Blueprint
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to _________
 
Commission File Number 0-1665
 
KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware(State or other jurisdiction of incorporation or organization)
 
36-2476480(I.R.S. EmployerIdentification Number)
15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)
 
(845) 802-7900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
 
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 filer ☐(Do not check if a smaller reporting company)
 
Smaller reporting company ☑
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
As of August 11, 2016 there were 7,910,375 shares of the registrant’s common stock outstanding.

 
 
 
KINGSTONE COMPANIES, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
PART I — FINANCIAL INFORMATION
 
2
 
Item 1 —
 
Financial Statements
 
2
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015
 
2
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months and six months ended June 30, 2016 (Unaudited) and 2015 (Unaudited)
 
3
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2016 (Unaudited)
 
4
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 (Unaudited) and 2015 (Unaudited)
 
5
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
6
 
Item 2 —
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
33
 
Item 3 —
 
 Quantitative and Qualitative Disclosures About Market Risk
 
67
 
Item 4 —
 
 Controls and Procedures
 
67
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
68
 
Item 1 —
 
Legal Proceedings
 
68
 
Item 1A —
 
Risk Factors
 
68
 
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
68
 
Item 3 —
 
Defaults Upon Senior Securities
 
68
 
Item 4 —
 
Mine Safety Disclosures
 
68
 
Item 5 —
 
Other Information
 
69
 
Item 6 —
 
Exhibits
 
69
Signatures
 
 
EXHIBIT 3(a)
EXHIBIT 3(b)
EXHIBIT 31(a)
EXHIBIT 31(b)
EXHIBIT 32
EXHIBIT 101.INS XBRL Instance Document
EXHIBIT 101.SCH XBRL Taxonomy Extension Schema
EXHIBIT 101.CAL XBRL Taxonomy Extension Calculation Linkbase
EXHIBIT 101.DEF XBRL Taxonomy Extension Definition Linkbase
EXHIBIT 101.LAB XBRL Taxonomy Extension Label Linkbase
EXHIBIT 101.PRE XBRL Taxonomy Extension Presentation Linkbase
 
 
 
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 under “Factors That May Affect Future Results and Financial Condition.”
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 
1
 
PART I. FINANCIAL INFORMATION
Item 1.                        Financial Statements.
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
June 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
(unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
 $5,446,841 at June 30, 2016 and $5,241,095 at December 31, 2015)
  $5,072,253 
  $5,138,872 
 Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
       
       
 $71,215,531 at June 30, 2016 and $62,221,129 at December 31, 2015)
    73,398,463 
    62,502,064 
 Equity securities, available-for-sale, at fair value (cost of $10,417,835
       
       
 at June 30, 2016 and $8,751,537 at December 31, 2015)
    10,962,617 
    9,204,270 
Total investments
    89,433,333 
    76,845,206 
Cash and cash equivalents
    14,638,274 
    13,551,372 
Premiums receivable, net
    11,250,184 
    10,621,655 
Reinsurance receivables, net
    35,354,444 
    31,270,235 
Deferred policy acquisition costs
    11,548,056 
    10,835,306 
Intangible assets, net
    1,520,000 
    1,757,816 
Property and equipment, net
    3,143,656 
    3,152,266 
Other assets
    1,042,165 
    1,095,894 
Total assets
  $167,930,112 
  $149,129,750 
 
       
       
Liabilities
       
       
Loss and loss adjustment expense reserves
  $44,335,224 
  $39,876,500 
Unearned premiums
    51,460,250 
    48,890,241 
Advance premiums
    1,789,122 
    1,199,376 
Reinsurance balances payable
    3,905,776 
    1,688,922 
Deferred ceding commission revenue
    6,662,989 
    6,435,068 
Accounts payable, accrued expenses and other liabilities
    4,021,433 
    4,826,603 
Income taxes payable
    739,615 
    263,622 
Deferred income taxes
    1,224,607 
    672,190 
Total liabilities
    114,139,016 
    103,852,522 
 
