kingstone_10q.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, 2011
 
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   36-2476480
(State or other jurisdiction of
incorporation or organization)
 
(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 þ 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 filer
o
Non-accelerated filer
o
Smaller reporting company
þ
        (Do not check if a smaller reporting company)      

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 15, 2011, there were 3,838,386 shares of the registrant’s common stock outstanding.



 
 

 
KINGSTONE COMPANIES, INC.
 
INDEX
 
     
PAGE
           
PART I — FINANCIAL INFORMATION
   
2
 
         
Item 1 —
Financial Statements
   
2
 
 
Condensed Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010
   
2
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months and six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited)
   
3
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2011 (Unaudited)
   
4
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 (Unaudited) and 2010  (Unaudited)
   
5
 
 
Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
6
 
Item 2 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
24
 
Item 3 —
Quantitative and Qualitative Disclosures About Market Risk
   
40
 
Item 4 —
Controls and Procedures
   
40
 
           
PART II — OTHER INFORMATION
   
41
 
         
Item 1 —
Legal Proceedings
   
41
 
Item 1A —
Risk Factors
   
41
 
Item 2 —
Unregistered Sales of Equity Securities and Use of Proceeds
   
41
 
Item 3 —
Defaults Upon Senior Securities
   
41
 
Item 4 —
Reserved
   
41
 
Item 5 —
Other Information
   
41
 
Item 6 —
Exhibits
   
41
 
Signatures
       
EXHIBIT 31(a)
EXHIBIT 31(b)
EXHIBIT 32
EXHIBIT 101.INS XBRL Instance Document
EXHIBIT 101.SCH XBRL Taxonomy Extension Schema
EXHIBIT 101.CAL XBRL Taxonomy Extension Calculation Linkbase
EXHIBIT 101.DEF XBRL Taxonomy Extension Definition Linkbase
EXHIBIT 101.LAB XBRL Taxonomy Extension Label Linkbase
EXHIBIT 101.PRE XBRL Taxonomy Extension Presentation Linkbase

 
 

 
 
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, 2010 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.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
   
June 30,
   
December 31,
 
   
2011
      2010*  
   
(unaudited)
         
 Assets
             
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $596,683 at
             
 June 30, 2011 and $606,398 at December 31, 2010)
  $ 606,234     $ 605,424  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $18,226,972
               
 at June 30, 2011 and $16,277,052 at December 31, 2010)
    18,570,793       16,339,101  
 Equity securities, available-for-sale, at fair value (cost of $2,741,606
               
 at June 30, 2011 and $2,825,015 at December 31, 2010)
    2,951,160       2,983,035  
 Total investments
    22,128,187       19,927,560  
 Cash and cash equivalents
    87,184       326,620  
 Premiums receivable, net of provision for uncollectible amounts
    6,239,129       5,001,886  
 Receivables - reinsurance contracts
    2,902,903       1,174,729  
 Reinsurance receivables, net of provision for uncollectible amounts
    23,043,406       20,720,194  
 Notes receivable-sale of business
    407,341       705,019  
 Deferred acquisition costs
    4,205,661       3,619,001  
 Intangible assets, net
    3,898,529       4,136,386  
 Property and equipment, net of accumulated depreciation
    1,532,742       1,585,029  
 Other assets
    624,886       1,486,249  
 Total assets
  $ 65,069,968     $ 58,682,673  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 18,505,367     $ 17,711,907  
 Unearned premiums
    20,190,149       17,277,332  
 Advance premiums
    605,578       410,574  
 Reinsurance balances payable
    3,004,668       1,106,897  
 Deferred ceding commission revenue
    3,672,391       3,219,513  
 Notes payable and capital lease obligations (includes payable to related
               
 parties of $378,000 at June 30, 2011 and $785,000 at December 31, 2010)
    747,000       1,460,997  
 Accounts payable, accrued expenses and other liabilities
    2,115,744       2,553,031  
 Income taxes payable
    164,876       -  
 Deferred income taxes
    1,935,645       1,998,557  
 Total liabilities
    50,941,418       45,738,808  
                 
 Commitments and Contingencies
               
                 
 Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,643,122 shares;
               
 outstanding 3,838,386 shares
    46,432       46,432  
 Preferred stock, $.01 par value; authorized 1,000,000 shares;
               
 -0- shares issued and outstanding
    -       -  
 Capital in excess of par
    13,698,061       13,633,913  
 Accumulated other comprehensive income
    365,229       145,247  
 Retained earnings
    1,182,086       281,531  
      15,291,808       14,107,123  
 Treasury stock, at cost, 804,736 shares
    (1,163,258 )     (1,163,258 )
 Total stockholders' equity
    14,128,550       12,943,865  
                 
 Total liabilities and stockholders' equity
  $ 65,069,968     $ 58,682,673  
 
* derived from audited financial information


See accompanying notes to condensed consolidated financial statements.
 
 
2

 
 
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,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
                       
Net premiums earned
 
$
3,517,249
   
$
2,622,114
   
$
6,884,948
   
$
4,840,061
 
Ceding commission revenue
   
2,727,867
     
1,971,144
     
5,040,442
     
4,182,281
 
Net investment income
   
160,464
     
148,923
     
338,134
     
281,203
 
Net realized gain on investments
   
89,961
     
110,089
     
160,432
     
144,749
 
Other income
   
217,101
     
228,381
     
464,573
     
449,485
 
Total revenues
   
6,712,642
     
5,080,651
     
12,888,529
     
9,897,779
 
                                 
Expenses
                               
Loss and loss adjustment expenses
   
1,823,630
     
1,175,718
     
4,374,394
     
2,610,336
 
Commission expense
   
1,504,894
     
1,223,484
     
2,876,643
     
2,360,103
 
Other underwriting expenses
   
1,734,095
     
1,428,142
     
3,310,914
     
2,532,062
 
Other operating expenses
   
299,002
     
377,188
     
602,965
     
916,807
 
Depreciation and amortization
   
154,682
     
151,801
     
313,142
     
308,488
 
Interest expense
   
38,907
     
47,100
     
84,672
     
92,302
 
Interest expense - mandatorily redeemable preferred stock
   
-
     
37,353
     
-
     
74,706
 
Total expenses
   
5,555,210
     
4,440,786
     
11,562,730
     
8,894,804
 
                                 
Income from continuing operations before taxes
   
1,157,432
     
639,865
     
1,325,799
     
1,002,975
 
Income tax expense
   
383,501
     
291,546
     
425,244
     
436,110
 
Income from continuing operations
   
773,931
     
348,319
     
900,555
     
566,865
 
Income from discontinued operations, net of taxes
   
-
     
10,000
     
-
     
23,848
 
Net income
   
773,931
     
358,319
     
900,555
     
590,713
 
                                 
Gross unrealized investment holding gains (losses) arising during period
   
301,456
     
(3,232
)
   
333,306
     
36,647
 
Income tax (expense) benefit related to items of other comprehensive income (loss)
   
(102,495
)
   
1,099
     
(113,324
)
   
(12,460
)
Comprehensive income
 
$
972,892
   
$
356,186
   
$
1,120,537
   
$
614,900
 
                                 
Basic and diluted earnings per common share:
                               
Income from continuing operations
 
$
0.20
   
$
0.11
   
$
0.23
   
$
0.19
 
Income from discontinued operations
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.01
 
Income per common share
 
$
0.20
   
$
0.11
   
$
0.23
   
$
0.20
 
                                 
Weighted average common shares outstanding
                               
Basic
   
3,838,386
     
3,079,451
     
3,838,386
     
3,016,830
 
Diluted
   
3,918,763
     
3,079,451
     
3,921,289
     
3,016,830
 
 
 

See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statement of Stockholders' Equity 

Six months ended June 30, 2011 (unaudited) 

