kins_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 March 31, 2012
 
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
(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 May 14, 2012, there were 3,779,900 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 March 31, 2012 (Unaudited) and December 31, 2011
    2  
 
Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited)
    3  
 
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012 (Unaudited)
    4  
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited)
    5  
 
Notes to Condensed Consolidated Financial Statements  (Unaudited)
    6  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    25  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    37  
Item 4.
Controls and Procedures
    38  
           
PART II.  OTHER INFORMATION
    39  
Item 1.
Legal Proceedings
    39  
Item 1A.
Risk Factors
    39  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    39  
Item 3.
Defaults Upon Senior Securities
    39  
Item 4.
Mine Safety Disclosures
    39  
Item 5.
Other Information
    39  
Item 6.
Exhibits
    40  
Signatures
    41  
  EXHIBIT 3(a)    
  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, 2011 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
           
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
 Assets
           
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $718,616 at
           
 March 31, 2012 and $777,953 at December 31, 2011)
  $ 606,257     $ 606,234  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $21,350,396
               
 at March 31, 2012 and $22,215,191 at December 31, 2011)
    22,017,110       22,568,932  
 Equity securities, available-for-sale, at fair value (cost of $4,323,868
               
 at March 31, 2012 and $3,857,741 at December 31, 2011)
    4,665,530       4,065,210  
 Total investments
    27,288,897       27,240,376  
 Cash and cash equivalents
    312,051       173,126  
 Premiums receivable, net of provision for uncollectible amounts
    6,322,652       5,779,085  
 Receivables - reinsurance contracts
    2,591,858       1,734,535  
 Reinsurance receivables, net of provision for uncollectible amounts
    25,183,818       23,880,814  
 Notes receivable-sale of business
    386,445       393,511  
 Deferred acquisition costs
    4,716,352       4,535,773  
 Intangible assets, net
    3,541,743       3,660,672  
 Property and equipment, net of accumulated depreciation
    1,630,141       1,646,341  
 Other assets
    681,151       660,672  
 Total assets
  $ 72,655,108     $ 69,704,905  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 19,933,009     $ 18,480,717  
 Unearned premiums
    22,253,722       21,283,160  
 Advance premiums
    577,436       544,791  
 Reinsurance balances payable
    3,103,242       2,761,828  
 Deferred ceding commission revenue
    4,149,217       3,982,399  
 Notes payable (includes payable to related parties of $378,000
               
 at March 31, 2012 and December 31, 2011)
    997,000       1,047,000  
 Accounts payable, accrued expenses and other liabilities
    3,084,678       4,419,623  
 Income taxes payable
    365,903       85,393  
 Deferred income taxes
    1,872,876       1,789,439  
 Total liabilities
    56,337,083       54,394,350  
                 
 Commitments and Contingencies
               
                 
 Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,665,338
               
 shares at March 31, 2012 and 4,643,122 shares at December 31, 2011;
               
 outstanding 3,779,900 shares at March 31, 2012 and 3,759,900 shares
               
 at December 31, 2011
    46,654       46,432  
 Preferred stock, $.01 par value; authorized 1,000,000 shares;
               
 -0- shares issued and outstanding
    -       -  
 Capital in excess of par
    13,808,090       13,739,792  
 Accumulated other comprehensive income
    665,528       370,399  
 Retained earnings
    3,206,370       2,554,349  
      17,726,642       16,710,972  
 Treasury stock, at cost, 885,438 shares at March 31, 2012 and 883,222 shares
               
 at December 31, 2011
    (1,408,617 )     (1,400,417 )
 Total stockholders' equity
    16,318,025       15,310,555  
                 
 Total liabilities and stockholders' equity
  $ 72,655,108     $ 69,704,905  
 

See accompanying notes to condensed consolidated financial statements.
 
