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 March 31, 2018
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
 
 
 
 
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 May 9, 2018, there were 10,667,577 shares of the registrant’s common stock outstanding.
 

 
 
KINGSTONE COMPANIES, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
PART I — FINANCIAL INFORMATION
 
 
2
 
 
 
Item 1 —
 
 
 
2
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
6
 
 
 
Item 2 —
 
 
 
36
 
 
 
Item 3 —
 
 
 
62
 
 
 
Item 4 —
 
 
 
65
 
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
66
 
 
 
Item 1 —
 
 
 
66
 
 
 
Item 1A —
 
 
 
66
 
 
 
Item 2 —
 
 
 
66
 
 
 
Item 3 —
 
 
 
66
 
 
 
Item 4 —
 
 
 
66
 
 
 
Item 5 —
 
 
 
67
 
 
 
Item 6 —
 
 
 
67
 
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, 2017 under “Factors That May Affect Future Results and Financial Condition.”
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 
 
1
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 March 31,
 
 
 December 31,
 
 
 
2018
 
 
2017
 
 
 
 (unaudited)
 
 
 
 
 Assets
 
 
 
 
 
 
  Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
  $5,062,065 at March 31, 2018 and $5,150,076 at December 31, 2017)
 $4,870,271 
 $4,869,808 
  Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
  $130,912,757 at March 31, 2018 and $119,122,106 at December 31, 2017)
  129,149,201 
  119,988,256 
  Equity securities, at fair value (cost of $16,383,342 at March 31, 2018 and
    
    
  $13,761,841 at December 31, 2017)
  16,600,485 
  14,286,198 
 Other investments
  2,027,860 
  - 
 Total investments
  152,647,817 
  139,144,262 
 Cash and cash equivalents
  31,594,167 
  48,381,633 
 Investment subscription receivable
  - 
  2,000,000 
 Premiums receivable, net
  13,065,874 
  13,217,698 
 Reinsurance receivables, net
  31,895,480 
  28,519,130 
 Deferred policy acquisition costs
  15,130,213 
  14,847,236 
 Intangible assets, net
  925,000 
  1,010,000 
 Property and equipment, net
  5,132,755 
  4,772,577 
 Other assets
  4,020,364 
  2,655,527 
 Total assets
 $254,411,670 
 $254,548,063 
 
    
    
 Liabilities
    
    
 Loss and loss adjustment expense reserves
 $56,272,113 
 $48,799,622 
 Unearned premiums
  66,654,632 
  65,647,663 
 Advance premiums
  2,216,603 
  1,477,693 
 Reinsurance balances payable
  3,017,734 
  2,563,966 
 Deferred ceding commission revenue
  4,347,812 
  4,266,412 
 Accounts payable, accrued expenses and other liabilities
  4,501,593 
  7,487,654 
 Deferred income taxes
  77,031 
  600,342 
 Long-term debt, net
  29,163,116 
  29,126,965 
 Total liabilities
  166,250,634 
  159,970,317 
 
    
    
 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 11,679,334 shares
    
    
  at March 31, 2018 and 11,618,646 at December 31, 2017; outstanding
    
    
  10,666,665 shares at March 31, 2018 and 10,631,837 shares at December 31, 2017
  116,793 
  116,186 
  Capital in excess of par
  68,163,744 
  68,380,390 
  Accumulated other comprehensive (loss) income
  (1,391,063)
  1,100,647 
  Retained earnings
  23,780,755 
  27,152,822 
 
  90,670,229 
  96,750,045 
  Treasury stock, at cost, 1,012,669 shares at March 31, 2018
    
    
  and 986,809 shares at December 31, 2017
  (2,509,193)
  (2,172,299)
 Total stockholders' equity
  88,161,036 
  94,577,746 
 
    
    
 Total liabilities and stockholders' equity
 $254,411,670 
 $254,548,063 


See accompanying notes to condensed consolidated financial statements.
 
