -       -               -       (34,602 )     (34,602 )     (34,602 )
Net loss
    -       -       -       -       -               (977,206 )     -       -       (977,206 )
Balance, December 31, 2008
    3,788,771       37,888       -       -       11,962,512               (5,522,448 )     (816,025 )     (1,220,382 )     5,257,570  
Stock-based payments
    6,836       69       -       -       51,257       -       -       -       -       51,326  
Net income
    -       -       -       -       -       -       5,175,462       -       -       5,175,462  
Net unrealized gains on securities
                                                                               
available for sale, net of income tax
    -       -       -       -       -       217,485       -       -       -       217,485  
Balance, September 30, 2009 (unaudited)
    3,795,607     $ 37,957       -     $ -     $ 12,013,769     $ 217,485     $ (346,986 )     (816,025 )   $ (1,220,382 )   $ 10,701,843  
                                                                                 
 
*As of December 31, 2008 and September 30, 2009 (unaudited), there were 2,972,746 and 2,979,582 common shares outstanding.

 

See notes to condensed consolidated financial statements.
 

 

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
 
2009
   
2008
 
             
 Cash flows provided by (used in) operating activities:
           
 Net income (loss)
  $ 5,175,462     $ (441,663 )
 Adjustments to reconcile net income to net cash provided by (used in) operations:
               
 Gain on acquistion of Kingstone Insurance Company
    (5,401,860 )     -  
 Gain on sale of investments
    (99,856 )     -  
 Depreciation and amortization
    103,113       26,532  
 Accretion of discount on notes receivable
    -       (576,228 )
 Amortization of warrants
    -       17,731  
 Stock-based payments
    51,326       104,614  
 Amortization of bond premium or discount
    11,142       -  
 Deferred income taxes
    (300,368 )     (328,000 )
 (Increase) decrease in assets:
               
 Short term investments
    373,430       -  
 Premiums receivable, net
    94,856       -  
 Receivables - reinsurance contracts
    (46,140 )     -  
 Reinsurance receivables, net
    (1,038,873 )     -  
 Deferred acquisition costs
    (134,643 )     -  
 Other assets
    78,670       332,555  
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    1,001,485       -  
 Unearned premiums
    340,977       -  
 Reinsurance balances payable
    (15,988 )     -  
 Deferred ceding commission revenue
    143,327       -  
 Accounts payable, accrued liabilities and other liabilities
    122,789       269,390  
 Net cash provided by (used in) operating activities of continuing operations
    458,849       (595,069 )
 Operating activities of discontinued operations
    123,325       (6,101 )
 Net cash flows provided by (used in) operations
    582,174       (601,170 )
                 
 Cash flows provided by investing activities:
               
 Purchase - fixed-maturity securities
    (3,046,799 )     -  
 Purchase - equity securities
    (744,704 )     -  
 Sale or maturity - fixed-maturity securities
    1,575,031       -  
 Sale - equity securities
    1,439,854       -  
 Cash acquired in acquisition
    1,327,057       -  
 Purchase of property and equipment
    (1,803 )     (2,437 )
 Increase in accrued interest - Commercial Mutual Insurance Company
    (60,757 )     -  
 Increase in notes receivable and accrued interest - Sale of businesses
    (118,766 )     -  
 Collections of notes receivable and accrued interest - Sale of businesses
    52,420       -  
 Other investing activities
    -       (136,128 )
 Net cash provided by (used in) investing activities of continuing operations
    421,533       (138,565 )
 Investing activities of discontinued operations
    1,869,628       1,158,291  
 Net cash flows provided by investing activities
    2,291,161       1,019,726  
                 
 Cash flows used in financing activities:
               
 Proceeds from long term debt
    750,000       -  
 Principal payments on long-term debt
    (1,448,143 )     (366,643 )
 Net cash used in financing activities of continuing operations
    (698,143 )     (366,643 )
 Financing activities of discontinued operations
    -       (562,177 )
 Net cash flows used in financing activities
    (698,143 )     (928,820 )
                 
 Increase (decrease) in cash and cash equivalents
    2,175,192       (510,264 )
 Cash and cash equivalents, beginning of year
    142,949       1,030,822  
 Cash and cash equivalents, end of period
  $ 2,318,141     $ 520,558  
 

See notes to condensed consolidated financial statements.
 