       
       
Commitments and Contingencies
       
       
 
       
       
Stockholders' Equity
       
       
 Preferred stock, $.01 par value; authorized 2,500,000 shares
    - 
    - 
 Common stock, $.01 par value; authorized 20,000,000 shares; issued 8,884,844 shares
       
       
 at June 30, 2016 and 8,289,606 at December 31, 2015; outstanding
       
       
 7,910,375 shares at June 30, 2016 and 7,328,637 shares at December 31, 2015
    88,848 
    82,896 
 Capital in excess of par
    37,861,030 
    32,987,082 
 Accumulated other comprehensive income
    1,800,290 
    484,220 
 Retained earnings
    16,036,390 
    13,605,225 
 
    55,786,558 
    47,159,423 
 Treasury stock, at cost, 974,469 shares at June 30, 2016 and 960,969 shares
       
       
 at December 31, 2015
    (1,995,462)
    (1,882,195)
Total stockholders' equity
    53,791,096 
    45,277,228 
 
       
       
Total liabilities and stockholders' equity
  $167,930,112 
  $149,129,750 
 

See accompanying notes to condensed consolidated financial statements.
 
2
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 
 
For the Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
  $15,010,875 
  $10,865,715 
  $29,542,550 
  $21,251,514 
Ceding commission revenue
    2,569,025 
    3,655,522 
    5,339,362 
    6,744,926 
Net investment income
    764,070 
    625,972 
    1,577,127 
    1,200,628 
Net realized gains (losses) on investments
    283,432 
    2,263 
    363,868 
    (65,231)
Other income
    284,508 
    393,040 
    533,855 
    1,024,231 
Total revenues
    18,911,910 
    15,542,512 
    37,356,762 
    30,156,068 
 
       
       
       
       
Expenses
       
       
       
       
Loss and loss adjustment expenses
    5,786,836 
    4,770,813 
    15,270,691 
    11,834,030 
Commission expense
    4,526,208 
    3,600,164 
    8,796,274 
    7,012,491 
Other underwriting expenses
    3,596,134 
    2,961,663 
    6,942,575 
    5,960,818 
Other operating expenses
    432,696 
    377,843 
    761,935 
    706,341 
Depreciation and amortization
    289,173 
    246,572 
    573,001 
    482,234 
Total expenses
    14,631,047 
    11,957,055 
    32,344,476 
    25,995,914 
 
       
       
       
       
Income from operations before taxes
    4,280,863 
    3,585,457 
    5,012,286 
    4,160,154 
Income tax expense
    1,438,602 
    1,206,275 
    1,628,993 
    1,398,473 
Net income
    2,842,261 
    2,379,182 
    3,383,293 
    2,761,681 
 
       
       
       
       
Other comprehensive income (loss), net of tax
       
       
       
       
Gross change in unrealized gains (losses)
       
       
       
       
on available-for-sale-securities
    873,850 
    (1,313,096)
    2,357,914 
    (607,522)
 
       
       
       
       
Reclassification adjustment for (gains) losses
       
       
       
       
included in net income
    (283,432)
    (2,263)
    (363,868)
    65,231 
Net change in unrealized gains (losses)
    590,418 
    (1,315,359)
    1,994,046 
    (542,291)
Income tax (expense) benefit related to items
       
       
       
       
of other comprehensive income (loss)
    (200,742)
    447,222 
    (677,976)
    184,379 
Other comprehensive income (loss), net of tax
    389,676 
    (868,137)
    1,316,070 
    (357,912)
 
       
       
       
       
Comprehensive income
  $3,231,937 
  $1,511,045 
  $4,699,363 
  $2,403,769 
 
       
       
       
       
Earnings per common share:
       
       
       
       
Basic
  $0.36 
  $0.32 
  $0.45 
  $0.38 
Diluted
  $0.36 
  $0.32 
  $0.44 
  $0.38 
 
       
       
       
       
Weighted average common shares outstanding
       
       
       
       
Basic
    7,794,347 
    7,337,817 
    7,558,366 
    7,328,098 
Diluted
    7,853,284 
    7,362,988 
    7,607,231 
    7,355,908 
 
       
       
       
       
Dividends declared and paid per common share
  $0.0,625 
  $0.0,500 
  $0.1,250 
  $0.1,000 
 

See accompanying notes to condensed consolidated financial statements.
 
