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, 2014
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________to _________

Commission File Number 0-1665

KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-2476480
(I.R.S. Employer
Identification Number)
 
15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)

(845) 802-7900
 
(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 May 15, 2014, there were 7,282,444 shares of the registrant’s common stock outstanding.
 


 
 
 
 
 
KINGSTONE COMPANIES, INC.
 
INDEX
 
      Page
       
PART I — FINANCIAL INFORMATION
   
       
 
Item 1 —
Financial Statements
  2
         
    Condensed Consolidated Balance Sheets at March 31, 2014 (Unaudited) and December 31, 2013   2
         
    Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2014 (Unaudited) and 2013 (Unaudited)   3
         
    Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2014 (Unaudited)   4
         
    Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 (Unaudited) and 2013 (Unaudited)   5
         
    Notes to Condensed Consolidated Financial Statements  (Unaudited)   6
         
 
Item 2 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations   29
         
 
Item 3 —
Quantitative and Qualitative Disclosures About Market Risk   49
         
 
Item 4 —
Controls and Procedures   49
         
PART II — OTHER INFORMATION
   
         
 
Item 1 —
Legal Proceedings
  50
         
 
Item 1A —
Risk Factors
  50
         
 
Item 2 —
Unregistered Sales of Equity Securities and Use of Proceeds
  50
         
 
Item 3 —
Defaults Upon Senior Securities
  50
         
 
Item 4 —
Mine Safety Disclosures
  50
         
 
Item 5 —
Other Information
  50
         
 
Item 6 —
Exhibits
  50
         
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    
 
 
 

 
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q 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, 2013 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,
 
   
2014
   
2013
 
   
(unaudited)
       
Assets
           
 Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
           
 $4,102,096 at March 31, 2014 and $2,425,261 at December 31, 2013)
  $ 3,969,335     $ 2,399,482  
 Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
               
 $36,267,872 at March 31, 2014 and $28,079,902 at December 31, 2013)
    37,087,852       28,436,022  
 Equity securities, available-for-sale, at fair value (cost of $8,190,655
               
 at March 31, 2014 and $6,690,338 at December 31, 2013)
    8,513,526       6,796,673  
 Total investments
    49,570,713       37,632,177  
 Cash and cash equivalents
    8,563,066       19,922,506  
 Premiums receivable, net of provision for uncollectible amounts
    8,102,612       7,590,074  
 Receivables - reinsurance contracts
    858,567       974,989  
 Reinsurance receivables, net of provision for uncollectible amounts
    43,531,328       37,560,825  
 Deferred policy acquisition costs
    7,193,301       6,860,263  
 Intangible assets, net
    2,590,315       2,709,244  
 Property and equipment, net of accumulated depreciation
    2,295,861       2,038,755  
 Other assets
    1,447,522       1,494,989  
Total assets
  $ 124,153,285     $ 116,783,822  
                 
Liabilities
               
 Loss and loss adjustment expense reserves
  $ 40,043,254     $ 34,503,229  
 Unearned premiums
    33,466,488       32,335,614  
 Advance premiums
    1,165,871       776,099  
 Reinsurance balances payable
    2,982,222       2,566,729  
 Deferred ceding commission revenue
    7,117,642       6,984,166  
 Accounts payable, accrued expenses and other liabilities
    2,301,195       3,215,487  
 Deferred income taxes
    868,281       693,087  
Total liabilities
    87,944,953       81,074,411  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity
               
Preferred stock, $.01 par value; authorized 2,500,000 shares
    -       -  
Common stock, $.01 par value; authorized 20,000,000 shares; issued 8,186,031 shares;
         
outstanding 7,266,573 shares
    81,860       81,860  
Capital in excess of par
    32,705,959       32,692,568  
Accumulated other comprehensive income
    754,280       305,219  
Retained earnings
    4,223,678       4,187,209  
      37,765,777       37,266,856  
Treasury stock, at cost, 919,458 shares
    (1,557,445 )     (1,557,445 )
Total stockholders' equity
    36,208,332       35,709,411  
                 
Total liabilities and stockholders' equity
  $ 124,153,285     $ 116,783,822  
________________________________________________________________________________________
 
See accompanying notes to condensed consolidated financial statements.
 
