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 June 30, 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)
 
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 (§ 232.405 of this chapter) 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 “large accelerated filer”, “accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filero
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ

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

As of August 14, 2012, there were 3,830,441 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, 2012 (Unaudited) and December 31, 2011
    2  
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 (Unaudited) and 2011 (Unaudited)
    3  
 
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2012 (Unaudited)
    4  
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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
    26  
Item 3 —
Quantitative and Qualitative Disclosures About Market Risk
    41  
Item 4—
Controls and Procedures
    41  
           
PART II — OTHER INFORMATION
    42  
         
Item 1 —
Legal Proceedings
    42  
Item 1A —
Risk Factors
    42  
Item 2 —
Unregistered Sales of Equity Securities and Use of Proceeds
    42  
Item 3 —
Defaults Upon Senior Securities
    42  
Item 4 —
Mine Safety Disclosures
    42  
Item 5 —
Other Information
    42  
Item 6 —
Exhibits
    43  
Signatures
    44  
         
EXHIBIT 3(a)
       
EXHIBIT 3(b)
       
EXHIBIT 10
       
EXHIBIT 31(a)
       
EXHIBIT 31(b)        
EXHIBIT 32
       
 
 
 

 
 
Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws.  The events described in forward-looking statements contained in this Quarterly Report may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results.  The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 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
           
             
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
Assets
           
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $797,992 at
           
 June 30, 2012 and $777,953 at December 31, 2011)
  $ 606,265     $ 606,234  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $21,323,148
               
 at June 30, 2012 and $22,215,191 at December 31, 2011)
    22,164,430       22,568,932  
 Equity securities, available-for-sale, at fair value (cost of $4,155,363
               
 at June 30, 2012 and $3,857,741 at December 31, 2011)
    4,617,047       4,065,210  
 Total investments
    27,387,742       27,240,376  
 Cash and cash equivalents
    1,025,724       173,126  
 Premiums receivable, net of provision for uncollectible amounts
    6,951,282       5,779,085  
 Receivables - reinsurance contracts
    3,423,759       1,734,535  
 Reinsurance receivables, net of provision for uncollectible amounts
    26,166,406       23,880,814  
 Notes receivable-sale of business
    339,102       393,511  
 Deferred acquisition costs
    5,092,435       4,535,773  
 Intangible assets, net
    3,422,815       3,660,672  
 Property and equipment, net of accumulated depreciation
    1,652,262       1,646,341  
 Other assets
    952,463       660,672  
Total assets
  $ 76,413,990     $ 69,704,905  
                 
Liabilities
               
 Loss and loss adjustment expenses
  $ 20,798,094     $ 18,480,717  
 Unearned premiums
    23,932,647       21,283,160  
 Advance premiums
    550,100       544,791  
 Reinsurance balances payable
    3,556,919       2,761,828  
 Deferred ceding commission revenue
    4,467,514       3,982,399  
 Notes payable (includes payable to related parties of $378,000
               
 at June 30, 2012 and December 31, 2011)
    997,000       1,047,000  
 Accounts payable, accrued expenses and other liabilities
    3,249,815       4,419,623  
 Income taxes payable
    -       85,393  
 Deferred income taxes
    1,886,541       1,789,439  
Total liabilities
    59,438,630       54,394,350  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,696,593
               
 shares at June 30, 2012 and 4,643,122 shares at December 31, 2011;
               
 outstanding 3,811,155 shares at June 30, 2012 and 3,759,900 shares
               
 at December 31, 2011
    46,966       46,432  
 Preferred stock, $.01 par value; authorized 1,000,000 shares;
               
 -0- shares issued and outstanding
    -       -  
 Capital in excess of par
    13,823,800       13,739,792  
 Accumulated other comprehensive income
    859,957       370,399  
 Retained earnings
    3,653,254       2,554,349  
      18,383,977       16,710,972  
 Treasury stock, at cost, 885,438 shares at June 30, 2012 and 883,222 shares at December 31, 2011
    (1,408,617 )     (1,400,417 )
                 