3
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Six months ended June 30, 2016
 
 
 
Preferred Stock   
 
 
  Common Stock  
 
 
Capital
in Excess
 
 
Accumulated
Other 
 
 
Retained 
 
 
  Treasury Stock  
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
of Par
 
 
Income
 
 
Earnings
 
 
Shares
 
 
Amount
 
 
Total
 
Balance, January 1, 2016
    - 
  $- 
    8,289,606 
  $82,896 
  $32,987,082 
  $484,220 
  $13,605,225 
    960,969 
  $(1,882,195)
  $45,277,228 
Proceeds from private placement, net of
       
       
       
       
       
       
       
       
       
       
closing costs of $186,426
    - 
    - 
    595,238 
    5,952 
    4,807,622 
    - 
    - 
    - 
    - 
    4,813,574 
Stock-based compensation
    - 
    - 
    - 
    - 
    66,326 
    - 
    - 
    - 
    - 
    66,326 
Acquisition of treasury stock
    - 
    - 
    - 
    - 
    - 
    - 
    - 
    13,500 
    (113,267)
    (113,267)
Dividends
    - 
    - 
    - 
    - 
    - 
    - 
    (952,128)
    - 
    - 
    (952,128)
Net income
    - 
    - 
    - 
    - 
    - 
    - 
    3,383,293 
    - 
    - 
    3,383,293 
Change in unrealized gains on available-
       
       
       
       
       
       
       
       
       
       
for-sale securities, net of tax
    - 
    - 
    - 
    - 
    - 
    1,316,070 
    - 
    - 
    - 
    1,316,070 
Balance, June 30, 2016
    - 
  $- 
    8,884,844 
  $88,848 
  $37,861,030 
  $1,800,290 
  $16,036,390 
    974,469 
  $(1,995,462)
  $53,791,096 
 

See accompanying notes to condensed consolidated financial statements.
 
4
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
Six months ended June 30,
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Cash flows provided by operating activities:
 
 
 
 
 
 
Net income
  $3,383,293 
  $2,761,681 
Adjustments to reconcile net income to net cash flows provided by operating activities:
       
       
Net realized (gains) losses on investments
    (363,868)
    65,231 
Depreciation and amortization
    573,001 
    482,234 
Amortization of bond premium, net
    167,488 
    152,665 
Stock-based compensation
    66,326 
    77,784 
Excess tax benefit from exercise of stock options
    - 
    (221,136)
Deferred income tax expense
    (125,559)
    (64,757)
(Increase) decrease in operating assets:
       
       
Premiums receivable, net
    (628,529)
    (1,551,888)
Receivables - reinsurance contracts
    - 
    (825,254)
Reinsurance receivables, net
    (4,084,209)
    (3,165,889)
Deferred policy acquisition costs
    (712,750)
    (773,097)
Other assets
    (196,719)
    6,583 
Increase (decrease) in operating liabilities:
       
       
Loss and loss adjustment expense reserves
    4,458,724 
    1,336,137 
Unearned premiums
    2,570,009 
    3,651,941 
Advance premiums
    589,746 
    376,077 
Reinsurance balances payable
    2,216,854 
    653,407 
Deferred ceding commission revenue
    227,921 
    371,785 
Accounts payable, accrued expenses and other liabilities
    (329,177)
    22,796 
Net cash flows provided by operating activities
    7,812,551 
    3,356,300 
 
       
       
Cash flows used in investing activities:
       