 
2
 
 
 
 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
Three months ended March 31,
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 Net premiums earned
 $22,837,617 
 $16,369,748 
 Ceding commission revenue
  1,695,158 
  3,184,452 
 Net investment income
  1,383,989 
  857,800 
 Net losses on investments
  (523,127)
  (54,506)
 Other income
  308,233 
  289,700 
 Total revenues
  25,701,870 
  20,647,194 
 
    
    
 Expenses
    
    
 Loss and loss adjustment expenses
  17,266,330 
  8,292,996 
 Commission expense
  5,799,948 
  4,888,978 
 Other underwriting expenses
  5,031,503 
  4,212,417 
 Other operating expenses
  246,858 
  755,804 
 Depreciation and amortization
  409,431 
  318,698 
 Interest expense
  456,545 
  - 
 Total expenses
  29,210,615 
  18,468,893 
 
    
    
 (Loss) income from operations before income taxes
  (3,508,745)
  2,178,301 
 Income tax (benefit) expense
  (790,811)
  707,721 
 Net (loss) income
  (2,717,934)
  1,470,580 
 
    
    
 Other comprehensive (loss) income, net of tax
    
    
 Gross change in unrealized (losses) gains
    
    
 on available-for-sale-securities
  (2,873,479)
  524,822 
 
    
    
 Reclassification adjustment for losses
    
    
 included in net income
  243,773 
  54,506 
 Net change in unrealized (losses) gains
  (2,629,706)
  579,328 
 Income tax benefit (expense) related to items
    
    
 of other comprehensive (loss) income
  552,238 
  (196,972)
 Other comprehensive (loss) income, net of tax
  (2,077,468)
  382,356 
 
    
    
 Comprehensive (loss) income
 $(4,795,402)
 $1,852,936 
 
    
    
(Loss) earnings per common share:
    
    
Basic
 $(0.25)
 $0.15 
Diluted
 $(0.25)
 $0.15 
 
    
    
Weighted average common shares outstanding
    
    
Basic
  10,669,992 
  9,663,751 
Diluted
  10,669,992 
  9,848,494 
 
    
    
Dividends declared and paid per common share
 $0.1000 
 $0.0625 
 

See accompanying notes to condensed consolidated financial statements.
 
 
3
 
 
  
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Capital
 
 
 Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 in Excess
 
 
 Comprehensive
 
 
 Retained
 
 
 Treasury Stock
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 of Par
 
 
 Income (Loss)
 
 
 Earnings
 
 
 Shares
 
 
 Amount
 
 
 Total
 
Balance, January 1, 2018, as reported
  - 
 $- 
  11,618,646 
 $116,186 
 $68,380,390 
 $1,100,647 
 $27,152,822 
  986,809 
 $(2,172,299)
 $94,577,746 
Cumulative effect of adoption of updated
    
    
    
    
    
    
    
    
    
    
accounting guidance for equity
    
    
    
    
    
    
    
    
    
    
financial instruments at January 1, 2018
  - 
  - 
  - 
  - 
  - 
  (414,242)
  414,242 
  - 
  - 
  - 
Balance, January 1, 2018, as adjusted
  - 
  - 
  11,618,646 
  116,186 
  68,380,390 
  686,405 
  27,567,064 
  986,809 
  (2,172,299)
  94,577,746 
Stock-based compensation
  - 
  - 
  - 
  - 
  108,368 
  - 
  - 
  - 
  - 
  108,368 
Shares deducted from exercise of stock
    
    
    
    
    
    
    
    
    
    
options for payment of withholding taxes
  - 
  - 
  (15,750)
  (158)
  (341,612)
  - 
  - 
  - 
  - 
  (341,770)
Vesting of restricted stock awards
  - 
  - 
  7,180 
  72 
  (72)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
  - 
  - 
  (618)
  (9)
  (12,205)
  - 
  - 
  - 
  - 
  (12,214)
Exercise of stock options
  - 
  - 
  69,876 
  702 
  28,875 
  - 
  - 
  - 
  - 
  29,577 
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  25,860 
  (336,894)
  (336,894)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (1,068,375)
  - 
  - 
  (1,068,375)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (2,717,934)
  - 
  - 
  (2,717,934)
Change in unrealized losses on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  (2,077,468)
  - 
  - 
  - 
  (2,077,468)
Balance, March 31, 2018
  - 
 $- 
  11,679,334 
 $116,793 
 $68,163,744 
 $(1,391,063)
 $23,780,755 
  1,012,669 
 $(2,509,193)
 $88,161,036 


See accompanying notes to condensed consolidated financial statements.
 
