10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
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(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Quarterly Period Ended March 31, 2016 |
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)
_________________________
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Ontario, Canada (State or other jurisdiction of incorporation or organization) | | Not Applicable (I.R.S. Employer Identification No.) |
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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.
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Large accelerated filer o | Accelerated filer x | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
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 May 5, 2016 was 19,855,906.
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KINGSWAY FINANCIAL SERVICES INC. |
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Table Of Contents |
PART I - FINANCIAL INFORMATION | | |
ITEM 1. FINANCIAL STATEMENTS | | |
Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015 | | |
Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited) | | |
Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2016 and 2015 (unaudited) | | |
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (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 | | |
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KINGSWAY FINANCIAL SERVICES INC. |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except per share data) |
| | | | | | | | |
| | March 31, 2016 |
| | December 31, 2015 |
|
| | (unaudited) |
| | |
Assets | | | | |
Investments: | | | | |
Fixed maturities, at fair value (amortized cost of $61,589 and $55,606, respectively) | | $ | 62,012 |
| | $ | 55,559 |
|
Equity investments, at fair value (cost of $26,185 and $26,428, respectively) | | 26,303 |
| | 27,559 |
|
Limited liability investments | | 20,240 |
| | 20,141 |
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Other investments, at cost which approximates fair value | | 4,060 |
| | 4,077 |
|
Short-term investments, at cost which approximates fair value | | 935 |
| | 400 |
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Total investments | | 113,550 |
| | 107,736 |
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Cash and cash equivalents | | 40,984 |
| | 51,701 |
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Investment in investee | | 1,702 |
| | 1,772 |
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Accrued investment income | | 506 |
| | 594 |
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Premiums receivable, net of allowance for doubtful accounts of $165 and $165, respectively | | 32,670 |
| | 27,090 |
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Service fee receivable, net of allowance for doubtful accounts of $283 and $276, respectively | | 765 |
| | 911 |
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Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively | | 3,452 |
| | 3,789 |
|
Reinsurance recoverable | | 1,176 |
| | 1,422 |
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Prepaid reinsurance premiums | | 134 |
| | 7 |
|
Deferred acquisition costs, net | | 13,440 |
| | 12,143 |
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Income taxes recoverable | | 60 |
| | 61 |
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Property and equipment, net of accumulated depreciation of $12,667 and $12,537, respectively | | 5,458 |
| | 5,577 |
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Goodwill | | 10,078 |
| | 10,078 |
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Intangible assets, net of accumulated amortization of $6,304 and $6,009, respectively | | 14,441 |
| | 14,736 |
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Other assets | | 3,128 |
| | 3,405 |
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Total Assets | | $ | 241,544 |
| | $ | 241,022 |
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Liabilities and Shareholders' Equity | | | | |
| | | | |
Liabilities: | | | | |
Unpaid loss and loss adjustment expenses: | | | | |
Property and casualty | | $ | 52,870 |
| | $ | 55,471 |
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Vehicle service agreements | | 2,975 |
| | 2,975 |
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Total unpaid loss and loss adjustment expenses | | 55,845 |
| | 58,446 |
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Unearned premiums | | 41,555 |
| | 35,234 |
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Reinsurance payable | | 272 |
| | 145 |
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Subordinated debt, at fair value | | 37,370 |
| | 39,898 |
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Deferred income tax liability | | 2,946 |
| | 2,924 |
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Deferred service fees | | 34,771 |
| | 34,319 |
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Accrued expenses and other liabilities | | 20,227 |
| | 19,959 |
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Total Liabilities | | 192,986 |
| | 190,925 |
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Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at March 31, 2016 and December 31, 2015, respectively; redemption amount of $6,572 | | 6,402 |
| | 6,394 |
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| | | | |
Shareholders' Equity: | | | | |
Common stock, no par value; unlimited number authorized; 19,709,706 and 19,709,706 issued and outstanding at March 31, 2016 and December 31, 2015, respectively | | — |
| | — |
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Additional paid-in capital | | 341,847 |
| | 341,646 |
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Accumulated deficit | | (310,547 | ) | | (308,995 | ) |
Accumulated other comprehensive income | | 9,143 |
| | 9,300 |
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Shareholders' equity attributable to common shareholders | | 40,443 |
| | 41,951 |
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Noncontrolling interests in consolidated subsidiaries | | 1,713 |
| | 1,752 |
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Total Shareholders' Equity | | 42,156 |
| | 43,703 |
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Total Liabilities and Shareholders' Equity | | $ | 241,544 |
| | $ | 241,022 |
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See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited) |
| | | | | | | | |
| | Three months ended March 31, | |
| | 2016 |
| | 2015 |
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Revenues: | | | | |
Net premiums earned | | $ | 29,427 |
| | $ | 29,030 |
|
Service fee and commission income | | 5,322 |
| | 5,398 |
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Net investment (loss) income | | (72 | ) | | 1,313 |
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Net realized losses | | (171 | ) | | — |
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Other-than-temporary impairment loss | | — |
| | (10 | ) |
Other income | | 2,374 |
| | 8,357 |
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Total revenues | | 36,880 |
| | 44,088 |
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Operating expenses: | | | | |
Loss and loss adjustment expenses | | 23,497 |
| | 21,953 |
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Commissions and premium taxes | | 5,598 |
| | 5,747 |
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Cost of services sold | | 773 |