       
Purchase - fixed-maturity securities available-for-sale
    (23,339,058)
    (7,505,716)
Purchase - equity securities available-for-sale
    (5,585,777)
    (2,225,328)
Sale or maturity - fixed-maturity securities available-for-sale
    14,314,798 
    1,135,673 
Sale - equity securities available-for-sale
    4,212,336 
    839,408 
Acquisition of fixed assets
    (326,575)
    (619,212)
Other investing activities
    250,448 
    3,170 
Net cash flows used in investing activities
    (10,473,828)
    (8,372,005)
 
       
       
Cash flows provided by (used in) financing activities:
       
       
Net proceeds from issuance of common stock
    4,813,574 
    - 
Withholding taxes paid on net exercise of stock options
    - 
    (243,662)
Excess tax benefit from exercise of stock options
    - 
    221,136 
Purchase of treasury stock
    (113,267)
    (204,060)
Dividends paid
    (952,128)
    (732,190)
Net cash flows provided by (used in) financing activities
    3,748,179 
    (958,776)
 
       
       
Increase (decrease) in cash and cash equivalents
  $1,086,902 
  $(5,974,481)
Cash and cash equivalents, beginning of period
    13,551,372 
    9,906,878 
Cash and cash equivalents, end of period
  $14,638,274 
  $3,932,397 
 
       
       
Supplemental disclosures of cash flow information:
       
       
Cash paid for income taxes
  $1,747,466 
  $1,008,433 
 
       
       
Supplemental schedule of non-cash investing and financing activities:
       
       
Value of shares deducted from exercise of stock options for payment of withholding taxes
  $- 
  $243,662 
 

See accompanying notes to condensed consolidated financial statements.
 
5
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Nature of Business and Basis of Presentation
Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”), through its wholly owned subsidiary, Kingstone Insurance Company (“KICO”), underwrites property and casualty insurance to small businesses and individuals exclusively through independent agents and brokers. KICO is a licensed insurance company in the States of New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO writes substantially all of its business in New York. Through March 31, 2015, Kingstone, through its wholly owned subsidiary, Payments Inc., a licensed premium finance company in the State of New York, received fees for placing contracts with a third party licensed premium finance company (see Note 11 – Premium Finance Placement Fees).
The accompanying unaudited condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8-03 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2015 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2016. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations for the six months ended June 30, 2016 may not be indicative of the results that may be expected for the year ending December 31, 2016.
Note 2 – Accounting Policies
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses, are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of several years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require considerable judgment by management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.
 
 
6
 
 
Principles of Consolidation
 
The consolidated financial statements consist of Kingstone and its wholly owned subsidiaries; (1) KICO and its wholly owned subsidiaries, CMIC Properties, Inc. (“Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates, and (2) Payments Inc. All significant inter-company account balances and transactions have been eliminated in consolidation.
Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers (Topic 606). The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08 and ASU 2016-10, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In May 2015, FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosures About Short-Duration Contracts. The updated accounting guidance requires expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with insurance claims. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting period is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, claims frequency information including the methodology used to determine claim frequency and any changes to that methodology, and claim duration. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and is to be applied retrospectively. The new guidance affects disclosures only and will have no impact on the Company’s results of operations or financial position.
In January 2016, FASB issued ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The primary change for the Company is expected to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The updated guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
 
7
 
 
In February 2016, FASB issued ASU 2016-02 – Leases (Topic 842). Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. The guidance will be effective for the Company for reporting periods beginning after December 15, 2018. The Company will apply the guidance using a modified retrospective approach. Early application is permitted. The Company is evaluating whether the adoption of ASU 2016-02 will have a significant impact on its consolidated results of operations, financial position or cash flows.
In January 2016, FASB issued ASU 2016-09 – Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments. These amendments to current accounting guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than through additional paid in capital in the equity section of the balance sheet. The amendments also permit an employer to repurchase an employee’s shares at the maximum statutory tax rate in the employee’s applicable jurisdiction for tax withholding purposes without triggering liability accounting. Finally, the amendments permit entities to make a one-time accounting policy election to account for forfeitures as they occur. Specific adoption methods depend on the issue being adopted and range from prospective to retrospective adoption. Early adoption is permitted, however all amendments must be adopted in the same period. The Company is evaluating whether the adoption of ASU 2016-09 will have a significant impact on its consolidated results of operations, financial position or cash flows.
In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised accounting guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses of available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
 
