kins_10q.htm
 

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 September 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. Employer
Identification Number)
 
15 Joys Lane
Kingston, NY 12401
(Address of principal executive offices)
 
(845) 802-7900
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ 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 November 10, 2016 there were 7,913,366 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 September 30, 2016 (Unaudited) and December 31, 2015
 
 
2
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended September 30, 2016 (Unaudited) and 2015 (Unaudited)
 
 
3
 
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2016 (Unaudited)
 
 
4
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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
 
 
34
 
 
 
Item 3 —
 
 Quantitative and Qualitative Disclosures About Market Risk
 
 
72
 
 
 
Item 4 —
 
 Controls and Procedures
 
 
72
 
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
73
 
 
 
Item 1 —
 
Legal Proceedings
 
 
73
 
 
 
Item 1A —
 
Risk Factors
 
 
73
 
 
 
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
73
 
 
 
Item 3 —
 
Defaults Upon Senior Securities
 
 
73
 
 
 
Item 4 —
 
Mine Safety Disclosures
 
 
73
 
 
 
Item 5 —
 
Other Information
 
 
73
 
 
 
Item 6 —
 
Exhibits
 
 
73
 
Signatures
 
 
 
 
 EXHIBIT 3(a)
 EXHIBIT 3(b)
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32
1 EXHIBIT 101.INS XBRL Instance Document
1 EXHIBIT 101.SCH XBRL Taxonomy Extension Schema
1 EXHIBIT 101.CAL XBRL Taxonomy Extension Calculation Linkbase
1 EXHIBIT 101.DEF XBRL Taxonomy Extension Definition Linkbase
1 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
 
 
 
 
 
 
 
 
 September 30,
 
 
 December 31,
 
 
 
2016
 
 
2015
 
 
 
 (unaudited)
 
 
 
 
 Assets
 
 
 
 
 
 
  Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
  $5,482,735 at September 30, 2016 and $5,241,095 at December 31, 2015)
 $5,094,455 
 $5,138,872 
  Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
  $78,917,448 at September 30, 2016 and $62,221,129 at December 31, 2015)
  81,078,953 
  62,502,064 
  Equity securities, available-for-sale, at fair value (cost of $9,978,137
    
    
  at September 30, 2016 and $8,751,537 at December 31, 2015)
  10,363,702 
  9,204,270 
 Total investments
  96,537,110 
  76,845,206 
 Cash and cash equivalents
  12,430,687 
  13,551,372 
 Premiums receivable, net
  11,516,429 
  10,621,655 
 Reinsurance receivables, net
  31,212,976
  31,270,235 
 Deferred policy acquisition costs
  12,032,407 
  10,835,306 
 Intangible assets, net
  1,435,000 
  1,757,816 
 Property and equipment, net
  3,161,227 
  3,152,266 
 Other assets
  1,153,951 
  1,095,894 
 Total assets
 $169,479,787
 $149,129,750 
 
    
    
 Liabilities
    
    
 Loss and loss adjustment expense reserves
 $39,802,323
 $39,876,500 
 Unearned premiums
  53,763,848 
  48,890,241 
 Advance premiums
  2,046,281 
  1,199,376 
 Reinsurance balances payable
  3,996,426 
  1,688,922 
 Deferred ceding commission revenue
  6,652,854 
  6,435,068 
 Accounts payable, accrued expenses and other liabilities
  4,893,246 
  4,826,603 
 Income taxes payable
  540,686 
  263,622 
 Deferred income taxes
  1,115,912 
  672,190 
 Total liabilities
 112,811,576
  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 8,887,344 shares
    
    
  at September 30, 2016 and 8,289,606 at December 31, 2015; outstanding
    
    
  7,912,875 shares at September 30, 2016 and 7,328,637 shares at December 31, 2015
  88,873 
  82,896 
  Capital in excess of par
  37,891,275 
  32,987,082 
  Accumulated other comprehensive income
  1,681,065 
  484,220 
  Retained earnings
  19,002,460 
  13,605,225 
 
  58,663,673 
  47,159,423 
  Treasury stock, at cost, 974,469 shares at September 30, 2016 and 960,969 shares
    
    
  at December 31, 2015
  (1,995,462)
  (1,882,195)
 Total stockholders' equity
  56,668,211 
  45,277,228 
 
    
    
 Total liabilities and stockholders' equity
 $169,479,787
 $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 Nine Months Ended
 
 
 
