Kingstone(KINS) - 2019 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1 — Financial Statements This section presents Kingstone Companies' unaudited condensed consolidated financial statements and detailed notes for the period Condensed Consolidated Balance Sheets Balance Sheet Summary (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------------- | :------------- | :---------------- | | Total assets | $277,387,935 | $266,752,078 | | Total liabilities | $193,612,764 | $178,086,436 | | Total stockholders' equity | $83,775,171 | $88,665,642 | | Loss and loss adjustment expense reserves | $69,110,271 | $56,197,106 | | Unearned premiums | $79,660,003 | $79,032,131 | - Total assets increased by approximately $10.6 million, primarily driven by an increase in total investments. Total liabilities increased significantly by approximately $15.5 million, largely due to a substantial rise in loss and loss adjustment expense reserves. Consequently, total stockholders' equity decreased by approximately $4.9 million[10] Condensed Consolidated Statements of Operations and Comprehensive Loss Statements of Operations and Comprehensive Loss (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | Change ($) | % Change | | :------------------------------------------ | :----------- | :----------- | :----------- | :------- | | Total revenues | $34,898,548 | $25,701,870 | +$9,196,678 | +35.8% | | Total expenses | $44,153,680 | $29,210,615 | +$14,943,065 | +51.2% | | Loss from operations before income taxes | $(9,255,132) | $(3,508,745) | $(5,746,387) | +163.8% | | Net loss | $(7,335,190) | $(2,717,934) | $(4,617,256) | +169.9% | | Basic Loss per common share | $(0.68) | $(0.25) | $(0.43) | +172.0% | | Diluted Loss per common share | $(0.68) | $(0.25) | $(0.43) | +172.0% | | Dividends declared and paid per common share | $0.1000 | $0.1000 | $0.0000 | 0.0% | - The company experienced a significant increase in net loss, rising by 169.9% to $(7,335,190) in Q1 2019 from $(2,717,934) in Q1 2018. This was primarily driven by a 51.2% increase in total expenses, particularly loss and loss adjustment expenses, which outpaced the 35.8% growth in total revenues. Loss per common share also worsened considerably[11] Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------------- | :------------- | :---------------- | | Total stockholders' equity | $83,775,171 | $88,665,642 | | Retained earnings | $17,969,664 | $26,380,816 | | Accumulated other comprehensive income (loss) | $442,493 | $(2,884,313) | - Total stockholders' equity decreased by $4.9 million, primarily due to a net loss of $7.3 million and dividends paid of $1.08 million, partially offset by a positive change in accumulated other comprehensive income (loss) of $3.3 million[13][14] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :-------------------------------- | :----------- | :----------- | | Net cash flows provided by operating activities | $2,702,404 | $380,373 | | Net cash flows used in investing activities | $(6,884,358) | $(15,438,163) | | Net cash flows used in financing activities | $(1,191,969) | $(1,729,676) | | Decrease in cash and cash equivalents | $(5,373,923) | $(16,787,466) | | Cash and cash equivalents, end of period | $15,764,480 | $31,594,167 | - Operating cash flows significantly increased by $2.3 million in Q1 2019 compared to Q1 2018, despite a higher net loss. Investing activities used less cash, while financing activities also used less cash, leading to a smaller overall decrease in cash and cash equivalents compared to the prior year[16] Notes to Condensed Consolidated Financial Statements Note 1 - Nature of Business and Basis of Presentation - Kingstone Companies, Inc. underwrites property and casualty insurance through its subsidiary, Kingstone Insurance Company (KICO), primarily in New York (91.4% of direct written premiums in Q1 2019) and expanding into New Jersey, Rhode Island, Massachusetts, and Connecticut[18] Note 2 – Accounting Policies - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing a right-of-use asset and corresponding lease liability of $855,000, which did not materially affect results or liquidity[23] - The company adopted SEC Release No. 33-10532, "Disclosure Update and Simplification," effective January 1, 2019, expanding disclosure requirements for stockholders' equity analysis in interim financial statements[22] - The company is evaluating the impact of ASU 2016-13 (Credit Losses) which becomes effective January 1, 2020[24] Note 3 - Investments Available-for-Sale Fixed-Maturity Securities (March 31, 2019) | Category | Amortized Cost ($) | Estimated Fair Value ($) | Net Unrealized Gains/(Losses) ($) | | :------------------------------------------------- | :------------- | :------------------- | :---------------------------- | | U.S. Treasury securities and obligations | $8,229,100 | $8,289,944 | $60,844 | | Political subdivisions of States, Territories and Possessions | $5,688,302 | $5,799,104 | $110,802 | | Corporate and other bonds (Industrial and miscellaneous) | $124,354,135 | $124,953,373 | $599,238 | | Residential mortgage and other asset backed securities | $21,648,213 | $21,434,731 | $(213,482) | | Total | $159,919,750 | $160,477,152 | $557,402 | Equity Securities (March 31, 2019 vs. December 31, 2018) | Category | Cost (Mar 2019) ($) | Fair Value (Mar 2019) ($) | Cost (Dec 2018) ($) | Fair Value (Dec 2018) ($) | | :-------------------------------- | :-------------- | :-------------------- | :-------------- | :-------------------- | | Preferred stocks | $7,882,618 | $7,889,792 | $6,694,754 | $6,152,956 | | Common stocks and exchange traded mutual funds | $11,763,863 | $11,774,195 | $11,611,232 | $10,419,660 | | Total | $19,646,481 | $19,663,987 | $18,305,986 | $16,572,616 | Net Investment Income (Three Months Ended March 31, 2019 vs. 2018) | Category | 2019 ($) | 2018 ($) | | :---------------------- | :----------- | :----------- | | Fixed-maturity securities | $1,526,870 | $1,150,293 | | Equity securities | $207,144 | $200,497 | | Cash and cash equivalents | $40,401 | $73,259 | | Investment expenses | $(150,703) | $(40,060) | | Net investment income | $1,623,712 | $1,383,989 | Net Gains (Losses) on Investments (Three Months Ended March 31, 2019 vs. 2018) | Category | 2019 ($) | 2018 ($) | | :-------------------------- | :----------- | :----------- | | Net realized losses | $(25,192) | $(243,773) | | Net unrealized gains (losses) | $2,060,555 | $(279,354) | | Net gains (losses) on investments | $2,035,363 | $(523,127) | - The company reported a significant shift from net investment losses of $(523,127) in Q1 2018 to net investment gains of $2,035,363 in Q1 2019, primarily driven by substantial unrealized gains on equity and other investments[40] Note 4 - Fair Value Measurements - The company categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[47][48][49] Fair Value Hierarchy (March 31, 2019) | Category | Level 1 ($) | Level 2 ($) | Level 3 ($) | Total ($) | | :------------------------------------------------- | :------------ | :------------ | :-------- | :------------ | | Fixed-maturity securities available-for-sale | $129,528,021 | $30,949,131 | $0 | $160,477,152 | | Equity securities | $19,663,987 | $0 | $0 | $19,663,987 | | Total investments | $149,192,008 | $30,949,131 | $0 | $180,141,139 | - As of March 31, 2019, 83% of the investment portfolio measured at fair value was priced based upon quoted market prices[218] Note 5 - Fair Value of Financial Instruments and Real Estate - The carrying values of cash and cash equivalents, premiums receivable, reinsurance receivables, and reinsurance balances payable approximate their fair values due to their short-term nature[56][57] - The fair value of the company's real estate (land and building) approximates its carrying value and is classified as a Level 3 asset based on an appraisal using the sales comparison approach[58][59] Note 6 – Property and Casualty Insurance Activity Premiums Earned (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :---------------------- | :----------- | :----------- | | Direct written premiums | $37,488,548 | $31,526,283 | | Ceded written premiums | $(7,127,909) | $(7,826,235) | | Net written premiums | $30,360,605 | $23,700,384 | | Net premiums earned | $29,595,889 | $22,837,617 | Loss and Loss Adjustment Expense Reserves (March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :-------------------------------- | :----------- | :----------- | | Balance at beginning of period | $56,197,106 | $48,799,622 | | Total incurred | $29,134,224 | $17,266,330 | | Total paid | $16,136,526 | $12,466,942 | | Balance at end of period | $69,110,271 | $56,272,113 | - Prior year incurred loss and LAE development was unfavorable by $4,478,249 in Q1 2019, compared to a favorable development of $(101,230) in Q1 2018, primarily due to increased case reserves for older open liability claims in commercial lines[63] Ceding Commission Revenue (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :-------------------------------- | :----------- | :----------- | | Provisional ceding commissions earned | $1,317,751 | $2,067,505 | | Contingent ceding commissions earned | $(40,068) | $(372,347) | | Total ceding commission revenue | $1,277,683 | $1,695,158 | - The quota share ceding rate for personal lines was reduced from 20% to 10% effective July 1, 2018, impacting ceded premiums and ceding commission revenue[82] Note 7 – Debt - KICO is a member of the FHLBNY, with an aggregate investment of $18,079 in common stock as of March 31, 2019, providing access to a credit line. The maximum allowable advance was approximately $9,849,000, with available collateral of $5,553,000 as of March 31, 2019. No borrowings were made in Q1 2019[100] Long-term Debt (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------- | :------------- | :---------------- | | 5.50% Senior Unsecured Notes | $30,000,000 | $30,000,000 | | Discount | $(121,656) | $(129,796) | | Issuance costs | $(539,048) | $(574,953) | | Long-term debt, net | $29,339,296 | $29,295,251 | - The company has $30 million in 5.50% Senior Unsecured Notes due December 30, 2022, which are unsecured obligations of the company and structurally subordinated to its subsidiaries' obligations[101] Note 8 – Stockholders' Equity Dividends Declared and Paid (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :-------------------------------- | :----------- | :----------- | | Dividends declared and paid | $1,075,962 | $1,068,375 | - Stock-based compensation expense was approximately $1,000 in Q1 2019, down from $2,000 in Q1 2018. No stock options were granted in either period[105][106] Restricted Stock Awards (March 31, 2019) | Metric | Shares | Average Grant Date Fair Value per Share ($) | Aggregate Fair Value ($) | | :-------------------------- | :------- | :------------------------------------ | :------------------- | | Balance at January 1, 2019 | 120,499 | $17.66 | $2,129,175 | | Granted | 51,242 | $17.76 | $910,058 | | Vested | (27,501) | $18.67 | $(513,446) | | Forfeited | (3,804) | $15.51 | $(59,011) | | Balance at March 31, 2019 | 140,436 | $17.58 | $2,466,776 | Note 9 – Income Taxes Deferred Tax Assets and Liabilities (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------------- | :------------- | :---------------- | | Total deferred tax assets | $4,319,977 | $4,527,960 | | Total deferred tax liabilities | $5,360,618 | $4,173,727 | | Net deferred income tax (liability) asset | $(1,040,641) | $354,233 | - The company shifted from a net deferred income tax asset of $354,233 at December 31, 2018, to a net deferred income tax liability of $(1,040,641) at March 31, 2019[118] - A valuation allowance has been recorded against state net operating loss (NOL) carryovers due to uncertainty in generating sufficient state taxable income[119] Note 10 – (Loss)/Earnings Per Common Share Weighted Average Common Shares Outstanding (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (Shares) | 2018 (Shares) | | :-------------------------------- | :----------- | :----------- | | Basic | 10,757,843 | 10,669,992 | | Diluted | 10,757,843 | 10,669,992 | - No stock options or restricted stock awards were included in the diluted EPS calculation for Q1 2019 and Q1 2018 as they would have been anti-dilutive due to the net loss[125] Note 11 - Commitments and Contingencies - The company is involved in various legal proceedings in the ordinary course of business, primarily related to claims against insureds, which are considered in estimating loss and LAE expenses. No other material adverse legal proceedings are pending[128] Operating Lease Liabilities (March 31, 2019) | For the Year Ending December 31, | Total Undiscounted Lease Payments ($) | | :------------------------------- | :-------------------------------- | | 2019 (remainder) | $128,482 | | 2020 | $175,806 | | 2021 | $181,959 | | 2022 | $188,328 | | 2023 | $194,919 | | Thereafter | $49,145 | | Total undiscounted lease payments | $918,639 | | Less: present value adjustment | $76,904 | | Operating lease liability | $841,735 | Note 12 – Deferred Compensation Plan - The company adopted a Deferred Compensation Plan in June 2018 for management and highly compensated employees, allowing deferrals and potential matching contributions. The deferred compensation liability was $440,045 as of March 31, 2019[136] Note 13 – Subsequent Events - On May 8, 2019, the Board of Directors approved a quarterly dividend of $0.10 per share, payable on June 14, 2019[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results for Q1 2019, covering operations, investments, and liquidity Overview - Kingstone Companies, Inc. (KICO) underwrites property and casualty insurance, primarily in downstate New York (91.4% of direct written premiums in Q1 2019) and expanding into other Northeast states[139] - Revenue is primarily derived from earned premiums, ceding commissions, net investment income, and investment gains/losses, while expenses include policyholder claims (losses and LAE) and policy acquisition costs[140][141] Product Lines - The company's active product lines include personal lines (homeowners, dwelling fire, etc.), commercial liability (businessowners, artisan's liability, special multi-peril, commercial umbrella), livery physical damage, and other (canine legal liability, state joint underwriting associations)[143][144][145] Key Measures - Key performance indicators include Net loss ratio (net losses and LAE to net premiums earned), Net underwriting expense ratio (acquisition costs and other underwriting expenses less ceding commission revenue and other income to net premiums earned), Net combined ratio (sum of net loss and net underwriting expense ratios), and Underwriting income (pre-tax income from insurance underwriting before investment activity)[146][148][149][150] Critical Accounting Policies and Estimates - Critical accounting policies involve significant management judgment and estimates, particularly for reserves for loss and LAE, amounts recoverable from reinsurers, deferred ceding commission revenue, deferred policy acquisition costs, deferred income taxes, impairment of investment securities, intangible assets, and stock-based compensation[151][152] Outlook - Despite disappointing Q1 results due to weather-related catastrophes and reserve re-evaluation, the company is pleased with year-over-year growth and plans to launch homeowners products in Maine in 2019[153] - For fiscal year 2019, the company expects a GAAP combined ratio (excluding catastrophe losses) between 88% and 91%, assuming no additional prior-year casualty reserve development, and anticipates catastrophe losses of approximately 4.0 to 5.0 points[153][154] Consolidated Results of Operations Consolidated Results (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | Change (in thousands of $) | % Change | | :------------------------------------------ | :----------- | :----------- | :----------- | :------- | | Total revenues | $34,899 | $25,702 | +$9,197 | +35.8% | | Total expenses | $44,154 | $29,211 | +$14,943 | +51.2% | | Loss from operations before taxes | $(9,255) | $(3,509) | $(5,746) | +163.8% | | Net loss | $(7,335) | $(2,718) | $(4,617) | +169.9% | Key Ratios (Three Months Ended March 31, 2019 vs. 2018) | Ratio | 2019 (%) | 2018 (%) | Percentage Point Change | | :-------------------------- | :----- | :----- | :---------------------- | | Net loss ratio | 98.4% | 75.6% | +22.8 | | Net underwriting expense ratio | 38.5% | 38.7% | (0.2) | | Net combined ratio | 136.9% | 114.3% | +22.6 | - The net combined ratio increased significantly to 136.9% in Q1 2019 from 114.3% in Q1 2018, primarily driven by a substantial increase in the net loss ratio[158] Direct Written Premiums Direct Written Premiums (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :---------------------- | :----------- | :----------- | | Direct written premiums | $37,489 | $31,526 | - The 18.9% increase in direct written premiums was primarily due to a 19.0% increase in policies in-force and continued demand in existing and expansion markets (New Jersey, Rhode Island, Massachusetts, Connecticut)[159][160] Net Written Premiums and Net Premiums Earned Net Written Premiums (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------------ | :----------- | :----------- | | Net written premiums | $30,361 | $23,700 | - The 28.1% increase in net written premiums was driven by growth in direct written premiums and a reduction in the personal lines quota share reinsurance rate from 20% to 10% effective July 1, 2018, leading to higher retention[164] Net Premiums Earned (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------------ | :----------- | :----------- | | Net premiums earned | $29,596 | $22,838 | Ceding Commission Revenue Ceding Commission Revenue (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :-------------------------------- | :----------- | :----------- | | Provisional ceding commissions earned | $1,318 | $2,067 | | Contingent ceding commissions earned | $(40) | $(372) | | Total ceding commission revenue | $1,278 | $1,695 | - Total ceding commission revenue decreased by 24.6% due to a reduction in the quota share ceding rate from 20% to 10% effective July 1, 2018, which decreased provisional ceding commissions[171][172] - Catastrophe losses in Q1 2019 did not impact contingent ceding commissions due to a fixed provisional ceding commission rate, unlike Q1 2018 where catastrophe losses led to a negative adjustment[174] Net Investment Income Net Investment Income (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------------ | :----------- | :----------- | | Net investment income | $1,624 | $1,384 | - The 17.4% increase in net investment income was primarily due to an increase in average invested assets, which grew by $17.6 million to $201.9 million as of March 31, 2019[176][177] Net Gains and Losses on Investments Net Gains (Losses) on Investments (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :-------------------------- | :----------- | :----------- | | Net gains (losses) on investments | $2,035 | $(523) | - The company swung from a net loss of $523,000 in Q1 2018 to a net gain of $2,035,000 in Q1 2019, driven by $2,061,000 in unrealized gains on equity and other investments[178] Other Income Other Income (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :--------- | :----------- | :----------- | | Other income | $366 | $308 | - The 18.5% increase in other income was primarily due to higher installment and other fees from insurance underwriting[179] Net Loss and LAE Net Loss and LAE (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------------ | :----------- | :----------- | | Net loss and LAE | $29,134 | $17,266 | | Net loss ratio | 98.4% | 75.6% | - The net loss ratio significantly increased by 22.8 percentage points to 98.4% in Q1 2019, primarily due to three factors: $5.1 million net impact from three winter weather catastrophe events (17.2-point impact), $4.5 million in prior year reserve strengthening (15.1-point impact), and a 14.3-point increase in the underlying loss ratio due to higher average claim severity[182][183][185] - The company initiated steps in March 2019 to improve claims operations by hiring additional staff, strengthening reserves, and changing practices[186] Commission Expense Commission Expense (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | % of Direct Earned Premiums (2019) | % of Direct Earned Premiums (2018) | | :---------------- | :----------- | :----------- | :--------------------------------- | :--------------------------------- | | Commission expense | $6,853 | $5,800 | 18.2% | 19.0% | - The 18.2% increase in commission expense was primarily due to the increase in direct earned premiums[187] Other Underwriting Expenses Other Underwriting Expenses (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :-------------------------- | :----------- | :----------- | | Other underwriting expenses | $6,136 | $5,032 | - The 21.9% increase in other underwriting expenses was mainly due to growth in direct written premiums and a 77.5% increase in professional fees for an outside review of claims practices[188] - Employment costs, the largest component, increased by 16.7% to $2,551,000, driven by additional staff and annual salary increases[189] Net Underwriting Expense Ratio Components (Three Months Ended March 31, 2019 vs. 2018) | Component | 2019 (%) | 2018 (%) | Percentage Point Change | | :------------------------------------------ | :----- | :----- | :---------------------- | | Ceding commission revenue - provisional | (4.5)% | (9.1)% | +4.6 | | Ceding commission revenue - contingent | 0.1% | 1.6% | (1.5) | | Other income | (1.1)% | (1.3)% | +0.2 | | Commission expense | 23.2% | 25.4% | (2.2) | | Other underwriting expenses (Employment costs) | 8.6% | 9.6% | (1.0) | | Other underwriting expenses (Professional fees) | 1.8% | 1.3% | +0.5 | | Other underwriting expenses (Other expenses) | 10.4% | 11.2% | (0.8) | | Net underwriting expense ratio | 38.5% | 38.7% | (0.2) | Other Operating Expenses Other Operating Expenses (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :---------------------- | :----------- | :----------- | | Other operating expenses | $972 | $247 | - The significant 293.5% increase in other operating expenses was primarily due to the absence of a decrease in accrued executive bonus compensation in Q1 2019 (compared to a decrease in Q1 2018) and increased salary and equity compensation from new executive hires[194] Depreciation and Amortization Depreciation and Amortization (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :-------------------------- | :----------- | :----------- | | Depreciation and amortization | $602 | $409 | - The 47.2% increase was mainly due to depreciation of a new system platform for expansion states and newly purchased assets for system infrastructure upgrades and home office improvements[195] Interest Expense Interest Expense (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------- | :----------- | :----------- | | Interest expense | $457 | $457 | - Interest expense remained flat at $457,000, related to the $30.0 million long-term debt issued in December 2017[196] Income Tax Expense Income Tax Benefit (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :------------------ | :----------- | :----------- | | Income tax benefit | $(1,920) | $(791) | | Effective tax rate | 20.7% | 22.5% | - The income tax benefit increased by 142.7% due to a higher loss before taxes in Q1 2019[197] Net Loss Net Loss (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (in thousands of $) | 2018 (in thousands of $) | | :--------- | :----------- | :----------- | | Net loss | $(7,335) | $(2,718) | - The net loss increased by 169.9% due to a higher net loss ratio, decreased ceding commission revenue, increased underwriting and operating expenses, and higher depreciation and amortization, partially offset by increased net premiums earned, net investment income, and net investment gains[198] Additional Financial Information Net Loss Ratio by Product Type (Three Months Ended March 31, 2019 vs. 2018) | Product Type | 2019 (%) | 2018 (%) | | :-------------------------- | :----- | :----- | | Personal lines | 87.1% | 76.1% | | Commercial lines | 185.3% | 75.8% | | Livery physical damage | 48.4% | 46.2% | | Other | 259.4% | 125.6% | | Total | 98.4% | 75.6% | - Commercial lines and "Other" product types experienced substantial increases in net loss ratios, significantly contributing to the overall rise in the total net loss ratio[200] Insurance Underwriting Business on a Standalone Basis Standalone Underwriting Results (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :------------------------------------------ | :----------- | :----------- | | Total revenues | $34,781,805 | $25,685,859 | | Total expenses | $42,701,984 | $28,507,212 | | Loss from operations | $(7,920,179) | $(2,821,353) | | Net loss | $(6,217,208) | $(2,211,073) | Key Measures (Standalone) (Three Months Ended March 31, 2019 vs. 2018) | Ratio | 2019 (%) | 2018 (%) | | :------------------------------------------ | :----- | :----- | | Net loss ratio | 98.4% | 75.6% | | Net underwriting expense ratio | 38.5% | 38.7% | | Net combined ratio | 136.9% | 114.3% | Underwriting Income (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :------------------ | :------------- | :------------- | | Underwriting income | $(10,935,321) | $(3,272,784) | Investments Portfolio Summary Available-for-Sale Fixed-Maturity Securities (March 31, 2019 vs. December 31, 2018) | Category | Fair Value (Mar 2019) ($) | % of Total (Mar 2019) | Fair Value (Dec 2018) ($) | % of Total (Dec 2018) | | :------------------------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | U.S. Treasury securities and obligations | $8,289,944 | 5.2% | $8,220,381 | 5.4% | | Political subdivisions of States, Territories and Possessions | $5,799,104 | 3.6% | $6,341,608 | 4.2% | | Corporate and other bonds (Industrial and miscellaneous) | $124,953,373 | 77.8% | $115,750,293 | 76.3% | | Residential mortgage and other asset backed securities | $21,434,731 | 13.4% | $21,465,234 | 14.1% | | Total | $160,477,152 | 100.0% | $151,777,516 | 100.0% | Equity Securities Equity Securities (March 31, 2019 vs. December 31, 2018) | Category | Fair Value (Mar 2019) ($) | % of Total (Mar 2019) | Fair Value (Dec 2018) ($) | % of Total (Dec 2018) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Preferred stocks | $7,889,792 | 40.1% | $6,152,956 | 37.1% | | Common stocks and exchange traded mutual funds | $11,774,195 | 59.9% | $10,419,660 | 62.9% | | Total | $19,663,987 | 100.0% | $16,572,616 | 100.0% | Other Investments Other Investments (March 31, 2019 vs. December 31, 2018) | Category | Fair Value (Mar 2019) ($) | Fair Value (Dec 2018) ($) | | :---------- | :-------------------- | :-------------------- | | Hedge fund | $2,147,945 | $1,855,225 | | Total | $2,147,945 | $1,855,225 | Held-to-Maturity Securities Held-to-Maturity Securities (March 31, 2019 vs. December 31, 2018) | Category | Fair Value (Mar 2019) ($) | % of Total (Mar 2019) | Fair Value (Dec 2018) ($) | % of Total (Dec 2018) | | :------------------------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | U.S. Treasury securities | $875,862 | 21.5% | $873,075 | 19.7% | | Political subdivisions of States, Territories and Possessions | $1,044,435 | 25.6% | $1,032,665 | 23.3% | | Corporate and other bonds (Industrial and miscellaneous) | $2,156,314 | 52.9% | $2,520,676 | 57.0% | | Total | $4,076,611 | 100.0% | $4,426,416 | 100.0% | Credit Rating of Fixed-Maturity Securities Credit Quality of Available-for-Sale Fixed-Maturity Securities (March 31, 2019) | Rating | Estimated Fair Value ($) | Percentage of Fair Value (%) | | :-------------------------------- | :------------------- | :----------------------- | | U.S. Treasury securities | $8,289,944 | 5.2% | | Corporate and municipal bonds (AAA-BBB) | $130,752,477 | 81.5% | | Residential mortgage backed securities (AAA-D, Non rated) | $21,434,731 | 13.3% | | Total | $160,477,152 | 100.0% | Average Yield by Fixed-Maturity Security Type (March 31, 2019 vs. December 31, 2018) | Category | 2019 (%) | 2018 (%) | | :------------------------------------------------- | :----- | :----- | | U.S. Treasury securities and obligations | 2.15% | 2.20% | | Political subdivisions of States, Territories and Possessions | 3.51% | 3.62% | | Corporate and other bonds (Industrial and miscellaneous) | 3.95% | 4.11% | | Residential mortgage and other asset backed securities | 1.98% | 1.94% | | Total | 3.58% | 3.68% | Fair Value Consideration - As of March 31, 2019, 83% of the investment portfolio recorded at fair value was priced based on quoted market prices (Level 1 and Level 2 inputs)[218] - The company held 94 fixed-maturity securities with gross unrealized losses at March 31, 2019, none of which were deemed other-than-temporarily impaired, based on management's intent and ability to hold them for recovery[222] Liquidity and Capital Resources Cash Flows Cash Flow Summary (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 ($) | 2018 ($) | | :-------------------------------- | :----------- | :----------- | | Operating activities | $2,702,404 | $380,373 | | Investing activities | $(6,884,358) | $(15,438,163) | | Financing activities | $(1,191,969) | $(1,729,676) | | Net decrease in cash and cash equivalents | $(5,373,923) | $(16,787,466) | - Operating cash flows increased significantly by $2.3 million in Q1 2019, while cash used in investing activities decreased by $8.5 million, and cash used in financing activities decreased by $0.5 million[228][229][230] - KICO paid $2,000,000 in dividends to the holding company in Q1 2019[224] Reinsurance - The company's personal lines quota share ceding rate was reduced from 20% to 10% effective July 1, 2018, following the termination of a contract with one reinsurer[233][235] - New excess of loss and catastrophe reinsurance treaties became effective July 1, 2018, with increased catastrophe loss coverage to $445,000,000 (from $315,000,000) and higher reinstatement premium protection[235][236][237] - The reinsurance program aims to support premium volume growth while maintaining regulatory capital and provides income through ceding commissions[91] Off-Balance Sheet Arrangements - The company has no material off-balance sheet arrangements that would significantly affect its financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources[244] Factors That May Affect Future Results and Financial Condition - Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results, as various factors can affect forward-looking statements[245] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to smaller reporting companies - This item is not applicable to smaller reporting companies[247] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2019, with no material changes in internal control - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2019[248][249] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[250] PART II — OTHER INFORMATION Item 1 — Legal Proceedings The company reported no legal proceedings - No legal proceedings were reported[253] Item 1A — Risk Factors No material changes to risk factors from the prior Annual Report on Form 10-K were reported - No material changes to risk factors from the prior Annual Report on Form 10-K[254] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or purchases of common stock were made by the company during the quarter ended March 31, 2019 - No unregistered sales of equity securities[255] - No purchases of common stock by the company or affiliated purchasers during the quarter[260] Item 3 — Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[256] Item 4 — Mine Safety Disclosures This item is not applicable - This item is not applicable[257] Item 5 — Other Information No other information was reported - No other information was reported[258] Item 6 — Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL-related documents - Exhibits include Restated Certificate of Incorporation, By-laws, Rule 13a-14(a)/15d-14(a) Certifications, Section 906 Certifications, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbases[261] Signatures The report was signed on May 10, 2019, by Dale A. Thatcher, Chief Executive Officer, and Victor Brodsky, Chief Financial Officer - The report was signed by Dale A. Thatcher (CEO) and Victor Brodsky (CFO) on May 10, 2019[265]