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 September 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 the definitions 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 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 November 14, 2012, there were 3,842,869 shares of the registrant’s common stock outstanding.
 


 
 

 
KINGSTONE COMPANIES, INC.
INDEX
           
     
PAGE
           
PART I — FINANCIAL INFORMATION
   
 
 
Item 1 —
Financial Statements
   
3
 
 
Condensed Consolidated Balance Sheets at September 30, 2012 (Unaudited) and December 31, 2011
   
3
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 (Unaudited) and 2011 (Unaudited)
   
4
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012 (Unaudited)
   
5
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 (Unaudited) and 2011 (Unaudited)
   
6
 
 
Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
7
 
Item 2 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
27
 
Item 3 —
Quantitative and Qualitative Disclosures About Market Risk
   
45
 
Item 4—
Controls and Procedures
   
45
 
           
PART II — OTHER INFORMATION
   
 
 
Item 1 —
Legal Proceedings
   
46
 
Item 1A —
Risk Factors
   
46
 
Item 2 —
Unregistered Sales of Equity Securities and Use of Proceeds
   
46
 
Item 3 —
Defaults Upon Senior Securities
   
46
 
Item 4 —
Mine Safety Disclosures
   
46
 
Item 5 —
Other Information
   
46
 
Item 6 —
Exhibits
   
 
 
Signatures
       
EXHIBIT 3(a)
EXHIBIT 3(b)
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
 
 
1

 

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.
 
 
2

 
 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS.
 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
   
Condensed Consolidated Balance Sheets
           
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
 Assets
           
 Fixed-maturity securities, held to maturity, at amortized cost (fair value of $792,101 at
           
 September 30, 2012 and $777,953 at December 31, 2011)
  $ 606,273     $ 606,234  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $21,780,082
               
 at September 30, 2012 and $22,215,191 at December 31, 2011)
    23,102,130       22,568,932  
 Equity securities, available-for-sale, at fair value (cost of $4,716,098
               
 at September 30, 2012 and $3,857,741 at December 31, 2011)
    5,230,893       4,065,210  
 Total investments
    28,939,296       27,240,376  
 Cash and cash equivalents
    2,447,849       173,126  
 Premiums receivable, net of provision for uncollectible amounts
    6,854,026       5,779,085  
 Receivables - reinsurance contracts
    2,668,123       1,734,535  
 Reinsurance receivables, net of provision for uncollectible amounts
    28,047,484       23,880,814  
 Notes receivable-sale of business
    331,207       393,511  
 Deferred acquisition costs
    5,397,647       4,535,773  
 Intangible assets, net
    3,303,886       3,660,672  
 Property and equipment, net of accumulated depreciation
    1,640,464       1,646,341  
 Other assets
    895,269       660,672  
 Total assets
  $ 80,525,251     $ 69,704,905  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 22,283,145     $ 18,480,717  
 Unearned premiums
    25,309,496       21,283,160  
 Advance premiums
    497,273       544,791  
 Reinsurance balances payable
    3,164,848       2,761,828  
 Deferred ceding commission revenue
    4,662,272       3,982,399  
 Notes payable (includes payable to related parties of $378,000
               
 at September 30, 2012 and December 31, 2011)
    1,097,000       1,047,000  
 Accounts payable, accrued expenses and other liabilities
    3,404,982       4,505,016  
 Deferred income taxes
    2,011,122       1,789,439  
 Total liabilities
    62,430,138       54,394,350  
                 
 Commitments and Contingencies
               
                 
 Stockholders' Equity
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 4,715,829
               
 shares at September 30, 2012 and 4,643,122 shares at December 31, 2011;
               
 outstanding 3,828,391 shares at September 30, 2012 and 3,759,900 shares
               
 at December 31, 2011
    47,159       46,432  
 Preferred stock, $.01 par value; authorized 1,000,000 shares;
               
 -0- shares issued and outstanding
    -       -  
 Capital in excess of par
    13,839,741       13,739,792  
 Accumulated other comprehensive income
    1,212,316       370,399  
 Retained earnings
    4,414,024       2,554,349  
      19,513,240       16,710,972  
 Treasury stock, at cost, 887,438 shares at September 30, 2012 and 883,222 shares
               
 at December 31, 2011
    (1,418,127 )     (1,400,417 )
 Total stockholders' equity
    18,095,113       15,310,555  
                 
 Total liabilities and stockholders' equity
  $ 80,525,251     $ 69,704,905  
 

See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                         
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
             
