10Q Q2 2015

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 June 30, 2015
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 August 6, 2015 was 19,709,706.



KINGSWAY FINANCIAL SERVICES INC.

Table Of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (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, 2015

 
December 31, 2014

 
 
(unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $58,403 and $56,000, respectively)
 
$
58,733

 
$
56,195

Equity investments, at fair value (cost of $21,346 and $16,579, respectively)
 
24,446

 
19,618

Limited liability investments
 
12,688

 
7,294

Other investments, at cost which approximates fair value
 
3,527

 
3,576

Short-term investments, at cost which approximates fair value
 
400

 
400

Total investments
 
99,794

 
87,083

Cash and cash equivalents
 
86,175

 
71,234

Investment in investee
 
1,904

 
2,115

Accrued investment income
 
703

 
141

Premiums receivable, net of allowance for doubtful accounts of $258 and $1,889, respectively
 
29,792

 
28,885

Service fee receivable, net of allowance for doubtful accounts of $247 and $247, respectively
 
1,115

 
964

Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively
 
6,852

 
5,145

Reinsurance recoverable
 
1,505

 
3,652

Prepaid reinsurance premiums
 
91

 
8

Deferred acquisition costs, net
 
12,617

 
12,197

Income taxes recoverable
 
57

 
74

Property and equipment, net of accumulated depreciation of $12,261 and $15,751, respectively
 
5,795

 
5,975

Goodwill
 
10,078

 
10,078

Intangible assets, net of accumulated amortization of $5,395 and $4,765, respectively
 
15,350

 
15,980

Other assets
 
3,282

 
3,638

Assets held for sale
 

 
54,553

Total Assets
 
$
275,110

 
$
301,722

Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
Unpaid loss and loss adjustment expenses:
 
 
 
 
Property and casualty
 
$
58,219

 
$
63,895

Vehicle service agreements
 
2,975

 
2,975

Total unpaid loss and loss adjustment expenses
 
61,194

 
66,870

Unearned premiums
 
37,848

 
36,432

Reinsurance payable
 
557

 
525

LROC preferred units, at fair value
 

 
13,618

Subordinated debt, at fair value
 
42,324

 
40,659

Deferred income tax liability
 
2,880

 
2,837

Deferred service fees
 
34,696

 
35,096

Accrued expenses and other liabilities
 
40,728

 
35,836

Liabilities held for sale
 

 
21,653

Total Liabilities
 
220,227

 
253,526

 
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at June 30, 2015 and December 31, 2014, respectively
 
6,377

 
6,330

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Common stock, no par value; unlimited number authorized; 19,709,706 and 19,709,706 issued and outstanding at June 30, 2015 and December 31, 2014, respectively
 

 

Additional paid-in capital
 
341,249

 
340,844

Accumulated deficit
 
(305,764
)
 
(312,050
)
Accumulated other comprehensive income
 
11,271

 
8,670

Shareholders' equity attributable to common shareholders
 
46,756

 
37,464

Noncontrolling interests in consolidated subsidiaries
 
1,750

 
4,402

Total Shareholders' Equity
 
48,506

 
41,866

Total Liabilities and Shareholders' Equity
 
$
275,110

 
$
301,722

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,
 
 
 
2015

 
2014

 
2015

 
2014

Revenues:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
30,200

 
$
28,755

 
$
59,230

 
$
60,675

Service fee and commission income
 
5,848

 
6,026

 
11,246

 
12,091

Net investment income
 
528

 
341

 
1,841

 
754

Net realized gains
 
53

 
5,091

 
53

 
5,130

Other-than-temporary impairment loss
 

 

 
(10
)
 

Other income
 
2,514

 
2,286

 
10,871

 
4,560

Total revenues
 
39,143

 
42,499

 
83,231

 
83,210

Operating expenses:
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
24,187

 
21,794

 
46,140

 
42,855

Commissions and premium taxes
 
5,799

 
5,532

 
11,546

 
12,085

Cost of services sold
 
1,058

 
937

 
1,721

 
1,793

General and administrative expenses
 
10,175

 
11,066

 
21,751

 
22,990

Amortization of intangible assets
 
313

 
409

 
630

 
823

Contingent consideration expense
 
110

 
267

 
254

 
534

Impairment of asset held for sale
 

 
1,180

 

 
1,180

Total operating expenses
 
41,642

 
41,185

 
82,042

 
82,260

Operating (loss) income
 
(2,499
)
 
1,314

 
1,189

 
950

Other expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
1,414

 
1,364

 
2,805

 
2,797

Foreign exchange losses (gains), net
 
760

 
(175
)
 
1,152

 
41

Loss on change in fair value of debt
 
1,228

 
7,799

 
967

 
7,236

Loss on disposal of subsidiary
 

 

 

 
1,242

Loss on deconsolidation of subsidiary
 
4,420

 

 
4,420

 

Equity in net loss of investee
 
71

 

 
207

 

Total other expenses, net
 
7,893

 
8,988

 
9,551

 
11,316

Loss from continuing operations before income tax expense (benefit)
 
(10,392
)
 
(7,674
)
 
(8,362
)
 
(10,366
)
Income tax expense (benefit)
 
34

 
(1,059
)
 
56

 
(999
)
Loss from continuing operations
 
(10,426
)
 
(6,615
)
 
(8,418
)
 
(9,367
)
Income from discontinued operations, net of taxes
 

 
1,141

 
1,426

 
2,887

Gain on disposal of discontinued operations, net of taxes
 
11,259

 

 
11,259

 

Net income (loss)
 
833

 
(5,474
)
 
4,267

 
(6,480
)
Less: net (loss) income attributable to noncontrolling interests in consolidated subsidiaries
 
(1,064
)
 
(558
)
 
160

 
95

Less: dividends on preferred stock
 
82

 
82

 
163

 
135

Net income (loss) attributable to common shareholders
 
$
1,815

 
$
(4,998
)
 
$
3,944

 
$
(6,710
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.48
)
 
$
(0.37
)
 
$
(0.44
)
 
$
(0.58
)
Diluted:
 
$
(0.48
)
 
$
(0.37
)
 
$
(0.44
)
 
$
(0.58
)
Earnings per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$
0.57

 
$
0.07

 
$
0.64

 
$
0.18

Diluted:
 
$
0.57

 
$
0.07

 
$
0.64

 
$
0.18

Earnings (loss) per share – net income (loss) attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
0.09

 
$
(0.30
)
 
$
0.20

 
$
(0.41
)
Diluted:
 
$
0.09

 
$
(0.30
)
 
$
0.20

 
$
(0.41
)
Weighted average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
19,710

 
16,430

 
19,710

 
16,430

Diluted:
 
19,710

 
16,430

 
19,710

 
16,430


See accompanying notes to unaudited consolidated financial statements.

 
4
 

KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
833

 
$
(5,474
)
 
$
4,267

 
$
(6,480
)
Other comprehensive income (loss), net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized (losses) gains on fixed maturities and equity investments:
 
 
 
 
 
 
 
 
Unrealized losses arising during the period
 
(1,068
)
 
(1,906
)
 
(1,268
)
 
(680
)
Reclassification adjustment for amounts included in net income (loss)
 
1,451

 
1,287

 
1,464

 
1,339

Foreign currency translation adjustments
 
719

 
3

 
693

 
(15
)
Recognition of currency translation loss on deconsolidation of subsidiary
 
1,243

 

 
1,243

 

Other comprehensive income (loss)
 
2,345

 
(616
)
 
2,132

 
644

Comprehensive income (loss)
 
3,178

 
(6,090
)
 
$
6,399

 
$
(5,836
)
Less: comprehensive loss attributable to noncontrolling interests in consolidated subsidiaries
 
(1,237
)
 
(568
)
 
(310
)
 
(27
)
Comprehensive income (loss) attributable to common shareholders
 
$
4,415

 
$
(5,522
)
 
$
6,709

 
$
(5,809
)
 (1) Net of income tax expense of $0 and $0 for the three and six months ended June 30, 2015 and June 30, 2014, 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,
 
 
 
2015

 
2014

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net income (loss)
 
$
4,267

 
$
(6,480
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
Gain on disposal of discontinued operations
 
(11,259
)
 

Equity in net loss of investee
 
207

 

Equity in net income of limited liability investments
 
(995
)
 
(25
)
Depreciation and amortization expense
 
954

 
1,287

Contingent consideration expense
 
254

 
534

Stock based compensation expense, net of forfeitures
 
405

 
828

Net realized gains
 
(53
)
 
(5,130
)
Loss on change in fair value of debt
 
967

 
7,236

Deferred income taxes
 
43

 
219

Other-than-temporary impairment loss
 
10

 

Amortization of fixed maturities premiums and discounts
 
164

 
377

Loss on disposal of subsidiary
 

 
1,242

Impairment of asset held for sale
 

 
1,180

Changes in operating assets and liabilities:
 
 
 
 
Premiums and service fee receivable
 
(1,058
)
 
1,856

Other receivables
 
(1,707
)
 
(5,450
)
Reinsurance recoverable
 
2,147

 
4,483

Prepaid reinsurance premiums
 
(83
)
 
6,714

Deferred acquisition costs, net
 
(420
)
 
(233
)
Income taxes recoverable
 
17

 

Unpaid loss and loss adjustment expenses
 
(5,676
)
 
(11,952
)
Unearned premiums
 
1,416

 
(10,401
)
Reinsurance payable
 
32

 
(937
)
Deferred service fees
 
(400
)
 
977

Other, net
 
3,185

 
(850
)
Net cash used in operating activities
 
(7,583
)
 
(14,525
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
18,861

 
11,210

Proceeds from sales of equity investments
 
307

 
5,703

Purchases of fixed maturities
 
(19,727
)
 
(12,368
)
Purchases of equity investments
 
(4,281
)
 
(9,430
)
Net acquisition of limited liability investments
 
(4,495
)
 
(2,494
)
Proceeds from other investments
 

 
1,000

Net proceeds from (purchases of) short-term investments
 
4

 
(103
)
Net proceeds from sale of discontinued operations
 
44,919

 

Net purchases of property and equipment
 
(144
)
 
(1,485
)
Net cash provided by (used in) investing activities
 
35,444

 
(7,967
)
Financing activities:
 
 
 
 
Proceeds from issuance of preferred stock, net
 

 
6,343

Redemption of LROC preferred units
 
(12,920
)
 

Redemption of senior unsecured debentures
 

 
(14,356
)
Net cash used in financing activities
 
(12,920
)
 
(8,013
)
Net increase (decrease) in cash and cash equivalents
 
14,941

 
(30,505
)
Cash and cash equivalents at beginning of period
 
71,234

 
97,505

Cash and cash equivalents at end of period
 
$
86,175

 
$
67,000

See accompanying notes to unaudited consolidated financial statements.

 
6
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015


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 ("2014 Annual Report") for the year ended December 31, 2014.
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 performance shares; fair value assumptions for debt obligations; and contingent consideration.
The fair values of the Company's investments in fixed maturities and equity investments, performance shares, LROC preferred units, subordinated debt and contingent consideration are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. The fair value of the Company's investment in investee is based on quoted market prices. 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 2014 Annual Report, except as disclosed below.
Derivative financial instruments
Derivative financial instruments include investments in warrants and performance shares issued to the Company under various performance share grant agreements. Refer to Note 20, "Related Party Transactions," for further details regarding the performance shares. Warrants are classified as equity investments in the consolidated balance sheets.

The Company measures derivative financial instruments at fair value. The fair value of derivative financial instruments is required to be revalued each reporting period, with corresponding changes in fair value recorded in the consolidated statements of operations, or, in the case of warrants that are actively traded, in other comprehensive income (loss). Realized gains or losses are recognized upon settlement of the contracts.



 
7
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
(a)    Adoption of New Accounting Standards:
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Accounting Standards Codification 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 April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 amends the requirements for reporting and disclosing discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results. Effective January 1, 2015, the Company adopted ASU 2014-08. The adoption of the standard did not have an impact on the consolidated financial statements.
(b)    Accounting Standards Not Yet Adopted:
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 ASU 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 expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017 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 currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services - Insurance ("ASU 2015-09"). ASU 2015-09 was issued to enhance disclosures about an entity’s insurance liabilities, including the nature, amount, timing and uncertainty of cash flows related to those liabilities. ASU 2015-09 is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. Except for the increased disclosure requirements, the Company does not believe the adoption will have a material effect on its consolidated financial statements.
 

NOTE 5 DISPOSITION, DECONSOLIDATION AND DISCONTINUED OPERATIONS
(a)     Disposition
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 unaudited 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. During the fourth quarter of 2014, the Company purchased additional shares of PIH which increased the Company's approximate voting percentage in PIH to 16.9% at December 31, 2014. The Company's investment in PIH common stock is included in equity investments and reported at its estimated fair value of $8.8 million in the consolidated balance sheet at June 30, 2015.

 
8
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

(b)     Deconsolidation
On July 14, 2005, Kingsway Linked Return of Capital Trust ("KLROC Trust") completed its public offering of C$78.0 million million through the issuance of 3,120,000 LROC 5% preferred units due June 30, 2015 (“LROC preferred units”), of which the Company was a promoter. KLROC Trust’s net proceeds of the public offering was C$74.1 million.
Beginning in 2009, the Company began purchasing LROC preferred units. During 2009, the Company acquired 833,715 LROC preferred units. During the second quarter of 2010, the Company commenced the take-over bid (the “KLROC Offer”) to acquire up to 1,500,000 units at a price per unit of C$20.00 in cash. The KLROC Offer expired on July 23, 2010, and 1,525,150 units were tendered, of which 1,500,000 were purchased on a pro-rata basis. The tender was paid for using available cash.
As a result of these acquisitions, the Company beneficially owned and controlled 2,333,715 units, representing 74.8% of the issued and outstanding LROC preferred units and began consolidating the financial statements of KLROC Trust effective July 23, 2010. In the consolidated financial statements, the par value of the units owned was netted against the liability related to the LROC preferred units due June 30, 2015. At December 31, 2014, the Company's outstanding net obligation was C$15.8 million.
During the second quarter of 2015, the Company's controlling interest in KLROC Trust was reduced to zero upon the Company's repayment of its C$15.8 million outstanding on its LROC preferred units due June 30, 2015. As a result, the Company recorded a non-cash loss on deconsolidation of KLROC Trust of $4.4 million. This reported loss results from removing the net assets and accumulated other comprehensive loss of KLROC Trust from the Company’s consolidated balance sheets. The deconsolidation reduced consolidated shareholders’ equity by $2.8 million at June 30, 2015.
(c)     Discontinued Operations
On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. ("ARS") for $47.0 million in cash.  During the second quarter of 2015, the Company received additional post-closing cash consideration of $2.0 million.  The terms of the sale also provide for potential future earnout payments to the Company equal to 1.25% of ARS' written premium and fee income during the earnout periods. The earnout payments are payable in three annual installments beginning in April 2016 through April 2018. As a result of the sale, ARS,  previously disclosed as part of the Insurance Services segment, has been classified as a discontinued operation.  The earnings of ARS are disclosed as discontinued operations in the consolidated statements of operations for all periods presented. Summary financial information included in income from discontinued operations, net of taxes for the three and six months ended June 30, 2015 and 2014 is presented below:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

Revenues:
 
 
 
 
 
 
 
 
Service fee and commission income
 
$

 
$
7,900

 
$
8,342

 
$
16,559

Other income (expense)
 

 
7

 
(20
)
 
21

Total revenues
 

 
7,907

 
8,322

 
16,580

Expenses:
 
 
 
 
 
 
 
 
General and administrative expenses
 

 
6,505

 
6,462

 
13,126

Income from discontinued operations before income tax expense
 

 
1,402

 
1,860

 
3,454

Income tax expense
 

 
261

 
434

 
567

Income from discontinued operations, net of taxes
 

 
1,141

 
1,426

 
2,887

Gain on disposal of discontinued operations before income tax benefit
 
11,010

 

 
11,010

 

Income tax benefit
 
(249
)
 

 
(249
)
 

Gain on disposal of discontinued operations, net of taxes
 
11,259

 

 
11,259

 

Total gain from discontinued operations, net of taxes
 
$
11,259

 
$
1,141

 
$
12,685

 
$
2,887


 
9
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

At December 31, 2014, the assets and liabilities of ARS are presented as held for sale in the consolidated balance sheets. The carrying amounts of the major classes of assets and liabilities of ARS at December 31, 2014 were as follows:
(in thousands)
 
December 31, 2014
 
 
 
Assets
 
 
Cash and cash equivalents
 
$
2,792

Service fee receivable
 
19,006

Other receivables
 
257

Income taxes recoverable
 
150

Property and equipment, net of accumulated depreciation
 
193

Goodwill
 
510

Intangible assets, net of accumulated amortization
 
31,318

Other assets
 
327

Assets held for sale
 
$
54,553

Liabilities
 
 
Deferred income tax liability
 
$
2,550

Deferred service fees
 
14,358

Accrued expenses and other liabilities
 
4,745

Liabilities held for sale
 
$
21,653

For the six months ended June 30, 2015 and June 30, 2014, ARS' net cash used in operating activities was $0.0 million and $0.6 million, respectively. ARS had no cash flows from investing activities for the six months ended June 30, 2015 and June 30, 2014.

 
10
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

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, 2015 and December 31, 2014 are summarized in the tables shown below:
(in thousands)
 
June 30, 2015
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
21,081

 
$
214

 
$
29

 
$
21,266

States, municipalities and political subdivisions
 
3,357

 
43

 

 
3,400

Mortgage-backed
 
7,966

 
48

 
32

 
7,982

Asset-backed securities and collateralized mortgage obligations
 
6,431

 
7

 
2

 
6,436

Corporate
 
19,568

 
101

 
20

 
19,649

Total fixed maturities
 
58,403

 
413

 
83

 
58,733

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
20,141

 
3,865

 
930

 
23,076

Warrants
 
1,205

 
217

 
52

 
1,370

Total equity investments
 
21,346

 
4,082

 
982

 
24,446

Total fixed maturities and equity investments
 
$
79,749

 
$
4,495

 
$
1,065

 
$
83,179


(in thousands)
 
December 31, 2014
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
20,436

 
$
333

 
$
10

 
$
20,759

Canadian government
 
4,519

 

 
277

 
4,242

States, municipalities and political subdivisions
 
3,358

 
61

 

 
3,419

Mortgage-backed
 
5,330

 
37

 
15

 
5,352

Asset-backed securities and collateralized mortgage obligations
 
7,221

 
3

 
10

 
7,214

Corporate
 
15,136

 
103

 
30

 
15,209

Total fixed maturities
 
56,000

 
537

 
342

 
56,195

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
16,450

 
3,360

 
284

 
19,526

Warrants
 
129

 

 
37

 
92

Total equity investments
 
16,579

 
3,360

 
321

 
19,618

Total fixed maturities and equity investments
 
$
72,579

 
$
3,897

 
$
663

 
$
75,813



 
11
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

The table below summarizes the Company's fixed maturities at June 30, 2015 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, 2015
 
 
 
Amortized Cost

 
Estimated Fair Value

Due in one year or less
 
$
9,663

 
$
9,855

Due after one year through five years
 
39,158

 
39,277

Due after five years through ten years
 
2,399

 
2,414

Due after ten years
 
7,183

 
7,187

Total
 
$
58,403

 
$
58,733


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, 2015 and December 31, 2014. 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, 2015
 
 
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
$
7,276

 
$
29

 
$

 
$

 
$
7,276

 
$
29

Mortgage-backed
4,398

 
32

 

 

 
4,398

 
32

Asset-backed securities and collateralized mortgage obligations
3,343

 
2

 

 

 
3,343

 
2

Corporate
6,557

 
20

 

 

 
6,557

 
20

Total fixed maturities
21,574

 
83

 

 

 
21,574

 
83

Equity investments:
 
 
 
 
 
 
 
 


 


Common stock
4,559

 
930

 

 

 
4,559

 
930

Warrants
73

 
52

 

 

 
73

 
52

Total equity investments
4,632

 
982

 

 

 
4,632

 
982

Total
$
26,206

 
$
1,065

 
$

 
$

 
$
26,206

 
$
1,065



 
12
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

(in thousands)
 
 
 
 
 
 
 
 
December 31, 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
$
12,784

 
$
10

 
$
473

 
$

 
$
13,257

 
$
10

Canadian government

 

 
4,242

 
277

 
4,242

 
277

States, municipalities and political subdivisions
250

 

 

 

 
250

 

Mortgage-backed
2,816

 
15

 

 

 
2,816

 
15

Asset-backed securities and collateralized mortgage obligations
5,097

 
10

 

 

 
5,097

 
10

Corporate
6,226

 
20

 

 
10

 
6,226

 
30

Total fixed maturities
27,173

 
55

 
4,715

 
287

 
31,888

 
342

Equity investments:
 
 
 
 
 
 
 
 
 
 
 
Common stock
4,164

 
284

 

 

 
4,164

 
284

Warrants
92

 
37

 

 

 
92

 
37

Total equity investments
4,256

 
321

 

 

 
4,256

 
321

Total
$
31,429

 
$
376

 
$
4,715

 
$
287

 
$
36,144

 
$
663

Fixed maturities and equity investments contain approximately 85 and 71 individual investments that were in unrealized loss positions as of June 30, 2015 and December 31, 2014, 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.

 
13
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded a write-down for other-than-temporary impairment related to fixed maturities of $0.0 million for the six months ended June 30, 2015. There were no write-downs for other-than-temporary impairments related to (1) fixed maturities for the three months ended June 30, 2015; (2) equity investments or other investments for the three and six months ended June 30, 2015; or (3) investments for the three and six months ended June 30, 2014.
There were $0.0 million of other-than-temporary losses recognized in other comprehensive income (loss) for the six months ended June 30, 2015. There were no other-than-temporary losses recognized in other comprehensive income (loss) for the three months ended June 30, 2015 and June 30, 2014, respectively, or for the six months ended June 30, 2014.
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 limited partnerships 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 June 30, 2015 and December 31, 2014, the carrying value of limited liability investments totaled $12.7 million and $7.3 million, respectively. At June 30, 2015, the Company has unfunded commitments totaling $2.4 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 mortgage loans and are reported at their unpaid principal balance. As of June 30, 2015 and December 31, 2014, the carrying value of other investments totaled $3.5 million and $3.6 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, 2015 and June 30, 2014 were as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

Gross realized gains
 
$
53

 
$
5,091

 
$
53

 
$
5,139

Gross realized losses
 

 

 

 
(9
)
Net realized gains
 
$
53

 
$
5,091

 
$
53

 
$
5,130


Net investment income for the three and six months ended June 30, 2015 and June 30, 2014, respectively, is comprised as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

Investment income
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
124

 
$
271

 
$
393

 
$
543

Dividends
 
201

 
54

 
348

 
86

Income from limited liability investments
 
66

 
3

 
995

 
25

Gain on change in fair value of warrants
 
165

 

 
165

 

Other
 
32

 
86

 
66

 
228

Gross investment income
 
588

 
414

 
1,967

 
882

Investment expenses
 
(60
)
 
(73
)
 
(126
)
 
(128
)
Net investment income
 
$
528

 
$
341

 
$
1,841

 
$
754

At June 30, 2015, fixed maturities and short-term investments with an estimated fair value of $13.0 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, 2015, the amount of such pledged securities was $16.5 million.

 
14
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

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 June 30, 2015 and December 31, 2014 were as follows:
(in thousands, except for percentages)
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
 
Equity Percentage
 
Estimated Fair Value
 
Carrying value
1347 Capital Corp.
 
21.0
%
 

$12,290

 
$
1,904

 
22.7
%
 

$13,038

 
$
2,115


Equity in net loss of investee was $0.1 million and zero for the three months ended June 30, 2015 and June 30, 2014, respectively ($0.2 million and zero for the six months ended June 30, 2015 and June 30, 2014, respectively).
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.
The components of deferred acquisition costs and the related amortization expense for the three and six months ended June 30, 2015 and 2014, respectively, are comprised as follows:
(in thousands)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

Beginning balance, net
 
$
13,203

 
$
12,559

 
$
12,197

 
$
12,392

Additions
 
6,164

 
6,827

 
13,718

 
14,101

Amortization
 
(6,750
)
 
(6,761
)
 
(13,298
)
 
(12,825
)
Acquisition costs disposed of during the year related to PIH
 

 

 

 
(1,043
)
Balance at June 30, net
 
$
12,617

 
$
12,625

 
$
12,617

 
$
12,625

NOTE 9 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
(in thousands)
 
 
June 30, 2015
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization
 
 
 
 
 
 
Database
 
$
4,918

 
$
1,291

 
$
3,627

Vehicle service agreements in-force
 
3,680

 
3,169

 
511

Customer-related relationships
 
3,611

 
875

 
2,736

Non-compete agreement
 
70

 
60

 
10

Intangible assets not subject to amortization
 
 
 
 
 
 
Insurance licenses
 
7,803

 

 
7,803

Trade name
 
663

 

 
663

Total
 
$
20,745

 
$
5,395

 
$
15,350



 
15
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

(in thousands)
 
 
December 31, 2014
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization
 
 
 
 
 
 
Database
 
$
4,918

 
$
1,045

 
$
3,873

Vehicle service agreements in-force
 
3,680

 
2,975

 
705

Customer-related relationships
 
3,611

 
695

 
2,916

Non-compete agreement
 
70

 
50

 
20

Intangible assets not subject to amortization
 
 
 
 
 
 
Insurance licenses
 
7,803

 

 
7,803

Trade name
 
663

 

 
663

Total
 
$
20,745

 
$
4,765

 
$
15,980

The Company's intangible assets with definite useful lives are amortized either based on the pattern in which the economic benefits of the intangible asset are expected to be consumed or using the straight-line method over their estimated useful lives, which range from three to fifteen years. Amortization of intangible assets was $0.3 million and $0.4 million for the three months ended June 30, 2015 and June 30, 2014, respectively ($0.6 million and $0.8 million for the six months ended June 30, 2015 and June 30, 2014, respectively). The insurance licenses and trade name intangible assets have indefinite useful lives and are not amortized.
NOTE 10 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.

 
16
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

(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, 2015 and June 30, 2014 were as follows:
(in thousands)
 
June 30, 2015

 
June 30, 2014

Balance at beginning of period, gross
 
$
63,895

 
$
84,534

Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
3,203

 
7,942

Balance at beginning of period, net
 
60,692

 
76,592

Incurred related to:
 
 
 
 

      Current year
 
43,610

 
40,286

      Prior years
 
(484
)
 
(866
)
Paid related to:
 
 
 
 

      Current year
 
(21,418
)
 
(19,961
)
      Prior years
 
(26,009
)
 
(27,361
)
Disposal of unpaid loss and loss adjustment expenses related to PIH
 

 
(405
)
Balance at end of period, net
 
56,391

 
68,285

Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
1,828

 
4,373

Balance at end of period, gross
 
$
58,219

 
$
72,658

(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, 2015 and June 30, 2014 were as follows:
(in thousands)
 
June 30, 2015

 
June 30, 2014

Balance at beginning of period
 
$
2,975

 
$
3,128

Incurred related to:
 
 
 
 
      Current year
 
3,014

 
3,435

      Prior years
 

 

Paid related to:
 
 
 
 
      Current year
 
(2,904
)
 
(3,450
)
      Prior years
 
(110
)
 
(61
)
Balance at end of period
 
$
2,975

 
$
3,052


NOTE 11 DEBT
Debt consists of the following instruments:
(in thousands)
 
June 30, 2015
 
December 31, 2014
 
 
Principal

 
Fair Value

 
Principal

 
Fair Value

LROC preferred units due 2015
 
$

 
$

 
$
13,618

 
$
13,618

Subordinated debt
 
90,500

 
42,324

 
90,500

 
40,659

Total
 
$
90,500

 
$
42,324

 
$
104,118

 
$
54,277



 
17
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

Subordinated debt 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, 2015 and December 31, 2014, deferred interest payable of $19.8 million and $17.4 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets. 
During the second quarter of 2015, the Company repaid its C$15.8 million outstanding on its LROC preferred units due June 30, 2015.

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 six months ended June 30, 2015 and June 30, 2014.

NOTE 12 FINANCE LEASE OBLIGATION LIABILITY
On October 2, 2014, the Company completed a sale and leaseback transaction involving building and land located in Miami, Florida, which was previously recorded as asset held for sale. The transaction did not qualify for sales recognition and was accounted for as a financing due to the Company's continuing involvement with the property as a result of nonrecourse financing provided to the buyer in the form of prepaid rent. A finance lease obligation liability equal to the selling price of the property was established at the date of the transaction. During the five-year lease term, the Company will record interest expense on the finance lease obligation at its incremental borrowing rate and will increase the finance lease obligation liability by the same amount. At the end of the lease term, the Company will no longer have continuing involvement with the property and will then recognize the sale of the property as well as the gain that will result from removing the net book value of the land and building and finance lease obligation liability from the consolidated balance sheets. At June 30, 2015 and December 31, 2014, finance lease obligation liability of $4.8 million and $4.7 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.


 
18
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

NOTE 13 INCOME TAXES
Income tax expense (benefit) for the three and six months ended June 30, 2015 and June 30, 2014, 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 June 30,
 
 
Six months ended June 30,
 
 
 
2015

 
2014

 
2015

 
2014

Income tax benefit at United States statutory income tax rate
 
$
(3,533
)
 
$
(2,609
)
 
$
(2,843
)
 
$
(3,524
)
Valuation allowance
 
1,172

 
2,952

 
533

 
3,618

Deconsolidation of subsidiary
 
2,391

 

 
2,391

 

Change in unrecognized tax benefits
 

 
(1,082
)
 

 
(1,024
)
Non-taxable dividend income
 
9

 
(415
)
 
(415
)
 
(830
)
Foreign operations subject to different tax rates
 
33

 
142

 
155

 
272

State income tax (net of federal tax benefit)
 
8

 
(1
)
 
8

 
211

Disposition of subsidiary
 

 

 

 
422

Prior year tax
 

 

 

 
(341
)
Other
 
(46
)
 
(46
)
 
227

 
197

Income tax expense (benefit)
 
$
34

 
$
(1,059
)
 
$
56

 
$
(999
)
The Company maintains a valuation allowance for its gross deferred tax assets at June 30, 2015 and December 31, 2014. 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, 2015 and December 31, 2014 net deferred tax asset. The Company carries a deferred income tax liability of $2.9 million and $2.8 million at June 30, 2015 and December 31, 2014, respectively, all of which relates to indefinite life intangible assets.
As of June 30, 2015, the Company had no unrecognized tax benefits. The Company analyzed its tax positions in accordance with the provisions of ASC Topic 740, Income Taxes, and has determined that there are currently no uncertain tax positions. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

 
19
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) June 30, 2015

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 six months ended June 30, 2015 and June 30, 2014:
(in thousands, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(10,426
)
 
$
(6,615
)
 
$
(8,418
)
 
$
(9,367
)
Plus (less): net loss (income) attributable to noncontrolling interests
 
1,064

 
558

 
(160
)
 
(95
)
Less: dividends on preferred stock
 
(82
)
 
(82
)
 
(163
)