 

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER, 2009 AND 2008

Note 1 - Basis of Presentation and Nature of Business
 
On July 1, 2009, Kingstone Companies, Inc. (formerly known as DCAP Group, Inc.) (referred to herein as "Kingstone" or the “Company”) completed the acquisition of 100% of the issued and outstanding common stock of Commercial Mutual Insurance Company (“CMIC”) (renamed Kingstone Insurance Company or “KICO”) and its subsidiaries, pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company (See Note 3). Pursuant to the plan of conversion, Kingstone acquired a 100% equity interest in KICO, in consideration for the exchange of the $3,750,000 principal amount of surplus notes of CMIC. In addition, Kingstone forgave all accrued and unpaid interest of approximately $2,246,000 on the surplus notes as of the date of conversion. 
 
Effective July 1, 2009, Kingstone through its subsidiary KICO, offers property and casualty insurance products to small businesses and individuals in New York State. The effect of the KICO acquisition is only included in the Company’s results of operations and cash flows for the period beginning July 1, 2009 (“KICO Acquistion Date”) through September 30, 2009. Accordingly, disclosures pertaining to KICO will only include the three months ended September 30, 2009.
 
Effective as of July 1, 2009, we changed the name of our company from DCAP Group, Inc. to Kingstone Companies, Inc.
 
Until December 2008, continuing operations primarily consisted of the ownership and operation of a network of retail insurance brokerage and agency offices engaged in the sale of retail auto, motorcycle, boat, business, and homeowner's insurance.
 
In December 2008, due to declining revenues and profits, the Company made a decision to restructure its network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of the least profitable locations during the month of December 2008 and the entry into negotiations to sell the remaining 19 locations in the Retail Business. On April 17, 2009, the Company sold substantially all of the assets, including the book of business, of its 16 remaining Retail Business locations that we owned in New York State (the “New York Sale”) (see Note 21). Effective June 30, 2009, the Company sold all of the outstanding stock of the subsidiary that operated its three remaining Retail Locations in Pennsylvania (the “Pennsylvania Sale”) (see Note 21).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Pennsylvania Sale effective June 30, 2009, the Retail Business has been presented as discontinued operations and prior periods have been restated.
 
Until May 2009, the Company operated a DCAP franchise business.  Effective May 1, 2009, the Company sold all of the outstanding stock of the subsidiaries that operated such DCAP franchise business (see Note 21).  As a result of the sale, the franchise business has been presented as discontinued operations and prior periods have been restated.
 
Until February 2008, the Company provided premium financing of insurance policies for customers of its offices as well as customers of non-affiliated entities. On February 1, 2008, the Company sold its outstanding premium finance loan portfolio (see Note 21). As a result of the sale, the premium financing operations have been classified as discontinued operations and prior periods have been restated. The purchaser of the premium finance portfolio has agreed that, during the five year period ending January 31, 2013 (subject to automatic renewal for successive two year terms under certain circumstances), it will purchase, assume and service premium finance contracts originated by the Company in the states of New York and Pennsylvania. In connection with such purchases, the Company will be entitled to receive a fee generally equal to a percentage of the amount financed.  The Company’s continuing operations of the premium financing business will consist of the revenue earned from placement fees and any related expenses.
 
9
 

 
The Retail Business also provided automobile club services and certain of our former franchisees provided tax preparation services.
 
Note 2 – Accounting Policies and Basis of Presentation
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8-03 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2008 and notes thereto included in the Company’s Annual Report on Form 10-K filed on April 14, 2009. The accompanying 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 statement of the Company’s financial position and results of operations. The Company has reclassified certain amounts in its 2008 consolidated balance sheet and 2008 statements of operations to conform to the 2009 presentation. None of these reclassifications had an effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.
 
The results of operations for the three and nine months ended September 30, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009. All significant inter-company transactions have been eliminated in consolidation. Business segment results are presented net of all material inter-segment transactions.

Consolidation

The consolidated financial statements consist of Kingstone Companies, Inc. and its wholly-owned subsidiaries. Subsidiaries acquired on July 1, 2009 include KICO and its subsidiaries, CMIC Properties, Inc. (“CMIC Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates.
 
Supplemental Disclosures of Cash Flow Information
 
The table below presents the cash paid for income taxes and interest for the nine months ended September 30, 2009 and 2008, respectively, and the non-cash investing and financing activities.
 

10 
 

 
 
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
 
             
 Supplemental disclosures of cash flow information:
           
 Cash paid for income taxes
  $ 11,337     $ 21,316  
 Cash paid for interest
    322,937       271,940  
                 
 Schedule of non-cash investing and financing activities:
               
 Exchange of notes receivable as consideration paid for the acquistion of
               
 Kingstone Insurance Company
    5,996,461       -  
 Notes received in connection with sale of businesses
    1,047,573       -  
 Notes payable exchanged for mandatorily redeemable preferred stock
    519,231       -  
 Liabilties assumed by purchaser of premium finance portfolio
    -       11,229,060  
 Reserve held by purchaser of premium finance portfolio
    -       261,363  
 
Revenue Recognition
 
Net Premiums Earned
 
Insurance policies issued by the Company are short-duration contracts. Accordingly, premium revenue, net of premiums ceded to reinsurers, is recognized as earned in proportion to the amount of insurance protection provided, on a pro-rata basis over the terms of the underlying policies. Unearned premiums represent premium applicable to the unexpired portions of in-force insurance contracts at the end of each year.
  