| | 663 |
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General and administrative expenses | | 9,551 |
| | 11,576 |
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Amortization of intangible assets | | 295 |
| | 317 |
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Contingent consideration expense | | — |
| | 144 |
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Total operating expenses | | 39,714 |
| | 40,400 |
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Operating (loss) income | | (2,834 | ) | | 3,688 |
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Other (revenues) expenses, net: | | | | |
Interest expense | | 1,093 |
| | 1,391 |
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Foreign exchange losses, net | | 1 |
| | 392 |
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Gain on change in fair value of debt | | (2,528 | ) | | (261 | ) |
Equity in net loss of investee | | 69 |
| | 136 |
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Total other (revenues) expenses, net | | (1,365 | ) | | 1,658 |
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(Loss) income from continuing operations before income tax expense | | (1,469 | ) | | 2,030 |
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Income tax expense | | 26 |
| | 22 |
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(Loss) income from continuing operations | | (1,495 | ) | | 2,008 |
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Income from discontinued operations, net of taxes | | — |
| | 1,426 |
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Net (loss) income | | (1,495 | ) | | 3,434 |
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Less: net (loss) income attributable to noncontrolling interests in consolidated subsidiaries | | (39 | ) | | 1,224 |
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Less: dividends on preferred stock | | 82 |
| | 81 |
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Net (loss) income attributable to common shareholders | | $ | (1,538 | ) | | $ | 2,129 |
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(Loss) earnings per share - continuing operations: | | | | |
Basic: | | $ | (0.08 | ) | | $ | 0.04 |
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Diluted: | | $ | (0.08 | ) | | $ | 0.03 |
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Earnings per share - discontinued operations: | | | | |
Basic: | | $ | — |
| | $ | 0.07 |
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Diluted: | | $ | — |
| | $ | 0.07 |
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(Loss) earnings per share – net (loss) income attributable to common shareholders: | | | | |
Basic: | | $ | (0.08 | ) | | $ | 0.11 |
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Diluted: | | $ | (0.08 | ) | | $ | 0.10 |
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Weighted average shares outstanding (in ‘000s): | | | | |
Basic: | | 19,710 |
| | 19,710 |
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Diluted: | | 19,710 |
| | 21,149 |
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See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
(Unaudited)
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| | | | | | | | |
| | Three months ended March 31, | |
| | 2016 |
| | 2015 |
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Net (loss) income | | $ | (1,495 | ) | | $ | 3,434 |
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Other comprehensive loss, net of taxes(1): | | | | |
Unrealized gains (losses) on fixed maturities and equity investments: | | | | |
Unrealized gains (losses) arising during the period | | 275 |
| | (200 | ) |
Reclassification adjustment for amounts included in net (loss) income | | (432 | ) | | 13 |
|
Foreign currency translation adjustments | | — |
| | (26 | ) |
Other comprehensive loss | | (157 | ) | | (213 | ) |
Comprehensive (loss) income | | $ | (1,652 | ) | | $ | 3,221 |
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Less: comprehensive (loss) income attributable to noncontrolling interests in consolidated subsidiaries | | (39 | ) | | 927 |
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Comprehensive (loss) income attributable to common shareholders | | $ | (1,613 | ) | | $ | 2,294 |
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(1) Net of income tax expense of $0 and $0 for the three months ended March 31, 2016 and March 31, 2015, respectively. | | |
See accompanying notes to unaudited consolidated financial statements
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) |
| | | | | | | | |
| | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Cash provided by (used in): | | | | |
Operating activities: | | | | |
Net (loss) income | | $ | (1,495 | ) | | $ | 3,434 |
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | |
Equity in net loss of investee | | 69 |
| | 136 |
|
Equity in net loss (income) of limited liability investments | | 201 |
| | (929 | ) |
Depreciation and amortization expense | | 425 |
| | 480 |
|
Contingent consideration expense | | — |
| | 144 |
|
Stock-based compensation expense, net of forfeitures | | 201 |
| | 201 |
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Net realized losses | | 171 |
| | — |
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Gain on change in fair value of debt | | (2,528 | ) | | (261 | ) |
Deferred income taxes | | 22 |
| | 22 |
|
Other-than-temporary impairment loss | | — |
| | 10 |
|
Amortization of fixed maturities premiums and discounts | | 75 |
| | 79 |
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Changes in operating assets and liabilities: | | | | |
Premiums and service fee receivable | | (5,434 | ) | | (4,856 | ) |
Other receivables | | 337 |
| | (69 | ) |
Reinsurance recoverable | | 246 |
| | 405 |
|
Prepaid reinsurance premiums | | (127 | ) | | (126 | ) |
Deferred acquisition costs, net | | (1,297 | ) | | (1,006 | ) |
Income taxes recoverable | | 1 |
| | 20 |
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Unpaid loss and loss adjustment expenses | | (2,601 | ) | | (4,373 | ) |
Unearned premiums | | 6,321 |
| | 6,133 |
|
Reinsurance payable | | 127 |
| | 260 |
|
Deferred service fees | | 452 |
| | (644 | ) |
Other, net | | 739 |
| | 1,127 |
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Net cash (used in) provided by operating activities | | (4,095 | ) | | 187 |
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Investing activities: | | | | |
Proceeds from sales and maturities of fixed maturities | | 2,582 |
| | 1,195 |
|
Proceeds from sales of equity investments | | 1,607 |
| | 308 |
|
Purchases of fixed maturities | | (8,443 | ) | | (4,722 | ) |
Purchases of equity investments | | (1,541 | ) | | (1,738 | ) |
Net acquisitions of limited liability investments | | (300 | ) | | (2,859 | ) |
Net proceeds from other investments | | 17 |
| | — |
|
Net purchases of short-term investments | | (533 | ) | | — |
|
Net purchases of property and equipment | | (11 | ) | | (39 | ) |
Net cash used in investing activities | | (6,622 | ) | | (7,855 | ) |
Net decrease in cash and cash equivalents | | (10,717 | ) | | (7,668 | ) |
Cash and cash equivalents at beginning of period | | 51,701 |
| | 71,234 |
|
Cash and cash equivalents at end of period | | $ | 40,984 |
| | $ | 63,566 |
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See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
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 ("2015 Annual Report") for the year ended December 31, 2015.
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; impairment assessment 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, 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 2015 Annual Report.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
(a) Adoption of New Accounting Standards:
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): 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")
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership. Effective January 1, 2016, the Company adopted ASU 2015-02. The adoption of the standard did not have an impact on the consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"). ASU 2015-16 simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. The effects, by line item, if any, must be disclosed. Effective January 1, 2016, the Company adopted ASU 2015-16. 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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ("ASU 2015-14"). This amendment defers the effective date of the previously issued ASU 2014-09 until the interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. 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 (Topic 944): Disclosures about Short-Duration Contracts ("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.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income (loss). For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied using a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year of adoption. The Company currently records its equity investments at fair value with net unrealized gains or losses reported in accumulated other comprehensive income. Adoption of ASU 2016-01 will require the changes in fair value on equity investments with readily determinable fair values to be recorded in net (loss) income. Adoption of ASU 2016-01 is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive (loss) income, but could have a significant impact on the Company's results of operations and (loss) earnings per share as changes in fair value will be presented in net (loss) income rather than other comprehensive loss.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that, prospectively, all tax effects related to share-based payments be made through the statement of operations at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in-capital under the current guidance. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 5 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 unaudited consolidated statements of operations for all periods presented. Summary financial information included in income from discontinued operations, net of taxes for the three months ended March 31, 2015 is presented below:
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| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Revenues: | | | | |
Service fee and commission income | | $ | — |
| | $ | 8,342 |
|
Other expense | | — |
| | (20 | ) |
Total revenues | | — |
| | 8,322 |
|
Expenses: | | | | |
General and administrative expenses | | — |
| | 6,462 |
|
Income from discontinued operations before income tax expense | | — |
| | 1,860 |
|
Income tax expense | | — |
| | 434 |
|
Income from discontinued operations, net of taxes | | $ | — |
| | $ | 1,426 |
|
For the three months ended March 31, 2016 and March 31, 2015, ARS' net cash used in operating activities was zero and $0.2 million, respectively. ARS had no cash flows from investing activities for the three months ended March 31, 2016 and March 31, 2015.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
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 March 31, 2016 and December 31, 2015 are summarized in the tables shown below:
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(in thousands) | | March 31, 2016 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 24,845 |
| | $ | 130 |
| | $ | 3 |
| | $ | 24,972 |
|
States, municipalities and political subdivisions | | 2,334 |
| | 31 |
| | — |
| | 2,365 |
|
Mortgage-backed | | 8,400 |
| | 91 |
| | 9 |
| | 8,482 |
|
Asset-backed securities and collateralized mortgage obligations | | 6,586 |
| | 15 |
| | 5 |
| | 6,596 |
|
Corporate | | 19,424 |
| | 196 |
| | 23 |
| | 19,597 |
|
Total fixed maturities | | 61,589 |
| | 463 |
| | 40 |
| | 62,012 |
|
Equity investments: | | | | | | | | |
Common stock | | 24,934 |
| | 3,402 |
| | 2,577 |
| | 25,759 |
|
Warrants | | 1,251 |
| | 27 |
| | 734 |
| | 544 |
|
Total equity investments | | 26,185 |
| | 3,429 |
| | 3,311 |
| | 26,303 |
|
Total fixed maturities and equity investments | | $ | 87,774 |
| | $ | 3,892 |
| | $ | 3,351 |
| | $ | 88,315 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2015 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 20,443 |
| | $ | 73 |
| | $ | 63 |
| | $ | 20,453 |
|
States, municipalities and political subdivisions | | 2,241 |
| | 20 |
| | 5 |
| | 2,256 |
|
Mortgage-backed | | 7,997 |
| | 25 |
| | 59 |
| | 7,963 |
|
Asset-backed securities and collateralized mortgage obligations | | 6,040 |
| | 4 |
| | 21 |
| | 6,023 |
|
Corporate | | 18,885 |
| | 60 |
| | 81 |
| | 18,864 |
|
Total fixed maturities | | 55,606 |
| | 182 |
| | 229 |
| | 55,559 |
|
Equity investments: | | | | | | | | |
Common stock | | 25,177 |
| | 3,464 |
| | 2,055 |
| | 26,586 |
|
Warrants | | 1,251 |
| | 52 |
| | 330 |
| | 973 |
|
Total equity investments | | 26,428 |
| | 3,516 |
| | 2,385 |
| | 27,559 |
|
