secondqtr10q.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 June 30, 2010
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)
1154 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 August 13, 2010, there were 3,833,798 shares of the registrant’s common stock outstanding.

 
 

 

 
KINGSTONE COMPANIES, INC.
INDEX
                 
           
PAGE
                 
PART I — FINANCIAL INFORMATION
       
   
Item 1 —
 
 Financial Statements
   
2
 
       
 Condensed Consolidated Balance Sheets at June 30, 2010 (Unaudited) and December 31, 2009
   
3
 
       
 Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months and six months ended June 30, 2010 (Unaudited) and 2009 (Unaudited)
   
4
 
       
 Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2010 (Unaudited) and for the year ended December 31, 2009
   
5
 
       
 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 (Unaudited) and 2009  (Unaudited)
   
6-7
 
       
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
8
 
   
Item 2 —
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
29
 
   
Item 3 —
 
 Quantitative and Qualitative Disclosures About Market Risk
   
42
 
   
Item 4T—
 
 Controls and Procedures
   
42
 
                 
PART II — OTHER INFORMATION
   
44
 
   
Item 1 —
 
Legal Proceedings
   
44
 
   
Item 1A —
 
Risk Factors
   
44
 
   
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
   
44
 
   
Item 3 —
 
Defaults Upon Senior Securities
   
44
 
   
Item 4 —
 
Reserved
   
44
 
   
Item 5 —
 
Other Information
   
44
 
   
Item 6 —
 
Exhibits
   
44
 
Signatures
   
44
 
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32

 
 

 
 
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, 2009 under “Factors That May Affect Future Results and Financial Condition”.
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 

 
1

 

PART I.  FINANCIAL INFORMATION
 
Item 1.                       Financial Statements.
 


 
2

 


KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
           
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
 Assets
           
 Short term investments
  $ -     $ 225,336  
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $116,813)
    106,205       -  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $14,294,969
               
 at June 30, 2010 and $12,676,867 at December 31, 2009)
    14,577,906       12,791,080  
 Equity securities, available-for-sale, at fair value (cost of $2,314,476 at June 30, 2010
               
 and $1,973,738 at December 31, 2009)
    2,395,587       2,186,926  
 Total investments
    17,079,698       15,203,342  
 Cash and cash equivalents
    915,119       625,320  
 Investment income receivable
    158,213       135,251  
 Premiums receivable, net of provision for uncollectible amounts
    5,590,914       4,479,363  
 Receivables - reinsurance contracts
    896,282       564,408  
 Reinsurance receivables, net of provision for uncollectible amounts
    20,568,206       20,849,621  
 Notes receivable-sale of business
    905,700       1,119,365  
 Deferred acquisition costs
    3,445,620       2,917,984  
 Intangible assets, net
    4,374,243       4,612,100  
 Property and equipment, net of accumulated depreciation
    1,593,305       1,659,015  
 Equities in pools and associations
    220,708       220,708  
 Other assets
    236,202       257,276  
 Total assets
  $ 55,984,210     $ 52,643,753  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 16,323,276     $ 16,513,318  
 Unearned premiums
    16,616,352       14,088,187  
 Advance premiums
    449,759       411,676  
 Reinsurance balances payable
    2,432,368       1,918,169  
 Deferred ceding commission revenue
    3,083,429       3,298,245  
 Notes payable (includes payable to related parties of $785,000 at June 30, 2010
               
 and $585,000 at December 31, 2009)
    1,473,597       1,085,637  
 Accounts payable, accrued liabilities and other liabilities
    1,924,280       2,446,558  
 Deferred income taxes
    1,112,334       1,173,256  
 Mandatorily redeemable preferred stock
    -       1,299,231  
 Liabilities of discontinued operations
    -       26,000  
 Total liabilities
    43,415,395       42,260,277  
                 
 Commitments
               
                 
 Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,638,534 shares at
               
 June 30, 2010 and 3,804,536 shares at December 31, 2009; outstanding 3,833,798
               
 shares at June 30, 2010 and 2,988,511 shares at December 31, 2009
    46,386       38,046  
 Preferred stock, $.01 par value; authorized 1,000,000 shares; 0 shares issued and outstanding
    -       -  
 Capital in excess of par
    13,556,307       12,051,332  
 Accumulated other comprehensive income
    240,273       216,086  
 Accumulated deficit
    (110,893 )     (701,606 )
      13,732,073       11,603,858  
 Treasury stock, at cost, 804,736 shares at June 30, 2010 and 816,025 shares
               
 at December 31, 2009
    (1,163,258 )     (1,220,382 )
 Total stockholders' equity
    12,568,815       10,383,476  
                 
 Total liabilities and stockholders' equity
  $ 55,984,210     $ 52,643,753  
                 


See notes to condensed consolidated financial statements.
 