Total stockholders' equity
    16,975,360       15,310,555  
                 
Total liabilities and stockholders' equity
  $ 76,413,990     $ 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)
       
         
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
 Net premiums earned
  $ 4,164,572     $ 3,517,249     $ 8,137,107     $ 6,884,948  
 Ceding commission revenue
    2,910,858       2,727,867       5,814,514       5,040,442  
 Net investment income
    229,879       160,464       497,396       338,134  
 Net realized gain on investments
    6,160       89,961       45,560       160,432  
 Other income
    222,691       217,101       461,746       464,573  
 Total revenues
    7,534,160       6,712,642       14,956,323       12,888,529  
                                 
Expenses
                               
 Loss and loss adjustment expenses
    2,408,505       1,823,630       4,687,019       4,374,394  
 Commission expense
    1,805,810       1,504,894       3,477,417       2,876,643  
 Other underwriting expenses
    1,994,576       1,734,095       3,852,322       3,310,914  
 Other operating expenses
    287,442       299,002       574,329       602,965  
 Depreciation and amortization
    150,472       154,682       297,021       313,142  
 Interest expense
    20,111       38,907       40,896       84,672  
 Total expenses
    6,666,916       5,555,210       12,929,004       11,562,730  
                                 
 Income from operations before taxes
    867,244       1,157,432       2,027,319       1,325,799  
 Income tax expense
    306,928       383,501       701,585       425,244  
Net income
    560,316       773,931       1,325,734       900,555  
                                 
 Gross unrealized investment holding gains arising during period
    294,590       301,456       741,755       333,306  
                                 
 Income tax expense related to items of other comprehensive income
    (100,161 )     (102,495 )     (252,197 )     (113,324 )
                                 
Comprehensive income
  $ 754,745     $ 972,892     $ 1,815,292     $ 1,120,537  
                                 
Earnings per common share:
                               
Basic
  $ 0.15     $ 0.20     $ 0.35     $ 0.23  
Diluted
  $ 0.15     $ 0.20     $ 0.35     $ 0.23  
                                 
Weighted average common shares outstanding
                               
Basic
    3,789,592       3,838,386       3,780,351       3,838,386  
Diluted
    3,883,779       3,918,763       3,780,351       3,921,289  
                                 
Dividends declared and paid per common share
  $ 0.03     $ -     $ 0.06     $ -  
 
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, 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
    -       -       -       -       30,111       -       -       -       -       30,111  
Exercise of stock options
    64,361       643       -       -       46,430       -       -       -       -       47,073  
Shares deducted from exercise of stock
                                                                               
options for payment of withholding taxes
    (10,890 )     (109 )     -       -       (56,521 )     -       -       -       -       (56,630 )
Tax benefit from exercise of stock options
    -       -       -       -       63,988       -       -       -       -       63,988  
Acquisition of treasury stock
    -       -       -       -       -       -       -       2,216       (8,200 )     (8,200 )
Dividends
    -       -       -       -       -       -       (226,829 )     -       -       (226,829 )
Net income
    -       -       -       -       -       -       1,325,734       -       -       1,325,734  
Change in unrealized gains on available
  for sale securities, net of tax
    -       -       -       -       -       489,558       -       -       -       489,558  
Balance, June 30, 2012
    4,696,593     $ 46,966       -     $ -     $ 13,823,800     $ 859,957     $ 3,653,254       885,438     $ (1,408,617 )   $ 16,975,360  

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,            
             
   
2012
   
2011
 
             
Cash flows provided by operating activities:
           
Net income
  $ 1,325,734     $ 900,555  
Adjustments to reconcile net income to net cash provided by operations:
               
 Gain on sale of investments
    (45,560 )     (160,432 )
 Depreciation and amortization
    297,021       313,142  
 Amortization of bond premium, net
    66,998       123,001  
 Stock-based compensation
    30,111       64,148  
 Deferred income tax expense
    (155,095 )     (176,236 )
(Increase) decrease in assets:
               
