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, 2017
 
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
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
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 10, 2017 there were 10,630,492 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, 2017 (Unaudited) and December 31, 2016
 
2
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months and six months ended June 30, 2017 (Unaudited) and 2016 (Unaudited)
 
3
 
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017 (Unaudited)
 
4
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2017 (Unaudited) and 2016 (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
 
66
 
 
 
Item 4 —
 
Controls and Procedures
 
66
 
 
 
 
 
 
 
 
 
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
 
68
 
 
 
Item 6 —
 
Exhibits
 
69
 
Signatures     
 
 
  70
 
 
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, 2016 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,
 
 
 
2017
 
 
2016
 
 
 
(unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
 $5,193,772 at June 30, 2017 and $5,298,119 at December 31, 2016)
 $4,895,894 
 $5,094,902 
 Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
 $111,374,779 at June 30, 2017 and $80,596,628 at December 31, 2016)
  112,423,511 
  80,428,828 
 Equity securities, available-for-sale, at fair value (cost of $11,311,097
    
    
 at June 30, 2017 and $9,709,385 at December 31, 2016)
  11,772,818 
  9,987,686 
Total investments
  129,092,223 
  95,511,416 
Cash and cash equivalents
  14,357,465 
  12,044,520 
Premiums receivable, net
  13,126,077 
  11,649,398 
Reinsurance receivables, net
  34,543,843 
  32,197,765 
Deferred policy acquisition costs
  13,284,665 
  12,239,781 
Intangible assets, net
  1,180,000 
  1,350,000 
Property and equipment, net
  3,838,351 
  3,011,373 
Other assets
  1,268,699 
  1,442,209 
Total assets
 $210,691,323 
 $169,446,462 
 
    
    
Liabilities
    
    
Loss and loss adjustment expense reserves
 $44,196,576 
 $41,736,719 
Unearned premiums
  59,034,845 
  54,994,375 
Advance premiums
  2,169,979 
  1,421,560 
Reinsurance balances payable
  2,803,939 
  2,146,017 
Deferred ceding commission revenue
  7,228,966 
  6,851,841 
Accounts payable, accrued expenses and other liabilities
  4,598,774 
  5,448,448 
Deferred income taxes
  339,840 
  166,949 
Total liabilities
  120,372,919 
  112,765,909 
 
    
    
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 11,600,288 shares
    
    
 at June 30, 2017 and 8,896,335 at December 31, 2016; outstanding
    
    
 10,622,491 shares at June 30, 2017 and 7,921,866 shares at December 31, 2016
  116,002 
  88,963 
 Capital in excess of par
  68,218,302 
  37,950,401 
 Accumulated other comprehensive income
  996,899 
  72,931 
 Retained earnings
  23,031,059 
  20,563,720 
 
  92,362,262 
  58,676,015 
 Treasury stock, at cost, 977,797 shares at June 30, 2017
    
    
 and 974,469 shares at December 31, 2016
  (2,043,858)
  (1,995,462)
Total stockholders' equity
  90,318,404 
  56,680,553 
 
    
    
Total liabilities and stockholders' equity
 $210,691,323 
 $169,446,462 
 
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,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 $16,953,727 
 $15,010,875 
 $33,323,475 
 $29,542,550 
Ceding commission revenue
  3,305,938 
  2,569,025 
  6,490,390 
  5,339,362 
Net investment income
  1,026,004 
  764,070 
  1,883,804 
  1,577,127 
Net realized gains on investments
  130,423 
  283,432 
  75,917 
  363,868 
Other income
  308,159 
  284,508 
  597,859 
  533,855 
Total revenues
  21,724,251 
  18,911,910 
  42,371,445 
  37,356,762 
 
    
    
    
    
Expenses
    
    
    