 
3

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                         
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
 Revenues
                       
 Net premiums earned
  $ 2,622,114     $ -     $ 4,840,061     $ -  
 Ceding commission revenue
    1,971,144       -       4,182,281       -  
 Net investment income
    148,923       -       281,203       -  
 Net realized gains on investments
    110,089       -       144,749       -  
 Other income
    228,381       245,359       449,485       357,396  
 Total revenues
    5,080,651       245,359       9,897,779       357,396  
                                 
 Expenses
                               
 Loss and loss adjustment expenses
    1,175,718       -       2,610,336       -  
 Commission expense
    1,223,484       -       2,360,103       -  
 Other underwriting expenses
    1,428,142       -       2,532,062       -  
 Other operating expenses
    377,188       384,983       916,807       666,896  
 Depreciation and amortization
    151,801       4,158       308,488       8,594  
 Interest expense
    47,100       53,084       92,302       133,351  
 Interest expense - mandatorily redeemable preferred stock
    37,353       32,952       74,706       52,452  
 Total expenses
    4,440,786       475,177       8,894,804       861,293  
                                 
 Income (loss) from operations
    639,865       (229,818 )     1,002,975       (503,897 )
 Interest income-CMIC note receivable
    -       37,313       -       67,782  
 Income (loss) from continuing operations before taxes
    639,865       (192,505 )     1,002,975       (436,115 )
 Income tax expense (benefit)
    291,546       (121,977 )     436,110       (209,752 )
 Income (loss) from continuing operations
    348,319       (70,528 )     566,865       (226,363 )
 Income (loss) from discontinued operations, net of taxes
    10,000       (168,094 )     23,848       (183,773 )
 Net income (loss)
    358,319       (238,622 )     590,713       (410,136 )
                                 
 Gross unrealized investment holding (losses) gains
                               
 arising during period
    (3,232 )     -       36,647       -  
 Income tax benefit (expense) related to items of
                               
 other comprehensive income
    1,099       -       (12,460 )     -  
 Comprehensive income (loss)
  $ 356,186     $ (238,622 )   $ 614,900     $ (410,136 )
                                 
Basic and diluted earnings (loss) per common share:
                               
Income (loss) from continuing operations
  $ 0.11     $ (0.02 )   $ 0.19     $ (0.08 )
Income (loss) from discontinued operations
  $ 0.00     $ (0.06 )   $ 0.01     $ (0.06 )
Income (loss) per common share
  $ 0.11     $ (0.08 )   $ 0.20     $ (0.14 )
                                 
Number of weighted average common shares used in
                               
computation of basic and diluted earnings (loss) per share
    3,079,451       2,972,746       3,016,830       2,972,746  


See notes to condensed consolidated financial statements.
 

 
4

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity (Unaudited)
                                           
Year ended December 31, 2009 and Six Months Ended June 30, 2010
                                     
                                                             
                                 
Accumulated
                         
                           
Capital
   
Other
                         
   
Common Stock
   
Preferred Stock
   
in Excess
   
Comprehensive
   
Accumulated
   
Treasury Stock
       
   
Shares
   
Amount
   
Shares
   
Amount
   
of Par
   
Income
   
(Deficit)
   