 Premiums receivable, net
    (1,172,197 )     (1,237,243 )
 Receivables - reinsurance contracts
    (1,689,224 )     (1,728,174 )
 Reinsurance receivables, net
    (2,285,592 )     (2,323,212 )
 Deferred acquisition costs
    (556,662 )     (586,660 )
 Other assets
    (348,303 )     858,805  
Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    2,317,377       793,460  
 Unearned premiums
    2,649,487       2,912,817  
 Advance premiums
    5,309       195,004  
 Reinsurance balances payable
    795,091       1,897,771  
 Deferred ceding commission revenue
    485,115       452,878  
 Accounts payable, accrued expenses and other liabilities
    (1,255,201 )     (272,411 )
Net cash flows provided by operating activities
    464,409       2,027,213  
                 
Cash flows provided by (used in) investing activities:
               
Purchase - fixed-maturity securities available for sale
    (915,228 )     (4,065,722 )
Purchase - equity securities
    (853,000 )     (1,056,775 )
Sale or maturity - fixed-maturity securities available for sale
    1,837,698       2,079,869  
Sale - equity securities
    559,993       1,215,296  
Collections of notes receivable and accrued interest - Sale of businesses
    54,409       297,678  
Other investing activities
    (65,085 )     (22,998 )
Net cash flows provided by (used in) investing activities
    618,787       (1,552,652 )
                 
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
    -       (713,997 )
Proceeds from exercise of stock options
    47,073       -  
Withholding taxes paid on cashless exercise of stock options
    (56,630 )     -  
Tax benefit from exercise of stock options
    63,988       -  
Purchase of treasury stock
    (8,200 )     -  
Dividends paid
    (226,829 )     -  
Net cash flows used in financing activities
    (230,598 )     (713,997 )
                 
Increase (decrease) in cash and cash equivalents
  $ 852,598     $ (239,436 )
Cash and cash equivalents, beginning of period
    173,126       326,620  
Cash and cash equivalents, end of period
  $ 1,025,724     $ 87,184  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for income taxes
  $ 1,505,000     $ 329,762  
Cash paid for interest
  $ 41,202     $ 125,994  
  
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 only nominally 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 six months ended June 30, 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.
 
 
6

 

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.
 
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 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.

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 June 30, 2012 and December 31, 2011 are summarized as follows:
 
   
June 30, 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
  $ 99,930     $ 5,672     $ -     $ -     $ 105,602     $ 5,672  
                                                 
Political subdivisions of States,
                                               
   Territories and Possessions
    5,572,075       279,663       -       (29,967 )     5,821,771       249,696  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    15,651,143       644,650       (9,850 )     (48,886 )     16,237,057       585,914  
 Total fixed-maturity securities
    21,323,148       929,985       (9,850 )     (78,853 )     22,164,430       841,282  
                                                 
Equity Securities:
                                               
Preferred stocks
    1,339,013       58,812       -       (12,775 )     1,385,050       46,037  
Common stocks
    2,816,350       442,031       (26,384 )     -       3,231,997       415,647  
Total equity securities
    4,155,363       500,843       (26,384 )     (12,775 )     4,617,047       461,684  
                                                 
                                                 
Total
  $ 25,478,511     $ 1,430,828     $ (36,234 )   $ (91,628 )   $ 26,781,477     $ 1,302,966  
 
 
7

 
 
   
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 June 30, 2012 and December 31, 2011 is shown below:

   
June 30, 2012
   
December 31, 2011
 
   
Amortized
         
Amortized
       
Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
 
Less than one year
  $ 1,082,670     $ 1,066,409     $ 1,063,493     $ 1,079,924  
One to five years
    7,118,991       7,382,219       6,899,892       7,045,774  
Five to ten years
    11,768,002       12,303,035       12,547,046       12,680,441  
More than 10 years
    1,353,485       1,412,767       1,704,760       1,762,793  
Total
  $ 21,323,148     $ 22,164,430     $ 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.
 