Ceding Commission Revenue
 
Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the costs of the reinsurance, generally on a pro-rata basis over the terms of the policies reinsured. Unearned amounts are recorded as deferred ceding commission revenue. Certain reinsurance agreements contain provisions whereby the ceding commission rates vary based on the loss experience under the agreements. The Company records ceding commission revenue based on its current estimate of subject losses. The Company records adjustments to the ceding commission revenue in the period that changes in the estimated losses are determined.
 
Liability for Loss and Loss Adjustment Expenses (“LAE”)
 
The liability for loss and LAE represents management’s best estimate of the ultimate cost of all reported and unreported losses that are unpaid as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis valuations, statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an analysis of the Company’s historical experience, supplemented by analyses of industry loss data. Management believes that the reserves for loss and LAE are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates become necessary, such adjustments are reflected in expense for the period in which the estimates are changed. Because of the nature of the business historically written, the Company’s management believes that the Company has limited exposure to environmental claim liabilities. The Company recognizes recoveries from salvage and subrogation when received.

11
 

 
Reinsurance
 
In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.
 
Reinsurance receivables represents management’s best estimate of paid and unpaid loss and LAE recoverable from reinsurers. Ceded losses receivable are estimated using techniques and assumptions consistent with those used in estimating the liability for loss and LAE. Management believes that reinsurance receivables as recorded represent its best estimate of such amounts; however, as changes in the estimated ultimate liability for loss and LAE are determined, the estimated ultimate amount receivable from the reinsurers will also change. Accordingly, the ultimate receivable could be significantly in excess of or less than the amount indicated in the consolidated financial statements. As adjustments to these estimates become necessary, such adjustments are reflected in current operations. Loss and LAE incurred as presented in the consolidated statement of income and comprehensive income are net of reinsurance recoveries.

The Company accounts for reinsurance in accordance with GAAP guidance for accounting and reporting for reinsurance of short-duration contracts. Management has evaluated its reinsurance arrangements and determined that significant insurance risk is transferred to the reinsurers. Reinsurance agreements have been determined to be short-duration prospective contracts and, accordingly, the costs of the reinsurance are recognized over the life of the contract in a manner consistent with the earning of premiums on the underlying policies subject to the reinsurance contract.

In preparing financial statements, management estimates uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. The allowance for uncollectible reinsurance as of September 30, 2009 was approximately $46,000. The Company did not expense any uncollectible reinsurance for the nine months or three months ended September 30, 2009. Significant uncertainties are inherent in the assessment of the creditworthiness of reinsurers and estimates of any uncollectible amounts due from reinsurers. Any change in the ability of the Company’s reinsurers to meet their contractual obligations could have a detrimental impact on the consolidated financial statements and KICO’s ability to meet their regulatory capital and surplus requirements.
 
Cash and Cash Equivalents
 
Cash and cash equivalents are presented at cost, which approximates fair value. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
 
The Company maintains its cash balances at several financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) secures accounts up to $250,000 at these institutions through December 31, 2013 at which time the insured limit is scheduled to revert back to $100,000. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.
 
Investments
 
The Company accounts for its investments in accordance with GAAP guidance for investments in debt and equity securities, which requires that fixed-maturity and equity securities that have readily determined fair values be segregated into categories based upon the Company’s intention for those securities. In accordance with this guidance, the Company has classified its fixed-maturity and equity securities as available-for-sale. The Company may sell its available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors.

12
 

 
Fixed-maturity securities and equity securities are reported at their estimated fair values based on quoted market prices or a recognized pricing service, with unrealized gains and losses, net of tax effects, reported as a separate component of comprehensive income in policyholder’s surplus. Realized gains and losses are determined on the specific identification method.

Investment income is accrued to the date of the financial statements and includes amortization of premium and accretion of discount on fixed maturities. Interest is recognized when earned, while dividends are recognized when declared.

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 and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management considers, among other criteria the following: the current fair value compared to amortized cost or cost, as appropriate; the length of time the security’s fair value has been below amortized cost or cost; management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value to cost or amortized cost; specific credit issues related to the issuer; and current economic conditions. Other-than-temporary impairment (“OTTI”) losses result in a permanent reduction of the cost basis of the underlying investment. For the nine months and three months ended September 30, 2009 and 2008, the Company did not record impairment write-downs, after determining that none of its investments were OTTI.

