kins_10k.htm


United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
(x)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

(  )
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 No.)

15 Joys Lane, Kingston, New York
12401
(Address of principal executive offices)
(Zip Code)

(845) 802-7900
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock
NASDAQ

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes __ No X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes __ No X

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 No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X  

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 __
Accelerated filer __
   
Non-accelerated __ (Do not check if a smaller reporting company)
Smaller reporting company  X  

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

As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $42,754,324 based on the closing sale price as reported on the NASDAQ Capital Market.  As of March 22, 2016, there were 7,321,637 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None


 
 
 
 
 
INDEX

   
Page No.
Forward-Looking Statements
2
PART I
   
Item 1.
Business.
3
Item 1A.
Risk Factors.
21
Item 1B.
Unresolved Staff Comments.
22
Item 2.
Properties.
22
Item 3.
Legal Proceedings.
22
Item 4.
Mine Safety Disclosures.
22
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
23
Item 6.
Selected Financial Data.
24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
61
Item 8.
Financial Statements and Supplementary Data.
61
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
61
Item 9A.
Controls and Procedures.
61
Item 9B.
Other Information.
62
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance.
63
Item 11.
Executive Compensation.
67
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
70
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
73
Item 14.
Principal Accountant Fees and Services.
73
PART IV
   
Item 15.
Exhibits and Financial Statement Schedules.
75
Signatures
 
78
 
 
 

 
 
PART I
 
Forward-Looking Statements
 
This Annual 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 Annual 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 this Annual Report 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.
 
 
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ITEM 1.                      BUSINESS.
 
(a)           Business Development
 
General
 
As used in this Annual Report on Form 10-K (the “Annual Report”), references to the “Company”, “we”, “us”, or “our” refer to Kingstone Companies, Inc. (“Kingstone”) and its subsidiaries.
 
We offer property and casualty insurance products to small businesses and individuals in New York State through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO is a licensed property and casualty insurance company in New York, New Jersey, Connecticut, Pennsylvania and Texas; however, KICO writes substantially all of its business in New York. Payments, Inc., our wholly owned subsidiary, is a licensed premium finance company in the State of New York and through March 31, 2015, received fees for placing contracts with a third party licensed premium finance company.
 
Recent Developments
 
Developments During 2015
 
  Reduced Reliance on Quota Share Reinsurance
 
Effective July 1, 2015, KICO reduced the ceding percentage for its personal lines quota share reinsurance treaty from 55% gross quota share to 40% net quota share. The reduction of the ceding percentage allows KICO to retain a higher portion of its premiums.
 
·  Implemented Electronic Content Management and Workflow System
 
In July 2015, KICO implemented Vertafore’s ImageRight® software, an insurance industry leading electronic content management and workflow system. The new software enhancement has streamlined underwriting and claims processes, allowing for greater efficiency and increased production to support KICO’s continued growth.
 
·  Expanded Licensing to Additional States
 
In 2015, KICO expanded its ability to write property and casualty insurance by obtaining licenses to write insurance policies in New Jersey, Connecticut and Texas.
 
·  A.M. Best Rating
 
In 2015, the A.M. Best rating for KICO was upgraded from B+ (Good) to B++ (Good).
 
·  Increased Rate of Dividends Declared
 
In November 2015, we increased the quarterly dividends on our common stock from $.05 per share to $.0625 per share.
 
Dividends of $.05 per share were declared on each of February 6, 2015, May 12, 2015 and August 11, 2015 and were paid on March 13, 2015 and June 15, 2015 and September 14, 2015, respectively. A dividend of $.0625 per share was declared on November 10, 2015 and was paid on December 14, 2015.
 
 
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Developments During 2014
 
·  Reduced Reliance on Quota Share Reinsurance
 
In May 2014, KICO notified its personal lines reinsurers of its election to reduce the ceding percentage for its personal lines quota share reinsurance treaty from 75% to 55% effective July 1, 2014.  It was this ability of KICO to retain a higher portion of its premiums that was a prime factor in proceeding with the December 2013 underwritten public offering.
 
Effective July 1, 2014, KICO non-renewed its commercial lines reinsurance treaty (excluding commercial auto), which consists of small business and artisans risks. KICO had previously ceded 25% of commercial lines written premiums to quota share reinsurers.
 
· Increased Rate of Dividends Declared
 
In August 2014, we increased the quarterly dividends on our common stock from $.04 per share to $.05 per share.
 
Dividends of $.04 per share were declared on each of February 19, 2014 and May 13, 2014 and were paid on March 14, 2014 and June 13, 2014, respectively. Dividends of $.05 per share were declared on each of August 12, 2014 and November 12, 2014 and were paid on September 15, 2014 and December 12, 2014, respectively.
 
 
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(b)
Business
 
Property and Casualty Insurance
 
Overview
 
Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers (the “insureds”).  An insurance policy is a contract between the insurance company and its insureds where the insurance company agrees to pay for losses suffered by the insured that are covered under the contract.  Such contracts often are subject to legal interpretation by courts, often involving legislative actions and/or arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured’s property, such as a home and the personal property in it, or a business’ building, inventory and equipment. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences related to the legal liability of an individual or an organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party.  Claims for property coverage generally are reported and settled in a relatively short period of time, whereas those for casualty coverage can take years and even decades to settle.
 
We generate revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from our investment portfolio, and net realized gains and losses on investment securities. We also receive installment fee income, fees charged to reinstate a policy after it has been cancelled for non-payment, and fees for placing premium finance contracts with a third party licensed premium finance company. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time can elapse between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
 
Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers and premium taxes, and other expenses related to the underwriting process, including their employees’ compensation and benefits.
 
The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company’s combined ratio is calculated by adding the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) and the ratio of policy acquisition and other underwriting expenses to earned premiums (the “expense ratio”). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit. However, after considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can be profitable.

            General; Strategy

 We are a property and casualty insurance holding company whose principal operating subsidiary is Kingstone Insurance Company, referred to as KICO, domiciled in the State of New York. We are a multi-line regional property and casualty insurance company writing business exclusively through independent retail and wholesale agents and brokers, referred to collectively as producers. We are licensed to write insurance policies in New York, New Jersey, Connecticut, Pennsylvania and Texas.
 
 
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We seek to deliver an attractive return on capital and to provide consistent earnings growth through underwriting profits and income from our investment portfolio. Our goal is to allocate capital efficiently to those lines of business that generate sustainable underwriting profits and exit any line for which an underwriting profit is not likely to result. Our strategy is to be the preferred multi-line property and casualty insurance company for selected producers in the geographic markets in which we operate. We believe producers prefer to place profitable business with us because we provide excellent, consistent service to our producers, policyholders and claimants coupled with competitive rates and commission levels and a consistent market presence. We offer a wide array of personal and commercial lines policies, and we believe that this differentiates us from other insurance companies that also distribute through our selected producers.

Our principal objectives are to increase the volume of profitable business that we write while limiting our risk of loss and preserving our capital. We seek to generate underwriting income by writing profitable insurance policies and by effectively managing our other underwriting and operating expenses. We are pursuing profitable growth by expanding the geographic regions in which we operate, increasing the volume of business that we write with existing producers, developing new selected producer relationships, and introducing niche insurance products that are attractive to our producers and policyholders.
  
For the year ended December 31, 2015, our gross written premiums totaled $91.0 million, an increase of 19.3% from the $76.3 million in gross written premium for the year ended December 31, 2014. For the year ended December 31, 2015, our gross written premiums from our continuing lines of business grew by 23.9% compared to the year ended December 31, 2014.
 
Product Lines
 
Our product lines include the following:
 
Personal lines - Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, condominiums, renters, equipment breakdown and service line endorsements, and personal umbrella policies. Personal lines policies accounted for 76.0% of our gross written premiums for the year ended December 31, 2015.
 
Commercial liability - We offer business owners policies, which consist primarily of small business retail, service, and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees.  In addition, we write special multi-peril policies for larger and more specialized business owners’ risks, including those with limited residential exposures. Commercial lines policies accounted for 13.2% of our gross written premiums for the year ended December 31, 2015.
 
Commercial automobile – Until recently we provided liability and physical damage coverage for light vehicles owned by small contractors and artisans. However, due to the poor performance of this line, effective October 1, 2014, we decided to no longer accept new commercial auto policies. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. Commercial automobile policies accounted for 0.6% of our gross written premiums for the year ended December 31, 2015.
 
Livery physical damage - We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included. These policies accounted for 9.9% of our gross written premiums for the year ended December 31, 2015.
 
 
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Other - We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations. This subset of our business accounted for 0.3% of our gross written premiums for the year ended December 31, 2015.
 
Our Competitive Strengths
 
History of Growing Our Profitable Operations

Our insurance company subsidiary, KICO, has been in operation in the State of New York for 129 years. We have consistently increased the volume of profitable business that we write by introducing new insurance products, increasing the volume of business that we write with our selected producers and developing new producer relationships. KICO has earned an underwriting profit in each of the past ten years, including in 2012 when our financial results were adversely impacted by Superstorm Sandy. The extensive heritage of our insurance company subsidiary and our commitment to the New York market is a competitive advantage with producers and policyholders.
 
Strong Producer Relationships

Within our selected producers’ offices, we compete with other property and casualty insurance carriers available to those producers. We carefully select the producers that distribute our insurance policies and continuously monitor and evaluate their performance. We believe our insurance producers value their relationships with us because we provide excellent, consistent personal service coupled with competitive rates and commission levels. We have consistently been rated by insurance producers as above average in the important areas of underwriting, claims handling and service. In the last three performance surveys conducted by the Professional Insurance Agents of New York and New Jersey (“PIA”) of its membership (2010, 2012, and 2014), KICO was rated as the one of the top performing insurance companies in New York, twice ranking as the top rated carrier among all those surveyed.

We offer our selected producers the ability to write a wide array of personal lines and commercial lines policies, including some which are unique to us. Many of our producers write multiple lines of business with us, which provides an advantage over those competitors who are focused on a single product line. We now provide a multi-policy discount on homeowners policies in order to attract and retain more of this multi-line business. We have had a consistent presence in the New York market for over 100 years and we believe that producers value the longevity of our relationship with them. We believe that the excellent service we provide to our selected producers, our broad product offering, and our consistent market presence provides a foundation for profitable growth.
  
Sophisticated Underwriting and Risk Management Practices

We believe that we have a significant underwriting advantage due to our local market presence and expertise. Our underwriting process evaluates and screens out certain risks based on property reports, individual insurance scoring, information collected from physical property inspections, and driving records. We maintain certain policy exclusions that reduce our exposure to risks that can create severe losses. We target a more preferred risk profile in order to reduce adverse selection from risks seeking the lowest premiums by selecting only minimal coverage levels.
 
 
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Our underwriting procedures, premium rates and policy terms support the underwriting profitability of our personal lines policies. We apply premium surcharges for certain coastal properties and maintain deductibles for hurricane-prone exposures in order to provide an appropriate premium rate for the risk of loss. We limit the business that we write in certain coastal counties and within close proximity to coastlines, through the use of individual catastrophe risk scoring, in order to manage our exposure to catastrophic weather events.

Our underwriting expertise and risk management practices enable us to profitably write personal and commercial lines business in our markets without the need for frequent rate adjustments. We believe that the consistency and the reliable availability of our insurance products is important to our selected producer relationships.

Effective Utilization of Reinsurance

Our reinsurance treaties allow us to limit our exposure to the financial impact of catastrophe losses and to reduce our net liability on individual risks. Our reinsurance program is structured to enable us to grow our premium volume while maintaining regulatory capital and other financial ratios generally within or below the expected ranges used for regulatory oversight purposes.

Our reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The income we earn from ceding commissions typically exceeds our fixed operating costs, which consist of other underwriting expenses. Quota share reinsurance treaties transfer a portion of the profit (or loss) associated with the subject insurance policies to the reinsurers. We believe that a prudent reduction in our reliance on quota share reinsurance in the future could increase our overall net underwriting profits.

Experienced Management Team

Our management team has significant expertise in underwriting, agency management, claims management and insurance regulatory matters. Barry Goldstein, our Chairman and Chief Executive Officer, has extensive experience in the insurance industry and managing public companies. He has served in his current capacity since 2001 and previously served as president of an insurance agency in Pennsylvania. John Reiersen, Executive Vice President of KICO, has over 50 years of industry and regulatory experience and previously served as Chief Examiner in the Property and Casualty Insurance Bureau of the New York State Insurance Department, now known as the New York State Department of Financial Services. Benjamin Walden, Senior Vice President and Chief Actuary of KICO, has 26 years of experience with both large and small insurance carriers and has also worked for actuarial consulting firms.  Throughout his career, he has specialized in many of the markets that are a primary focus for KICO.  Our underwriting and claims managers have extensive experience in the insurance industry with an average of 33 years of experience, including over 6 years with KICO on average.

Scalable, Low-Cost Operations

 We focus on keeping expenses low, but invest in tools and processes that improve the efficiency and effectiveness of underwriting risks and processing claims.  We evaluate the costs and benefits of each new tool or process in order to achieve optimal results.  While the majority of our policies are written for risks in downstate New York, our Kingston, New York location provides a significantly lower cost operating environment. We also take a proactive approach to settling outstanding claims rather than engaging in protracted litigation, which results in substantially lower loss adjustment expenses and reduced reserve uncertainty.
 
 
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We have made investments to develop online application and quoting systems for many of our personal lines and commercial products. This has resulted in increased business submissions from our producers due to the greater ease of placing business with us. We plan to expand these online capabilities to all lines of business. We have also leveraged a paperless workflow management and document storage tool in order to further improve efficiency and reduce costs.  Our ability to control the growth of our operating and other expenses while growing revenue at a higher rate is a key component of our business model and is important to our future financial success.
 
Underwriting and Claims Management Philosophy
 
Our underwriting philosophy is to target niche risk segments for which we have detailed expertise and can take advantage of market conditions.  We monitor results on a regular basis and all of our selected producers are reviewed by management on a quarterly basis.  We utilize certain targeted policy exclusions to reduce our exposure to risks that can create severe losses.
 
We believe that our rates are competitive with other carriers’ rates in our markets.  We believe that consistency and the reliable availability of our insurance products is important to our producers.  We do not seek to grow by competing based solely upon price.  We seek to develop long-term relationships with our selected producers who understand and appreciate the consistent path we have chosen.  We carefully underwrite all of our business utilizing the CLUE industry claims database, insurance scoring reports, physical inspection of risks and other individual risk underwriting tools. In the event that a material misrepresentation is discovered in the underwriting application, the policy is voided. If a material misrepresentation is discovered after a claim is presented, we deny the claim. We write homeowners and dwelling fire business in New York City and Long Island and are cognizant of our exposure to hurricanes. We have mitigated this risk through application of mandatory hurricane deductibles in these areas. Our claim and underwriting expertise enables us to profitably write personal lines business in all areas of New York City and Long Island.
 
Distribution
 
We generate business through our relationships with over 350 independent producers. We carefully select our producers by evaluating several factors such as their need for our products, premium production potential, loss history with other insurance companies that they represent, product and market knowledge, and the size of the agency. We only distribute through independent agents and have never sought to distribute our products direct to the consumer.  We will not appoint any agency owned or controlled by another carrier which distributes its products direct to the consumer.  We monitor and evaluate the performance of our producers through periodic reviews of volume, profitability, and quality of business. Our senior executives are actively involved in managing our producer relationships.
 
Each producer is assigned an underwriter and the producer can call that underwriter directly on any matter. We believe that the close relationship with their underwriter is the principal reason producers place their business with us. Our online application and quoting systems have streamlined the process of placing business with KICO.  Our producers have access to a website portal that contains all of our applications, quoting screens, policy forms and underwriting guidelines for all lines of business.  We send out frequent electronic “Producer Grams” in order to inform our producers of updates at KICO. In addition, we have an active Producer Council and have at least one annual meeting with all of our producers.
 
 
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Competition; Market
 
The insurance industry is highly competitive. We constantly assess and project the market conditions and prices for our products, but we cannot fully know our profitability until all claims have been reported and settled.
 
Our policyholders are located primarily in New York State. Our market primarily consists of New York City, Long Island and Westchester County, which we collectively define as Downstate New York. We are also licensed to write insurance in Connecticut, New Jersey, Pennsylvania, and Texas, and are in the process of obtaining a license in one other state.

New York State is the fourth largest property and casualty insurance market in the U.S. and the fourth largest state in the United States with respect to homeowners and dwelling fire insurance direct premiums written. In 2015, we were the 19th largest writer of homeowners and dwelling fire insurance in the State of New York, according to data compiled by SNL Financial. Based on this same data, we now have a 0.9% market share for this combined group of personal lines property business. We compete with large national carriers as well as regional and local carriers in the property and casualty marketplace in New York. We believe that many national and regional carriers have chosen to limit their rate of premium growth or to decrease their presence in the Downstate New York property insurance market due to the high catastrophe risk that exists in the region. Given present market conditions, we believe that we have the opportunity to significantly expand the size of our business in the State of New York, as well as in the other states where we recently became licensed.
 
Loss and Loss Adjustment Expense Reserves
 
We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. We establish these reserves after considering all information known to us as of the date they are recorded.
 
Loss reserves fall into two categories: case reserves for reported losses and loss expenses associated with a specific reported insured claim, and reserves for losses incurred but not reported (“IBNR”) and LAE. We establish these two categories of loss reserves as follows:
 
Reserves for reported losses - When a claim is received, we establish a case reserve for the estimated amount of its ultimate settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time the claim is reported and may subsequently increase or reduce the case reserves as our claims department deems necessary based upon the development of additional facts about claims.
 
IBNR reserves - We also estimate and establish reserves for loss and LAE amounts incurred but not yet reported. IBNR reserves are calculated as ultimate losses and LAE less reported losses and LAE. Ultimate losses are projected by using generally accepted actuarial techniques.
 
 
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The liability for loss and LAE represents our best estimate of the ultimate cost of all reported and unreported losses that are unpaid as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis valuations, statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an analysis of our historical experience, supplemented by analyses of industry loss data. We believe that the reserves for loss and LAE are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates become necessary, such adjustments are reflected in expense for the period in which the estimates are changed. Because of the nature of the business historically written, we believe that we have limited exposure to asbestos and environmental claim liabilities. We recognize recoveries from salvage and subrogation when received.
 
We engage an independent external actuarial specialist to opine on our recorded statutory reserves. Our actuary estimates a range of ultimate losses, along with a range and recommended central estimate of IBNR reserve amounts.
 
Reconciliation of Loss and Loss Adjustment Expenses
 
The table below shows the reconciliation of loss and LAE on a gross and net basis, reflecting changes in losses incurred and paid losses:
 
   
Years ended
 
   
December 31,
 
   
2015
   
2014
 
             
 Balance at beginning of period
  $ 39,912,683     $ 34,503,229  
 Less reinsurance recoverables
    (18,249,526 )     (17,363,975 )
 Net balance, beginning of period
    21,663,157       17,139,254  
                 
 Incurred related to:
               
 Current year
    23,642,998       15,268,426  
 Prior years
    (462,998 )     1,763,762  
 Total incurred
    23,180,000       17,032,188  
                 
 Paid related to:
               
 Current year
    13,172,870       6,351,920  
 Prior years
    8,500,151       6,156,365  
 Total paid
    21,673,021       12,508,285  
  
               
 Net balance at end of period
    23,170,136       21,663,157  
 Add reinsurance recoverables
    16,706,364       18,249,526  
 Balance at end of period
  $ 39,876,500     $ 39,912,683  
 
Our claims reserving practices are designed to set reserves that, in the aggregate, are adequate to pay all claims at their ultimate settlement value.
 
Loss and Loss Adjustment Expenses Development
 
The table below shows the net loss development for business written each year from 2005 through 2015. The table reflects the changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year.
 
 
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The next section of the table sets forth the re-estimates in later years of incurred losses, including payments for the years indicated. The next section of the table shows by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $4,370,000 as of December 31, 2006, by December 31, 2008 (two years later), $3,303,000 had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2006.
 
The “cumulative redundancy (deficiency)” represents, as of December 31, 2015, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.
 
 
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(in thousands of $)
 
2005
   
2006
   
2007
   
2008
   
2009
   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
 
Reserve for loss and loss adjustment expenses, net of reinsurance recoverables
    3,074       4,370       4,799       5,823       6,001       7,280       8,520       12,065       17,139       21,663       23,170  
Net reserve estimated as of One year later
    3,627       4,844       5,430       6,119       6,235       7,483       9,261       13,886       18,903       21,200          
Two years later
    4,315       5,591       5,867       6,609       6,393       8,289       11,022       16,875       18,332                  
Three years later
    5,101       5,792       6,433       6,729       6,486       9,170       12,968       16,624                          
Four years later
    5,094       6,260       6,569       6,711       7,182       10,128       12,552                                  
Five years later
    5,540       6,343       6,683       7,261       7,766       9,925                                          
Six years later
    5,616       6,429       7,245       7,727       7,602                                                  
Seven years later
    5,678       6,886       7,721       7,554                                                          
Eight years later
    6,140       7,318       7,568                                                                  
Nine years later
    6,560       7,160                                                                          
Ten years later
    6,399                                                                                  
Net cumulative redundancy (deficiency)
    (3,325 )     (2,790 )     (2,769 )     (1,731 )     (1,601 )     (2,645 )     (4,032 )     (4,559 )     (1,193 )     463          
                                                                                         
                                                                                         
                                                                                         
(in thousands of $)
    2005       2006       2007       2008       2009       2010       2011       2012       2013       2014       2015  
Cumulative amount of reserve paid, net of reinsurance recoverable through
                                                                                       
One year later
    1,106       2,018       1,855       2,533       2,307       3,201       3,237       4,804       6,156       8,500          
Two years later
    2,321       3,303       3,339       3,974       3,992       4,947       5,661       8,833       10,629                  
Three years later
    3,321       4,036       4,339       5,054       4,659       6,199       8,221       11,873                          
Four years later
    3,705       4,471       5,146       5,373       5,238       7,737       10,100                                  
Five years later
    3,988       5,079       5,424       5,717       5,997       8,585                                          
Six years later
    4,484       5,305       5,738       6,224       6,562                                                  
Seven years later
    4,595       5,594       6,247       6,718                                                          
Eight years later
    4,880       5,966       6,740                                                                  
Nine years later
    5,246       6,377                                                                          
Ten years later
    5,654                                                                                  
                                                                                         
Net reserve -
                                                                                       
December 31,
    3,074       4,370       4,799       5,823       6,001       7,280       8,520       12,065       17,139       21,663       23,170  
* Reinsurance Recoverable
    7,283       6,523       6,693       9,766       10,512       10,432       9,960       18,420       17,364       18,250       16,707  
* Gross reserves -
                                                                                       
  December 31,
    10,357       10,893       11,492       15,589       16,513       17,712       18,480       30,485       34,503       39,913       39,877  
                                                                                         
Net re-estimated reserve
    6,399       7,160       7,568       7,554       7,602       9,925       12,552       16,624       18,332       21,200          
Re-estimated reinsurance recoverable
    11,137       11,312       11,254       12,954       12,920       13,621       14,150       27,750       19,779       18,742          
Gross re-estimated reserve
    17,536       18,472       18,822       20,508       20,522       23,546       26,702       44,374       38,111       39,942          
                                                                                         
Gross cumulative redundancy (deficiency)
    (7,179 )     (7,579 )     (7,330 )     (4,919 )     (4,009 )     (5,834 )     (8,222 )     (13,889 )     (3,608 )     (29 )        
         
 
13

 
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
 
Reinsurance
 
We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to achieve a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Our reinsurance program is structured to reflect our obligations and goals. Reinsurance via quota share allows for a carrier to write business without increasing its underwriting leverage above a management determined ratio. The business written under a reinsurance quota share obligates a reinsurer to assume the risks involved, and gives the reinsurer the profit (or loss) associated with such.  We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance.  This will result in higher earned premiums and a reduction in ceding commission revenue in future years. Our participation in reinsurance arrangements does not relieve us from our obligations to policyholders.
 
Our quota share reinsurance treaties in effect for the year ended December 31, 2015 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the July 1, 2014/June 30, 2015 treaty year (“2014/2015 Treaty”) and July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”). The expired 2014/2015 Treaty was at a 55% quota share percentage and the current 2015/2016 Treaty is at a 40% quota share percentage. Our maximum net retention under the quota share and excess of loss treaties for any one personal lines policy for dates of loss after July 1, 2015 is $450,000.
 
We did not renew our expiring 25% commercial lines quota share reinsurance treaty on July 1, 2014.  Excess of loss contracts provide coverage for individual commercial lines losses. Our maximum net retention under excess of loss treaties for any one commercial general liability policy for dates of loss after July 1, 2015 is $425,000. Commercial auto policies are covered by an excess of loss reinsurance contract that provides coverage for individual losses in excess of $300,000.
 
We earn ceding commission revenue under the quota share reinsurance treaties based on a  provisional commission rate on all premiums ceded to the reinsurers as adjusted by a sliding scale based on the ultimate treaty year loss ratios on the policies reinsured under each agreement. The sliding scale provides minimum and maximum ceding commission rates in relation to specified ultimate loss ratios. Under the 2015/2016 Treaty, we are receiving a higher upfront fixed provisional rate in exchange for a less favorable sliding scale contingent rate. Under this arrangement, we earn more provisional ceding commissions, while contingent ceding commissions are reduced due the less favorable sliding scale rate.
 
The 2015/2016 Treaty is on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in prior treaties. Under a “net” arrangement, all catastrophe reinsurance coverage is now purchased directly by us. Since we pay for all of the catastrophe coverage, none of the losses covered under a catastrophic event will be included in the quota share, drastically reducing the adverse impact that a catastrophic event can have on ceding commissions.

 
In 2015, we purchased catastrophe reinsurance to provide coverage of up to $180 million for losses associated with a single event. One of the most commonly used catastrophe forecasting models prepared for us indicates that the catastrophe reinsurance treaties provide coverage in excess of our estimated probable maximum loss associated with a single one-in-200 year storm event. Losses on personal lines policies are subject to the 40% quota share treaty, which results in a net retention by us of $2.4 million of exposure per catastrophe occurrence. Our catastrophe reinsurance also covers losses caused by severe winter weather during any consecutive 28 day period. Catastrophe coverage is limited on an annual basis to two times the per occurrence amounts. Effective July 1, 2015, we have reinstatement premium protection on the first $16,000,000 layer of catastrophe coverage in excess of $4,000,000.
 
 
14

 
 
Investments
 
Our investment portfolio, including cash and cash equivalents, and short term investments, as of December 31, 2015 and 2014, is summarized in the table below by type of investment.
 
   
December 31, 2015
   
December 31, 2014
 
   
Carrying
   
% of
   
Carrying
   
% of
 
 Category
 
Value
   
Portfolio
   
Value
   
Portfolio
 
                         
 Cash and cash equivalents
  $ 13,551,372       15.0 %   $ 9,906,878       13.4 %
                                 
 Held to maturity
                               
 U.S. Treasury securities and
                               
 obligations of U.S. government
                               
 corporations and agencies
    606,389       0.7 %     606,353       0.8 %
                                 
 Political subdivisions of states,
                               
 territories and possessions
    1,417,679       1.6 %     1,413,303       1.9 %
                                 
 Available for sale                                
 Corporate and other bonds
                               
 Industrial and miscellaneous
    3,114,804       3.4 %     3,109,079       4.2 %
                                 
 Political subdivisions of states,
                               
 territories and possessions
    12,555,098       13.9 %     14,244,438       19.2 %
                                 
 Corporate and other bonds
                               
 Industrial and miscellaneous
    44,956,468       49.7 %     36,876,421       49.7 %
                                 
 Residential backed mortgage securities
    4,990,498       5.5 %     -       0.0 %
                                 
 Preferred stocks
    2,915,650       3.2 %     3,126,280       4.2 %
                                 
 Common stocks
    6,288,620       7.0 %     4,891,449       6.6 %
 Total
  $ 90,396,578       100.0 %   $ 74,174,201       100.0 %
 
 
15

 
 
The table below summarizes the credit quality of our fixed-maturity securities available-for-sale as of December 31, 2015 and 2014 as rated by Standard and Poor’s (or if unavailable from Standard and Poor's, then Moody’s or Fitch):
 
     
December 31, 2015
   
December 31, 2014
 
           
Percentage of
         
Percentage of
 
     
Fair Market
   
Fair Market
   
Fair Market
   
Fair Market
 
     
Value
   
Value
   
Value
   
Value
 
                           
Rating
                         
Corporate and municipal bonds
                         
AAA
    $ 2,218,147       3.5 %   $ 2,779,539       5.5 %
AA
      9,060,781       14.5 %     9,826,545       19.2 %
A         10,639,888       17.0 %     13,954,036       27.3 %
BBB
      35,592,750       57.1 %     24,560,739       48.0 %
Total corporate and municipal bonds
      57,511,566       92.1 %     51,120,859       100.0 %
                                     
Residential mortgage backed securities
                                 
A         216,077       0.3 %     -       0.0 %
CCC
      457,889       0.7 %     -       0.0 %
CC
      402,558       0.6 %     -       0.0 %
D         3,913,974       6.3 %     -       0.0 %
Total residential mortgage backed securities
      4,990,498       7.9 %     -       0.0 %
                                     
Total
    $ 62,502,064       100.0 %   $ 51,120,859       100.0 %
 
Additional financial information regarding our investments is presented under the subheading “Investments” in Item 7 of this Annual Report.
 
Ratings
 
Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance.  In 2009, KICO applied for its initial A.M. Best rating, and was assigned a letter rating of “B” (Fair) by A.M. Best in 2010. Our rating was upgraded to B+ (Good) in 2011 and B++ (Good) in 2015. KICO is beginning the process of undergoing its annual review from A.M. Best, which may result in a change to its rating. A.M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors. An A.M. Best rating of A- or better could create additional demand from producers in markets requiring a carrier to have that level of rating from A.M. Best. We currently have a Demotech rating of A (Excellent) which generally qualifies our policies as eligible by most banks and finance companies.
 
Severe Winter Weather
 
Our predominant market, downstate New York, suffered severe weather during the winters of 2015 and 2014. We include severe winter weather in our definition of catastrophe. The catastrophe component of 2015 and 2014 severe winters was determined by the number of claims in excess of our threshold of average claims from severe winter weather. These claims were primarily from losses due to frozen pipes, weight of snow and ice, and other water related structural damage as a result of excess snow and below normal temperatures for an extended period of time. The effects of severe winter weather increased our net loss ratio by 4.3 percentage points in 2015 and 2.9 percentage points in 2014.
 
 
16

 
 
The computation to determine contingent ceding commission revenue includes direct catastrophe losses and loss adjustment expenses incurred from severe winter weather. Such losses increased our ceded loss ratio in our July 1, 2014/June 30, 2015 personal lines quota share treaties which reduced our contingent ceding commission revenue by $1.3 million for the year ended December 31, 2015. The effects of severe winter weather increased our net underwriting expense ratio by 2.7 percentage points in 2015. The effects of severe winter weather increased our ceded loss ratio in our July 1, 2013/June 30, 2014 personal lines quota share treaties which reduced our contingent ceding commission revenue by $0.5 million for the year ended December 31, 2014. The effects of severe winter weather increased our net underwriting expense ratio by 1.6 percentage points in 2014.
 
Premium Financing
 
Customers who purchase insurance policies are often unable to pay the premium in a lump sum or are unable to afford the payment plan offered and, therefore, require extended payment terms.  Premium finance involves making a loan to the customer that is secured by the unearned portion of the insurance premiums being financed and held by the insurance carrier.  Our wholly owned subsidiary, Payments Inc. (“Payments”), is licensed as a premium finance agency in the state of New York.
 
Prior to February 1, 2008, Payments Inc. provided premium financing in connection with the obtaining of insurance policies.  Effective February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio.  The purchaser of the portfolio (the “Purchaser”) agreed that, during the five year period ended February 1, 2013 (which period was extended to February 1, 2015), it would purchase, assume and service all eligible premium finance contracts originated by Payments in the state of New York (the “Agreement”). In connection with such purchases, Payments was entitled to receive a fee generally equal to a percentage of the amount financed. On July 17, 2014, the Purchaser terminated the Agreement effective February 1, 2015. Following any expiration or termination of the obligation of the Purchaser to purchase premium finance contracts, Payments was entitled to receive the fees for an additional two years (“Termination Period”) with regard to contracts for policies from our producers. On March 26, 2015, we and the Purchaser agreed to amend the Termination Period to end as of March 31, 2015 (“Termination Date”). We received a one-time payment of $350,000 in exchange for the fees that we would have received during the Termination Period. In connection with such agreement, we agreed to several restrictive covenants, including that, for a period of eighteen months following the Termination Date, we would not engage in the premium financing business within New York, New Jersey and Pennsylvania. Our premium financing business consisted of the placement fees that Payments earned from placing contracts. Placement fees earned from placing contracts constituted approximately 0.1% and 0.5% of our revenues from operations during the years ended December 31, 2015 and 2014, respectively.
 
Government Regulation
 
Holding Company Regulation
 
We, as the parent of KICO, are subject to the insurance holding company laws of the state of New York. These laws generally require an insurance company to register with the New York State Department of Financial Services (the “DFS”) and to furnish annually financial and other information about the operations of companies within our holding company system. Generally under these laws, all material transactions among companies in the holding company system to which KICO is a party must be fair and reasonable and, if material or of a specified category, require prior notice and approval or non-disapproval by the DFS.
 
 
17

 
 
Change of Control
 
The insurance holding company laws of the state of New York require approval by the DFS for any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company.  Any future transactions that would constitute a change of control of KICO, including a change of control of Kingstone Companies, Inc., would generally require the party acquiring control to obtain the approval of the DFS (and in any other state in which KICO may operate).  Obtaining these approvals may result in the material delay of, or deter, any such transaction.  These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Kingstone Companies, Inc., including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
 
State Insurance Regulation
 
Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates in some instances and regulate unfair trade and claims practices.
 
KICO is required to file detailed financial statements and other reports with the insurance departments in the states in which KICO is licensed to transact business. These financial statements are subject to periodic examination by the insurance departments.
 
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations, including those in New York, that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of KICO to exit unprofitable markets.
 
In the aftermath of Superstorm Sandy, the DFS adopted various emergency regulations that affect insurance companies that operate in the state of New York.  Included among the regulations is mandatory participation in non-binding mediation proceedings funded by the insurer.
 
 
18

 

Federal and State Legislative and Regulatory Changes
 
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or at the present being considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (the “NAIC”).
 
In December 2010, the NAIC adopted amendments to the Model Insurance Holding Company System Regulation Act and Regulation (the “Amended Model Act and Regulation”) to introduce the concept of “enterprise risk” within an insurance company holding system. Enterprise risk is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. If and when adopted by a particular state, the Amended Model Act and Regulation would impose more extensive informational requirements on us in order to protect the licensed insurance companies from enterprise risk, including requiring us to prepare an annual enterprise risk report that identifies the material risks within the insurance company holding system that could pose enterprise risk to the licensed insurer. In addition, the Amended Model Act and Regulation requires any controlling person of a domestic insurer seeking to divest its controlling interest to file a notice of its proposed divestiture, which may be subject to approval by the insurance commissioner.  The Amended Model Act and Regulation must be adopted by the individual states, and specifically states in which we are licensed, for the new requirements to apply to us. The NAIC has made certain sections of the amendments part of its accreditation standards for state solvency regulation, which may motivate more states to adopt the amendments promptly. Additional requirements are also expected. For example, the NAIC has adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, which, when adopted by the states, will require insurers to perform a risk and solvency assessment and, upon request of a state, file an ORSA Summary Report with the state. The ORSA Summary Report will be required in 2015, subject to the various dates of adoption by states, and will describe our process for assessing our own solvency.
 
In 2013, New York, where KICO is domiciled, adopted its version of the Amended Model Act and Regulation.  The statute requires a holding company that directly or indirectly controls an insurer to adopt a formal enterprise risk management function and file an enterprise risk report with the DFS by April 30 of each year commencing in 2014.  In 2014, the DFS promulgated the implementing regulations. The report must identify the material risks within the holding company system that could pose enterprise risk to the insurer.  In addition, any holding company seeking to divest its controlling interest in a domestic insurer is required to file with the DFS a notice of its proposed divestiture at least thirty days prior to cessation of control. Also in 2014 the DFS also promulgated two amendments to its holding company regulation affecting the transactions between the insurer and any person in the holding company system and requiring additional information in applications for control. In 2015, the DFS indicated that it will initiate new targeted cybersecurity assessments for insurance companies.
 
On November 9, 2015, the DFS sent a letter to financial regulators outlining the parameters of the regulations.  While the letter primarily addresses banking institutions, it is expected the regulations will also apply to insurance companies.
 
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that established a Federal Insurance Office (the “FIO”) within the U.S. Department of the Treasury. The FIO is initially charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. On December 12, 2013, the FIO issued a report (as required under the Dodd-Frank Act) entitled “How to Modernize and Improve the System of Insurance Regulation in the United States” (the “Report”), which stated that, given the “uneven” progress the states have made with several near-term state reforms, should the states fail to accomplish the necessary modernization reforms in the near term, “Congress should strongly consider direct federal involvement.” The FIO continues to support the current state-based regulatory regime, but will consider federal regulation should the states fail to take steps to greater uniformity (e.g., federal licensing of insurers).
 
 
19

 
 
State Insurance Department Examinations
 
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the financial reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC.
 
Risk-Based Capital Regulations
 
State insurance departments impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a benchmark for the regulation of insurance companies by state insurance regulators.  RBC provides for targeted surplus levels based on formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk); (c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC (“ACLC”).

The RBC guidelines define specific capital levels based on a company’s ACLC that are determined by the ratio of the company’s total adjusted capital (“TAC”) to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO was in compliance with New York’s RBC requirements as of December 31, 2015.
 
Dividend Limitations
 
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing 36 months, less dividends paid during such period.
 
Insurance Regulatory Information System Ratios
 
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.
 
 
20

 
 
As of December 31, 2015, as a result of its growth and reduction of its quota share reinsurance percentages, KICO had two ratios outside the usual range due to an increase in net premiums written and an estimated current reserve deficiency to surplus.
 
Accounting Principles
 
Statutory accounting principles (“SAP”) are a basis of accounting developed by the NAIC. They are used to prepare the statutory financial statements of insurance companies and to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
 
Generally accepted accounting principles (“GAAP”) is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
 
Statutory accounting practices established by the NAIC and adopted in part by the New York insurance regulators, determine, among other things, the amount of statutory surplus and statutory net income of KICO and thus determine, in part, the amount of funds that are available to pay dividends to Kingstone Companies, Inc.
 
Legal Structure
 
We were incorporated in 1961 and assumed the name DCAP Group, Inc. in 1999. On July 1, 2009, we changed our name to Kingstone Companies, Inc.
 
Offices
 
Our principal executive offices are located at 15 Joys Lane, Kingston, New York 12401, and our telephone number is (845) 802-7900. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business maintains an executive office located at 70 East Sunrise Highway, Valley Stream, New York 11581. Our website is www.kingstonecompanies.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report.
 
Employees
 
As of December 31, 2015, we had 69 employees all of whom are located in New York. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is good.
 
ITEM 1A.                      RISK FACTORS.
 
Not applicable.  See, however, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
 
 
21

 
 
ITEM 1B.                      UNRESOLVED STAFF COMMENTS.
 
Not applicable.
 
ITEM 2.                      PROPERTIES.
 
Our principal executive offices are currently located at 15 Joys Lane, Kingston, New York 12401.  Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business also maintains an executive office located at 70 East Sunrise Highway, Valley Stream, New York 11581, at which we lease 3,250 square feet of space.
 
We own the building at which our insurance underwriting business principally operates, free of mortgage.
 
ITEM 3.                      LEGAL PROCEEDINGS.
 
None.
 
ITEM 4.                      MINE SAFETY DISCLOSURES.
 
Not applicable.
 
 
22

 
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our common stock is quoted on The NASDAQ Capital Market under the symbol “KINS.”
 
Set forth below are the high and low sales prices for our common stock for the periods indicated, as reported on The NASDAQ Capital Market.
 
   
High
   
Low
 
2015 Calendar Year
           
First Quarter
  $ 8.22     $ 7.50  
Second Quarter
    7.79       6.11  
Third Quarter
    9.47       7.50  
Fourth Quarter
    10.00       8.47  
   
High
   
Low
 
2014 Calendar Year
               
First Quarter
  $ 7.90     $ 6.66  
Second Quarter
    7.24       5.66  
Third Quarter
    8.24       6.53  
Fourth Quarter
    8.97       7.44  

Holders
 
As of March 8, 2016, there were approximately 299 record holders of our common stock.
 
Dividends
 
Holders of our common stock are entitled to dividends when and if declared by our Board of Directors out of funds legally available. During 2015, we paid quarterly dividends of $0.05 per share on March 13, 2015, June 15, 2015 and September 14, 2015, and $.0625 per share on December 14, 2015.  During 2014, we paid quarterly dividends of $0.04 per share on March 14, 2014 and June 13, 2014, and $.05 per share on September 15, 2014 and December 12, 2014.  Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors.  Therefore, we can give no assurance that future dividends of any kind will continue to be paid to holders of our common stock.
  
Our ability to pay dividends depends, in part, upon on the ability of KICO to pay dividends to us. KICO, as an insurance company, is subject to significant regulatory restrictions limiting its ability to declare and pay dividends. See “Business – Government Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity” in Items 1 and 7, respectively, of this Annual Report.
 
 
23

 
 
We declared and paid dividends on our common stock as follows:
 
   
2015
   
2014
 
             
 Common stock dividends declared
  $ 1,557,398     $ 1,312,625  
 
Recent Sales of Unregistered Securities
 
None.
 
Issuer Purchases of Equity Securities
 
 The following table set forth certain information with respect to purchases of common stock made by us or any “affiliated purchaser” during the quarter ended December 31, 2015:
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Be Purchased Under the Plans or Programs
 
                         
10/1/15 – 10/31/15
    -       -       -       -  
11/1/15 – 11/30/15
    -       -       -       -  
12/1/15 – 12/31/15
    8,181     $ 9.04       -       -  
Total
    8,181     $ 9.04       -       -  
 
ITEM 6.  
SELECTED FINANCIAL DATA.
 
Not applicable.
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
We offer property and casualty insurance products to small businesses and individuals in New York State through our subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County. We are also licensed in the States of New Jersey, Connecticut, Pennsylvania and Texas.
 
We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities.  All of KICO’s insurance policies are for a one year period. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one year life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
 
 
24

 
 
Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are commonly referred to as claims. In settling these claims for losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and litigation expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.
 
Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company.
 
Principal Revenue and Expense Items
 
Net premiums earned.  Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written on July 1, 2014, we would earn half of the premiums in 2014 and the other half in 2015.
 
Ceding commission revenue.  Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.
 
Net investment income and net realized gains (losses) on investments.  We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify equity securities as available-for-sale and our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
 
Other income.  We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment. Through March 31, 2015, we also recognized premium finance fee income on loans financed by a third party finance company.
 
Loss and loss adjustment expenses incurred.  Loss and loss adjustment expenses (“LAE”) incurred represent our largest expense item, and for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.
 
 
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Commission expenses and other underwriting expenses.  Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.
 
Other operating expenses.  Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company.
 
Stock-based compensation. Non-cash equity compensation includes the fair value of stock grants issued to our directors, officers and employees, and amortization of stock options issued to the same.
 
Depreciation and amortization. Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of capital expenditures for information technology projects, office equipment and furniture.
 
Income tax expense.  We incur federal income tax expense on our consolidated operations as well as state income tax expense for our non-insurance underwriting subsidiaries.
 
Product Lines
 
Our product lines include the following:
 
Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, cooperative and condominium, renters, equipment breakdown and service line endorsements, and personal umbrella policies.
 
Commercial liability: We offer business owners policies, which consist primarily of small business retail, service, and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees.  In addition, we write special multi-peril policies for larger and more specialized business owners’ risks, including those with limited residential exposures.
 
Commercial automobile: Until recently we provided liability and physical damage coverage for light vehicles owned by small contractors and artisans. However, due to the poor performance of this line, effective October 1, 2014, we decided to no longer accept new commercial auto policies. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015.
 
 
 
26

 
 
Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.
 
Other:  We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations.
 
Key Measures
 
We utilize the following key measures in analyzing the results of our insurance underwriting business:
 
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business.  Expressed as a percentage, this is the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
 
Net underwriting expense ratio:  The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.
 
Net combined ratio:  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, our management has utilized information available including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.
 
 
27

 
 
We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred ceding commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets and the valuation of stock-based compensation. See Note 2 (Accounting Policies and Basis of Presentation) of the Notes to Consolidated Financial Statements following Item 15 of this Annual Report.
 
Consolidated Results of Operations
 
The following table summarizes the changes in the results of our operations for the periods indicated:
 
   
Year ended December 31,
 
($ in thousands)
 
2015
   
2014
   
Change
   
Percent
 
 Revenues
                       
 Direct written premiums
  $ 91,004     $ 76,255     $
14,749
      19.3 %
 Assumed written premiums
    41       49       (8 )     (16.3 )%
      91,045       76,304       14,741       19.3 %
 Ceded written premiums
                               
 Ceded to quota share treaties in force during the period
    28,701       35,887       (7,186 )     (20.0 )%
 Return of premiums previously ceded to prior quota share treaties
    (5,866 )     (6,597 )     731       (11.1 )%
 Ceded to quota share treaties
    22,835       29,290       (6,455 )     (22.0 )%
 Ceded to excess of loss treaties
    1,277       1,039       238       22.9 %
 Ceded to catastrophe treaties
    6,548       2,611       3,937       150.8 %
 Catastrophe reinstatement (1)
    -       70       (70 )     (100.0 )%
 Total ceded written premiums
    30,660       33,010       (2,350 )     (7.1 )%
                                 
 Net written premiums
    60,385       43,294       17,091       39.5 %
 Change in net unearned premiums
    (11,773 )     (10,666 )     (1,107 )     10.4 %
 Net premiums earned
    48,612       32,628       15,984       49.0 %
                                 
 Ceding commission revenue
                               
 Excluding the effect of catastrophes
    12,754       14,427       (1,673 )     (11.6 )%
 Effect of catastrophes (1)
    (1,281 )     (517 )     (764 )     147.8 %
 Total ceding commission revenue
    11,473       13,910       (2,437 )     (17.5 )%
 Net investment income
    2,564       1,800       764       42.4 %
 Net realized gain (loss) on investments
    (50 )     707       (757 )     (107.1 )%
 Other income
    1,577       1,006       571       56.8 %
 Total revenues
    64,176       50,051       14,125       28.2 %
                                 
 Expenses
                               
 Loss and loss adjustment expenses
                               
 Direct and assumed:
                               
 Loss and loss adjustment expenses excluding the effect of catastrophes
    32,962       28,146       4,816       17.1 %
 Losses from catastrophes (1)
    4,646       3,764       882       23.4 %
 Total direct and assumed loss and loss adjustment expenses
    37,608       31,910       5,698       17.9 %
                                 
 Ceded loss and loss adjustment expenses:
                               
 Loss and loss adjustment expenses excluding the effect of catastrophes
    11,873       12,055       (182 )     (1.5 )%
 Losses from catastrophes (1)
    2,555       2,823       (268 )     (9.5 )%
 Total ceded loss and loss adjustment expenses
    14,428       14,878       (450 )     (3.0 )%
                                 
 Net loss and loss adjustment expenses:
                               
 Loss and loss adjustment expenses excluding the effect of catastrophes
    21,089       16,091       4,998       31.1 %
 Losses from catastrophes (1)
    2,091       941       1,150       122.2 %
 Net loss and loss adjustment expenses
    23,180       17,032       6,148       36.1 %
                                 
 Commission expense
    15,317       12,125       3,192       26.3 %
 Other underwriting expenses
    12,833       10,656       2,177       20.4 %
 Other operating expenses
    1,504       1,487       17       1.1 %
 Depreciation and amortization
    1,032       875       157       17.9 %
 Total expenses
    53,867       42,176       11,691       27.7 %
                                 
 Income from operations before taxes
    10,309       7,875       2,434       30.9 %
 Provision for income tax
    3,349       2,547       802       31.5 %
 Net income
  $ 6,960     $ 5,328     $ 1,632       30.6 %

 
28

 
 
(1) For the years ended December 31, 2015 and 2014, includes the effects of severe winter weather (which we define as a catastrophe).  The year ended December 31, 2014 also includes catastrophe reinstatement premiums resulting from Superstorm Sandy, which occurred on October 29, 2012. We define a “catastrophe” as an event or series of related events that involve multiple first party policyholders, or an event or series of events that produce a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event or series of events.  Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, severe winter weather, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
 
   
Year ended December 31,
 
   
2015
   
2014
   
Point Change
   
Percent Change
 
 Key ratios:
                       
 Net loss ratio
    47.7 %     52.2 %     -4.5 %     (8.6 )%
 Net underwriting expense ratio
    32.3 %     24.9 %     7.4 %     29.7 %
 Net combined ratio
    80.0 %     77.1 %     2.9 %     3.8 %
 
Direct Written Premiums
 
Direct written premiums during the year ended December 31, 2015 (“2015”) were $91,004,000 compared to $76,255,000 during the year ended December 31, 2014 (“2014”). The increase of $14,749,000, or 19.3%, was primarily due to an increase in policies in-force during 2015 as compared to 2014. We wrote more new policies as a result of continued demand for our products in the markets that we serve. Policies in-force increased by 17.9% as of December 31, 2015 compared to December 31, 2014.
 
Our growth rate in direct premiums written was dampened somewhat due to the cessation, effective October 1, 2014, of the writing of new policies in our commercial auto line of business due to a history of poor underwriting results. In February 2015, we made the decision to no longer offer renewals on our existing commercial auto policies beginning with those that expire on or after May 1, 2015.
 
Our direct written premiums in our other lines of business grew by 23.9% in 2015 compared to 2014. Policies-in-force in our other lines of business increased by 19.5% as of December 31, 2015 compared to December 31, 2014.
 
Net Written Premiums and Net Premiums Earned
 
The following table describes the quota share reinsurance ceding rates in effect during 2015 and 2014. For purposes of the discussion herein, the change in quota share ceding rates on July 1 of each year will be referred to as “the Cut-off”. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.
 
   
Year ended December 31, 2015
   
Year ended December 31, 2014
 
   
January 1,
   
July 1,
   
January 1,
   
July 1,
 
   
to
   
to
   
to
   
to
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
   
("2014/2015 Treaty")
   
("2015/2016 Treaty")
   
("2013/2014 Treaties")
 
("2014/2015 Treaty")
 
                         
 Quota share reinsurance rates
                       
 Personal lines
    55 %     40 %     75 %     55 %
 Commercial lines
 
none
   
none
      25 %  
none
 
 
 
29

 
 
Net written premiums increased $17,091,000, or 39.5%, to $60,385,000 in 2015 from $43,294,000 in 2014. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). Our personal lines business is currently subject to a quota share treaty and our commercial lines business was subject to a quota share treaty through June 30, 2014. A reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded written premiums, which will result in a corresponding increase to our net written premiums.
 
Effective July 1, 2015, we decreased the quota share ceding rate in our personal lines quota share treaty from 55% to 40%. The Cut-off of this treaty on July 1, 2015 resulted in a $5,866,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring personal lines quota share treaty. The new treaty is on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in prior years. Under a “net” arrangement, all catastrophe reinsurance coverage is now purchased directly by us.

Effective July 1, 2014, we terminated our commercial lines quota share treaty. The previous commercial lines quota share treaty effective July 1, 2013 had a quota share percentage of 25%. Also, effective July 1, 2014, we decreased the quota share percentage in our personal lines quota share treaty from 75% to 55%. The Cut-off of these treaties on July 1, 2014 resulted in a $6,597,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring quota share treaties.
 
Most of the premiums written under our personal lines are also subject to our catastrophe treaty. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums for catastrophe insurance will increase. This results in an increase in premiums ceded under our catastrophe treaty, which reduces net written premiums. With the inception of our personal lines quota share treaty being on a “net” basis effective July 1, 2015, our catastrophe premiums are ceded based on substantially all of our personal lines direct written premiums, compared to catastrophe premiums being ceded only on the amount of personal lines written premiums that we retained under the expired “gross” basis. As a result of the increase in our personal lines business and the change to a “net” basis for our personal lines quota share treaty, ceded catastrophe premiums increased by $3,937,000, or 150.8%, to $6,548,000 in 2015 from $3,937,000 in 2014.
 
An increase in written premiums will also increase the premiums ceded under our excess of loss treaties, which will also reduce our net written premiums. In 2015, our ceded excess of loss reinsurance premiums increased by $238,000 over the ceded premiums for 2014.
 
Net premiums earned increased $15,984,000, or 49.0%, to $48,612,000 in 2015 from $32,628,000 in 2014. The increase was primarily due to us retaining more earned premiums as result of the reduction of the quota share percentage in our personal lines quota share treaty and the elimination of the commercial lines treaty on July 1, 2014. The decreases in our quota share ceding percentages from the July 1, 2015 and 2014 Cut-offs gave us a return of premiums previously ceded, which increases our net premiums earned during the twelve month periods after the Cut-offs. In addition, as premiums written earn ratably over a twelve month period, net premiums earned in 2015 increased due to the higher net written premiums generated for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014.
 
 
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Ceding Commission Revenue
 
The following table describes the quota share provisional ceding commission rates in effect during 2015 and 2014. This table should be referred to in conjunction with the discussion for ceding commission revenue that follows.
 
   
Year ended December 31, 2015
   
Year ended December 31, 2014
 
   
January 1,
   
July 1,
   
January 1,
   
July 1,
 
   
to
   
to
   
to
   
to
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
   
("2014/2015 Treaty")
   
("2015/2016 Treaty")
   
("2013/2014 Treaties")
 
("2014/2015 Treaty")
 
                         
Provisional ceding commission rate on quota share treaty
                   
 Personal lines
    40 %     55 %     40 %     40 %
 Commercial lines
 
none
   
none
      36 %  
none
 
 
The following table summarizes the changes in the components of ceding commission revenue (in thousands) for the periods indicated:
 
   
Year ended December 31,
 
($ in thousands)
 
2015
   
2014
   
Change
   
Percent
 
                         
 Provisional ceding commissions earned
  $ 11,692     $ 12,456     $ (764 )     (6.1 )%
                                 
 Contingent ceding commissions earned
                               
 Contingent ceding commissions earned excluding
                               
 the effect of catastrophes
    1,062       1,971       (909 )     (46.1 )%
 Effect of catastrophes on ceding commisions earned
    (1,281 )     (517 )     (764 )     147.8 %
 Contingent ceding commissions earned
    (219 )     1,454       (1,673 )     (115.1 )%
                                 
 Total ceding commission revenue
  $ 11,473     $ 13,910     $ (2,437 )     (17.5 )%
 
Ceding commission revenue was $11,473,000 in 2015 compared to $13,910,000 in 2014. The decrease of $2,437,000, or 17.5%, was due to a decrease in provisional ceding commissions earned and a decrease in contingent ceding commissions earned.
 
 Provisional Ceding Commissions Earned
 
We receive a provisional ceding commission based on ceded written premiums. Under the terms of the 2015/2016 Treaty, the provisional ceding commission rate increased to 55% from 40% under the 2014/2015 Treaty. Provisional ceding commission earned was $11,692,000 in 2015 compared to $12,456,000 in 2014. The decrease of $764,000, or 6.1%, in provisional ceding commissions earned is due to: (1) a decrease in the amount of premiums subject to provisional ceding commissions, (2) a decrease in the percentage of ceded premiums subject to quota share under the “net” 2015/2016 Treaty compared to the “gross” 2014/2015 Treaty, and (3) partially offset by the increase in the provisional ceding commission rates under the 2015/2016 Treaty.
 
 
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Contingent Ceding Commissions Earned
 
As a result of the increase in the provisional ceding commission rate to 55% under the 2015/2016 Treaty from 40% under the 2014/2015 Treaty, we do not have an opportunity to earn as much contingent ceding commissions. Under the “net” treaty in effect as of July 1, 2015, catastrophe losses in excess of the first $4,000,000 will fall outside of the quota share treaty and such losses will not have an impact on contingent ceding commissions, as was the case under previous “gross” treaties. The new structure eliminates the adverse impact that catastrophe losses above $4,000,000 would have on contingent ceding commissions.
 
We receive a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties. The lower the ceded loss ratio, the more contingent commission we receive. The amount of contingent ceding commissions we are eligible to receive under the two personal lines quota share treaties described in the table above that were in effect during 2015 are subject to change based on losses incurred from claims with accident dates beginning July 1, 2014. The amount of contingent ceding commissions we are eligible to receive under our prior years’ quota share treaties is subject to change based on losses incurred related to claims with accident dates before July 1, 2014 under those treaties. In addition, our total ceding contingent commission revenue was reduced in 2015 due to us not renewing our commercial lines quota share treaty upon its expiration on June 30, 2014.
 
The term of our expired personal lines reinsurance quota share treaty covered the period from July 1, 2013 to June 30, 2015 (“2013/2015 Treaty”). The computation to arrive at contingent ceding commission revenue under the 2013/2015 Treaty included catastrophe losses and LAE incurred from severe winter weather during 2015 and 2014 (see discussion of “Net Loss and LAE” below). Such losses increased our ceded loss ratio in our 2013/2015 Treaty, which reduced our contingent ceding commission revenue in accordance with the sliding scale discussed above in 2015 and 2014 by $1,281,000 and $517,000, respectively. See “Reinsurance” below for changes to our personal lines quota share treaty effective July 1, 2015.
 
Net Investment Income
 
Net investment income was $2,564,000 in 2015 compared to $1,800,000 in 2014. The increase of $764,000, or 42.4%, was due to an increase in average invested assets in 2015. The increase in cash and invested assets resulted primarily from: (1) the proceeds of $18,804,000 that we received on December 13, 2013 from our public offering being fully deployed in 2015 as compared to the partial deployment in 2014, (2) increased operating cash flows for the period after December 31, 2014, and (3) a decrease in investment expenses due to a rate decrease in our custodial fees. The increase in operating cash flows is due in part from the reduction in quota share rates on July 1, 2015 and 2014. The reduction in quota share ceding rates results in a decline in ceded premiums, which leads to more cash flow and more invested funds. The pre-tax equivalent investment yield on estimated annual income, excluding cash, was 4.77% and 4.67% as of December 31, 2015 and 2014, respectively.
 
Other Income
 
Other income was $1,577,000 in 2015 compared to $1,006,000 in 2014. The increase of $571,000, or 56.8%, was primarily due to the $350,000 we received as early settlement of the termination agreement that generated placement fees in our premium finance business (see Note 19 to the Consolidated Financial Statements).
 
 
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Net Loss and LAE
 
Net loss and LAE was $23,180,000 in 2015 compared to $17,032,000 in 2014. The net loss ratio was 47.7% in 2015 compared to 52.2% in 2014, a decrease of 4.5 percentage points. The following graphs summarize the changes in the components of net loss ratio for the periods indicated:


 
During 2015, our calendar year net loss ratio decreased by 4.5 points as compared to 2014. The primary driver of the decrease is an improvement in prior year loss development, as we recorded 1.0 points of favorable prior year loss development in 2015 compared to 5.4 points of adverse (unfavorable) prior year development in 2014, or an improvement of 6.4 points. Offsetting some of the improvement in prior year loss development was the impact of severe winter weather, determined as the losses incurred over and above those expected in an average winter season.  Severe winter weather had a 4.3 point impact on the net loss ratio in 2015 compared to 2.9 points in 2014, an increase of 1.4 points. The core loss ratio (excluding prior year loss development and severe winter weather) was stable, at 44.4% in 2015 compared to 43.9% for 2014, an increase of 0.5 points. The provision in our current year catastrophe reinsurance treaty that adds coverage for winter storm losses in excess of $4,000,000 over any 28 day period was not triggered by the winter weather in 2015. See table below under “Additional Financial Information” summarizing net loss ratios by line of business.
 
Commercial Auto Line of Business
 
Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. The action was taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of business.  The actions taken did not yield the hoped for results. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of December 31, 2015, we had 134 commercial auto policies in force, which represented 0.3% of our policies in force. As of December 31, 2014, we had 730 commercial auto policies in force, which represented 1.6% of our policies in force.
 
 
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Commission Expense
 
Commission expense was $15,317,000 in 2015 or 18.9% of direct earned premiums. Commission expense was $12,125,000 in 2014 or 17.8% of direct earned premiums. The increase of $3,192,000, or 26.3%, is due to the increase in direct written premiums in 2015 as compared to 2014 and a change in the mix of business to lines of business with higher commission rates, and an increase in bonus commissions.
 
Other Underwriting Expenses
 
Other underwriting expenses were $12,833,000 in 2015 compared to $10,656,000 in 2014. The increase of $2,177,000, or 20.4%, in other underwriting expenses was primarily due to expenses directly and indirectly related to growth in direct written premiums. Expenses directly related to the increase in direct written premiums primarily consist of underwriting expenses, software usage fees and state premium taxes. Expenses indirectly related to the increase in direct written premiums primarily consist of salaries along with related other employment costs. Salaries and employment costs were $5,858,000 in 2015 compared to $4,914,000 in 2014. The increase of $944,000, or 19.2%, was due to hiring of additional staff to service our current level of business and anticipated growth in volume. In addition, there were annual rate increases in both salaries and the cost of employee benefits. Other underwriting expenses as a percentage of direct written premiums increased to 14.1% in 2015 from 14.0% in 2014. Other underwriting expenses as a percentage of direct earned premiums decreased to 15.5% in 2015 from 15.6% in 2014.

Our net underwriting expense ratio in 2015 was 32.3% compared with 24.9% in 2014. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:
 
   
Years ended
       
   
December 31,
   
Percentage
 
   
2015
   
2014
   
Point Change
 
                   
 Ceding commission revenue - provisional
    (24.1 )%     (38.2 )%     14.1  
 Ceding commission revenue - contingent
    0.5       (4.5 )     5.0  
 Other income
    (2.0 )     (2.3 )     0.3  
Acquistion costs and other underwriting expenses:
                 
 Commission expense
    31.5       37.2       (5.7 )
 Other underwriting expenses
    26.4       32.7       (6.3 )
 Net underwriting expense ratio
    32.3 %     24.9 %     7.4  
 
The increase of 7.4 percentage points was due to the individual components of provisional ceding commission revenue, commission expense and other underwriting expenses and their relation to the increase in net premiums earned as a result of the additional retention resulting from the Cut-offs to our quota share treaties on July 1, 2015.
 
 
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Other Operating Expenses
 
Other operating expenses, related to the expenses of our holding company, were $1,504,000 in 2015 compared to $1,487,000 in 2014. The increase in 2015 of $17,000, or 1.1%, was composed of nominal increases and decreases in the various expenses that are included in other operating expenses.
 
Depreciation and Amortization
 
Depreciation and amortization was $1,032,000 in 2015 compared to $875,000 in 2014. The increase of $157,000, or 17.9%, in depreciation and amortization was primarily due to depreciation on newly purchased assets used to upgrade our systems infrastructure and the Kingston, New York home office building from which we operate.
 
Income Tax Expense
 
Income tax expense in 2015 was $3,349,000, which resulted in an effective tax rate of 32.5%. Income tax expense in 2014 was $2,547,000, which resulted in an effective tax rate of 32.3%. Income before taxes was $10,309,000 in 2015 compared to $7,875,000 in 2014. The increase in the effective tax rate by 0.2 percentage points in 2015 is a result of the change in the enacted state tax rate resulting in a current period decrease in the deferred tax benefit of our state net operating losses, net of the corresponding valuation adjustment. This increase was partially offset by the benefits of permanent differences generated from investment income as a result of the increase in our invested assets.
 
Net Income
 
Net income was $6,960,000 in 2015 compared to $5,328,000 in 2014. The increase in net income of $1,632,000, or 30.6%, was due to the circumstances described above that caused the increase in our net premiums earned, net investment income, and other income, and a decrease in our net loss ratio, partially offset by a decrease in net realized gains and ceding commission revenue, and increases in other underwriting expenses related to premium growth and other operating expenses.
 
Additional Financial Information
 
We operate our business as one segment, property and casualty insurance. Within this segment, we offer a wide array of property and casualty policies to our producers. The following table summarizes gross and net premiums written, net premiums earned, and loss and loss adjustment expenses by major product type, which were determined based primarily on similar economic characteristics and risks of loss.
 
 
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For the Year Ended
 
   
December 31,
 
   
2015
   
2014
 
             
 Gross premiums written:
           
 Personal lines
  $ 69,227,233     $ 56,808,940  
 Commercial lines
    12,010,892       10,967,008  
 Commercial auto
    519,920       3,222,033  
 Livery physical damage
    9,032,957       5,034,260  
 Other(1)
    253,937       272,041  
 Total
  $ 91,044,939     $ 76,304,282  
                 
 Net premiums written:
               
 Personal lines
               
 Excluding the effect of quota share
               
 adjustments on July 1
  $ 33,899,714     $ 19,817,259  
 Return of premiums previously ceded to
               
 prior quota share treaties
    5,866,300       5,159,646  
 Total Personal lines
    39,766,014