 
2

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 
Three months ended March 31,
 
2012
   
2011
 
             
 Revenues
           
 Net premiums earned
  $ 3,972,535     $ 3,367,699  
 Ceding commission revenue
    2,903,656       2,312,575  
 Net investment income
    267,517       177,670  
 Net realized gain on investments
    39,400       70,471  
 Other income
    239,055       247,472  
 Total revenues
    7,422,163       6,175,887  
                 
 Expenses
               
 Loss and loss adjustment expenses
    2,278,514       2,550,764  
 Commission expense
    1,671,607       1,371,749  
 Other underwriting expenses
    1,857,746       1,576,819  
 Other operating expenses
    286,887       303,963  
 Depreciation and amortization
    146,549       158,460  
 Interest expense
    20,785       45,765  
 Total expenses
    6,262,088       6,007,520  
                 
 Income from operations before taxes
    1,160,075       168,367  
 Income tax expense
    394,657       41,743  
 Net income
    765,418       126,624  
                 
 Gross unrealized investment holding gains arising during period
    447,165       31,850  
                 
 Income tax expense related to items of other comprehensive income
    (152,036 )     (10,829 )
 Comprehensive income
  $ 1,060,547     $ 147,645  
                 
Earnings per common share:
               
Basic
  $ 0.20     $ 0.03  
Diluted
  $ 0.20     $ 0.03  
                 
Weighted average common shares outstanding
               
Basic
    3,771,109       3,838,386  
Diluted
    3,771,109       3,838,386  
                 
Dividends declared and paid per common share
  $ 0.03     $ -  
 

See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity
 
Three months ended March 31, 2012 (unaudited)
 
                                                             
                                 
Accumulated
                         
                           
Capital
   
Other
                         
   
Common Stock
   
Preferred Stock
   
in Excess
   
Comprehensive
   
Retained
   
Treasury Stock
       
   
Shares
   
Amount
   
Shares
   
Amount
   
of Par
   
Income
   
Earnings
   
Shares
   
Amount
   
Total
 
Balance, December 31, 2011
    4,643,122       46,432       -       -       13,739,792       370,399       2,554,349       883,222       (1,400,417 )     15,310,555  
Stock-based compensation
    -       -       -       -       19,501       -       -       -       -       19,501  
Exercise of stock options
    22,216       222       -       -       40,978       -       -       2,216       (8,200 )     33,000  
Tax benefit from exercise of stock options
    -       -       -       -       7,819       -       -       -       -       7,819  
Dividends
    -       -       -       -       -       -       (113,397 )     -       -       (113,397 )
Net income
    -       -       -       -       -       -       765,418       -       -       765,418  
Other comprehensive income     -       -       -       -       -       295,129       -       -       -       295,129  
Balance, March 31, 2012
    4,665,338     $ 46,654       -     $ -     $ 13,808,090     $ 665,528     $ 3,206,370       885,438     $ (1,408,617 )   $ 16,318,025  
 

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
Three months ended March 31,
 
2012
   
2011
 
             
 Cash flows (used in) provided by operating activities:
           
 Net income
  $ 765,418     $ 126,624  
 Adjustments to reconcile net income to net cash provided by operations:
               
 Gain on sale of investments
    (39,400 )     (70,471 )
 Depreciation and amortization
    146,549       158,460  
 Amortization of bond premium, net
    32,938       23,482  
 Stock-based compensation
    19,501       40,494  
 Deferred income tax (expense) benefit
    (68,599 )     29,793  
 (Increase) decrease in assets:
               
 Premiums receivable, net
    (543,567 )     (762,287 )
 Receivables - reinsurance contracts
    (857,323 )     (745,584 )
 Reinsurance receivables, net
    (1,303,004 )     (1,127,162 )
 Deferred acquisition costs
    (180,579 )     (260,552 )
 Other assets
    (75,757 )     (240,372 )
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    1,452,292       1,501,710  
 Unearned premiums
    970,562       1,234,739  
 Advance premiums
    32,645       199,307  
 Reinsurance balances payable
    341,414       1,317,794  
 Deferred ceding commission revenue
    166,818       104,935  
 Accounts payable, accrued expenses and other liabilities
    (1,054,435 )     (284,612 )
 Net cash flows (used in) provided by operating activities
    (194,527 )     1,246,298  
                 
 Cash flows provided by (used in) investing activities:
               
 Purchase - fixed-maturity securities available for sale
    (105,544 )     (1,658,387 )
 Purchase - equity securities
    (658,388 )     (580,638 )
 Sale or maturity - fixed-maturity securities available for sale
    1,032,800       -  
 Sale - equity securities
    191,516       990,247  
 Collections of notes receivable and accrued interest - Sale of businesses
    7,066       80,438  
 Other investing activities
    (11,420 )     (4,092 )
 Net cash flows provided by (used in) investing activities
    456,030       (1,172,432 )
                 