 
8

 

Held to Maturity Securities

The amortized cost and fair value of investments in held to maturity fixed-maturity securities as of June 30, 2012 and December 31, 2011 are summarized as follows:

    June 30, 2012  
  
 
Cost or
   
Gross
   
 
 Gross Unrealized Losses
         
Net
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
Category
 
Cost
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
                                     
U.S. Treasury securities
  $ 606,265     $ 191,727     $ -     $ -     $ 797,992     $ 191,727  
 
   
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
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Income:
             
 
   
 
 
Fixed-maturity securities
  $ 226,777     $ 174,363     $ 461,270     $ 356,500  
Equity securities
    62,310       33,474       148,239       70,298  
Cash and cash equivalents
    (1,347 )     236       59       2,223  
Other
    2       (3,325 )     4       (3,315 )
Total
    287,742       204,748       609,572       425,706  
Expenses:
                               
Investment expenses
    57,863       44,284       112,176       87,572  
Net investment income
  $ 229,879     $ 160,464     $ 497,396     $ 338,134  
 
 
9

 
 
Proceeds from the sale and maturity of fixed-maturity securities were $1,837,698 and $2,079,869 for the six months ended June 30, 2012 and 2011, respectively.

Proceeds from the sale of equity securities were $559,993 and $1,215,296 for the six months ended June 30, 2012 and 2011, respectively.

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

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Fixed-maturity securities
                       
Gross realized gains
  $ 55,004     $ 87,302     $ 95,150     $ 87,302  
Gross realized losses
    (54,404 )     (1,983 )     (54,404 )     (1,983 )
      600       85,319       40,746       85,319  
Equity securities
                               
Gross realized gains
    25,215       18,484       32,284       135,817  
Gross realized losses
    (19,655 )     (13,842 )     (27,470 )     (60,704 )
      5,560       4,642       4,814       75,113  
                                 
Net realized gains
  $ 6,160     $ 89,961     $ 45,560     $ 160,432  
 
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 18 securities at June 30, 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 six months ended June 30, 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.
 
 
10

 

The Company held securities with unrealized losses representing declines that were considered temporary at June 30, 2012 as follows:
 
   
June 30, 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
    -       -       -       773,253       (29,967 )     2       773,253       (29,967 )
                                                                 
Corporate and other
                                                               
  bonds industrial and
                                                               
  miscellaneous
    1,022,335       (9,850 )     5       1,821,008       (48,886 )     8       2,843,343       (58,736 )
                                                                 
Total fixed-maturity  securities
  $ 1,022,335     $ (9,850 )     5     $ 2,594,261     $ (78,853 )     10     $ 3,616,596     $ (88,703 )
                                                                 
Equity Securities:
                                                               
Preferred stocks
  $ -     $ -       -     $ 114,750     $ (12,775 )     1     $ 114,750     $ (12,775 )
Common stocks
    238,502       (26,384 )     2       -       -       -       238,502       (26,384 )
                                                                 
Total equity securities
  $ 238,502     $ (26,384 )     2     $ 114,750     $ (12,775 )     1     $ 353,252     $ (39,159 )
                                                                 
Total
  $ 1,260,837     $ (36,234 )     7     $ 2,709,011     $ (91,628 )     11     $ 3,969,848     $ (127,862 )
 
 
11

 
 
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.
 
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 June 30, 2012 and December 31, 2011 as follows:
 
   
June 30, 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
  $ 106     $ -     $ -     $ 106  
                                 
Political subdivisions of
                               
States, Territories and
                               
Possessions
    -       5,821       -       5,821  
                                 
Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    7,776       8,461       -       16,237  
                                 
Total fixed maturities
    7,882       14,282       -       22,164  
Equity investments
    4,617       -       -       4,617  
Total investments
  $ 12,499     $ 14,282     $ -     $ 26,781  
 
 
12

 
 
   
December 31, 2011
 
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
       
Fixed-maturity investments available for sale
                       
U.S. Treasury securities
                       
   and obligations of U.S.
                       
   government corporations
                       
   and agencies
  $ 550     $ -     $ -     $ 550  
                                 
Political subdivisions of
                               
   States, Territories and
                               
   Possessions
    -       6,171       -       6,171  
                                 
Corporate and other
                               
   bonds industrial and
                               
   miscellaneous
    8,465       7,383       -       15,848  
                                 
Total fixed maturities
    9,015       13,554