 
8
 
 
Note 3 - Investments 
 
Available-for-Sale Securities
 
The amortized cost and fair value of investments in available-for-sale fixed-maturity securities and equity securities as of June 30, 2016 and December 31, 2015 are summarized as follows:
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Unrealized
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Gains/
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
(Losses)
 
 
 
 
 
Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Territories and Possessions
  $8,109,438 
  $515,834 
  $(4,402)
    - 
  $8,620,870 
  $511,432 
 
       
       
       
       
       
       
Corporate and other bonds
       
       
       
       
       
       
Industrial and miscellaneous
    44,293,609 
    1,553,402 
    (69,496)
    (41,112)
    45,736,403 
    1,442,794 
 
       
       
       
       
       
       
Residential mortgage backed
       
       
       
       
       
       
securities
    18,812,484 
    278,790 
    (33,751)
    (16,333)
    19,041,190 
    228,706 
Total fixed-maturity securities
    71,215,531 
    2,348,026 
    (107,649)
    (57,445)
    73,398,463 
    2,182,932 
 
       
       
       
       
       
       
Equity Securities:
       
       
       
       
       
       
Preferred stocks
    5,473,690 
    141,126 
    (594)
    (37,072)
    5,577,150 
    103,460 
Common stocks
    4,944,145 
    596,463 
    (155,141)
    - 
    5,385,467 
    441,322 
Total equity securities
    10,417,835 
    737,589 
    (155,735)
    (37,072)
    10,962,617 
    544,782 
 
       
       
       
       
       
       
Total
  $81,633,366 
  $3,085,615 
  $(263,384)
  $(94,517)
  $84,361,080 
  $2,727,714 
 
 
9
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Unrealized
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Gains/
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
(Losses)
 
 
 
 
 
Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Political subdivisions of States,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Territories and Possessions
  $12,139,793 
  $431,194 
  $(15,889)
  $- 
  $12,555,098 
  $415,305 
 
       
       
       
       
       
       
Corporate and other bonds
       
       
       
       
       
       
Industrial and miscellaneous
    45,078,044 
    490,444 
    (512,427)
    (99,593)
    44,956,468 
    (121,576)
 
       
       
       
       
       
       
Residential mortgage backed
       
       
       
       
       
       
securities
    5,003,292 
    48,375 
    (61,169)
    - 
    4,990,498 
    (12,794)
Total fixed-maturity securities
    62,221,129 
    970,013 
    (589,485)
    (99,593)
    62,502,064 
    280,935 
 
       
       
       
       
       
       
Equity Securities:
       
       
       
       
       
       
Preferred stocks
    2,874,173 
    70,799 
    - 
    (29,322)
    2,915,650 
    41,477 
Common stocks
    5,877,364 
    514,977 
    (103,721)
    - 
    6,288,620 
    411,256 
Total equity securities
    8,751,537 
    585,776 
    (103,721)
    (29,322)
    9,204,270 
    452,733 
 
       
       
       
       
       
       
Total
  $70,972,666 
  $1,555,789 
  $(693,206)
  $(128,915)
  $71,706,334 
  $733,668 
 
A summary of the amortized cost and fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of June 30, 2016 and December 31, 2015 is shown below:
 
 
 
June 30, 2016
 
 
December 31, 2015
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
Less than one year
  $1,507,212 
  $1,538,112 
  $827,246 
  $837,918 
One to five years
    21,557,731 
    22,347,267 
    17,146,349 
    17,393,571 
Five to ten years
    28,657,092 
    29,756,566 
    37,877,726 
    37,884,450 
More than 10 years
    681,012 
    715,328 
    1,366,516 
    1,395,627 
Residential mortgage backed securities
    18,812,484 
    19,041,190 
    5,003,292 
    4,990,498 
Total
  $71,215,531 
  $73,398,463 
  $62,221,129 
  $62,502,064 
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
 