                                  Accumulated
Other
Comprehensive
Income
                         
                            Capital in Excess
of Par
                             
   
Common Stock
   
Preferred Stock
            Retained
Earnings
   
Treasury Stock
       
   
Shares
   
Amount
   
Shares
   
Amount
               
Shares
   
Amount
   
Total
 
Balance, December 31, 2010
    4,643,122     $ 46,432       -     $ -     $ 13,633,913     $ 145,247     $ 281,531       804,736     $ (1,163,258 )   $ 12,943,865  
Stock-based payments
    -       -       -       -       64,148       -       -       -       -       64,148  
Net income
    -       -       -       -       -       -       900,555       -       -       900,555  
Net unrealized gains on securities available for sale, net of income tax
    -       -       -       -       -       219,982       -       -       -       219,982  
Balance, June 30, 2011
    4,643,122     $ 46,432       -     $ -     $ 13,698,061     $ 365,229     $ 1,182,086       804,736     $ (1,163,258 )   $ 14,128,550  
 

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)  

Six months ended June  30, 

   
2011
   
2010
 
             
 Cash flows provided by operating activities:
           
 Net income
  $ 900,555     $ 590,713  
 Adjustments to reconcile net income to net cash provided by operations:
               
 Gain on sale of investments
    (160,432 )     (144,749 )
 Depreciation and amortization
    313,142       308,488  
 Amortization of bond premium, net
    123,001       34,605  
 Stock-based payments
    64,148       271,208  
 Deferred income taxes
    (176,236 )     (73,382 )
 (Increase) decrease in assets:
               
 Short term investments
    -       225,336  
 Premiums receivable, net
    (1,237,243 )     (1,111,551 )
 Receivables - reinsurance contracts
    (1,728,174 )     (331,874 )
 Reinsurance receivables, net
    (2,323,212 )     281,415  
 Deferred acquisition costs
    (586,660 )     (527,636 )
 Other assets
    858,805       (27,068 )
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    793,460       (190,042 )
 Unearned premiums
    2,912,817       2,528,165  
 Advance premiums
    195,004       38,083  
 Reinsurance balances payable
    1,897,771       514,199  
 Deferred ceding commission revenue
    452,878       (214,816 )
 Income taxes payable
    164,876       -  
 Accounts payable, accrued expenses and other liabilities
    (437,287 )     (522,278 )
 Net cash provided by operating activities of continuing operations
    2,027,213       1,648,816  
 Operating activities of discontinued operations
    -       (26,000 )
 Net cash flows provided by operating activities
    2,027,213       1,622,816  
                 
 Cash flows used in investing activities:
               
 Purchase - fixed-maturity securities held to maturity
    -       (106,205 )
 Purchase - fixed-maturity securities available for sale
    (4,065,722 )     (3,116,725 )
 Purchase - equity securities
    (1,056,775 )     (877,639 )
 Sale or maturity - fixed-maturity securities available for sale
    2,079,869       1,566,632  
 Sale - equity securities
    1,215,296       604,217  
 Collections of notes receivable and accrued interest - Sale of businesses
    297,678       213,665  
 Other investing activities
    (22,998 )     (4,922 )
 Net cash flows used in investing activities
    (1,552,652 )     (1,720,977 )
                 
 Cash flows (used in) provided by financing activities:
               
 Proceeds from long term debt (includes $200,000 from related parties in 2010)
    -       400,000  
 Principal payments on long-term debt (includes $407,000 to related parties in 2011)
    (713,997 )     (12,040 )
 Net cash flows (used in) provided by financing activities
    (713,997 )     387,960  
                 
 (Decrease) increase in cash and cash equivalents
    (239,436 )     289,799  
 Cash and cash equivalents, beginning of period
    326,620       625,320  
 Cash and cash equivalents, end of period
  $ 87,184     $ 915,119  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for income taxes
  $ 329,762     $ 486,525  
 Cash paid for interest
  $ 125,994     $ 170,018  
                 
 Supplemental Schedule of Non-Cash Investing and Finacing Activities:
               
 Mandatorily redeemable preferred stock exchanged for common stock
    -     $ 1,299,231  
 

See accompanying notes to condensed consolidated financial statements.
 
 
5

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

Note 1 - Basis of Presentation and Nature of Business
 
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its subsidiary Kingstone Insurance Company (“KICO”), offers property and casualty insurance products to small businesses and individuals in New York State.
 
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, 2010 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 31, 2011. 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, 2011 may not be indicative of the results that may be expected for the year ending December 31, 2011.
 
Note 2 – Accounting Policies and Basis of Presentation
 
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 2010 statements of consolidated operations and cash flows to conform to the 2011 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 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.
 
 
6

 
 
Accounting Pronouncements
 
In October 2010, the FASB issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance generally follows the model of that for loan origination costs. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. The Company adopted this guidance retrospectively effective January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or liquidity.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”). ASU 2011-03 provides amendments to Accounting Standards Codification (“ASC”) No. 860 “Transfers and Servicing”, which remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective prospectively for transactions or modifications of existing transactions that occur on or after the beginning of the first interim or annual reporting period beginning on or after December 15, 2011, with early adoption not permitted.
 
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”). ASU 2011-04 provides amendments to ASC No. 820 “Fair Value Measurement”, which results in a consistent definition of fair value and common requirements for measurement of and disclosure of fair value between U.S. GAAP and IFRS. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this update are effective prospectively during interim and annual periods beginning after December 15, 2011, with early adoption not permitted.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 provides amendments to ASC No. 220 “Comprehensive Income”, which require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.
 
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations. 
 
Note 3 - 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, 2011 and December 31, 2010 are summarized as follows:

   
June 30, 2011
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
 Fixed-Maturity Securities:
                                   
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ 1,000,242     $ 55,719     $ -     $ -     $ 1,055,961     $ 55,719  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    6,161,995       180,375       -       (880 )     6,341,490       179,495  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    11,064,735       210,008       (99,069 )     (2,332 )     11,173,342       108,607  
 Total fixed-maturity securities
    18,226,972       446,102       (99,069 )     (3,212 )     18,570,793       343,821  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    896,228       25,224       (9,397 )     -       912,055       15,827  
 Common stocks
    1,845,378       222,241       (28,514 )     -       2,039,105       193,727  
 Total equity securities
    2,741,606       247,465       (37,911 )     -       2,951,160       209,554  
                                                 
 Total
  $ 20,968,578     $ 693,567     $ (136,980 )   $ (3,212 )   $ 21,521,953     $ 553,375  
 
 
7

 
 
   
December 31, 2010
       
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                     
 Fixed-Maturity Securities:
                                   
 U.S. Treasury securities and
                                   
 obligations of U.S. government
                                   
 corporations and agencies
  $ 1,000,572     $ 42,085     $ -     $ -     $ 1,042,657     $ 42,085  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    7,278,663       79,791       (86,234 )     (12,995 )     7,259,225       (19,438 )
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    7,997,817       176,999       (137,597 )     -       8,037,219       39,402  
 Total fixed-maturity securities
    16,277,052       298,875       (223,831 )     (12,995 )     16,339,101       62,049  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    824,569       29,934       (6,333 )     -       848,170       23,601  
 Common stocks
    2,000,446       188,783       (54,364 )     -       2,134,865       134,419  
 Total equity securities
    2,825,015       218,717       (60,697 )     -       2,983,035       158,020  
                                                 
 Total
  $ 19,102,067     $ 517,592     $ (284,528 )   $ (12,995 )   $ 19,322,136     $ 220,069  
 
 
8

 
 
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, 2011 and December 31, 2010 is shown below:
 
   
June 30, 2011
   
December 31, 2010
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
       
 Less than one year
  $ 302,204     $ 305,388     $ 263,098     $ 253,385  
 One to five years
    6,662,009       6,915,777       6,868,952       6,997,694  
 Five to ten years
    9,976,605       10,039,474       7,132,079       7,118,405  
 More than 10 years
    1,286,154       1,310,154       2,012,923       1,969,617  
 Total
  $ 18,226,972     $ 18,570,793     $ 16,277,052     $ 16,339,101  
 
