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 September 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. 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 every Interactive Data File required to be submitted 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 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
 
  
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 November 8, 2018, there were 10,743,373 shares of the registrant’s common stock outstanding.
 

 
 
 
KINGSTONE COMPANIES, INC.
INDEX
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
PART I — FINANCIAL INFORMATION
 
 
2
 
 
Item 1 —
 
Financial Statements
 
 
2
 
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2018 (Unaudited) and December 31, 2017
 
 
2
 
 
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended September 30, 2018 (Unaudited) and 2017 (Unaudited)
 
 
3
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2018 (Unaudited)
 
 
4
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 (Unaudited) and 2017 (Unaudited)
 
 
5
 
 
 
 
Notes to Condensed Consolidated Financial  Statements (Unaudited)
 
 
6
 
 
Item 2 —
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
40
 
 
Item 3 —
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
76
 
 
Item 4 —
 
Controls and Procedures
 
 
77
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
78
 
 
Item 1 —
 
Legal Proceedings
 
 
78
 
 
Item 1A —
 
Risk Factors
 
 
78
 
 
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
78
 
 
Item 3 —
 
Defaults Upon Senior Securities
 
 
78
 
 
Item 4 —
 
Mine Safety Disclosures
 
 
78
 
 
Item 5 —
 
Other Information
 
 
78
 
 
Item 6 —
 
Exhibits
 
 
79
 
Signatures
 
 
 
 
 EXHIBIT 3(a)
 EXHIBIT 3(b)
 EXHIBIT 10(a)
 EXHIBIT 10(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 within the meaning of the Private Securities Litigation Reform Act of 1995. 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 cause actual results and outcomes to differ materially from those contained in the forward-looking statements 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, except as required by law.
 
 
 
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.   
 Financial Statements.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 September 30,
 
 
 December 31,
 
 
 
2018
 
 
2017
 
 
 
 (unaudited)
 
 
 
 
 Assets
 
 
 
 
 
 
  Fixed-maturity securities, held-to-maturity, at amortized cost (fair value of
 
 
 
 
 
 
  $4,410,764 at September 30, 2018 and $5,150,076 at December 31, 2017)
 $4,222,352 
 $4,869,808 
  Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
    
    
  $144,572,834 at September 30, 2018 and $119,122,106 at December 31, 2017)
  141,360,535 
  119,988,256 
  Equity securities, at fair value (cost of $18,494,309 at September 30, 2018 and
    
    
  $13,761,841 at December 31, 2017)
  18,876,690 
  14,286,198 
 Other investments
  2,241,444 
  - 
 Total investments
  166,701,021 
  139,144,262 
 Cash and cash equivalents
  29,893,676 
  48,381,633 
 Investment subscription receivable
  - 
  2,000,000 
 Premiums receivable, net
  13,484,547 
  13,217,698 
 Reinsurance receivables, net
  25,018,461 
  28,519,130 
 Deferred policy acquisition costs
  17,123,248 
  14,847,236 
 Intangible assets, net
  755,000 
  1,010,000 
 Property and equipment, net
  5,798,042 
  4,772,577 
 Deferred income taxes
  122,003 
  - 
 Other assets
  4,476,703 
  2,655,527 
 Total assets
 $263,372,701 
 $254,548,063 
 
    
    
 Liabilities
    
    
 Loss and loss adjustment expense reserves
 $53,942,957 
 $48,799,622 
 Unearned premiums
  75,574,404 
  65,647,663 
 Advance premiums
  2,888,720 
  1,477,693 
 Reinsurance balances payable
  1,723,844 
  2,563,966 
 Deferred ceding commission revenue
  2,517,468 
  4,266,412 
 Accounts payable, accrued expenses and other liabilities
  6,108,345 
  7,487,654 
 Deferred income taxes
  - 
  600,342 
 Long-term debt, net
  29,251,206 
  29,126,965 
 Total liabilities
  172,006,944 
  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 11,729,166 shares
    
    
  at September 30, 2018 and 11,618,646 at December 31, 2017; outstanding
    
    
  10,701,727 shares at September 30, 2018 and 10,631,837 shares at December 31, 2017
  117,291 
  116,186 
  Capital in excess of par
  68,220,714 
  68,380,390 
  Accumulated other comprehensive (loss) income
  (2,595,040)
  1,100,647 
  Retained earnings
  28,335,344 
  27,152,822 
 
  94,078,309 
  96,750,045 
  Treasury stock, at cost, 1,027,439 shares at September 30, 2018
    
    
  and 986,809 shares at December 31, 2017
  (2,712,552)
  (2,172,299)
 Total stockholders' equity
  91,365,757 
  94,577,746 
 
    
    
 Total liabilities and stockholders' equity
 $263,372,701 
 $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 (Unaudited)      
 
 
For the Three Months Ended
 
 
For the Nine Months Ended
 
 
 
  September 30,      
 
 
  September 30,      
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Net premiums earned
 $27,533,907 
 $21,514,408 
 $74,476,138 
 $54,837,883 
 Ceding commission revenue
  1,044,529 
  1,717,610 
  4,430,855 
  8,208,000 
 Net investment income
  1,602,371 
  1,033,307 
  4,543,226 
  2,917,111 
 Net gains (losses) on investments
  352,025 
  20,998 
  (277,835)
  96,915 
 Other income
  353,077 
  328,330 
  961,581 
  926,189 
 Total revenues
  30,885,909 
  24,614,653 
  84,133,965 
  66,986,098 
 
    
    
    
    
 Expenses
    
    
    
    
 Loss and loss adjustment expenses
  13,296,708 
  7,073,323 
  41,739,123 
  22,821,241 
 Commission expense
  6,594,323 
  5,500,483 
  18,411,460 
  15,491,027 
 Other underwriting expenses
  5,193,679 
  4,475,455 
  15,301,168 
  12,887,488 
 Other operating expenses
  683,309 
  1,069,005 
  1,773,983 
  2,731,499 
 Depreciation and amortization
  440,383 
  378,518 
  1,273,975 
  1,023,390 
 Interest expense
  456,545 
  - 
  1,365,052 
  - 
 Total expenses
  26,664,947 
  18,496,784 
  79,864,761 
  54,954,645 
 
    
    
    
    
 Income from operations before taxes
  4,220,962 
  6,117,869 
  4,269,204 
  12,031,453 
 Income tax expense
  287,232 
  2,043,948 
  296,111 
  3,976,560 
 Net income
  3,933,730 
  4,073,921 
  3,973,093 
  8,054,893 
 
    
    
    
    
 Other comprehensive (loss) income, net of tax
    
    
    
    
 Gross change in unrealized (losses) gains
    
    
    
    
 on available-for-sale-securities
  (242,453)
  499,077 
  (4,591,699)
  1,974,946 
 
    
    
    
    
 Reclassification adjustment for losses (gains)
    
    
    
    
 included in net income
  131,978 
  (20,998)
  451,877 
  (96,915)
 Net change in unrealized (losses) gains
  (110,475)
  478,079 
  (4,139,822)
  1,878,031 
 Income tax benefit (expense) related to items
    
    
    
    
 of other comprehensive (loss) income
  12,416 
  (162,547)
  858,377 
  (638,531)
 Other comprehensive (loss) income, net of tax
  (98,059)
  315,532 
  (3,281,445)
  1,239,500 
 
    
    
    
    
 Comprehensive income
 $3,835,671 
 $4,389,453 
 $691,648 
 $9,294,393 
 
    
    
    
    
Earnings per common share:
    
    
    
    
Basic
 $0.37 
 $0.38 
 $0.37 
 $0.78 
Diluted
 $0.36 
 $0.38 
 $0.37 
 $0.77 
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
Basic
  10,681,329 
  10,626,242 
  10,672,084 
  10,307,689 
Diluted
  10,791,123 
  10,832,739 
  10,780,590 
  10,500,272 
 
    
    
    
    
Dividends declared and paid per common share
 $0.1000 
 $0.0800 
 $0.3000 
 $0.2225 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)              
Nine months ended September 30, 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
  - 
  - 
  - 
  - 
  481,812 
  - 
  - 
  - 
  - 
  481,812 
Shares deducted from exercise of stock
    
    
    
    
    
    
    
    
    
    
options for payment of withholding taxes
  - 
  - 
  (33,891)
  (337)
  (674,314)
  - 
  - 
  - 
  - 
  (674,651)
Vesting of restricted stock awards
  - 
  - 
  15,752 
  155 
  (155)
  - 
  - 
  - 
  - 
  - 
Shares deducted from restricted stock
    
    
    
    
    
    
    
    
    
    
awards for payment of withholding taxes
  - 
  - 
  (2,213)
  (24)
  (39,847)
  - 
  - 
  - 
  - 
  (39,871)
Exercise of stock options
  - 
  - 
  130,872 
  1,311 
  72,828 
  - 
  - 
  - 
  - 
  74,139 
Acquisition of treasury stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  40,630 
  (540,253)
  (540,253)
Dividends
  - 
  - 
  - 
  - 
  - 
  - 
  (3,204,813)
  - 
  - 
  (3,204,813)
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  3,973,093 
  - 
  - 
  3,973,093 
Change in unrealized losses on available-
    
    
    
    
    
    
    
    
    
    
for-sale securities, net of tax
  - 
  - 
  - 
  - 
  - 
  (3,281,445)
  - 
  - 
  - 
  (3,281,445)
Balance, September 30, 2018
  - 
 $- 
  11,729,166 
 $117,291 
 $68,220,714 
 $(2,595,040)
 $28,335,344 
  1,027,439 
 $(2,712,552)
 $91,365,757 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)    
Nine months ended September 30,
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net income
 $3,973,093 
 $8,054,893 
 Adjustments to reconcile net income to net cash flows provided by operating activities:
    
    
 Net losses (gains) on investments
  277,835 
  (96,915)
 Depreciation and amortization
  1,273,975 
  1,023,390 
 Amortization of bond premium, net
  284,204 
  405,832 
 Amortization of discount and issuance costs on long-term debt
  124,241 
  - 
 Stock-based compensation
  481,812 
  198,046 
 Deferred income tax expense
  136,032 
  322,608 
 (Increase) decrease in operating assets:
    
    
 Premiums receivable, net
  (266,849)
  (1,745,402)
 Reinsurance receivables, net
  3,500,669 
  7,226,493 
 Deferred policy acquisition costs
  (2,276,012)
  (2,142,195)
 Other assets
  (1,824,401)
  (219,189)
 Increase (decrease) in operating liabilities:
    
    
 Loss and loss adjustment expense reserves
  5,143,335 
  554,078 
 Unearned premiums
  9,926,741 
  8,448,528 
 Advance premiums
  1,411,027 
  665,029 
 Reinsurance balances payable
  (840,122)
  (333,669)
 Deferred ceding commission revenue
  (1,748,944)
  (2,898,092)
 Accounts payable, accrued expenses and other liabilities
  (1,379,309)
  1,426,188 
 Net cash flows provided by operating activities
  18,197,327 
  20,889,623 
 
    
    
 Cash flows from investing activities:
    
    
 Purchase - fixed-maturity securities available-for-sale
  (43,957,529)
  (38,612,403)
 Purchase - equity securities
  (10,357,210)
  (5,298,781)
 Sale and redemption - fixed-maturity securities held-to-maturity
  624,963 
  200,000 
 Sale or maturity - fixed-maturity securities available-for-sale
  17,740,260 
  8,385,874 
 Sale - equity securities
  5,694,121 
  2,571,122 
 Acquisition of property and equipment
  (2,044,440)
  (1,944,342)
 Net cash flows used in investing activities
  (32,299,835)
  (34,698,530)
 
    
    
 Cash flows from financing activities:
    
    
 Net proceeds from issuance of common stock
  - 
  30,136,699 
 Proceeds from exercise of stock options
  74,139 
  66,517 
 Withholding taxes paid on net exercise of stock options
  (674,651)
  - 
 Withholding taxes paid on vested retricted stock awards
  (39,871)
  (17,693)
 Purchase of treasury stock
  (540,253)
  (176,837)
 Dividends paid
  (3,204,813)
  (2,363,993)
 Net cash flows (used in) provided by financing activities
  (4,385,449)
  27,644,693 
 
    
    
 (Decrease) increase in cash and cash equivalents
 $(18,487,957)
 $13,835,786 
 Cash and cash equivalents, beginning of period
  48,381,633 
  12,044,520 
 Cash and cash equivalents, end of period
 $29,893,676 
 $25,880,306 
 
    
    
 Supplemental disclosures of cash flow information:
    
    
 Cash paid for income taxes
 $1,250,000 
 $3,936,000 
 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, 92.6% and 94.5% of KICO’s direct written premiums for the three months and nine months ended September 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 three months and nine months ended September 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, was effective for the Company 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 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 a 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 gains (losses) on investments in the condensed consolidated statements of income and comprehensive income. At December 31, 2017, equity investments were classified as available-for-sale on the Company's consolidated balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments. Furthermore, for the three months and nine months ended September 30, 2018, net gain (loss) on investments of approximately $352,000 and ($278,000), respectively, in the condensed consolidated statements of income and comprehensive income included gains of approximately $409,000 and $99,000, 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.
 
 
7
 
 
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.
 
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 “Tax 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.
 
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements. The Company anticipates its first presentation of changes in stockholders’ equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
 
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.
 
 
8
 
 
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, fair value, and unrealized gains and losses of investments in fixed-maturity securities classified as available-for-sale as of September 30, 2018 and December 31, 2017 are summarized as follows:
 
 
 
September 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
 $8,214,959 
 $- 
 $(75,222)
 $- 
 $8,139,737 
 $(75,222)
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  6,545,242 
  26,468 
  (63,596)
  (50,343)
  6,457,771 
  (87,471)
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  106,538,272 
  87,788 
  (2,461,966)
  (399,360)
  103,764,734 
  (2,773,538)
 
    
    
    
    
    
    
 Residential mortgage and other
    
    
    
    
    
    
 asset backed securities (1)
  23,274,361 
  288,079 
  (99,954)
  (464,193)
  22,998,293 
  (276,068)
 Total
 $144,572,834 
 $402,335 
 $(2,700,738)
 $(913,896)
 $141,360,535 
 $(3,212,299)
 
(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 September 30, 2018, the fair value of the eligible investments was approximately $5,790,000. KICO will retain all rights regarding all securities if pledged as collateral. As of September 30, 2018, there was no outstanding balance on the FHLBNY 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 FHLBNY 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 September 30, 2018 and December 31, 2017 is shown below:
 
 
 
September 30, 2018
 
 
December 31, 2017
 
 
 
Amortized
 
 
 
 
 
Amortized
 
 
 
 
 Remaining Time to Maturity
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Less than one year
 $1,689,356 
 $1,683,350 
 $2,585,479 
 $2,595,938 
 One to five years
  39,607,252 
  39,173,793 
  31,716,345 
  32,065,197 
 Five to ten years
  77,027,918 
  74,706,819 
  62,702,945 
  63,129,543 
 More than 10 years
  2,973,947 
  2,798,280 
  1,653,984 
  1,666,230 
 Residential mortgage and other asset backed securities
  23,274,361 
  22,998,293 
  20,463,353 
  20,531,348 
 Total
 $144,572,834 
 $141,360,535 
 $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 September 30, 2018 being reported in net income instead of being reported in comprehensive income. See Note 2, Accounting Policies, for additional discussion. The cost, fair value, and gross gains and losses of investments in equity securities as of September 30, 2018 and December 31, 2017 are as follows:
 
 
 
September 30, 2018
 
  
 
 
 
 
 Gross
 
 
 Gross
 
 
 Fair
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $6,865,381 
 $20,121 
 $(188,302)
 $6,697,200 
 Common stocks and exchange
    
    
    
    
 traded mutual funds
  11,628,928 
  1,131,212 
  (580,650)
  12,179,490 
 Total
 $18,494,309 
 $1,151,333 
 $(768,952)
 $18,876,690 
 
 
 
December 31, 2017
 
  
 
 
 
 
 Gross
 
 
 Gross
 
 
 Fair
 
 Category
 
 Cost
 
 
 Gains
 
 
 Losses
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Preferred stocks
 $7,081,099 
 $60,867 
 $(141,025)
 $7,000,941 
 Common stocks and exchange
    
    
    
    
 traded mutual funds
  6,680,742 
  841,250 
  (236,735)
  7,285,257 
 Total
 $13,761,841 
 $902,117 
 $(377,760)
 $14,286,198 
 
Other Investments
 
The cost, fair value, and gross gains of the Company’s other investments as of September 30, 2018 and December 31, 2017 are as follows:
 
 
 
September 30, 2018        
 
 
December 31, 2017        
 
 
 
 
 
 
 Gross
 
 
 Fair
 
 
 
 
 
 Gross
 
 
 Fair
 
 Category
 
 Cost
 
 
 Gains
 
 
 Value
 
 
 Cost
 
 
 Gains
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Hedge fund
 $2,000,000 
 $241,444 
 $2,241,444 
 $- 
 $- 
 $- 
 Total
 $2,000,000 
 $241,444 
 $2,241,444 
 $- 
 $- 
 $- 
 
 
 
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 September 30, 2018 and December 31, 2017 are summarized as follows:
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
   
   
 
 Gross Unrealized Losses
 
 
 
 
   
 
 
Cost or Amortized
 
 
Gross Unrealized
 
 
 Less
than 12
 
 
 More
than 12
 
 
 Fair
 
 
Net
Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains/(Losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Held-to-Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $729,496 
 $147,543 
 $(7,649)
 $- 
 $869,390 
 $139,894 
 
    
    
    
    
    
    
 Political subdivisions of States,
    
    
    
    
    
    
 Territories and Possessions
  998,852 
  24,393 
  - 
  - 
  1,023,245 
  24,393 
 
    
    
    
    
    
    
 Corporate and other bonds
    
    
    
    
    
    
 Industrial and miscellaneous
  2,494,004 
  36,835 
  (5,100)
  (7,610)
  2,518,129 
  24,125 
 
    
    
    
    
    
    
 Total
 $4,222,352 
 $208,771 
 $(12,749)
 $(7,610)
 $4,410,764 
 $188,412 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
   
   
 
 Gross Unrealized Losses
 
 
 
 
   
 
 
  Cost or Amortized
 
 
Gross Unrealized
 
 
 Less
than 12
 
 
 More
than 12
 
 
 Fair
 
 
Net
Unrealized
 
 Category
 
 Cost
 
 
 Gains
 
 
 Months
 
 
 Months
 
 
 Value
 
 
 Gains/(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 September 30, 2018 and December 31, 2017 is shown below:
 
 
 
September 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
  2,996,308 
  3,030,709 
  2,546,459 
  2,601,898 
 Five to ten years
  619,548 
  626,016 
  1,716,884 
  1,794,139 
 More than 10 years
  606,496 
  754,039 
  606,465 
  754,039 
 Total
 $4,222,352 
 $4,410,764 
 $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
 
 
 Nine months ended
 
 
 
 September 30,
 
 
 September 30,
 
 
 
 2018
 
 
 2017
 
 
 2018
 
 
 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Income:
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities
 $1,386,931 
 $926,170 
 $3,898,730 
 $2,607,166 
 Equity securities
  214,498 
  143,826 
  609,086 
  408,812 
 Cash and cash equivalents
  44,024 
  5,772 
  159,865 
  14,446 
 Total
  1,645,453 
  1,075,768 
  4,667,681 
  3,030,424 
 Expenses:
    
    
    
    
 Investment expenses
  43,082 
  42,461 
  124,455 
  113,313 
 Net investment income
 $1,602,371 
 $1,033,307 
 $4,543,226 
 $2,917,111 
 
Proceeds from the sale and redemption of fixed-maturity securities held-to-maturity were $624,963 and $200,000 for the nine months ended September 30, 2018 and 2017, respectively.
 
Proceeds from the sale or maturity of fixed-maturity securities available-for-sale were $17,740,260 and $8,385,874 for the nine months ended September 30, 2018 and 2017, respectively.
 
Proceeds from the sale of equity securities were $5,694,121 and $2,571,122 for the nine months ended September 30, 2018 and 2017, respectively.
 
 
13
 
 
The Company’s net gains (losses) on investments are summarized as follows:
 
 
 
 Three months ended
 
 
 Nine months ended
 
 
 
 September 30,
 
 
 September 30,
 
 
 
 2018
 
 
 2017
 
 
 2018
 
 
 2017
 
 Realized (Losses) Gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 Gross realized gains
 $4,750 
 $5,542 
 $116,961 
 $67,260 
 Gross realized losses (1)
  (77,192)
  (56,783)
  (560,418)
  (167,340)
 
  (72,442)
  (51,241)
  (443,457)