Fair Value
 
The fair value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets or liabilities 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 assumptions that market participants would use, having the lowest priority (“Level 3”).

For investments in active markets, the Company uses quoted market prices to determine fair value. In circumstances where quoted market prices are unavailable, the Company utilizes fair value estimates based upon other observable inputs including matrix pricing, benchmark interest rates, market comparables and other relevant inputs.

Premiums Receivable
 
Premiums receivable are presented net of an allowance for doubtful accounts of approximately $63,000 as of September 30, 2009. The allowance for uncollectible amounts is based on an analysis of amounts receivable giving consideration to historical loss experience and current economic conditions and reflects an amount that, in management’s judgment, is adequate. Uncollectible premiums receivable balances of approximately $6,000 were written off for the three months ended September 30, 2009.
 
Deferred Acquisition Costs
 
Acquisition costs represent the costs of writing business that vary with, and are primarily related to, the production of insurance business (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as related premiums are earned.

Intangible Assets
 
The Company has recorded acquired identifiable intangible assets. In accounting for such assets, the Company follows GAAP guidance for intangible assets. The cost of a group of assets acquired in a transaction is allocated to the individual assets including identifiable intangible assets based on their relative fair values. Identifiable intangible assets with a finite useful life are amortized over the period that the asset is expected to contribute directly or indirectly to the future cash flows of the Company. Intangible assets with an indefinite life are not amortized and are subject to annual impairment testing. All identifiable intangible assets are tested for recoverability whenever events or changes in circumstances indicate that a carrying amount may not be recoverable. No impairment losses from continuing operations were recognized for the nine months ended September 30, 2009 and 2008, and for the three months ended September 30, 2009 and 2008.

13
 

 
Property and Equipment
 
Building and building improvements, furniture, leasehold improvements, computer equipment, and software are reported at cost less accumulated depreciation and amortization. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets. The Company estimates the useful life for computer equipment, computer software, furniture and other equipment is three years, and building and building improvements is 39 years.

The fair value of the Company’s real estate assets was based on an appraisal dated August 31, 2009. The fair value of the real estate assets is estimated to be in excess of the carrying value.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company will file a consolidated tax return with KICO for periods after June 30, 2009.
 
Assessments
 
Insurance related assessments are accrued in the period in which they have been incurred. A typical obligating event would be the issuance of an insurance policy or the occurrence of a claim. The Company is subject to a variety of assessments.
 
Concentration and Credit Risk
 
Financial instruments that potentially subject the Company to concentration of credit risk are primarily cash and cash equivalents, investments and accounts receivable. Investments are diversified through many industries and geographic regions through the investment committee which employs different investment strategies. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect to cash and investments. At September 30, 2009, the outstanding premiums receivable balance is generally diversified due to the number of entities composing the Company’s customer base, which is largely concentrated in the New York City area. To reduce credit risk, the Company obtains customer credit reports before it underwrites a policy. The Company also has receivables from its reinsurers. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company periodically evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Management’s policy is to review all outstanding receivables at period end as well as the bad debt write-offs experienced in the past and establish an allowance for doubtful accounts, if deemed necessary.
 
14
 

 
Gross premiums earned from lines of business that subject the Company to concentration risk from July 1, 2009 (KICO Acquisition Date) through September 30, 2009 are as follows:
 
 Personal Lines
    66.4 %
 Commercial Automobile
    24.5 %
 Total premiums earned subject to concentration
    90.9 %
 Premiums earned not subject to concentration
    9.1 %
 Total premiums earned
    100.0 %
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 those estimates.

Accounting Pronouncements

Accounting guidance adopted in 2009

In December 2007, the Financial Accounting Standards Board (“FASB”) issued guidance on business combinations, where an acquiring entity is required to recognize assets acquired and liabilities assumed at fair value, with very few exceptions. In addition, transaction costs are no longer included in the measurement of the business acquired, but are expensed as incurred. The new guidance applies to all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company prospectively adopted the guidance on January 1, 2009.

In February 2008, the FASB delayed the effective date of the guidance regarding fair value measurements for certain nonfinancial assets and nonfinancial liabilities and associated required disclosures. On January 1, 2009 the guidance became effective and the Company applied the guidance to the nonfinancial assets and nonfinancial liabilities with no material effect.

In April 2008, the FASB issued new guidance in determining the useful life of a recognized intangible asset. The purpose of this guidance is to improve consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset for purposes of determining possible impairments. This guidance requires an entity to disclose information related to the extent the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. This guidance is required to be applied prospectively to all new intangible assets acquired after January 1, 2009. The Company prospectively adopted the new guidance on January 1, 2009, with no material effect on the financial statements.

In June 2008, the FASB issued new guidance related to earnings per share (“EPS”) calculations and the participating securities in the basic earnings per share calculation under the two-class method. This new guidance requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the guidance. Early adoption was not permitted. The Company adopted the guidance on January 1, 2009, which did not have a material effect on the Company’s earnings per share.

15
 

 
In April, 2009, the FASB issued new guidance to help an entity in determining whether a market for an asset is not active and when a price for a transaction is not distressed. The model includes the following two steps:

 
Determine whether there are factors present that indicate that the market for the asset is not active at the measurement date; and
 
Evaluate the quoted price (i.e., a recent transaction or broker price quotation) to determine whether the quoted price is not associated with a distressed transaction.

This guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the new provisions on January 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial condition and results of operations.

In April 2009, the FASB issued new guidance for other-than-temporary impairments (“OTTI”) for fixed-maturity securities. Subsequent to this guidance, companies are required to separate OTTI into (a) the amount representing the credit loss, which continues to be recorded in earnings, and (b) the amount related to all other factors, which is now recorded in other comprehensive net income/loss. The new guidance required a cumulative-effect adjustment for those securities that were other-than-temporarily-impaired at the effective date. This cumulative-effect adjustment reclassifies the noncredit portion of previously other-than-temporarily-impaired instrument held at the effective date to accumulated other comprehensive net income/loss from retained earnings. Early adoption was permitted for periods ending after March 15, 2009. The Company adopted the guidance on January 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial condition and results of operations.

In April, 2009, the FASB issued new guidance regarding requirements for disclosures relating to fair value of financial instruments. This guidance specifies that for reporting periods ended after June 15, 2009, all interim, as well as annual, financial statements must contain the additional disclosures regarding fair value of financial instruments. Early adoption was permitted for periods ending after March 15, 2009. The Company adopted this guidance on January 1, 2009, with no material effect on the financial statements.

In May 2009, the FASB issued new guidance requiring entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. The Company implemented this guidance as of April 1, 2009 with no material effect on Company’s consolidated financial condition and results of operations.

In June 2009, the FASB issued guidance establishing a new hierarchy of generally accepted accounting principles called “FASB Accounting Standards Codification”. The new hierarchy is the new single source of authoritative nongovernmental U.S. generally accepted accounting principles. The codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. Effective for interim and annual periods that end after September 15, 2009, the Company implemented this guidance as of July 1, 2009 and has removed all references to prior authoritative literature.

16
 

 
Accounting guidance not yet effective

In June 2009, the FASB issued new guidance which requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The new guidance enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. This guidance will be effective for annual reporting periods beginning on or after January 1, 2010. Early application is not permitted. The Company is currently analyzing the effect this guidance will have on its financial statements.

In June 2009, the FASB issued new guidance which concerns the consolidation of variable interest entities and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly affect the other entity’s economic performance. The new guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance will be effective for annual reporting periods beginning on or after January 1, 2010. Early application is not permitted. The Company is currently analyzing the effect this guidance will have on its financial statements.

In August 2009, the FASB issued new guidance concerning the fair value measurement of liabilities. This new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, fair value can be measured using a valuation technique that uses the quoted price of the identical liability when traded as an asset (Level 1) or similar liability when traded as an asset (Level 2) or another valuation technique that is consistent with the principles of fair value. Under this guidance, a company is not required to make an adjustment to reflect the existence of a restriction that prevents the transfer of the liability. This guidance is effective for interim and annual periods beginning after August 2009. The Company is currently analyzing the effect this guidance will have on its financial statements.

Note 3 - Acquisition of Commercial Mutual Insurance Company
 
On July 1, 2009, Kingstone completed the acquisition of 100% of the issued and outstanding common stock of Commercial Mutual Insurance Company and its subsidiaries (“CMIC”) (renamed Kingstone Insurance Company or “KICO”), pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company.  The total purchase price was $5,996,461.

