Kingstone(US:KINS)2023-11-20 20:52PART I — FINANCIAL INFORMATION This section presents the Company's unaudited condensed consolidated financial statements and related notes Item 1 — Financial Statements Unaudited condensed consolidated financial statements and notes for Kingstone Companies, Inc. are presented for Q3 2023 Condensed Consolidated Balance Sheets The balance sheets provide a snapshot of the Company's assets, liabilities, and stockholders' equity at period-end Condensed Consolidated Balance Sheets | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :----------------------------------- | :----------------------- | :----------- | | Assets | | | | Total investments | $156,961,693 | $179,087,345 | | Cash and cash equivalents | $15,132,969 | $11,958,228 | | Total assets | $316,988,261 | $320,332,531 | | Liabilities | | | | Loss and loss adjustment expense reserves | $121,674,947 | $118,339,513 | | Unearned premiums | $103,161,550 | $107,492,777 | | Total liabilities | $290,459,400 | $284,163,099 | | Stockholders' Equity | | | | Total stockholders' equity | $26,528,861 | $36,169,432 | Condensed Consolidated Statements of Operations and Comprehensive Loss Statements of operations and comprehensive loss detail the Company's revenues, expenses, and net loss over the periods Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net premiums earned | $27,938,318 | $29,360,976 | $85,701,467 | $83,936,424 | | Total revenues | $34,236,671 | $35,537,635 | $107,584,422 | $93,068,180 | | Total expenses | $38,633,229 | $40,096,924 | $118,848,087 | $116,075,459 | | Net loss | $(3,537,571) | $(3,997,621) | $(9,114,298) | $(18,574,772) | | Comprehensive loss | $(5,763,478) | $(7,981,933) | $(10,275,349) | $(36,350,081) | | Basic Loss per common share | $(0.33) | $(0.38) | $(0.85) | $(1.75) | | Diluted Loss per common share | $(0.33) | $(0.38) | $(0.85) | $(1.75) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the Company's stockholders' equity, including common stock and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Common stock, $.01 par value | $122,275 | $121,715 | | Capital in excess of par | $75,153,808 | $74,519,590 | | Accumulated other comprehensive loss | $(17,119,479) | $(15,958,428) | | Accumulated deficit | $(26,060,262) | $(16,945,964) | | Treasury stock | $(5,567,481) | $(5,567,481) | | Total stockholders' equity | $26,528,861 | $36,169,432 | Condensed Consolidated Statements of Cash Flows The cash flow statements summarize cash generated and used in operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash flows used in operating activities | $(15,754,344) | $(7,921,438) | | Net cash flows provided by investing activities | $19,755,073 | $398,911 | | Net cash flows used in financing activities | $(825,988) | $(1,656,865) | | Increase (decrease) in cash and cash equivalents | $3,174,741 | $(9,179,392) | | Cash and cash equivalents, end of period | $15,132,969 | $15,111,206 | Notes to Condensed Consolidated Financial Statements Detailed notes provide additional information and context for the condensed consolidated financial statements Note 1 - Nature of Business and Basis of Presentation Kingstone Companies, Inc. underwrites property and casualty insurance in New York through KICO, with GAAP-compliant financial statements - Kingstone Companies, Inc. operates through its wholly-owned subsidiary, Kingstone Insurance Company (KICO), underwriting property and casualty insurance29 - For the three and nine months ended September 30, 2023, 88.5% and 88.1% of KICO's direct written premiums, respectively, originated from New York policies29 - The financial statements are unaudited and prepared in accordance with U.S. GAAP, with certain reclassifications for ceded premiums having no impact on prior financial results3031 Note 2 – Accounting Policies Accounting policies are detailed, emphasizing estimates for loss reserves, reinsurance receivables, and the non-material impact of ASU 2016-13 - Management relies on estimates and assumptions for financial statements, particularly for loss and loss adjustment expense reserves and reinsurance receivables, which are subject to inherent uncertainty3233 - The condensed consolidated financial statements include Kingstone and its wholly-owned subsidiaries (KICO, CMIC Properties, 15 Joys Lane, and Cosi Agency)33 - The adoption of ASU 2016-13 (Financial Instruments - Credit Losses) on January 1, 2023, did not have a material impact on the Company's consolidated financial statements34 Note 3 - Investments The investment portfolio breakdown includes fixed-maturity, equity, and other securities, detailing fair value, income, and confirming no credit losses Fixed-Maturity Securities, Available-for-Sale (Fair Value) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------------- | :----------- | :----------- | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $8,167,845 | $23,869,096 | | Political subdivisions of States, Territories and Possessions | $12,414,354 | $13,141,387 | | Corporate and other bonds Industrial and miscellaneous | $69,465,238 | $72,082,485 | | Residential mortgage and other asset backed securities | $42,739,462 | $45,622,195 | | Total fixed-maturity securities | $132,786,899 | $154,715,163 | Net Investment Income | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Income | $1,531,134 | $1,508,332 | $4,694,376 | $3,734,358 | | Investment expenses | $86,774 | $89,811 | $257,168 | $322,412 | | Net investment income | $1,444,360 | $1,418,521 | $4,437,208 | $3,411,946 | Net (Losses) Gains on Investments | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net realized (losses) gains | $(4,181) | $1,399,906 | $(17,201) | $1,189,006 | | Net unrealized (losses) gains | $(820,189) | $(1,797,564) | $614,844 | $(10,502,442) | | Net (losses) gains on investments | $(824,370) | $(397,658) | $597,643 | $(9,313,436) | - The Company determined that none of the unrealized losses on its fixed-maturity securities were deemed credit losses, citing credit quality, magnitude of losses, investment nature, interest rate environment, and management's intent/ability to hold the investments54 Note 4 - Fair Value Measurements Fair value hierarchy (Level 1, 2, 3) for investments, including fixed-maturity, equity, hedge funds, and long-term debt, is outlined Fair Value Hierarchy of Investments (Sep 30, 2023) | Category | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | :---------- | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $8,167,845 | $- | $- | $8,167,845 | | Political subdivisions of States, Territories and Possessions | $- | $12,414,354 | $- | $12,414,354 | | Corporate and other bonds industrial and miscellaneous | $69,465,238 | $- | $- | $69,465,238 | | Residential mortgage and other asset backed securities | $- | $42,739,462 | $- | $42,739,462 | Hedge Fund Investment at NAV | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------- | :----------- | :----------- | | Hedge fund | $3,213,318 | $2,771,652 | Fair Value of Long-Term Debt (Senior Notes due 2024) | Date | Level 1 | Level 2 | Level 3 | Total | | :----------- | :-------- | :---------- | :-------- | :---------- | | Sep 30, 2023 | $- | $17,314,915 | $- | $17,314,915 | | Dec 31, 2022 | $- | $15,829,096 | $- | $15,829,096 | Note 5 - Fair Value of Financial Instruments and Real Estate Carrying and fair values of financial instruments and real estate are provided, categorized by fair value hierarchy levels Fair Value of Financial Instruments and Real Estate (Sep 30, 2023) | Instrument | Carrying Value | Fair Value | | :------------------------------------------ | :------------- | :----------- | | Fixed-maturity securities-held-to maturity | $7,053,825 | $5,699,498 | | Cash and cash equivalents | $15,132,969 | $15,132,969 | | Premiums receivable, net | $13,326,369 | $13,326,369 | | Reinsurance receivables, net | $84,257,926 | $84,257,926 | | Real estate, net of accumulated depreciation | $2,015,414 | $2,800,000 | | Reinsurance balances payable | $20,263,484 | $20,263,484 | Note 6 – Property and Casualty Insurance Activity Property and casualty insurance activities are detailed, including premiums, loss reserves, actuarial methods, reinsurance, and ceding commission revenue Premiums Earned (9 Months Ended Sep 30) | Metric | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Direct premiums written | $147,236,636 | $147,353,911 | | Ceded premiums written | $(91,009,861) | $(81,313,211) | | Net premiums written | $56,226,775 | $66,040,700 | | Net premiums earned | $85,701,467 | $83,936,424 | Loss and Loss Adjustment Expense Reserves Reconciliation | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $118,339,513 | $94,948,745 | | Total incurred | $66,552,565 | $63,624,755 | | Total paid | $67,860,922 | $62,713,420 | | Balance at end of period | $121,674,947 | $106,928,898 | - The Company utilizes various actuarial reserving methodologies, including Paid Loss Development, Incurred Loss Development, Bornhuetter-Ferguson methods, Incremental Claim-Based Methods, and Frequency/Severity Based Methods, to estimate loss and LAE reserves69707172737475 Ceding Commission Revenue (9 Months Ended Sep 30) | Metric | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Provisional ceding commissions earned | $15,733,145 | $14,116,044 | | Contingent ceding commissions earned | $660,799 | $167,033 | | Total ceding commission revenue | $16,393,944 | $14,283,077 | Note 7 – Debt Debt obligations are detailed, including FHLBNY, 2022 Senior Notes, equipment financing, and a Leverage Maintenance Test waiver - KICO is a member of FHLBNY, providing access to flexible, low-cost funding, with eligible collateral including residential and commercial mortgage-backed securities, and U.S. Treasury securities98 Debt Balances | Debt Type | Sep 30, 2023 | Dec 31, 2022 | | :---------------- | :----------- | :----------- | | 2022 Notes, net | $18,129,327 | $17,252,868 | | Equipment financing | $7,095,366 | $7,905,655 | | Total Debt | $25,224,693 | $25,158,523 | - The Company issued $19,950,000 of 12.0% Senior Notes due December 30, 2024, as part of a Note and Warrant Exchange Agreement, with interest payable semi-annually100101 - As of September 30, 2023, the Company's leverage ratio was 31.4%, exceeding the 30% limit, but a waiver was obtained from noteholders on November 7, 2023105161 Note 8 – Stockholders' Equity Changes in stockholders' equity are outlined, covering dividend suspension, equity plans, and the issuance and valuation of warrants - Dividends on Common Stock were suspended for the nine months ended September 30, 2023, compared to $1,277,066 paid in the prior year, following a Board decision on November 11, 2022108 - The 2014 Equity Participation Plan's authorized shares were increased to 1,900,000 on August 9, 2023109 Stock-Based Compensation Expense | Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock options | $-0- | $2,000 | $-0- | $9,000 | | Restricted stock awards | $207,000 | $186,000 | $636,000 | $1,180,000 | | Employee Stock Purchase Plan | $-0- | $5,000 | $-0- | $16,000 | - Warrants to purchase 969,525 shares of Common Stock were issued on December 15, 2022, with a fair value of $993,200, exercisable at $1.00 per share through December 30, 2025122123124 Note 9 – Income Taxes Income tax policies are detailed, including deferred tax assets/liabilities, NOL carryovers, and state NOL valuation allowance Net Deferred Income Tax Asset | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Total deferred tax assets | $18,106,252 | $16,296,969 | | Total deferred tax liabilities | $5,317,092 | $5,965,811 | | Net deferred income tax asset | $12,789,160 | $10,331,158 | - The Company has federal net operating loss (NOL) carryovers of $6,411,993 (Sep 30, 2023) with no expiration, and state NOLs of approximately $39,317,000 (Sep 30, 2023) with a valuation allowance due to uncertainty of utilization129 - A deferred tax liability of $759,543 related to the investment in KICO is maintained due to a temporary difference with an indefinite life130 Note 10 – Loss Per Common Share The calculation of basic and diluted loss per common share is explained, noting anti-dilutive securities were excluded from diluted EPS Weighted Average Common Shares Outstanding | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average number of shares outstanding | 10,756,156 | 10,645,675 | 10,754,709 | 10,640,290 | | Weighted average number of shares outstanding, used for computing diluted loss per share | 10,756,156 | 10,645,675 | 10,754,709 | 10,640,290 | - No options, warrants, or restricted stock awards were included in the computation of diluted loss per common share for the three and nine months ended September 30, 2023 and 2022, as they were anti-dilutive135 Note 11 - Commitments and Contingencies Commitments and contingencies are detailed, including legal proceedings, operating leases, executive agreements, and leadership changes - The Company is involved in various legal proceedings in the ordinary course of business, with potential liabilities considered in loss and LAE estimates137 - The Company has a non-cancellable operating lease for its KICO office facility expiring March 31, 2024138 - Effective October 1, 2023, Barry Goldstein transitioned from President and CEO, with his salary reduced to $300,000 per annum and bonus eligibility removed148 - Effective October 1, 2023, Meryl Golden was appointed President and Chief Executive Officer of the Company155162 Note 12 – Employee Benefit Plans Employee benefit plans are covered, including the 401(k) Plan with matching contributions and the terminated Deferred Compensation Plan - The Company matches 100% of participant contributions up to 4% in its 401(k) Plan157 401(k) Plan Expense | Period | Expense | | :-------------------------- | :-------- | | 3 Months Ended Sep 30, 2023 | $90,000 | | 3 Months Ended Sep 30, 2022 | $71,000 | | 9 Months Ended Sep 30, 2023 | $249,000 | | 9 Months Ended Sep 30, 2022 | $207,000 | - The Deferred Compensation Plan was terminated effective December 22, 2022, with termination payments to participants to be made between December 22, 2023, and December 22, 2024158 Note 13 – Subsequent Events Significant subsequent events include a Leverage Maintenance Test waiver and Meryl Golden's appointment as CEO - On November 7, 2023, a majority of 2022 Note holders agreed to waive the Leverage Maintenance Test as of September 30, 2023161 - Effective October 1, 2023, Meryl Golden was appointed President and Chief Executive Officer of the Company162 Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis covers financial condition, operational results, insurance business, key metrics, strategic initiatives, and outlook Overview of Business and Product Lines Kingstone operates through KICO, underwriting property and casualty insurance in New York, with revenue from premiums, ceding commissions, and investments - Kingstone's primary business is property and casualty insurance through KICO, with 88.5% (3 months) and 88.1% (9 months) of direct written premiums from New York policies163 - The Company's main product lines are personal lines (homeowners, dwelling fire, etc) and livery physical damage168169170[171](index=171&type=chunk] Key Measures and Critical Accounting Policies Key financial metrics for insurance underwriting and critical accounting policies, including loss reserves and reinsurance, are defined - Key measures for analyzing insurance underwriting include: Net loss ratio, Net underwriting expense ratio, Net combined ratio, and Underwriting income173175176[177](index=177&type=chunk] - Critical accounting policies and estimates relate to reserves for loss and LAE, amounts recoverable from reinsurers, deferred income taxes, allowance for credit losses of investment securities, and valuation of warrants179 Strategic Initiatives: Kingstone 2.0 and 3.0 Kingstone 2.0 focused on modernization, while Kingstone 3.0 targets non-Core business reduction, pricing adjustments, and expense control - Kingstone 2.0 initiatives included strengthening management, reducing expenses via technology, developing segmented products (Kingstone Select), and better managing catastrophe exposure180 - Kingstone 3.0 strategy focuses on: 1) Aggressively reducing non-Core business (policy count down 38.9% YoY as of Sep 30, 2023) 2) Adjusting pricing to stay ahead of loss trends (average written premium for Legacy Core homeowners increased 25.5% over 12 months) 3) Tightly managing reinsurance requirements and costs 4) Continuing expense reduction to achieve a 33% net expense ratio by year-end 2024 (achieved 33.0% for 9 months ended Sep 30, 2023)181[183](index=183&type=chunk] Policies In Force and Direct Written Premiums (YoY Change as of Sep 30, 2023) | Metric | Core Policies In Force | Core Direct Written Premiums | Non-Core Policies In Force | Non-Core Direct Written Premiums | | :---------------- | :--------------------- | :--------------------------- | :------------------------- | :----------------------------- | | % change (YoY) | -4.5% | 4.7% | -38.9% | -43.9% | Consolidated Results of Operations (Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022) The Company reported a reduced net loss of $9.1 million for the nine months ended September 30, 2023, driven by increased revenues and an improved net combined ratio Consolidated Financial Highlights (9 Months Ended Sep 30) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | Percent Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------------- | | Total revenues | $107,584 | $93,068 | $14,517 | 15.6% | | Total expenses | $118,848 | $116,075 | $2,774 | 2.4% | | Net loss | $(9,114) | $(18,575) | $9,461 | 50.9% | | Net loss ratio | 77.7% | 75.8% | 1.9 ppt | 2.5% | | Net underwriting expense ratio | 33.0% | 37.2% | (4.2) ppt | (11.3)% | | Net combined ratio | 110.7% | 113.0% | (2.3) ppt | (2.0)% | - Direct written premiums remained stable at $147.2 million, with a 9.6% increase in Core business premiums offset by a 39.5% decrease in non-Core business premiums, aligning with the Kingstone 3.0 strategy189[192](index=192&type=chunk] - Net investment income increased by 30.0% to $4.4 million, primarily due to a prior year adjustment and higher interest rates on cash balances202 - Net loss and LAE increased by 4.6% to $66.6 million, with the net loss ratio rising to 77.7% due to a larger impact from catastrophe losses (8.5 points in 2023 vs 4.1 points in 2022)205206[207](index=207&type=chunk] - Interest expense surged by 119.3% to $3.0 million, driven by the 12% interest rate on the 2022 Notes and equipment financing221 Consolidated Results of Operations (Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022) The Company's net loss decreased to $3.5 million for the three months ended September 30, 2023, due to lower expenses and improved net combined ratio Consolidated Financial Highlights (3 Months Ended Sep 30) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | Percent Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------------- | | Total revenues | $34,237 | $35,538 | $(1,303) | (3.7)% | | Total expenses | $38,633 | $40,097 | $(1,465) | (3.7)% | | Net loss | $(3,538) | $(3,998) | $460 | 11.5% | | Net loss ratio | 78.5% | 75.0% | 3.5 ppt | 4.7% | | Net underwriting expense ratio | 31.7% | 36.9% | (5.2) ppt | (14.1)% | | Net combined ratio | 110.2% | 111.9% | (1.7) ppt | (1.5)% | - Direct written premiums decreased by 4.8% to $52.0 million, primarily due to a 5.5% decrease in personal lines premiums, partially offset by a 7.1% increase in livery physical damage premiums231232[233](index=233&type=chunk] - Net premiums earned decreased by 4.8% to $27.9 million, influenced by lower direct written premiums and increased catastrophe reinsurance rates238 - Ceding commission revenue increased by 13.3% to $5.5 million, driven by higher provisional and contingent ceding commissions239 - Net loss and LAE remained stable at $21.9 million, but the net loss ratio increased to 78.5% due to a higher impact from catastrophe losses (7.7 points in 2023 vs 1.1 points in 2022)246248[249](index=249&type=chunk] - Other underwriting expenses decreased by 13.2% to $6.3 million, mainly due to reductions in salaries, credit card fees, and policy management system fees254 Additional Financial Information (Segment Reporting) Detailed segment reporting for the insurance underwriting business includes premiums, loss expenses by product type, and key performance measures Gross Premiums Written by Product Type (9 Months Ended Sep 30) | Product Type | 2023 | 2022 | | :----------------------- | :----------- | :----------- | | Personal lines | $136,601,070 | $138,197,960 | | Livery physical damage | $10,559,310 | $9,036,713 | | Other | $76,256 | $119,238 | | Total gross premiums written | $147,236,636 | $147,353,911 | Net Loss Ratio by Product Type (9 Months Ended Sep 30) | Product Type | 2023 | 2022 | | :----------------------- | :----- | :----- | | Personal lines | 79.0% | 74.3% | | Livery physical damage | 39.2% | 46.1% | | Other | 205.2% | -13.9% | | Total without commercial lines | 77.3% | 74.9% | | Total | 77.7% | 75.8% | Key Measures for Insurance Underwriting Business (9 Months Ended Sep 30) | Metric | 2023 | 2022 | | :----------------------------------- | :----- | :----- | | Net loss ratio | 77.7% | 75.8% | | Net underwriting expense ratio | 33.0% | 37.2% | | Net combined ratio | 110.7% | 113.0% | Investments Portfolio Analysis A comprehensive analysis of the investment portfolio covers fixed-maturity, equity, and other securities, detailing fair value, credit ratings, yields, and maturity Fixed-Maturity Securities This section details the Company's fixed-maturity securities, including available-for-sale and held-to-maturity categories Fixed-Maturity Securities, Available-for-Sale (Fair Value) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------------- | :----------- | :----------- | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $8,167,845 | $23,869,096 | | Political subdivisions of States, Territories and Possessions | $12,414,354 | $13,141,387 | | Corporate and other bonds Industrial and miscellaneous | $69,465,238 | $72,082,485 | | Residential mortgage and other asset backed securities | $42,739,462 | $45,622,195 | | Total fixed-maturity securities | $132,786,899 | $154,715,163 | Equity Securities This section provides a breakdown of the Company's equity securities, including preferred and common stocks and exchange-traded funds Equity Securities (Fair Value) | Category | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Preferred stocks | $10,199,241 | $9,994,629 | | Common stocks and exchange traded funds | $3,708,410 | $3,839,761 | | Total | $13,907,651 | $13,834,390 | Other Investments This section details other investments, specifically the hedge fund measured at fair value Other Investments (Hedge Fund Fair Value) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------- | :----------- | :----------- | | Hedge fund | $3,213,318 | $2,771,652 | Held-to-Maturity Securities This section details the Company's held-to-maturity securities, including U.S. Treasury, municipal, and corporate bonds Held-to-Maturity Securities (Fair Value) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------------- | :----------- | :----------- | | U.S. Treasury securities | $1,147,493 | $1,222,883 | | Political subdivisions of States, Territories and Possessions | $489,990 | $500,730 | | Exchange traded debt | $252,500 | $275,000 | | Corporate and other bonds Industrial and miscellaneous | $3,809,515 | $4,601,775 | | Total | $5,699,498 | $6,600,388 | Credit Rating of Fixed-Maturity Securities This section analyzes the credit quality and average yield of the Company's fixed-maturity securities portfolio Credit Quality of Available-for-Sale Fixed-Maturity Securities (Fair Value) | Rating Category | Sep 30, 2023 (Estimated Fair Value) | Sep 30, 2023 (% of Total) | Dec 31, 2022 (Estimated Fair Value) | Dec 31, 2022 (% of Total) | | :---------------------------------------------------------------- | :---------------------------------- | :------------------------ | :---------------------------------- | :------------------------ | | U.S. Treasury securities | $8,167,845 | 6.2% | $23,869,096 | 15.4% | | Total corporate and municipal bonds | $80,238,403 | 60.4% | $83,572,384 | 54.1% | | Total residential mortgage backed, asset backed, and other collateralized obligations | $44,380,651 | 33.4% | $47,273,683 | 30.5% | | Total | $132,786,899 | 100.0% | $154,715,163 | 100.0% | Average Yield by Fixed-Maturity Security Type | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------------- | :----------- | :----------- | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | 4.53% | 2.58% | | Political subdivisions of States, Territories and Possessions | 3.61% | 3.58% | | Corporate and other bonds Industrial and miscellaneous | 3.72% | 3.68% | | Residential mortgage backed securities | 2.97% | 2.70% | | Total | 3.53% | 3.20% | Fair Value Consideration This section discusses the fair value considerations for the investment portfolio, including pricing levels and credit loss assessments - As of September 30, 2023, and December 31, 2022, 62% and 65%, respectively, of the investment portfolio recorded at fair value was priced based on quoted market prices (Level 1)286 - The Company determined that none of the gross unrealized losses on its 150 fixed-maturity securities (available-for-sale) at September 30, 2023, were credit losses, based on credit quality, loss magnitude, investment nature, interest rate environment, and management's intent to hold289 Liquidity and Capital Resources Liquidity and capital resources are discussed, covering cash flows, reinsurance, inflation impact, and the absence of material off-balance sheet arrangements Cash Flows This section analyzes cash flows from operating, investing, and financing activities, highlighting key changes and sources - Primary cash flow sources for KICO include direct premiums, ceding commissions, loss recovery payments, investment income, and proceeds from investment sales/maturities290 - KICO paid a $1,250,000 dividend and a $2,700,000 distribution from paid-in capital to the holding company during the nine months ended September 30, 2023291 Cash Flow Summary (9 Months Ended Sep 30) | Cash Flow Activity | 2023 | 2022 | | :----------------------------------- | :------------- | :------------- | | Operating activities | $(15,754,344) | $(7,921,438) | | Investing activities | $19,755,073 | $398,911 | | Financing activities | $(825,988) | $(1,656,865) | | Net increase (decrease) in cash and cash equivalents | $3,174,741 | $(9,179,392) | | Cash and cash equivalents, end of period | $15,132,969 | $15,111,206 | - Net cash used in operating activities increased by $7,833,000 to $15,754,000 in Nine Months 2023, primarily due to fluctuations in operating assets and liabilities294 - Net cash provided by investing activities increased by $19,356,000 to $19,755,000 in Nine Months 2023, driven by net cash from the investment portfolio and decreased fixed asset acquisitions296 Reinsurance This section details the Company's reinsurance program, including quota share, excess of loss, and catastrophe treaties - The Company utilizes quota share, excess of loss, and catastrophe reinsurance treaties to manage capital and financial ratios, and to provide income through ceding commissions298[299](index=299&type=chunk] - New quota share (30% personal lines), excess of loss, and catastrophe reinsurance treaties became effective January 1, 2023, and July 1, 2023, respectively298[299](index=299&type=chunk] Inflation This section discusses the impact of inflation on loss and loss adjustment expenses and the investment portfolio - Inflation impacts loss and loss adjustment expenses, especially medical and hospital rates, and influences interest rates, affecting the investment portfolio and yields303[304](index=304&type=chunk] - Continuing economic inflation in Nine Months 2023 impacted loss and LAE, and if trends persist, could negatively affect results of operations305 Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements that would significantly affect the Company's financials - The Company has no material off-balance sheet arrangements that would significantly affect its financial condition, revenues, or liquidity306 Outlook The outlook indicates net premiums earned will be influenced by written premium volume, competitive markets, and underwriting changes prioritizing profitability - Net premiums earned are expected to be impacted by net written premium volume, which is influenced by competitive market conditions and general economic conditions308 - Underwriting changes emphasizing profitability over growth are anticipated to lead to a slowdown in premium growth, especially in new business308 Item 3 — Quantitative and Qualitative Disclosures About Market Risk The Company, as a smaller reporting company, is not required to provide market risk disclosures - The Company is exempt from providing quantitative and qualitative disclosures about market risk as it is a smaller reporting company309 Item 4 — Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control - As of September 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective310[311](index=311&type=chunk] - There have been no material changes in internal control over financial reporting during the most recently completed fiscal quarter312 - Internal control over financial reporting has inherent limitations and may not prevent or detect all misstatements313[314](index=314&type=chunk] PART II — OTHER INFORMATION This section provides other required information, including legal proceedings, risk factors, and exhibits Item 1 — Legal Proceedings No material legal proceedings are reported - The Company has no material legal proceedings to disclose316 Item 1A — Risk Factors No material changes to previously disclosed risk factors have occurred since the 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company's 2022 Annual Report317 Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds are reported - There are no unregistered sales of equity securities or use of proceeds to report318[325](index=325&type=chunk] Item 3 — Defaults Upon Senior Securities No defaults upon senior securities are reported - The Company has no defaults upon senior securities to report319 Item 4 — Mine Safety Disclosures Mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company320 Item 5 — Other Information No other information is reported - There is no other information to report321 Item 6 — Exhibits Exhibits filed with the Quarterly Report include corporate documents, CEO/CFO certifications, and XBRL taxonomy documents - Exhibits include the Restated Certificate of Incorporation, By-laws, Rule 13a-14(a)/15d-14(a) Certifications of CEO and CFO, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase documents322 Signatures The report includes signatures from the Chief Executive Officer and Chief Financial Officer, certifying its filing - The report is signed by Meryl Golden, Chief Executive Officer, and Jennifer Gravelle, Chief Financial Officer, on November 20, 2023324325[326](index=326&type=chunk]