Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2009 for Kingstone Companies, Inc. (formerly DCAP Group, Inc.). The reporting period is defined by a fundamental transformation of the company's business model. On July 1, 2009, the Company acquired 100% of Kingstone Insurance Company (KICO), a New York property and casualty insurer, converting its primary operations from insurance brokerage and franchising to insurance underwriting. Concurrently, the Company completed the sale of its Retail Business (New York and Pennsylvania locations) and Franchise Business, classifying these as discontinued operations.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues (Continuing Ops) | $7,666,775 | $429,642 |
| Net Premiums Earned | $4,526,341 | $0 |
| Net Income (Loss) | $4,820,842 | $(977,206) |
| Income from Continuing Ops | $5,086,900 | $79,477 |
| Loss from Discontinued Ops | $(266,058) | $(1,056,683) |
| Cash and Cash Equivalents (End of Period) | $625,320 | $142,949 |
| Total Assets | $52,643,753 | $9,436,632 |
| Total Liabilities | $42,260,277 | $4,179,062 |
| Stockholders' Equity | $10,383,476 | $5,257,570 |
Insurance Underwriting Performance (KICO only, July 1 - Dec 31, 2009):
- Net Combined Ratio: 78.8% (Indicates underwriting profitability)
- Net Loss Ratio: 45.0%
- Net Underwriting Expense Ratio: 33.8%
- Underwriting Income: $959,349
Material Changes vs. Prior Period
- Acquisition of KICO: The most significant change was the July 1, 2009 acquisition of KICO. This resulted in a bargain purchase gain of $5,177,851, which was the primary driver of the 2009 net income. The acquisition was funded by exchanging $3.75 million in surplus notes and forgiving $2.246 million in accrued interest.
- Discontinued Operations: The Company sold its Retail Business (16 NY locations and 3 PA locations) and Franchise Business in 2009. Consequently, revenues and expenses from these segments are excluded from continuing operations. The loss from discontinued operations improved significantly from $(1.06) million in 2008 to $(0.27) million in 2009 due to the cessation of these operations.
- Revenue Composition: In 2008, continuing operations revenue was derived almost entirely from premium finance placement fees ($430k). In 2009, revenue shifted to insurance premiums ($4.5M) and ceding commissions ($2.2M).
- Debt Restructuring: The Company repaid $1.5 million in Notes Payable during 2009, partially by exchanging $519,231 of principal for Series E Preferred Stock. New debt of $1.05 million ("2009 Notes") was issued at 12.625% interest.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook:
- Management intends to reduce reliance on quota share reinsurance to increase earned premiums and reduce ceding commission revenue in future years.
- The Company is seeking an A.M. Best financial strength rating, which is critical for expanding its producer base. It currently holds a Demotech rating of A (Excellent).
- Dividends from KICO to the parent company are restricted until July 1, 2011, requiring New York State Insurance Department approval.
Risks and Contingencies:
- Catastrophe Exposure: As a P&C insurer, the Company faces risks from hurricanes and severe weather. A subsequent event in March 2010 (severe storm in NYC) generated approximately 250 claims with estimated losses of $1.5 million (75% reinsured).
- Bank Failure: In March 2010, a bank holding $497,000 of the Company's deposits failed. The Company recorded an Other-Than-Temporary Impairment (OTTI) loss of $246,151 for the uninsured portion in 2009.
- Reinsurance Credit Risk: The Company relies on reinsurers (e.g., Motors Insurance Corporation, SCOR) to cover a significant portion of losses. Failure of a reinsurer to pay could materially impact financial condition.
- Regulatory Capital: The Company must maintain Risk-Based Capital (RBC) requirements. While compliant as of Dec 31, 2009, two IRIS ratios were outside the usual range due to quota share reliance and investment expenses.
Unusual Items:
- Bargain Purchase Gain: The $5.18 million gain on the KICO acquisition is a non-recurring item that significantly inflated 2009 earnings.
- OTTI Loss: The $246,151 loss related to the failed bank deposit was recorded in 2009 but the event was confirmed in 2010.
Investor Verification Checklist
- Sustainability of Earnings: Verify if the 2009 net income is sustainable without the one-time $5.18 million bargain purchase gain. The standalone underwriting income was $959k for only six months.
- Reinsurance Concentration: Review the creditworthiness of top reinsurers, specifically Motors Insurance Corporation (NR-5 rating) and Folksamerica (NR-5 rating), which accounted for a large portion of recoverables.
- Dividend Restrictions: Confirm the impact of the two-year dividend restriction on KICO (until July 2011) on the parent company's ability to service debt and pay shareholders.
- Loss Reserve Adequacy: Assess the stability of loss reserves, noting that the Company had limited historical data for a full 10-year loss development table at the time of filing.
- Related Party Transactions: Review the terms of the "2009 Notes" and Series E Preferred Stock, as significant portions were held by directors, officers, and their affiliates (e.g., Barry Goldstein, Jack Seibald).