Shares
   
Amount
   
Total
 
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
    15,765       158       -       -       88,820       -       -       -       -       88,978  
Net income
    -       -       -       -       -               4,820,842       -       -       4,820,842  
Net unrealized gains on securities
                                                                            -  
available for sale, net of income tax
    -       -       -       -       -       216,086       -       -       -       216,086  
Balance, December 31, 2009
    3,804,536       38,046       -       -       12,051,332       216,086       (701,606 )     816,025       (1,220,382 )     10,383,476  
Stock-based payments
    57,878       578       -       -       270,630       -       -       -       -       271,208  
Mandatorily redeemable preferred stock
                                                                               
exchanged for common stock
    787,409       7,874       -       -       1,291,357       -       -       -       -       1,299,231  
Retirement of treasury stock
    (11,289 )     (112 )                     (57,012 )                     (11,289 )     57,124       -  
Net income
    -       -       -       -       -       -       590,713       -       -       590,713  
Net unrealized gains on securities
                                                                               
available for sale, net of income tax
    -       -       -       -       -       24,187       -       -       -       24,187  
Balance, June 30, 2010
    4,638,534     $ 46,386       -     $ -     $ 13,556,307     $ 240,273     $ (110,893 )     804,736     $ (1,163,258 )   $ 12,568,815  
                                                                                 
 

See notes to condensed consolidated financial statements.

 
5

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows (Unaudited)
           
Six Months Ended June 30,
 
2010
   
2009
 
             
 Cash flows provided by (used in) operating activities:
           
 Net income (loss)
  $ 590,713     $ (410,136 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
         
 Gain on sale of investments
    (144,749 )     -  
 Depreciation and amortization
    308,488       8,594  
 Amortization of bond premium (discount), net
    34,605       -  
 Stock-based payments
    271,208       13,510  
 Deferred income taxes
    (73,382 )     (226,000 )
 (Increase) decrease in assets:
               
 Short term investments
    225,336       -  
 Premiums receivable, net
    (1,111,551 )     -  
 Receivables - reinsurance contracts
    (331,874 )     -  
 Reinsurance receivables, net
    281,415       -  
 Deferred acquisition costs
    (527,636 )     -  
 Other assets
    (27,068 )     3,714  
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    (190,042 )     -  
 Unearned premiums
    2,528,165       -  
 Advance premiums
    38,083       -  
 Reinsurance balances payable
    514,199       -  
 Deferred ceding commission revenue
    (214,816 )     -  
 Accounts payable, accrued liabilities and other liabilities
    (522,278 )     (283,330 )
 Net cash provided by (used in) operating activities of continuing operations
    1,648,816       (893,648 )
 Operating activities of discontinued operations
    (26,000 )     109,851  
 Net cash flows provided by (used in) operating activities
    1,622,816       (783,797 )
                 
 Cash flows (used in) provided by investing activities:
               
 Purchase - fixed-maturity securities held to maturity
    (106,205 )     -  
 Purchase - fixed-maturity securities available for sale
    (3,116,725 )     -  
 Purchase - equity securities
    (877,639 )     -  
 Sale - fixed-maturity securities available for sale
    1,566,632       -  
 Sale - equity securities
    604,217       -  
 Increase in accrued interest - Commercial Mutual Insurance Company
    -       (60,757 )
 Increase in notes receivable and accrued interest - Sale of businesses
    -       (106,926 )
 Collections of notes receivable and accrued interest - Sale of businesses
    213,665       50,000  
 Other investing activities
    (4,921 )     (806 )
 Net cash used in investing activities of continuing operations
    (1,720,976 )     (118,489 )
 Investing activities of discontinued operations
    -       1,869,628  
 Net cash flows (used in) provided by investing activities
    (1,720,976 )     1,751,139  
                 
 Cash flows provided by (used in) financing activities:
               
 Proceeds from long term debt (includes $200,000 from related parties in 2010
               
 and $120,000 in 2009)
    400,000       500,000  
 Principal payments on long-term debt
    (12,040 )     (1,442,456 )
 Net cash provided by (used in) financing activities of continuing operations
    387,960       (942,456 )
 Financing activities of discontinued operations
    -       -  
 Net cash flows provided by (used in) financing activities
    387,960       (942,456 )
 

See notes to condensed consolidated financial statements.
 


 
6

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows (Unaudited)
           
Six Months Ended June 30,
 
2010
   
2009
 
             
 Increase in cash and cash equivalents
  $ 289,799     $ 24,886  
 Cash and cash equivalents, beginning of period
    625,320       142,949  
 Cash and cash equivalents, end of period
  $ 915,119     $ 167,835  
                 
 Supplemental Schedule of Non-Cash Investing and Finacing Activities:
               
 Mandatorily redeemable preferred stock exchanged for common stock
  $ 1,299,231     $ -  
 Notes receivable issued in connection with sale of business
  $ -     $ 1,047,573  
 Notes payable exchanged for mandatorily redeemable preferred stock
  $ -     $ 519,231  
 

See notes to condensed consolidated financial statements.
 
 
7

 


KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation and Nature of Business
 
On July 1, 2009, Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”) completed the acquisition of 100% of the issued and outstanding common stock of Kingstone Insurance Company (“KICO”) (formerly Commercial Mutual Insurance Company (“CMIC”)) 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 $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 from July 1, 2009 (the KICO acquisition date) through June 30, 2010. Accordingly, only the disclosures for the six month and three month periods ended June 30, 2010 will include KICO. As a result, disclosures for the six month and three month periods ended June 30, 2010 and 2009 are not comparable.

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 of 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 it owned in New York State (the “New York Sale”) (see Note 14). 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 14).  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 14).  As a result of the sale, the franchise business has been presented as discontinued operations and prior periods have been restated.
 
Note 2 – Accounting Policies and Basis of Presentation
 
Basis of Presentation
 
The accompanying unaudited condensed 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, 2009 and notes thereto included in the Company’s Annual Report on Form 10-K filed on April 7, 2010. 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 statement of the Company’s financial position and results of operations. The results of operations for the six months ended June 30, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010.
 
 
8

 
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 those estimates.
 
Reclassification
 
The Company has reclassified certain amounts in its 2009 consolidated balance sheet and 2009 statements of operations to conform to the 2010 presentation. None of these reclassifications had an effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.
 
Principles of Consolidation

The consolidated financial statements consist of Kingstone 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. All material intercompany transactions have been eliminated in consolidation.
 
Accounting Pronouncements
 
Accounting guidance adopted in 2010
 
In June 2009, the Financial Accounting Standards Board (“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. The Company adopted this new guidance on January 1, 2010, with no material effects on its financial statements as of June 30, 2010.
 
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 requires 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 is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The Company adopted this new guidance on January 1, 2010, with no material effects on its financial statements as of June 30, 2010. The Company will apply this guidance on a transaction by transaction basis going forward.
 
 
9

 
In January 2010, the FASB issued new guidance that requires additional disclosure of the fair value of assets and liabilities. This guidance requires additional disclosures to be made about significant transfers in and out of Levels 1 and 2 of the fair value hierarchy within GAAP. The Company adopted this guidance on January 1, 2010, with the required disclosure included in “Note 5 — Fair Value Measurements”.
 
Accounting guidance not yet effective
 
The guidance issued by the FASB in January 2010 also requires additional disclosure about the gross activity within Level 3 of the fair value hierarchy within GAAP as opposed to the net disclosure currently required. This disclosure will be effective for annual and interim periods beginning after December 15, 2010. As this guidance relates to disclosure rather than measurement of assets and liabilities, there will be no effect on the financial results or position of the Company. The Company will comply with this disclosure requirement when it becomes effective.
 
Pending accounting guidance
 
The Emerging Issues Task Force of the FASB is discussing Issue No. 09-G, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” At issue is how the definition of acquisition costs should be interpreted in assessing whether certain costs relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. In July 2010, the Task Force reached a final consensus-for-exposure that acquisition costs that qualify as deferrable should include only those costs that are directly related to the acquisition of insurance contracts by applying a model similar to the accounting for loan origination costs. That definition would not include, for example, any costs incurred in the acquisition of new or renewal contracts related to unsuccessful contract acquisitions. This pending guidance is expected to be effective for annual and interim periods beginning after December 15, 2011 and would allow, but not require, retrospective application.
 
The amount included in the category “other deferred acquisition expenses” may be significantly reduced as a result of the adoption of this pending guidance.
 
Note 3 - Acquisition of Kingstone Insurance Company
 
On July 1, 2009, Kingstone completed the acquisition of 100% of the issued and outstanding common stock of 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 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.