 
9

 
 
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, 2011 and December 31, 2010 are summarized as follows:

   
June 30, 2011
       
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
                                     
 U.S. Treasury securities
  $ 606,234     $ 1,699     $ (11,250 )   $ -     $ 596,683     $ (9,551 )
 
    December 31, 2010        
    Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
    Gross Unrealized Losses              
Category
         
Less than 12
Months
   
More than 12
Months
   
Fair
Value
   
Gains/
(Losses)
 
                                     
U.S. Treasury securities   $ 605,424     $ 974     $ -     $ -     $ 606,398     $ 974  
 
All held to maturity securities are held in trust pursuant to the New York State Insurance Department’s minimum funds requirement.

Contractual maturities of all held to maturity securities are greater than ten years.
 
 
10

 

 
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,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
 Income
             
 
   
 
 
 Fixed-maturity securities
  $ 174,363     $ 125,616     $ 356,500     $ 254,723  
 Equity securities
    33,474       32,225       70,298       59,526  
 Cash and cash equivalents
    236       2,967       2,223       4,817  
 Other
    (3,325 )     6       (3,315 )     21  
 Total
    204,748       160,814       425,706       319,087  
 Expenses
                               
 Investment expenses
    44,284       11,891       87,572       37,884  
 Net investment income
  $ 160,464     $ 148,923     $ 338,134     $ 281,203  
 
Proceeds from the sale and maturity of fixed-maturity securities were $2,079,869 and $1,566,632 for the six months ended June 30, 2011 and 2010.

Proceeds from the sale of equity securities were $1,215,296 and $604,217 for the six months ended June 30, 2011 and 2010, respectively.

The Company’s gross realized gains and losses on investments are summarized as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
 Fixed-maturity securities
                       
 Gross realized gains
  $ 87,302     $ 95,997     $ 87,302     $ 95,997  
 Gross realized losses
    (1,983 )     (18,562 )     (1,983 )     (18,562 )
      85,319       77,435       85,319       77,435  
                                 
 Equity securities
                               
 Gross realized gains
    18,484       37,854       135,817       84,252  
 Gross realized losses
    (13,842 )     (5,200 )     (60,704 )     (16,938 )
      4,642       32,654       75,113       67,314  
                                 
 Net realized gains
  $ 89,961     $ 110,089     $ 160,432     $ 144,749  
 
 
11

 
 
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 (“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 condensed consolidated statement of operations and comprehensive 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. There are 41 securities at June 30, 2011 that account for the gross unrealized loss. The Company determined that none of the unrealized losses were deemed to be OTTI for its portfolio of fixed maturity investments and equity securities for the six months ended June 30, 2011 and 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, 2011 as follows:
 
   
June 30, 2011
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
               
No. of
   
Aggregate
       
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Held
   
Value
   
Losses
 
   
(unaudited)
 
Fixed-Maturity Securities:
                                           
Political subdivisions of
                                           
 States, Territories and
                                               
 Possessions
  $ -     $ -       -     $ 231,548     $ (880 )     1     $ 231,548     $ (880 )
                                                                 
 Corporate and other
                                                               
 bonds industrial and
                                                               
 miscellaneous
    4,282,600       (99,069 )     22       397,668       (2,332 )     1       4,680,268       (101,401 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 4,282,600     $ (99,069 )     22     $ 629,216     $ (3,212 )     2     $ 4,911,816     $ (102,281 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 316,000     $ (9,397 )     8     $ -     $ -       -     $ 316,000     $ (9,397 )
 Common stocks
    488,948       (28,514 )     9       -       -       -       488,948       (28,514 )
                                                                 
 Total equity securities
  $ 804,948     $ (37,911 )     17     $ -     $ -       -     $ 804,948     $ (37,911 )
                                                                 
 Total
  $ 5,087,548     $ (136,980 )     39     $ 629,216     $ (3,212 )     2     $ 5,716,764     $ (140,192 )
 
 
12

 
 
Note 4 - 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.
 