  September 30,      
 
 
  September 30,      
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Net premiums earned
 $15,646,181 
 $13,129,604 
 $45,188,731 
 $34,381,118 
 Ceding commission revenue
  2,934,928 
  2,643,531 
  8,274,290 
  9,388,457 
 Net investment income
  709,072 
  649,441 
  2,286,199 
  1,850,069 
 Net realized gains (losses) on investments
  241,035 
  (40,487)
  604,903 
  (105,718)
 Other income
  297,181 
  275,280 
  831,036 
  1,299,511 
 Total revenues
  19,828,397 
  16,657,369 
  57,185,159 
  46,813,437 
 
    
    
    
    
 Expenses
    
    
    
    
 Loss and loss adjustment expenses
  5,134,854 
  5,050,194 
  20,405,545 
  16,884,224 
 Commission expense
  4,603,755 
  4,021,383 
  13,400,029 
  11,033,874 
 Other underwriting expenses
  4,039,209 
  3,389,024 
  10,981,784 
  9,349,842 
 Other operating expenses
  530,261 
  468,352 
  1,292,196 
  1,174,693 
 Depreciation and amortization
  262,387 
  267,424 
  835,388 
  749,658 
 Total expenses
  14,570,466 
  13,196,377 
  46,914,942 
  39,192,291 
 
    
    
    
    
 Income from operations before taxes
  5,257,931 
  3,460,992 
  10,270,217 
  7,621,146 
 Income tax expense
  1,797,305 
  1,115,338 
  3,426,298 
  2,513,811 
 Net income
  3,460,626 
  2,345,654 
  6,843,919 
  5,107,335 
 
    
    
    
    
 Other comprehensive income (loss), net of tax
    
    
    
    
 Gross change in unrealized gains (losses)
    
    
    
    
 on available-for-sale-securities
  60,391 
  (92,097)
  2,418,305 
  (699,619)
 
    
    
    
    
 Reclassification adjustment for (gains) losses
    
    
    
    
 included in net income
  (241,035)
  40,487 
  (604,903)
  105,718 
 Net change in unrealized gains (losses)
  (180,644)
  (51,610)
  1,813,402 
  (593,901)
 Income tax (expense) benefit related to items
    
    
    
    
 of other comprehensive income (loss)
  61,419 
  17,547 
  (616,557)
  201,926 
 Other comprehensive income (loss), net of tax
  (119,225)
  (34,063)
  1,196,845 
  (391,975)
 
    
    
    
    
 Comprehensive income
 $3,341,401 
 $2,311,591 
 $8,040,764 
 $4,715,360 
 
    
    
    
    
Earnings per common share:
    
    
    
    
Basic
 $0.44 
 $0.32 
 $0.89 
 $0.70 
Diluted
 $0.43 
 $0.32 
 $0.89 
 $0.69 
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
Basic
  7,911,353 
  7,334,269 
  7,676,887 
  7,330,178 
Diluted
  7,972,925 
  7,381,626 
  7,729,712 
  7,367,714 
 
    
    
    
    
Dividends declared and paid per common share
 $0.0625 
 $0.0500 
 $0.1875 
 $0.1500 
 

See accompanying notes to condensed consolidated financial statements.
 
 
3
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)              
Nine months ended September 30, 2016                    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Capital
 
 
 Other
 
 
 
 
   Treasury      
 
 
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 in Excess
 
 
 Comprehensive
 
 
 Retained
 
    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 $192,369
  - 
  - 
  595,238 
  5,952 
  4,801,679 
  - 
  - 
  - 
  - 
  4,807,631 
Stock-based compensation
  - 
  - 
  - 
  - 
  89,814 
  - 
  - 
  - 
  - 
  89,814 
Exercise of stock options
  - 
  - 
  2,500 
  25 
  12,700 
  - 
  - 
  - 
  - 
  12,725 
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  13,500 
  (113,267)
  (113,267)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (1,446,684)
  - 
  - 
  (1,446,684)
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  6,843,919 
  - 
  - 
  6,843,919 
Change in unrealized gains on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  1,196,845 
  - 
  - 
  - 
  1,196,845 
Balance, September 30, 2016
  - 
 $- 
  8,887,344 
 $88,873 
 $37,891,275 
 $1,681,065 
 $19,002,460 
  974,469 
 $(1,995,462)
 $56,668,211 
 

See accompanying notes to condensed consolidated financial statements.
 
