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, 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 August 9, 2018, there were 10,663,599 shares of the registrant’s common stock outstanding.

 
 
 
KINGSTONE COMPANIES, INC.
INDEX
 
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
2
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
6
 
 
 
 
 
 
39
 
 
 
 
 
 
75
 
 
 
 
 
 
76
 
 
 
 
 
 
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
77
 
 
 
 
 
 
78
 
 
 
 
 
  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
 
 
 
 
 
 
 
 
 June 30,
 
 
 December 31,
 
 
 
2018
 
 
2017
 
 
 
 (unaudited)
 
 
 
 
 Assets
 
 
 
 
 
 
Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
$5,033,545 at June 30, 2018 and $5,150,076 at December 31, 2017)
 $4,870,743 
 $4,869,808 
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
$145,707,769 at June 30, 2018 and $119,122,106 at December 31, 2017)
  142,545,533 
  119,988,256 
Equity securities, at fair value (cost of $17,291,038 at June 30, 2018 and
    
    
$13,761,841 at December 31, 2017)
  17,384,984 
  14,286,198 
Other investments
  2,120,700 
  - 
Total investments
  166,921,960 
  139,144,262 
Cash and cash equivalents
  19,387,971 
  48,381,633 
Investment subscription receivable
  - 
  2,000,000 
Premiums receivable, net
  14,337,192 
  13,217,698 
Reinsurance receivables, net
  27,892,404 
  28,519,130 
Deferred policy acquisition costs
  16,071,756 
  14,847,236 
Intangible assets, net
  840,000 
  1,010,000 
Property and equipment, net
  5,456,563 
  4,772,577 
Deferred income taxes
  429,459 
  - 
Other assets
  4,052,494 
  2,655,527 
 Total assets
 $255,389,799 
 $254,548,063 
 
    
    
 Liabilities
    
    
Loss and loss adjustment expense reserves
 $49,257,856 
 $48,799,622 
Unearned premiums
  71,139,929 
  65,647,663 
Advance premiums
  2,831,829 
  1,477,693 
Reinsurance balances payable
  4,185,624 
  2,563,966 
Deferred ceding commission revenue
  4,759,134 
  4,266,412 
Accounts payable, accrued expenses and other liabilities
  5,281,458 
  7,487,654 
Deferred income taxes
  - 
  600,342 
Long-term debt, net
  29,207,161 
  29,126,965 
 Total liabilities
  166,662,991 
  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 11,685,904 shares
    
    
at June 30, 2018 and 11,618,646 at December 31, 2017; outstanding
    
    
10,661,460 shares at June 30, 2018 and 10,631,837 shares at December 31, 2017
  116,859 
  116,186 
Capital in excess of par
  68,347,784 
  68,380,390 
Accumulated other comprehensive (loss) income
  (2,496,981)
  1,100,647 
Retained earnings
  25,471,668 
  27,152,822 
 
  91,439,330 
  96,750,045 
Treasury stock, at cost, 1,024,444 shares at June 30, 2018
    
    
and 986,809 shares at December 31, 2017
  (2,712,522)
  (2,172,299)
 Total stockholders' equity
  88,726,808 
  94,577,746 
 
    
    
 Total liabilities and stockholders' equity
 $255,389,799 
 $254,548,063 
 
See accompanying notes to condensed consolidated financial statements.
_________________________________________________________________________________________________________
 
 
2
 
 
  KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)
 
 
For the Three Months Ended
 
 
For the Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Net premiums earned
 $24,104,614 
 $16,953,727 
 $46,942,231 
 $33,323,475 
 Ceding commission revenue
  1,691,168 
  3,305,938 
  3,386,326 
  6,490,390 
 Net investment income
  1,556,866 
  1,026,004 
  2,940,855 
  1,883,804 
 Net (losses) gains on investments
  (106,733)
  130,423 
  (629,860)
  75,917 
 Other income
  300,271 
  308,159 
  608,504 
  597,859 
 Total revenues
  27,546,186 
  21,724,251 
  53,248,056 
  42,371,445 
 
    
    
    
    
 Expenses
    
    
    
    
 Loss and loss adjustment expenses
  11,176,085 
  7,454,922 
  28,442,415 
  15,747,918 
 Commission expense
  6,017,189 
  5,101,566 
  11,817,137 
  9,990,544 
 Other underwriting expenses
  5,075,986 
  4,199,616 
  10,107,489 
  8,412,033 
 Other operating expenses
  843,816 
  906,690 
  1,090,674 
  1,662,494 
 Depreciation and amortization
  424,161 
  326,174 
  833,592 
  644,872 
 Interest expense
  451,962 
  - 
  908,507 
  - 
 Total expenses
  23,989,199 
  17,988,968 
  53,199,814 
  36,457,861 
 
    
    
    
    
 Income from operations before taxes
  3,556,987 
  3,735,283 
  48,242 
  5,913,584 
 Income tax expense
  799,690 
  1,224,891 
  8,879 
  1,932,612 
 Net income
  2,757,297 
  2,510,392 
  39,363 
  3,980,972 
 
    
    
    
    
Other comprehensive (loss) income, net of tax
 
    
    
    
    Gross change in unrealized (losses) gains
 
    
    
    
on available-for-sale-securities
  (1,475,767)
  951,047 
  (4,349,246)
  1,475,869 
 
    
    
    
    
Reclassification adjustment for (losses) gains
    
    
    
    
included in net income
  76,126 
  (130,423)
  319,899 
  (75,917)
Net change in unrealized (losses) gains
  (1,399,641)
  820,624 
  (4,029,347)
  1,399,952 
    Income tax benefit (expense) related to items
 
    
    
    
of other comprehensive (loss) income
  293,723 
  (279,012)
  845,961 
  (475,984)
Other comprehensive (loss) income, net of tax
  (1,105,918)
  541,612 
  (3,183,386)
  923,968 
 
    
    
    
    
Comprehensive income (loss)
 $1,651,379 
 $3,052,004 
 $(3,144,023)
 $4,904,940 
 
    
    
    
    
Earnings per common share:
    
    
    
    
Basic
 $0.26 
 $0.24 
 $0.00 
 $0.39 
Diluted
 $0.25 
 $0.23 
 $0.00 
 $0.39 
 
    
    
    
    
Weighted average common shares outstanding
 
    
    
    
Basic
  10,664,806 
  10,622,496 
  10,667,385 
  10,145,772 
Diluted
  10,820,322 
  10,822,577 
  10,828,020 
  10,337,213 
 
    
    
    
    
Dividends declared and paid per common share
 $0.1000 
 $0.0800 
 $0.2000 
 $0.1425 
____________________________________________________________________________________________________
 
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, 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
  - 
  - 
  - 
  - 
  284,477 
  - 
  - 
  - 
  - 
  284,477 
Shares deducted from exercise of stock
    
    
    
    
    
    
    
    
    
    
options for payment of withholding taxes
  - 
  - 
  (15,750)
  (158)
  (341,612)
  - 
  - 
  - 
  - 
  (341,770)
Vesting of restricted stock awards
  - 
  - 
  10,886 
  109 
  (109)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
  - 
  - 
  (1,154)
  (14)
  (21,509)
  - 
  - 
  - 
  - 
  (21,523)
Exercise of stock options
  - 
  - 
  73,276 
  736 
  46,147 
  - 
  - 
  - 
  - 
  46,883 
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  37,635 
  (540,223)
  (540,223)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (2,134,759)
  - 
  - 
  (2,134,759)
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  39,363 
  - 
  - 
  39,363 
Change in unrealized losses on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  (3,183,386)
  - 
  - 
  - 
  (3,183,386)
Balance, June 30, 2018
  - 
 $- 
  11,685,904 
 $116,859 
 $68,347,784 
 $(2,496,981)
 $25,471,668 
  1,024,444 
 $(2,712,522)
 $88,726,808 
____________________________________________________________________________________________________________________________________________
 
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,
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net income
 $39,363 
 $3,980,972 
 Adjustments to reconcile net income to net cash flows provided by operating activities:
    
    
Net losses (gains) on investments
  629,860 
  (75,917)
Depreciation and amortization
  833,592 
  644,872 
Amortization of bond premium, net
  174,110 
  258,269 
Amortization of discount and issuance costs on long-term debt
  80,196 
  - 
Stock-based compensation
  284,477 
  127,768 
Deferred income tax benefit
  (183,840)
  (303,093)
 (Increase) decrease in operating assets:
    
    
Premiums receivable, net
  (1,119,494)
  (1,476,679)
Reinsurance receivables, net
  626,726 
  (2,346,078)
Deferred policy acquisition costs
  (1,224,520)
  (1,044,884)
Other assets
  (1,400,192)
  173,510 
 Increase (decrease) in operating liabilities:
    
    
Loss and loss adjustment expense reserves
  458,234 
  2,459,857 
Unearned premiums
  5,492,266 
  4,040,470 
Advance premiums
  1,354,136 
  748,419 
Reinsurance balances payable
  1,621,658 
  657,922 
Deferred ceding commission revenue
  492,722 
  377,125 
Accounts payable, accrued expenses and other liabilities
  (2,206,196)
  (849,674)
 Net cash flows provided by operating activities
  5,953,098 
  7,372,859 
 
    
    
 Cash flows from investing activities:
    
    
 Purchase - fixed-maturity securities available-for-sale
  (42,305,529)
  (36,818,402)
 Purchase - equity securities
  (8,221,931)
  (2,275,929)
 Sale and redemption - fixed-maturity securities held-to-maturity
  - 
  200,000 
 Sale or maturity - fixed-maturity securities available-for-sale
  15,172,845 
  5,732,151 
 Sale - equity securities available-for-sale
  4,746,825 
  798,973 
 Acquisition of fixed assets
  (1,347,578)
  (1,301,850)
 Net cash flows used in investing activities
  (31,955,368)
  (33,665,057)
 
    
    
 Cash flows from financing activities:
    
    
 Net proceeds from issuance of common stock
  - 
  30,136,699 
 Proceeds from exercise of stock options
  46,883 
  39,361 
 Withholding taxes paid on net exercise of stock options
  (341,770)
  - 
 Withholding taxes paid on vested retricted stock awards
  (21,523)
  (8,888)
 Purchase of treasury stock
  (540,223)
  (48,396)
 Dividends paid
  (2,134,759)
  (1,513,633)
 Net cash flows (used in) provided by financing activities
  (2,991,392)
  28,605,143 
 
    
    
 (Decrease) increase in cash and cash equivalents
 $(28,993,662)
 $2,312,945 
 Cash and cash equivalents, beginning of period
  48,381,633 
  12,044,520 
 Cash and cash equivalents, end of period
 $19,387,971 
 $14,357,465 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $801,000 
 $1,762,000 
 Cash paid for interest
 $875,417 
 $- 
_____________________________________________________________________________________
 
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, Rhode Island, Massachusetts, Pennsylvania, Connecticut, Maine, New Hampshire and Texas. KICO is currently offering its property and casualty insurance products in New York, New Jersey, Rhode Island, Massachusetts and Pennsylvania. Although New Jersey, Rhode Island and Massachusetts are now growing expansion markets for the Company, 94.1% and 95.4% of KICO’s direct written premiums for the three months and six months ended June 30, 2018, respectively, came from the New York policies.
 
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 six months ended June 30, 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. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance. Accordingly, the adoption of ASU 2014-09, as amended, did not have a material impact on the Company’s condensed consolidated financial statements.
 
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, including limited partnership interests, 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 for equity 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 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 income 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 three months and six months ended June 30, 2018 net loss on investments of approximately $107,000 and $630,000, respectively, in the condensed consolidated statements of income and comprehensive income (loss) included approximately $30,000 and $310,000, respectively, from the fair value change of equity securities.
 
In August 2016, FASB issued ASU 2016-15 – Statement of Cash Flows (Topic 320): 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. The effective date of ASU 2016-15 was 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.
 
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 was 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 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.
 
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 
 
Fixed-Maturity Securities
 
The amortized cost, fair value, and unrealized gains and losses of investments in fixed-maturity securities classified as available-for-sale as of June 30, 2018 and December 31, 2017 are summarized as follows:
 
 
 
June 30, 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
 $8,207,870 
 $9,970 
 $(40,264)
 $- 
 $8,177,576 
 $(30,294)
 
    
    
    
    
    
    
 
Political subdivisions of States,
 
    
    
    
    
    
 Territories and Possessions
  6,575,843 
  39,481 
  (55,324)
  (28,074)
  6,531,926 
  (43,917)
 
    
    
    
    
    
    
 
Corporate and other bonds
 
    
    
    
    
    
 Industrial and miscellaneous
  107,013,925 
  111,659 
  (2,617,680)
  (377,166)
  104,130,738 
  (2,883,187)
 
    
    
    
    
    
    
 
Residential mortgage and other
 
    
    
    
    
    
 asset backed securities (1)
  23,910,131 
  306,272 
  (159,886)
  (351,224)
  23,705,293 
  (204,838)
 Total
 $145,707,769 
 $467,382 
 $(2,873,154)
 $(756,464)
 $142,545,533 
 $(3,162,236)
 
(1)
In 2017, KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in 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 June 30, 2018, the fair value of the eligible investments was approximately $6,083,000. KICO will retain all rights regarding all securities if pledged as collateral. As of June 30, 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 membership in 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 June 30, 2018 and December 31, 2017 is shown below:
 
 
 
June 30, 2018
 
 
December 31, 2017
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $1,203,463 
 $1,200,051 
 $2,585,479 
 $2,595,938 
 One to five years
  38,902,149 
  38,568,541 
  31,716,345 
  32,065,197 
 Five to ten years
  78,718,637 
  76,286,658 
  62,702,945 
  63,129,543 
 More than 10 years
  2,973,389 
  2,784,990 
  1,653,984 
  1,666,230 
 Residential mortgage and other asset backed securities
  23,910,131 
  23,705,293 
  20,463,353 
  20,531,348 
 Total
 $145,707,769 
 $142,545,533 
 $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
 
Effective January 1, 2018, the Company adopted ASU 2016-01, which resulted in changes in the fair value of equity securities held at June 30, 2018 being reported in net income instead of being reported in comprehensive income (loss). See Note 2, Accounting Policies, for additional discussion. The cost, fair value, and unrealized gains and losses of investments in equity securities as of June 30, 2018 and December 31, 2017 are as follows:
 
 
 
 
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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
 $6,792,075 
 $25,774 
 $(43,333)
 $(114,138)
 $6,660,378 
 $(131,697)
 Common stocks and exchange
    
    
    
    
    
    
traded mutual funds
  10,498,963 
  662,490 
  (436,847)
  - 
  10,724,606 
  225,643 
 Total
 $17,291,038 
 $688,264 
 $(480,180)
 $(114,138)
 $17,384,984 
 $93,946 
 
 
 
 
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, fair value, and unrealized gains and losses of the Company’s other investments as of June 30, 2018 and December 31, 2017 are as follows:
 
 
 
 
June 30, 2018
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 
 
 
 
 Fair
 
 
 Unrealized
 
 Category
 
 Cost
 
 
 Value
 
 
 Gain
 
 
 Cost
 
 
 Value
 
 
 Gain
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Hedge fund
 $2,000,000 
 $2,120,700 
 $120,700 
 $- 
 $- 
 $- 
 Total
 $2,000,000 
 $2,120,700 
 $120,700 
 $- 
 $- 
 $- 
 
 
11
 
 
Held-to-Maturity Securities
 
The amortized cost, fair value, and unrealized gains and losses of investments in held-to-maturity fixed-maturity securities as of June 30, 2018 and December 31, 2017 are summarized as follows:
 
 
 
June 30, 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)
 
 
 
 
 
 Held-to-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,486 
 $147,553 
 $(5,934)
 $- 
 $871,105 
 $141,619 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,898 
  32,522 
  - 
  - 
  1,031,420 
  32,522 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  3,142,359 
  33,076 
  (38,765)
  (5,650)
  3,131,020 
  (11,339)
 
    
    
    
    
    
    
 Total
 $4,870,743 
 $213,151 
 $(44,699)
 $(5,650)
 $5,033,545 
 $162,802 
 
 
 
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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Held-to-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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.
 
 
12
 
 
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, 2018 and December 31, 2017 is shown below:
 
 
 
June 30, 2018
 
 
December 31, 2017
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $- 
 $- 
 $- 
 $- 
 One to five years
  3,398,823 
  3,398,780 
  2,546,459 
  2,601,898 
 Five to ten years
  865,434 
  880,726 
  1,716,884 
  1,794,139 
 More than 10 years
  606,486 
  754,039 
  606,466 
  754,039 
 Total
 $4,870,743 
 $5,033,545 
 $4,869,808 
 $5,150,076 
 
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,
 
 
 
 2018
 
 
 2017
 
 
 2018
 
 
 2017
 
 
 
 
 
 
 
 
 Income:
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities
 $1,361,506 
 $935,543 
 $2,511,799 
 $1,680,996 
 Equity securities
  194,091 
  128,501 
  394,588 
  264,986 
 Cash and cash equivalents
  42,582 
  2,505 
  115,841 
  8,674 
 Total
  1,598,179 
  1,066,549 
  3,022,228 
  1,954,656 
 Expenses:
    
    
    
    
 Investment expenses
  41,313 
  40,545 
  81,373 
  70,852 
 Net investment income
 $1,556,866 
 $1,026,004 
 $2,940,855 
 $1,883,804 
 
Proceeds from the redemption of fixed-maturity securities held-to-maturity were $-0- and $200,000 for the six months ended June 30, 2018 and 2017, respectively.
 
Proceeds from the sale and maturity of fixed-maturity securities available-for-sale were $15,172,845 and $5,732,151 for the six months ended June 30, 2018 and 2017, respectively.
 
Proceeds from the sale of equity securities were $4,746,825 and $798,973 for the six months ended June 30, 2018 and 2017, respectively.
 
 
13
 
 
The Company’s net (losses) gains on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 Six months ended
 
 
 
 June 30,
 
 
 June 30,