10
 
 
Held-to-Maturity Securities
 
The amortized cost and fair value of investments in held-to-maturity fixed-maturity securities as of June 30, 2016 and December 31, 2015 are summarized as follows:
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Unrealized
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Gains/
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
(Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $606,408 
  $147,631 
  $- 
  $- 
  $754,039 
  $147,631 
 
       
       
       
       
       
       
Political subdivisions of States,
       
       
       
       
       
       
Territories and Possessions
    1,350,056 
    113,781 
    - 
    - 
    1,463,837 
    113,781 
 
       
       
       
       
       
       
Corporate and other bonds
       
       
       
       
       
       
Industrial and miscellaneous
    3,115,789 
    179,743 
    (347)
    (66,220)
    3,228,965 
    113,176 
 
       
       
       
       
       
       
Total
  $5,072,253 
  $441,155 
  $(347)
  $(66,220)
  $5,446,841 
  $374,588 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Unrealized
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Gains/
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
(Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $606,389 
  $147,650 
  $- 
  $- 
  $754,039 
  $147,650 
 
       
       
       
       
       
       
Political subdivisions of States,
       
       
       
       
       
       
Territories and Possessions
    1,417,679 
    70,284 
    - 
    (54,189)
    1,433,774 
    16,095 
 
       
       
       
       
       
       
Corporate and other bonds
       
       
       
       
       
       
Industrial and miscellaneous
    3,114,804 
    82,265 
    (17,980)
    (125,807)
    3,053,282 
    (61,522)
 
       
       
       
       
       
       
Total
  $5,138,872 
  $300,199 
  $(17,980)
  $(179,996)
  $5,241,095 
  $102,223 
 
Held-to-maturity U.S. Treasury securities are held in trust pursuant to the New York State Department of Financial Services’ minimum funds requirement.
 
 
11
 
 
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of June 30, 2016 and December 31, 2015 is shown below:
 
 
 
June 30, 2016
 
 
December 31, 2015
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
Less than one year
  $- 
  $- 
  $- 
  $- 
One to five years
    500,000 
    504,210 
    500,000 
    496,245 
Five to ten years
    3,965,845 
    4,188,592 
    4,032,483 
    3,990,811 
More than 10 years
    606,408 
    754,039 
    606,389 
    754,039 
Total
  $5,072,253 
  $5,446,841 
  $5,138,872 
  $5,241,095 
 
Investment Income
 
Major categories of the Company’s net investment income are summarized as follows:
 
 
 
Three months ended
 
 
Six months ended
 
 
 
 June 30,
 
 
 June 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Income:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities
  $685,776 
  $565,337 
  $1,350,252 
  $1,076,292 
Equity securities
    104,652 
    130,136 
    280,603 
    252,705 
Cash and cash equivalents
    2,732 
    121 
    9,178 
    215 
Total
    793,160 
    695,594 
    1,640,033 
    1,329,212 
Expenses:
       
       
       
       
Investment expenses
    29,090 
    69,622 
    62,906 
    128,584 
Net investment income
  $764,070 
  $625,972 
  $1,577,127 
  $1,200,628 
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $14,314,798 and $1,135,673 for the six months ended June 30, 2016 and 2015, respectively.
 
Proceeds from the sale of equity securities available-for-sale were $4,212,336 and $839,408 for the six months ended June 30, 2016 and 2015, respectively.
 
 
12
 
 
The Company’s net realized gains (losses) on investments are summarized as follows:
 
 
 
Three months ended
 
 
Six months ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Gross realized gains
  $205,476 
  $- 
  $311,893 
  $- 
Gross realized losses
    (65,428)
    (18,717)
    (170,971)
    (86,211)
 
    140,048 
    (18,717)
    140,922 
    (86,211)
 
       
       
       
       
Equity securities:
       
       
       
       
Gross realized gains
    232,929 
    36,421 
    315,617 
    36,421 
Gross realized losses
    (19,634)
    (15,441)
    (22,760)
    (15,441)
 
    213,295 
    20,980 
    292,857 
    20,980 
 
       
       
       
       
Other-than-temporary impairment losses:
       
       
       
       
Fixed-maturity securities
    (69,911)
    - 
    (69,911)
    - 
 
    (69,911)
    - 
    (69,911)
    - 
 
       
       
       
       
Net realized gains (losses)
  $283,432 
  $2,263 
  $363,868 
  $(65,231)
 
Impairment Review
  
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, GAAP specifies (i) if the Company does not have the intent to sell a debt security prior to recovery and (ii) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.  When the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment (“OTTI”) of a debt security in earnings and the remaining portion in other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.  For held-to-maturity debt securities, the amount of OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of timing of future estimated cash flows of the security.
 
OTTI losses are recorded in the condensed consolidated statements of income and comprehensive income as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At June 30, 2016 and December 31, 2015, there were 26 and 57 securities, respectively, that accounted for the gross unrealized loss. As of June 30, 2016 the Company’s held-to-maturity debt securities included an investment in one bond issued by the Commonwealth of Puerto Rico (“PR”). In July 2016, PR defaulted on its interest payment to bondholders. Due to the credit deterioration of PR, the Company recorded a credit loss component of OTTI on this investment as of June 30, 2016. For the three months and six months ended June 30, 2016, the full amount of the write-down was recognized as a credit component of OTTI in the amount of $69,911 and is included as a reduction to net realized gains in the condensed consolidated statements of income and comprehensive income. The Company determined that none of the other unrealized losses were deemed to be OTTI for its portfolio of fixed-maturity investments and equity securities for the six months ended June 30, 2016 and 2015. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery of fair value to the Company’s cost basis.
 
 
13
 
The Company held securities with unrealized losses representing declines that were considered temporary at June 30, 2016 and December 31, 2015 as follows:
 
 
 
June 30, 2016
 
 
 
Less than 12 months
 
 
12 months or more
 
 
Total
 
 
 
 
 
 
 
 
 
No. of
 
 
 
 
 
 
 
 
No. of
 
 
Aggregate
 
 
 
 
 
 
Fair
 
 
Unrealized
 
 
Positions
 
 
Fair
 
 
Unrealized
 
 
Positions
 
 
Fair
 
 
Unrealized
 
Category
 
Value
 
 
Losses
 
 
Held
 
 
Value
 
 
Losses
 
 
Held
 
 
Value
 
 
Losses
 
 
 
 
 
Fixed-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Political subdivisions of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, Territories and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Possessions
  $331,626 
  $(4,402)
    1 
  $- 
  $- 
    - 
  $331,626 
  $(4,402)
 
       
       
       
       
       
       
       
       
Corporate and other
       
       
       
       
       
       
       
       
bonds industrial and
       
       
       
       
       
       
       
       
miscellaneous
    2,807,274 
    (69,496)
    5 
    504,110 
    (41,112)
    2 
    3,311,384 
    (110,608)
 
       
       
       
       
       
       
       
       
Residential mortgage
       
       
       
       
       
       
       
       
backed securities
    1,042,448 
    (33,751)
    10 
    560,806 
    (16,333)
    3 
    1,603,254 
    (50,084)
 
       
       
       
       
       
       
       
       
Total fixed-maturity
       
       
       
       
       
       
       
       
securities
  $4,181,348 
  $(107,649)
    16 
  $1,064,916 
  $(57,445)
    5 
  $5,246,264 
  $(165,094)
 
       
       
       
       
       
       
       
       
Equity Securities:
       
       
       
       
       
       
       
       
Preferred stocks
  $530,800 
  $(594)
    1 
  $694,250 
  $(37,072)
    1 
  $1,225,050 
  $(37,666)
Common stocks
    1,331,100 
    (155,141)
    3 
    -