 
4
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
Three months ended March 31,
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net (loss) income
 $(2,717,934)
 $1,470,580 
 
Adjustments to reconcile net (loss) income to net cash flows provided by operating activities:
 
    
 Net losses on investments
  523,127 
  54,506 
 Depreciation and amortization
  409,431 
  318,698 
 Amortization of bond premium, net
  118,841 
  124,054 
 Amortization of discount on issuance costs on long-term debt
  36,151 
  - 
 Stock-based compensation
  108,368 
  59,055 
 Deferred income tax benefit
  28,927 
  32,504 
 (Increase) decrease in operating assets:
    
    
 Premiums receivable, net
  151,824 
  (79,045)
 Reinsurance receivables, net
  (3,376,350)
  (1,304,877)
 Deferred policy acquisition costs
  (282,977)
  (228,195)
 Other assets
  (1,386,512)
  11,563 
 Increase (decrease) in operating liabilities:
    
    
 Loss and loss adjustment expense reserves
  7,472,491 
  2,874,867 
 Unearned premiums
  1,006,969 
  327,923 
 Advance premiums
  738,910 
  543,896 
 Reinsurance balances payable
  453,768 
  (37,570)
 Deferred ceding commission revenue
  81,400 
  (78,984)
 Accounts payable, accrued expenses and other liabilities
  (2,986,061)
  (2,032,832)
 Net cash flows provided by operating activities
  380,373 
  2,056,143 
 
    
    
 Cash flows from investing activities:
    
    
 Purchase - fixed-maturity securities available-for-sale
  (20,018,600)
  (22,811,402)
 Purchase - equity securities
  (6,004,614)
  - 
 Sale and redemption - fixed-maturity securities held-to-maturity
  - 
  200,000 
 Sale or maturity - fixed-maturity securities available-for-sale
  7,891,145 
  2,706,202 
 Sale - equity securities available-for-sale
  3,378,515 
  132,091 
 Acquisition of fixed assets
  (684,609)
  (597,761)
 Net cash flows used in investing activities
  (15,438,163)
  (20,370,870)
 
    
    
 Cash flows from financing activities:
    
    
 Net proceeds from issuance of common stock
  - 
  30,136,699 
 Proceeds from exercise of stock options
  29,577 
  33,000 
 Withholding taxes paid on net exercise of stock options
  (341,770)
  - 
 Withholding taxes paid on vested retricted stock awards
  (12,214)
  - 
 Purchase of treasury stock
  (336,894)
  - 
 Dividends paid
  (1,068,375)
  (663,837)
 Net cash flows (used in) provided by financing activities
  (1,729,676)
  29,505,862 
 
    
    
 (Decrease) increase in cash and cash equivalents
 $(16,787,466)
 $11,191,135 
 Cash and cash equivalents, beginning of period
  48,381,633 
  12,044,520 
 Cash and cash equivalents, end of period
 $31,594,167 
 $23,235,655 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $- 
 $- 


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, Massachusetts and Texas. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island and Pennsylvania. Although New Jersey and Rhode Island are now growing expansion markets for the Company, 97.2% of KICO’s direct written premiums for the three months ended March 31, 2018 were written in the State of New York. In February 2018, a homeowners rate, rule, and form filing was made with the State of Massachusetts. KICO anticipates writing business in Massachusetts in 2018.
 
The accompanying unaudited condensed consolidated financial statements 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 10 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, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2018. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations for the three months ended March 31, 2018 may not be indicative of the results that may be expected for the year ending December 31, 2018.
 
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. Actual results could differ from these estimates and assumptions, which include the reserves for losses and loss adjustment expenses and are subject to estimation errors due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require judgments by management. On an on-going basis, management reevaluates its assumptions and the methods for calculating these 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 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). 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. The Company adopted ASU 2014-09 effective January 1, 2018 and it did not have a material impact on the Company’s condensed consolidated financial statements. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance.
 
In January 2016, the FASB issued ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). Effective January 1, 2018, the Company has adopted the provisions of ASU 2016-01. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair value to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required forequity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of approximately $414,000 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased accumulated other comprehensive income (“AOCI”) by the same amount. The Company elected to report changes in the fair value of equity investments in net losses on investments in the condensed consolidated statements of operations and comprehensive income (loss). At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments. Furthermore, the first quarter 2018 net loss on investments of approximately $523,000 in the condensed consolidated statements of operations and comprehensive income (loss) included approximately $307,000 from the fair value change of equity securities.
 
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendment should be applied on a prospective basis. The effective date of ASU 2017-09 is for interim and annual reporting periods, beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s condensed consolidated financial statements.
 
 
7
 
 
In February 2018, the FASB issued ASU 2018-02 - Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The deferred income tax liability for unrealized gains on available-for-sale securities that were re-measured due to the reduction in corporate income tax rates under the Tax Cuts and Jobs Act of 2017 (the “Act”) resulted in a stranded tax effect within AOCI. This is due to the effect of the tax rate change being recorded through continuing operations as required under Accounting Standards Codification 740 (“ASC 740”). The revised ASU allows for the reclassification of the stranded tax effects as a result of the Act from AOCI to retained earnings and requires certain other disclosures. Effective December 31, 2017, the Company chose to early adopt the provisions of ASU 2018-02 and recorded a one-time reclassification of $182,912 from AOCI to retained earnings for the stranded tax effects resulting from the newly enacted corporate tax rate. The amount of the reclassification was the difference between the historical corporate tax rate and the newly enacted 21% corporate tax rate.
 
Accounting Pronouncements
 
In February 2016, FASB issued ASU 2016-02 – Leases (Topic 842) (“ASU 2016-02”). 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 does not expect the adoption of ASU 2016-02 to 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 (“ASU 2016-13”). 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.
 
 
8
 
 
In August 2016, FASB issued ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). 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.
 
Note 3 - Investments 
 
Fixed Maturity Securities
 
The amortized cost and fair value of investments in fixed-maturity securities classified as available-for-sale as of March 31, 2018 and December 31, 2017 are summarized as follows:
 
 
  
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
obligations of U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
corporations and agencies
 $4,964,012 
 $- 
 $(20,282)
 $- 
 $4,943,730 
 $(20,282)
 
    
    
    
    
    
    
 
Political subdivisions of States,
  
    
    
    
    
    
Territories and Possessions
  6,591,252 
  48,955 
  (84,282)
  - 
  6,555,925 
  (35,327)
 
    
    
    
    
    
    
 
Corporate and other bonds
  
    
    
    
    
    
Industrial and miscellaneous
  96,910,715 
  189,515 
  (1,436,598)
  (369,216)
  95,294,416 
  (1,616,299)
 
    
    
    
    
    
    
 
Residential mortgage and other
 
    
    
    
    
    
asset backed securities (1)
  22,446,778 
  325,807 
  (104,872)
  (312,583)
  22,355,130 
  (91,648)
Total
 $130,912,757 
 $564,277 
 $(1,646,034)
 $(681,799)
 $129,149,201 
 $(1,763,556)
 
(1) 
In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its relationship with the Federal Home Loan Bank of New York ("FHLBNY") (See Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHBLNY credit line. As of March 31, 2018, the fair value of the eligible investments was approximately $6,225,000. KICO will retain all rights regarding all securities if pledged as collateral. As of March 31, 2018, there was no outstanding balance on the credit line.
 
 
9
 
 
 
 
  
  December 31, 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
obligations of U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
corporations and agencies
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
Political subdivisions of States,
    
    
    
    
    
Territories and Possessions
  11,096,122 
  250,135 
  (30,814)
  - 
  11,315,443 
  219,321 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
Industrial and miscellaneous
  87,562,631 
  1,189,207 
  (269,857)
  (340,516)
  88,141,465 
  578,834 
 
    
    
    
    
    
    
Residential mortgage and other
    
    
    
    
    
asset backed securities (1)
  20,463,353 
  305,499 
  (48,482)
  (189,022)
  20,531,348 
  67,995 
Total
 $119,122,106 
 $1,744,841 
 $(349,153)
 $(529,538)
 $119,988,256 
 $866,150 
 
(1) 
In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its relationship with the FHLBNY (see Note 7). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHBLNY credit line. As of December 31, 2017, the fair value of the eligible investments was approximately $6,703,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2017, there was no outstanding balance on the credit line.
 
A summary of the amortized cost and fair value of the Company’s investments in available-for-sale fixed-maturity securities by contractual maturity as of March 31, 2018 and December 31, 2017 is shown below:
 
 
 
March 31, 2018
 
 
December 31, 2017
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than one year
 $2,409,941 
 $2,412,121 
 $2,585,479 
 $2,595,938 
One to five years
  37,226,594 
  37,045,335 
  31,716,345 
  32,065,197 
Five to ten years
  66,817,711 
  65,430,615 
  62,702,945 
  63,129,543 
More than 10 years
  2,011,733 
  1,906,000 
  1,653,984 
  1,666,230 
Residential mortgage and other asset backed securities
  22,446,778 
  22,355,130 
  20,463,353 
  20,531,348 
Total
 $130,912,757 
 $129,149,201 
 $119,122,106 
 $119,988,256 
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.
 
 
10
 
 
Equity Securities
 
In the first quarter of 2018, the Company adopted ASU 2016-01, which resulted in changes in the fair value of equity securities held at March 31, 2018 being reported in net (loss) income instead of being reported in comprehensive (loss) income. See Note 1, Accounting Policies, for additional discussion. The cost and fair value of investments in equity securities as of March 31, 2018 and December 31, 2017 are as follows:
 
 
 
  
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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)
 
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stocks
 $7,301,491 
 $25,807 
 $(97,834)
 $(116,287)
 $7,113,177 
 $(188,314)
Common stocks and exchange
    
    
    
    
    
    
 traded mutual funds
  9,081,851 
  683,494 
  (278,037)
  - 
  9,487,308 
  405,457 
Total
 $16,383,342 
 $709,301 
 $(375,871)
 $(116,287)
 $16,600,485 
 $217,143 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net
 
  
 
 
 
 
 Gross
 
 
 Gross Unrealized Losses
 
 
 
 
 
 Unrealized
 
 
 
 
 
 
 Unrealized
 
 
 Less than 12
 
 
 More than 12
 
 
 Fair
 
 
 Gains/
 
Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 (Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stocks
 $7,081,099 
 $60,867 
 $(20,313)
 $(120,712)
 $7,000,941 
 $(80,158)
Common stocks and exchange
 
    
    
    
    
    
 traded mutual funds
  6,680,742 
  841,250 
  (222,205)
  (14,530)
  7,285,257 
  604,515 
Total
 $13,761,841 
 $902,117 
 $(242,518)
 $(135,242)
 $14,286,198 
 $524,357 
 
Other Investments
 
The cost and fair value of the Company’s other investments as of March 31, 2018 and December 31, 2017 are as follows:
 
 
 
March 31, 2018
 
 
December 31, 2017
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 
 
 
 Fair
 
 
 Unrealized
 
Category
 
 Cost
 
 
 Value
 
 
 Gain
 
 
 Cost
 
 
 Value
 
 
 Gain
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge fund
 $2,000,000 
 $2,027,860 
 $27,860 
 $- 
 $- 
 $- 
Total
 $2,000,000 
 $2,027,860 
 $27,860 
 $- 
 $- 
 $- 
 
 
11
 
 
Held-to-Maturity Securities
 
The amortized cost and fair value of investments in held-to-maturity fixed-maturity securities as of March 31, 2018 and December 31, 2017 are summarized as follows:
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 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
 $729,476 
 $147,563 
 $(5,064)
 $- 
 $871,975 
 $142,499 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,941 
  32,014 
  - 
  - 
  1,030,955 
  32,014 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,141,854 
  43,177 
  (15,741)
  (10,155)
  3,159,135 
  17,281 
 
    
    
    
    
    
    
 Total
 $4,870,271 
 $222,754 
 $(20,805)
 $(10,155)
 $5,062,065 
 $191,794 
 
 
 
December 31, 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
 $729,466 
 $147,573 
 $(1,729)
 $- 
 $875,310 
 $145,844 
 
    
    
    
    
    
    
Political subdivisions of States,
    
    
    
    
    
    
Territories and Possessions
  998,984 
  50,366 
  - 
  - 
  1,049,350 
  50,366 
 
    
    
    
    
    
    
Corporate and other bonds
    
    
    
    
    
    
Industrial and miscellaneous
  3,141,358 
  90,358 
  - 
  (6,300)
  3,225,416 
  84,058 
 
    
    
    
    
    
    
Total
 $4,869,808 
 $288,297 
 $(1,729)
 $(6,300)
 $5,150,076 
 $280,268 
 
Held-to-maturity U.S. Treasury securities are held in trust pursuant to various states' minimum funds requirements.
 
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of March 31, 2018 and December 31, 2017 is shown below:
 
 
 
March 31, 2018
 
 
December 31, 2017
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
Less than one year
 $123,000 
 $117,936 
 $- 
 $- 
One to five years
  2,546,338 
  2,549,597 
  2,546,459 
  2,601,898 
Five to ten years
  1,594,457 
  1,640,493 
  1,716,884 
  1,794,139 
More than 10 years
  606,476 
  754,039 
  606,466 
  754,039 
Total
 $4,870,271 
 $5,062,065 
 $4,869,808 
 $5,150,076 
 
 
12
 
 
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
 
 
 
 March 31,
 
 
 
 2018
 
 
 2017
 
Income:
 
 
 
 
 
 
Fixed-maturity securities
 $1,150,293 
 $745,453 
Equity securities
  200,497 
  136,485 
Cash and cash equivalents
  73,259 
  6,169 
Total
  1,424,049 
  888,107 
Expenses:
    
    
Investment expenses
  40,060 
  30,307 
Net investment income
 $1,383,989 
 $857,800 
 
Proceeds from the redemption of fixed-maturity securities held-to-maturity were $-0- and $200,000 for the three months ended March 31, 2018 and 2017, respectively.
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $7,891,145 and $2,706,202 for the three months ended March 31, 2018 and 2017, respectively.
 
Proceeds from the sale of equity securities were $3,378,515 and $132,091 for the three months ended March 31, 2018 and 2017, respectively.

The Company’s net losses on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 
 March 31,
 
 
 
 2018
 
 
 2017
 
Realized Losses
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
Gross realized gains
 $117,469 
 $13,123 
Gross realized losses (1)
  (334,969)
  (36,120)
 
  (217,500)
  (22,997)
 
    
    
Equity securities:
    
    
Gross realized gains
  210,558 
  - 
Gross realized losses
  (236,831)
  (31,509)
 
  (26,273)
  (31,509)
 
    
    
 Net realized losses
  (243,773)
  (54,506)
 
    
    
Unrealized Losses
    
    
 
    
    
Equity securities:
    
    
Gross gains
  - 
  - 
Gross losses
  (307,214)
  - 
 
  (307,214)
  - 
 
    
    
Other investments:
    
    
Gross gains
  27,860 
  - 
Gross losses
  - 
  - 
 
  27,860 
  - 
 
    
    
 Net unrealized losses
  (279,354)
  - 
 
    
    
Net loss on investments
 $(523,127)
 $(54,506)
 
(1) 
Gross realized losses for the three months ended March 31, 2017 include $747 of loss from the redemption of fixed-maturity securities held-to-maturity.
 
 
13
 
 
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 reviewed its equity securities portfolios prior to January 1, 2018 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 comprehensive (loss) 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 comprehensive (loss) 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 operations and comprehensive income (loss) as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. At March 31, 2018 and December 31, 2017, there were 134 and 75 securities that accounted for the gross unrealized loss, respectively. In December 2017, the Company disposed of one of its held-to-maturity debt securities that was previously included in OTTI, a 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 its first 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. In September 2017, Hurricane Maria significantly affected Puerto Rico. The impact of this event further contributed to the credit deterioration of PR and, as a result, the Company recorded an additional credit loss component of OTTI on this investment for the amount of $50,000 during the quarter ended September 30, 2017. The total of the two OTTI write-downs of this investment through December 31, 2017 was $119,911. The Company determined that none of the other unrealized losses were deemed to be OTTI for its portfolio of fixed-maturity investments, equity securities in 2017, and other investments for the three months ended March 31, 2018 and 2017. 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.
 
 
14
 
 
The Company held available-for-sale securities with unrealized losses representing declines that were considered temporary at March 31, 2018 as follows:
 
 
 
March 31, 2018
 
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and obligations of U.S.