As of June 30, 2009, Kingstone held two surplus notes issued by CMIC in the aggregate principal amount of $3,750,000. Previously accrued and unpaid interest on the notes as of June 30, 2009 was approximately $2,246,000. Pursuant to the plan of conversion, effective July 1, 2009, Kingstone acquired a 100% equity interest in KICO in consideration of the exchange of the principal amount of surplus notes of CMIC. In addition, Kingstone forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. The transaction was considered a bargain purchase, resulting in a gain on acquisition. The fair value of the CMIC acquisition is presented as follows:

17 
 

 
 
 Exchange of principal amount of surplus notes of CMIC
  $ 3,750,000  
 Accrued interest forgiven
    2,246,461  
 Total purchase consideration
    5,996,461  
 Gain on acquisition (bargain purchase)
    5,401,860  
 Fair value of CMIC at acquisition, net of deferred taxes
  $ 11,398,321  
 
KICO offers property and casualty insurance products to small businesses and individuals in New York State. KICO’s subsidiaries include CMIC Properties, Inc. (“CMIC Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which owns the land and building from which KICO operates.

The Company began consolidating KICO’s financial statements as of the closing date in accordance with GAAP. The purchase consideration has been allocated to the assets acquired and liabilities assumed, including separately identified intangible assets, based on their fair values as of the close of the acquisition.
 
The following unaudited condensed balance sheet presents assets acquired and liabilities assumed with the acquisition of KICO, based on their fair values and the fair value hierarchy level under GAAP as of July 1, 2009:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
 Assets
                       
 Short term investments
  $ 811,738     $ -     $ -     $ 811,738  
 Fixed-maturity securities
    9,266,253       -       -       9,266,253  
 Equity securities
    1,823,045       -       -       1,823,045  
 Total investments
    11,901,036       -       -       11,901,036  
 Cash and cash equivalents
    1,327,057       -       -       1,327,057  
 Investment income receivable
    -       -       70,216       70,216  
 Premiums receivable, net of of provision for
                               
 uncollectible amounts
    -       -       4,418,094       4,418,094  
 Receivables - reinsurance contracts
    -       -       1,137,832       1,137,832  
 Reinsurance receivables, net of provision for
                               
 uncollectible amounts
    -       -       20,049,199       20,049,199  
 Deferred acquisition costs
    -       -       2,665,802       2,665,802  
 Intangible assets
    -       -       4,850,000       4,850,000  
 Property and equipment, net of accumulated depreciation
    -       -       1,658,493       1,658,493  
 Other assets
    -       -       531,991       531,991  
 Total assets
  $ 13,228,093     $ -     $ 35,381,627     $ 48,609,720  
                                 
 Liabilities
                               
 Loss and loss adjustment expenses
  $ -     $ -     $ 16,191,784     $ 16,191,784  
 Unearned premiums
    -       -       13,879,374       13,879,374  
 Reinsurance balances payable
    -       -       2,005,590       2,005,590  
 Deferred ceding commission revenue
    -       -       2,700,376       2,700,376  
 Accounts payable, accrued liabilities and other liabilities
    -       -       1,157,829       1,157,829  
 Deferred income taxes
    -       -       1,271,452       1,271,452  
 Other liabilities
    -       -       4,994       4,994  
 Total liabilities
    -       -       37,211,399       37,211,399  
 Stockholder's equity
                            11,398,321  
 Total liabilities and stockholder's equity
                          $ 48,609,720  
 
The fair values of separately identifiable intangibles and fixed assets were based on independent appraisals. The values of certain assets and liabilities may be subject to change as additional information is obtained. The valuations will be finalized within the measurement period, generally defined as 12 months from the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to the bargain purchase price. The aggregate purchase price of $5,996,461 was less than the $11,398,321 fair value of KICO’s net assets acquired, resulting in a bargain purchase of $5,401,860. The purchase price was determined in CMIC’s plan of conversion, which was equal to the current value of the surplus notes and accrued interest on the effective date of conversion. Transaction costs related to acquisition were expensed as incurred. Transaction costs for the nine months ended September 30, 2009 and 2008 were $163,673 and $21,235, respectively. Transaction costs for the three months ended September 30, 2009 and 2008 were $71,153 and $3,470, respectively.

18
 

 
Allocation of Purchase Price (a):
 Purchase Price
        $ 5,996,461  
               
 Book value of CMIC at June 30, 2009
          2,010,171  
 Conversion of surplus notes and accrued interest thereon to common stock
          5,996,461  
 Fair value adjustments, net of taxes based on appraisal
             
 of CMIC's identifiable assets at June 30, 2009:
             
 Insurance license
  $ 500,000          
 Customer relationships
    3,400,000          
 Assembled workforce
    950,000          
 Total intangible assets
    4,850,000          
 Real estate assets
    288,923          
 Identifiable assets
    5,138,923          
 Tax effect
    (1,747,234 )        
 Fair value adjustments, net of taxes based on appraisal
               
 of CMIC's identifiable assets at June 30, 2009
            3,391,689  
 Fair value of net assets acquired, net of taxes
            11,398,321  
                 
 Excess of fair value of assets acquied over purchase price (bargain purchase price)
          $ (5,401,860 )
 
(a)The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value.