 Cash flows used in financing activities:
               
 Proceeds from line of credit
    50,000       -  
 Principal payments on line of credit
    (100,000 )     -  
 Principal payments on long-term debt
    -       (6,518 )
 Proceeds from exercise of stock options
    41,200       -  
 Tax benefit from exercise of stock options
    7,819       -  
 Purchase of treasury stock
    (8,200 )     -  
 Dividends paid
    (113,397 )     -  
 Net cash flows used in financing activities
    (122,578 )     (6,518 )
                 
 Increase in cash and cash equivalents
  $ 138,925     $ 67,348  
 Cash and cash equivalents, beginning of period
    173,126       326,620  
 Cash and cash equivalents, end of period
  $ 312,051     $ 393,968  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for income taxes
  $ 500,000     $ -  
 Cash paid for interest
  $ 120,037     $ 91,441  
 

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”), underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and brokers. KICO is a licensed insurance company in the State of New York. In February 2011, KICO’s application for an insurance license to write insurance in the Commonwealth of Pennsylvania was approved; however, KICO has not commenced writing business in Pennsylvania. Kingstone, through its subsidiary, Payments, Inc., a licensed premium finance company in the State of New York, receives fees for placing contracts with a third party licensed premium finance company.
 
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, 2011 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 30, 2012. 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 three months ended March 31, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012.
 
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. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses, are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of several years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require considerable judgment by management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements consist of Kingstone and its wholly-owned subsidiaries. Subsidiaries include KICO and its subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All significant inter-company transactions have been eliminated in consolidation.
 
 
6

 
 
Accounting Pronouncements
 
In June 2011 (and as amended in December 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 not elected to early adopt ASU 2011-05. The Company adopted this guidance effective January 1, 2012.
 
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.
 
 
7

 

Note 3 - Investments 

Available for Sale Securities

The amortized cost and fair value of investments in available for sale fixed-maturity securities and equities as of March 31, 2012 and December 31, 2011 are summarized as follows:
 
   
March 31, 2012
 
                                 
Net
 
  
 
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
  $ 499,837     $ 44,716     $ -     $ -     $ 544,553     $ 44,716  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,585,259       255,975       (26,568 )     -       5,814,666       229,407  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,265,300       475,826       (33,700 )     (49,535 )     15,657,891       392,591  
 Total fixed-maturity securities
    21,350,396       776,517       (60,268 )     (49,535 )     22,017,110       666,714  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    1,468,554       36,208       (44,946 )     -       1,459,817       (8,737 )
 Common stocks
    2,855,314       372,927       (22,528 )     -       3,205,713       350,399  
 Total equity securities
    4,323,868       409,135       (67,474 )     -       4,665,530       341,662  
                                                 
 Total
  $ 25,674,264     $ 1,185,652     $ (127,742 )   $ (49,535 )   $ 26,682,640     $ 1,008,376  

 
8

 
 
   
December 31, 2011
 
                                 
Net
 
  
 
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
  $ 499,832     $ 50,356     $ -     $ -     $ 550,188     $ 50,356  
                                                 
 Political subdivisions of States,
                                               
 Territories and Possessions
    5,868,743       301,559       -       -       6,170,302       301,559  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,846,616       338,284       (228,792 )     (107,666 )     15,848,442       1,826  
 Total fixed-maturity securities
    22,215,191       690,199       (228,792 )     (107,666 )     22,568,932       353,741  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    1,428,435       36,762       (76,969 )     (4,893 )     1,383,335       (45,100 )
 Common stocks
    2,429,306       274,538       (21,969 )     -       2,681,875       252,569  
 Total equity securities
    3,857,741       311,300       (98,938 )     (4,893 )     4,065,210       207,469  
                                                 
 Total
  $ 26,072,932     $ 1,001,499     $ (327,730 )   $ (112,559 )   $ 26,634,142     $ 561,210  
 
A summary of the amortized cost and fair value of the Company’s investments in available for sale fixed-maturity securities by contractual maturity as of March 31, 2012 and December 31, 2011 is shown below:

