10Q Q3 14

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
For Quarterly Period Ended September 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____
 
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 November 5, 2014 was 19,709,706.


KINGSWAY FINANCIAL SERVICES INC.

Table Of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (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)
 
 
September 30, 2014

 
December 31, 2013

 
 
 (unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $48,355 and $53,455, respectively)
 
$
48,648

 
$
54,151

Equity investments, at fair value (cost of $12,344 and $3,554, respectively)
 
14,932

 
7,137

Limited liability investments
 
6,997

 
4,406

Other investments, at cost which approximates fair value
 
2,000

 
3,000

Short-term investments, at cost which approximates fair value
 
401

 
501

Total investments
 
72,978


69,195

Cash and cash equivalents
 
87,273

 
98,589

Investment in investee
 
2,222

 
—

Accrued investment income
 
884

 
614

Premiums receivable, net of allowance for doubtful accounts of $2,173 and $2,123, respectively
 
30,600

 
32,035

Service fee receivable, net of allowance for doubtful accounts of $247 and $0, respectively
 
22,243

 
19,012

Other receivables, net of allowance for doubtful accounts of $1,061 and $1,062, respectively
 
5,273

 
4,097

Reinsurance recoverable
 
4,003

 
10,335

Prepaid reinsurance premiums
 
55

 
6,816

Deferred acquisition costs, net
 
12,463

 
12,392

Property and equipment, net of accumulated depreciation of $16,399 and $15,848, respectively
 
1,261

 
1,662

Goodwill
 
10,588

 
10,588

Intangible assets, net of accumulated amortization of $19,803 and $18,583, respectively
 
47,698

 
48,918

Other assets
 
3,672

 
4,039

Asset held for sale
 
5,167

 
6,347

Total Assets
 
$
306,380

 
$
324,639

Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
Unpaid loss and loss adjustment expenses:
 
 
 
 
Property and casualty
 
$
68,156

 
$
84,534

Vehicle service agreements
 
2,975

 
3,128

Total unpaid loss and loss adjustment expenses
 
71,131

 
87,662

Unearned premiums
 
38,396

 
48,577

Reinsurance payable
 
49

 
1,033

LROC preferred units, at fair value
 
14,106

 
14,854

Senior unsecured debentures, at fair value
 
—

 
14,356

Subordinated debt, at fair value
 
39,418

 
28,471

Deferred income tax liability
 
5,076

 
4,173

Deferred service fees
 
50,477

 
48,788

Income taxes payable
 
80

 
2,984

Accrued expenses and other liabilities
 
41,329

 
36,821

Total Liabilities
 
$
260,062

 
$
287,719

Shareholders' Equity:
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 262,876 and zero issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
$
6,330

 
$
—

Common stock, no par value; unlimited number authorized; 19,709,706 and 16,429,761 issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
—

 
—

Additional paid-in capital
 
340,595

 
324,803

Accumulated deficit
 
(312,596
)
 
(298,930
)
Accumulated other comprehensive income
 
8,300

 
9,601

Shareholders' equity attributable to common shareholders
 
42,629

 
35,474

Noncontrolling interests in consolidated subsidiaries
 
3,689

 
1,446

Total Shareholders' Equity
 
46,318

 
36,920

Total Liabilities and Shareholders' Equity
 
$
306,380

 
$
324,639

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 September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Revenues:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
28,418

 
$
26,041

 
$
89,093

 
$
82,406

Service fee and commission income
 
14,102

 
12,156

 
42,752

 
37,332

Net investment income
 
542

 
409

 
1,296

 
1,805

Net realized gains (losses)
 
329

 
321

 
5,459

 
(1,056
)
Other-than-temporary impairment loss
 
—

 
—

 
—

 
(1,800
)
Other income
 
2,142

 
2,723

 
6,680

 
7,115

Total revenues
 
45,533

 
41,650

 
145,280

 
125,802

Expenses:
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
22,361

 
21,343

 
65,216

 
67,789

Commissions and premium taxes
 
5,738

 
6,683

 
17,823

 
18,566

Cost of services sold
 
1,544

 
951

 
3,337

 
1,097

General and administrative expenses
 
16,510

 
19,030

 
52,659

 
58,622

Restructuring expense
 
5

 
223

 
(29
)
 
1,150

Interest expense
 
1,417

 
1,808

 
4,214

 
5,568

Amortization of intangible assets
 
397

 
508

 
1,220

 
1,574

Contingent consideration expense
 
267

 
155

 
801

 
465

Impairment of asset held for sale
 
—

 
—

 
1,180

 
1,446

Total expenses
 
48,239

 
50,701

 
146,421

 
156,277

Loss from continuing operations before (loss) gain on change in fair value of debt, loss on disposal of subsidiary, loss on buy-back of debt, equity in net (loss) income of investee and income tax expense (benefit)
 
(2,706
)
 
(9,051
)
 
(1,141
)
 
(30,475
)
(Loss) gain on change in fair value of debt
 
(2,963
)
 
3,801

 
(10,199
)
 
(2,812
)
Loss on disposal of subsidiary
 
—

 
—

 
(1,242
)
 
—

Loss on buy-back of debt
 
—

 
—

 
—

 
(24
)
Equity in net (loss) income of investee
 
(83
)
 
—

 
(83
)
 
255

Loss from continuing operations before income tax expense (benefit)
 
(5,752
)
 
(5,250
)
 
(12,665
)
 
(33,056
)
Income tax expense (benefit)
 
343

 
403

 
(90
)
 
(398
)
Loss from continuing operations
 
(6,095
)
 
(5,653
)
 
(12,575
)
 
(32,658
)
Gain on liquidation of subsidiaries, net of taxes
 
—

 
7,227

 
—

 
7,227

Net (loss) income
 
(6,095
)
 
1,574

 
(12,575
)
 
(25,431
)
Less: net income (loss) attributable to noncontrolling interests in consolidated subsidiaries
 
778

 
(305
)
 
873

 
407

Less: dividends on preferred stock
 
83

 
—

 
218

 
—

Net (loss) income attributable to common shareholders
 
$
(6,956
)
 
$
1,879

 
$
(13,666
)
 
$
(25,838
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.41
)
 
$
(0.39
)
 
$
(0.82
)
 
$
(2.48
)
Diluted:
 
$
(0.41
)
 
$
(0.39
)
 
$
(0.82
)
 
$
(2.48
)
(Loss) earnings per share – net (loss) income attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.41
)
 
$
0.14

 
$
(0.82
)
 
$
(1.94
)
Diluted:
 
$
(0.41
)
 
$
0.14

 
$
(0.82
)
 
$
(1.94
)
Weighted average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
16,993

 
13,684

 
16,620

 
13,329

Diluted:
 
16,993

 
13,684

 
16,620

 
13,329

See accompanying notes to unaudited consolidated financial statements.

 
4
 
KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(6,095
)
 
$
1,574

 
$
(12,575
)
 
$
(25,431
)
Other comprehensive loss, net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized (losses) gains on fixed maturities and equity investments:
 
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
 
(2,244
)
 
(281
)
 
(2,924
)
 
855

Reclassification adjustment for amounts included in net (loss) income
 
187

 
1,860

 
1,526

 
2,142

Foreign currency translation adjustments
 
(22
)
 
1

 
(37
)
 
—

Recognition of currency translation gain on liquidation of subsidiaries
 
—

 
(7,227
)
 
—

 
(7,227
)
Equity in other comprehensive income of investee
 
—

 
—

 
—

 
642

Other comprehensive loss
 
(2,079
)
 
(5,647
)
 
(1,435
)
 
(3,588
)
Comprehensive loss
 
(8,174
)
 
(4,073
)
 
(14,010
)
 
(29,019
)
Less: comprehensive income (loss) attributable to noncontrolling interests in consolidated subsidiaries
 
795

 
(312
)
 
768

 
359

Comprehensive loss attributable to common shareholders
 
$
(8,969
)
 
$
(3,761
)
 
$
(14,778
)
 
$
(29,378
)
 (1) Net of income tax expense (benefit) of $0 and $0 for the three and nine months ended September 30, 2014 and September 30, 2013, respectively.
 
 
See accompanying notes to unaudited consolidated financial statements

 
5
 
KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net loss
 
$
(12,575
)
 
$
(25,431
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Gain on liquidation of subsidiaries, net of taxes
 
—

 
(7,227
)
Equity in net loss (income) of investee
 
83

 
(255
)
Equity in net income of limited liability investments
 
(201
)
 
(133
)
Depreciation and amortization
 
2,006

 
2,786

Contingent consideration expense
 
801

 
465

Stock based compensation expense, net of forfeitures
 
1,033

 
198

Net realized (gains) losses
 
(5,459
)
 
1,056

Loss on change in fair value of debt
 
10,199

 
2,812

Deferred income taxes
 
1,079

 
144

Other than temporary impairment loss
 
—

 
1,800

Amortization of fixed maturities premiums and discounts
 
515

 
2,302

Loss on disposal of subsidiary
 
1,242

 
—

Impairment of asset held for sale
 
1,180

 
1,446

Realized loss on buy-back of debt
 
—

 
24

Changes in operating assets and liabilities:
 
 
 
 
Premiums and service fee receivable
 
(1,796
)
 
8

Other receivables
 
(1,176
)
 
(7,918
)
Reinsurance recoverable
 
6,332

 
(6,751
)
Prepaid reinsurance premiums
 
6,761

 
(944
)
Deferred acquisition costs
 
(71
)
 
3,411

Unpaid loss and loss adjustment expenses
 
(16,531
)
 
(13,696
)
Unearned premiums
 
(10,181
)
 
2,799

Reinsurance payable
 
(984
)
 
(721
)
Deferred service fees
 
1,689

 
255

Other, net
 
1,640

 
4,895

Net cash used in operating activities
 
(14,414
)
 
(38,675
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
21,722

 
18,725

Proceeds from sales of equity investments
 
6,761

 
8,799

Proceeds from sales of other investments
 
1,000

 
—

Proceeds from sales of investment in investee
 
—

 
13,638

Purchase of fixed maturities
 
(21,293
)
 
(4,725
)
Purchase of equity investments
 
(10,180
)
 
(286
)
Net acquisition of limited liability investments
 
(1,159
)
 
(919
)
Purchase of other investments
 
—

 
(1,031
)
Net purchases of short-term investments
 
(103
)
 
(325
)
Acquisition of business, net of cash acquired
 
—

 
(1,052
)
Net purchases of property and equipment and intangible assets
 
(384
)
 
(455
)
Net cash (used in) provided by investing activities
 
(3,636
)
 
32,369

Financing activities:
 
 
 
 
Proceeds from issuance of preferred stock, net
 
6,330

 
—

Proceeds from issuance of common stock, net
 
—

 
12,113

Proceeds from issuance of warrants
 
14,760

 
—

Redemption of senior unsecured debentures
 
(14,356
)
 
(583
)
Net cash provided by financing activities
 
6,734

 
11,530

Net (decrease) increase in cash and cash equivalents
 
(11,316
)
 
5,224

Cash and cash equivalents at beginning of period
 
98,589

 
80,813

Cash and cash equivalents at end of period
 
$
87,273

 
$
86,037

See accompanying notes to unaudited consolidated financial statements.

 
6
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014


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 Canadian holding company with operating subsidiaries located in the United States. The Company operates as a merchant bank 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 ("2013 Annual Report") for the year ended December 31, 2013.
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, fair value assumptions for debt obligations and contingent consideration.
The fair values of the Company's investments in fixed maturities and equity investments, LROC preferred units, senior unsecured debentures, subordinated debt and contingent consideration 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 balance. 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 2013 Annual Report.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
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 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. Effective January 1, 2014, the Company adopted ASU 2013-11. Except for the new disclosure requirements, the adoption of the standard did not have an impact on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASC 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be entitled in exchange for those goods or services. ASC 2014-09 is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. Insurance contracts are not within the scope of ASU 2014-09, therefore this standard would not apply to the Company's Insurance Underwriting segment. The Company is evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 
7
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

NOTE 5 ACQUISITION, DISPOSITIONS AND LIQUIDATIONS
(a)     Acquisition
Trinity Warranty Solutions LLC:
Effective May 22, 2013, the Company's subsidiary, Trinity Warranty Solutions LLC ("Trinity"), acquired certain intangible assets and liabilities of Trinity Warranty Corp. for total consideration consisting of approximately $1.1 million in cash and future contingent payments. As further discussed in Note 18, "Segmented Information," Trinity is included in the Insurance Services segment. Trinity is based in Illinois and is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning ("HVAC") and refrigeration industry.
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 2013, the Company completed its fair value analysis on the assets acquired and liabilities assumed. Goodwill of $1.1 million was recognized in addition to $0.5 million of a separately identifiable intangible asset for customer-related relationships. The fair value analysis performed resulted in the establishment of a $0.6 million liability effective May 22, 2013 related to present value of future contingent payments. The maximum the Company can pay in future contingent payments is $2.4 million, on an undiscounted basis. The contingent payments are payable annually beginning in 2014 through 2023, are subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. As of September 30, 2014, the recorded value of the contingent payment liability is $1.0 million, which is included in accrued expenses and other liabilities on the consolidated balance sheets.
(b)     Dispositions
1347 Property Insurance Holdings, Inc.:
Effective March 31, 2014, the Company's wholly owned subsidiary, 1347 Property Insurance Holdings, Inc. ("PIH"), formerly known as Maison Insurance Holdings, Inc., completed an initial public offering of its common stock. Total consideration to the Company as a result of this transaction was $7.7 million, consisting of a 28.7% interest in the common shares of PIH. As a result of the disposal, the Company recognized a loss of $1.2 million during the first quarter of 2014. The earnings of PIH are included in the consolidated statements of operations through the March 31, 2014 transaction date. At March 31, 2014, the Company's investment in the common stock of PIH was reported as investment in investee in the consolidated balance sheets.
During the second quarter of 2014, PIH announced the closing and settlement of an underwritten public offering of 2,875,000 shares of its common stock at a price to the public of $8.00 per share. As a result of the issuance of additional shares of common stock, the Company's approximate voting percentage in PIH was reduced to 15.7% at June 30, 2014. As a result of this change in ownership and other qualitative factors, the Company determined that its investment in the common stock of PIH no longer qualified for the equity method of accounting. Accordingly, the Company's investment in PIH common stock is included in equity investments and reported at its fair value of $7.8 million in the consolidated balance sheets at September 30, 2014.
Investment in Atlas Financial Holdings, Inc.:
The Company formerly held an investment in the preferred and restricted voting common stock of Atlas Financial Holdings, Inc. ("Atlas") that was recorded as investment in investee in the consolidated balance sheets. 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 gains (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. 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.
Equity in net income of investee related to Atlas was zero and $0.3 million for the nine months ended September 30, 2014 and September 30, 2013, respectively. The Company also recognized an increase to shareholders' equity attributable to common shareholders of zero and $0.6 million for the three and nine months ended September 30, 2013, respectively, for the Company's pro rata share of Atlas' accumulated other comprehensive income.

 
8
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

During the fourth quarter of 2013, the Company further reduced its investment in the common stock of Atlas. The Company's investment in Atlas common stock at September 30, 2014 is included in equity investments and reported at fair value of $1.8 million in the consolidated balance sheets.
(c)     Liquidations
During 2013, the Company's subsidiaries, Kingsway Reinsurance (Bermuda) Ltd. ("KRL") and Kingsway 2007 General Partnership ("2007 GP"), were liquidated. As a result of the liquidations of these subsidiaries, the Company realized a net after-tax gain of $7.2 million for the three months ended September 30, 2013. This gain represents the foreign exchange gain previously recorded in accumulated other comprehensive income and now recognized in the statement of operations as a result of the liquidations of KRL and 2007 GP. Summarized financial information for liquidation of subsidiaries is shown below:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Liquidations:
 
 
 
 
 
 
 
 
Gain on liquidations before income taxes
 
—

 
7,227

 
—

 
7,227

Income tax benefit
 
—

 
—

 
—

 
—

Gain on liquidation of subsidiaries, net of taxes
 
—

 
7,227

 
—

 
7,227

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 September 30, 2014 and December 31, 2013 are summarized in the tables shown below:
(in thousands)
 
September 30, 2014
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
10,199

 
$
403

 
$
14

 
$
10,588

Canadian government
 
4,681

 
—

 
248

 
4,433

States municipalities and political subdivisions
 
6,102

 
91

 
—

 
6,193

Mortgage-backed
 
4,391

 
21

 
14

 
4,398

Asset-backed securities and collateralized mortgage obligations
 
7,756

 
3

 
8

 
7,751

Corporate
 
15,226

 
103

 
44

 
15,285

Total fixed maturities
 
48,355

 
621

 
328

 
48,648

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
12,215

 
2,698

 
121

 
14,792

Warrants
 
129

 
11

 
—

 
140

Total equity investments
 
12,344

 
2,709

 
121

 
14,932

Total fixed maturities and equity investments
 
$
60,699

 
$
3,330

 
$
449

 
$
63,580



 
9
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

(in thousands)
 
December 31, 2013
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
17,777

 
$
591

 
$
30

 
$
18,338

Canadian government
 
4,235

 
—

 
153

 
4,082

States municipalities and political subdivisions
 
6,126

 
105

 
—

 
6,231

Mortgage-backed
 
1,993

 
15

 
2

 
2,006

Asset-backed securities and collateralized mortgage obligations
 
3,996

 
1

 
3

 
3,994

Corporate
 
19,328

 
183

 
11

 
19,500

Total fixed maturities
 
53,455

 
895

 
199

 
54,151

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
3,554

 
3,623

 
40

 
7,137

Total fixed maturities and equity investments
 
$
57,009

 
$
4,518

 
$
239

 
$
61,288


The table below summarizes the Company's fixed maturities at September 30, 2014 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)
 
September 30, 2014
 
 
 
Amortized Cost

 
Estimated Fair Value

Due in one year or less
 
$
11,957

 
$
11,760

Due after one year through five years
 
31,214

 
31,302

Due after five years through ten years
 
1,215

 
1,607

Due after ten years
 
3,969

 
3,979

Total
 
$
48,355

 
$
48,648


The following tables highlight the aggregate unrealized loss position, by security type, of fixed maturities and equity investments in unrealized loss positions as of September 30, 2014 and December 31, 2013. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.

 
10
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

(in thousands)
 
 
 
 
 
 
 
 
September 30, 2014
 
 
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
$
2,518

 
$
14

 
$
224

 
$
—

 
$
2,742

 
$
14

Canadian government
—

 
—

 
4,433

 
248

 
4,433

 
248

Mortgage-backed
2,729

 
14

 
—

 
—

 
2,729

 
14

Asset-backed securities and collateralized mortgage obligations
2,950

 
8

 
—

 
—

 
2,950

 
8

Corporate
9,557

 
34

 
—

 
10

 
9,557

 
44

Total fixed maturities
17,754

 
70

 
4,657

 
258

 
22,411

 
328

Equity investments:
 
 
 
 
 
 
 
 


 


Common stock
1,824

 
121

 
—

 
—

 
1,824

 
121

Total
$
19,578

 
$
191

 
$
4,657

 
$
258

 
$
24,235

 
$
449


(in thousands)
 
 
 
 
 
 
 
 
December 31, 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
$
4,008

 
$
30

 
$
—

 
$
—

 
$
4,008

 
$
30

Canadian government
—

 
—

 
4,082

 
153

 
4,082

 
153

Mortgage-backed
919

 
2

 
—

 
—

 
919

 
2

Asset-backed securities and collateralized mortgage obligations
3,474

 
3

 
—

 
—

 
3,474

 
3

Corporate
408

 
1

 
—

 
10

 
408

 
11

Total fixed maturities
8,809

 
36

 
4,082

 
163

 
12,891

 
199

Equity investments:
 
 
 
 
 
 
 
 
 
 
 
Common stock
969

 
35

 
1

 
5

 
970

 
40

Total
$
9,778

 
$
71

 
$
4,083

 
$
168

 
$
13,861

 
$
239

Fixed maturities and equity investments contain approximately 59 and 27 individual investments that were in unrealized loss positions as of September 30, 2014 and December 31, 2013, 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;

 
11
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

•
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, there were no write-downs for other-than-temporary impairments related to investments for the three and nine months ended September 30, 2014.
On July 8, 2013, the Company announced that it had entered into a non-binding letter of intent with its former investee, 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 zero and $1.8 million for the three and nine months ended September 30, 2013. There were no write-downs related to fixed maturities or other investments for the three and nine months ended September 30, 2013.
There were no other-than-temporary losses recognized in other comprehensive loss for the three and nine months ended September 30, 2014 and September 30, 2013.
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 or real estate related investments. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. As of September 30, 2014 and December 31, 2013, the carrying value of limited liability investments totaled $7.0 million and $4.4 million, respectively. At September 30, 2014, the Company has unfunded commitments totaling $0.5 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 loans and are reported at their unpaid principal balance. As of September 30, 2014 and December 31, 2013, the carrying value of other investments totaled $2.0 million and $3.0 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the three and nine months ended September 30, 2014 and September 30, 2013 were as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Gross realized gains
 
$
330

 
$
321

 
$
5,469

 
$
694

Gross realized losses
 
(1
)
 
—

 
(10
)
 
(32
)
Total
 
$
329

 
$
321

 
$
5,459

 
$
662


 
12
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014


Gross realized losses for the nine months ended September 30, 2013 reported in the preceding table excludes the realized loss of $1.7 million on the sale of Atlas common stock recorded during the first quarter of 2013. At the time this loss was incurred, the Atlas common stock was classified as investment in investee. Refer to Note 5, "Acquisition, Dispositions and Liquidations," for further discussion.
Net investment income for the three and nine months ended September 30, 2014 and September 30, 2013, respectively, is comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Investment income
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
284

 
$
314

 
$
827

 
$
964

Dividends
 
67

 
101

 
153

 
591

Income from limited liability investments
 
176

 
(22
)
 
201

 
133

Other
 
29

 
51

 
257

 
310

Gross investment income
 
556

 
444

 
1,438

 
1,998

Investment expenses
 
(14
)
 
(35
)
 
(142
)
 
(193
)
Net investment income
 
$
542

 
$
409

 
$
1,296

 
$
1,805

At September 30, 2014, fixed maturities and short-term investments with an estimated fair value of $11.9 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 September 30, 2014, the amount of such pledged securities was $17.4 million.
NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the common stock and private units of 1347 Capital Corp. and is accounted for under the equity method. 1347 Capital Corp. was formed for the purpose of entering into a merger, share exchange, asset acquisition or other similar business combination with one or more businesses or entities. The carrying value, estimated fair value and approximate equity percentage for the Company's investment in 1347 Capital Corp. at September 30, 2014 were as follows:
(in thousands, except for percentages)
 
 
 
September 30, 2014
 
 
 
 
 
 
 
Equity percentage
 
Estimated Fair Value
 
Carrying value
1347 Capital Corp.
 
 
22.7
%
 
$
13,008

 
$
2,222


Equity in net loss of investee related to 1347 Capital Corp. was $0.1 million and zero for the three months ended September 30, 2014 and September 30, 2013, respectively ($0.1 million and zero, respectively, year to date).
The Company formerly held an investment in Atlas that was recorded as investment in investee in the consolidated balance sheets. Refer to Note 5, "Acquisition, Dispositions and Liquidations," to the unaudited consolidated interim financial statements, for discussion of the Company's disposition of its investment in Atlas.

NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses, net of ceding commission income, incurred related to successful efforts to acquire new or renewal insurance contracts 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.

 
13
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

The components of deferred acquisition costs and the related amortization expense for the three and nine months ended September 30, 2014 and 2013, respectively, are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Beginning balance, net
 
$
12,625

 
$
11,797

 
$
12,392

 
$
14,102

Additions
 
6,632

 
4,952

 
20,733

 
20,719

Amortization
 
(6,794
)
 
(6,058
)
 
(19,619
)
 
(24,130
)
Acquisition costs disposed of during the year related to PIH
 
—

 
—

 
(1,043
)
 
—

Balance at September 30, net
 
$
12,463

 
$
10,691

 
$
12,463

 
$
10,691

NOTE 9 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
(in thousands)
 
 
September 30, 2014
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization
 
 
 
 
 
 
Database
 
$
4,918

 
$
922

 
$
3,996

Vehicle service agreements in-force
 
3,680

 
2,786

 
894

Customer-related relationships
 
3,611

 
612

 
2,999

Non-compete agreement
 
70

 
45

 
25

Intangible assets not subject to amortization
 
 
 
 
 
 
Renewal rights
 
46,756

 
15,438

 
31,318

Insurance licenses
 
7,803

 
—

 
7,803

Trade name
 
663

 
—

 
663

Total
 
$
67,501

 
$
19,803

 
$
47,698


(in thousands)
 
 
December 31, 2013
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization
 
 
 
 
 
 
Database
 
$
4,918

 
$
554

 
$
4,364

Vehicle service agreements in-force
 
3,680

 
2,220

 
1,460

Customer-related relationships
 
3,611

 
344

 
3,267

Non-compete agreement
 
70

 
27

 
43

Intangible assets not subject to amortization
 
 
 
 
 
 
Renewal rights
 
46,756

 
15,438

 
31,318

Insurance licenses
 
7,803

 
—

 
7,803

Trade name
 
663

 
—

 
663

Total
 
$
67,501

 
$
18,583

 
$
48,918

The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Amortization of intangible assets was $0.4 million and $0.5 million for the three months ended September 30, 2014 and September 30, 2013, respectively ($1.2 million and $1.6 million for the nine months ended September 30, 2014 and September 30, 2013, respectively).
The insurance licenses, renewal rights and trade name intangible assets have indefinite useful lives and are not amortized. The renewal rights intangible assets, recognized related to the acquisitions of Northeast Alliance Insurance Agency, LLC ("NEA") and Assigned Risk Solutions Ltd. ("ARS"), were originally being amortized on a straight-line basis over 10 to 15 years. As a result

 
14
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

of the acquisition of ARS during 2010, the Company determined that it was necessary to re-examine the useful lives assigned to the renewal rights intangible assets due to the fact that NEA and ARS service the assigned risk business in the states of New York and New Jersey and operate in the New York voluntary markets where there is limited competition for the renewal rights. As a result of the review performed, the Company determined that there were no legal, regulatory, contractual, competitive, economic, or other factors limiting the useful life of the renewal rights intangible assets; therefore, effective January 1, 2011, the renewal rights intangible assets were deemed to have indefinite useful lives and are no longer being amortized. The renewal rights had accumulated amortization of $15.4 million at December 31, 2010.
NOTE 10 ASSET HELD FOR SALE
As of September 30, 2014, property consisting of building and land located in Miami, Florida with a carrying value of $5.2 million was classified as held for sale. During the nine months ended September 30, 2014 and September 30, 2013, the Company recorded write-downs of $1.2 million and $1.4 million, respectively, related to the asset held for sale. At September 30, 2014, the carrying value of the property is equal to its fair value net of estimated selling costs. On October 2, 2014, the Company closed on the sale of the property. The Company will record the disposal during the fourth quarter of 2014.

NOTE 11 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.
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.

 
15
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

(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 September 30, 2014 and September 30, 2013 were as follows:
(in thousands)
 
September 30, 2014

 
September 30, 2013

Balance at beginning of period, gross
 
$
84,534

 
$
103,116

Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
7,942

 
5,478

Balance at beginning of period, net
 
76,592

 
97,638

Incurred related to:
 
 
 
 

      Current year
 
61,177

 
63,347

      Prior years
 
(1,151
)
 
(427
)
Paid related to:
 
 
 
 

      Current year
 
(35,172
)
 
(35,653
)
      Prior years
 
(36,219
)
 
(43,092
)
Disposal of unpaid loss and loss adjustment expenses related to PIH
 
(405
)
 
—

Balance at end of period, net
 
64,822

 
81,813

Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
3,334

 
8,173

Balance at end of period, gross
 
$
68,156

 
$
89,986

(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 September 30, 2014 and September 30, 2013 were as follows:
(in thousands)
 
September 30, 2014

 
September 30, 2013

Balance at beginning of period
 
$
3,128

 
$
3,448

Incurred related to:
 
 
 
 
      Current year
 
5,190

 
4,869

      Prior years
 
—

 
—

Paid related to:
 
 
 
 
      Current year
 
(5,282
)
 
(5,354
)
      Prior years
 
(61
)
 
(81
)
Balance at end of period
 
$
2,975

 
$
2,882


NOTE 12 DEBT
Debt consists of the following instruments:
(in thousands)
 
September 30, 2014
 
December 31, 2013
 
 
Principal

 
Fair Value

 
Principal

 
Fair Value

7.5% senior notes due 2014
 
$
—

 
$
—

 
$
14,356

 
$
14,356

LROC preferred units due 2015
 
14,106

 
14,106

 
14,854

 
14,854

Subordinated debt
 
90,500

 
39,418

 
90,500

 
28,471

Total
 
$
104,606

 
$
53,524

 
$
119,710

 
$
57,681



 
16
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

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 September 30, 2014, deferred interest payable of $16.2 million is included in accrued expenses and other liabilities in the consolidated balance sheets. 
During the first quarter of 2014, the Company repaid the $14.4 million remaining amount outstanding on its senior unsecured debentures due February 1, 2014. No debt repurchases were made during the three and nine months ended September 30, 2014. 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 due February 1, 2014 with a carrying value of $0.6 million, including accrued interest, recording a loss of $0.0 million. No debt repurchases were made during the three months ended September 30, 2013.
NOTE 13 INCOME TAXES
Income tax expense (benefit) for the three and nine months ended September 30, 2014 and September 30, 2013, respectively, varies from the amount that would result by applying the applicable United States corporate income tax rate of 34% to loss from continuing operations before income tax expense (benefit). The following table summarizes the differences:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2014

 
2013

 
2014

 
2013

Income tax benefit at United States statutory income tax rate
 
(1,956
)
 
(1,785
)
 
(4,306
)
 
(11,239
)
Valuation allowance
 
2,119

 
2,120

 
4,579

 
11,385

Change in unrecognized tax benefits
 
—

 
117

 
(1,024
)
 
117

Non-taxable dividend income
 
(414
)
 
(414
)
 
(1,244
)
 
(1,261
)
Indefinite life intangibles
 
283

 
280

 
849

 
828

Prior year tax
 
—

 
—

 
(341
)
 
(710
)
Other
 
311

 
85

 
1,397

 
482

Income tax expense (benefit)
 
343

 
403

 
(90
)
 
(398
)
The Company maintains a valuation allowance for its gross deferred tax assets at September 30, 2014 and December 31, 2013. 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 September 30, 2014 and December 31, 2013 net deferred tax asset. The Company carries a deferred income tax liability of $5.1 million and $4.2 million at September 30, 2014 and December 31, 2013, respectively, of which $5.0 million and $4.2 million, respectively, relates to indefinite life intangible assets.

 
17
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

As of September 30, 2014 and December 31, 2013, the Company carried a liability for unrecognized tax benefits of $0.2 million and $3.2 million, respectively, that is included in income taxes payable in the consolidated balance sheets. The Company generally recognizes interest and penalties related to unrecognized tax benefits in income tax benefit.
NOTE 14 LOSS FROM CONTINUING OPERATIONS PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted loss from continuing operations per share computation for the three and nine months ended September 30, 2014 and September 30, 2013:
(in thousands, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
(6,095
)
 
(5,653
)
 
(12,575
)
 
(32,658
)
(Less) plus: net (income) loss attributable to noncontrolling interests
 
(778
)
 
305

 
(873
)
 
(407
)
Less: dividends on preferred stock
 
(83
)
 
—

 
(218
)
 
—

Loss from continuing operations attributable to common shareholders
 
(6,956
)
 
(5,348
)
 
(13,666
)
 
(33,065
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average basic shares
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
16,993

 
13,684

 
16,620

 
13,329

Weighted average diluted shares
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
16,993

 
13,684

 
16,620

 
13,329

Effect of potentially dilutive securities
 
—

 
—

 
—

 
—

Total weighted average diluted shares
 
16,993

 
13,684

 
16,620

 
13,329

Basic loss from continuing operations per common share
 
$
(0.41
)
 
$
(0.39
)
 
$
(0.82
)
 
$
(2.48
)
Diluted loss from continuing operations per common share
 
$
(0.41
)
 
$
(0.39
)
 
$
(0.82
)
 
$
(2.48
)
Loss from continuing operations 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 securities. Potentially dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock. Since the Company is reporting a loss from continuing operations for the three and nine months ended September 30, 2014 and September 30, 2013, all potentially dilutive securities outstanding were excluded from the calculation of both basic and diluted loss from continuing operations per share since their inclusion would have been anti-dilutive.


 
18
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

NOTE 15 STOCK-BASED COMPENSATION
(a)     Stock Options
The following table summarizes the stock option activity during the nine months ended September 30, 2014:
(in thousands, except for share data)
 
 
 
 
 
 
 
 
 
Number of Options Outstanding
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2013
 
355,625

 
C$
18.35

 


 
—

Granted
 
611,875

 
$
4.50

 
 
 
 
Exchanged and Cancelled
 
(351,875
)
 
C$
18.12

 
 
 
 
Expired
 
(1,875
)
 
C$
40.12

 
 
 
 
Forfeited
 
(1,875
)
 
C$
40.12

 
 
 
 
Outstanding at September 30, 2014
 
611,875

 
$
4.50

 
3.5

 
1,089

Exercisable at September 30, 2014
 
611,875

 
$
4.50

 
3.5

 
1,089

The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the September 30, 2014 market price for the Company's common shares and the exercise price of the options, multiplied by the number of options where the fair value exceeds the exercise price.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option on the date of grant. The assumptions used in the Black-Scholes pricing model for options granted or exchanged during the nine months ended September 30, 2014 were as follows:
 
 
September 30, 2014

Risk-free interest rate
 
0.06% - 1.4%

Dividend yield
 
—

Expected volatility
 
0.4
%
Expected term (in years)
 
0.78 - 4

(b)     Restricted Stock Awards
Under the 2013 Equity Incentive Plan, the Company made grants of restricted stock to certain officers of the Company. The restricted stock vests after a ten-year period and is subject to the officer's continued employment through the vesting date. The restricted stock is amortized on a straight-line basis over the ten-year requisite service period. Total unamortized compensation expense related to unvested awards at September 30, 2014 was $7.7 million. The grant-date fair value of restricted stock awards is determined using the closing price of Kingsway common stock on the date of grant. The following table summarizes the activity related to unvested restricted stock for the nine months ended September 30, 2014:
(in thousands, except for share data)
 
 
 
 
 
 
Restricted stock awards
 
Weighted-average grant date fair value (per share)
Unvested at December 31, 2013
 
—

 
—

Granted
 
1,972,345

 
$
4.14

Unvested at September 30, 2014
 
1,972,345

 
$
4.14

Total stock-based compensation expense, net of forfeitures was $0.2 million and $0.1 million for the three months ended September 30, 2014 and September 30, 2013, respectively ($1.0 million and $0.2 million, respectively, year to date).

 
19
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2014

NOTE 16 SHAREHOLDERS' EQUITY
(a)     Preferred Shares
On May 13, 2013, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to create an unlimited number of zero par value class A preferred shares. The Company's Board of Directors will have the ability to fix the designation, rights, privileges, restrictions and conditions attaching to the shares of each series of preferred shares. The preferred shares will have priority over the common shares.
On February 3, 2014, the Company closed on its previously announced private placement totaling $6.6 million. At closing, the Company received gross proceeds of $6.6 million, resulting from the sale and issuance of 262,876 units for a purchase price of $25.00 per unit. Net proceeds to the Company were $6.3 million after deducting expenses.
Each unit consists of one class A convertible preferred share, series 1 (the "Preferred Shares"), and 6.25 common share class C purchase warrants. Each Preferred Share is convertible into 6.25 common shares at a conversion price of $4.00 per common share any time at the option of the holder prior to April 1, 2021. The maximum number of common shares issuable upon conversion of the Preferred Shares is 1,642,975 common shares. Each warrant will entitle the subscriber to purchase one common share of Kingsway at a price of $5.00 per common share at any time after September 16, 2016 and prior to expiry on September 15, 2023.
The Preferred Shares are not entitled to vote. The holders of the Preferred Shares are entitled to receive fixed, cumulative, preferential cash dividends at a rate of $1.25 per Preferred Share per year. The cash dividend rate shall be revised to $1.875 per Preferred Share per year if the dividend accumulates for a period greater than 30 consecutive months from the date of the most recent dividend payment. On and after February 3, 2016, the Company may redeem all or any part of the then outstanding Preferred Shares for the price of $28.75 per Preferred Share, plus accrued but unpaid dividends thereon, whether or not declared, up to and including the date specified for redemption. The Company will redeem any Preferred Shares not previously converted into common shares, and which remain outstanding on April 1, 2021, for the price of $25.00 per Preferred Share, plus accrued but unpaid dividends, whether or not declared, up to and including the date specified for redemption.
On July 8, 2014, the holders of the Company's series B warrants approved certain amendments to the terms of the Series B Warrant Agreement dated September 16, 2013. The Series B Warrant Agreement Amendments permit the Company to issue up to 1,642,975 additional Series B Warrants and complete the Series C Warrant Exchange. Under the Series C Warrant Exchange, each class C purchase warrant is automatically exchanged for a Series B Warrant.

(b)     Common Shares
On May 30, 2013, the Company announced that it had filed a registration statement for a proposed rights offering relating to transferable subscription rights to purchase up to approximately $13.1 million of its shares of common stock (the "Common Shares") and warrants to purchase Common Shares. The rights offering was made in the United States pursuant to a registration statement on Form S-1 that was previously filed with the Securities and Exchange Commission and became effective on July 24, 2013. On September 16, 2013, the transaction closed. Subscription rights to purchase 3,280,790 units were exercised, resulting in gross proceeds to the Company of $13.1 million. Net proceeds to the Company were $12.1 million after deducting commissions and other offering expenses.

Under the rights offering, each shareholder of record as of August 9, 2013 (the "Record Date") received, at no charge, one subscription right for each Common Share owned on the Record Date (the "Subscription Right"). Four Subscription Rights entitled the holder to purchase one unit (a "Unit") consisting of one Common Share, one Series A Warrant (a "Series A Warrant") and one Series B Warrant (a "Series B Warrant", and together with the Series A Warrants, the "Warrants"). Each Warrant entitled the holder to purchase one Common Share. The subscription price was $4.00 per Unit. The exercise prices per Common Share for each Series A Warrant is $4.50 and for each Series B Warrant is $5.00. Each Series A Warrant is redeemable by the Company and has a term of seven years from its date of issuance. Each Series B Warrant is non-redeemable and has a term of ten years from its date of issuance. The Company may redeem the Series A Warrants at a price of $0.25 per Warrant if, and only if, the closing price of the Common Shares equals or exceeds $6.00 per Common Share for twenty consecutive trading days on the New York Stock Exchange or such other market or exchange as the Common Shares of the Company trade on or are quoted at the time of redemption; but in any event, no earlier than the first anniversary date of issuance. Subject to applicable securities laws, the Warrants may be exercised at any time starting on the first day of the thirty-seventh month after the date of issuance until any time on or before the seventh anniversary after the date of issuance for the Series A Warrants and the tenth anniversary after the date of issuance for the Series B Warrants. Holders who fully exercise their Subscription Rights will be entitled to subscribe for an additional amount of

 
20