The Company included total revenues and net income for KICO from the acquisition date of July 1, 2009 through September 30, 2009 in its consolidated statement of operations as follows:
 Total revenue
  $ 4,002,204  
 Net income
    414,006  
 
Intangibles

The fair value of intangible assets represent customer and producer relationships, assembled workforce and insurance license. The fair value of customer and producer relationships was estimated based upon using a discounted cash flow approach methodology. The fair value of the assembled workforce was valued using cost of workforce replacement and the cost of loss of efficiency methodology. The fair value of the insurance license was valued using a market approach methodology. Critical inputs into the valuation model for customer relationships included estimations of expected premium and attrition rates, expected operating margins and capital requirements (See note 7).

Real Estate

The fair value of the land and building included in property and equipment, which is used in the Company’s operations is greater than the carrying value. The fair value was based on an appraisal dated August 31, 2009.

19
 

 
Loss and Loss Adjustment Expense Reserves Acquired
 
Loss and Loss Adjustment Expense Reserves Acquired were valued at fair value which approximated carrying value.

Non-financial Assets and Liabilities

Receivables, other assets and liabilities were valued at fair value which approximated carrying value.

Pro Forma Results of Operations

Selected unaudited pro forma results of operations assuming the KICO acquisition had occurred as of January 1, 2008, are set forth below:
   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Total revenue
  $ 13,355,291     $ 12,296,307     $ 4,122,473     $ 4,190,680  
Income from continuing operations
  $ 930,741     $ 498,161     $ 269,612     $ 195,827  
Net income (loss)
  $ 690,418     $ (144,282 )   $ 213,062     $ 178,876  
                                 
Basic earnings (loss) per common share:
                               
Income from continuing operations
  $ 0.31     $ 0.17     $ 0.09     $ 0.07  
Net income (loss)
  $ 0.23     $ (0.05 )   $ 0.07     $ 0.06  
                                 
Diluted earnings (loss) per common share:
                               
Income from continuing operations
  $ 0.31     $ 0.17     $ 0.07     $ 0.07  
Net income (loss)
  $ 0.23     $ (0.05 )   $ 0.06     $ 0.06  
                                 
Weighted average common shares outstanding
                               
Basic
    2,974,349       2,972,547       2,977,501       2,971,521  
Diluted
    2,974,349       2,972,547       3,627,116       2,971,521  
 
Note:
The Company excluded certain one-time charges from the pro forma results for the nine months ended September 30, 2009 and 2008 including, (i) transaction costs of $74,581 and $284,814, respectively related to the acquisition of KICO, and (ii) Kingstone’s gain of $5,401,860 related to the acquisition of KICO for the nine months ended September 30, 2009. The Company excluded transaction costs related to the acquisition of KICO from the pro forma results for the three months ended September 30, 2009 and 2008 of $131,650 and $31,523, respectively.

Note 4 - Investments 

The amortized cost and fair value of investments in fixed-maturity securities and equities as of September 30, 2009 are summarized as follows:

20 
 

 
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
       
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
 
 Category
 
Cost (a)
   
Gains
   
Months
   
Months
   
Value
 
                               
 Fixed-Maturity Securities:
                             
 U.S. Treasury securities and
                             
 obligations of U.S. government
                             
 corporations and agencies
  $ 3,070,902     $ 23,877     $ -     $ -     $ 3,094,779  
                                         
 Political subdivisions of States,
                                       
 Territories and Possessions
    4,607,406       119,320       -       -       4,726,726  
                                         
 Corporate and other bonds
                                       
 Industrial and miscellaneous
    3,064,581       78,974       (25,401 )     -       3,118,154  
 Total fixed-maturity securities
    10,742,889       222,171       (25,401 )     -       10,939,659  
                                         
 Equity Securities:
                                       
 Preferred stocks
    438,177       1,273       -       -       439,450  
 Common stocks
    783,585       187,557       (56,078 )     -       915,064  
 Total equity securities
    1,221,762       188,830       (56,078 )     -       1,354,514  
                                         
 Short term investments
    438,308       -       -       -       438,308  
                                         
 Total
  $ 12,402,959     $ 411,001     $ (81,479 )   $ -     $ 12,732,481  
 
(a) The cost or amortized cost of securities acquired in the KICO acquisition are equal to their fair value as of the July 1, 2009 acquisition date.