Total fixed maturities and equity investments | | $ | 82,034 |
| | $ | 3,698 |
| | $ | 2,614 |
| | $ | 83,118 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
The table below summarizes the Company's fixed maturities at March 31, 2016 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) | | March 31, 2016 | |
| | Amortized Cost |
| | Estimated Fair Value |
|
Due in one year or less | | $ | 13,092 |
| | $ | 13,157 |
|
Due after one year through five years | | 37,524 |
| | 37,789 |
|
Due after five years through ten years | | 3,108 |
| | 3,130 |
|
Due after ten years | | 7,865 |
| | 7,936 |
|
Total | | $ | 61,589 |
| | $ | 62,012 |
|
The following tables highlight the aggregate unrealized loss position, by security type, of fixed maturities and equity investments in unrealized loss positions as of March 31, 2016 and December 31, 2015. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | March 31, 2016 | |
| 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 | $ | 5,516 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 5,516 |
| | $ | 3 |
|
Mortgage-backed | 1,332 |
| | 9 |
| | — |
| | — |
| | 1,332 |
| | 9 |
|
Asset-backed securities and collateralized mortgage obligations | 2,866 |
| | 5 |
| | — |
| | — |
| | 2,866 |
| | 5 |
|
Corporate | 3,569 |
| | 23 |
| | — |
| | — |
| | 3,569 |
| | 23 |
|
Total fixed maturities | 13,283 |
| | 40 |
| | — |
| | — |
| | 13,283 |
| | 40 |
|
Equity investments: | | | | | | | | |
|
| |
|
|
Common stock | 9,586 |
| | 2,577 |
| | — |
| | — |
| | 9,586 |
| | 2,577 |
|
Warrants | 491 |
| | 734 |
| | — |
| | — |
| | 491 |
| | 734 |
|
Total equity investments | 10,077 |
| | 3,311 |
| | — |
| | — |
| | 10,077 |
| | 3,311 |
|
Total | $ | 23,360 |
| | $ | 3,351 |
| | $ | — |
| | $ | — |
| | $ | 23,360 |
| | $ | 3,351 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | December 31, 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 | $ | 12,635 |
| | $ | 63 |
| | $ | — |
| | $ | — |
| | $ | 12,635 |
| | $ | 63 |
|
States, municipalities and political subdivisions | 745 |
| | 5 |
| | — |
| | — |
| | 745 |
| | 5 |
|
Mortgage-backed | 5,685 |
| | 59 |
| | — |
| | — |
| | 5,685 |
| | 59 |
|
Asset-backed securities and collateralized mortgage obligations | 5,035 |
| | 21 |
| | — |
| | — |
| | 5,035 |
| | 21 |
|
Corporate | 9,171 |
| | 81 |
| | — |
| | — |
| | 9,171 |
| | 81 |
|
Total fixed maturities | 33,271 |
| | 229 |
| | — |
| | — |
| | 33,271 |
| | 229 |
|
Equity investments: | | | | | | | | | | | |
Common stock | 15,711 |
| | 2,055 |
| | — |
| | — |
| | 15,711 |
| | 2,055 |
|
Warrants | 897 |
| | 330 |
| | — |
| | — |
| | 897 |
| | 330 |
|
Total equity investments | 16,608 |
| | 2,385 |
| | — |
| | — |
| | 16,608 |
| | 2,385 |
|
Total | $ | 49,879 |
| | $ | 2,614 |
| | $ | — |
| | $ | — |
| | $ | 49,879 |
| | $ | 2,614 |
|
Fixed maturities and equity investments contain approximately 64 and 127 individual investments that were in unrealized loss positions as of March 31, 2016 and December 31, 2015, respectively.
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
| |
• | identifying all unrealized loss positions that have existed for at least six months; |
| |
• | identifying other circumstances which management believes may impact the recoverability of the unrealized loss positions; |
| |
• | obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based on their knowledge and experience together with market-based valuation techniques; |
| |
• | reviewing the trading range of certain investments over the preceding calendar period; |
| |
• | assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings from third-party rating agencies; |
| |
• | assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit rating based on the continuity of its debt service record; |
| |
• | determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses performed; and |
| |
• | assessing the Company's ability and intent to hold these investments at least until the investment impairment is recovered. |
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:
| |
• | the opinions of professional investment managers could be incorrect; |
| |
• | the past trading patterns of individual investments may not reflect future valuation trends; |
| |
• | the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a company's financial situation; and |
| |
• | the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not reflect a company's unknown underlying financial problems. |
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs for other-than-temporary impairments related to investments recorded for the three months ended March 31,
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
2016. For the three months ended March 31, 2015, the Company recorded a write-down of $0.0 million for other-than-temporary impairment related to fixed maturities.
There were no other-than-temporary losses recognized in other comprehensive loss for the three months ended March 31, 2016. There were $0.0 million of other-than-temporary losses recognized in other comprehensive loss for the three months ended March 31, 2015.
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 March 31, 2016 and December 31, 2015, the carrying value of limited liability investments totaled $20.2 million and $20.1 million, respectively. At March 31, 2016, the Company has unfunded commitments totaling $2.3 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 (loss) income.
