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EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - KINGSTONE COMPANIES, INC.kins_ex32.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - KINGSTONE COMPANIES, INC.kins_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - KINGSTONE COMPANIES, INC.kins_ex311.htm
EX-23 - CONSENTS OF EXPERTS AND COUNSEL - KINGSTONE COMPANIES, INC.kins_ex23.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - KINGSTONE COMPANIES, INC.kins_ex21.htm
 

United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
 
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
36-2476480
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
15 Joys Lane, Kingston, New York
12401
(Address of principal executive offices)
(Zip Code)
 
(845) 802-7900
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock
NASDAQ
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ 
 
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
 
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 ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $54,758,366 based on the closing sale price as reported on the NASDAQ Capital Market. As of March 13, 2017, there were 10,621,367 shares of common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
None


 
 
INDEX
 
 
 
Page No.
Forward-Looking Statements
2
PART I
 
 
Item 1.
Business.
3
Item 1A.
Risk Factors.
21
Item 1B.
Unresolved Staff Comments.
21
Item 2.
Properties.
21
Item 3.
Legal Proceedings.
21
Item 4.
Mine Safety Disclosures.
21
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
22
Item 6.
Selected Financial Data.
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
63
Item 8.
Financial Statements and Supplementary Data.
63
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
63
Item 9A.
Controls and Procedures.
63
Item 9B.
Other Information.
64
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance.
65
Item 11.
Executive Compensation.
69
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
72
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
75
Item 14.
Principal Accountant Fees and Services.
75
PART IV
 
 
Item 15.
Exhibits and Financial Statement Schedules.
76
Item 16.
Form 10-K Summary.
 77
Signatures
 
78
 
 
 

1
 
 
PART I
 
Forward-Looking Statements
 
This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Annual 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, which 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 this Annual Report 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.
 
 
 
 
 
2
 
 
ITEM 1. BUSINESS.
 
(a) Business Development
 
General
 
As used in this Annual Report on Form 10-K (the “Annual Report”), references to the “Company”, “we”, “us”, or “our” refer to Kingstone Companies, Inc. (“Kingstone”) and its subsidiaries.
 
We offer property and casualty insurance products to individuals and small businesses in New York State through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO is a licensed property and casualty insurance company in New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas; however, KICO writes substantially all of its business in New York.
 
Recent Developments
 
Developments During 2017
 
 Public Offering of Common Stock
 
In January and February 2017, we sold a total of 2,692,500 newly issued shares of common stock in a public offering at a public offering price of $12.00 per share. We received net proceeds from the public offering of approximately $30,230,000 after deducting underwriting discounts and commissions, and other offering expenses. Concurrently, selling shareholders sold a total of 700,000 shares of our common stock. On March 1, 2017, we used $23,000,000 of the net proceeds from the offering to contribute capital to KICO in support of our ratings upgrade plan and anticipated growth, including geographic and product expansion. A registration statement relating to the shares that were sold was filed with the Securities and Exchange Commission and became effective in January 2017.
 
Developments During 2016
 
 Expanded Licensing to Additional State; New Jersey Rate Approval
 
In 2016, KICO expanded its ability to write property and casualty insurance by obtaining a license to write insurance policies in Rhode Island. Also in 2016, KICO’s Homeowners insurance rate, rule, and policy form filing was approved by the New Jersey Department of Banking and Insurance. We anticipate to start writing business in New Jersey in the first half of 2017.
 
 A.M. Best Rating
 
In 2016, A.M. Best revised the outlook to positive from stable for the issuer credit rating (“ICR”) of KICO. A.M. Best also affirmed KICO’s financial strength rating of B++ (Good) and ICR of “bbb”, and affirmed our ICR of “bb”.
 
 
3
 
 
  Increased Catastrophe Reinsurance Coverage
 
Effective July 1, 2016, KICO increased the top limit of its catastrophe reinsurance coverage to $252,000,000, which equates to more than a 1-in-250 year storm event according to the primary industry catastrophe model that we follow.
 
 Continued Quarterly Dividends
 
Dividends of $.0625 per share were declared on each of February 8, 2016, May 12, 2016, August 11, 2016 and November 10, 2016 and were paid on March 15, 2016, June 15, 2016, September 15, 2016, and December 15, 2016, respectively.
 
 Private Placement of Common Stock
 
In April 2016, we sold 595,238 newly issued shares of common stock to RenaissanceRe Ventures Ltd., a subsidiary of RenaissanceRe Holdings Ltd. (“RenaissanceRe”), for a purchase price of $8.40 per share. We received $4,808,000 in net proceeds from the sale. RenaissanceRe is a global provider of catastrophe and specialty reinsurance and insurance.
 
Developments During 2015
 
 Reduced Reliance on Quota Share Reinsurance
 
Effective July 1, 2015, KICO reduced the ceding percentage for its personal lines quota share reinsurance treaty from 55% to 40%. In addition, the treaty structure was changed from a ‘gross’ to a ‘net’ basis meaning that KICO now pays the entire cost of catastrophe reinsurance instead of sharing the cost and benefit of this reinsurance with quota share reinsurers. The reduction of the quota share ceding percentage allows KICO to retain a higher portion of its premiums.
 
 Implemented Electronic Content Management and Workflow System
 
In July 2015, KICO implemented Vertafore’s ImageRight® software, an insurance industry leading electronic content management and workflow system. The new software enhancement has streamlined underwriting and claims processes and created a less paper-intensive environment, allowing for greater efficiency and increased production to support KICO’s continued growth.
 
 Expanded Licensing to Additional States
 
In 2015, KICO expanded its ability to write property and casualty insurance by obtaining licenses to write insurance policies in New Jersey, Connecticut and Texas.
 
 A.M. Best Rating
 
In 2015, the A.M. Best financial strength rating for KICO was upgraded from B+ (Good) to B++ (Good).
 
 Increased Rate of Dividends Declared
 
 
4
 
 
In November 2015, we increased the quarterly dividends on our common stock from $.05 per share to $.0625 per share. Dividends of $.05 per share were declared on each of February 6, 2015, May 12, 2015 and August 11, 2015 and were paid on March 13, 2015 and June 15, 2015 and September 14, 2015, respectively. A dividend of $.0625 per share was declared on November 10, 2015 and was paid on December 14, 2015.
 
 (b) Business
 
Property and Casualty Insurance
 
Overview
 
Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers (the “insureds”). An insurance policy is a contract between the insurance company and its insureds where the insurance company agrees to pay for losses suffered by the insured that are covered under the contract. Such contracts are subject to legal interpretation by courts, sometimes involving legislative rulings and/or arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured’s property, such as a home and the personal property in it, or a business’ building, inventory and equipment. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences related to the legal liability of an individual or an organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party. Claims for property coverage generally are reported and settled in a relatively short period of time, whereas those for casualty coverage can take many years to settle.
 
We generate revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from our investment portfolio, and net realized gains and losses on investment securities. We also receive installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time can elapse between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
 
Insurance companies incur a significant amount of their total expenses from policyholder losses, which are commonly referred to as claims. In settling policyholder losses, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to producers and premium taxes, and other expenses related to the underwriting process, including their employees’ compensation and benefits.
 
The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company’s combined ratio is calculated by adding the ratio of incurred loss and LAE to earned premiums (the “loss and LAE ratio”) to the ratio of policy acquisition and other underwriting expenses to earned premiums (the “expense ratio”). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit prior to the impact of investment income. After considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can also be profitable.
 
 
5
 
 
  General; Strategy
 
 We are a property and casualty insurance holding company whose principal operating subsidiary is Kingstone Insurance Company (“KICO”), domiciled in the State of New York. We are a multi-line regional property and casualty insurance company writing business exclusively through independent retail and wholesale agents and brokers (“producers”). We are licensed to write insurance policies in New York, New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas.
 
We seek to deliver an attractive return on capital and to provide consistent earnings growth through underwriting profits and income from our investment portfolio. Our goal is to allocate capital efficiently to those lines of business that generate sustainable underwriting profits and to avoid lines of business for which an underwriting profit is not likely. Our strategy is to be the preferred multi-line property and casualty insurance company for selected producers in the geographic markets in which we operate. We believe producers place profitable business with us because we provide excellent, consistent service to policyholders and claimants and provide a consistent market with stable and competitive rate and commission structures. We offer a wide array of personal and commercial lines policies, which further differentiates us from other insurance companies that also distribute through our selected producers.
 
Our principal objectives are to increase the volume of profitable business that we write while managing risk through prudent use of reinsurance in order to preserve and grow our capital base. We seek to generate underwriting income by writing profitable insurance policies and by effectively managing our other underwriting and operating expenses. We are pursuing profitable growth by selectively expanding the geographic regions in which we operate, increasing the volume of business that we write with existing producers, developing new selected producer relationships, and introducing niche insurance products that are relevant to our producers and policyholders.
 
           For the year ended December 31, 2016, our gross written premiums totaled $103.2 million, an increase of 13.4% from the $91.0 million in gross written premium for the year ended December 31, 2015. For the year ended December 31, 2016, our gross written premiums from our continuing lines of business grew by 14.0% compared to the year ended December 31, 2015.
 
Product Lines
 
Our product lines include the following:
 
Personal lines - Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, cooperatives and condominiums, renters, equipment breakdown, service line and personal umbrella policies. Personal lines policies accounted for 76.8% of our gross written premiums for the year ended December 31, 2016.
 
Commercial liability - We offer businessowners policies which consist primarily of small business retail, service and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees.  In addition, we write special multi-peril policies for larger and more specialized businessowners risks, including those with limited residential exposures. In the fourth quarter of 2016, we began offering commercial umbrella policies written above our supporting commercial lines policies. Commercial lines policies accounted for 12.4% of our gross written premiums for the year ended December 31, 2016. 
 
 
 
6
 
 
Livery physical damage - We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included. These policies accounted for 10.6% of our gross written premiums for the year ended December 31, 2016.
 
Other - We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations. These policies accounted for 0.2% of our gross written premiums for the year ended December 31, 2016.
 
Our Competitive Strengths
 
History of Growing Our Profitable Operations
 
Our insurance company subsidiary, KICO, has been in operation in the State of New York for 130 years. We have consistently increased the volume of profitable business that we write by introducing new insurance products, increasing the volume of business that we write with our selected producers and developing new producer relationships. KICO has earned an underwriting profit in each of the past ten years, including in 2012 and 2013 when our financial results were adversely impacted by Superstorm Sandy. The extensive heritage of our insurance company subsidiary and our commitment to the markets in which we operate is a competitive advantage with producers and policyholders.
 
Strong Producer Relationships
 
Within our selected producers’ offices, we compete with other property and casualty insurance carriers available to those producers. We carefully select the producers that distribute our insurance policies and continuously monitor and evaluate their performance. We believe our insurance producers value their relationships with us because we provide excellent, consistent personal service coupled with competitive rates and commission levels. We have consistently been rated by insurance producers as above average in the important areas of underwriting, claims handling and service. In the biennial performance surveys conducted by the Professional Insurance Agents of New York and New Jersey of its membership since 2010, KICO was rated as one of the top performing insurance companies in New York, twice ranking as the top rated carrier among all those surveyed.
 
We offer our selected producers the ability to write a wide array of personal lines and commercial lines policies, including some which are unique to us. Many of our producers write multiple lines of business with us which provides an advantage over those competitors who are focused on a single product. We provide a multi-policy discount on homeowners policies in order to attract and retain more of this multi-line business. We have had a consistent presence in the New York market and we believe that producers value the longevity of our relationship with them. We believe that the excellent service we provide to our selected producers, our broad product offerings, and our consistent market presence provide a strong foundation for continued profitable growth.
 
Sophisticated Underwriting and Risk Management Practices
 
We believe that we have a significant underwriting advantage due to our local market presence and expertise. Our underwriting process evaluates and screens out certain risks based on property reports, individual insurance scoring, information collected from physical property inspections, and driving records. We maintain certain policy exclusions that reduce our exposure to risks that can create severe losses. We target a more preferred risk profile in order to reduce adverse selection from risks seeking the lowest premiums by selecting only minimal coverage levels.
 
 
7
 
 
Our underwriting procedures, premium rates and policy terms support the underwriting profitability of our personal lines policies. We apply premium surcharges for certain coastal properties and maintain deductibles for hurricane-prone exposures in order to provide an appropriate premium rate for the risk of loss. We manage coastal risk exposure through the use of individual catastrophe risk scoring and through prudent use of reinsurance.
 
Our underwriting expertise and risk management practices enable us to profitably write personal and commercial lines business in our markets without the need for frequent rate adjustments, in contrast to many of our competitors. We believe that the consistency in rates and the reliable availability of our insurance products are important factors in maintaining our selected producer relationships.
 
Effective Utilization of Reinsurance
 
Our reinsurance treaties allow us to limit our exposure to the financial impact of catastrophe losses and to reduce our net liability on individual risks. Our reinsurance program is structured to enable us to grow our premium volume while maintaining regulatory capital and other financial ratios within thresholds used for regulatory oversight purposes.
 
Our reinsurance program also provides income as a result of ceding commissions earned pursuant to the quota share reinsurance contracts. The income we earn from ceding commissions typically exceeds our fixed operating costs, which consist of other underwriting expenses. Quota share reinsurance treaties transfer a portion of the profit (or loss) associated with the subject insurance policies to the reinsurers. We believe that a prudent reduction in our reliance on quota share reinsurance could increase our overall net underwriting profits and improve our ability to obtain an upgrade to our financial strength rating from A.M. Best.
 
Experienced Management Team
 
Our management team has significant expertise in underwriting, agency management and claims management. Barry Goldstein, our Chairman and Chief Executive Officer, has extensive experience in the insurance industry and managing public companies, serving in his current capacity since 2001. Benjamin Walden, Executive Vice President and Chief Actuary of KICO, has 27 years of experience with both large and small insurance carriers and has also worked for actuarial consulting firms. Throughout his career, he has specialized in many of the markets that are a primary focus for KICO. Our underwriting and claims managers have extensive experience in the insurance industry with an average of 27 years of experience.
 
Scalable, Low-Cost Operations
 
 We focus on keeping expenses low, but invest in tools and processes that improve the efficiency and effectiveness of underwriting risks and processing claims. We evaluate the costs and benefits of each new tool or process in order to achieve optimal results. While the majority of our policies are written for risks in downstate New York, our Kingston, New York location provides a significantly lower cost operating environment. We also take a proactive approach to settling outstanding claims rather than engaging in protracted litigation, which results in more favorable claim outcomes and reduced reserve uncertainty.
 
 
8
 
 
We have made investments to develop online application and quoting systems for many of our personal lines and commercial products. Currently, 98% of the business submitted to KICO comes from online raters. This has resulted in increased business submissions from our producers due to the greater ease of placing business with us. We plan to expand these online capabilities to all lines of business. We have also leveraged a paperless workflow management and document storage tool in order to further improve efficiency and reduce costs. Our ability to control the growth of our operating and other expenses while expanding our operations and growing revenue at a higher rate is a key component of our business model and is important to our future financial success.
 
Underwriting and Claims Management Philosophy
 
Our underwriting philosophy is to target niche risk segments for which we have detailed expertise and can take advantage of market conditions. We monitor results on a regular basis and all of our selected producers are reviewed by management on a quarterly basis.
 
We believe that our rates are competitive with other carriers’ rates in our markets.  We believe that rate consistency and the reliable availability of our insurance products is important to our producers.  We do not seek to grow by competing based solely upon price.  We seek to develop long-term relationships with our selected producers who understand and appreciate the consistent path we have chosen.  We carefully underwrite our business utilizing the CLUE industry claims database, insurance scoring reports, physical inspection of risks and other individual risk underwriting tools. In the event that a material misrepresentation is discovered in the underwriting application, the policy is voided. If a material misrepresentation is discovered after a claim is presented, we deny the claim. We write homeowners and dwelling fire business in New York City and Long Island and are cognizant of our exposure to hurricanes. We have mitigated this risk through application of mandatory hurricane deductibles in these areas. Our claim and underwriting expertise enables us to profitably write personal lines business in all areas of New York City and Long Island.
 
Distribution
 
We generate business through our relationships with over 350 independent producers. We carefully select our producers by evaluating several factors such as their need for our products, premium production potential, loss history with other insurance companies that they represent, product and market knowledge, and the size of the agency. We only distribute through independent agents and have never sought to distribute our products direct to the consumer. We will not appoint any agency owned or controlled by another carrier which distributes its products direct to the consumer. We monitor and evaluate the performance of our producers through periodic reviews of volume and profitability. Our senior executives are actively involved in managing our producer relationships.
 
Each producer is assigned to a personal and commercial lines underwriter and the producer can call that underwriter directly on any matter. We believe that the close relationship with their underwriters is a principal reason producers place their business with us. Our online application and quoting systems have streamlined the process of placing business with KICO. Our producers have access to a KICO website portal that contains links to our policy applications, quoting screens, policy forms and underwriting guidelines for all lines of business. We send out frequent electronic “Producer Grams” in order to inform our producers of updates at KICO. In addition, we have an active Producer Council and have at least one annual meeting with all of our producers.
 
 
9
 
 
Competition; Market
 
The insurance industry is highly competitive. We constantly assess and project the market conditions and prices for our products, but we cannot fully know our profitability until all claims have been reported and settled.
 
Our policyholders are located primarily in New York State. Our market primarily consists of New York City, Long Island and Westchester County, which we collectively define as downstate New York. We also offer property and casualty insurance products in other areas of New York State and in the Commonwealth of Pennsylvania. In addition, we are licensed to write insurance policies in New Jersey, Connecticut, Rhode Island and Texas. KICO’s Homeowners insurance rate, rule and policy form filing was approved by the New Jersey Department of Banking and Insurance in October 2016. We anticipate we will start writing business in New Jersey in the first half of 2017. New Jersey is the eleventh largest state in the country with a current estimated population of approximately 8.9 million, according to the U.S. Census Bureau. New Jersey is the seventh largest property and casualty insurance market in the U.S., and also the tenth largest homeowners and dwelling fire insurance market in the U.S. The New Jersey homeowners market aligns well with the niche markets that have generated profitable results in New York, and we believe that our market expertise can be effectively transferred to this new market.
 
New York State is the fourth largest property and casualty insurance market in the U.S. and also the fourth largest homeowners and dwelling fire insurance market in the U.S. In 2015, KICO was the 16th largest writer of homeowners and dwelling fire insurance in the State of New York, according to data compiled by SNL Financial LC. Based on the same data, in 2015, we had a 1.0% market share for this combined group of personal lines property business. We compete with large national carriers as well as regional and local carriers in the property and casualty marketplace in New York. We believe that many national and regional carriers have chosen to limit their rate of premium growth or to decrease their presence in the downstate New York property insurance market and other similar property insurance markets in northeastern states due to the relatively high coastal population and associated catastrophe risk that exists in the region.
 
Given present market conditions, we believe that we have the opportunity to significantly expand the size of our personal and commercial lines business in both New York and in the other northeastern states in which we are licensed, beginning with New Jersey.
 
Loss and Loss Adjustment Expense Reserves
 
We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. We establish these reserves after considering all information known to us as of the date they are recorded.
 
Loss reserves fall into two categories: case reserves for reported losses and LAE associated with specific reported claims, and reserves for losses and LAE that are incurred but not reported (“IBNR”). We establish these two categories of loss reserves as follows:
 
 
10
 
 
Reserves for reported losses - When a claim is received, we establish a case reserve for the estimated amount of its ultimate settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time the claim is reported and we may subsequently increase or reduce the case reserves as additional facts and information about each claim develops.
 
IBNR reserves - We also estimate and establish reserves for loss and LAE amounts incurred but not yet reported. IBNR reserves are calculated in bulk as an estimate of ultimate losses and LAE less reported losses and LAE. There are two types of IBNR. One type includes a provision for claims that have occurred but are not yet reported or known. Another type of IBNR provides a provision for expected future development on known claims from the evaluation date until the time claims are settled and closed. Ultimate losses driving the determination of appropriate IBNR levels are projected by using generally accepted actuarial techniques.
 
The liability for loss and LAE represents our best estimate of the ultimate cost of all reported and unreported losses that are unpaid as of the balance sheet date. The liability for loss and LAE is estimated on an undiscounted basis, using individual case-basis valuations, statistical analyses and various actuarial procedures. The projection of future claim payment and reporting is based on an analysis of our historical experience, supplemented by analyses of industry loss data. We believe that the reserves for loss and LAE are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates become necessary, such adjustments are reflected in expense for the period in which the estimates are changed. Because of the nature of the business historically written, we believe that we have limited exposure to asbestos and environmental claim liabilities.
 
We engage an independent external actuarial specialist (the ‘Appointed Actuary’) to opine on our recorded statutory reserves. The Appointed Actuary estimates a range of ultimate losses, along with a range and recommended central estimate of IBNR reserve amounts. Our carried IBNR reserves are based on an internal actuarial analysis and reflect management’s best estimate of unpaid loss and LAE liabilities.
 
 
 
11
 
 
Reconciliation of Loss and Loss Adjustment Expenses
 
The table below shows the reconciliation of loss and LAE on a gross and net basis, reflecting changes in losses incurred and paid losses:
 
 
 
 Years ended
 
 
 
 December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 Balance at beginning of period
 $39,876,500 
 $39,912,683 
 Less reinsurance recoverables
  (16,706,364)
  (18,249,526)
 Net balance, beginning of period
  23,170,136 
  21,663,157 
 
    
    
 Incurred related to:
    
    
 Current year
  27,853,010 
  23,642,998 
 Prior years
  (63,349)
  (462,998)
 Total incurred
  27,789,661 
  23,180,000 
 
    
    
 Paid related to:
    
    
 Current year
  16,496,648 
  13,172,870 
 Prior years
  8,503,310 
  8,500,151 
 Total paid
  24,999,958 
  21,673,021 
  
    
    
 Net balance at end of period
  25,959,839 
  23,170,136 
 Add reinsurance recoverables
  15,776,880 
  16,706,364 
 Balance at end of period
 $41,736,719 
 $39,876,500 
 
Our claims reserving practices are designed to set reserves that, in the aggregate, are adequate to pay all claims at their ultimate settlement value.
 
Loss and Loss Adjustment Expenses Development
 
The table below shows the net loss development for business written each year from 2006 through 2016. The table reflects the changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year.
 
The next section of the table sets forth the re-estimates in later years of incurred losses, including payments for the years indicated. The following section of the table shows by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $4,370,000 as of December 31, 2006, by December 31, 2008 (two years later), $3,303,000 had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2006.
 
The “cumulative redundancy (deficiency)” represents, as of December 31, 2016, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate. Estimates for the liabilities in place as of December 31, 2014 and December 31, 2015 have both developed favorably relative to initial estimates.
 
 
12
 
 
(in thousands of $)
 
2006
 
 
2007
 
 
2008
 
 
2009
 
 
2010
 
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
Reserve for loss and loss adjustment expenses, net of reinsurance recoverables
  4,370 
  4,799 
  5,823 
  6,001 
  7,280 
  8,520 
  12,065 
  17,139 
  21,663 
  23,170 
  25,960 
Net reserve estimated as of One year later
  4,844 
  5,430 
  6,119 
  6,235 
  7,483 
  9,261 
  13,886 
  18,903 
  21,200 
  23,107 
    
Two years later
  5,591 
  5,867 
  6,609 
  6,393 
  8,289 
  11,022 
  16,875 
  18,332 
  21,501 
    
    
Three years later
  5,792 
  6,433 
  6,729 
  6,486 
  9,170 
  12,968 
  16,624 
  18,687 
    
    
    
Four years later
  6,260 
  6,569 
  6,711 
  7,182 
  10,128 
  12,552 
  16,767 
    
    
    
    
Five years later
  6,343 
  6,683 
  7,261 
  7,766 
  9,925 
  12,440 
    
    
    
    
    
Six years later
  6,429 
  7,245 
  7,727 
  7,602 
  9,932 
    
    
    
    
    
    
Seven years later
  6,886 
  7,721 
  7,554 
  7,615 
    
    
    
    
    
    
    
Eight years later
  7,318 
  7,568 
  7,511 
    
    
    
    
    
    
    
    
Nine years later
  7,160 
  7,527 
    
    
    
    
    
    
    
    
    
Ten years later
  7,069 
    
    
    
    
    
    
    
    
    
    
Net cumulative redundancy (deficiency)
  (2,699)
  (2,728)
  (1,688)
  (1,614)
  (2,652)
  (3,920)
  (4,702)
  (1,548)
  162 
  63 
    
 
    
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
(in thousands of $)
    2006 
    2007 
    2008 
    2009 
    2010 
    2011 
    2012 
    2013 
    2014 
    2015 
    2016 
Cumulative amount of reserve paid, net of reinsurance recoverable through
 
 
 
    
    
    
    
One year later
  2,018 
  1,855 
  2,533 
  2,307 
  3,201 
  3,237 
  4,804 
  6,156 
  8,500 
  8,503 
    
Two years later
  3,303 
  3,339 
  3,974 
  3,992 
  4,947 
  5,661 
  8,833 
  10,629 
  12,853 
    
    
Three years later
  4,036 
  4,339 
  5,054 
  4,659 
  6,199 
  8,221 
  11,873 
  13,571 
    
    
    
Four years later
  4,471 
  5,146 
  5,373 
  5,238 
  7,737 
  10,100 
  13,785 
    
    
    
    
Five years later
  5,079 
  5,424 
  5,717 
  5,997 
  8,585 
  10,903 
    
    
    
    
    
Six years later
  5,305 
  5,738 
  6,224 
  6,562 
  8,941 
    
    
    
    
    
    
Seven years later
  5,594 
  6,247 
  6,718 
  6,749 
    
    
    
    
    
    
    
Eight years later
  5,966 
  6,740 
  6,853 
    
    
    
    
    
    
    
    
Nine years later
  6,377 
  6,875 
    
    
    
    
    
    
    
    
    
Ten years later
  6,468 
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
Net reserve -
    
    
    
    
    
    
    
    
    
    
    
December 31,
  4,370 
  4,799 
  5,823 
  6,001 
  7,280 
  8,520 
  12,065 
  17,139 
  21,663 
  23,170 
  25,960 
* Reinsurance Recoverable
  6,523 
  6,693 
  9,766 
  10,512 
  10,432 
  9,960 
  18,420 
  17,364 
  18,250 
  16,707 
  15,777 
* Gross reserves -
    
    
    
    
    
    
    
    
    
    
    
  December 31,
  10,893 
  11,492 
  15,589 
  16,513 
  17,712 
  18,480 
  30,485 
  34,503 
  39,913 
  39,877 
  41,737 
 
    
    
    
    
    
    
    
    
    
    
    
Net re-estimated reserve
  7,069 
  7,527 
  7,511 
  7,615 
  9,932 
  12,440 
  16,767 
  18,687 
  21,501 
  23,107 
    
Re-estimated reinsurance recoverable
  11,183 
  11,151 
  12,849 
  12,833 
  13,486 
  13,884 
  27,970 
  20,218 
  19,450 
  16,674 
    
Gross re-estimated reserve
  18,252 
  18,678 
  20,360 
  20,448 
  23,418 
  26,324 
  44,737 
  38,905 
  40,951 
  39,781 
    
 
    
    
    
    
    
    
    
    
    
    
    
Gross cumulative redundancy (deficiency)
  (7,359)
  (7,186)
  (4,771)
  (3,935)
  (5,706)
  (7,844)
  (14,252)
  (4,402)
  (1,038)
  96 
    

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
 
 
13
 
 
Reinsurance
 
We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to remain within a target ratio of net premiums written to policyholders’ surplus, and to expand our underwriting capacity. Participation in reinsurance arrangements does not relieve us from our obligations to policyholders. Our reinsurance program is structured to reflect our obligations and goals. 
 
Reinsurance via quota share allows for a carrier to write business without increasing its underwriting leverage above a ratio determined by management. The business written under a quota share reinsurance structure obligates a reinsurer to assume some portion of the risks involved, and gives the reinsurer the profit (or loss) associated with such in exchange for a ceding commission.  We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance.  This will result in higher earned premiums and a reduction in ceding commission revenue in future years, but will allow us to retain more net income from our profitable business.
 
Our quota share reinsurance treaties in effect for the year ended December 31, 2016 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the July 1, 2015/June 30, 2016 treaty year (“2015/2016 Treaty”) and July 1, 2016/June 30, 2017 treaty year (“2016/2017 Treaty”). The expired 2015/2016 Treaty was at a 40% quota share percentage and the current 2016/2017 Treaty remains at a 40% quota share percentage.
 
Excess of loss contracts provide coverage for individual loss occurrences exceeding a certain threshold. The quota share reinsurance treaties inure to the benefit of our excess of loss treaties, as the maximum net retention on any single risk occurrence is first limited through the excess of loss treaty, and then that loss is shared again through the quota share reinsurance treaty. Our maximum net retention under the quota share and excess of loss treaties for any one personal lines occurrence for dates of loss on or after July 1, 2016 is $500,000. Commercial lines policies are not subject to a quota share reinsurance treaty. Our maximum net retention under the excess of loss treaties for any one commercial general liability occurrence for dates of loss on or after July 1, 2016 is $500,000.
 
We earn ceding commission revenue under the quota share reinsurance treaties based on a provisional commission rate on all premiums ceded to the reinsurers as adjusted by a sliding scale based on the ultimate treaty year loss ratios on the policies reinsured under each agreement. The sliding scale provides minimum and maximum ceding commission rates in relation to specified ultimate loss ratios.
 
Under the 2016/2017 Treaty and 2015/2016 Treaty, KICO is receiving a higher upfront fixed provisional rate than in prior years’ treaties. In exchange for the higher provisional rate, KICO has a reduced opportunity to earn sliding scale contingent commissions.
 
The 2016/2017 Treaty and the 2015/2016 Treaty are on a “net” of catastrophe reinsurance basis, as opposed to the “gross” arrangement that existed in prior treaties. Under a “net” arrangement, all catastrophe reinsurance coverage is purchased directly by us. Since we pay for all of the catastrophe coverage, none of the losses covered under a catastrophic event will be included in the quota share ceded amounts, drastically reducing the adverse impact that a catastrophic event can have on ceding commissions.
 
In 2016, we purchased catastrophe reinsurance to provide coverage of up to $252,000,000 for losses associated with a single event. One of the most commonly used catastrophe forecasting models prepared for us indicates that the catastrophe reinsurance treaties provide coverage in excess of our estimated probable maximum loss associated with a single more than one-in-250 year storm event. The direct retention for any single catastrophe event is $5,000,000. Losses on personal lines policies are subject to the 40% quota share treaty, which results in a net retention by us of $3,000,000 of exposure per catastrophe occurrence. Effective July 1, 2016, we have reinstatement premium protection on the first $20,000,000 layer of catastrophe coverage in excess of $5,000,000. This protects us from having to pay an additional premium to reinstate catastrophe coverage for an event up to this level.
 
 
14
 
 
Investments
 
Our investment portfolio, including cash and cash equivalents, and short term investments, as of December 31, 2016 and 2015, is summarized in the table below by type of investment.
 
 
 
  December 31, 2016      
 
 
  December 31, 2015      
 
 
 
 Carrying
 
 
% of
 
 
 Carrying
 
 
% of
 
 Category
 
 Value
 
 
Portfolio
 
 
 Value
 
 
Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
 $12,044,520 
  11.2%
 $13,551,372 
  15.0%
 
    
    
    
    
 Held to maturity
    
    
    
    
 U.S. Treasury securities and
    
    
    
    
 obligations of U.S. government
    
    
    
    
 corporations and agencies
  606,427 
  0.6%
  606,389 
  0.7%
 
    
    
    
    
 Political subdivisions of states,
    
    
    
    
 territories and possessions
  1,349,916 
  1.3%
  1,417,679 
  1.6%
 
    
    
    
    
 Corporate and other bonds
    
    
    
    
 Industrial and miscellaneous
  3,138,559 
  2.9%
  3,114,804 
  3.4%
 
    
    
    
    
 Available for sale
    
    
    
    
 Political subdivisions of states,
    
    
    
    
 territories and possessions
  8,205,888 
  7.6%
  12,555,098 
  13.9%
 
    
    
    
    
 Corporate and other bonds
    
    
    
    
 Industrial and miscellaneous
  53,685,189 
  49.9%
  44,956,468 
  49.7%
 
    
    
    
    
 Residential backed mortgage securities
  18,537,751 
  17.2%
  4,990,498 
  5.5%
 
    
    
    
    
 Preferred stocks
  5,685,001 
  5.3%
  2,915,650 
  3.2%
 
    
    
    
    
 Common stocks
  4,302,685 
  4.0%
  6,288,620 
  7.0%
 Total
 $107,555,936 
  100.0%
 $90,396,578 
  100.0%
 
 
15
 
 
The table below summarizes the credit quality of our fixed-maturity securities available-for-sale as of December 31, 2016 and 2015 as rated by Standard and Poor’s (or if unavailable from Standard and Poor’s, then Moody’s or Fitch):
 
 
 
December 31, 2016    
 
 
December 31, 2015    
 
 
 
 
 
 
 Percentage of
 
 
 
 
 
 Percentage of
 
 
 
 Fair Market
 
 
 Fair Market
 
 
 Fair Market
 
 
 Fair Market
 
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Rating
 
 
 
 
 
 
 
 
 
 
 
 
 U.S. Treasury securities
 $- 
  0.0%
 $- 
  0.0%
 
    
    
    
    
 Corporate and municipal bonds
    
    
    
    
 AAA
  1,801,106 
  2.2%
  2,218,147 
  3.5%
 AA
  7,236,457 
  9.0%
  9,060,781 
  14.5%
 A
  13,944,784 
  17.3%
  10,639,888 
  17.0%
 BBB
  38,908,731 
  48.4%
  35,592,750 
  57.1%
 Total corporate and municipal bonds
  61,891,078 
  76.9%
  57,511,566 
  92.1%
 
    
    
    
    
 Residential mortgage backed securities
    
    
    
    
 AA
  14,143,828 
  17.7%
  - 
  0.0%
 A
  173,973 
  0.2%
  216,077 
  0.3%
 CCC
  513,369 
  0.6%
  457,889 
  0.7%
 CC
  - 
  0.0%
  402,558 
  0.6%
 C
  112,136 
  0.1%
  - 
  0.0%
 D
  3,594,444 
  4.5%
  3,913,974 
  6.3%
 Total residential mortgage backed securities
  18,537,750 
  23.1%
  4,990,498 
  7.9%
 
    
    
    
    
 Total
 $80,428,828 
  100.0%
 $62,502,064 
  100.0%
 
Additional financial information regarding our investments is presented under the subheading “Investments” in Item 7 of this Annual Report.
 
Ratings
 
Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies with which they do business and from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. A.M. Best financial strength ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best financial strength ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors.
 
In 2009, KICO, our operating subsidiary, applied for its initial A.M. Best rating, and was assigned a letter rating of B (Fair) by A.M. Best in 2010. KICO’s financial strength rating was upgraded to B+ (Good) in 2011 and B++ (Good) in 2015. KICO’s current A.M. Best issuer credit rating is “bbb” with a positive outlook.
 
 
16
 
 
In March, 2017, we contributed $23,000,000 in capital to KICO in connection with our recently completed public offering. We also have been considering taking certain other actions, including modifying KICO’s personal lines net quota share treaty and enhancing its catastrophe excess of loss reinsurance treaties. We believe that such completed and contemplated actions could lead to an upgrade of KICO’s financial strength rating to “A- (Excellent)”. An A.M. Best financial strength rating of A- (Excellent) or better could create additional demand from new producers and policyholders. No assurances can be given, however, that we will be able to satisfy all of the conditions necessary to achieve a ratings upgrade. KICO also has a Demotech financial stability rating of A (Exceptional) which generally makes its policies acceptable to mortgage lenders that require homeowners to purchase insurance from highly rated carriers.
 
Severe Winter Weather
 
Our predominant market, downstate New York, suffered severe weather during the winters of 2016 and 2015. We include severe winter weather in our definition of catastrophe. The catastrophe component of the 2016 and 2015 severe winter was determined by the number of claims in excess of our threshold of average claims from severe winter weather. These claims were primarily from losses due to frozen pipes, weight of snow and ice, and other water-related structural damage as a result of excess snow and below normal temperatures for an extended period. The effects of severe winter weather increased our net loss ratio by 2.3 and 4.3 percentage points in 2016 and 2015, respectively.
 
The computation to determine contingent ceding commission revenue includes direct catastrophe losses and loss adjustment expenses incurred from severe winter weather. Such losses increased our ceded loss ratio in our July 1, 2014/June 30, 2015 personal lines quota share treaties which reduced our contingent ceding commission revenue by $1,300,000 million for the year ended December 31, 2015. Catastrophe losses for 2016 had no impact on our contingent ceding commission revenue since the ultimate loss ratio used to determine these commissions was not affected by the 2016 severe winter weather. Due to these impacts on ceding commission levels, the effects of severe winter weather increased our net underwriting expense ratio by 0.0 and 2.7 percentage points in 2016 and 2015, respectively.
 
Government Regulation
 
Holding Company Regulation
 
We, as the parent of KICO, are subject to the insurance holding company laws of the state of New York. These laws generally require an insurance company to register with the New York State Department of Financial Services (the “DFS”) and to furnish annually financial and other information about the operations of companies within our holding company system. Generally under these laws, all material transactions among companies in the holding company system to which KICO is a party must be fair and reasonable and, if material or of a specified category, require prior notice and approval or acknowledgement (absence of disapproval) by the DFS.
 
 
17
 
 
Change of Control
 
The insurance holding company laws of the state of New York require approval by the DFS for any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. Any future transactions that would constitute a change of control of KICO, including a change of control of Kingstone Companies, Inc., would generally require the party acquiring control to obtain the approval of the DFS (and in any other state in which KICO may operate). Obtaining these approvals may result in the material delay of, or deter, any such transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Kingstone Companies, Inc., including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
 
State Insurance Regulation
 
Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates, and in some instances to regulate unfair trade and claims practices.
 
KICO is required to file detailed financial statements and other reports with the insurance regulatory authorities in the states in which it is licensed to transact business. These financial statements are subject to periodic examination by the insurance regulators.
 
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the insurance regulatory authority. The state regulator may disapprove a plan that may lead to market disruption. Laws and regulations, including those in New York, that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of KICO to exit unprofitable markets. Such laws did not affect KICO’s ability to withdraw from the commercial auto market in New York State.
 
Federal and State Legislative and Regulatory Changes
 
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or at the present being considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (the “NAIC”).
 
In 2016, the DFS proposed new comprehensive cybersecurity regulations. In 2017, the regulations were finalized and became effective on March 1, 2017 with transitional implementation periods. When fully implemented, the regulations require covered entities, including KICO, to establish a cybersecurity policy, a chief information security officer, oversight over third party service providers, penetration and vulnerability assessments, secure systems to maintain an audit trail, risk assessments to include access privileges to nonpublic information, use of multi-factor authentication, and an incident response plan, among other provisions. KICO has until August 28, 2017 to become compliant with many of the provisions. Commencing February 15, 2018, and annually thereafter, KICO must certify compliance to the DFS with the applicable cybersecurity regulatory provisions.
 
 
18
 
 
In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that established a Federal Insurance Office (the “FIO”) within the U.S. Department of the Treasury. The FIO is initially charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. In December 2013, the FIO issued a report (as required under the Dodd-Frank Act) entitled “How to Modernize and Improve the System of Insurance Regulation in the United States” (the “Report”), which stated that, given the “uneven” progress the states have made with several near-term state reforms, should the states fail to accomplish the necessary modernization reforms in the near term, “Congress should strongly consider direct federal involvement.” The FIO continues to support the current state-based regulatory regime, but will consider federal regulation should the states fail to take steps to greater uniformity (e.g., federal licensing of insurers). In 2017, the new President indicated that the provisions of this law should be reviewed.
 
State Regulatory Examinations
 
As part of their regulatory oversight process, state regulatory authorities conduct periodic detailed examinations of the financial reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance regulators of other states under guidelines promulgated by the NAIC. The New York DFS commenced its examination of KICO in 2016. As of the date of this Annual Report, the examination is still in progress.
 
Risk-Based Capital Regulations
 
State regulatory authorities impose risk-based capital (“RBC”) requirements on insurance enterprises. The RBC Model serves as a benchmark for the regulation of insurance companies. RBC provides for targeted surplus levels based on formulas, which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company’s assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders, or other creditors (credit risk); (c) the risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and (d) the risk associated with items such as excessive premium growth, contingent liabilities, and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC (“ACL”).
 
The RBC guidelines define specific capital levels based on a company’s ACL that are determined by the ratio of the company’s total adjusted capital (“TAC”) to its ACL. TAC is equal to statutory capital, plus or minus certain other specified adjustments. KICO’s TAC is far above the ACL and is in compliance with New York’s RBC requirements as of December 31, 2016.
 
Dividend Limitations
 
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing 36 months, less dividends by KICO paid during such period.
 
 
19
 
 
Insurance Regulatory Information System Ratios
 
The Insurance Regulatory Information System (“IRIS”) was developed by the NAIC and is intended primarily to assist state insurance regulators in meeting their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.
 
As of December 31, 2016, KICO was within the usual range for all IRIS ratios.
 
Accounting Principles
 
Statutory accounting principles (“SAP”) are a basis of accounting developed by the NAIC. They are used to prepare the statutory financial statements of insurance companies and to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s policyholder surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
 
Generally accepted accounting principles (“GAAP”) is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different types and amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
 
Statutory accounting practices established by the NAIC and adopted in part by New York insurance regulators determine, among other things, the amount of statutory surplus and statutory net income of KICO and thus determine, in part, the amount of funds that are available to Kingstone Companies, Inc. from which to pay dividends.
 
Legal Structure
 
We were incorporated in 1961 and assumed the name DCAP Group, Inc. in 1999. On July 1, 2009, we changed our name to Kingstone Companies, Inc.
 
Offices
 
Our principal executive offices are located at 15 Joys Lane, Kingston, New York 12401, and our telephone number is (845) 802-7900. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business maintains an executive office located at 70 East Sunrise Highway, Valley Stream, New York 11581. Our website is www.kingstonecompanies.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report.
 
Employees
 
As of December 31, 2016, we had 80 employees all of whom are located in New York. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is good.
 
 
20
 
 
ITEM 1ARISK FACTORS.
 
Not applicable. See, however, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition” in Item 7 of this Annual Report.
 
ITEM 1BUNRESOLVED STAFF COMMENTS.
 
Not applicable.
 
ITEM 2. PROPERTIES. 
 
Our principal executive offices are currently located at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business is located principally at 15 Joys Lane, Kingston, New York 12401. Our insurance underwriting business also maintains an executive office located at 70 East Sunrise Highway, Valley Stream, New York 11581, at which we lease 4,985 square feet of space.
 
We own the building at which our insurance underwriting business principally operates, free of mortgage.
 
ITEM 3. LEGAL PROCEEDINGS.
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
 
 
21
 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 
 
Market Information
 
Our common stock is quoted on The NASDAQ Capital Market under the symbol “KINS.”
 
Set forth below are the high and low sales prices for our common stock for the periods indicated, as reported on The NASDAQ Capital Market.
 
 
 
High
 
 
Low
 
2016 Calendar Year
 
 
 
 
 
 
First Quarter
 $9.25 
 $7.21 
Second Quarter
  9.62 
  8.21 
Third Quarter
  9.39 
  8.45 
Fourth Quarter
  14.15 
  9.25 
 
 
 
High
 
 
Low
 
2015 Calendar Year
 
 
 
 
 
 
First Quarter
 $8.22 
 $7.50 
Second Quarter
  7.79 
  6.11 
Third Quarter
  9.47 
  7.49 
Fourth Quarter
  10.00 
  8.47 
 
Holders
 
As of March 13, 2017, there were approximately 263 record holders of our common stock.
 
Dividends
 
 Holders of our common stock are entitled to dividends when, as and if declared by our Board of Directors out of funds legally available. Since September 2011 and through December 31, 2016, we have paid quarterly dividends as follows:
 
Payment Date
 
  
 
 
 
 
 
September 2011 - June 2012
 $.03 
September 2012 - June 2014
 $.04 
September 2014 -September 2015
 $.05 
December 2015 - December 2016
 $.0625 
 
Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that future dividends of any kind will continue to be paid to holders of our common stock.
 
 
22
 
 
Our ability to pay dividends depends, in part, upon on the ability of KICO to pay dividends to us. KICO, as an insurance subsidiary, is subject to significant regulatory restrictions limiting its ability to declare and pay dividends. These restrictions are related to surplus and net investment income. Without the prior approval of the DFS, dividends are restricted to the lesser of 10% of surplus or 100% of investment income (on a statutory accounting basis) for the trailing 36 months, less dividends paid by KICO during such period. As of December 31, 2016, the maximum distribution that KICO could pay without prior regulatory approval was approximately $4,385,000, which is based on investment income for the trailing 36 months, net of dividends paid by KICO during such period. See “Business – Government Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity” in Items 1 and 7, respectively, of this Annual Report.
 
We declared and paid dividends on our common stock as follows:
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 Common stock dividends declared and paid
 $1,941,271 
 $1,557,398 
 
Recent Sales of Unregistered Securities
 
None.
 
Issuer Purchases of Equity Securities
 
There were no purchases of common stock made by us or any “affiliated purchaser” during the quarter ended December 31, 2016.
 
ITEM 6SELECTED FINANCIAL DATA.
 
Not applicable.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
We offer property and casualty insurance products to individuals and small businesses in New York State through our wholly owned subsidiary, Kingstone Insurance Company (“KICO”). KICO’s insureds are located primarily in downstate New York, consisting of New York City, Long Island and Westchester County. We are also licensed in the States of New Jersey, Connecticut, Pennsylvania, Rhode Island and Texas. In October 2016, a homeowners rate, rule, and form filing was approved for use by the State of New Jersey. We anticipate writing business there in the first half of 2017.
 
We derive substantially all of our revenue from KICO, which includes revenues from earned premiums, ceding commissions from quota share reinsurance, net investment income generated from its portfolio, and net realized gains and losses on investment securities. All of KICO’s insurance policies are for a one year period. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time that insurance coverage is provided (i.e., ratably over the one year life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, KICO invests the premiums, earns investment income and generates net realized and unrealized investment gains and losses on investments.
 
 
23
 
 
Our expenses include the insurance underwriting expenses of KICO and other operating expenses. Insurance companies incur a significant amount of their total expenses from losses incurred by policyholders, which are commonly referred to as claims. In settling these claims, various loss adjustment expenses (“LAE”) are incurred such as insurance adjusters’ fees and legal expenses. In addition, insurance companies incur policy acquisition costs. Policy acquisition costs include commissions paid to producers, premium taxes, and other expenses related to the underwriting process, including employees’ compensation and benefits.
 
Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees, executive employment costs, and other costs directly associated with being a public company.
 
Principal Revenue and Expense Items
 
Net premiums earned.  Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies have a term of one year. Accordingly, for a one-year policy written on July 1, 2016, we would earn half of the premiums in 2016 and the other half in 2017.
 
Ceding commission revenue.  Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured.
 
Net investment income and net realized gains (losses) on investments.  We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify equity securities as available-for-sale and our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
 
Other income.  We recognize installment fee income and fees charged to reinstate a policy after it has been cancelled for non-payment. Through March 31, 2015, we also recognized premium finance fee income on loans financed by a third party finance company.
 
Loss and loss adjustment expenses incurred.  Loss and LAE incurred represent our largest expense item, and for any given reporting period include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations, statistical analyses and actuarial procedures. We seek to establish all reserves at the most likely ultimate liability based on our historical claims experience. It is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor affecting our profitability.
 
 
24
 
 
Commission expenses and other underwriting expenses.  Other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies. Policy acquisition costs represent the costs of originating new insurance policies that vary with, and are primarily related to, the production of insurance policies (principally commissions, premium taxes and certain underwriting salaries). Policy acquisition costs are deferred and recognized as expense as the related premiums are earned. Other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees, telecommunication and technology costs, occupancy costs, employment costs, and legal and auditing fees.
 
Other operating expenses. Other operating expenses include the corporate expenses of our holding company, Kingstone Companies, Inc. These expenses include executive employment costs, legal and auditing fees, and other costs directly associated with being a public company.
 
Stock-based compensation. Non-cash equity compensation includes the fair value of stock grants issued to our directors, officers and employees, and amortization of stock options issued to the same.
 
Depreciation and amortization. Depreciation and amortization includes the amortization of intangibles related to the acquisition of KICO, depreciation of the real estate used in KICO’s operations, as well as depreciation of capital expenditures for information technology projects, office equipment and furniture.
 
Income tax expense.  We incur federal income tax expense on our consolidated operations as well as state income tax expense for our non-insurance underwriting subsidiaries.
 
Product Lines
 
Our product lines include the following:
 
Personal lines: Our largest line of business is personal lines, consisting of homeowners, dwelling fire, 3-4 family dwelling package, cooperative and condominium, renters, equipment breakdown and service line endorsements, and personal umbrella policies.
 
 Commercial liability: We offer businessowners policies, which consist primarily of small business retail, service, and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees.  In addition, we write special multi-peril policies for larger and more specialized businessowners’ risks, including those with limited residential exposures. In the fourth quarter of 2016, we began offering commercial umbrella policies written above our supporting commercial lines policies.
 
Commercial automobile: Until recently we provided liability and physical damage coverage for light commercial vehicles. However, due to the poor performance of this line, effective October 1, 2014, we decided to no longer accept new commercial auto policies. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of April 30, 2016 we had no commercial auto policies in force and we have 34 open claims remaining as of December 31, 2016.
 
 
25
 
 
Livery physical damage: We write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs. These policies insure only the physical damage portion of insurance for such vehicles, with no liability coverage included.
 
Other: We write canine legal liability policies and also have a small participation in mandatory state joint underwriting associations.
 
Key Measures
 
We utilize the following key measures in analyzing the results of our insurance underwriting business:
 
Net loss ratio: The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned.
 
Net underwriting expense ratio:  The net underwriting expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs (the most significant being commissions paid to our producers) and other underwriting expenses less ceding commission revenue less other income to net premiums earned.
 
Net combined ratio:  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net underwriting expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Underwriting income: Underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity. It excludes net investment income, net realized gains from investments, and depreciation and amortization (net premiums earned less expenses included in combined ratio). Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, depreciation and amortization, interest expense and income taxes.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements include the accounts of Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these consolidated financial statements, our management has utilized information including our past history, industry standards, and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.
 
We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred ceding commission revenue, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, intangible assets and the valuation of stock-based compensation. See Note 2 (Accounting Policies and Basis of Presentation) of the Notes to Consolidated Financial Statements following Item 15 of this Annual Report.
 
Consolidated Results of Operations
 
The following table summarizes the changes in the results of our operations for the periods indicated:
 
 
26
 
 
 
 
  Year ended December 31,
 
($ in thousands)
 
2016
 
 
2015
 
 
Change
 
 
 Percent
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Direct written premiums
 $103,192 
 $91,004 
 $12,188 
  13.4%
 Assumed written premiums
  29 
  41 
  (12)
  (29.3) %
 
  103,221 
  91,045 
  12,176 
  13.4%
 Ceded written premiums
    
    
    
    
 Ceded to quota share treaties in force during the period
  26,377 
  28,701 
  (2,324)
  (8.1) %
 Return of premiums previously ceded to prior quota share treaties (1)
  - 
  (5,866)
  5,866 
  (100.0) %
 Ceded to quota share treaties
  26,377 
  22,835 
  3,542 
  15.5%
 Ceded to excess of loss treaties
  1,389 
  1,277 
  112 
  8.8%
 Ceded to catastrophe treaties
    
    
    
    
  January 1 - June 30 (Net basis in 2016, Gross basis in 2015) (2)
  4,575 
  2,079 
  2,496 
  120.1%
  July 1 - December 31 (Net basis in 2016 and 2015) (2)
  4,954 
  4,469 
  485 
  10.9%
 Total ceded to catastrophe treaties
  9,529 
  6,548 
  2,981 
  45.5%
 
    
    
    
    
 Total ceded written premiums
  37,295 
  30,660 
 6,635
 21.6%
 
    
    
    
    
 Net written premiums
  65,926 
  60,385 
  5,541 
  9.2%
 
    
    
    
    
 Change in unearned premiums
    
    
    
    
 Direct and assumed
  (6,104)
  (8,433)
  2,329 
  (27.6) %
 Ceded to quota share treaties (1)
  1,586 
  (3,340)
  4,926 
  (147.5) %
 Change in net unearned premiums
  (4,518)
  (11,773)
  7,255 
  (61.6) %
 
    
    
    
    
 Premiums earned
    
    
    
    
 Direct and assumed
  97,116 
  82,613 
  14,503 
  17.6%
 Ceded to quota share treaties (1)
  (35,708)
  (34,001)
  (1,707)
  5.0%
 Net premiums earned
  61,408 
  48,612 
  12,796 
  26.3%
 
    
    
    
    
 Ceding commission revenue
    
    
    
    
 Excluding the effect of catastrophes
  11,268 
  12,754 
  (1,486)
  (11.7) %
 Effect of catastrophes (3)
  - 
  (1,281)
  1,281 
  (100.0) %
 Total ceding commission revenue
  11,268 
  11,473 
  (205)
  (1.8) %
 Net investment income
  3,116 
  2,564 
  552 
  21.5%
 Net realized gain (loss) on investments
  529 
  (50)
  579 
  (1,158.0) %
 Other income
  1,115 
  1,577 
  (462)
  (29.3) %
 Total revenues
  77,436 
  64,176 
  13,260 
  20.7%

(1) Effective July 1, 2015, we decreased the quota share ceding rate in our personal lines quota share treaty from 55% to 40% (the “Cut-off”). The Cut-off on July 1, 2015 resulted in a $5,866,000 return of unearned premiums from our reinsurers that were previously ceded under the personal lines quota share treaty that expired on June 30, 2015. The $5,866,000 return of premiums previously ceded reduced earned premiums under our quota share, which, in turn, increased our net premiums earned during the twelve month period after the Cut-off.
 
(2) Under a “gross” basis catastrophe reinsurance treaty, catastrophe reinsurance coverage is purchased by us only on the net written premiums after the quota share. Under a “gross” basis, catastrophe losses affect the ceded loss ratio and contingent ceding commissions from quota share reinsurance. Under a “net” basis catastrophe reinsurance treaty, all catastrophe reinsurance coverage is purchased by us directly, eliminating the impact of a catastrophe on quota share results. The “net” basis increases our ceded premium for catastrophe reinsurance. See discussion below for Net Written Premiums, Net Premiums Earned and Contingent Ceding Commissions Earned.
 
 
27
 
 
 
 
  Year ended December 31,
 
($ in thousands)
 
2016
 
 
2015
 
 
Change
 
 
 Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
  77,436 
  64,176 
  13,260 
  20.7%
 
    
    
    
    
Expenses
    
    
    
    
 Loss and loss adjustment expenses
    
    
    
    
 Direct and assumed:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  37,249 
  32,962 
  4,287 
  13.0%
 Losses from catastrophes (3)
  2,337 
  4,646 
  (2,309)
  (49.7) %
 Total direct and assumed loss and loss adjustment expenses
  39,586 
  37,608 
  1,978 
  5.3%
 
    
    
    
    
 Ceded loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  10,862 
  11,873 
  (1,011)
  (8.5) %
 Losses from catastrophes (3)
  935 
  2,555 
  (1,620)
  (63.4) %
 Total ceded loss and loss adjustment expenses
  11,797 
  14,428 
  (2,631)
  (18.2) %
 
    
    
    
    
 Net loss and loss adjustment expenses:
    
    
    
    
 Loss and loss adjustment expenses excluding the effect of catastrophes
  26,387 
  21,089 
  5,298 
  25.1%
 Losses from catastrophes (3)
  1,402 
  2,091 
  (689)
  (33.0) %
 Net loss and loss adjustment expenses
  27,789 
  23,180 
  4,609 
  19.9%
 
    
    
    
    
 Commission expense
  18,327 
  15,317 
  3,010 
  19.7%
 Other underwriting expenses
  14,867 
  12,833 
  2,034 
  15.8%
 Other operating expenses
  1,910 
  1,504 
  406 
  27.0%
 Depreciation and amortization
  1,125 
  1,032 
  93 
  9.0%
 Total expenses
  64,018 
  53,867 
  10,152 
  18.8%
 
    
    
    
    
 Income from operations before taxes
  13,418 
  10,309 
  3,109 
  30.2%
 Provision for income tax
  4,518 
  3,349 
  1,169 
  34.9%
Net income
 $8,900 
 $6,960 
 $1,940 
  27.9%
 
(3) For the year ended December 31, 2016 and 2015, includes the effects of severe winter weather (which we define as a catastrophe). We define a “catastrophe” as an event or series of related events that involve multiple first party policyholders, or an event or series of events that produce a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event or series of events.  Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, severe winter weather, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
 
 
 
Year ended December 31,
 
 
 
2016
 
 
2015
 
 
Percentage Point Change
 
 
 Percent Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 Net loss ratio
  45.3%
  47.7%
  (2.4)
  (5.0) %
 Net underwriting expense ratio
  33.9%
  32.3%
  1.6 
  5.0%
 Net combined ratio
  79.2%
  80.0%
  (0.8)
  (1.0) %
 
Direct Written Premiums
 
Direct written premiums during the year ended December 31, 2016 (“2016”) were $103,192,000 compared to $91,004,000 during the year ended December 31, 2015 (“2015”). The increase of $12,188,000, or 13.4%, was primarily due to an increase in policies in-force during 2016 as compared to 2015. We wrote more new policies as a result of continued demand for our products in the markets that we serve. Policies in-force increased by 11.7% as of December 31, 2016 compared to December 31, 2015.
 
 
28
 
 
Our growth rate in direct written premiums was dampened somewhat due to the: (1) slowing of growth in our livery physical damage line of business, and (2) suspension, effective October 1, 2014, of the writing of new policies in our commercial auto line of business due to a history of poor underwriting results. In February 2015, we made the decision to no longer offer renewals on our existing commercial auto policies beginning with those that expired on or after May 1, 2015. Our direct written premiums in our continuing lines of business grew by 14.0% in 2016 compared to 2015. Policies-in-force in our continuing lines of business increased by 12.0% as of December 31, 2016 compared to December 31, 2015.
 
Net Written Premiums and Net Premiums Earned
 
The following table details the quota share reinsurance ceding rates in effect during 2016 and 2015. For purposes of the discussion herein, the change in quota share ceding rates on July 1 of each year will be referred to as “the Cut-off”. This table should be referred to in conjunction with the discussions for net written premiums, net premiums earned, ceding commission revenue and net loss and loss adjustment expenses that follow.
 
 
 
 Year ended December 31, 2016
 
 
 Year ended December 31, 2015  
 
 
 
January 1,
 
 
July 1,
 
 
January 1,
 
 
July 1,
 
 
 
 to
 
 
 to
 
 
 to
 
 
 to
 
 
 
June 30,
 
 
December 31,
 
 
June 30,
 
 
December 31,
 
 
 
("2015/2016 Treaty")
 
 
("2016/2017 Treaty")
 
 
("2014/2015 Treaty")
 
 
("2015/2016 Treaty")  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Quota share reinsurance rates
 
 
 
 
 
 
 
 
 
 
 
 
 Personal lines
 40% 
 40% 
 55% 
 40% 
 
See “Reinsurance” below for changes to our personal lines quota share treaty effective July 1, 2016.
 
Net written premiums increased $5,541,000, or 9.2%, to $65,926,000 in 2016 from $60,385,000 in 2015. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). Our personal lines business is currently subject to a quota share treaty. A reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded written premiums, which will result in a corresponding increase to our net written premiums.
 
Change in quota share ceding rate
 
Effective July 1, 2015, we decreased the quota share ceding rate in our personal lines quota share treaty from 55% to 40%. The Cut-off of this treaty on July 1, 2015 resulted in a $5,866,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring personal lines quota share treaty. We did not change our quota share ceding rates on July 1, 2016, and accordingly, there was no return of unearned premiums from our reinsurers (in contrast with what occurred on July 1, 2015), thus diminishing the increase in net written premiums in 2016. The table below shows the effect of the $5,866,000 return of ceded premiums on net written premiums for 2015:
 
 
29
 
 
 
Year ended December 31,
($ in thousands)
 
2016
 
 
2015
 
 
Change
 
 
 Percent