A summary of the amortized cost and fair value of the Company’s investments in fixed-maturity securities by contractual maturity as of September 30, 2009 is shown below:
 
   
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
 
             
 Less than one year
  $ 1,027,122     $ 1,015,083  
 One to five years
    5,677,420       5,767,589  
 Five to ten years
    3,257,064       3,358,142  
 More than 10 years
    781,283       798,845  
 Total
  $ 10,742,889     $ 10,939,659  

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

Major categories of the Company’s net investment income from July 1, 2009 (Date of KICO Acquisition) through September 30, 2009 are summarized as follows:
 Income
     
 Fixed-maturity securities
  $ 105,300  
 Equity securities
    23,130  
 Cash and cash equivalents
    18,791  
 Other
    60  
 Total
    147,281  
 Expenses
       
 Investment expenses
    31,624  
 Net investment income
  $ 115,657  
 
Proceeds from the sale and maturity of fixed-maturity securities were $1,575,031 for the period from July 1, 2009 (Date of KICO Acquisition) through September 30, 2009.
21 
 

 

Proceeds from the sale of equity securities were $1,439,854 for the period from July 1, 2009 (Date of KICO Acquisition) through September 30, 2009.

The Company’s gross realized gains and losses on investments for the period from July 1, 2009 (Date of KICO Acquisition) through September 30, 2009 are summarized as follows:
 
 Fixed-maturity securities
     
 Gross realized gains
  $ 7,433  
 Gross realized losses
    (1,446 )
      5,987  
         
 Equity securities
       
 Gross realized gains
    93,869  
 Gross realized losses
    -  
      93,869  
         
 Other-than-temporary impairment losses
       
 Fixed-maturity securities
    -  
 Equity securities
    -  
      -  
         
 Net realized gains
  $ 99,856  
 
Impairment Review
 
The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value to cost; and (v) current economic conditions.
 
OTTI losses are recorded in the statement of income 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. The Company determined there was no OTTI for the nine months and three months ended September 30, 2009.  Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for anticipated recovery of fair value to the Company’s cost basis.

The Company held securities with unrealized losses representing declines that were considered temporary at September 30, 2009 as follows:

22 
 

 

   
Less than 12 months
   
12 months or more
   
Total
 
  
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
 Fixed-Maturity Securities:
                                   
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    -       -       -       -       -       -  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    1,192,246       (25,401 )     -       -       1,192,246       (25,401 )
 Total fixed-maturity securities
    1,192,246       (25,401 )     -       -       1,192,246       (25,401 )
                                                 
 Equity Securities:
                                               
 Preferred stocks
  $ 70,700     $ (19,530 )   $ -     $ -     $ 70,700     $ (19,530 )
 Common stocks
    252,490       (36,548 )     -       -       252,490       (36,548 )
 Total equity securities
    323,190       (56,078 )     -       -       323,190       (56,078 )
                                                 
 Total
  $ 1,515,436     $ (81,479 )   $ -     $ -     $ 1,515,436     $ (81,479 )
 
Note 5 - Fair Value Measurements

On January 1, 2008, the Company adopted GAAP guidance regarding fair value measurements. The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.
 
This guidance establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during period of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy and those investments included in each are as follows:
 
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Included are those investments traded on an active exchange, such as the NASDAQ Global Select Market, U.S. Treasury securities and obligations of U.S. government agencies, together with municipal bonds, corporate debt securities that are generally investment grade.
 
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
 
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows, market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period. Included in this valuation methodology are the real estate assets owned by the Company that are utilized in its operations.
 
23
 

 
The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, the Company considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the observability of prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.
  
The Company’s investments are allocated among pricing input levels as follows:
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporations
                       
 and agencies
  $ 3,095     $ -     $ -     $ 3,095  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    4,727       -       -       4,727  
                                 
 Corporate and
                               
 other bonds
    3,118       -       -       3,118  
                                 
 Total fixed maturities
    10,940       -       -       10,940  
 Equity investments
    1,355       -       -       1,355  
 Short term investments
    438                       438  
 Total investments
    12,733       -       -       12,733  
                                 
 Cash and
                               
 cash equivalents
    2,318       -       -       2,318  
 Total
  $ 15,051     $ -     $ -     $ 15,051  
 
Note 6 - Fair Value of Financial Instruments

GAAP requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. The company uses the following methods and assumptions in estimating its fair value disclosures for financial instruments:
 
Equity and fixed income investments:  Fair value disclosures for investments are included in “Note 4 - Investments.”

Cash and short-term investments: The carrying values of cash and cash equivalents, and short-term investments approximate their fair values because of the short maturity of these investments.

Premiums receivable, reinsurance receivables:  The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair values.
 
Notes receivable: The carrying amount of notes receivable related to the sale of businesses approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty. For “Notes receivable – Commercial Mutual Insura