   
March 31, 2012
   
December 31, 2011
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
       
 Less than one year
  $ 785,661     $ 770,732     $ 1,063,493     $ 1,079,924  
 One to five years
    7,298,755       7,586,081       6,899,892       7,045,774  
 Five to ten years
    11,912,177       12,275,602       12,547,046       12,680,441  
 More than 10 years
    1,353,803       1,384,695       1,704,760       1,762,793  
 Total
  $ 21,350,396     $ 22,017,110     $ 22,215,191     $ 22,568,932  
 
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 March 31, 2012 and December 31, 2011 are summarized as follows:
 
   
March 31, 2012
 
                                 
Net
 
  
 
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
  $ 606,257     $ 112,359     $ -     $ -     $ 718,616     $ 112,359  

 
9

 
 
   
December 31, 2011
 
                                 
Net
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                                 
 U.S. Treasury securities
  $ 606,234     $ 171,719     $ -     $ -     $ 777,953     $ 171,719  
 
All held to maturity securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.

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

Investment Income

Major categories of the Company’s net investment income are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Income:
 
 
   
 
 
 Fixed-maturity securities
  $ 234,493     $ 182,137  
 Equity securities
    85,929       36,824  
 Cash and cash equivalents
    1,406       1,987  
 Other
    2       10  
 Total
    321,830       220,958  
 Expenses:
               
 Investment expenses
    54,313       43,288  
 Net investment income
  $ 267,517     $ 177,670  
 
Proceeds from the sale and maturity of fixed-maturity securities were $1,032,800 and $-0- for the three months ended March 31, 2012 and 2011, respectively.

Proceeds from the sale of equity securities were $191,516 and $990,247 for the three months ended March 31, 2012 and 2011, respectively.

The Company’s net realized gains and losses on investments are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Fixed-maturity securities
           
 Gross realized gains
  $ 40,146     $ -  
 Gross realized losses
    -       -  
      40,146       -  
                 
 Equity securities
               
 Gross realized gains
    7,069       117,333  
 Gross realized losses
    (7,815 )     (46,862 )
      (746 )     70,471  
                 
                 
 Net realized gains
  $ 39,400     $ 70,471  
 
 
10

 
 
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 investment (“OTTI”) declines in the fair value of investments. In evaluating potential impairment, management considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value to cost; and (v) current economic conditions.

OTTI losses are recorded in the 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 30 securities at March 31, 2012 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 three months ended March 31, 2012 and 2011. 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 March 31, 2012 as follows:
 
 
11

 
 
   
March 31, 2012
 
   
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:
                                           
U.S. Treasury securities
                                           
 and obligations of U.S.
                                               
government corporations
                                           
 and agencies
  $ -     $ -       -     $ -     $ -       -     $ -     $ -  
                                                                 
Political subdivisions of
                                                         
 States, Territories and
                                                               
 Possessions
    782,235       (26,568 )     2       -       -       -       782,235       (26,568 )
                                                                 
 Corporate and other
                                                               
 bonds industrial and
                                                               
 miscellaneous
    2,021,911       (33,700 )     11       2,006,067       (49,535 )     9       4,027,978       (83,235 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 2,804,146     $ (60,268 )     13     $ 2,006,067     $ (49,535 )     9     $ 4,810,213     $ (109,803 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 530,592     $ (44,946 )     4     $ -     $ -       -     $ 530,592     $ (44,946 )
 Common stocks
    397,268       (22,528 )     4       -       -       -       397,268       (22,528 )
                                                                 
 Total equity securities
  $ 927,860     $ (67,474 )     8     $ -     $ -       -     $ 927,860     $ (67,474 )
                                                                 
 Total
  $ 3,732,006     $ (127,742 )     21     $ 2,006,067     $ (49,535 )     9     $ 5,738,073     $ (177,277 )

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 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.
 
 
12

 
 
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.

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 March 31, 2012 and December 31, 2011 as follows:

   
March 31, 2012
 
 ($ 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
  $ 545     $ -     $ -     $ 545  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    -       5,815       -       5,815  
                                 
 Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    8,190       7,228       240       15,658  
 Total fixed maturities
    8,735       13,043       240       22,018  
 Equity investments
    4,665       -       -       4,665  
 Total investments
  $ 13,400     $ 13,043     $ 240     $ 26,683  
 
 
13

 
 
   
December 31, 2011
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
       
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporationsz
                       
 and agencies
  $ 550     $ -     $ -     $ 550  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    -       6,171       -       6,171  
                                 
 Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    8,465       7,168       215       15,848  
 Total fixed maturities
    9,015       13,339       215       22,569  
 Equity investments
    4,065       -       -       4,065  
 Total investments
  $ 13,080     $ 13,339     $ 215     $ 26,634  
 
A reconciliation of the beginning and ending balances of assets measured at fair value using Level 3 inputs is as follows:
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
             
 Beginning balance, January 1
  $ 215     $ -  
 Total unrealized (losses)
               
 included in other comprehensive income
    25       -  
 Net transfers into Level 3
    -       -  
 Ending balance, March 31
  $ 240     $ -  
 
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 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 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:

   
March 31, 2012
   
December 31, 2011
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(unaudited)
             
 Fixed-maturity investments held to maturity
  $ 606,257     $ 718,616     $ 606,234     $ 777,953  
 Cash and cash equivalents
    312,051       312,051       173,126       173,126  
 Premiums receivable
    6,322,652       6,322,652       5,779,085       5,779,085  
 Receivables - reinsurance contracts
    2,591,858       2,591,858       1,734,535       1,734,535  
 Reinsurance receivables
    25,183,818       25,183,818       23,880,814       23,880,814  
 Notes receivable-sale of business
    386,445       386,445       393,511       393,511  
 Real estate, net of
                               
 accumulated depreciation
    1,464,314       1,510,000       1,477,639       1,510,000  
 Reinsurance balances payable
    3,103,242       3,103,242       2,761,828       2,761,828  
 Notes payable (including related parties)
    997,000       997,000       1,047,000       1,047,000  
 
Note 6 - Notes Receivable-Sale of Businesses
 
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 (the “Pennsylvania 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). Effective August 10, 2011, the Pennsylvania Notes were restructured into one note with a principal balance of $361,625. The restructured note provides for interest at the rate of 8.63% per annum and is payable in 102 equal monthly installments of $5,015. There was no gain or loss recorded on the restructuring of the Pennsylvania Notes.
 
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 May 1, 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 provided 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 March 31, 2012 and December 31, 2011 consists of:
 
   
March 31, 2012
   
December 31, 2011
 
   
Total
   
Current
         
Total
   
Current
       
   
Note
   
Maturities
   
Long-Term
   
Note
   
Maturities
   
Long-Term
 
   
(unaudited)
                   
Sale of Pennsylvania stores
  $ 344,352     $ 31,702     $ 312,650     $ 351,861     $ 31,028     $ 320,833  
Sale of Franchise business
    37,797       37,797       -       37,797       37,797       -  
      382,149       69,499       312,650       389,658       68,825       320,833  
Accrued interest
    4,296       4,296       -       3,853       3,853       -  
Total
  $ 386,445     $ 73,795     $ 312,650     $ 393,511     $ 72,678     $ 320,833  
 
Note 7 – Property and Casualty Insurance Activity
 
Earned Premiums

Premiums written, ceded and earned are as follows:
 
   
Direct
   
Assumed
   
Ceded
   
Net
 
                         
Three months ended March 31, 2012 (unaudited)
   
 
   
 
   
 
 
 Premiums written
  $ 11,235,725     $ 1,400     $ (6,856,962 )   $ 4,380,163  
 Change in unearned premiums
    (972,141 )     1,579       562,934       (407,628 )
 Premiums earned
  $ 10,263,584     $ 2,979     $ (6,294,028 )   $ 3,972,535  
                                 
Three months ended March 31, 2011 (unaudited)
                         
 Premiums written
  $ 9,533,146     $ 234     $ (5,496,365 )   $ 4,037,015  
 Change in unearned premiums
    (1,236,876 )     2,138       565,422       (669,316 )
 Premiums earned
  $ 8,296,270     $ 2,372     $ (4,930,943 )   $ 3,367,699  
 
Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums was approximately $577,000 and $545,000 as of March 31, 2012 (unaudited) and December 31, 2011, respectively.

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”):
 
 
16

 
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
   
(unaudited)
 
 Balance at beginning of period
  $ 18,480,717     $ 17,711,907  
 Less reinsurance recoverables
    (10,001,060 )