 
10

 
Note 4 - Investments 

Available for Sale Securities

The amortized cost and fair value of investments in available for sale fixed-maturity securities, equities and short term investments as of June 30, 2010 and December 31, 2009 are summarized as follows:
 
   
June 30, 2010
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
   
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost (a)
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
Fixed-Maturity Securities:
                               
U.S. Treasury securities and
                               
obligations of U.S. government
                               
corporations and agencies (b)
  $ 2,474,497     $ 85,905     $ (15,635 )   $ -     $ 2,544,767     $ 70,270  
                                                 
Political subdivisions of States,
                                         
Territories and Possessions
    6,901,104       103,377       (10,918 )     -       6,993,563       92,459  
                                                 
Corporate and other bonds
                                               
Industrial and miscellaneous
    4,919,368       128,013       (7,805 )     -       5,039,576       120,208  
Total fixed-maturity securities
    14,294,969       317,295       (34,358 )     -       14,577,906       282,937  
                                                 
Equity Securities:
                                               
Preferred stocks
    840,283       37,143       (9,161 )     -       868,265       27,982  
Common stocks
    1,474,193       82,073       (28,944 )     -       1,527,322       53,129  
Total equity securities
    2,314,476       119,216       (38,105 )     -       2,395,587       81,111  
                                                 
Short term investments
    -       -       -       -       -       -  
                                                 
Total
  $ 16,609,445     $ 436,511     $ (72,463 )   $ -     $ 16,973,493     $ 364,048  
                                                 
 
 
 
11

 

 
   
December 31, 2009
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost (a)
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                     
Fixed-Maturity Securities:
                               
U.S. Treasury securities and
                               
obligations of U.S. government
                               
 corporations and agencies (b)
  $ 3,549,616     $ 38,790     $ (23,929 )   $ -     $ 3,564,477     $ 14,861  
                                                 
Political subdivisions of States,
                                         
 Territories and Possessions
    5,751,979       82,480       (12,356 )     -       5,822,103       70,124  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    3,375,272       54,384       (25,156 )     -       3,404,500       29,228  
 Total fixed-maturity securities
    12,676,867       175,654       (61,441 )     -       12,791,080       114,213  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    716,903       33,661       (5,564 )     -       745,000       28,097  
 Common stocks
    1,256,835       191,075       (5,984 )     -       1,441,926       185,091  
 Total equity securities
    1,973,738       224,736       (11,548 )     -       2,186,926       213,188  
                                                 
 Short term investments
    225,336       -       -       -       225,336       -  
                                                 
 Total
  $ 14,875,941     $ 400,390     $ (72,989 )   $ -     $ 15,203,342     $ 327,401  

(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.

(b) Includes U. S. Treasury securities with fair values at June 30, 2010 and December 31, 2009 of $530,986 and $608,327, respectively, held in trust pursuant to the New York State Insurance Department’s minimum funds requirement.

A summary of the amortized cost and fair value of the Company’s available for sale investments in fixed-maturity securities by contractual maturity as of June 30, 2010 and December 31, 2009 is shown below:
 
   
June 30, 2010
   
December 31, 2009
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
             
 Less than one year
  $ 621,757     $ 606,626     $ 1,190,319     $ 1,176,050  
 One to five years
    5,793,942       5,896,883       5,202,936       5,260,443  
 Five to ten years
    5,898,877       6,078,432       4,945,787       4,986,236  
 More than 10 years
    1,980,393       1,995,965       1,337,825       1,368,351  
 Total
  $ 14,294,969     $ 14,577,906     $ 12,676,867     $ 12,791,080  
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.

Held to Maturity Securities

The amortized cost and fair value of investments in held to maturity fixed-maturity securities as of June 30, 2010 are summarized as follows:

 
12

 

 
 
June 30, 2010
  
 Cost or
 
 Gross
 
 Gross Unrealized Losses
   
 Unrealized
 
 Amortized
 Unrealized
 Less than 12
 More than 12
 Fair
 Gains/
 Category
 Cost (a)
 
 Gains
 
 Months
 
 Months
 
 Value
 (Losses)
                     
 U.S. Treasury securities
 $      106,205
 
 $        10,608
 
 $                  -
 
 $                  -
 
 $      116,813
 $        10,608
 
There were no held to maturity securities as of December 31, 2009.