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, 2011 and December 31, 2010 as follows:
 
   
June 30, 2011
 
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(unaudited)
 
Fixed-maturity investments available for sale
                       
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 1,056     $ -     $ -     $ 1,056  
                                 
Political subdivisions of  States, Territories and  Possessions
    4,984       1,358       -       6,342  
 
                               
Corporate and other bonds industrial and miscellaneous
    10,942       231       -       11,173  
Total fixed maturities
    16,982       1,589       -       18,571  
Equity investments
    2,951       -       -       2,951  
Total investments
  $ 19,933     $ 1,589     $ -     $ 21,522  
 
 
13

 
 
  December 31, 2010  
($ 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
  $ 1,043     $ -     $ -     $ 1,043  
                                 
Political subdivisions of States, Territories and Possessions
    5,351       1,908       -       7,259  
                                 
Corporate and other bonds industrial and miscellaneous
    8,037       -       -       8,037  
Total fixed maturities
    14,431       1,908       -       16,339  
Equity investments
    2,983       -       -       2,983  
Total investments
  $ 17,414     $ 1,908     $ -     $ 19,322  
 
Note 5 - 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 3 - Investments.”

Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their fair values because of the short maturity of these instruments.

Premiums receivable, reinsurance receivables:  The carrying values reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to the short term nature of the assets.

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.

Real Estate: The fair value of the land and building included in property and equipment, which is used in the Company’s operations, approximates the carrying value. The fair value was based on an appraisal prepared using the sales comparison approach.

Reinsurance balances payable:  The carrying value reported in the condensed consolidated balance sheets for these financial instruments approximates fair value.

Notes payable (including related parties): The Company estimates that the carrying amount of notes payable approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.

 
14

 
 
The estimated fair values of the Company’s financial instruments are as follows:
 
   
June 30, 2011
   
December 31, 2010
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(unaudited)
             
 Fixed-maturity investments held to maturity
  $ 606,234     $ 596,683     $ 605,424     $ 606,398  
 Cash and cash equivalents
    87,184       87,184       326,620       326,620  
 Premiums receivable
    6,239,129       6,239,129       5,001,886       5,001,886  
 Receivables - reinsurance contracts
    2,902,903       2,902,903       1,174,729       1,174,729  
 Reinsurance receivables
    23,043,406       23,043,406       20,720,194       20,720,194  
 Notes receivable-sale of business
    407,341       407,341       705,019       705,019  
 Real estate, net of
                               
 accumulated depreciation
    1,415,162       1,510,000       1,437,787       1,510,000  
 Reinsurance balances payable
    3,004,668       3,004,668       1,106,897       1,106,897  
 Notes payable (including related parties)
    747,000       747,000       1,460,997       1,460,997  
 
Note 6 - Notes Receivable-Sale of Businesses
 
Retail Business
 
New York Stores: On April 17, 2009, the Company’s wholly-owned subsidiaries that owned and operated 16 Retail Business locations in New York State sold substantially all of their assets, including their book of business (the “New York Assets”). The purchase price for the New York Assets was approximately $2,337,000, of which approximately $1,786,000 was paid at closing.  Promissory notes in the aggregate original principal amount of approximately $551,000 (the “New York Notes”) were also delivered at the closing.  On April 1, 2011 the purchaser of the New York Assets paid in advance the balance of the New York Notes in the amount of $138,762.
 
Pennsylvania Stores:  Effective June 30, 2009, the Company sold all of the outstanding stock of the subsidiary that operated the three remaining Pennsylvania stores (the “Pennsylvania Stock”).  The purchase price for the Pennsylvania Stock was approximately $397,000 which was paid by delivery of two promissory notes, one in the approximate principal amount of $238,000 and payable with interest at the rate of 9.375% per annum in 120 equal monthly installments, and the other in the approximate principal amount of $159,000 and payable with interest at the rate of 6% per annum in 60 monthly installments commencing August 10, 2011 (with interest only being payable prior to such date).
 
Franchise Business
 
Effective May 1, 2009, the Company sold all of the outstanding stock of the subsidiaries that operated the DCAP franchise business (collectively, the “Franchise Stock”).  The purchase price for the Franchise Stock was $200,000 which was paid, by delivery of a promissory note in such principal amount (the “Franchise Note”).  As of March 31, 2011, the terms of the Franchise Note called for installments of $50,000 on May 15, 2009, $50,000 on May 1, 2010, both of which were paid and $100,000 plus accrued interest on May 1, 2011 and provides for interest at the rate of 5.25% per annum. On May 1, 2011, the Franchise Note was amended. Under the amended Franchise Note, the payment due on May 1, 2011 was reduced to a principal payment only of $75,000. The remaining balance of $25,000 plus accrued interest of $12,797 is due on May 1, 2012.  A principal of the buyer is the son-in-law of Morton L. Certilman, one of the Company’s principal shareholders at the time.
 
 
15

 
 
Notes receivable arising from the sale of businesses as of June 30, 2011 and December 31, 2010 consists of:
 
   
June 30, 2011
   
December 31, 2010
 
   
Total
   
Current
         
Total
   
Current
       
   
Note
   
Maturities
   
Long-Term
   
Note
   
Maturities
   
Long-Term
 
   
(unaudited)
                   
Sale of NY stores
  $ -     $ -     $ -     $ 211,536     $ 211,536     $ -  
Sale of Pennsylvania stores
    366,795       43,731       323,064       375,211       28,730       346,481  
Sale of Franchise business
    37,797       37,797       -       100,000       100,000       -  
      404,592       81,528       323,064       686,747       340,266       346,481  
Accrued interest
    2,749       24,493       (21,744 )     18,272       18,272       -  
Total
  $ 407,341     $ 106,021     $ 301,320     $ 705,019     $ 358,538     $ 346,481  
 
Note 7 – Property and Casualty Insurance Activity
 
Earned Premiums

Premiums written, ceded and earned are as follows:
 
   
Direct
   
Assumed
   
Ceded
   
Net
 
                         
Six months ended June 30, 2011 (unaudited)
   
 
   
 
   
 
 
 Premiums written
  $ 20,120,159     $ 2,880     $ (11,979,870 )   $ 8,143,169  
 Change in unearned premiums
    (2,914,468 )     1,652       1,654,595       (1,258,221 )
 Premiums earned
  $ 17,205,691     $ 4,532     $ (10,325,275 )   $ 6,884,948  
                                 
Six months ended June 30, 2010 (unaudited)
                         
 Premiums written
  $ 16,593,343     $ 3,136     $ (9,513,527 )   $ 7,082,952  
 Change in unearned premiums
    (2,530,237 )     2,072       285,274       (2,242,891 )
 Premiums earned
  $ 14,063,106     $ 5,208     $ (9,228,253 )   $ 4,840,061  
                                 
Three months ended June 30, 2011 (unaudited)
                         
 Premiums written
  $ 10,587,013     $ 2,646     $ (6,483,505 )   $ 4,106,154  
 Change in unearned premiums
    (1,677,592 )     (486 )     1,089,173       (588,905 )
 Premiums earned
  $ 8,909,421     $ 2,160     $ (5,394,332 )   $ 3,517,249  
                                 
Three months ended June 30, 2010 (unaudited)
                         
 Premiums written
  $ 8,932,360     $ 1,775     $ (5,229,674 )   $ 3,704,461  
 Change in unearned premiums
    (1,640,879 )     663       557,869       (1,082,347 )
 Premiums earned
  $ 7,291,481     $ 2,438     $ (4,671,805 )   $ 2,622,114  
 
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $606,000 and $411,000 as of June 30, 2011 (unaudited) and December 31, 2010, respectively.
 
 
16

 

 
Loss and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):
 
   
Six months ended
 
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
 
 Balance at beginning of period
  $ 17,711,907     $ 16,513,318  
 Less reinsurance recoverables
    (10,431,415 )     (10,512,203 )
 Net balance, beginning of period
    7,280,492       6,001,115  
                 
 Incurred related to: