10-Q

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, 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 November 9, 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 September 30, 2015 (unaudited) and December 31, 2014
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 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)
 
 
September 30, 2015

 
December 31, 2014

 
 
(unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $59,366 and $56,000, respectively)
 
$
59,764

 
$
56,195

Equity investments, at fair value (cost of $24,666 and $16,579, respectively)
 
25,296

 
19,618

Limited liability investments
 
15,377

 
7,294

Other investments, at cost which approximates fair value
 
4,102

 
3,576

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

 
400

Total investments
 
104,939

 
87,083

Cash and cash equivalents
 
75,785

 
71,234

Investment in investee
 
1,712

 
2,115

Accrued investment income
 
856

 
141

Premiums receivable, net of allowance for doubtful accounts of $258 and $1,889, respectively
 
30,052

 
28,885

Service fee receivable, net of allowance for doubtful accounts of $269 and $247, respectively
 
1,388

 
964

Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively
 
5,815

 
5,145

Reinsurance recoverable
 
1,687

 
3,652

Prepaid reinsurance premiums
 
49

 
8

Deferred acquisition costs, net
 
12,541

 
12,197

Income taxes recoverable
 
56

 
74

Property and equipment, net of accumulated depreciation of $12,399 and $15,751, respectively
 
5,687

 
5,975

Goodwill
 
10,078

 
10,078

Intangible assets, net of accumulated amortization of $5,702 and $4,765, respectively
 
15,043

 
15,980

Other assets
 
3,180

 
3,638

Assets held for sale
 
—

 
54,553

Total Assets
 
$
268,868

 
$
301,722

Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
Unpaid loss and loss adjustment expenses:
 
 
 
 
Property and casualty
 
$
55,438

 
$
63,895

Vehicle service agreements
 
2,975

 
2,975

Total unpaid loss and loss adjustment expenses
 
58,413

 
66,870

Unearned premiums
 
37,752

 
36,432

Reinsurance payable
 
452

 
525

LROC preferred units, at fair value
 
—

 
13,618

Subordinated debt, at fair value
 
39,865

 
40,659

Deferred income tax liability
 
2,902

 
2,837

Deferred service fees
 
34,733

 
35,096

Accrued expenses and other liabilities
 
42,823

 
35,836

Liabilities held for sale
 
—

 
21,653

Total Liabilities
 
216,940

 
253,526

 
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at September 30, 2015 and December 31, 2014, respectively; redemption amount of $6,572
 
6,386

 
6,330

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

 
—

Additional paid-in capital
 
341,443

 
340,844

Accumulated deficit
 
(306,655
)
 
(312,050
)
Accumulated other comprehensive income
 
9,090

 
8,670

Shareholders' equity attributable to common shareholders
 
43,878

 
37,464

Noncontrolling interests in consolidated subsidiaries
 
1,664

 
4,402

Total Shareholders' Equity
 
45,542

 
41,866

Total Liabilities and Shareholders' Equity
 
$
268,868

 
$
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 September 30,
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

 
2015

 
2014

Revenues:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
29,197

 
$
28,418

 
$
88,427

 
$
89,093

Service fee and commission income
 
6,184

 
6,949

 
17,430

 
19,040

Net investment income
 
791

 
542

 
2,632

 
1,296

Net realized gains
 
83

 
329

 
136

 
5,459

Other-than-temporary impairment loss
 
—

 
—

 
(10
)
 
—

Other income
 
2,303

 
2,369

 
13,174

 
6,929

Total revenues
 
38,558

 
38,607

 
121,789

 
121,817

Operating expenses:
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
22,914

 
22,361

 
69,054

 
65,216

Commissions and premium taxes
 
5,653

 
5,738

 
17,199

 
17,823

Cost of services sold
 
1,408

 
1,544

 
3,129

 
3,337

General and administrative expenses
 
9,997

 
10,206

 
31,748

 
33,196

Amortization of intangible assets
 
307

 
397

 
937

 
1,220

Contingent consideration expense
 
110

 
267

 
364

 
801

Impairment of asset held for sale
 
—

 
—

 
—

 
1,180

Total operating expenses
 
40,389

 
40,513

 
122,431

 
122,773

Operating loss
 
(1,831
)
 
(1,906
)
 
(642
)
 
(956
)
Other (revenues) expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
1,248