 
4
 
 
 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES    
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)    
Nine months ended September 30,
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net income
 $6,843,919 
 $5,107,335 
 
Adjustments to reconcile net income to net cash flows provided by operating activities:
 
    
 Net realized (gains) losses on investments
  (604,903)
  105,718 
 Depreciation and amortization
  835,388 
  749,658 
 Amortization of bond premium, net
  310,838 
  257,996 
 Stock-based compensation
  89,814 
  129,546 
 Excess tax benefit from exercise of stock options
  - 
  (223,976)
 Deferred income tax expense
  (172,835)
  (279,793)
 (Increase) decrease in operating assets:
    
    
 Premiums receivable, net
  (894,774)
  (1,885,547)
 Receivables - reinsurance contracts
  - 
  (983,807)
 Reinsurance receivables, net
 57,259 
  4,403,717 
 Deferred policy acquisition costs
  (1,197,101)
  (1,470,726)
 Other assets
  (308,505)
  (16,634)
 Increase (decrease) in operating liabilities:
    
    
 Loss and loss adjustment expense reserves
 (74,177)
  (1,013,191)
 Unearned premiums
  4,873,607 
  6,983,289 
 Advance premiums
  846,905 
  549,204 
 Reinsurance balances payable
  2,307,504 
  (754,150)
 Deferred ceding commission revenue
  217,786 
  113,367 
 Accounts payable, accrued expenses and other liabilities
  343,707 
  952,160 
 Net cash flows provided by operating activities
  13,474,432 
  12,724,166 
 
    
    
 Cash flows from investing activities:
    
    
 Purchase - fixed-maturity securities available-for-sale
  (33,295,669)
  (13,187,405)
 Purchase - equity securities available-for-sale
  (6,728,540)
  (3,552,291)
 Sale or maturity - fixed-maturity securities available-for-sale
  16,374,028 
  1,680,633 
 Sale - equity securities available-for-sale
  6,065,744 
  1,642,971 
 Acquisition of fixed assets
  (521,533)
  (1,166,834)
 Other investing activities
  250,448 
  6,203 
 Net cash flows used in investing activities
  (17,855,522)
  (14,576,723)
 
    
    
 Cash flows from financing activities:
    
    
 Net proceeds from issuance of common stock
  4,807,631 
  - 
  Proceeds from exercise of stock options
  12,725 
  - 
 Withholding taxes paid on net exercise of stock options
  - 
  (243,662)
 Excess tax benefit from exercise of stock options
  - 
  223,976 
 Purchase of treasury stock
  (113,267)
  (204,060)
 Dividends paid
  (1,446,684)
  (1,098,946)
 Net cash flows provided by (used in) financing activities
  3,260,405 
  (1,322,692)
 
    
    
 Decrease in cash and cash equivalents
 $(1,120,685)
 $(3,175,249)
 Cash and cash equivalents, beginning of period
  13,551,372 
  9,906,878 
 Cash and cash equivalents, end of period
 $12,430,687 
 $6,731,629 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $3,799,671 
 $1,457,000 
 
    
    
 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 nine months ended September 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.
 
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.
 
 
7
 
 
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.  The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  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.
 
In August 2016, FASB issued ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The revised ASU provides accounting guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or lacking in specific guidance. ASU 2016-15 will be effective for the Company for reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect the updated guidance will have on its consolidated statement of cash flows.
 
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 September 30, 2016 and December 31, 2015 are summarized as follows:
 
 
 
September 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
 $8,094,036 
 $465,453 
 $(4,564)
 $- 
 $8,554,925 
 $460,889 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  51,884,984 
  1,613,713 
  (45,063)
  (47,332)
  53,406,302 
  1,521,318 
 
    
    
    
    
    
    
 Residential mortgage backed
    
    
    
    
    
    
 securities
  18,938,428 
  243,487 
  (54,967)
  (9,222)
  19,117,726 
  179,298 
 Total fixed-maturity securities
  78,917,448 
  2,322,653 
  (104,594)
  (56,554)
  81,078,953 
  2,161,505 
 
    
    
    
    
    
    
 Equity Securities:
    
    
    
    
    
    
 Preferred stocks
  6,107,947 
  90,696 
  (35,823)
  (56,071)
  6,106,749 
  (1,198)
 Common stocks
  3,870,190 
  500,681 
  (113,918)
  - 
  4,256,953 
  386,763 
 Total equity securities
  9,978,137 
  591,377 
  (149,741)
  (56,071)
  10,363,702 
  385,565 
 
    
    
    
    
    
    
 Total
 $88,895,585 
 $2,914,030 
 $(254,335)
 $(112,625)
 $91,442,655 
 $2,547,070 
 
 
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 September 30, 2016 and December 31, 2015 is shown below:
 
 
 
September 30, 2016    
 
 
December 31, 2015    
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $1,553,198 
 $1,574,389 
 $827,246 
 $837,918 
 One to five years
  27,294,171 
  28,183,978 
  17,146,349 
  17,393,571 
 Five to ten years
  30,249,462 
  31,282,681 
  37,877,726 
  37,884,450 
 More than 10 years
  882,189 
  920,179 
  1,366,516 
  1,395,627 
 Residential mortgage backed securities
  18,938,428 
  19,117,726 
  5,003,292 
  4,990,498 
 Total
 $78,917,448 
 $81,078,953 
 $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 September 30, 2016 and December 31, 2015 are summarized as follows:
 
 
 
September 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
 $606,417 
 $147,622 
 $- 
 $- 
 $754,039 
 $147,622 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  1,349,988 
  101,599 
  - 
  - 
  1,451,587 
  101,599 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,138,050 
  170,747 
  - 
  (31,688)
  3,277,109 
  139,059 
 
    
    
    
    
    
    
 Total
 $5,094,455 
 $419,968 
 $- 
 $(31,688)
 $5,482,735 
 $388,280 
 
 
 
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 September 30, 2016 and December 31, 2015 is shown below:
 
 
 
September 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
  650,000 
  658,165 
  500,000 
  496,245 
 Five to ten years
  3,838,038 
  4,070,530 
  4,032,483 
  3,990,811 
 More than 10 years
  606,417 
  754,040 
  606,389 
  754,039 
 Total
 $5,094,455 
 $5,482,735 
 $5,138,872 
 $5,241,095 
 
Investment Income
 
Major categories of the Company’s net investment income are summarized as follows:
 
 
 
 Three months ended
 
 
 Nine months ended
 
 
 
 September 30,  
 
 
 September 30,    
 
 
 
 2016
 
 
 2015
 
 
 2016
 
 
 2015
 
 Income:
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities
 $602,337 
 $595,529 
 $1,952,589 
 $1,671,821 
 Equity securities
  135,809 
  125,379 
  416,412 
  378,084 
 Cash and cash equivalents
  5,674 
  250 
  14,852 
  465 
 Total
  743,820 
  721,158 
  2,383,853 
  2,050,370 
 Expenses:
    
    
    
    
 Investment expenses
  34,748 
  71,717 
  97,654 
  200,301 
 Net investment income
 $709,072 
 $649,441 
 $2,286,199 
 $1,850,069 
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $16,374,028 and $1,680,633 for the nine months ended September 30, 2016 and 2015, respectively.
 
Proceeds from the sale of equity securities available-for-sale were $6,065,744 and $1,642,971 for the nine months ended September 30, 2016 and 2015, respectively.
 
 
12
 
 
The Company’s net realized gains (losses) on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 Nine months ended
 
 
 
 September 30,
 
 
 September 30,
 
 
 
 2016
 
 
 2015
 
 
 2016
 
 
 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Gross realized gains
 $21,173 
 $20 
 $333,066 
 $20 
 Gross realized losses
  (51,085)
  (25,886)
  (222,056)
  (112,097)
 
  (29,912)
  (25,866)
  111,010 
  (112,077)
 
    
    
    
    
 Equity securities:
    
    
    
    
 Gross realized gains
  270,947 
  12,549 
  586,564 
  48,970 
 Gross realized losses
  - 
  (27,170)
  (22,760)
  (42,611)
 
  270,947 
  (14,621)
  563,804 
  6,359 
 
    
    
    
    
 Other-than-temporary impairment losses:
    
    
    
    
 Fixed-maturity securities
  - 
  - 
  (69,911)
  - 
 
  - 
  - 
  (69,911)
  - 
 
    
    
    
    
 Net realized gains (losses)
 $241,035 
 $(40,487)
 $604,903 
 $(105,718)
 
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 September 30, 2016 and December 31, 2015, there were 37 and 57 securities, respectively, that accounted for the gross unrealized loss. As of September 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 nine months ended September 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 nine months ended September 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 September 30, 2016 and December 31, 2015 as follows:
 
 
 
September 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
 $330,141 
 $(4,564)
  1 
 $- 
 $- 
  - 
 $330,141 
 $(4,564)
 
    
    
    
    
    
    
    
    
 Corporate and other
    
    
    
    
    
    
    
    
 bonds industrial and
    
    
    
    
    
    
    
    
 miscellaneous
  7,829,356 
  (45,063)
  13 
  716,422 
  (47,332)
  2 
  8,545,778 
  (92,395)
 
    
    
    
    
    
    
    
    
 Residential mortgage