    
Loss and loss adjustment expenses
  7,454,922 
  5,786,836 
  15,747,918 
  15,270,691 
Commission expense
  5,101,566 
  4,526,208 
  9,990,544 
  8,796,274 
Other underwriting expenses
  4,199,616 
  3,596,134 
  8,412,033 
  6,942,575 
Other operating expenses
  906,690 
  432,696 
  1,662,494 
  761,935 
Depreciation and amortization
  326,174 
  289,173 
  644,872 
  573,001 
Total expenses
  17,988,968 
  14,631,047 
  36,457,861 
  32,344,476 
 
    
    
    
    
Income from operations before taxes
  3,735,283 
  4,280,863 
  5,913,584 
  5,012,286 
Income tax expense
  1,224,891 
  1,438,602 
  1,932,612 
  1,628,993 
Net income
  2,510,392 
  2,842,261 
  3,980,972 
  3,383,293 
 
    
    
    
    
Other comprehensive income, net of tax
    
    
    
    
Gross change in unrealized gains
    
    
    
    
on available-for-sale-securities
  951,047 
  873,850 
  1,475,869 
  2,357,914 
 
    
    
    
    
Reclassification adjustment for gains
    
    
    
    
included in net income
  (130,423)
  (283,432)
  (75,917)
  (363,868)
Net change in unrealized gains
  820,624 
  590,418 
  1,399,952 
  1,994,046 
Income tax expense related to items
    
    
    
    
of other comprehensive income
  (279,012)
  (200,742)
  (475,984)
  (677,976)
Other comprehensive income, net of tax
  541,612 
  389,676 
  923,968 
  1,316,070 
 
    
    
    
    
Comprehensive income
 $3,052,004 
 $3,231,937 
 $4,904,940 
 $4,699,363 
 
    
    
    
    
Earnings per common share:
    
    
    
    
Basic
 $0.24 
 $0.36 
 $0.39 
 $0.45 
Diluted
 $0.23 
 $0.36 
 $0.39 
 $0.44 
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
Basic
  10,622,496 
  7,794,347 
  10,145,772 
  7,558,366 
Diluted
  10,822,577 
  7,853,284 
  10,337,213 
  7,607,231 
 
    
    
    
    
Dividends declared and paid per common share
 $0.0800 
 $0.0625 
 $0.1425 
 $0.1250 
 
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, 2017    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Preferred Stock
  Common Stock
 
  in Excess
 
 
Comprehensive
 
 
Retained
 
  Treasury Stock
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
of Par
 
 
Income
 
 
Earnings
 
 
Shares
 
 
Amount
 
 
Total
 
Balance, January 1, 2017
  - 
 $- 
  8,896,335 
 $88,963 
 $37,950,401 
 $72,931 
 $20,563,720 
  974,469 
 $(1,995,462)
 $56,680,553 
Proceeds from public offering, net of
    
    
    
    
    
    
    
    
    
    
offering costs of $2,173,000
  - 
  - 
  2,692,500 
  26,925 
  30,109,774 
  - 
  - 
  - 
  - 
  30,136,699 
Stock-based compensation
  - 
  - 
  - 
  - 
  127,768 
  - 
  - 
  - 
  - 
  127,768 
Vesting of restricted stock awards
  - 
  - 
  5,621 
  56 
  (56)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
    
    
  (584)
  (6)
  (8,882)
    
    
    
    
  (8,888)
Exercise of stock options
  - 
  - 
  6,416 
  64 
  39,297 
  - 
  - 
  - 
  - 
  39,361 
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  3,328 
  (48,396)
  (48,396)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (1,513,633)
  - 
  - 
  (1,513,633)
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  3,980,972 
  - 
  - 
  3,980,972 
Change in unrealized gains on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  923,968 
  - 
  - 
  - 
  923,968 
Balance, June 30, 2017
  - 
 $- 
  11,600,288 
 $116,002 
 $68,218,302 
 $996,899 
 $23,031,059 
  977,797 
 $(2,043,858)
 $90,318,404 
 
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,
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 $3,980,972 
 $3,383,293 
Adjustments to reconcile net income to net cash flows provided by operating activities:
    
    
Net realized gains on sale of investments
  (75,917)
  (363,868)
Depreciation and amortization
  644,872 
  573,001 
Amortization of bond premium, net
  258,269 
  167,488 
Stock-based compensation
  127,768 
  66,326 
Deferred income tax expense
  (303,093)
  (125,559)
(Increase) decrease in operating assets:
    
    
Premiums receivable, net
  (1,476,679)
  (628,529)
Reinsurance receivables, net
  (2,346,078)
  (4,084,209)
Deferred policy acquisition costs
  (1,044,884)
  (712,750)
Other assets
  173,510 
  (196,719)
Increase (decrease) in operating liabilities:
    
    
Loss and loss adjustment expense reserves
  2,459,857 
  4,458,724 
Unearned premiums
  4,040,470 
  2,570,009 
Advance premiums
  748,419 
  589,746 
Reinsurance balances payable
  657,922 
  2,216,854 
Deferred ceding commission revenue
  377,125 
  227,921 
Accounts payable, accrued expenses and other liabilities
  (849,674)
  (329,177)
Net cash flows provided by operating activities
  7,372,859 
  7,812,551 
 
    
    
Cash flows from investing activities:
    
    
Purchase - fixed-maturity securities available-for-sale
  (36,818,402)
  (23,339,058)
Purchase - equity securities available-for-sale
  (2,275,929)
  (5,585,777)
Redemption - fixed-maturity securities held-to-maturity
  200,000 
  - 
Sale or maturity - fixed-maturity securities available-for-sale
  5,732,151 
  14,314,798 
Sale - equity securities available-for-sale
  798,973 
  4,212,336 
Acquisition of fixed assets
  (1,301,850)
  (326,575)
Other investing activities
  - 
  250,448 
Net cash flows used in investing activities
  (33,665,057)
  (10,473,828)
 
    
    
Cash flows from financing activities:
    
    
Net proceeds from issuance of common stock
  30,136,699 
  4,813,574 
Proceeds from exercise of stock options
  39,361 
  - 
Purchase of treasury stock
  (48,396)
  (113,267)
Withholding taxes paid on vested retricted stock awards
  (8,888)
  - 
Dividends paid
  (1,513,633)
  (952,128)
Net cash flows provided by financing activities
  28,605,143 
  3,748,179 
 
    
    
Increase in cash and cash equivalents
 $2,312,945 
 $1,086,902 
Cash and cash equivalents, beginning of period
  12,044,520 
  13,551,372 
Cash and cash equivalents, end of period
 $14,357,465 
 $14,638,274 
 
    
    
Supplemental disclosures of cash flow information:
    
    
Cash paid for income taxes
 $1,762,000
 
 $1,747,466
 
 
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. KICO is currently offering its property and casualty insurance products in New York, New Jersey and Pennsylvania; although New Jersey is now a growing expansion market for the Company, KICO currently writes substantially all of its business in New York.
 
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 consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2016 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2017. 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, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017.
 
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: 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. All significant inter-company account balances and transactions have been eliminated in consolidation.
 
Accounting Changes
 
In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 that 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 became effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and has been applied retrospectively. The new guidance affected disclosures only and had no impact on the Company’s results of operations or financial position.
 
Effective January 1, 2017, the Company has adopted the provisions of ASU 2016-09 – Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires recognition of all income tax effects from share-based payments arising on or after January 1, 2017 (the Company’s adoption date) in income tax expense. As a result, the Company realized windfall tax benefits in the interim period of adoption of approximately $5,000, which was recognized as a discrete period income tax benefit as required by this ASU. This benefit resulted in lowering the Company’s effective tax rate for the interim period by 0.1%.
 
Accounting Pronouncements
 
In May 2014, FASB issued ASU 2014-09 – Revenue from Contracts with Customers (Topic 606). The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance. 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, ASU 2016-10 and ASU 2016-20, 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 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 interim and annual 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 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 interim and annual 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 June 30, 2017 and December 31, 2016 are summarized as follows:
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 $12,080,402 
 $269,275 
 $(40,955)
 $(23,057)
 $12,285,665 
 $205,263 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
Industrial and miscellaneous
  77,041,418 
  1,202,532 
  (371,550)
  (5,946)
  77,866,454 
  825,036 
 
    
    
    
    
    
    
Residential mortgage and other
    
    
    
    
    
    
asset backed securities
  22,252,959 
  233,063 
  (190,684)
  (23,946)
  22,271,392 
  18,433 
Total fixed-maturity securities
  111,374,779 
  1,704,870 
  (603,189)
  (52,949)
  112,423,511 
  1,048,732 
 
    
    
    
    
    
    
Equity Securities:
    
    
    
    
    
    
Preferred stocks
  6,512,399 
  59,812 
  (77,538)
  (88,073)
  6,406,600 
  (105,799)
Common stocks
  4,798,698 
  656,319 
  (10,131)
  (78,668)
  5,366,218 
  567,520 
Total equity securities
  11,311,097 
  716,131 
  (87,669)
  (166,741)
  11,772,818 
  461,721 
 
    
    
    
    
    
    
Total
 $122,685,876 
 $2,421,001 
 $(690,858)
 $(219,690)
 $124,196,329 
 $1,510,453 
 

 
9
 
 
 
 
December 31, 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
 $8,053,449 
 $199,028 
 $(46,589)
 $- 
 $8,205,888 
 $152,439 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
Industrial and miscellaneous
  53,728,395 
  600,519 
  (638,113)
  (5,612)
  53,685,189 
  (43,206)
 
    
    
    
    
    
    
Residential mortgage backed
    
    
    
    
    
    
securities
  18,814,784 
  70,682 
  (309,273)
  (38,442)
  18,537,751 
  (277,033)
Total fixed-maturity securities
  80,596,628 
  870,229 
  (993,975)
  (44,054)
  80,428,828 
  (167,800)
 
    
    
    
    
    
    
Equity Securities:
    
    
    
    
    
    
Preferred stocks
  5,986,588 
  10,317 
  (241,333)
  (70,571)
  5,685,001 
  (301,587)
Common stocks
  3,722,797 
  691,324 
  (13,968)
  (97,468)
  4,302,685 
  579,888 
Total equity securities
  9,709,385 
  701,641 
  (255,301)
  (168,039)
  9,987,686 
  278,301 
 
    
    
    
    
    
    
Total
 $90,306,013 
 $1,571,870 
 $(1,249,276)
 $(212,093)
 $90,416,514 
 $110,501 
 
 
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, 2017 and December 31, 2016 is shown below:
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
Less than one year
 $2,377,970 
 $2,391,524 
 $1,752,501 
 $1,765,795 
One to five years
  31,548,682 
  32,100,717 
  29,541,568 
  29,913,308 
Five to ten years
  50,427,456 
  50,883,126 
  30,487,775 
  30,211,974 
More than 10 years
  4,767,712 
  4,776,752 
  - 
  - 
Residential mortgage and other asset backed securities
  22,252,959 
  22,271,392 
  18,814,784 
  18,537,751 
Total
 $111,374,779 
 $112,423,511 
 $80,596,628 
 $80,428,828 
 
    
    
    
    
 
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, 2017 and December 31, 2016 are summarized as follows:
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Net
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Unrealized
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 $606,446 
 $147,593 
 $- 
 $- 
 $754,039 
 $147,593 
 
    
    
    
    
    
    
Political subdivisions of States,
    
    
    
    
    
    
Territories and Possessions
  1,149,077 
  55,703 
  (2,500)
  - 
  1,202,280 
  53,203 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
Industrial and miscellaneous
  3,140,371 
  117,338 
  (5,025)
  (15,231)
  3,237,453 
  97,082 
 
    
    
    
    
    
    
Total
 $4,895,894 
 $320,634 
 $(7,525)
 $(15,231)
 $5,193,772 
 $297,878 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost or
 
 
Gross
 
 
Gross Unrealized Losses
 
 
 
 
 
Net
 
 
 
Amortized
 
 
Unrealized
 
 
Less than 12
 
 
More than 12
 
 
Fair
 
 
Unrealized
 
Category
 
Cost
 
 
Gains
 
 
Months
 
 
Months
 
 
Value
 
 
Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 $606,427 
 $147,612 
 $- 
 $- 
 $754,039 
 $147,612 
 
    
    
    
    
    
    
Political subdivisions of States,
    
    
    
    
    
    
Territories and Possessions
  1,349,916 
  37,321 
  - 
  - 
  1,387,237 
  37,321 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
Industrial and miscellaneous
  3,138,559 
  72,784 
  (7,619)
  (46,881)
  3,156,843 
  18,284 
 
    
    
    
    
    
    
Total
 $5,094,902 
 $257,717 
 $(7,619)
 $(46,881)
 $5,298,119 
 $203,217 
 
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, 2017 and December 31, 2016 is shown below:
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
Less than one year
 $- 
 $- 
 $- 
 $- 
One to five years
  1,300,771 
  1,327,098 
  650,000 
  642,455 
Five to ten years
  2,988,677 
  3,112,635 
  3,838,475 
  3,901,625 
More than 10 years
  606,446 
  754,039 
  606,427 
  754,039 
Total
 $4,895,894 
 $5,193,772 
 $5,094,902 
 $5,298,119 
  
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
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,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Income:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities
 $935,543 
 $685,776 
 $1,680,996 
 $1,350,252 
Equity securities
  128,501 
  104,652 
  264,986 
  280,603 
Cash and cash equivalents
  2,505 
  2,732 
  8,674 
  9,178 
Total
  1,066,549 
  793,160 
  1,954,656 
  1,640,033 
Expenses:
    
    
    
    
Investment expenses
  40,545 
  29,090 
  70,852 
  62,906 
Net investment income
 $1,026,004 
 $764,070 
 $1,883,804 
 $1,577,127 
 
 
Proceeds from the redemption of fixed-maturity securities held-to-maturity were $200,000 and $-0- for the six months ended June 30, 2017 and 2016, respectively.
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $5,732,151 and $14,314,798 for the six months ended June 30, 2017 and 2016, respectively.
 
Proceeds from the sale of equity securities available-for-sale were $798,973 and $4,212,336 for the six months ended June 30, 2017 and 2016, 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,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Gross realized gains
 $48,595 
 $205,476 
 $61,718 
 $311,893 
Gross realized losses (1)
  (74,437)
  (65,428)
  (110,557)
  (170,971)
 
  (25,842)
  140,048 
  (48,839)
  140,922 
 
    
    
    
    
Equity securities:
    
    
    
    
Gross realized gains
  156,265 
  232,929 
  156,265 
  315,617 
Gross realized losses
  - 
  (19,634)
  (31,509)
  (22,760)
 
  156,265 
  213,295 
  124,756 
  292,857 
 
    
    
    
    
Other-than-temporary impairment losses:
    
    
    
    
Fixed-maturity securities
  - 
  (69,911)
  - 
  (69,911)
 
    
    
    
    
Net realized gains
 $130,423 
 $283,432 
 $75,917 
 $363,868 
 
(1)
Gross realized losses for the six months ended June 30, 2017 include $747 of loss from the redemption of fixed-maturity securities held-to-maturity.
 
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, 2017 and December 31, 2016, there were 75 and 85 securities, respectively, that accounted for the gross unrealized loss. As of June 30, 2017, 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. As of December 31, 2016, the full amount of the write-down was recognized as a credit component of OTTI in the amount of $69,911. 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, 2017 and 2016. 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, 2017 and December 31, 2016 as follows:
 
 
 
June 30, 2017
 
 
 
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
 $4,767,571 
 $(40,9554)
  8 
 $307,632 
 $(23,057)
  1 
 $5,075,203 
 $(64,012)
 
    
    
    
    
    
    
    
    
Corporate and other
    
    
    
    
    
    
    
    
bonds industrial and
    
    
    
    
    
    
    
    
miscellaneous
  16,347,328 
  (371,550)