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
 Revenues
                       
 Net premiums earned
  $ 5,281,701     $ 3,937,189     $ 13,418,808     $ 10,822,137  
 Ceding commission revenue
    2,711,431       2,307,390       8,525,945       7,347,832  
 Net investment income
    242,159       172,039       739,555       510,173  
 Net realized gain on investments
    65,986       196,574       111,546       357,006  
 Other income
    218,723       228,615       680,469       693,188  
 Total revenues
    8,520,000       6,841,807       23,476,323       19,730,336  
                                 
 Expenses
                               
 Loss and loss adjustment expenses
    2,691,402       2,933,531       7,378,421       7,307,925  
 Commission expense
    1,952,583       1,596,281       5,430,000       4,472,924  
 Other underwriting expenses
    2,134,106       1,734,137       5,986,428       5,045,051  
 Other operating expenses
    255,628       260,149       829,957       863,114  
 Depreciation and amortization
    150,351       144,122       447,372       457,264  
 Interest expense
    19,781       23,577       60,677       108,249  
 Total expenses
    7,203,851       6,691,797       20,132,855       18,254,527  
                                 
 Income from operations before taxes
    1,316,149       150,010       3,343,468       1,475,809  
 Income tax expense (benefit)
    402,162       (69,559 )     1,103,747       355,685  
 Net income
    913,987       219,569       2,239,721       1,120,124  
                                 
 Gross unrealized investment holding gains
                               
 arising during period
    533,877       (166,793 )     1,275,632       166,513  
                                 
 Income tax (expense) benefit related to items of other
                               
 comprehensive income
    (181,518 )     56,710       (433,715 )     (56,614 )
 Comprehensive income
  $ 1,266,346     $ 109,486     $ 3,081,638     $ 1,230,023  
                                 
Earnings per common share:
                               
Basic
  $ 0.24     $ 0.06     $ 0.59     $ 0.29  
Diluted
  $ 0.23     $ 0.06     $ 0.59     $ 0.29  
                                 
Weighted average common shares outstanding
                               
Basic
    3,824,461       3,838,386       3,794,979       3,838,386  
Diluted
    3,936,167       3,913,036       3,884,172       3,838,386  
                                 
Dividends declared and paid per common share
  $ 0.04     $ 0.03     $ 0.10     $ 0.03  


See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity
 
Nine months ended September 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
    -       -       -       -       39,125       -       -       -       -       39,125  
Exercise of stock options
    90,985       910       -       -       46,164       -       -       -       -       47,074  
                                                                                 
Shares deducted from exercise of stock options for payment of withholding taxes
    (18,278 )     (183 )     -       -       (103,410 )     -       -       -       -       (103,593 )
Tax benefit from exercise of stock options
    -       -       -       -       118,070       -       -       -       -       118,070  
Acquisition of treasury stock
    -       -       -       -       -       -       -       4,216       (17,710 )     (17,710 )
Dividends
    -       -       -       -       -       -       (380,046 )     -       -       (380,046 )
Net income
    -       -       -       -       -       -       2,239,721       -       -       2,239,721  
Change in unrealized gains on available for sale securities, net of tax
    -       -       -       -       -       841,917       -       -       -       841,917  
Balance, September 30, 2012
    4,715,829     $ 47,159       -     $ -     $ 13,839,741     $ 1,212,316     $ 4,414,024       887,438     $ (1,418,127 )   $ 18,095,113  
 

See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
Nine months ended September 30,
 
2012
   
2011
 
             
 Cash flows provided by operating activities:
           
 Net income
  $ 2,239,721     $ 1,120,124  
 Adjustments to reconcile net income to net cash provided by operations:
               
 Gain on sale of investments
    (111,545 )     (357,006 )
 Depreciation and amortization
    447,372       457,264  
 Amortization of bond premium, net
    88,127       162,990  
 Stock-based compensation
    39,125       85,571  
 Deferred income tax expense
    (212,032 )     (402,447 )
 (Increase) decrease in assets:
               
 Premiums receivable, net
    (1,074,941 )     (1,036,447 )
 Receivables - reinsurance contracts
    (933,588 )     489,413  
 Reinsurance receivables, net
    (4,166,670 )     (4,923,362 )
 Deferred acquisition costs
    (861,874 )     (796,055 )
 Other assets
    (264,712 )     860,804  
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    3,802,428       3,661,655  
 Unearned premiums
    4,026,336       3,824,216  
 Advance premiums
    (47,518 )     226,783  
 Reinsurance balances payable
    403,020       1,815,918  
 Deferred ceding commission revenue
    679,873       638,307  
 Accounts payable, accrued expenses and other liabilities
    (1,100,034 )     (37,087 )
 Net cash flows provided by operating activities
    2,953,088       5,790,641  
                 
 Cash flows used in investing activities:
               
 Purchase - fixed-maturity securities available for sale
    (2,264,507 )     (4,372,917 )
 Purchase - equity securities
    (1,873,253 )     (2,570,333 )
 Sale or maturity - fixed-maturity securities available for sale
    2,766,758       3,034,295  
 Sale - equity securities
    1,001,247       1,362,700  
 Recovery of loss from failed bank
    -       133,211  
 Collections of notes receivable and accrued interest - sale of businesses
    62,304       304,602  
 Other investing activities
    (84,709 )     (148,601 )
 Net cash flows used in investing activities
    (392,160 )     (2,257,043 )
                 
 Cash flows used in financing activities:
               
 Proceeds from line of credit
    465,000       -  
 Principal payments on line of credit
    (415,000 )     -  
 Principal payments on long-term debt (includes $407,000 to related parties)
    -       (713,997 )
 Proceeds from exercise of stock options
    47,074       -  
 Withholding taxes paid on cashless exercise of stock options
    (103,593 )     -  
 Tax benefit from exercise of stock options
    118,070       -  
 Purchase of treasury stock
    (17,710 )     -  
 Dividends paid
    (380,046 )     (115,153 )
 Net cash flows used in financing activities
    (286,205 )     (829,150 )
                 
 Increase in cash and cash equivalents
  $ 2,274,723     $ 2,704,448  
 Cash and cash equivalents, beginning of period
    173,126       326,620  
 Cash and cash equivalents, end of period
  $ 2,447,849     $ 3,031,068  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for income taxes
  $ 1,853,000     $ 458,871  
 Cash paid for interest
  $ 78,122     $ 172,964  
 

See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
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 nine months ended September 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.

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.
 
 
7

 
 
Accounting Pronouncements
 
In July 2012, the Financial Accounting Standards Board (the “FASB”) issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. Under this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an intangible asset is less than its carrying amount.  If such a determination is not reached, then performance of further impairment testing is not necessary. The new guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after September 15, 2012.  However, early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

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 September 30, 2012 and December 31, 2011 are summarized as follows:
 
 
8

 
 
   
September 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:
                                   
 Political subdivisions of States,
                                   
 Territories and Possessions
  $ 5,568,774     $ 290,672     $ -     $ (40,055 )   $ 5,819,391     $ 250,617  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    16,211,308       1,085,116       (5,348 )     (8,337 )     17,282,739       1,071,431  
 Total fixed-maturity securities
    21,780,082       1,375,788       (5,348 )     (48,392 )     23,102,130       1,322,048  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    1,453,688       44,552       (8,977 )     -       1,489,263       35,575  
 Common stocks
    3,262,410       505,609       (26,389 )     -       3,741,630       479,220  
 Total equity securities
    4,716,098       550,161       (35,366 )     -       5,230,893       514,795  
                                                 
 Total
  $ 26,496,180     $ 1,925,949     $ (40,714 )   $ (48,392 )   $ 28,333,023     $ 1,836,843  

   
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  
 
 
9

 
 
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 September 30, 2012 and December 31, 2011 is shown below:
 
   
September 30, 2012
   
December 31, 2011
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
       
 Less than one year
  $ 1,212,342     $ 1,179,180     $ 1,063,493     $ 1,079,924  
 One to five years
    7,523,680       7,967,410       6,899,892       7,045,774  
 Five to ten years
    11,909,521       12,760,814       12,547,046       12,680,441  
 More than 10 years
    1,134,539       1,194,726       1,704,760       1,762,793  
 Total
  $ 21,780,082     $ 23,102,130     $ 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 September 30, 2012 and December 31, 2011 are summarized as follows:

   
September 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)
 
                                                 
 U.S. Treasury securities
  $ 606,273     $ 185,828     $ -     $ -     $ 792,101     $ 185,828  
 
   
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.
 
 
10

 

Investment Income

Major categories of the Company’s net investment income are summarized as follows:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
 Income:
             
 
   
 
 
 Fixed-maturity securities
  $ 249,315     $ 170,083     $ 710,585     $ 526,583  
 Equity securities
    49,279       44,089       197,518       114,387  
 Cash and cash equivalents
    25       2,552       84       4,775  
 Other
    2       8       6       (3,307 )
 Total
    298,621       216,732       908,193       642,438  
 Expenses:
                               
 Investment expenses
    56,462       44,693       168,638       132,265  
 Net investment income
  $ 242,159     $ 172,039     $ 739,555     $ 510,173  

Proceeds from the sale and maturity of fixed-maturity securities were $2,766,758 and $3,034,295 for the nine months ended September 30, 2012 and 2011, respectively.

Proceeds from the sale of equity securities were $1,001,247 and $1,362,700 for the nine months ended September 30, 2012 and 2011, respectively.

The Company’s net realized gains and losses on investments are summarized as follows:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
 Fixed-maturity securities:
                       
 Gross realized gains
  $ 60,349     $ 51,805     $ 153,695     $ 139,107  
 Gross realized losses
    -       -       (52,600 )     (1,983 )
      60,349       51,805       101,095       137,124  
                                 
 Equity securities:
                               
 Gross realized gains
    7,735       11,558       40,019       147,375  
 Gross realized losses
    (2,098 )     -       (29,568 )     (60,704 )
      5,637       11,558       10,451       86,671  
                                 
 Cash and short term investments (1)
    -       133,211       -       133,211  
                                 
 Net realized gains
  $ 65,986     $ 196,574     $ 111,546     $ 357,006  
 
(1) Realized gain on cash and short term investments is a partial recovery from the FDIC of an amount previously written off in 2009 due to the failure of Waterfield Bank.
 
 
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 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 13 securities at September 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 nine months ended September 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.

The Company held securities with unrealized losses representing declines that were considered temporary at September 30, 2012 and December 31, 2011 as follows:
 
   
September 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:
                                           
Political subdivisions of
                                           
States, Territories and
                                               
Possessions
  $ -     $ -       -     $ 764,668     $ (40,055 )     2     $ 764,668     $ (40,055 )
                                                                 
Corporate and other
                                                               
bonds industrial and
                                                               
miscellaneous
    877,005       (5,348 )     3       370,758       (8,337 )     2       1,247,763       (13,685 )
                                                                 
Total fixed-maturity
                                                               
securities
  $ 877,005     $ (5,348 )     3     $ 1,135,426     $ (48,392 )     4     $ 2,012,431     $ (53,740 )
                                                                 
Equity Securities:
                                                               
Preferred stocks
  $ 386,950     $ (8,977 )     3     $ -     $ -       -     $ 386,950     $ (8,977 )
Common stocks
    439,205       (26,389 )     3       -       -       -       439,205       (26,389 )
                                                                 
Total equity securities
  $ 826,155     $ (35,366 )     6     $ -     $ -       -     $ 826,155     $ (35,366 )
                                                                 
Total
  $ 1,703,160     $ (40,714 )     9     $ 1,135,426     $ (48,392 )     4     $ 2,838,586     $ (89,106 )
 
   
December 31, 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
 
                                                 
Fixed-Maturity Securities:
                                           
Corporate and other
   
 
         
 
   
 
         
 
   
 
 
 bonds industrial and
                                               
 miscellaneous
  $ 4,849,378     $ (228,792 )     26     $ 1,483,425     $ (107,666 )     7     $ 6,332,803     $ (336,458 )
                                                                 
 Total fixed-maturity
                                                               
 securities
  $ 4,849,378     $ (228,792 )     26     $ 1,483,425     $ (107,666 )     7     $ 6,332,803     $ (336,458 )
                                                                 
 Equity Securities:
                                                               
 Preferred stocks
  $ 368,350     $ (76,969 )     12     $ 189,364     $ (4,893 )     5     $ 557,714     $ (81,862 )
 Common stocks
    397,268       (21,969 )     14       -       -       -       397,268       (21,969 )
 Total equity securities
  $ 765,618     $ (98,938 )     26     $ 189,364     $ (4,893 )     5     $ 954,982     $ (103,831 )
                                                                 
 Total
  $ 5,614,996     $ (327,730 )     52     $ 1,672,789     $ (112,559 )     12     $ 7,287,785     $ (440,289 )
 
 
 
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 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 September 30, 2012 and December 31, 2011 as follows:

   
September 30, 2012
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(unaudited)
 
 Fixed-maturity investments available for sale
                       
 Political subdivisions of
                       
 States, Territories and
                       
 Possessions
    -       5,819       -       5,819  
                                 
 Corporate and other
                               
 bonds industrial and
                               
 miscellaneous
    8,334       8,949       -       17,283  
 Total fixed maturities
    8,334       14,768       -       23,102  
 Equity investments
    5,231       -       -       5,231  
 Total investments
  $ 13,565     $ 14,768     $ -     $ 28,333  
 
 
13

 
 
   
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