 
1,417

 
4,053

 
4,214

Foreign exchange losses, net
 
58

 
230

 
1,210

 
271

(Gain) loss on change in fair value of debt
 
(2,458
)
 
2,963

 
(1,491
)
 
10,199

Loss on disposal of subsidiary
 
—

 
—

 
—

 
1,242

Loss on deconsolidation of subsidiary
 
—

 
—

 
4,420

 
—

Equity in net loss of investee
 
192

 
83

 
399

 
83

Total other (revenues) expenses, net
 
(960
)
 
4,693

 
8,591

 
16,009

Loss from continuing operations before income tax expense (benefit)
 
(871
)
 
(6,599
)
 
(9,233
)
 
(16,965
)
Income tax expense (benefit)
 
23

 
28

 
79

 
(971
)
Loss from continuing operations
 
(894
)
 
(6,627
)
 
(9,312
)
 
(15,994
)
Income from discontinued operations, net of taxes
 
—

 
532

 
1,426

 
3,419

Gain on disposal of discontinued operations, net of taxes
 
—

 
—

 
11,259

 
—

Net (loss) income
 
(894
)
 
(6,095
)
 
3,373

 
(12,575
)
Less: net (loss) income attributable to noncontrolling interests in consolidated subsidiaries
 
(86
)
 
778

 
74

 
873

Less: dividends on preferred stock
 
83

 
83

 
246

 
218

Net (loss) income attributable to common shareholders
 
$
(891
)
 
$
(6,956
)
 
$
3,053

 
$
(13,666
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.05
)
 
$
(0.44
)
 
$
(0.49
)
 
$
(1.03
)
Diluted:
 
$
(0.05
)
 
$
(0.44
)
 
$
(0.49
)
 
$
(1.03
)
Earnings per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$
—

 
$
0.03

 
$
0.64

 
$
0.21

Diluted:
 
$
—

 
$
0.03

 
$
0.64

 
$
0.21

(Loss) earnings per share – net (loss) income attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.05
)
 
$
(0.41
)
 
$
0.15

 
$
(0.82
)
Diluted:
 
$
(0.05
)
 
$
(0.41
)
 
$
0.15

 
$
(0.82
)
Weighted average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
19,710

 
16,993

 
19,710

 
16,620

Diluted:
 
19,710

 
16,993

 
19,710

 
16,620


See accompanying notes to unaudited consolidated financial statements.

 
4
 
KINGSWAY FINANCIAL SERVICES INC.


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

 
2014

 
2015

 
2014

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(894
)
 
$
(6,095
)
 
$
3,373

 
$
(12,575
)
Other comprehensive loss, net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized (losses) gains on fixed maturities and equity investments:
 
 
 
 
 
 
 
 
Unrealized losses arising during the period
 
(2,271
)
 
(2,244
)
 
(3,704
)
 
(2,924
)
Reclassification adjustment for amounts included in net (loss) income
 
90

 
187

 
1,554

 
1,526

Foreign currency translation adjustments
 
—

 
(22
)
 
858

 
(37
)
Recognition of currency translation loss on deconsolidation of subsidiary
 
—

 
—

 
1,243

 
—

Other comprehensive loss
 
(2,181
)
 
(2,079
)
 
(49
)
 
(1,435
)
Comprehensive (loss) income
 
(3,075
)
 
(8,174
)
 
$
3,324

 
$
(14,010
)
Less: comprehensive (loss) income attributable to noncontrolling interests in consolidated subsidiaries
 
(85
)
 
795

 
(395
)
 
768

Comprehensive (loss) income attributable to common shareholders
 
$
(2,990
)
 
$
(8,969
)
 
$
3,719

 
$
(14,778
)
 (1) Net of income tax expense (benefit) of $0 and $0 for the three and nine months ended September 30, 2015 and September 30, 2014, respectively.
 
 
See accompanying notes to unaudited consolidated financial statements
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net income (loss)
 
$
3,373

 
$
(12,575
)
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
 
399

 
83

Equity in net income of limited liability investments
 
(1,590
)
 
(201
)
Depreciation and amortization expense
 
1,400

 
1,888

Contingent consideration expense
 
364

 
801

Stock based compensation expense, net of forfeitures
 
598

 
1,033

Net realized gains
 
(136
)
 
(5,459
)
(Gain) loss on change in fair value of debt
 
(1,491
)
 
10,199

Deferred income taxes
 
66

 
241

Other-than-temporary impairment loss
 
10

 
—

Amortization of fixed maturities premiums and discounts
 
245

 
515

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
 
(1,591
)
 
590

Other receivables
 
(670
)
 
(1,186
)
Reinsurance recoverable
 
1,965

 
6,332

Prepaid reinsurance premiums
 
(41
)
 
6,761

Deferred acquisition costs, net
 
(344
)
 
(71
)
Income taxes recoverable
 
18

 
—

Unpaid loss and loss adjustment expenses
 
(8,457
)
 
(16,531
)
Unearned premiums
 
1,320

 
(10,181
)
Reinsurance payable
 
(73
)
 
(984
)
Deferred service fees
 
(363
)
 
1,181

Other, net
 
5,719

 
1,428

Net cash used in operating activities
 
(10,538
)
 
(13,714
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
23,302

 
21,722

Proceeds from sales of equity investments
 
617

 
6,761

Purchases of fixed maturities
 
(25,788
)
 
(21,293
)
Purchases of equity investments
 
(7,666
)
 
(10,180
)
Net acquisition of limited liability investments
 
(6,604
)
 
(1,159
)
Net (purchases of) proceeds from other investments
 
(600
)
 
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
 
(175
)
 
(1,565
)
Net cash provided by (used in) investing activities
 
28,009

 
(4,817
)
Financing activities:
 
 
 
 
Proceeds from issuance of preferred stock, net
 
—

 
6,330

Proceeds from issuance of warrants
 
—

 
14,760

Redemption of LROC preferred units
 
(12,920
)
 
—

Redemption of senior unsecured debentures
 
—

 
(14,356
)
Net cash (used in) provided by financing activities
 
(12,920
)
 
6,734

Net increase (decrease) in cash and cash equivalents
 
4,551

 
(11,797
)
Cash and cash equivalents at beginning of period
 
71,234

 
97,505

Cash and cash equivalents at end of period
 
$
75,785

 
$
85,708

See accompanying notes to unaudited consolidated financial statements.

 
5
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 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 loss. Realized gains or losses are recognized upon settlement of the contracts.



 
6
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 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 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 January 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 is effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption being permissible. The Company is currently evaluating the impact of the adoption of ASU 2015-02 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.
 


 
7
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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 $7.8 million in the consolidated balance sheet at September 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 for the nine months ended September 30, 2015. 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 nine months ended September 30, 2015 and 2014 is presented below:

 
8
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

 
2015

 
2014

Revenues:
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
—

 
$
7,153

 
$
8,342

 
$
23,712

Other income (expense)
 
—

 
3

 
(20
)
 
24

Total revenues
 
—

 
7,156

 
8,322

 
23,736

Expenses:
 
 
 
 
 
 
 
 
General and administrative expenses
 
—

 
6,309

 
6,462

 
19,435

Income from discontinued operations before income tax expense
 
—

 
847

 
1,860

 
4,301

Income tax expense
 
—

 
315

 
434

 
882

Income from discontinued operations, net of taxes
 
—

 
532

 
1,426

 
3,419

Gain on disposal of discontinued operations before income tax benefit
 
—

 
—

 
11,010

 
—

Income tax benefit
 
—

 
—

 
(249
)
 
—

Gain on disposal of discontinued operations, net of taxes
 
—

 
—

 
11,259

 
—

Total gain from discontinued operations, net of taxes
 
$
—

 
$
532

 
$
12,685

 
$
3,419

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 nine months ended September 30, 2015 and September 30, 2014, ARS' net cash provided by operating activities was $0.0 million and $0.5 million, respectively. ARS had no cash flows from investing activities for the nine months ended September 30, 2015 and September 30, 2014.

 
9
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 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 September 30, 2015 and December 31, 2014 are summarized in the tables shown below:
(in thousands)
 
September 30, 2015
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
20,490

 
$
203

 
$
—

 
$
20,693

States, municipalities and political subdivisions
 
2,917

 
37

 
—

 
2,954

Mortgage-backed
 
8,583

 
85

 
11

 
8,657

Asset-backed securities and collateralized mortgage obligations
 
7,599

 
20

 
2

 
7,617

Corporate
 
19,777

 
78

 
12

 
19,843

Total fixed maturities
 
59,366

 
423

 
25

 
59,764

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
23,460

 
3,042

 
2,330

 
24,172

Warrants
 
1,206

 
99

 
181

 
1,124

Total equity investments
 
24,666

 
3,141

 
2,511

 
25,296

Total fixed maturities and equity investments
 
$
84,032

 
$
3,564

 
$
2,536

 
$
85,060


(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



 
10
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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

 
Estimated Fair Value

Due in one year or less
 
$
10,642

 
$
10,803

Due after one year through five years
 
37,897

 
38,047

Due after five years through ten years
 
2,151

 
2,165

Due after ten years
 
8,676

 
8,749

Total
 
$
59,366

 
$
59,764


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, 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)
 
 
 
 
 
 
 
 
September 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
$
500

 
$
—

 
$
—

 
$
—

 
$
500

 
$
—

Mortgage-backed
2,597

 
11

 
—

 
—

 
2,597

 
11

Asset-backed securities and collateralized mortgage obligations
2,571

 
2

 
—

 
—

 
2,571

 
2

Corporate
4,512

 
12

 
—

 
—

 
4,512

 
12

Total fixed maturities
10,180

 
25

 
—

 
—

 
10,180

 
25

Equity investments:
 
 
 
 
 
 
 
 


 


Common stock
15,898

 
2,330

 
—

 
—

 
15,898

 
2,330

Warrants
904

 
181

 
—

 
—

 
904

 
181

Total equity investments
16,802

 
2,511

 
—

 
—

 
16,802

 
2,511

Total
$
26,982

 
$
2,536

 
$
—

 
$
—

 
$
26,982

 
$
2,536



 
11
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 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 58 and 71 individual investments that were in unrealized loss positions as of September 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.

 
12
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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 recorded for the three months ended September 30, 2015 and September 30, 2014, respectively, and for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, the Company recorded a write-down of $0.0 million for other-than-temporary impairment related to fixed maturities.
There were $0.0 million of other-than-temporary losses recognized in other comprehensive loss for the nine months ended September 30, 2015. There were no other-than-temporary losses recognized in other comprehensive loss for the three months ended September 30, 2015 and September 30, 2014, respectively, or for the nine months ended September 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 September 30, 2015 and December 31, 2014, the carrying value of limited liability investments totaled $15.4 million and $7.3 million, respectively. At September 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 and collateral loans and are reported at their unpaid principal balance. As of September 30, 2015 and December 31, 2014, the carrying value of other investments totaled $4.1 million and $3.6 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, 2015 and September 30, 2014 were as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

 
2015

 
2014

Gross realized gains
 
$
84

 
$
330

 
$
137

 
$
5,469

Gross realized losses
 
(1
)
 
(1
)
 
(1
)
 
(10
)
Net realized gains
 
$
83

 
$
329

 
$
136

 
$
5,459


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

 
2014

 
2015

 
2014

Investment income
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
255

 
$
284

 
$
648

 
$
827

Dividends
 
169

 
67

 
517

 
153

Income from limited liability investments
 
595

 
176

 
1,590

 
201

Loss on change in fair value of warrants
 
(222
)
 
—

 
(57
)
 
—

Other
 
40

 
29

 
106

 
257

Gross investment income
 
837

 
556

 
2,804

 
1,438

Investment expenses
 
(46
)
 
(14
)
 
(172
)
 
(142
)
Net investment income
 
$
791

 
$
542

 
$
2,632

 
$
1,296


 
13
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

At September 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 September 30, 2015, the amount of such pledged securities was $17.0 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, 2015 and December 31, 2014 were as follows:
(in thousands, except for percentages)
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
 
Equity Percentage
 
Estimated Fair Value
 
Carrying value
1347 Capital Corp.
 
21.0
%
 

$12,353

 
$
1,712

 
22.7
%
 

$13,038

 
$
2,115


Equity in net loss of investee was $0.2 million and $0.1 million for the three months ended September 30, 2015 and September 30, 2014, respectively ($0.4 million and $0.1 million for the nine months ended September 30, 2015 and September 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 nine months ended September 30, 2015 and 2014, respectively, are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

 
2015

 
2014

Beginning balance, net
 
$
12,617

 
$
12,625

 
$
12,197

 
$
12,392

Additions
 
5,843

 
6,632

 
19,561

 
20,733

Amortization
 
(5,919
)
 
(6,794
)
 
(19,217
)
 
(19,619
)
Acquisition costs disposed of during the year related to PIH
 
—

 
—

 
—

 
(1,043
)
Balance at September 30, net
 
$
12,541

 
$
12,463

 
$
12,541

 
$
12,463


 
14
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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

 
$
1,414

 
$
3,504

Vehicle service agreements in-force
 
3,680

 
3,265

 
415

Customer-related relationships
 
3,611

 
958

 
2,653

Non-compete agreement
 
70

 
65

 
5

Intangible assets not subject to amortization
 
 
 
 
 
 
Insurance licenses
 
7,803

 
—

 
7,803

Trade name
 
663

 
—

 
663

Total
 
$
20,745

 
$
5,702

 
$
15,043


(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 September 30, 2015 and September 30, 2014, respectively ($0.9 million and $1.2 million for the nine months ended September 30, 2015 and September 30, 2014, respectively). The insurance licenses and trade name intangible assets have indefinite useful lives and are not amortized.

 
15
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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

 
September 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
 
64,893

 
61,177

      Prior years
 
(299
)
 
(1,151
)
Paid related to:
 
 
 
 

      Current year
 
(37,378
)
 
(35,172
)
      Prior years
 
(33,993
)
 
(36,219
)
Disposal of unpaid loss and loss adjustment expenses related to PIH
 
—

 
(405
)
Balance at end of period, net
 
53,915

 
64,822

Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses
 
1,523

 
3,334

Balance at end of period, gross
 
$
55,438

 
$
68,156


 
16
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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

 
September 30, 2014

Balance at beginning of period
 
$
2,975

 
$
3,128

Incurred related to:
 
 
 
 
      Current year
 
4,460

 
5,190

      Prior years
 
—

 
—

Paid related to:
 
 
 
 
      Current year
 
(4,350
)
 
(5,282
)
      Prior years
 
(110
)
 
(61
)
Balance at end of period
 
$
2,975

 
$
2,975


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

 
Fair Value

 
Principal

 
Fair Value

LROC preferred units due 2015
 
$
—

 
$
—

 
$
13,618

 
$
13,618

Subordinated debt
 
90,500

 
39,865

 
90,500

 
40,659

Total
 
$
90,500

 
$
39,865

 
$
104,118

 
$
54,277


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

5/22/2003
annual interest rate equal to LIBOR, plus 4.20% payable quarterly
5/22/2033
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


 
17
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2015

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, 2015 and December 31, 2014, deferred interest payable of $21.1 million and $17.4 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets. On November 6, 2015, the Company paid $22.1 million to its Trust Preferred trustees to be used by the trustees to pay the interest which the Company has been deferring since the first quarter of 2011. 
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 nine months ended September 30, 2015 and September 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 September 30, 2015 and December 31, 2014, finance lease obligation liability of $4.9 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) September 30, 2015

NOTE 13 INCOME TAXES
Income tax expense (benefit) for the three and nine months ended September 30, 2015 and September 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 September 30,
 
 
Nine months ended September 30,
 
 
 
2015

 
2014

 
2015

 
2014

Income tax benefit at United States statutory income tax rate
 
$
(296
)
 
$
(2,244
)
 
$
(3,139
)
 
$
(5,768
)
Valuation allowance
 
128

 
2,387

 
661

 
6,005

Deconsolidation of subsidiary
 
(7
)
 
—

 
2,384

 
—

Change in unrecognized tax benefits
 
—

 
—

 
—

 
(1,024
)
Non-taxable dividend income
 
—

 
(414
)
 
(415
)
 
(1,244
)
Foreign operations subject to different tax rates
 
31

 
127

 
186

 
399

State income tax (net of federal tax benefit)
 
—

 
4

 
8

 
215

Disposition of subsidiary
 
—

 
—

 
—

 
422

Prior year tax
 
—

 
—

 
—

 
(341
)
Other
 
167

 
168

 
394

 
365

Income tax expense (benefit)
 
$
23

 
$
28

 
$
79

 
$
(971
)
The Company maintains a valuation allowance for its gross deferred tax assets at September 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 September 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 September 30, 2015 and December 31, 2014, respectively, all of which relates to indefinite life intangible assets.
As of September 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) September 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 nine months ended September 30, 2015 and September 30, 2014:
(in thousands, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(894
)
 
$
(6,627
)
 
$
(9,312
)
 
$
(15,994
)
Plus (less): net loss (income) attributable to noncontrolling interests
 
86

 
(778