 
2

 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
       
             
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three months ended March 31,
 
2014
   
2013
 
             
 Revenues
           
 Net premiums earned
  $ 5,926,311     $ 4,623,215  
 Ceding commission revenue
    3,381,283       2,293,711  
 Net investment income
    378,788       283,287  
 Net realized gains on sales of investments
    188,348       105,125  
 Other income
    227,557       213,990  
 Total revenues
    10,102,287       7,519,328  
                 
 Expenses
               
 Loss and loss adjustment expenses
    4,324,954       2,469,641  
 Commission expense
    2,582,508       2,115,820  
 Other underwriting expenses
    2,281,749       2,213,345  
 Other operating expenses
    250,035       243,310  
 Depreciation and amortization
    183,120       152,986  
 Interest expense
    -       21,215  
 Total expenses
    9,622,366       7,216,317  
                 
 Income from operations before taxes
    479,921       303,011  
 Income tax expense
    152,788       112,003  
 Net income
    327,133       191,008  
                 
 Other comprehensive income, net of tax
               
 Gross change in unrealized gains on available-for-sale-securities
    680,396       445,743  
                 
 Income tax expense related to items of other comprehensive income
    (231,335 )     (151,553 )
 Comprehensive income
  $ 776,194     $ 485,198  
                 
Earnings per common share:
               
Basic
  $ 0.05     $ 0.05  
Diluted
  $ 0.04     $ 0.05  
                 
Weighted average common shares outstanding
               
Basic
    7,266,573       3,840,899  
Diluted
    7,372,149       3,914,406  
                 
Dividends declared and paid per common share
  $ 0.04     $ 0.04  
_______________________________________________________________________________________
 
See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
Three months ended March 31, 2014 (unaudited)
 
                                                           
                                 
Accumulated
                         
                           
Capital
   
Other
 
 
                   
   
Preferred Stock
   
Common Stock
   
in Excess
    Comprehensive    
Retained
   
Treasury Stock
       
   
Shares
   
Amount
   
Shares
   
Amount
   
of Par
   
Income
   
Earnings
   
Shares
   
Amount
   
Total
 
Balance, January 1, 2014
    -     $ -       8,186,031     $ 81,860     $ 32,692,568     $ 305,219     $ 4,187,209       919,458     $ (1,557,445 )   $ 35,709,411  
Stock-based compensation
    -       -       -       -       13,391       -       -       -       -       13,391  
Dividends
    -       -       -       -       -       -       (290,664 )     -       -       (290,664 )
Net income
    -       -       -       -       -       -       327,133       -       -       327,133  
Change in unrealized gains on available-
                                                                         
for-sale securities, net of tax
    -       -       -       -       -       449,061       -       -       -       449,061  
Balance, March 31, 2014
    -     $ -       8,186,031     $ 81,860     $ 32,705,959     $ 754,280     $ 4,223,678       919,458     $ (1,557,445 )   $ 36,208,332  
______________________________________________________________________________________________________________________
 
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,
 
2014
   
2013
 
             
 Cash flows provided by operating activities:
           
 Net income
  $ 327,133     $ 191,008  
Adjustments to reconcile net income to net cash provided by operating activities:
         
 Net realized gains on sales of investments
    (188,348 )     (105,125 )
 Depreciation and amortization
    183,120       152,986  
 Amortization of bond premium, net
    82,997       45,074  
 Stock-based compensation
    13,391       8,748  
 Deferred income tax expense
    (56,141 )     (124,532 )
 (Increase) decrease in operating assets:
               
 Premiums receivable, net
    (512,538 )     370,668  
 Receivables - reinsurance contracts
    116,422       -  
 Reinsurance receivables, net
    (5,970,503 )     5,281,411  
 Deferred policy acquisition costs
    (333,038 )     17,101  
 Other assets
    46,785       1,011,071  
 (Decrease) increase in operating liabilities:
               
 Loss and loss adjustment expense reserves
    5,540,025       (2,175,646 )
 Unearned premiums
    1,130,874       551,525  
 Advance premiums
    389,772       156,610  
 Reinsurance balances payable
    415,493       4,421,673  
 Advance payments from catastrophe reinsurers
    -       (7,358,391 )
 Deferred ceding commission revenue
    133,476       45,226  
 Accounts payable, accrued expenses and other liabilities
    (914,292 )     (244,362 )
 Net cash flows provided by operating activities
    404,628       2,245,045  
                 
 Cash flows used in investing activities:
               
 Purchase - fixed-maturity securities held-to-maturity
    (1,566,354 )     -  
 Purchase - fixed-maturity securities available-for-sale
    (10,396,843 )     (1,146,075 )
 Purchase - equity securities
    (2,662,152 )     (2,298,727 )
 Sale or maturity - fixed-maturity securities available-for-sale
    2,176,834       1,522,781  
 Sale - equity securities
    1,287,326       945,053  
 Other investing activities
    (312,215 )     (75,898 )
 Net cash flows used in investing activities
    (11,473,404 )     (1,052,866 )
                 
 Cash flows used in financing activities:
               
 Proceeds from line of credit
    -       100,000  
 Principal payments on line of credit
    -       (550,000 )
 Dividends paid
    (290,664 )     (153,637 )
 Net cash flows used in financing activities
    (290,664 )     (603,637 )
                 
 (Decrease) increase in cash and cash equivalents
  $ (11,359,440 )   $ 588,542  
 Cash and cash equivalents, beginning of period
    19,922,506       2,240,012  
 Cash and cash equivalents, end of period
  $ 8,563,066     $ 2,828,554  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for income taxes
  $ 400     $ -  
 Cash paid for interest
  $ -     $ 39,087  
___________________________________________________________________________________
See accompanying notes to condensed consolidated financial statements.
 
 
5

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

Note 1 - Nature of Business and Basis of Presentation
 
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned 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. KICO has also obtained a license to write insurance in the Commonwealth of Pennsylvania; however, KICO has only nominally commenced writing business in Pennsylvania. Kingstone, through its wholly owned 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, 2013 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 31, 2014. 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, 2014 may not be indicative of the results that may be expected for the year ending December 31, 2014.
 
Note 2 – Accounting Policies
 
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: (1) KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates, and (2) Payments Inc. All significant inter-company transactions have been eliminated in consolidation.
 
 
6

 
 
Accounting Pronouncements
 
There have been no recent accounting pronouncements or changes in recent accounting pronouncements during the three months ended March 31, 2014, as compared to those described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, that are of significance, or potential significance, to the Company.

Note 3 - Investments 

Available-for-Sale Securities

The amortized cost and fair value of investments in available-for-sale fixed-maturity securities and equity securities as of March 31, 2014 and December 31, 2013 are summarized as follows:
 
   
March 31, 2014
 
                                   Net  
     Cost or      Gross      Gross Unrealized Losses           Unrealized  
     Amortized      Unrealized      Less than 12      More than 12      Fair      Gains/  
   
Cost
 
Gains
   
Months
   
Months
    Value    
(Losses)
 
 Category
                                   
                                     
Fixed-Maturity Securities:
                               
Political subdivisions of States,
                         
 Territories and Possessions
  $ 11,199,284     $ 257,295     $ (25,457 )   $ (35,326 )   $ 11,395,796     $ 196,512  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    25,068,588       724,043       (62,730 )     (37,845 )     25,692,056       623,468  
 Total fixed-maturity securities
    36,267,872       981,338       (88,187 )     (73,171 )     37,087,852       819,980  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    3,159,917       6,756       (68,114 )     (58,228 )     3,040,331       (119,586 )
 Common stocks
    5,030,738       463,402       (20,945 )     -       5,473,195       442,457  
 Total equity securities
    8,190,655       470,158       (89,059 )     (58,228 )     8,513,526       322,871  
                                                 
 Total
  $ 44,458,527     $ 1,451,496     $ (177,246 )   $ (131,399 )   $ 45,601,378     $ 1,142,851  
 
 
 
7

 
 
   
December 31, 2013
                                 
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:
                               
Political subdivisions of States,
                         
Territories and Possessions
  $ 7,000,222     $ 162,616     $ (49,491 )   $ (45,140 )   $ 7,068,207     $ 67,985  
                                                 
Corporate and other bonds
                                               
Industrial and miscellaneous
    21,079,680       569,139       (179,810 )     (101,194 )     21,367,815       288,135  
Total fixed-maturity securities
    28,079,902       731,755       (229,301 )     (146,334 )     28,436,022       356,120  
                                                 
Equity Securities:
                                               
Preferred stocks
    2,899,301       2,503       (251,525 )     (62,551 )     2,587,728       (311,573 )
Common stocks
    3,791,037       470,606       (38,785 )     (13,913 )     4,208,945       417,908  
Total equity securities
    6,690,338       473,109       (290,310 )     (76,464 )     6,796,673       106,335  
                                                 
Total
  $ 34,770,240     $ 1,204,864     $ (519,611 )   $ (222,798 )   $ 35,232,695     $ 462,455  
 