A summary of the amortized cost and fair value of the Company’s held to maturity investments in fixed-maturity securities by contractual maturity as of June 30, 2010 is shown below:
 
   
June 30, 2010
   
December 31, 2009
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
             
 Less than one year
  $ -     $ -     $ -     $ -  
 One to five years
    -       -       -       -  
 Five to ten years
    -       -       -       -  
 More than 10 years
    106,205       116,813       -       -  
 Total
  $ 106,205     $ 116,813     $ -     $ -  
 
Investment Income

Major categories of the Company’s net investment income are summarized as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 Income
             
 
   
 
 
 Fixed-maturity securities
  $ 125,616     $ -     $ 254,723     $ -  
 Equity securities
    32,225       -       59,526       -  
 Cash and cash equivalents
    2,967       -       4,817       -  
 Other
    6       -       21       -  
 Total
    160,814       -       319,087       -  
 Expenses
                               
 Investment expenses
    11,891       -       37,884       -  
 Net investment income
  $ 148,923     $ -     $ 281,203     $ -  
 
Proceeds from the sale and maturity of fixed-maturity securities were $1,566,632 and $-0- for the six months ended June 30, 2010 and 2009, respectively.

Proceeds from the sale of equity securities were $604,217 and $-0- for the six months ended June 30, 2010 and 2009, respectively.

The Company’s gross realized gains and losses on investments are summarized as follows:

 
13

 
 

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
 Fixed-maturity securities
                       
 Gross realized gains
  $ 95,997     $ -     $ 95,997     $ -  
 Gross realized losses
    (18,562 )     -       (18,562 )     -  
      77,435       -       77,435       -  
                                 
 Equity securities
                               
 Gross realized gains
    37,854       -       84,252       -  
 Gross realized losses
    (5,200 )     -       (16,938 )     -  
      32,654       -       67,314       -  
                                 
 Net realized gains
  $ 110,089     $ -     $ 144,749     $ -  

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 impairments (“OTTI”) 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 consolidated statement of operations 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 its portfolio of fixed maturity investments, equity securities and short term investments for the six months ended June 30, 2010.  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 June 30, 2010 as follows:

 
14

 

 
   
June 30, 2010
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
                         
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Value
   
Losses
 
   
(unaudited)
 
Fixed-Maturity Securities:
                                     
U.S. Treasury securities
                                     
 and obligations of U.S.
                                         
government corporations
                                     
 and agencies
  $ 455,231     $ (15,635 )     1     $ -     $ -     $ 455,231     $ (15,635 )
                                                         
 Political subdivisions of
                                                       
 States, Territories and
                                                       
 Possessions
    1,807,922       (10,918 )     6       -       -       1,807,922       (10,918 )
                                                         
 Corporate and other
                                                       
 bonds industrial and
                                                       
 miscellaneous
    1,426,766       (7,805 )     5       -       -       1,426,766       (7,805 )
                                                         
 Total fixed-maturity
                                                       
 securities
    3,689,919       (34,358 )     12       -       -       3,689,919       (34,358 )
                                                         
 Equity Securities:
                                                       
 Preferred stocks
  $ 44,484     $ (9,161 )     7     $ -     $ -     $ 44,484     $ (9,161 )
 Common stocks
    1,388,128       (28,944 )     1       -       -       1,388,128       (28,944 )
                                                         
 Total equity securities
    1,432,612       (38,105 )     8       -       -       1,432,612       (38,105 )
                                                         
 Total
  $ 5,122,531     $ (72,463 )     20     $ -     $ -     $ 5,122,531     $ (72,463 )
 
Note 5 - Fair Value Measurements

The Company follows 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.
 
 
15

 
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.
 
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 at June 30, 2010 and December 31, 2009 as follows:
 
   
June 30, 2010
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(unaudited)
 
                         
 Fixed-maturity investments held to maturity
                       
 U.S. Treasury securities
  $ 117    $  -    $  -     $ 117  
                             
 Fixed-maturity investments available for sale
                           
 U.S. Treasury securities
                           
 and obligations of U.S.
                           
 government corporations
                           
 and agencies
    2,545       -       -       2,545  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    6,994       -       -       6,994  
                                 
 Corporate and
                               
 other bonds
    5,040       -       -       5,040  
                                 
 Total fixed maturities
    14,696       -       -       14,696  
 Equity investments
    2,396       -       -       2,396  
 Short term investments
    -       -       -       -  
 Total investments
  $ 17,092     $ -     $ -     $ 17,092  
 
 
 
16

 

 
   
December 31, 2009
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporations