Other operating expenses include our corporate expenses as a holding company. These expenses include legal and auditing fees, occupancy costs related to our former corporate office, which was closed in May 2013, executive employment costs, and other costs directly associated with being a public company.
Net loss and loss adjustment expenses were $13,587,000 in 2013 compared to $11,235,000 in 2012. The net loss ratio was 61.1% in 2013 compared to 65.3% in 2012, a decrease of 4.2 percentage points. The decrease of 4.2 percentage points in our net loss ratio for 2013 as compared to 2012 is driven by catastrophe and excess of loss ceded premium reconciliations that increased our net earned premiums as discussed above, and by a decrease in the current accident year loss ratios for our personal lines of business. The decreases were offset by increases in loss and LAE reserves required for prior accident years. This was driven primarily by increases in required LAE reserves resulting from a shift in mix of claims toward longer-tailed commercial lines business which carries a higher LAE component than short-tailed personal lines business. In addition, prior year loss reserves were strengthened for commercial auto business as a result of re-estimation of ultimate claim liabilities for that line of business. The calendar year loss ratio was also impacted by the effect of catastrophe reinstatement premiums related to Superstorm Sandy that reduced 2013 calendar year net earned premiums.
Income tax expense in 2013 was $764,000, which resulted in an effective tax rate of 27.5%. Income tax expense in 2012 was $303,000, which resulted in an effective tax rate of 28.3%. Income before taxes was $2,776,000 in 2013 compared to $1,070,000 in 2012. The decrease in the effective tax rate of .8% in 2013 is a result of net changes in permanent differences, tax true-ups and the state net operating loss valuation allowance.
The insurance industry is subject to extensive restrictive regulation that may affect our operating costs and limit the growth of our business, and changes within this regulatory environment may, too, adversely affect our operating costs and limit the growth of our business.
The insurance industry is highly competitive. Many of our competitors have well-established national reputations, substantially more capital and significantly greater marketing and management resources. Because of the competitive nature of the insurance industry, including competition for customers, agents and brokers, there can be no assurance that we will continue to effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our business, operating results or financial condition.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses, are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of several years. In addition, estimates and assumptions associated with receivables under reinsurance contracts related to contingent ceding commission revenue require considerable judgment by management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results may differ significantly from the estimates and assumptions used in preparing the consolidated financial statements.
The Company records compensation expense associated with stock options and other equity-based compensation in accordance with guidance established by GAAP. Stock-based compensation expense in 2013 and 2012 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award less an estimate for anticipated forfeitures.
Proceeds from the sale and maturity of fixed-maturity securities were $5,850,770 and $4,322,120 for the years ended December 31, 2013 and 2012, respectively.
On December 13, 2013, the Company closed on an underwritten public offering of 3,450,000 shares of its Common Stock, including 450,000 shares issued pursuant to the underwriter’s 30-day over-allotment option, at a public offering price of $5.95 per share. The aggregate net proceeds to the Company was approximately $18,804,000, after deducting underwriting discounts and commissions and other offering expenses of $1,723,000.
(A) Kingstone generates operating losses for state purposes and has prior year net operating loss carryovers available. The state net operating loss carryover as of December 31, 2013 and December 31, 2012 was approximately $5,482,000 and $4,588,000, respectively. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax, which is included in the consolidated statements of income and comprehensive income within other underwriting expenses. A valuation allowance has been recorded due to the uncertainty of generating enough state taxable income to utilize 100% of the available state net operating loss carryovers over their remaining lives, which expire between 2027 and 2033.