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, 2014 and December 31, 2013 is shown below:
 
   
March 31, 2014
   
December 31, 2013
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                         
 Less than one year
  $ 745,401     $ 760,948     $ 758,281     $ 768,954  
 One to five years
    8,424,752       8,843,711       9,025,386       9,466,973  
 Five to ten years
    20,629,510       20,997,899       14,070,003       14,114,271  
 More than 10 years
    6,468,209       6,485,294       4,226,232       4,085,824  
 Total
  $ 36,267,872     $ 37,087,852     $ 28,079,902     $ 28,436,022  
 
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 March 31, 2014 and December 31, 2013 are summarized as follows:
 
   
March 31, 2014
                                 
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
  $ 606,327     $ 84,612     $ -     $ -     $ 690,939     $ 84,612  
                                                 
Political subdivisions of States,
                                       
Territories and Possessions
    1,410,299       -       (3,437 )     -       1,406,862       (3,437 )
                                                 
Corporate and other bonds
                                         
Industrial and miscellaneous
    1,952,709       51,586       -       -       2,004,295       51,586  
                                                 
Total
  $ 3,969,335     $ 136,198     $ (3,437 )   $ -     $ 4,102,096     $ 132,761  
 
   
December 31, 2013
                                 
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
  $ 606,138     $ 46,915     $ -     $ -     $ 653,053     $ 46,915  
                                                 
Political subdivisions of States,
                                       
Territories and Possessions
    208,697       -       (25,359 )     -       183,338       (25,359 )
                                                 
Corporate and other bonds
                                         
Industrial and miscellaneous
    1,584,647       4,223       -       -       1,588,870       4,223  
                                                 
Total
  $ 2,399,482     $ 51,138     $ (25,359 )   $ -     $ 2,425,261     $ 25,779  

U.S. Treasury securities included in held-to-maturity securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.

A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2014 and December 31, 2013 is shown below:
 
 
9

 
 
   
March 31, 2014
   
December 31, 2013
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                         
 Less than one year
  $ -     $ -     $ -     $ -  
 One to five years
    -       -       -       -  
 Five to ten years
    2,162,433       2,206,448       1,793,344       1,772,208  
 More than 10 years
    1,806,902       1,895,648       606,138       653,053  
 Total
  $ 3,969,335     $ 4,102,096     $ 2,399,482     $ 2,425,261  

Investment Income

Major categories of the Company’s net investment income are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2014
   
2013
 
             
 Income:
           
 Fixed-maturity securities
  $ 342,918     $ 260,035  
 Equity securities
    114,513       86,455  
 Cash and cash equivalents
    20,619       29  
 Total
    478,050       346,519  
 Expenses:
               
 Investment expenses
    99,262       63,232  
 Net investment income
  $ 378,788     $ 283,287  

Proceeds from the sale and maturity of fixed-maturity securities were $2,176,834 and $1,522,781 for the three months ended March 31, 2014 and 2013, respectively.

Proceeds from the sale of equity securities were $1,287,326 and $945,053 for the three months ended March 31, 2014 and 2013, respectively.

The Company’s net realized gains and losses on investments are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2014
   
2013
 
             
Fixed-maturity securities:
       
Gross realized gains
  $ 89,256     $ 76,976  
Gross realized losses
    (26,399 )     -  
      62,857       76,976  
                 
Equity securities:
               
Gross realized gains
    136,059       71,785  
Gross realized losses
    (10,568 )     (43,636 )
      125,491       28,149  
                 
                 
Net realized gains
  $ 188,348     $ 105,125  
 
 
10

 
 
Impairment Review
 
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, in accordance with GAAP, management considers weather (i) the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an Other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.  For held-to-maturity debt securities, the amount of OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security.

OTTI losses are recorded in the condensed consolidated statements of income 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. At March 31, 2014, there were 39 securities that accounted 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, 2014 and 2013. 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 an anticipated recovery of fair value to the Company’s cost basis.
 
 
11

 
 
The Company held securities with unrealized losses representing declines that were considered temporary at March 31, 2014 and December 31, 2013 as follows:
 
   
March 31, 2014
 
   
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:
                                           
Political subdivisions of
                                           
States, Territories and
                                           
Possessions
  $ 2,669,178     $ (25,457 )     9     $ 772,206     $ (35,326 )     2     $ 3,441,384     $ (60,783 )
                                                                 
Corporate and other
                                                         
bonds industrial and
                                                         
miscellaneous
    4,378,126       (62,730 )     13       1,036,070       (37,845 )     4       5,414,196       (100,575 )
                                                                 
Total fixed-maturity
                                                         
securities
  $ 7,047,304     $ (88,187 )     22     $ 1,808,276     $ (73,171 )     6     $ 8,855,580     $ (161,358 )
                                                                 
Equity Securities:
                                                               
Preferred stocks
  $ 1,443,956     $ (68,114 )     6     $ 646,300     $ (58,228 )     3     $ 2,090,256     $ (126,342 )
Common stocks
    418,425       (20,945 )     2       -       -       -       418,425       (20,945 )
                                                                 
Total equity securities
  $ 1,862,381     $ (89,059 )     8     $ 646,300     $ (58,228 )     3     $ 2,508,681     $ (147,287 )
                                                                 
Total
  $ 8,909,685     $ (177,246 )     30     $ 2,454,576     $ (131,399 )     9     $ 11,364,261     $ (308,645 )
 
 
12

 
 
   
December 31, 2013
 
   
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:
                                           
Political subdivisions of
                                           
States, Territories and
                                           
Possessions
  $ 2,015,437     $ (49,491 )     6     $ 415,866     $ (45,140 )     2     $ 2,431,303     $ (94,631 )
                                                                 
Corporate and other
                                                         
bonds industrial and
                                                         
miscellaneous
    6,447,605       (179,810 )     24       1,430,377       (101,194 )     5       7,877,982       (281,004 )
                                                                 
Total fixed-maturity
                                                         
securities
  $ 8,463,042     $ (229,301 )     30     $ 1,846,243     $ (146,334 )     7     $ 10,309,285     $ (375,635 )
                                                                 
Equity Securities:
                                                               
Preferred stocks
  $ 1,835,958     $ (251,525 )     8     $ 444,100     $ (62,551 )     2     $ 2,280,058     $ (314,076 )
Common stocks
    879,525       (38,785 )     4       145,625       (13,913 )     1       1,025,150       (52,698 )
                                                                 
Total equity securities
  $ 2,715,483     $ (290,310 )     12     $ 589,725     $ (76,464 )     3     $ 3,305,208     $ (366,774 )
                                                                 
Total
  $ 11,178,525     $ (519,611 )     42     $ 2,435,968     $ (222,798 )     10     $ 13,614,493     $ (742,409 )
 
 
13

 
 
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.  Municipal and corporate bonds that are traded in less active markets are classified as Level 2.  These securities are valued using market price quotations for recently executed transactions.

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 ability to observe prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.
 
 
14

 

The Company’s investments are allocated among pricing input levels at March 31, 2014 and December 31, 2013 as follows:
 
   
March 31, 2014
 
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Fixed-maturity securities
                       
U.S. Treasury securities
                       
and obligations of U.S.
                       
government corporations
                       
and agencies
  $ -     $ -     $ -     $ -  
                                 
Political subdivisions of
                               
States, Territories and
                               
Possessions
    -       11,396       -       11,396  
                                 
Corporate and other
                               
bonds industrial and
                               
miscellaneous
    17,553       8,138       -       25,691  
Total fixed maturities
    17,553       19,534       -       37,087  
Equity securities
    8,514       -       -       8,514  
Total investments
  $ 26,067     $ 19,534     $ -     $ 45,601  

 
   
December 31, 2013
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Fixed-maturity investments available for sale
                   
Political subdivisions of
                       
States, Territories and
                       
Possessions
  $ -     $ 7,068     $ -     $ 7,068  
                                 
Corporate and other
                               
bonds industrial and
                               
miscellaneous
    20,731       637       -       21,368  
Total fixed maturities
    20,731       7,705       -       28,436  
Equity investments
    6,797       -       -       6,797  
Total investments
  $ 27,528     $ 7,705     $ -     $ 35,233  
 
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 securities and fixed income securities available-for-sale:  Fair value disclosures for these 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-term nature of these instruments.

Premiums receivable, reinsurance receivables:  The carrying values reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to the short-term nature of the assets.
 
 
15

 

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, and accordingly the real estate is a Level 3 asset under the fair value hierarchy.

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

The estimated fair values of the Company’s financial instruments are as follows:
 
   
March 31, 2014
   
December 31, 2013
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
                         
Fixed-maturity investments held to maturity
  $ 3,969,335     $ 4,102,096     $ 2,399,482     $ 2,425,261