10Q Q2 13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
June 30, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013
 
Commission File Number: 001-15204
 
Kingsway Financial Services Inc.
(Exact name of registrant as specified in its charter)
_________________________
Ontario, Canada
(State or other jurisdiction of
incorporation or organization)
 
Not Applicable (I.R.S. Employer
Identification No.)
45 St. Clair Avenue West, Suite 400 Toronto, Ontario M4V 1K9
(Address of principal executive offices and zip code)
1-416-848-1171
(Registrant's telephone number, including area code)
_________________________

Indicate by checkmark 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 x No o

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 ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of shares outstanding of the registrant's common stock as of August 8, 2013 was 13,148,971.


KINGSWAY FINANCIAL SERVICES INC.

Table Of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)
 
Notes to Consolidated Financial Statements (unaudited)
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 4. CONTROLS AND PROCEDURES
 
PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
ITEM 1A. RISK FACTORS
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
ITEM 4. MINE SAFETY DISCLOSURES
 
ITEM 5. OTHER INFORMATION
 
ITEM 6. EXHIBITS
 
SIGNATURES
 


















 
2
 
KINGSWAY FINANCIAL SERVICES INC.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except per share data)
 
 
June 30, 2013

 
December 31, 2012

 
 
 (unaudited)

 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $71,254 and $77,858, respectively)
 
$
72,256

 
$
79,534

Equity investments, at fair value (cost of $27,775 and $2,305, respectively)
 
31,110

 
3,548

Limited liability investments
 
2,268

 
2,333

Other investments, at cost which approximates fair value
 
3,031

 
2,000

Short-term investments, at cost which approximates fair value
 
586

 
585

Total investments
 
109,251

 
88,000

Cash and cash equivalents
 
71,351

 
80,813

Investment in investee
 
—

 
41,733

Accrued investment income
 
635

 
2,263

Premiums receivable, net of allowance for doubtful accounts of $3,977 and $4,040, respectively
 
34,864

 
35,598

Service fee receivable
 
19,313

 
15,173

Other receivables, net of allowance for doubtful accounts of $1,002 and $1,002, respectively
 
4,852

 
4,750

Reinsurance recoverable
 
15,133

 
8,557

Prepaid reinsurance premiums
 
11,835

 
7,316

Deferred acquisition costs, net
 
11,797

 
14,102

Property and equipment, net of accumulated depreciation of $23,707 and $22,887, respectively
 
2,159

 
2,709

Goodwill
 
9,484

 
8,421

Intangible assets, net of amortization of $20,329 and $19,263, respectively
 
50,569

 
50,583

Other assets
 
4,542

 
4,045

Asset held for sale
 
7,291

 
8,737

TOTAL ASSETS
 
$
353,076

 
$
372,800

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
Unpaid loss and loss adjustment expenses:
 
 
 
 
Property and casualty
 
$
96,703

 
$
103,116

Vehicle service agreements
 
3,140

 
3,448

Total unpaid loss and loss adjustment expenses
 
99,843

 
106,564

Unearned premiums
 
47,308

 
45,047

Reinsurance payable
 
7,620

 
4,956

LROC preferred units
 
14,204

 
13,655

Senior unsecured debentures
 
26,356

 
23,730

Subordinated debt
 
26,674

 
23,774

Deferred income tax liability
 
3,602

 
3,054

Deferred service fees
 
49,198

 
48,987

Income taxes payable
 
2,821

 
2,879

Accrued expenses and other liabilities
 
34,533

 
34,740

TOTAL LIABILITIES
 
$
312,159

 
$
307,386

EQUITY
 
 
 
 
Common stock, no par value; unlimited number authorized; 13,148,971 issued and outstanding at June 30, 2013 and December 31, 2012
 
$
296,621

 
$
296,621

Additional paid-in capital
 
15,824

 
15,757

Accumulated deficit
 
(289,784
)
 
(262,069
)
Accumulated other comprehensive income
 
16,862

 
14,762

Shareholders' equity attributable to common shareholders
 
39,523

 
65,071

Noncontrolling interests in consolidated subsidiaries
 
1,394

 
343

TOTAL EQUITY
 
40,917

 
65,414

TOTAL LIABILITIES AND EQUITY
 
$
353,076

 
$
372,800

See accompanying notes to unaudited consolidated financial statements.

 
3
 
KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
2013

 
2012

 
2013

 
2012

Revenue:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
28,297

 
$
30,985

 
$
56,365

 
$
60,252

Service fee and commission income
 
12,052

 
8,138

 
25,176

 
17,667

Net investment income
 
816

 
797

 
1,396

 
1,623

Net realized gains (losses)
 
32

 
(23
)
 
(1,377
)
 
250

Other-than-temporary impairment loss
 
(1,800
)
 
(488
)
 
(1,800
)
 
(488
)
Gain (loss) on change in fair value of debt
 
2,338

 
(2,418
)
 
(6,613
)
 
(6,749
)
Other income
 
2,174

 
2,744

 
4,392

 
3,827

Total revenues
 
43,909

 
39,735

 
77,539

 
76,382

Expenses:
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
24,615

 
23,616

 
46,446

 
45,391

Commissions and premium taxes
 
5,171

 
4,747

 
11,883

 
9,166

General and administrative expenses
 
20,289

 
17,154

 
40,048

 
35,955

Restructuring expense
 
147

 
—

 
927

 
—

Interest expense
 
1,927

 
1,916

 
3,760

 
3,765

Amortization of intangible assets
 
508

 
—

 
1,066

 
—

Impairment of asset held for sale
 
1,446

 
—

 
1,446

 
—

Total expenses
 
54,103

 
47,433

 
105,576

 
94,277

Loss before loss on buy-back of debt, equity in net income (loss) of investee and income tax (benefit) expense
 
(10,194
)
 
(7,698
)
 
(28,037
)
 
(17,895
)
Loss on buy-back of debt
 
—

 
—

 
(24
)
 
—

Equity in net income (loss) of investee
 
—

 
97

 
255

 
(2,169
)
Loss before income tax (benefit) expense
 
(10,194
)
 
(7,601
)
 
(27,806
)
 
(20,064
)
Income tax (benefit) expense
 
(525
)
 
116

 
(801
)
 
175

Net loss
 
(9,669
)
 
(7,717
)
 
(27,005
)
 
(20,239
)
Less: net income (loss) attributable to noncontrolling interests in consolidated subsidiaries
 
617

 
(1,700
)
 
712

 
(3,214
)
Net loss attributable to common shareholders
 
$
(10,286
)
 
$
(6,017
)
 
$
(27,717
)
 
$
(17,025
)
Loss per share – net loss:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.74
)
 
$
(0.59
)
 
$
(2.05
)
 
$
(1.54
)
Diluted:
 
(0.74
)
 
(0.59
)
 
(2.05
)
 
(1.54
)
Weighted average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
13,149

 
13,149

 
13,149

 
13,117

Diluted:
 
13,149

 
13,149

 
13,149

 
13,117

See accompanying notes to unaudited consolidated financial statements.



 
4
 
KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

 
 
 
 
 
 
 
 
 
Net loss
 
$
(9,669
)
 
$
(7,717
)
 
$
(27,005
)
 
$
(20,239
)
Other comprehensive income (loss), net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on fixed maturities and equity investments:
 
 
 
 
 
 
 
 
Unrealized gains arising during the period
 
1,639

 
417

 
1,136

 
197

Reclassification adjustment for losses (gains) included in net loss
 
34

 
(509
)
 
282

 
(367
)
Foreign currency translation adjustments
 
(2
)
 
(1,497
)
 
(1
)
 
27

Equity in other comprehensive income of investee
 
747

 
28

 
642

 
339

Other comprehensive income (loss)
 
2,418

 
(1,561
)
 
2,059

 
196

Comprehensive loss
 
(7,251
)
 
(9,278
)
 
(24,946
)
 
(20,043
)
Less: comprehensive income (loss) attributable to noncontrolling interests in consolidated subsidiaries
 
605

 
(1,722
)
 
671

 
(3,318
)
Comprehensive loss attributable to common shareholders
 
$
(7,856
)
 
$
(7,556
)
 
$
(25,617
)
 
$
(16,725
)
 (1) Net of income tax (benefit) expense of $0 and $0 for the three and six months ended June 30, 2013 and June 30, 2012, respectively.
 
 
See accompanying notes to unaudited consolidated financial statements

 
5
 
KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Six months ended June 30,
 
 
 
2013

 
2012

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net loss
 
$
(27,005
)
 
$
(20,239
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Equity in net (income) loss of investee
 
(255
)
 
2,169

Equity in net (income) loss of limited liability investments
 
(155
)
 
9

Depreciation and amortization
 
1,885

 
1,063

Stock based compensation expense, net of forfeitures
 
67

 
101

Net realized losses (gains)
 
1,377

 
(250
)
Loss on change in fair value of debt
 
6,613

 
6,749

Deferred income taxes
 
(136
)
 
—

Other than temporary impairment loss
 
1,800

 
488

Amortization of fixed maturities premiums and discounts
 
1,906

 
1,574

Impairment of asset held for sale
 
1,446

 
—

Realized loss on buy-back of debt
 
24

 
—

Changes in operating assets and liabilities:
 
 
 
 
Premiums and service fee receivable
 
(3,406
)
 
(4,681
)
Reinsurance recoverable
 
(6,576
)
 
(4,988
)
Deferred acquisition costs
 
2,305

 
482

Income taxes recoverable
 
—

 
1,002

Unpaid loss and loss adjustment expenses
 
(6,721
)
 
(20,608
)
Unearned premiums
 
2,261

 
2,483

Reinsurance payable
 
2,664

 
2,463

Deferred service fees
 
211

 
2,080

Other, net
 
(3,897
)
 
(834
)
Net cash used in operating activities
 
(25,592
)
 
(30,937
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
10,878

 
51,145

Proceeds from sales of equity investments
 
377

 
—

Proceeds from sales of investment in investee
 
13,638

 
—

Purchase of fixed maturities
 
(4,892
)
 
(42,223
)
Purchase of equity investments
 
(23
)
 
—

Net acquisition of limited liability investments
 
(588
)
 
—

Purchase of other investments
 
(1,031
)
 
—

Net purchases of short-term investments
 
(325
)
 
—

Acquisition of business, net of cash acquired
 
(1,052
)
 
—

Net purchases of property and equipment and intangible assets
 
(269
)
 
(502
)
Net cash provided by investing activities
 
16,713

 
8,420

Financing activities:
 
 
 
 
Common stock issued
 
—

 
132

Redemption of senior unsecured debentures
 
(583
)
 
—

Net cash (used in) provided by financing activities
 
(583
)
 
132

Net decrease in cash and cash equivalents
 
(9,462
)
 
(22,385
)
Cash and cash equivalents at beginning of period
 
80,813

 
85,486

Cash and cash equivalents at end of period
 
$
71,351

 
$
63,101

See accompanying notes to unaudited consolidated financial statements.

 
6
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013


NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Kingsway is a holding company and is primarily engaged, through its subsidiaries, in the property and casualty insurance business.

NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year.
The accompanying unaudited consolidated interim financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included within our Annual Report on Form 10-K ("2012 Annual Report") for the year ended December 31, 2012.
The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and 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 year. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying unaudited consolidated interim financial statements include the provision for unpaid loss and loss adjustment expenses, valuation of fixed maturities and equity investments, valuation of deferred income taxes, valuation of intangible assets, goodwill recoverability, deferred acquisition costs, and fair value assumptions for debt obligations.
The fair values of the Company's investments in fixed maturities and equity investments, LROC preferred units, senior unsecured debentures and subordinated debt are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balances. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash, short-term investments and certain other assets and other liabilities because of their short-term nature.
The Company's financial results contained herein are reported in U.S. dollars unless otherwise indicated.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as reported in our 2012 Annual Report.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
Adoption of New Accounting Standards:

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. Effective January 1, 2013, the Company adopted ASU 2012-02 and the adoption did not have an impact on the consolidated financial statements. There have been no triggering events that would suggest possible impairment or that it is more-likely-than-not that the fair values of indefinite-lived intangible assets are less than their carrying amounts. The Company will utilize the new guidance during its annual impairment testing in December 2013.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which is intended to improve the reporting of reclassifications out of accumulated other comprehensive

 
7
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

income.  The ASU requires an entity to report, either on the face of the income statement or in the notes to the financial statements, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the income statement if the amount being reclassified is required to be reclassified in its entirety to net income.  For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts.  Effective January 1, 2013, the Company adopted ASU 2013-02. Except for the new disclosure requirements, the adoption of the standard did not have an impact on the consolidated financial statements. The required disclosures are included in Note 16, "Accumulated Other Comprehensive Income."

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 is effective for the first interim or annual period beginning on or after December 15, 2013 with early adoption permitted. ASU 2013-11 amends ASC Topic 740, Income Taxes, to provide guidance and reduce diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Except for the changes, if any, in the Company's presentation, the initial application of the standard will not impact the Company.

NOTE 5 ACQUISITIONS
(a)    IWS Acquisition Corporation:
Effective November 16, 2012, the Company's subsidiary, IWS Acquisition Corporation ("IWS"), acquired certain tangible and intangible assets and liabilities of Intercontinental Warranty Services, Inc. for total consideration consisting of approximately $4.9 million in cash, future contingent payments and common equity in a newly formed entity.

IWS is based in Florida and is a provider of after-market vehicle protection services distributed by credit unions throughout the United States and Puerto Rico to their members. The acquisition allows the Company to benefit from the institutional knowledge of the credit unions' vehicle loan programs and expand into the vehicle protection service business.

This acquisition was accounted for as a business combination using the purchase method of accounting. The purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. During the fourth quarter of 2012, the Company began its fair value analysis on the assets acquired and liabilities assumed. In accordance with U.S. GAAP, fair value accounting effects may be adjusted up to one year from the acquisition date upon finalization of the valuation process. The Company recorded adjustments related to the acquisition during the first six months of 2013, which resulted in an increase to goodwill of $1.1 million from the amount recorded at December 31, 2012.

After allocation of additional purchase price, goodwill of $9.0 million was recognized in addition to $12.4 million of separately identifiable intangible assets. Of this amount, $8.7 million of separately identifiable intangible assets related to this acquisition resulted from the valuations of acquired database, customer-related relationships, trade name and non-compete agreement. An additional $3.7 million of separately identifiable intangible assets resulted from the valuation of vehicle service agreements in-force ("VSA in-force"). Refer to Note 10, "Intangible Assets," for further disclosure on intangible assets related to this acquisition. The fair value analysis performed included $3.9 million related to present value of future contingent payments. The maximum the Company can pay in future contingent payments is $11.1 million, on an undiscounted basis. The contingent payments are payable annually beginning in 2013 through 2018 and are subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. As of June 30, 2013, the recorded value of the contingent earn-out agreement is $4.3 million, which is included in accrued expenses and other liabilities on the consolidated balance sheets.

(b)    Trinity Warranty Solutions LLC:
Effective May 22, 2013, the Company's subsidiary, Trinity Warranty Solutions LLC ("TWS"), acquired certain intangible assets of Trinity Warranty Corp. for total consideration consisting of approximately $1.1 million in cash and future contingent payments. The consolidated statements of operations include the earnings of TWS from the date of acquisition. As further discussed in Note 17, "Segmented Information," TWS is included in the Insurance Services segment. TWS is based in Illinois and is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning and refrigeration industry.

This acquisition will be accounted for as a business combination using the purchase method of accounting. The purchase price is expected to be allocated during the third quarter of 2013 to the assets purchased based upon their estimated fair values at the date of acquisition. Refer to Note 10, "Intangible Assets," for further disclosure on intangible assets related to this acquisition.


 
8
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

NOTE 6 INVESTMENTS

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's investments in fixed maturities and equity investments at June 30, 2013 and December 31, 2012 are summarized in the tables shown below:
(in thousands)
 
June 30, 2013
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
26,015

 
$
749

 
$
13

 
$
26,751

Canadian government
 
4,283

 
—

 
101

 
4,182

States municipalities and political subdivisions
 
7,142

 
134

 
1

 
7,275

Mortgage-backed
 
282

 
16

 
—

 
298

Asset-backed securities and collateralized mortgage obligations
 
156

 
2

 
—

 
158

Corporate
 
33,376

 
228

 
12

 
33,592

Total fixed maturities
 
71,254

 
1,129

 
127

 
72,256

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
11,575

 
3,356

 
21

 
14,910

Preferred stock
 
16,200

 
—

 
—

 
16,200

Total equity investments
 
27,775

 
3,356

 
21

 
31,110

Total fixed maturities and equity investments
 
$
99,029

 
$
4,485

 
$
148

 
$
103,366



(in thousands)
 
December 31, 2012
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
23,954

 
$
962

 
$
1

 
$
24,915

Canadian government
 
3,822

 
—

 
40

 
3,782

States municipalities and political subdivisions
 
7,158

 
187

 
—

 
7,345

Mortgage-backed
 
4,850

 
193

 
—

 
5,043

Asset-backed securities and collateralized mortgage obligations
 
1,084

 
8

 
—

 
1,092

Corporate
 
36,990

 
391

 
24

 
37,357

Total fixed maturities
 
77,858

 
1,741

 
65

 
79,534

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
2,305

 
1,256

 
13

 
3,548

Total fixed maturities and equity investments
 
$
80,163

 
$
2,997

 
$
78

 
$
83,082



 
9
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

Amortized cost, gross unrealized gains and estimated fair value for common stock in the preceding table at June 30, 2013 include $9.3 million, $2.0 million and $11.3 million, respectively, for the Company's investment in the common stock of the Company's former investee, Atlas Financial Holdings, Inc. ("Atlas"). As discussed further in Note 7, Investment in Investee, the Company's investment in the common stock of Atlas was accounted for under the equity method of accounting and reported as investment in investee in the consolidated balance sheets at December 31, 2012.

Amortized cost and estimated fair value for preferred stock in the preceding table at June 30, 2013 include $16.2 million and $16.2 million, respectively, for the Company's investment in the preferred stock of Atlas. The Company's investment in the preferred stock of Atlas was reported as investment in investee in the consolidated balance sheets at December 31, 2012.

The table below summarizes the Company's fixed maturities at June 30, 2013 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
(in thousands)
 
June 30, 2013
 
 
 
Amortized Cost

 
Estimated Fair Value

Due in one year or less
 
$
25,289

 
$
25,380

Due after one year through five years
 
44,587

 
45,392

Due after five years through ten years
 
1,130

 
1,221

Due after ten years
 
248

 
263

Total
 
$
71,254

 
$
72,256


The following tables highlight the aggregate unrealized loss position, by security type, of fixed maturities and equity investments in unrealized loss positions as of June 30, 2013 and December 31, 2012. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
(in thousands)
 
 
 
 
 
 
 
 
June 30, 2013
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
$
4,848

 
$
13

 
$
—

 
$
—

 
$
4,848

 
$
13

Canadian government
4,182

 
101

 
—

 
—

 
4,182

 
101

States municipalities and political subdivisions
1,002

 
1

 
—

 
—

 
1,002

 
1

Mortgage-backed
127

 
—

 
—

 
—

 
127

 
—

Corporate
1,031

 
10

 
1,008

 
2

 
2,039

 
12

Total fixed maturities
11,190

 
125

 
1,008

 
2

 
12,198

 
127

Equity investments:
 
 
 
 
 
 
 
 


 


Common stock
154

 
21

 
—

 
—

 
154

 
21

Total
$
11,344

 
$
146

 
$
1,008

 
$
2

 
$
12,352

 
$
148



 
10
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

(in thousands)
 
 
 
 
 
 
 
 
December 31, 2012
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
$
4,612

 
$
1

 
$
—

 
$
—

 
$
4,612

 
$
1

Canadian government
3,782

 
40

 
—

 
—

 
3,782

 
40

Mortgage-backed
—

 
—

 
267

 
—

 
267

 
—

Corporate
4,169

 
14

 
—

 
10

 
4,169

 
24

Total fixed maturities
12,563

 
55

 
267

 
10

 
12,830

 
65

Equity investments:
 
 
 
 
 
 
 
 
 
 
 
Common stock
8

 
1

 
38

 
12

 
46

 
13

Total
$
12,571

 
$
56

 
$
305

 
$
22

 
$
12,876

 
$
78

Fixed maturities and equity investments contain approximately 17 and 19 individual investments that were in unrealized loss positions as of June 30, 2013 and December 31, 2012, respectively. 
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
•
identifying all unrealized loss positions that have existed for at least six months;
•
identifying other circumstances which management believes may impact the recoverability of the unrealized loss positions;
•
obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based on their knowledge and experience together with market-based valuation techniques;
•
reviewing the trading range of certain investments over the preceding calendar period;
•
assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings from third-party rating agencies;
•
assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit rating based on the continuity of its debt service record;
•
determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses performed; and
•
assessing the Company's ability and intent to hold these investments at least until the investment impairment is recovered.
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:
•
the opinions of professional investment managers could be incorrect;
•
the past trading patterns of individual investments may not reflect future valuation trends;
•
the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a company's financial situation; and
•
the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not reflect a company's unknown underlying financial problems.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, a write-down for other-than-temporary impairment related to other investments of zero and $0.5 million was recorded for the three months ended June 30, 2013 and June 30, 2012, respectively (zero and $0.5 million for the six months ended June 30, 2013 and June 30, 2012, respectively).
On July 8, 2013, the Company announced that it had entered into a non-binding letter of intent with Atlas to sell its holdings of Atlas preferred stock for 90.0% of liquidation value, or $16.2 million. On August 1, 2013, the Company announced that the transaction had closed. As a result, the Company recorded a write-down for other-than-temporary impairment related to its investment in Atlas preferred stock of $1.8 million for the three months ended June 30, 2013.

 
11
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

There were no write-downs related to fixed maturities for other-than-temporary impairments for the three and six months ended June 30, 2013 and June 30, 2012. There were no other-than-temporary losses recognized in other comprehensive income (loss) for the three and six months ended June 30, 2013 and June 30, 2012.
The Company has reviewed currently available information regarding investments with estimated fair values that are less than their carrying amounts and believes that these unrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments, and it is not likely that it will be required to sell those investments before recovery of its amortized cost.
The Company does not have any exposure to subprime mortgage-backed investments.
Limited liability investments include investments in limited liability companies and a limited partnership that primarily invest in income-producing real estate. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. As of June 30, 2013 and December 31, 2012, the carrying value of limited liability investments totaled $2.3 million and $2.3 million, respectively. At June 30, 2013, the Company has unfunded commitments totaling $4.0 million to fund limited liability investments. Income from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is included in net investment income.
Other investments include collateral and mortgage loans and are reported at their unpaid principal balance. As of June 30, 2013 and December 31, 2012, the carrying value of other investments totaled $3.0 million and $2.0 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the three and six months ended June 30, 2013 and June 30, 2012 were as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Gross realized gains
 
$
64

 
$
51

 
$
373

 
$
324

Gross realized losses
 
(32
)
 
(74
)
 
(32
)
 
(74
)
Total
 
$
32

 
$
(23
)
 
$
341

 
$
250


Gross realized losses for the six months ended June 30, 2013 reported in the preceding table excludes the realized loss on sale of Atlas common stock recorded during the first quarter of 2013. Refer to Note 7, Investment in Investee, for further discussion.
Net investment income for the three and six months ended June 30, 2013 and June 30, 2012, respectively, is comprised as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Investment income
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
368

 
$
600

 
$
650

 
$
1,118

Dividends
 
237

 
262

 
490

 
504

Income (loss) from limited liability investments
 
105

 
(5
)
 
155

 
(9
)
Other
 
167

 
63

 
259

 
229

Gross investment income
 
877

 
920

 
1,554

 
1,842

Investment expenses
 
(61
)
 
(123
)
 
(158
)
 
(219
)
Net investment income
 
$
816

 
$
797

 
$
1,396

 
$
1,623

At June 30, 2013, fixed maturities and short-term investments with an estimated fair value of $14.4 million were on deposit with state and provincial regulatory authorities. Also, from time to time, the Company pledges investments to third-parties to collateralize liabilities incurred under its policies of insurance. At June 30, 2013, the amount of such pledged securities was $24.5 million.

 
12
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the preferred and restricted voting common stock of Atlas. On February 12, 2013, the Company executed an underwriting agreement to sell 2,625,000 shares of Atlas common stock. The shares were being offered as part of Atlas' United States initial public offering at a price per share of $5.85. During the first quarter of 2013, the Company received net proceeds of $13.6 million and recognized a loss of $1.7 million, which is included in net realized losses on the consolidated statements of operations, resulting from commissions and other expenses incurred as part of the sale. As a result of this sale, the Company's approximate voting percentage in Atlas was reduced to 16.5%. As a result of this change in ownership and other qualitative factors, the Company determined that its investment in the common stock of Atlas no longer qualified for the equity method of accounting. Accordingly, the Company's investments in Atlas common stock and preferred stock are included in equity investments and reported at their fair values of $11.3 million and $16.2 million, respectively, in the consolidated balance sheets at June 30, 2013. The Company's share of its investee's equity adjustments for other comprehensive income of $0.7 million was offset against the carrying value of the Company's investment in Atlas common stock during the second quarter of 2013. Prior to discontinuing the use of the equity method of accounting for Atlas, the Company used a reporting lag of three months to report its proportionate share of Atlas' results.
The carrying value, estimated fair value and approximate voting and equity percentages for the Company's investment in the common stock of Atlas, which was accounted for under the equity method of accounting and reported as investment in investee in the Company's consolidated balance sheets at December 31, 2012, were as follows:
(in thousands, except for percentages)
 
 
 
 
 
 
December 31, 2012
 
 
Voting percentage
 
Equity percentage
 
Estimated Fair Value
 
Carrying value
Atlas
 
30.0
%
 
63.3
%
 
$
38,758

 
$
41,733


The fair value of the Company's investment in Atlas at December 31, 2012 in the table above is calculated based on the published closing price of Atlas at September 30, 2012 to be consistent with the three-month lag in reporting its carrying value under the equity method.
Equity in net income (loss) of investee was income of zero and $0.1 million for the three months ended June 30, 2013 and June 30, 2012, respectively (income of $0.3 million and loss of $2.2 million, respectively, year to date). The Company also recognized an increase to shareholders' equity attributable to common shareholders of $0.7 million and $0.6 million for the three and six months ended June 30, 2013, respectively, for the Company's pro rata share of its investee's accumulated other comprehensive income.
NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses incurred related to successful efforts to acquire new or renewal insurance contracts, net of ceding commission income, and vehicle service agreements. Acquisition costs deferred on both property and casualty insurance products and vehicle service agreements are amortized over the period in which the related revenues are earned.
The components of deferred acquisition costs and the related amortization expense for the three and six months ended June 30, 2013 and 2012, respectively, is comprised as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Beginning balance, net
 
$
12,685

 
$
8,403

 
$
14,102

 
$
8,116

Additions
 
6,595

 
2,649

 
15,767

 
8,858

Amortization
 
(7,483
)
 
(3,418
)
 
(18,072
)
 
(9,340
)
Balance at June 30, net
 
$
11,797

 
$
7,634

 
$
11,797

 
$
7,634


 
13
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

NOTE 9 GOODWILL
Goodwill was $9.5 million and $8.4 million at June 30, 2013 and December 31, 2012, respectively. As further discussed in Note 5, "Acquisitions," during the first six months of 2013, the Company continued its evaluation of certain tangible and intangible assets and liabilities of Intercontinental Warranty Services, Inc. that were acquired on November 16, 2012, which resulted in an increase to goodwill of $1.1 million from the amount recorded at December 31, 2012.
NOTE 10 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
(in thousands)
 
 
 
 
 
 
June 30, 2013

 
December 31, 2012

Intangible assets subject to amortization
 
 
 
 
Database
 
$
4,611

 
$
4,907

VSA in-force
 
2,116

 
2,770

Customer-related relationships
 
4,004

 
3,056

Non-compete agreement
 
54

 
66

Intangible assets not subject to amortization
 
 
 
 
     Insurance licenses
 
7,803

 
7,803

     Renewal rights
 
31,318

 
31,318

Trade name
 
663

 
663

Intangible assets
 
$
50,569

 
$
50,583

As further discussed in Note 5, "Acquisitions," during the second quarter of 2013, the Company acquired certain intangible assets of Trinity Warranty Corp. for total consideration consisting of approximately $1.1 million in cash and future contingent payments. The purchase price is expected to be allocated to the intangible assets purchased based upon their estimated fair values at the date of acquisition during the third quarter of 2013. Accordingly, the customer-related relationships intangible asset in the preceding table includes $1.1 million related to the estimated TWS intangible asset acquired.
The Company's intangible assets with indefinite useful lives are not amortized. The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Accumulated amortization for these intangibles as of June 30, 2013 and December 31, 2012 was $20.4 million and $19.3 million, respectively. Amortization of intangible assets was $0.5 million and zero for the three months ended June 30, 2013 and June 30, 2012, respectively ($1.1 million and zero for the six months ended June 30, 2013 and June 30, 2012, respectively).
NOTE 11 ASSET HELD FOR SALE
As of June 30, 2013, property consisting of building and land located in Miami, Florida with a carrying value of $7.3 million was classified as held for sale. During the three months ended June 30, 2013, the Company recorded a write-down of $1.4 million related to the asset held for sale. At June 30, 2013, the carrying value of the property is equal to its fair value net of estimated selling costs.
 
NOTE 12 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
The establishment of the provision for unpaid loss and loss adjustment expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a large variety of factors. These factors include the Company's experience with similar cases and historical trends involving loss payment patterns, pending levels of unpaid loss and loss adjustment expenses, product mix or concentration, loss severity and loss frequency patterns.
Other factors include the continually evolving and changing regulatory and legal environment; actuarial studies; professional experience and expertise of the Company's claims departments' personnel and independent adjusters retained to handle individual claims; the quality of the data used for projection purposes; existing claims management practices including claims-handling and settlement practices; the effect of inflationary trends on future loss settlement costs; court decisions; economic conditions; and public attitudes.
Consequently, the process of determining the provision necessarily involves risks that the actual results will deviate, perhaps materially, from the best estimates made.

 
14
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

The Company's evaluation of the adequacy of unpaid loss and loss adjustment expenses includes a re-estimation of the liability for unpaid loss and loss adjustment expenses relating to each preceding financial year compared to the liability that was previously established.
(a) Property and Casualty
The results of this comparison and the changes in the provision for property and casualty unpaid loss and loss adjustment expenses, net of amounts recoverable from reinsurers, as of June 30, 2013 and June 30, 2012 were as follows:
(in thousands)
 
June 30, 2013

 
June 30, 2012

Balance at beginning of period, gross
 
$
103,116

 
$
120,258

Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
5,478

 
298

Balance at beginning of period, net
 
97,638

 
119,960

Incurred related to:
 
 
 
 

      Current year
 
43,992

 
45,064

      Prior years
 
(834
)
 
327

Paid related to:
 
 
 
 

      Current year
 
(20,116
)
 
(19,870
)
      Prior years
 
(31,897
)
 
(47,582
)
Balance at end of period, net
 
88,783

 
97,899

Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
7,920

 
1,751

Balance at end of period, gross
 
$
96,703

 
$
99,650

(b) Vehicle Service Agreements
The results of the comparison and the changes in the provision for vehicle service agreement unpaid loss and loss adjustment expenses as of June 30, 2013 are presented below. The changes in and the provision for vehicle service agreement unpaid loss and loss adjustment expenses were zero as of June 30, 2012.
(in thousands)
 
June 30, 2013

Balance at beginning of period
 
$
3,448

Incurred related to:
 
 
      Current year
 
3,288

      Prior years
 
—

Paid related to:
 
 
      Current year
 
(3,515
)
      Prior years
 
(81
)
Balance at end of period
 
$
3,140




 
15
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

NOTE 13 DEBT
Debt consists of the following instruments:
(in thousands)
 
June 30, 2013
 
December 31, 2012
 
 
Principal

 
Fair Value

 
Principal

 
Fair Value

7.5% Senior notes due 2014
 
$
26,356

 
$
26,356

 
$
26,966

 
$
23,730

LROC preferred units due 2015
 
15,020

 
14,204

 
15,879

 
13,655

Subordinated debt
 
90,500

 
26,674

 
90,500

 
23,774

Total
 
$
131,876

 
$
67,234

 
$
133,345

 
$
61,159


Subordinated indebtedness mentioned above consists of the following trust preferred debt instruments:
Issuer
Principal

Issue date
Interest
Redemption date
Kingsway CT Statutory Trust I
15,000

12/4/2002
annual interest rate equal to LIBOR, plus 4.00% payable quarterly
12/4/2032
Kingsway CT Statutory Trust II
17,500

5/15/2003
annual interest rate equal to LIBOR, plus 4.10% payable quarterly
5/15/2033
Kingsway CT Statutory Trust III
20,000

10/29/2003
annual interest rate equal to LIBOR, plus 3.95% payable quarterly
10/29/2033
Kingsway DE Statutory Trust III
15,000

5/23/2003
annual interest rate equal to LIBOR, plus 4.20% payable quarterly
5/23/2033
Kingsway DE Statutory Trust IV
10,000

9/30/2003
annual interest rate equal to LIBOR, plus 3.85% payable quarterly
9/30/2033
Kingsway DE Statutory Trust VI
13,000

1/8/2004
annual interest rate equal to LIBOR, plus 4.00% payable quarterly
1/8/2034

During the first quarter of 2011, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures.  At June 30, 2013, deferred interest payable of $10.5 million is included in accrued expenses and other liabilities in the consolidated balance sheets.  The cash interest due in 2016 is subject to changes in the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") over the deferral period.
No debt repurchases were made during the second quarter of 2013. During the first quarter of 2013, the Company purchased for $0.6 million, including accrued interest, $0.6 million of par value of its senior unsecured debentures with a carrying value of $0.6 million, including accrued interest, recording a loss of $0.0 million. The Company subsequently canceled the acquired debentures. During the three and six months ended June 30, 2012, respectively, the Company did not buy-back any of its outstanding debt.
NOTE 14 INCOME TAXES
Income tax benefit for the three and six months ended June 30, 2013 varies from the amount that would result by applying the applicable United States income tax rate of 34% to loss before income tax benefit primarily due to a valuation allowance being applied to the Company's operating losses, a tax expense being recorded attributable to the Company's indefinite life intangible assets and a tax benefit being recorded for a Canadian income tax refund. Income tax expense for the three and six months ended June 30, 2012 varies from the amount that would result by applying the applicable United States income tax rate of 34% to loss before income tax expense primarily due to a valuation allowance being applied to the Company's operating losses.
The Company maintains a valuation allowance for its gross deferred tax assets at June 30, 2013 and December 31, 2012. The Company's operations have generated substantial operating losses during the last several years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income. The Company's operations, however, remain challenged and, as a result, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its June 30, 2013 and December 31, 2012 net deferred tax asset. The Company carries a deferred tax liability of $3.6 million and $3.1 million at June 30, 2013 and December 31, 2012, respectively, all of which relates to indefinite life intangible assets.

 
16
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

As of June 30, 2013 and December 31, 2012, the Company carried a liability for unrecognized tax benefits of $3.0 million and $3.0 million, respectively. The Company generally recognizes interest and penalties related to unrecognized tax benefits in income tax (benefit) expense.
NOTE 15 NET LOSS PER SHARE
Net loss per share is based on the weighted-average number of shares outstanding. Diluted weighted-average shares is calculated by adjusting basic weighted-average shares outstanding by all potentially dilutive stock options. Since the Company is reporting a net loss for the three and six months ended June 30, 2013 and June 30, 2012, all stock options outstanding were excluded from the calculation of both basic and diluted loss per share since their inclusion would have been anti-dilutive.
On July 3, 2012, the Company announced that the Board of Directors of the Company authorized the implementation of a share consolidation at a ratio of one post-consolidation share for every four pre-consolidation shares. The share consolidation, which was approved by the stockholders at the Company's Annual and Special Meeting held on May 31, 2012, was effective as of July 3, 2012 (the "Effective Date"). As a result of the consolidation, every four of the Company's common shares that were issued and outstanding on the Effective Date were automatically combined into one issued and outstanding common share, without any change in the par value of such shares. Any fractional shares resulting from the consolidation were rounded up to the nearest whole. The consolidation had the effect of reducing the number of common shares of the Company issued and outstanding from 52,595,828 shares pre-consolidation to 13,148,971 shares post-consolidation. The issued and outstanding shares reported in the consolidated balance sheets and the number of weighted-average shares outstanding included in the loss per share computations, as reported in the consolidated statements of operations, have been restated for all periods presented to reflect the impact of the share consolidation.

NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the components of accumulated other comprehensive income, net of tax, for the three and six months ended June 30, 2013 and June 30, 2012 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets. On the other hand, the unaudited consolidated statements of comprehensive loss present the components of other comprehensive income (loss), net of tax, only for the three and six months ended June 30, 2013 and June 30, 2012 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
  
 
2013

 
2012

 
2013

 
2012

Beginning balance
 
$
14,433

 
$
14,588

 
$
14,762

 
$
12,749

Unrealized gains on fixed maturities and equity investments arising during the period
 
1,650

 
425

 
1,152

 
304

Reclassification adjustment for losses (gains) included in net loss
 
34

 
(509
)
 
282

 
(367
)
Foreign currency translation adjustments
 
(2
)
 
(1,485
)
 
24

 
22

Equity in other comprehensive income of investee
 
747

 
28

 
642

 
339

Balance at June 30
 
$
16,862

 
$
13,047

 
$
16,862

 
$
13,047


 
17
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

Components of accumulated other comprehensive income were reclassified to the following lines of the consolidated statements of operations for the three and six months ended June 30, 2013 and June 30, 2012:
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
  
 
2013

 
2012

 
2013

 
2012

Reclassification of accumulated other comprehensive income from unrealized gains on fixed maturities and equity investments to:
 
 
 
 
 
 
 
 
Net realized (losses) gains
 
$
(34
)
 
$
509

 
$
(282
)
 
$
367

Other-than-temporary impairment loss
 
—

 
—

 
—

 
—

(Loss) gains before income tax (benefit) expense
 
(34
)
 
509

 
(282
)
 
367

Income tax (benefit) expense
 
—

 
—

 
—

 
—

Net (loss) gain
 
$
(34
)
 
$
509

 
$
(282
)
 
$
367

NOTE 17 SEGMENTED INFORMATION
The Company is primarily engaged, through its subsidiaries, in the property and casualty insurance business. The Company conducts its business through the following two reportable segments: Insurance Underwriting and Insurance Services.
On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments under two separate management teams. As a result of the Company's intent to streamline its non-standard property and casualty insurance business operations under one management team, KAI Advantage Auto, Inc. ("Advantage Auto"), formerly included in Insurance Services, is now part of Insurance Underwriting. All segmented information has been restated for all periods presented to include Advantage Auto in Insurance Underwriting.
Insurance Underwriting Segment
Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company, Mendakota Insurance Company, Universal Casualty Company, Maison Insurance Company ("Maison"), Kingsway Amigo Insurance Company ("Amigo"), Advantage Auto, Kingsway Reinsurance Corporation and Kingsway Reinsurance (Bermuda) Ltd. (collectively, "Insurance Underwriting"). In November 2012, the Company formed Maison, a Louisiana-domiciled property and casualty insurance company, which provides homeowners policies for wind and hail-related property losses of residential dwellings and certain contents. Insurance Underwriting principally offers personal automobile insurance to drivers who do not meet the criteria for coverage by standard automobile insurers and actively conducts business in 17 states.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. On November 19, 2012, the Florida Office of Insurance Regulation (“OIR”) approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida. On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines plans for Amigo's run-off. The comprehensive run-off plan is subject to OIR approval.
Insurance Services Segment
Insurance Services includes the following subsidiaries of the Company: Assigned Risk Solutions Ltd. ("ARS"), IWS and TWS (collectively, "Insurance Services"). During the first quarter of 2013, Northeast Alliance Insurance Agency, LLC, formerly included in Insurance Services, was merged into ARS.
ARS is a licensed property and casualty agent, full service managing general agent and third-party administrator focused primarily on the assigned risk market. ARS is licensed to administer business in 22 states but generates its revenues primarily by operating in the states of New York and New Jersey.
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 26 states and Puerto Rico to their members.

 
18
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

TWS is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning ("HVAC") and refrigeration industry. TWS distributes its warranty products through original equipment manufacturers, HVAC distributors and commercial and residential contractors. It distributes its maintenance support direct through corporate owners of retail spaces throughout the United States.
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
Segment revenues for the three and six months ended June 30, 2013 and 2012 were:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Revenues:
 
 
 
 
 
 
 
 
Insurance Underwriting:
 
 
 
 
 
 
 
 
   Net premiums earned
 
$
28,297

 
$
30,985

 
$
56,365

 
$
60,252

Other income
 
2,199

 
1,866

 
4,656

 
3,753

Total Insurance Underwriting
 
30,496

 
32,851

 
61,021

 
64,005

Insurance Services:
 
 
 
 
 
 
 
 
Service fee and commission income
 
12,052

 
8,138

 
25,176

 
17,667

Total Insurance Services
 
12,052

 
8,138

 
25,176

 
17,667

Total segment revenues
 
42,548

 
40,989

 
86,197

 
81,672

Net investment income
 
816

 
797

 
1,396

 
1,623

Net realized gains (losses)
 
32

 
(23
)
 
(1,377
)
 
250

Other-than-temporary impairment loss
 
(1,800
)
 
(488
)
 
(1,800
)
 
(488
)
Gain (loss) on change in fair value of debt
 
2,338

 
(2,418
)
 
(6,613
)
 
(6,749
)
Other income not allocated to segments
 
(25
)
 
878

 
(264
)
 
74

Total revenues
 
$
43,909

 
$
39,735

 
$
77,539

 
$
76,382

The operating (loss) income of each segment in the following table is before income taxes and includes revenues and direct segment costs. For the three months ended June 30, 2013 and 2012, Insurance Services operating income includes amortization expense of $0.3 million and zero, respectively, related to its VSA in-force intangible asset. For the six months ended June 30, 2013 and 2012, Insurance Services operating income includes amortization expense of $0.7 million and zero, respectively, related to its VSA in-force intangible asset.

 
19
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

Segment (loss) income for the three and six months ended June 30, 2013 and 2012 were:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Segment operating (loss) income
 
 
 
 
 
 
 
 
Insurance Underwriting
 
$
(5,355
)
 
$
(3,838
)
 
$
(9,725
)
 
$
(6,963
)
Insurance Services
 
(60
)
 
991

 
1,289

 
2,724

Total segment operating loss
 
(5,415
)
 
(2,847
)
 
(8,436
)
 
(4,239
)
Net investment income
 
816

 
797

 
1,396

 
1,623

Net realized gains (losses)
 
32

 
(23
)
 
(1,377
)
 
250

Other-than-temporary impairment loss
 
(1,800
)
 
(488
)
 
(1,800
)
 
(488
)
Gain (loss) on change in fair value of debt
 
2,338

 
(2,418
)
 
(6,613
)
 
(6,749
)
Other income and expenses not allocated to segments, net
 
(2,611
)
 
(803
)
 
(5,589
)
 
(4,527
)
Interest expense
 
(1,927
)
 
(1,916
)
 
(3,760
)
 
(3,765
)
Amortization of intangible assets not allocated to segments
 
(181
)
 
—

 
(412
)
 
—

Impairment of asset held for sale
 
(1,446
)
 
—

 
(1,446
)
 
—

Loss on buy-back of debt
 
—

 
—

 
(24
)
 
—

Equity in net income (loss) of investee
 
—

 
97

 
255

 
(2,169
)
Loss before income tax (benefit) expense
 
$
(10,194
)
 
$
(7,601
)
 
$
(27,806
)
 
$
(20,064
)
Income tax (benefit) expense
 
(525
)
 
116

 
(801
)
 
175

Net loss
 
$
(9,669
)
 
$
(7,717
)
 
$
(27,005
)
 
$
(20,239
)
Net premiums earned by line of business for the three and six months ended June 30, 2013 and 2012 were:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2013

 
2012

 
2013

 
2012

Insurance Underwriting:
 
 
 
 
 
 
 
 
Private passenger auto liability
 
$
19,176

 
$
20,415

 
$
37,837

 
$
39,820

Auto physical damage
 
8,330

 
7,515

 
16,173

 
14,819

Total non-standard automobile
 
27,506

 
27,930

 
$
54,010

 
$
54,639

Commercial auto liability
 
97

 
3,057

 
746

 
5,613

Homeowners
 
694

 
—

 
1,609

 
—

Other
 
—

 
(2
)
 
—

 
—

Total net premiums earned
 
$
28,297

 
$
30,985

 
$
56,365

 
$
60,252

NOTE 18 RESTRUCTURING
On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments under two separate management teams. As part of the restructuring, the Company intends to streamline its non-standard property and casualty insurance business operations. Specific to Insurance Underwriting, during the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. On November 19, 2012, the OIR approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida. On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines plans for Amigo's run-off. The comprehensive run-off plan is subject to OIR approval.

 
20
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2013

As part of the restructuring, the Company will reduce staffing levels to be consistent with placing Amigo into run-off. The Company continues to estimate that Insurance Underwriting will incur approximately $2.0 million in cash severance expenses due to reductions-in-force as part of the restructuring, and the Company now expects that these expenses will be incurred during the period beginning with the announcement through the end of 2013. From the time the restructuring was announced on September 17, 2012 through June 30, 2013, the Company has incurred severance expense of $1.6 million.
Changes in the restructuring liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, and the related restructuring expense for the three and six months ended June 30, 2013 is as follows:
(in thousands)
 
Three months ended June 30, 2013
 
 
 
Severance
 
Lease abandonment
 
Total
Restructuring liability, beginning of period
 
$
486

 
$
1,139

 
$
1,625

Restructuring expense
 
127

 
20

 
147

Cash payments
 
(569
)
 
(88
)
 
(657
)
Restructuring liability, end of period
 
$
44

 
$
1,071

 
$
1,115


(in thousands)
 
Six months ended June 30, 2013
 
 
 
Severance
 
Lease abandonment
 
Total
Restructuring liability, beginning of period
 
$
214

 
$
1,207