Other investments include mortgage and collateral loans and are reported at their unpaid principal balance. As of March 31, 2016 and December 31, 2015, the carrying value of other investments totaled $4.1 million and $4.1 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the three months ended March 31, 2016 and March 31, 2015 were as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Gross realized gains | | $ | 34 |
| | $ | — |
|
Gross realized losses | | (205 | ) | | — |
|
Net realized losses | | $ | (171 | ) | | $ | — |
|
Net investment (loss) income for the three months ended March 31, 2016 and March 31, 2015, respectively, is comprised as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Investment income | | | | |
Interest from fixed maturities | | $ | 218 |
| | $ | 269 |
|
Dividends | | 266 |
| | 147 |
|
(Loss) income from limited liability investments | | (201 | ) | | 929 |
|
Loss on change in fair value of warrants | | (387 | ) | | — |
|
Other | | 39 |
| | 34 |
|
Gross investment (loss) income | | (65 | ) | | 1,379 |
|
Investment expenses | | (7 | ) | | (66 | ) |
Net investment (loss) income | | $ | (72 | ) | | $ | 1,313 |
|
At March 31, 2016, fixed maturities and short-term investments with an estimated fair value of $12.7 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 March 31, 2016, the amount of such pledged securities was $15.8 million.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
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 March 31, 2016 and December 31, 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except for percentages) | | | | |
| | March 31, 2016 | | December 31, 2015 |
| | Equity Percentage | | Estimated Fair Value | | Carrying Value | | Equity Percentage | | Estimated Fair Value | | Carrying value |
1347 Capital Corp. | | 21.0 | % | |
| $12,447 |
| | $ | 1,702 |
| | 21.0 | % | |
| $12,369 |
| | $ | 1,772 |
|
Equity in net loss of investee was $0.1 million and $0.1 million for the three months ended March 31, 2016 and March 31, 2015, 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 months ended March 31, 2016 and 2015, respectively, are comprised as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Beginning balance, net | | $ | 12,143 |
| | $ | 12,197 |
|
Additions | | 7,589 |
| | 7,554 |
|
Amortization | | (6,292 | ) | | (6,548 | ) |
Balance at March 31, net | | $ | 13,440 |
| | $ | 13,203 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 9 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
|
| | | | | | | | | | | | |
(in thousands) | | | March 31, 2016 | |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Intangible assets subject to amortization | | | | | | |
Database | | $ | 4,918 |
| | $ | 1,660 |
| | $ | 3,258 |
|
Vehicle service agreements in-force | | 3,680 |
| | 3,410 |
| | 270 |
|
Customer-related relationships | | 3,611 |
| | 1,164 |
| | 2,447 |
|
Non-compete agreement | | 70 |
| | 70 |
| | — |
|
Intangible assets not subject to amortization | | | | | | |
Insurance licenses | | 7,803 |
| | — |
| | 7,803 |
|
Trade name | | 663 |
| | — |
| | 663 |
|
Total | | $ | 20,745 |
| | $ | 6,304 |
| | $ | 14,441 |
|
|
| | | | | | | | | | | | |
(in thousands) | | | December 31, 2015 | |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Intangible assets subject to amortization | | | | | | |
Database | | $ | 4,918 |
| | $ | 1,537 |
| | $ | 3,381 |
|
Vehicle service agreements in-force | | 3,680 |
| | 3,362 |
| | 318 |
|
Customer-related relationships | | 3,611 |
| | 1,040 |
| | 2,571 |
|
Non-compete agreement | | 70 |
| | 70 |
| | — |
|
Intangible assets not subject to amortization | | | | | | |
Insurance licenses | | 7,803 |
| | — |
| | 7,803 |
|
Trade name | | 663 |
| | — |
| | 663 |
|
Total | | $ | 20,745 |
| | $ | 6,009 |
| | $ | 14,736 |
|
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 $0.3 million for the three months ended March 31, 2016 and March 31, 2015, respectively. The insurance licenses and trade name intangible assets have indefinite useful lives and are not amortized.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
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 for unpaid loss and loss adjustment expenses necessarily involves risks that the actual loss and loss adjustment expenses incurred by Company will deviate, perhaps materially, from the estimates recorded.
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 March 31, 2016 and March 31, 2015 were as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2016 |
| | March 31, 2015 |
|
Balance at beginning of period, gross | | $ | 55,471 |
| | $ | 63,895 |
|
Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 1,207 |
| | 3,203 |
|
Balance at beginning of period, net | | 54,264 |
| | 60,692 |
|
Incurred related to: | | | | |
|
Current year | | 22,039 |
| | 20,472 |
|
Prior years | | 91 |
| | (76 | ) |
Paid related to: | | | | |
|
Current year | | (7,036 | ) | | (7,532 | ) |
Prior years | | (17,517 | ) | | (16,740 | ) |
Balance at end of period, net | | 51,841 |
| | 56,816 |
|
Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 1,029 |
| | 2,706 |
|
Balance at end of period, gross | | $ | 52,870 |
| | $ | 59,522 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
(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 March 31, 2016 and March 31, 2015 were as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2016 |
| | March 31, 2015 |
|
Balance at beginning of period | | $ | 2,975 |
| | $ | 2,975 |
|
Incurred related to: | | | | |
Current year | | 1,367 |
| | 1,557 |
|
Prior years | | — |
| | — |
|
Paid related to: | | | | |
Current year | | (1,233 | ) | | (1,446 | ) |
Prior years | | (134 | ) | | (111 | ) |
Balance at end of period | | $ | 2,975 |
| | $ | 2,975 |
|
NOTE 11 DEBT
Debt consists of the following instrument:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2016 | | December 31, 2015 |
| | Principal |
| | Fair Value |
| | Principal |
| | Fair Value |
|
Subordinated debt | | $ | 90,500 |
| | $ | 37,370 |
| | $ | 90,500 |
| | $ | 39,898 |
|
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 |
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
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 March 31, 2016 and December 31, 2015, finance lease obligation liability of $4.9 million and $4.9 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.
NOTE 13 INCOME TAXES
Income tax expense for the three months ended March 31, 2016 and March 31, 2015, respectively, varies from the amount that would result by applying the applicable United States corporate income tax rate of 34% to (loss) income from continuing operations before income tax expense. The following table summarizes the differences:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Income tax (benefit) expense at United States statutory income tax rate | | $ | (499 | ) | | $ | 690 |
|
Valuation allowance | | 389 |
| | (638 | ) |
Non-taxable dividend income | | — |
| | (424 | ) |
Foreign operations subject to different tax rates | | 36 |
| | 122 |
|
Other | | 100 |
| | 272 |
|
Income tax expense | | $ | 26 |
| | $ | 22 |
|
The Company maintains a valuation allowance for its gross deferred tax assets at March 31, 2016 and December 31, 2015. 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; however, 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 March 31, 2016 and December 31, 2015 net deferred tax asset. The Company carries a deferred income tax liability of $2.9 million and $2.9 million at March 31, 2016 and December 31, 2015, respectively, all of which relates to indefinite life intangible assets.
As of March 31, 2016, 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.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 14 (LOSS) EARNINGS PER SHARE FROM CONTINUING OPERATIONS
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted (loss) earnings per share from continuing operations computation for the three months ended March 31, 2016 and March 31, 2015:
|
| | | | | | | | |
(in thousands, except per share data) | | Three months ended March 31, |
| | 2016 | | 2015 |
Numerator: | | | | |
(Loss) income from continuing operations | | $ | (1,495 | ) | | $ | 2,008 |
|
Plus (less): net loss (income) attributable to noncontrolling interests | | 39 |
| | (1,224 | ) |
Less: dividends on preferred stock | | (82 | ) | | (81 | ) |
(Loss) income from continuing operations attributable to common shareholders | | $ | (1,538 | ) | | $ | 703 |
|
Denominator: | | | | |
Weighted average basic shares | | | | |
Weighted average common shares outstanding | | 19,710 |
| | 19,710 |
|
Weighted average diluted shares | | | | |
Weighted average common shares outstanding | | 19,710 |
| | 19,710 |
|
Effect of potentially dilutive securities | | | | |
Stock options | | — |
| | 130 |
|
Unvested restricted stock awards | | — |
| | 689 |
|
Warrants | | — |
| | 620 |
|
Convertible preferred stock | | — |
| | — |
|
Total weighted average diluted shares | | 19,710 |
| | 21,149 |
|
Basic (loss) earnings per common share from continuing operations | | $ | (0.08 | ) | | $ | 0.04 |
|
Diluted (loss) earnings per common share from continuing operations | | $ | (0.08 | ) | | $ | 0.03 |
|
(Loss) earnings per share from continuing operations is based on the weighted-average number of shares outstanding. Diluted weighted-average shares is calculated by adjusting basic weighted-average shares outstanding by all potentially dilutive securities. Potentially dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock.
Since the Company is reporting a loss from continuing operations for the three months ended March 31, 2016, all potentially dilutive securities outstanding were excluded from the calculation of diluted loss per share from continuing operations since their inclusion would have been anti-dilutive.
The dilutive effect of the stock options, unvested restricted stock awards and warrants are reflected in diluted earnings per share from continuing operations by application of the treasury stock method. The dilutive effect of the convertible preferred stock is reflected in diluted earnings per share from continuing operations by application of the if-converted method. The effects of these potentially dilutive securities are excluded from the computation of diluted earnings per share from continuing operations in periods in which the effect would be anti-dilutive. For the three months ended March 31, 2015, the convertible preferred stock was deemed to be anti-dilutive and was excluded from the calculation of diluted earnings per share from continuing operations.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 15 STOCK-BASED COMPENSATION
(a) Stock Options
The following table summarizes the stock option activity during the three months ended March 31, 2016:
|
| | | | | | | | | | | | | | |
(in thousands, except for share data) | | | | | | | |
| | Number of Options Outstanding | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2015 | | 611,875 |
| | $ | 4.50 |
| | 2.2 |
| | $ | 43 |
|
Granted | | — |
| | — |
| | | | |
Expired | | — |
| | — |
| | | | |
Outstanding at March 31, 2016 | | 611,875 |
| | $ | 4.50 |
| | 2.0 |
| | $ | 153 |
|
Exercisable at March 31, 2016 | | 611,875 |
| | $ | 4.50 |
| | 2.0 |
| | $ | 153 |
|
The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the March 31, 2016 market price for the Company's common shares and the exercise price of the options, multiplied by the number of options where the fair value exceeds the exercise price.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option on the date of grant. No options were granted during the three months ended March 31, 2016.
(b) Restricted Stock Awards
Under the 2013 Equity Incentive Plan, the Company made grants of restricted common stock ("Restricted Stock") to certain officers of the Company. The Restricted Stock vests after a ten-year period and is subject to the officer's continued employment through the vesting date. The Restricted Stock is amortized on a straight-line basis over the ten-year requisite service period. Total unamortized compensation expense related to unvested awards at March 31, 2016 was $6.5 million. The grant-date fair value of the Restricted Stock was determined using the closing price of Kingsway common stock on the date of grant. The following table summarizes the activity related to unvested Restricted Stock for the three months ended March 31, 2016:
|
| | | | | | | |
(in thousands, except for share data) | | | | |
| | Restricted Stock Awards | | Weighted-Average Grant Date Fair Value (per Share) |
Unvested at December 31, 2015 | | 1,952,665 |
| | $ | 4.14 |
|
Granted | | — |
| | — |
|
Forfeited | | — |
| | — |
|
Unvested at March 31, 2016 | | 1,952,665 |
| | $ | 4.14 |
|
Total stock-based compensation expense, net of forfeitures, was $0.2 million and $0.2 million for the three months ended March 31, 2016 and March 31, 2015, respectively.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2016 and March 31, 2015 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets. On the other hand, the unaudited consolidated statements of comprehensive (loss) income present the components of other comprehensive loss, net of tax, only for the three months ended March 31, 2016 and March 31, 2015 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
|
| | | | | | | | | | | | |
(in thousands) | | | | Three months ended March 31, 2016 | |
| | Unrealized Gains (Losses) on Fixed Maturities and Equity Investments | | Foreign Currency Translation Adjustments | | Total Accumulated Other Comprehensive Income |
| | | | | | |
Balance at January 1, 2016 | | $ | 13,080 |
| | $ | (3,780 | ) | | $ | 9,300 |
|
| | | | | | |
Other comprehensive income before reclassifications | | 275 |
| | — |
| | 275 |
|
Amounts reclassified from accumulated other comprehensive income | | (432 | ) | | — |
| | (432 | ) |
Net current-period other comprehensive loss | | (157 | ) | | — |
| | (157 | ) |
| | | | | | |
Balance at March 31, 2016 | | $ | 12,923 |
| | $ | (3,780 | ) | | $ | 9,143 |
|
|
| | | | | | | | | | | | |
(in thousands) | | | | Three months ended March 31, 2015 | |
| | Unrealized Gains (Losses) on Fixed Maturities and Equity Investments | | Foreign Currency Translation Adjustments | | Total Accumulated Other Comprehensive Income |
| | | | | | |
Balance at January 1, 2015 | | $ | 14,622 |
| | $ | (5,952 | ) | | $ | 8,670 |
|
| | | | | | |
Other comprehensive (loss) income before reclassifications | | (108 | ) | | 180 |
| | 72 |
|
Amounts reclassified from accumulated other comprehensive income | | 13 |
| | — |
| | 13 |
|
Net current-period other comprehensive (loss) income | | (95 | ) | | 180 |
| | 85 |
|
| | | | | | |
Balance at March 31, 2015 | | $ | 14,527 |
| | $ | (5,772 | ) | | $ | 8,755 |
|
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three months ended March 31, 2016 and March 31, 2015:
|
| | | | | | | | |
| | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Reclassification of accumulated other comprehensive income from unrealized gains (losses) on fixed maturities and equity investments to: | | | | |
Net realized losses | | $ | 432 |
| | $ | (3 | ) |
Other-than-temporary impairment loss | | — |
| | (10 | ) |
(Loss) income from continuing operations before income tax expense | | 432 |
| | (13 | ) |
Income tax expense | | — |
| | — |
|
Net (loss) income | | 432 |
| | (13 | ) |
NOTE 17 SEGMENTED INFORMATION
The Company operates as a merchant bank primarily engaged, through its subsidiaries, in the property and casualty insurance business. The Company conducts its business through the following two reportable segments: Insurance Underwriting and Insurance Services.
Insurance Underwriting Segment
Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company, Mendakota Insurance Company, Mendakota Casualty Company ("MCC"), Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance Corporation (collectively, "Insurance Underwriting"). Insurance Underwriting principally offers personal automobile insurance to drivers who do not meet the criteria for coverage by standard automobile insurers. Insurance Underwriting has policyholders in 12 states; however, new business is accepted in only nine states.
The Company previously placed Amigo and MCC into voluntary run-off in 2012 and 2011, respectively. Each of Amigo and MCC entered into a comprehensive run-off plan which was approved by its respective state of domicile. Kingsway continues to manage Amigo in a manner consistent with the run-off plans. During the first quarter of 2015, MCC sent a letter of intent to the Illinois Department of Insurance to resume writing private passenger automobile policies in the state of Illinois. MCC began writing these policies on April 1, 2015.
Insurance Services Segment
Insurance Services includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS") and Trinity Warranty Solutions LLC ("Trinity") (collectively, "Insurance Services").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 26 states to their members.
Trinity is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration industries. Trinity distributes its warranty products through original equipment manufacturers, HVAC distributors and commercial and residential contractors. Trinity distributes its maintenance support directly through corporate owners of retail spaces throughout the United States.
Effective April 1, 2015, the Company closed on the sale of its wholly owned subsidiary, ARS. As a result, ARS has been classified as discontinued operations and the results of their operations are reported separately for all periods presented. Prior to the transaction, ARS was included in the Insurance Services segment. As a result of classifying ARS as a discontinued operation, all segmented information has been restated to exclude ARS from the Insurance Services segment.
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
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| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
Revenues by reportable segment reconciled to consolidated revenues for the three months ended March 31, 2016 and 2015 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Revenues: | | | | |
Insurance Underwriting: | | | | |
Net premiums earned | | $ | 29,427 |
| | $ | 29,030 |
|
Other income | | 2,273 |
| | 2,237 |
|
Total Insurance Underwriting | | 31,700 |
| | 31,267 |
|
Insurance Services: | | | | |
Service fee and commission income | | 5,322 |
| | 5,398 |
|
Other income | | 54 |
| | 97 |
|
Total Insurance Services | | 5,376 |
| | 5,495 |
|
Total segment revenues | | 37,076 |
| | 36,762 |
|
Net investment (loss) income | | (72 | ) | | 1,313 |
|
Net realized losses | | (171 | ) | | — |
|
Other-than-temporary impairment loss | | — |
| | (10 | ) |
Other income not allocated to segments | | 47 |
| | 6,023 |
|
Total revenues | | $ | 36,880 |
| | $ | 44,088 |
|
The operating (loss) income of each segment in the following table is before income taxes and includes revenues and direct segment costs.
Segment operating (loss) income reconciled to the consolidated (loss) income from continuing operations for the three months ended March 31, 2016 and 2015 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Segment operating (loss) income | | | | |
Insurance Underwriting | | $ | (239 | ) | | $ | 322 |
|
Insurance Services | | (156 | ) | | (186 | ) |
Total segment operating (loss) income | | (395 | ) | | 136 |
|
Net investment (loss) income | | (72 | ) | | 1,313 |
|
Net realized losses | | (171 | ) | | — |
|
Other-than-temporary impairment loss | | — |
| | (10 | ) |
Other income and expenses not allocated to segments, net | | (1,901 | ) | | 2,710 |
|
Amortization of intangible assets | | (295 | ) | | (317 | ) |
Contingent consideration expense | | — |
| | (144 | ) |
Interest expense | | (1,093 | ) | | (1,391 | ) |
Foreign exchange losses, net | | (1 | ) | | (392 | ) |
Gain on change in fair value of debt | | 2,528 |
| | 261 |
|
Equity in net loss of investee | | (69 | ) | | (136 | ) |
(Loss) income from continuing operations before income tax expense | | (1,469 | ) | | 2,030 |
|
Income tax expense | | 26 |
| | 22 |
|
(Loss) income from continuing operations | | $ | (1,495 | ) | | $ | 2,008 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
Insurance Underwriting net premiums earned by line of business for the three months ended March 31, 2016 and 2015 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2016 |
| | 2015 |
|
Insurance Underwriting: | | | | |
Private passenger auto liability | | $ | 20,075 |
| | $ | 19,339 |
|
Auto physical damage | | 9,352 |
| | 9,691 |
|
Total net premiums earned | | $ | 29,427 |
| | $ | 29,030 |
|
NOTE 18 RELATED PARTY TRANSACTIONS
Related party transactions, including services provided to or received by the Company's subsidiaries, are carried out in the normal course of operations and are measured in part by the amount of consideration paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each case approximates fair value. Except where disclosed elsewhere in these unaudited consolidated interim financial statements, the following is a summary of related party transactions.
On February 11, 2014, the Company's subsidiary, 1347 Advisors LLC ("1347 Advisors") entered into a Management Services Agreement ("MSA") with 1347 Property Insurance Holdings, Inc. ("PIH") which provides for certain services, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives, that 1347 Advisors will provide to PIH unless and until 1347 Advisors and PIH agree to terminate the services. On February 24, 2015, the Company announced that it had entered into a definitive agreement with PIH to terminate the MSA. Pursuant to the transaction, 1347 Advisors received the following consideration: $2.0 million in cash; $3.0 million of 8% preferred stock of PIH, redeemable on February 24, 2020; a Performance Shares Grant Agreement with PIH, whereby 1347 Advisors will be entitled to receive 100,000 shares of PIH common stock if at any time the last sales price of PIH's common stock equals or exceeds $10.00 per share for any 20 trading days within any 30-trading day period; and warrants to purchase 1,500,000 shares of common stock of PIH with a strike price of $15.00, expiring on February 24, 2022. The Company recorded a gain of $6.0 million during the first quarter of 2015 related to the termination of the MSA, which is included in other income in the unaudited consolidated statements of operations. To the extent shares of PIH common stock are granted to the Company under the Performance Shares Grant Agreement, they will be recorded at the time the shares are granted and will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. No shares were received by the Company under the Performance Shares Grant Agreement as of March 31, 2016. Refer to Note 19, "Fair Value of Financial Instruments," for further details regarding the performance shares.
On March 26, 2014, the Company entered into a Performance Share Grant Agreement with PIH, whereby the Company will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones for PIH’s stock price. Pursuant to the terms of the Performance Share Grant Agreement, if at any time the last sales price of PIH’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). To the extent shares of PIH common stock are granted to the Company under the Performance Share Grant Agreement, they will be recorded at the time the shares are granted and will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. No shares were received by the Company under the Performance Share Grant Agreement as of March 31, 2016. Refer to Note 19, "Fair Value of Financial Instruments," for further details regarding the performance shares.
During the second quarter of 2014, the Company made an investment in Itasca Golf Investors, LLC ("Itasca Golf") which is included in limited liability investments on the consolidated balance sheets. On August 28, 2014, the Company entered into a $0.5 million line of credit with Itasca Golf. On August 29, 2014, the Company advanced $0.5 million to Itasca Golf under the line of credit which is included in other receivables on the consolidated balance sheets. On June 11, 2015, the line of credit was increased
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| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
by $0.2 million. On June 11, 2015, the Company advanced $0.2 million to Itasca Golf under the line of credit which is included in other receivables on the consolidated balance sheets. The line of credit bears interest at 3% and matures on August 28, 2016.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments at fair value. The Company's performance shares, subordinated debt and contingent consideration liabilities are measured and reported at fair value.
Fixed maturities and equity investments - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence. Fair values of equity investments, including warrants, reflect quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist.
Performance shares - The performance shares, for which no active market exists, are required to be valued at fair value as determined in good faith by the Company. Such determination of fair value would require the Company to develop a model based upon relevant observable market inputs as well as significant unobservable inputs, including developing a sufficiently reliable estimate for an appropriate discount to reflect the illiquidity and unique structure of the security. The Company determined that its model for the performance shares was not sufficiently reliable. As a result, the Company has assigned a fair value of zero to the performance shares. Refer to Note 18, "Related Party Transactions," for further details regarding the performance shares.
Debt - The fair value of the subordinated debt is calculated by a third-party using a model based on significant market observable inputs.
Contingent consideration - The consideration for certain of the Company's acquisitions includes future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of contingent consideration liabilities is estimated using internal models without relevant observable market inputs. Estimated payments are discounted using present value techniques to arrive at estimated fair value. Contingent consideration liabilities are revalued each reporting period. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement or timing of any targets. Changes in assumptions could have an impact on the payout of contingent consideration liabilities. Changes in fair value are reported in the unaudited consolidated statements of operations as contingent consideration expense. The maximum the Company can pay in future contingent payments is $13.5 million, on an undiscounted basis.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2016 |
The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The extent of use of quoted market prices (Level 1), valuation models using observable market information (Level 2) and internal models without observable market information (Level 3) in the valuation of the Company's financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 was as follows: